OK. Ignore the last post, the problem is with IE8. But I think I solved the thumbnail problem.
The thumbnails display fine in IE8 when you click on Compatibility View, but how many visitors are going to know that? about zero.
I edited the Header.php file to include a meta tag after the <head> entry that forces IE8 to load the page in compatibility view in IE8. That solved the thumbnail problem. Other browser ignore this tag, so it should only affect IE8 (and eventually, another tag will need to be added for IE9, probly, because microsoft is what it is).
BUT, was there a reason this wasnt included in the header file in the first place? Other folks have found that turning on compatibility view with the meta tag actually does not work as well as manually clicking the button, so I was just wondering if I have just opened the door to other unknown bugs. So far everything seems to work super, and the page loads fine in Firefox and Safari, but I havent checked anything else.