Will my iPhone 4s be out of contract if I upgrade?

If I upgrade my iPhone 4s to an iPhone 5 by doing an early upgrade and paying the $250 early upgrade fee does that make my iPhone 4s out of contract? Or does that phone still have to wait out the 2 full years before it can be unlocked?

Yes. By upgrading the line to a new device (and thus beginning a new contract), your iPhone 4S will be out of contract.