Well my hosting people really worked hard on this. They researched the script, tried it on different servers, all sorts, and they couldn't suggest or tweak anything that wuld make it work.
In the end they found an alternative script that does a very similar thing, but they cant make that work on the main page of my blog either. However, if you surf to the direct location of the image it does indeed display the watermark, but really badly. It's a PNG with transparency and the transparent elements show up as semi-transparent yellow. Yuk.
Basically, it doesn't work.