If I look into the code (via reflector) :
in the assembly : RadEditorSharepoint.dll
int the class : Telerik.Sharepoint.Editor.SPContentProvider
int the method : GetSPFolderFromPath :
I see the following code :
|string strUrl = "/";
|SPWeb web = site.OpenWeb(strUrl);
which means :
If your site collection is not a "root" site collection (ie the server relative url is not "/"), Then, it will always throw an exception.
=> If your site collection is something like http://blabla/sites/Site then you have the following options :
1. Remove the 126.96.36.199 version and reinstall an older version
2. Or in the ToolsFile.xml, change the ImageManager by MOSSImageManager, and don't use the flash manager or media manager..
3. Or Wait until the next release.
Anyway, this is what I think...