What exact is wrong with watermarking?
I do not see any issues with it. In your gallery settings you specify the full server path to a png image to use as a watermark file.
It then says to watermark your images select yes and this action requires use of the gd library.
I upload an image and it is watermarked fine. http://omegatron.net/vbgallery/showimage.php?i=16&c=5
I am still running 1.01 on my test site so I have not upgraded yet. Please explain in detail what does not work for you.