I put my watermark in the folder /plugins/watermarks/
http://www.stipvoorstip.nl/fotoblog/plugins/watermarks/watermark.png
but when I watch the pic's I get just the text WATERMARK.
Well, maybe we should have user watermarks override the ones zenphoto provides. But of course, then we would get confused if someone had a problem with one of their own creation that sounded like one we distribute.
Before 1.2.7 the update of Zenphoto would just have overwritten your watermark if you used the same name, so no one did.