Folders have to be inside of libraries. IMHPO folders are bad, but be that as it may, you can have a library created when a site  is created from the site definition. I don't know how to add files to a site at creation time other than the default pages and templates.other than

So can I add a document library prepopulated with files and when I create a new WSS site  it should show the document library with all the files in it?

Is this possible? please advice.

I know I can save the site as a template, but the requirement is to use a Site Definition and not a template.

You can add extra file when you are creating Area or site  in sharepoint. Open the onet.xml of particular site template and find <module> tag under find <file> tag
in <FILE> tag mentioned your file name.
So you can add n number of files.if its under folder give proper path foldername/filename

Yes I know I can do that but I have over 100 files.