[Eurisko]

What I did on my computer was to create full screen jpg's of my contacts faces (480x320), sync them to the iPhone so they show up in Photos.app (use iPhoto or store them in a folder).

Once that's done, go into contacts, edit the contact photo and select "Choose Existing Photo" and select the appropriate one from your Photos library. Next time you sync, your new contacts, with full screen photos, will be copied back to the address book.

Once that's done, you can simply remove them from your iPhone Photo library.