Thanks for your reply!
I did read the subfolders help page but had trouble following it all. But if you say I need to split my rule into two, that gives me something to work with though it sounds like a ton of work because it seems like I'll have to reset the rule for each subfolder if I have to split the rule into two. The image files inside each subfolder could have conflicting names, so they can't just be moved into the same folder.
Ultimately, I just don't understand what the rule, as I have it in the screenshot, is doing. It seems like it should work.
Basically:
"If items in watched folder are folders, apply the following to the contents: rename contents and move to the watched folder."
If/then statement, really. But I'll try splitting the rule and see if I can make that work.