I had the same problem. However to revert back to the previous settings (contact picture on inbox only) go to SETTINGS ---> BUBBLE CONVERSATION ----> DISPLAY CONTACT off.
My phone batt is dead so can't check the EXACT wordings however that should give you a rough idea where to look.
NOTE: You can DISPLAY contact picture for the inbox AND during conversation threads and BOTH can be tweaked (thankfully).
I have the opposite problem. After updating, the contact pictures no longer are displayed. They have been replaced with a generic outline with a question mark. My People application does have the pics populated.
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