This example shows the result from applying watermark when using non-transparent images like JPEGs, or using files with non-alpha transparency like GIFs.
Pay attention to the JPEG watermark: probably you all know it, but let me put these words of wisdom again – do not use JPEGs and plain flat colors. When the JPEG compression is applied, it tries to smoothen the image and this f*cks up the areas covered with flat color.
Here you can see the source image, the watermark image, and the result:
You can download the source for this example from here: