Are you sure you've got the "I will upload my own picture" button selected?
This is the equivalent of the computer guy asking you to make sure it's plugged in 
The selection automatically goes to the "I will upload my own picture" button when you select the "browse" button.
Just to be sure I've got the right sequence I've also tried selecting the "I will upload my own picture" button and then clicked the "browse" button. The avatar jpg is on my C drive, 65 x 65 pixels and 29 kb.
I've also logged out, rebooted my computer, logged back in and tried again... no joy.
Is there an intermediate step where the jpg file actually uploads to the website before you click the "change my profile" button? Perhaps Windows 7 is stopping the website from uploading the file from my hard drive?
Maybe the forum is not hosting avatars anymore - only hot links?
Yes my computer is plugged in.