This example is very striaght forward.
It replaces an image on a mouse over, and puts the original image back on a mouse out.
It preloads the images so you don't have to wait for the images to download when you move the mouse over/out on the image.
The href link to "#" provides all web browsers with the capability to monitor the object inside the link for the mouse over and mouse out events. It provides no other use here - clicking will not do anything.
IE would allow the user to have a span object around the image, but NS will not.