When I first installed NextGen Gallery plugin for WordPress I could not get the watermarking working. I read of all sorts of problems with it including FreeType not being installed, permission problems, etc. but everything that I was trying was not resolving my issue. During upload I was not getting any errors so at the time I felt I had little to go on. To make a long story short I finally read a post on WordPress.org that said the watermark image has to be a PNG for it to work. I saved my watermark file as a .png file and sure enough it worked without issue.