I have FrontPage 2000. I had not used the thumbnail feature but just tried it now. I see that when I insert a picture, make a thumbnail and then save the file, the original image and the thumbnail are both added to the files in the folder containing the web page files. Do you see both image files for the problem picture in the folder containing your web page files?
Try opening them the problem thumbnail and a non-problem thumbnail in Paint. Do they both open OK?