Please Note: The WordPress Image Uploader was upgraded dramatically with WordPress 3.5. See updated instructions for choosing a Featured Image with the WordPress 3.5+ image uploader.
Many themes use “Featured Image” as a way for administrators to choose which image represents a post. Frequently the Featured Image will be the thumbnail that represents a Post on a Category table-of-contents page (this is how it works for WPFolio). But they can also be used in slideshows for featured Posts and many other things.
On the Posts page of the WordPress Dashboard click “Set Featured Image” in the “Featured Image” subpanel in the lower right sidebar.
Then on the “Add an Image” screen, click “Use as Featured Image”. (If you have not uploaded any images, please upload them.)
Be sure to click ” Save All Changes” before closing dialog box.
The featured image will appear in the lower right of the Edit Posts page. Like this:
You can easily remove the image and add another one, if you wish.
(This video speaks about some specific themes but the lesson about Featured Image is applicable to most WordPress Themes.)