try using a full URL in the options – watermark screen. worked for me.
i’m a fool…you have to supply a full url even though the preview image will show the watermark even if you only include a relative url. and i have to keep allow_url_fopen enabled even though mediatemple’s knowledge base says that’s not the best idea as far as security is concerned…oh well…fixed.
i am also…and it was totally working before! just the “use image as watermark” option seems to be broken…i can watermark with text (not that i want to).