The paths looked something like "$My Pictures/images/foo", which was
wrong (I don't have a "My Pictures" folder in my setup, and the "$My
Pictures" system folder resolves to "images")... Picasa 2 nevertheless
managed to find the images as (I suppose) it removed the "$My
Pictures" which it couldn't resolve, and prefixed "$My Documents" to
the path. Picasa 3 on the other hand seems to be stricter.
To rebuild the database (as per instructions from a Googler) hit Ctrl-
Alt-Shift right after launching Picasa (i.e. within a fraction of a
second of clicking on the Picasa icon, may require some practice). If
you get this right, you will be prompted if you want to have all data
reset. Before you proceed with this, copy your .pal files back into
the directory from which they were deleted.