I've always scalloped first, that way you don't have to worry about hitting the frets when you're doing your scallops. You can even sand across the scallops, allowing the paper to hit the frets and scratch them all up, because you're removing them anyway! It's a little more likely to chip out during fret removal if your scallops are close to the fret slot, and overly deep. Otherwise it's fine. You can also clean up your scallops when the frets are out, too. You pull the frets, level the board, and then clean up the lines where the scallops begin and end. For me that's always been the way I do it. I've done plenty of scallops without refrets, too. So it's not a big deal to do a scallop with frets installed, you just have to be more careful to work AROUND the frets. Since I do a lot of wood removal with the automated tools, there's always a risk of touching the fret.