@freshstart

Those folders are used for template images only. Product images go in the images folder in your site's root directory. Your medium sized images would go in images/medium and your large ones in images/large.

You can also include a folder name such as products in your images filenames when you define them via the admin and then your images should be placed in images/products, images/products/medium and images/products/large.

Have you also included the _MED and _LRG suffices for your medium and large products?