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Once you set a picture, it's stored in the contact info itself (pim.vol maybe?) so you don't need to save all those pics on your device.
The only reason you would need to have those pictures handy is if you're using some contact or phone application that's not using the assigned (poutlook) pictures. I know some apps like PhotoContacts Pro save them to something like my documents\contacts because it allows you to use something like 240x240 pics.
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