The Thumbnail view was introduced with Windows 98 and allows one to easily overview a collection of pictures. This done by displaying a smaller version of the original image so it is possible to see several pictures on single screen. To optimize the thumbnail view a cache (Thumbs.db / ehThumbs.db) is made so all the pictures doesn't have to processed every time viewing the folder.

It is possible to configure thumbnails quality (Will also affect the size of the cache):

[HKEY_CURRENT_USER\ Software\ Microsoft \ Windows\ CurrentVersion\ Explorer]
ThumbnailSize = 96 (Default, 96, Range 32-256)

[HKEY_CURRENT_USER\ Software\ Microsoft \ Windows\ CurrentVersion\ Explorer]
ThumbnailQuality = 90 (Default = 90, Range 50-100)

More Info MS Technet
More Info MS Press: XP Registry Guide

Note in Windows 98/Me/2000/XP the thumbnail view depends on these DLLs, and if unregistered the thumbnail view is disabled:

regsvr32 /u shimgvw.dll
regsvr32 /u thumbvw.dll

More Info MS KB272969

Note in Windows XP the thumbnail cache can be disabled completely with this DWORD registry key:

[HKEY_CURRENT_USER \Software \Microsoft \Windows \CurrentVersion \Explorer \Advanced]
DisableThumbnailCache = 1 (Same as "Do not cache thumbnails" in Folder options)

Note in Windows XP the thumbnail cache (and the thumbnail view) can be disabled for network-drives and -shares with this DWORD registry key:

[HKEY_CURRENT_USER \Software \Microsoft \Windows \CurrentVersion \Explorer \Policies]
NoDetailsThumbnailOnNetwork = 1

More Info MS KB830903

Note in Windows XP when holding down the SHIFT key while opening a folder in thumbnail view, then the picture titles and filenames will not be displayed and will give more room for the thumb nails.

More Info MS KB176882
More Info MS KB192573

Credits Tlab404.com