The picture shows up when you roll over a name in your inbox, Contacts, or Quick Contacts list. You can show your picture to everyone or only to your friends (the people that can see when you're online in Google Talk or Google Chat). A very cool feature is that you can suggest a photo for a contact.
Google tries to build a strong community of users. Everything started with Google Talk, and now continues with Google Co-op, Google Notebook - both social tagging tools. Using some gadgets from Google Desktop, you can play games with your friends and even send files. This will become standard features for Google Talk.
So expect more social products from Google.
P.S.: the feature will roll out in the next days, so don't be surprised if you don't see it.