Comment 17 for bug 968268

I've got exactly the same thing; adding picture(s) in the drop down 'Pictures folder' item, only lasts as long as you have that screen open. If you close the window / backgrounds option and you right click on your desktop to reopen it; wallpapers appear ok.
When clicking on 'wallpapers' to get again the 'picture folder' option, everything is gone.

At my version of Precise it does point to the /home/username> folder though.. which is not correct either….