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Stumped, what am I missing here?
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When working with templates you have to look at all the code, in all the files. The "style.css" file makes no mention of those graphics that you have edited. Which means they are not called up from there.
The "index.html" shows only this code again no reference to those graphic files, but if you change the words highlighted in red and save the file you will see the change.
Why are they in the images directory. Probably remnants from the psd file and when the coding was done, it was decided the method now shown was the better way to code the file.