Brad,
Short answers;
1) 2nd option and yes the 1st would be spam or at least spammy.
2) Combination and focus on themed links eg; keyword to keyword, asian to asian, etc.
3)
a)There is plenty you could do to make that site better for the SE's, but exactly what you should do would depend on the keywords you are targetting. At a minimum your galleries need links back to the main page.
b) Yes listable in DMOZ, but dependent on editors in Category and number of similar sites in submitted category.
HTH
DD