When a SharePoint is application is created, a web.config file is created in the application folder you specified. One of the entries inside the SharePoint element is BlobCache. By default, it looks like this:

<BlobCache location="C:\blobCache" path="\.(gif|jpg|png|css|js)$" maxSize="10" enabled="false" />

In order to improve the performance of your site, the BlobCache should be enabled.

<BlobCache location="C:\blobCache" path="\.(gif|jpg|png|css|js)$" maxSize="10" enabled="true" />

The maxSize attribute is in GigaBytes, so make sure you have enough room at the location.

Pop quiz: why is it off by default?!

See this article for more information about other caching techniques: http://blogs.msdn.com/ecm/archive/2006/11/08/how-to-make-your-moss-2007-web-site-faster-with-caching.aspx