I don't have too many non-Calibre EPUBs but I did find one with images in a sub-dir. The PB360 displayed images as expected - so no problem there.
Thanks for your suggestion to switch to Sigil, but I have too much time/effort invested in making Calibre/MSWord cooperate to produce nice-looking EPUBs. I don't have any problems creating TOCs in Calibre.
I have no reason to believe my Thumbnail images problem is anything to do with Calibre as many EPUBs display just fine. Unless a few more people contribute their own experiences with PocketBook Thumbnails I guess I'm going to stay wondering.
