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Please try these steps to resolve the issue:

1. Close Windows Live Photo Gallery
2. Click Start
3. Click on run
4. type %userprofile%\Local Settings\Application Data\Microsoft\Windows Live Photo Gallery and click on ok
5. Right click Pictures.pd5 and click on rename
6. Change the file name to OLD_Pictures.pd5
7. Open Windows Live Photo Gallery and check if you are getting the error again.
8. If you are still getting the error, then please try these steps:
• Click Start
• Click on run
• Type Regedit.exe and click on ok. . This will open the Registry Editor for you.
Note: The registry contains critical settings that are necessary for your system to function properly. Wrong changes made in the registry can cause damage to your system.
• Navigate to the following key:
HKEY_CLASSES_ROOT \ WindowsLive.PhotoGallery.bmp.15.4 \ shell \ open \ DropTarget
• Right-click DropTarget, click Rename and prefix a hyphen so that it becomes "-DropTarget"
• Repeat the steps for the following keys
HKEY_CLASSES_ROOT \ WindowsLive.PhotoGallery.gif.15.4 \ shell \ open \ DropTarget
HKEY_CLASSES_ROOT \ WindowsLive.PhotoGallery.ico.15.4 \ shell \ open \ DropTarget
HKEY_CLASSES_ROOT \ WindowsLive.PhotoGallery.jpg.15.4 \ shell \ open \ DropTarget
HKEY_CLASSES_ROOT \ WindowsLive.PhotoGallery.png.15.4 \ shell \ open \ DropTarget
HKEY_CLASSES_ROOT \ WindowsLive.PhotoGallery.tif.15.4 \ shell \ open \ DropTarget
9. Close the registry editor and restart the computer. Try again and check for the error.

Here’s to Good Karma