Yes, those fields are checked in the "edit categories" screen.
Yes, if I create a new ad and upload new pics, those pics appear watermarked.
Chuck, you have all the login information and "admin" access for our upcoming migration from devforum. Please feel free to use that to login and check if we're doing something wrong or if in fact it's a bug.
The items and devforum are all "dummies" for testing purposes, so there's no live data to cause problems with.