Nala,
If you do not see anything in the drop down list, it means that Watch cannot find any Image service installed. Are you sure Image is correctly installed(or installed at all)? Note that you can select a PlanetPress Image output in Watch even if Image is not installed, but you won't be able to select a service, and therefore it will not work.
If you did install Image, try reinstalling it. If you installed it on a remote host, make sure the network connections are properly done, and that you are logged on as administrator with all the admin rights. To login as administrator, go to Tools->Configure Services, then uncheck local user if it's checked, and then choose your domain and username under which you installed Watch, and make sure you have all admin rights.
Hope this helps.
Regards,
Rapha