I have WIndows 7 Ultimate and when I go into User Accounts in Control Panel I click on "change your picture" and I am only able to use the Windows 7 pictures. When I click on "browse for more pictures" nothing happens.
You might check to see if it opened a window that may be hidden behind another opened window. Sometimes these windows are small and can easily be covered up.
If not, then try a sfc /scannow command to see if it can find and fix any bad system files that may be responsible. Afterwards try again.
Since SFC cannot fix it, and you can view the log for a error, you might consider a repair install. It'll take around 20 minutes to finish, and you will not lose anything.