When logged in as the admin go to "Pages"
Click thumbnail icon to upload a thumbnail for a specific page
Upload the thumbnail. The thumbnail you upload MUST be .jpg format. Also, for best quality the image should be 196px in width and 187px in height.
Often because of browser caching you may not see the change right away. Even though you do not see the image, the image still was successfully replaced. To see the new image, either try a new browser OR if using FireFox, right click on the thumbnail you see, select view image, hit refresh (now you will see the new image you uploaded), then click the back button and hit refresh again. This will empty your cache in FireFox so you can see the new image you uploaded.
I believe your problem is the image you are uploading is not jpg (must be jpg, can't use png). If that isn't the issue, if you can forward us the file and we'll upload for you and see/fix the issue (could be invalid mime type of some issue with the file itself).