When the KT processes an epub, it finds the cover image and creates 4 thumbnail images in the .kobo/images folder.
They are named with a complex pathname that includes the folders to the epub to which they refer.
N3_LIBRARY_FULL 355x500 pixels
N3_LIBRARY_GRID 149x223 pixels
N3_LIBRARY_LIST 60x90 pixels
N3_SOCIAL_CURRENTREAD 120x186 pixels
The files end in the extension "parsed" but are simply renamed jpg files.
You can view them by copying to your machine and renaming to .jpg.
In firmware versions up to 1.9.10 ( I have not tested 10 yet ) you could replace these files with your own image and the KT would use that image for sleep and power off covers etc.
The simplest method of ensuring that you have the correct filename is to open the actual file on the KT in an image editor and then simply copy the image you want over the original image and thus when you save, the correct filename is used. Note that you will likely have to resize the "canvas" of the original image to fit the new image if it is larger than the original.
I have tried images with up to 800x600 with no problem, though I only replace the big thumbnail most of the time. Yes, it will be VERY time consuming.
Please remember that the proportions of the KT screen and the proportions of the average paperback or epub cover are NOT the same so you will need to either add margins ( I suggest black ) or crop the cover.
Also, I had a reply on another post I made about this that they are looking into the method used to create the thumbnails. I suspect that this is way down on the list since it is simply cosmetic and not a functional problem.
Hope this helps.