There’s something strange going on with the iPhone’s photo storage routines. If you create a new contact and press the Edit Photo button (it should be empty), the camera fires up and you can take a picture. This photo is then automatically added as the contact’s picture. However, the photo itself is nowhere to be found in the Camera Roll or Photo Library on your iPhone.
Now, if you take a picture outside of the Add Contact process, it’s stored normally in the Camera Roll. You can then apply it to a contact. However, if you delete that photo from the Camera Roll, it will only delete the photo from the Contact image well but not from the Camera Roll.