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You need to decide whether you want permanent or on the fly watermarks.
If you want on the fly you set in watermark options watermark NO and fill in the server path to the watermark and in Admin => Show Photo Options turn on the on the fly watermarks
Now if you want permanent watermarks you need to turn watermarking ON in watermarking options and set the path you then go to Admin => Edit Categories and set the usergroups in permissions that get there images watermarked.
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