The Store Manager downloads the main image from the URL that is listed in the .csv (downloading from suppliers server or any other place where the image is initially stored).
The image is being downloaded to the local temporary directory "C:\Users\"MYUSERACC"\AppData\Local\Temp\" where the Store Manager creates a resized copies (according to the PrestaShop image types) that should be uploaded to the appropriate path in of the store root directory.
The image path generates basing on the image ID. For example, if the image ID is 76395. Accordingly the image name is 76395.jpg and the main image with its resized copies will be uploaded to the store root directory/img/p/7/6/3/9/5 directory.
The more image types in your PrestaShop back-office: http://screencast.com/t/CBA5PqEv3Q
the more tasks in the FTP queue of the Store Manager.
Concerning Cache images option. This option speeds up product management in the Store Manager.
If the option is activated, and you click at the product, then the Store Manger will download its image and save it to the temporary local folder. And the next time you click at the same product, its image will be displayed in 1 second as it is downloaded locally (and the FTP task will not appear in the Queue).
If you disable Cache images option, the Store Manager will download product image every time you click at the product (that takes more time and creates FTP tasks).