I "think" its trying to create that folder but can't. You could try creating the folder, it needs to be wriatable as thats where it creates thumbnails and web size images from the full size originals.
You can put your web sites anywhere on your hard drive, it does not have to be in C:\inetpub\wwwroot, that is just the default location, I never put mine there. The important thing is wherever you point it, IIS and asp.net must have read permission on the whole web root folder and full control on the Data folder.
Though the web site can live anywhere on your drive, the images must live beneath the web for it to work at all because its just creating html and links that point to those images so it can only point to images that are being served from the web.
I've locked it down so it can only access files and folders beneath /Data/Sites/[SiteID]/FolderGalleries because if its not locked down this feature can be used to browse all the folders in the web site by hacking the urls in its links. It can only browse images, but it also could show the entire folder structure of your web if it were not locked down.
I integrated this feature from this Photo Handler project on Codeplex. I had to modify it quite a bit for the integration and I have no plans to keep up with changes in that project. I also have no immediate plans of doing any improvements on this feature because I have too many other plans with higher priorities. To me the beauty of this feature is that it has no database components at all, you just point it at the folder with full size images and it creates a nice display with thumbnails. So there is nowhere to store labels or any other text related to the images without adding database logic to this feature and that adds complexity and work.
I'm not sure about what it would take to style it differently and unfortunately don't really have time to investigate that right now. The thing is very self contained, it writes in its own css from code and the styles may be hard coded, I'm not 100% sure.