As far as I know, the "thumbs.db" file is used in WinMe (at least) to store thumbnails for a "My Pictures" folder, or a folder that is set up to contain pictures. Ever notice how the "My Pictures" folder "works differently" (has an image previewer in the lower left of the window, has a different folder icon, displays image files as thumbnails instead of normal icons, etc.) in Explorer than other folders? This is part of what is different. Just ignore the file.
You can make any folder work like the "My Pictures" folder by opening the folder, then selecting "Customize this folder..." from the View menu, click Next, then "Customize" and "Choose or edit and HTML template for this folder" and selecting "Image Preview". After doing so, the thumbs.db file will show up there automatically.