If you open the "Folder Options" applet, located in the Control Panel, and access the “View" tab, you’ll see a list of checkbox items. In Vista, the first checkbox item, “Always show icons, never thumbnails," controls how your icons are displayed. If the box is unchecked, the icons for image files will be displayed as thumbnails, or previews of the images, as long as the size of the icons are set to “medium" or larger. In addition, your folder icons will display previews of some of the folder’s contents, as shown in the illustration.
If the “Always show icons, never thumbnails" box is checked, previews of images will not appear in place of their associated program’s icons, and your folder icons will not display previews. This option is worth considering because, while being a quick and convenient way to preview an image folder's contents, generating thumbnails takes time and system resources, and may slow your computer down, especially if you've set that folder's icon view to large or extra large.