Canon finally found an obscure reference to the problem...it IS a driver problem, and it WAS caused by a previous multifunction device which replaces the Canon driver with an older Canon driver. You were on the right track Paul. Just wanted to say thanks for helping me, I learned alot.
If anyone else is having this problem, here's Canon's reply that fixed the problem:
-TWAIN scanner or other TWAIN sources are not listed as selectable
scanning sources in Toolbox or other scanning applications (PhotoStudio,
Photoshop Elements, etc.).
-ERROR: Failed to open a driver
"TWAIN Source Manager.Shlb" has been replaced with an older version by
another application or driver.
Download the Mac OS X Data Source Manager (DSM) from www.twain.org.
The exact download link is:
1. Once the file is downloaded and the disk image is mounted,
double-click it to open it.
2. Open the Carbon TWAIN SDK folder and then the TWAIN folder.
3. Copy the file "TWAIN Source Manager.Shlb" to the following location.
It has been noticed that some HP scanner/all-in-one drivers have
replaced this file with an older version. When this happens, you no
longer have the ability to access the Canon TWAIN drivers from any
application. It was not necessary to remove or replace the version in
this location. Simply follow the steps as noted above."