Your \images directory is the starting point for your small images, \images\medium is the starting point for your medium images and \images\large is the starting point for your large images. The _MED and _LRG suffixes are the default values; you can change them in your admin's Configuration->Images.
Let's say that you have a product with an image file named my_picture.jpg. That would result in you having the following files:
If you wanted to have another image for that product, you'd pick another suffix, like _00. Then you'd also have the following files: