The issue I have as well is not with the contact pictures but with the ones I can set for the IM accounts (e.g. for the Skype account). The the N900 downsamples the image to a very bad quality and all my Skype contact see this image when they view my Profile in their Skype.

So I am very interested please to know which is the folder where these IM account pictures are stored in. Does any one know the path?