A soldier, in a watchtower, can not target an enemy creature 2 zones away orthogonally, with a steep hill directly in between.
A soldier in a watchtower, can target an enemy creature 2 zones away diagonally, with a steep hill in one of the two zones that could be used to determine LOS between them
A soldier, in a watchtower, can not target an enemy creature 2 zones away diagonally, with a steep hill in both of the two zones that could be used to determine LOS between them.
This is correct, this is what we are all saying here, right?
Not quite. First, I think you may be confused about line of sight. Determining Line of Sight is completely different and separate from determining distance. You trace line of sight from the center of your zone straight to the center of your target's zone (or the center of the zone border if you're targeting a wall). So, if your target is in a zone adjacent to you, line of sight will go straight from your zone and into there's by passing through the corner that connects them. There are no intervening zones and so there can't possibly be a steep hill between them.
Now that we have that established, we also need to keep in mind that steep hill only blocks line of sight if it passes through two sides of the zone, i.e. if line of sight passes through the zone rather than simply into the zone. It doesn't prevent you from targeting the zone with the hill, just zones beyond it.
So, when evaluating your statements, and ignoring the error in how LoS is determined, the first two are correct and the third is false. If I have a steep hill to my east and another steep hill to my north, then I still can fire between them to hit the zone directly to my northeast (diagonally adjacent to my current zone). If that zone also has a steep hill, then I can again still fire into it because I'd only be dealing with its steep hill which prevents me from firing beyond it but not into it.
This is because, unlike walls, there is no rule that says flanking hills affect LoS through the diagonal at all. While flanking walls are meant to portray one continuous wall through the diagonal, flanking hills are still conceptually two separate hills with a valley between them. Which also helps explain why moving from one hill to another still requires a Full Action, because you aren't just staying on a high plateau.