Picture Gallery consists of two products.
Picture Processor - ActiveX component, which can create thumbnails on fly or save it to disk. It has some more features, see Picture Processor documentation for more details. Picture Processor is in PictureProcessor \ folder of the pack.
Picture Gallery -ASP script, which implements gallery of pictures on web-site. It uses Picture Processor to create thumbnails, that's why it doesn't require preparing them before. You should only put picture into certain folder and the script will show it on your site. List of the supported file formats you can see in Picture Processor documentation. Picture Gallery is in PictureGallery \ folder of the pack.