Thumbnails are used to show a preview of image without opening the image in any Image Viewer or Editor. To Show thumbnails of pictures in Windows XP you have to enable thumbnail View. Once you enable Thumbnail view windows create a Thumbnail Database file (thumbs.db) in same folder and cache the thumbnails of images into this file. This way windows will show you preview of images faster next time you browse through same set of pictures.
If you like the Thumbnail view of images but not satisfied with quality or size of the thumbnails you can change default setting of these by using following registry hack. (Always backup your registry before making any changes).
However Before changing these settings be sure that your computer have enough RAM and processing resources to handle these. As Thumbnail views can use a lot of system resources making your computer slow. If you increase the quality and size of thumbnail view, Browsing through files will require more time as building thumbnail is quite a slow process. Also if you have very large folders with thousands of images in it. Then it will be very time consuming and also your thumbnail cache can grow big.