Take A4Desk Flash Photo Gallery Builder as an example (it was the very first one advertised when I searched for "flash photo gallery"). When a user clicks on an image in the gallery, the original image is sent from the server to the user's browser, and then the A4Desk software puts the watermark on the image after it's arrived at the user's browser. Unfortunately, it's possible for a user to see the original URL of the image (via software like Firebug) and request it from another tab in their browser, bypassing the protection that the Flash gallery offers.
|Left: Watermarked image from A4Desk. Right: Original image retrieved from their server.|