For ImageCache to work properly it needs to be able to make use fou clean URLs.
This requires some webserver specific setup.

Apache2 + mod_rewrite
  Works out of the box.

LightHTTPD:
  http://nordisch.org/2007/2/6/drupal-on-lighttpd-with-clean-urls

IIS 6:
  add an error404.asp that passed everything to drupal.

  <%
    Response.Expires=0
    strQString=Request.ServerVariables("QUERY_STRING")
    If (InStr(strQString,"/d5/")) Then
    pos=Instr(strQString,"/d5/")+3
    Id=Right(strQString,Len(strQString)-pos) 
    Response.Redirect("/d5/index.php?q=" & Id)
    End If
    Response.Redirect("index.htm")
  %>