I'm experimenting with the watermark feature as well.
But what exactly happens when you turn "Permanently Watermark Images" off?
All it seems to do is make my images unwatchable and turns the source of the image into something like "showimage.php?i=3571&c=56" instead of site.com/gallery/files/1/stuff.jpg
Also is there any way to watermark already uploaded images
And last question are non-watermarked files saved anywhere?