In the process of optimizing my site my portfolio images keep getting storted and I'm wondering if it has something to do with the K2 cached images.

www.thatworksdesign.com/

Click on any of the portfolio images and you will see the image is 820 x 544 but is being displayed as 540 x 544

Screenshot

i60.tinypic.com/zlf6vm.jpg

This is a template issue.
It is missing a height: auto in the project-media class.

Since this is template specific and not a K2 issue you need to address this to the template's developer.