I think I just answered my own question.
Regardless of whether or not you use iPhoto and Faces to add the name and photo to a contact, IF you took the photo with your iPhone, the photo will default to a full screen photo when the contact makes a call or you call that contact.
The work around I used was to go into iPhoto, take a screen grab of the photo I originally took with my iPhone and re-import the screen grab into iPhoto.
I then added the Faces name through iPhoto on the new imported screen grab. After closing iPhoto, I went back into contact, and selected the contact's name.
I hit 'edit' and let the Faces selection refresh (takes a moment). After refreshing, the new screen grab Faces thumbnail appeared and I selected it.
After letting iCloud update my Contacts on my iPhone 5, i went in and called the contact. The contact's photo appeared as a thumbnail.
Kind of silly that you can't take Contact Thumbnail photos with the iPhone, but I guess it's the way the software is written.
Hope this helps someone.
Cheers / Josue
Mine is just the opposite problem, I have an iPhone 5, just updated my IOS6 version and I always get a thumbnail photo of the caller when receiving or making a call. I would like to get a full screen caller ID photo. I tried creating a new contact with a new photo on the iPhone 5, editing an existing contact photo, etc. but unsuccessfully. Any ideas?
Wow. That's odd. Full screen photos are supposed to be the default. Also, any photo taken with the iPhone to be used as a photo ID for a contact, should default to full screen.
The only long-winded solution I can think of would be to upload your photos onto your iPhone, grab a screen shot of each, thus creating a new id photo, and then assigning those to your contacts.
Long way around what should be a simple solution. I'm not sure why apple just doesn't make this as easy as adding a general setting that includes an option for either Thumbnail or Full Screen.