Did you figure out the problem? As an experiment I "moved" my embellishment and paper scraps folders to another hard drive and I then got the same error as you did. When I moved them back the error went away so it looks like your folders got moved some how.
These two folders should reside in:
"C:\Program Files\Scrapbook MAX!\Gallery\Images".
To find them on a Windows XP system click on the Windows XP Start button and then Search. In the Search Results dialog box click on "All files and folders".
Type in "paper scraps" (without the quotes) in the box that says "All or part of the file name:". In the pulldown box that says "Look in:" select Local Hard Drives. Now click on the Search button. The results window should show you where this folder is.
If the folder is not in the above listed place then it needs to be moved back there.
Hope this helps.
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