Michael,
This is definitely the strangest issue I have ever seen with a picture control. The only explanation is that the VI was somehow corrupted, and my bet is that the current control set is outside of the acceptable bounds for a front panel. What highlights the weird behavior is if you right-click the picture control's wire on the block diagram and select Create->Indicator. Doing so creates a picture control at the extreme bottom of front panel. Running the VI, you can see that the picture control at the bottom works fine, while the picture control at the top does not, and they are connected to the same wire!
I will pass this find on to our R&D department for their review. The only workaround I can offer you is to move the controls to the bottom of the front panel ("inbounds") and let the front panel resize itself -- everything works fine after doing this. I have attached a modified version of your VI with this fix made. Thank you for reporting the strange behavior!
Regards,
E. Sulzer
Applications Engineer
National Instruments