Pictures allow you to put a face to a name! User-selected pictures show up when you roll over a name in your inbox, Contacts, or Quick Contacts list. You can choose your own photo for yourself and for your contacts, suggest a photo for a contact to use, or see what your friends have selected for themselves.
Pictures can be configured to show to all users who you email or who email you, or they can be limited to only those users who are able to see when you're online. You can see a full list of users who can see your online status from the All Contacts tab of your Contacts page - they'll be listed with a colored ball next to their name.