Well this is why there's a test-backup feature. We've never seen an example of it not working, it's usually a problem with the way it's typed in. Have you selected the proper backup version? Did you enter the SecurePrint code? (does your backup have one?)
Unfortunately, without seeing the paper backup, there's only so much we can do to figure out what's wrong (I'm not encouraging you to send me the backup, btw, I just don't know how much I can do for you).
If you did not use SecurePrint, you can go to make a backup, and under the "More Backup Options" go to "Export Key Lists." In this window it will display the non-SecurePrint paper backup root (and chaincode, but if your backup is 1.35c, you can ignore the chaincode if displayed). This should match what you have on the sheet of paper -- but only if the backup does not user SecurePrint. I don't know if there's any way to show the SecurePrint version.
Also, if an Armory wallet file is encrypted, it will only ever write the encrypted data to disk. The decryption happens in RAM only and immediately zeroed out as soon as the data is no longer needed. The only way to end up with unencrypted data on disk is if you explicitly remove the encryption through wallet properties.
I will mark this as resolved. The test paper backup defaulted on version 1.35C, and I had to manually select 1.35A. What does this mean? Is my wallet an older version or something? Does it need to be updated? I was under the impression that it defaulted to the correct version I was using. So paper test is %100.