How To (from the Nexus One):
1. From you Home Screen, press the Menu button
2. Choose Accounts & Sync Settings
3. Add Account from the button at the bottom
4. Choose FaceBook and enter your login information
5. Make sure that the Sync Button to the right of the Facebook account is green
I sync it once and then turn it off, so that it isn't always updating or looking for new data. When you go to contacts you should see your Facebook friends added. For contacts you already had on your phone that are also on Facebook, you should now see the Facebook Profile Photo as the Contact Photo.
Now how cool is that?