I upgraded to WP Related Posts 2.9 and had the same missing [replaced with default] thumbnail issue others have noted so I backed down to 2.7.
Somewhere along the way I noticed that my transparent png featured images were converted by this plugin to non-transparent jpg thumbnails which looked awful... so, being brilliant as I am, I deleted all the jpg thumbnails using my FTP client. Yes.
NOW the plugin displays broken image icons where the thumbnail images should be. Worse even than the default thumbnail problem! So now what? How do I get the plugin to regenerate the thumbnails it doesn't know are missing? And... what to do about my transparent png images that get converted to jpg?
Thanks in advance for your help!