I'm not quite sure why you get the message of directory being invalid. If this is access related I would expect that you would have access denied message.

Having said that,

what account are sql service and sql agent running under? Local system wouldn't have access to the share.

Did you create a share? (I think replication takes care of that for you though- gives you a default directory)

There is a step at the end of creating a publication where you setup the replication agent(s) to run under a service account - you might have set that to the SQL Service account which might be local system.

http://www.informit.com/articles/article.aspx?p=599700&seqNum=2

If this is your pc and you don't care for security, you just want to see how replication works, you can add your account to run sql services and let replication use sql account to run under. If you need to do this on a server, you might need to use a different account for replication.