incrediBILL - 9:30 pm on Mar 28, 2012 (gmt 0)
I'm not keen on watermarking the images, it's defacing my own website - cutting off my nose to spite my face.
You don't have to watermark what's show on your site.
Put images in 2 directories called /site and /off-site and create a rewrite rule that redirects anything requesting the same image that isn't coming from your pages, to load them from the off-site directory.
Simple solutions for simple problems and your nose is still intact although it would appear slightly bent.