In home.php, on the line that starts
<?php $recent = new WP_Query("cat=1&showposts=3");
replace cat=1 with the category number that you want to be featured in that space. you can find the category number by going to Manage>>Categories, then click on the category you want. The number (or ID) is at the end of the url.
To change the title of the featured section, replace the text between the h3 tags.
To have a custom thumbnail for a post, add a custom field when you are editing the post. For the Key, enter “thumbnail”. For the value, put the absolute path for the image you want to use.