Okay well here is what I suggest. Note any errors you have.
Set watermarking to On and make sure the path to image if correct
If your using Imagemagick the watermark needs to be a gif
If your using GD it needs to be a png
Next after you know the path is correct and watermarking is on go to your categories editor and in there set the usergroups that have there images watermarked.
That should get you going
