did you set both lines to your absolute path in the watermark file?
also there is a error in their code, atleast there is from 2.11 and earlier,
Enable On-The-Fly Watermarks
Requires GD2 and you must edit the file watermark.php
needs to be either a 0 or a 1, not yes or no... (it does NOT say this anywhere in their documentation, and it comes default (fresh install) with a "no" typed there...
also the 2 lines in the watermark.php need to be absolute paths not url's as one moderator on this site mentioned to me...
if you are on a vps with cpanel, then there's a 90% chance you have GD2
the easiest way to find out what you have access to is, creat a php info file, you will get something like this http://phpinfo.modwest.com/
if you scroll down a bit you will see a section called GD, it will tell you what version is installed (if any)
hope this helps..