This is the file used to store authentication information (username/password pairs), when using "flatfile" authentication. (If authentication_type=1)
The file format is very simple:
username1|password1
username2|password2
username3|password3
...
For example:
bobbitt|giraffe
user2|photos
...
The location is defined by the auth_db config item, so make sure you put the file where album.pl expects to see it. For security reasons, this file should be above the web root, so people can't download you user list.