Basically, you'll need to physically re-add your contacts. You know, as if you're adding a new contact?! But, when the system prompts you to select Google contact or Phone contact, select Phone contact. For some reason the images aren't rendered correctly when synced through Google. *shrugs* I'm not at all sure why this is or if this will be the case with everybody. But, like I said, it's what I did to resolve the issue. This method will especially suck if you have tons of contacts.
Try it out... Lemme know if it works.