Save and upload the file back to the server. Now in your Post/Page edit section, you will find a Set thumbnail option in the rightmost column (just below the Categories section).
Click on it. The image uploader window will appear. You can either new image (or select from Gallery) the picture to be used as the thumbnail. Once you have uploaded, click on the use as thumbnail option.
Save the post.
Getting the thumbnail to appear in the front end
To get the thumbnail image to appear, you need to insert the function in your theme files. The most likely place is index.php, single.php and page.php Check out Mark Jaquith‘s article for more detail on the usage of the thumbnail function.
