Install the NEW iPhone Facebook App from the App Store. If you already have Facebook on your phone make sure its updated to the latest version.
The new Facebook App has a little different user interface and getting to the screen to sync your contacts and pull down their photos is different than before. Open the Facebook App on your iPhone and click the top left menu button to expose your sidebar.
After following the steps above your contacts will start to have their Facebook images applied to them. One thing that I’ve noticed is that this process only syncs photos to contacts that you have listed that match the name and email address associated with a Facebook account. If you don’t have that information in contacts, it will not pull down their images when you sync the contact info. It does however add a FB link to each contact.