It should work:-) I added a report to a project, then added two images as well. Source=external, value==IIF(Parameters!SetBack.Value="DRAFT","e2ead2.png","e2ead1.png"). Report worked fine in IDE or deployed. I would start by making sure both images got uploaded to the same folder as the report and that you can see them.

Note that while it doesnt apply to your issue, the parameter value will be case sensitive, so entering Draft, draft, or any other value other than upper case DRAFT will cause it to match to the else clause. Can be fixed by just coercing the input value to uppercase in the comparison.