Well, exactly where did these pictures ORIGINATE from?
I had pics assigned to contacts from my previous phone which moved over to the hero when I originally synced from Outlook, they were blurry too. Yes, Outlook uses lower spec's/resolution for its contact pics.
If you used a
picture file on your phone and then used it to assign to a contact I think the issue will go away. I had blurry ones too, so I went and found the original pictures, copied it to my phone, used it to assign to contact, deleted the pic afterwards and whoola, no more blurry picture.
This obviously won't work if you don't have the original. If they are FB friends, just go there and download a pic from their page and then proceed to do it this way.
Hope this helps... it's a long way around, but it works.