Nearly the same thing I experienced: after an Adobe Reader update and system restart, browsing to any folder in Picture Location will not select it - I'm stuck with the default folders in the dropdown box.
Originally posted here -> Cannot add Picture locations
If you create another user account it seems to work for that account. However, I just found out that it broke on that new account today (just under a week)! Wonder how they are saving those image locations, why can't it simply be a bunch of registry keys?
Dunno if this is part of the problem though: I remove all folders from any library and delete the junctions when creating a new account (I hate the library concept, I prefer to know where exactly a file is - folder hierarchies exist for a reason). I thought it shouldn't matter. Apps shouldn't be so crap as to break if they can't find the libraries or "default" folders anyway.
Edit: Indexing? That's... strange. I'll give it a try. I moved all my wallpapers to C:\pix and it seems that isn't included in the index.