This modification uses the GD 2 image library, which now comes packaged with most PHP builds, to dynamically generate your product image thumbnails on the fly. It works with GIFs, JPGs and PNGs, produces much smaller thumbnail file sizes (saving bandwidth), maintains the proper ratio of your pics, and does not create any extra files on your server.
Easy installation involves adding only one file and updating the tep_image function. It should work with osC 2.1-2.2
Unfortunately, transparencies are not supported as of this release. GIF creation was disabled in the GD Library due to licencing issues with Compuserve (Gifs are thumbnailed as JPGs), and I haven't got the PNG transparencies quite worked out.