Yes, the watermark_MED.png and the watermark_LRG.png files are in place in their respective folders.
I'm not sure if this makes a difference, but i upgraded my cart from 1.3.5 to 1.3.7. Is it possible it could be a database issue? When i was re-creating the new 1.3.7 site, i noticed that after i uploaded the IH2 files to all of their respective folders, that i did not have an "install IH2" button in the IH2 admin control panel. Instead, it was magically installed. I'm assuming stuff carried over from the 1.3.5 database info. So, just to make sure, i deleted IH2 from the database with the provided link, and installed it again, with the provided link.
If it helps, the site is
http://www.qcookies.com
Now, i just found out something interesting... Essentially, all of my images for products are in images/product_images. There is also images/large and images/medium (with the correct png file and zoom files, respectively.) In the main images folder i have a watermark.png and zoom.png file as spec'ed in the IH2 installation instructions. Now, putting an image into the large folder does not generate a "large" image on the website. But if i go into the images/product_images folder and create an image with the _LRG suffix, it will show up on the product page with a watermark as an additional image on the bottom. The same image without the suffix (that generates the main image) does not plop a watermark on the main image once you click to zoom in.
I really hope that all made sense. If it didn't, i'll have a second attempt at explaining it.

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