The gallery thumbnail is simply the image that represents that gallery. For example on your main galleries page, all your galleries show up with their thumbnail images and their titles.
The easiest way to designate thumbnails for each gallery is to first upload your images to the gallery, then you can MODIFY the gallery and there will be a drop-down list where you can just choose the image you want for the thumbnail. If you don't pick a thumbnail for a gallery, the first photo in the gallery will be chosen automatically as the thumbnail.
Alternatively, if for some reason you want to use a thumbnail image that is not actually a photo in the gallery (and thus not in the drop-down list), you can do this by first uploading the image via the UPLOAD FILE feature, then when you modify the gallery you can enter the thumbnail's filename in the field below the thumbnail drop-down list. Be sure to also check the radio button next to that text field there.