Joe C:
1. If you still have dnsmasq.conf.add.txt, That's a problem. It needs to be dnsmasq.conf.add, and it needs to be in unix format. In it you need the line pointing to your hosts.clean (or whatever you call it). Whenever dnsmasq restarts, it goes to the dnsmasq.conf.add file, sees the line pointing to hosts.clean, and reads all those hosts in. If it doesn't, nothing will happen. You can see it do that in the system log.
2. If you don't do the changemod, the scripts won't run in the first place. One way to do it is to select the scripts in WinSCP, right click, go to properties, and change the rights by clicking the checkboxes until they add to 755.
3. If you execute a script in WinSCP, in my experience, you get that popup that just shows 0%, until the script finishes. If it doesn't run, you get an error, but 0% is as good as it gets. Putty gives you more feedback.
4. Somewhere, you need to run update-hosts.sh first, to generate the file. Some do it from services-start. I prefer to follow what thelonelycoder did and do it in a chron job once a week. Then services-start just restarts dnsmasq. In my case, my USB drive is not mounting early enough, so I put the dnsmasq restart instruction in post-mount instead.
5. whitelist.txt and blacklist.txt both need to exist (even if they are empty). But whitelist.txt can't have empty lines or your hosts.clean file will be empty.
PS. Hope that helps. I've found this whole thread a marvelous way to go from complete ignorance to some awareness of how the scripts work with Merlin's firmware, and Linux commands. Even more useful than adblocking!