First thing is to check the actual snd function.
Click Prefs->Reset editor to MSPaint and see if images will be sent there. If this works then Select Editor again and browse for the PSP application.
Note that it is the actual psp.exe application that needs to be selected. Make sure you haven`t accidentally selected the wrong exe. XP stores a cached version of executables for its own uses and these are not actually functioning exes but some sort of special shortcut file used by the system.
PSP.exe will usually be found in "Program FilesJasc Software incPaint shop pro 7" unless you did a custom installation
