I also had this issue, figured it out now... you guys are doing it wrong.
It's a good thing to link your phone contacts to their Facebook profile. You can access so much more content for each contact this way, via the "People" app. Sync your contacts and turn off viewing Facebook in the "People -> Menu -> View" setting. It will suggest linked contacts for you and you can do the rest manually by editing contacts in the "People" app.
Now set a shortcut to "People" on your home screen. THIS IS YOUR CONTACTS APP. If you did the above right, you should see just your phone contacts, but with their Facebook picture and accounts linked. It will not show the other contacts from Facebook as you have turned those off above.
The "Phone" app on the homescreen is NOT YOUR CONTACTS. It is your recent call history, and when you have no recent call history, it does populate it with your entire contacts list (and you cannot exclude anything from this like you can with the "People" app). HOWEVER, once you start making calls, the "Phone" app will now be populated with your most recent/favourite contacts.
This did me take me a little while to get right, and it got me very frustrated, but now that I have it set up correctly I promise you it is an absolutely awesome interface. You just have to get over the fact that "Phone" is recent call history not contacts, and "People" is your contacts app.