Yes, local directory windows and such were rendered with the IE engine in Windows 98 as I recall. Files and directories became "hyperlinks" and Microsoft made a big stink about how they could be navigated with one click instead of a double click, "just like the web". "Push" was the fad; instead of visiting Web sites, in Soviet Russia websites would come to you. That motivated Active Desktop.

I thought it was stupid and potentially dangerous because it misled users to treat the web and local resources equally, and put the same amount of trust in each. Of course nowadays, not treating local resources with the same amount of distrust we give the web is a major security fail, and that's why we must notarize and sandbox everything.