I can also confirm that I have the same problem on a local installation on my development machine.
I completely removed my old zenphoto 1.2.2 directory, went to the setup.php file, entered in the database configuration information, saved it and clicked the go button, copied the contents of my old albums/ directory to the new albums/ directory, then published the album.
Now, when I view the full image page, it shows "Watermark" in the bottom-right corner even though I have the watermark set to "none". This does not happen when I'm browsing the album, only when I click on it to view the original full image file.