[Milhouse]

mklocal.py is trying to create a binary (jpg) file called Z:\Movies - Kids\poster - does this path already exist, perhaps as a directory (not a file)?

It's not obvious why mklocal.py is trying to create a filename without an extension - it would be interesting to see your Sets metadata, you may have a mangled filename or artwork type in your library.

Try enabling verbose mode by adding --verbose to the mklocal.py command - this might output relevant information prior to the error which allows you to identify the problem Set.

Failing that, dump your Sets metadata to pastebin (long winded solution for Windows: texturecache.py jd sets >textfile then upload textfile to a http://pastebin.com).