http://exviva.posterous.com/watermarking-images-with-rails-3-and-papercli

development.log

[paperclip] identify '-format' '%wx%h' '/tmp/stream,4458,0.JPG[0]' 2>/dev/null
[paperclip] convert '"/tmp/stream,4458,0.JPG[0]" -resize "x100" -crop "100x100+16+0" +repage "/tmp/stream,4458,0,4458,0[0]"' 2>/dev/null
[paperclip] An error was received while processing: #<Paperclip::PaperclipError: There was an error processing the watermark for stream,4458,0>
[paperclip] identify '-format' '%wx%h' '/tmp/stream,4458,0.JPG[0]' 2>/dev/null
[paperclip] composite '-gravity Center /home/olek/projekty/shotmix/public/images/watermark.png "/tmp/stream,4458,0.JPG[0]" -resize "640x480>" "/tmp/stream,4458,0,4458,1[0]"' 2>/dev/null
[paperclip] An error was received while processing: #<Paperclip::PaperclipError: There was an error processing the watermark for stream,4458,0>

development2.log

[paperclip] identify '-format' '%wx%h' '/tmp/stream,8723,0.JPG[0]' 2>/dev/null
[paperclip] convert '"/tmp/stream,8723,0.JPG[0]"' '-resize' 'x100' '-crop' '100x100+16+0' '+repage' '"/tmp/stream,8723,0,8723,0[0]"' 2>/dev/null
[paperclip] An error was received while processing: #<Paperclip::PaperclipError: There was an error processing the watermark for stream,8723,0>
[paperclip] identify '-format' '%wx%h' '/tmp/stream,8723,0.JPG[0]' 2>/dev/null
[paperclip] composite '-gravity' 'Center' '/home/olek/projekty/shotmix/public/images/watermark.png' '"/tmp/stream,8723,0.JPG[0]"' '-resize' '640x480>' '"/tmp/stream,8723,0,8723,1[0]"' 2>/dev/null
[paperclip] An error was received while processing: #<Paperclip::PaperclipError: There was an error processing the watermark for stream,8723,0>

gistfile3.diff

diff --git b/lib/paperclip_processors/watermark.rb a/lib/paperclip_processors/watermark.rb
index 2493f1b..2a8977b 100644
--- b/lib/paperclip_processors/watermark.rb
+++ a/lib/paperclip_processors/watermark.rb
@@ -42,14 +42,18 @@ module Paperclip
 
         if watermark_path
           command = "composite"
-          params = "-gravity #{@position} #{watermark_path} #{fromfile} #{transformation_command} #{tofile(dst)}"
+          params = %W[-gravity #{@position} #{watermark_path} #{fromfile}]
+          params += transformation_command
+          params << tofile(dst)
         else
           command = "convert"
-          params = "#{fromfile} #{transformation_command} #{tofile(dst)}"
+          params = [fromfile]
+          params += transformation_command
+          params << tofile(dst)
         end
 
         begin
-          success = Paperclip.run(command, params)
+          success = Paperclip.run(command, *params)
         rescue PaperclipCommandLineError
           raise PaperclipError, "There was an error processing the watermark for #{@basename}" if @whiny
         end
@@ -67,9 +71,9 @@ module Paperclip
 
       def transformation_command
         scale, crop = @current_geometry.transformation_to(@target_geometry, crop?)
-        trans = "-resize \"#{scale}\""
-        trans << " -crop \"#{crop}\" +repage" if crop
-        trans << " #{convert_options}" if convert_options?
+        trans = %W[-resize #{scale}]
+        trans += %W[-crop #{crop} +repage] if crop
+        trans << convert_options if convert_options?
         trans
       end
   end

gistfile4.diff

diff --git b/lib/paperclip_processors/watermark.rb a/lib/paperclip_processors/watermark.rb
index c35b56d..7060ced 100644
--- b/lib/paperclip_processors/watermark.rb
+++ a/lib/paperclip_processors/watermark.rb
@@ -60,12 +60,12 @@ module Paperclip
       end
 
       def fromfile
-        "\"#{ File.expand_path(@file.path) }[0]\""
+        File.expand_path(@file.path)
       end
 
       def tofile(destination)
-        "\"#{ File.expand_path(destination.path) }[0]\""
-      end    
+        File.expand_path(destination.path)
+      end
 
       def transformation_command
         scale, crop = @current_geometry.transformation_to(@target_geometry, crop?)

photo.rb

class Photo < ActiveRecord::Base
  has_attached_file :image, :processors => [:watermark],
    :styles => {:thumb => '100x100#',
      :preview => {
        :geometry => '640x480>',
        :watermark_path => "#{Rails.root}/public/images/watermark.png",
        :position => 'Center'
      }
    }
end

photo_with_require.rb

require 'paperclip_processors/watermark'

class Photo < ActiveRecord::Base
...

watermark.rb

# from http://github.com/ng/paperclip-watermarking-app with modifications

module Paperclip
  class Watermark < Processor
    # Handles watermarking of images that are uploaded.
    attr_accessor :current_geometry, :target_geometry, :format, :whiny, :convert_options, :watermark_path, :overlay, :position

    def initialize file, options = {}, attachment = nil
       super
       geometry          = options[:geometry]
       @file             = file
       @crop             = geometry[-1,1] == '#'
       @target_geometry  = Geometry.parse geometry
       @current_geometry = Geometry.from_file @file
       @convert_options  = options[:convert_options]
       @whiny            = options[:whiny].nil? ? true : options[:whiny]
       @format           = options[:format]
       @watermark_path   = options[:watermark_path]
       @position         = options[:position].nil? ? "SouthEast" : options[:position]
       @overlay          = options[:overlay].nil? ? true : false
       @current_format   = File.extname(@file.path)
       @basename         = File.basename(@file.path, @current_format)
     end

     # TODO: extend watermark

     # Returns true if the +target_geometry+ is meant to crop.
      def crop?
        @crop
      end

      # Returns true if the image is meant to make use of additional convert options.
      def convert_options?
        not @convert_options.blank?
      end

      # Performs the conversion of the +file+ into a watermark. Returns the Tempfile
      # that contains the new image.
      def make
        dst = Tempfile.new([@basename, @format].compact.join("."))
        dst.binmode

        if watermark_path
          command = "composite"
          params = %W[-gravity #{@position} #{watermark_path} #{fromfile}]
          params += transformation_command
          params << tofile(dst)
        else
          command = "convert"
          params = [fromfile]
          params += transformation_command
          params << tofile(dst)
        end

        begin
          success = Paperclip.run(command, *params)
        rescue PaperclipCommandLineError
          raise PaperclipError, "There was an error processing the watermark for #{@basename}" if @whiny
        end

        dst
      end

      def fromfile
        File.expand_path(@file.path)
      end

      def tofile(destination)
        File.expand_path(destination.path)
      end

      def transformation_command
        scale, crop = @current_geometry.transformation_to(@target_geometry, crop?)
        trans = %W[-resize #{scale}]
        trans += %W[-crop #{crop} +repage] if crop
        trans << convert_options if convert_options?
        trans
      end
  end
end