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Hi..
i would disable on the fly, just try this, goto PP admin > Watermark Options > Enable watermarking of photos with overlay image (set to YES) set the watermark position, then the path : /home/mysite/public_html/gallery/watermark.png ( for example )
note : use a transparent PNG file if possible
then setup categories > PP admin > Administration > Edit Categories > Path to watermark for this category (and) check "These checked usergroups will have their photos stamped with your overlay photo" found at the bottom of the edit category page and set for each usergroup.
-T
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