I feel your pain and I'm here to help. You mentioned that you were unable to update the SW on the device. Since your last post have you been able to update the SW? If not, this may be the reason you are having the issue with the pictures on your phone and not being able to manage the pictures for your contacts.
I've researched this and found other users have reported having issues with the SW update as well were they were getting a Low Memory message and others have also lost pictures on their phone.
Many customers have found that a hard reset has resolved all these issues and after the hard reset they have been able to pull the SW update. I recommend you attempt the hard reset. Please make sure to save all your picture to your SD card as this will erase all data on the device. Once you have done the hard reset click here for steps on how to update the SW.
If after performing the hard reset you are still having issue with your phone, please post back and I will be more than happy to further assist you.