You are turning off the wrong thumbnail caching. In group policy where you turned the other thumbnail catching off you want: "Turn off the caching of thumbnails in hidden thumbs.db files"
There are two thumbnail caches in Windows 7, the first one is a central store at "C:\Users\[username]\AppData\Local\Microsoft\Windows\Explorer" this handles all thumbnail caching for the whole computer. Now, thumbs.db files are created for network locations, or in Windows 7 libraries and other interfaces seem to go though a network interface fooling the caching routines as if local files were on a network drive. Thus you get thumbs.db when you should not.
Registry key if you don't have group policy: