Watermarks on Hotlinked Images

I have loads of images hotlinked around the web, even some of the image search engines seem to be as good as hotlinking these days. I always figured one day they'd actually come in handy, so when I discovered this Wordpress plugin http://www.tranchesdunet.com/hotlink2watermark/ I thought the day had arrived (it allows you to add watermarks to all hotlinked images in just a few Seconds). Well, the benefit is partly true, I'm seeing good well-focused traffic coming in from the hotlinked images, however in certain cases when the image is clicked via an image search engine e.g. Bing, it comes up as a Jpeg text file i.e. gobbledygook, rather than the image.

Anyone know a fix or another way of doing the same? I don't want the watermarks appearing on my own site, only on hotlinked images.