well water dragons are extreamly common and caust almost nothing for the pet store to buy, its kind of suprizing a pet store owner wouldnt know anything about water dragons, they are almost as common as bearded because of their price.

the mark on the lip, what did the vet tell you? its from rubbing his nose on the enclosure, simple topical antibiotic is the first rout, injection is way better then oral, less stress.

i inject the antibiotic into crickets. is the antibiotic called baytril? this will often make the wd not want to eat. from stress and from the antibiotic.

i think one is afraid of the other, puff is it? try keepinng puff in a 20 gallon long for a few weeks and see if that makes him feel better. if you have 2 males, this also could be the problem.
did your vet recomend testing for internal parasites?
do you feel confident in your vets treatment? if not , dont go back. look up recomended vets in your local area.
http://www.repticzone.com/forums/index.html has more action and advice
i recomend goingn there because this forum is way to slow

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