Yes, pictures do show up on Kindle books. I love the intricate pictures that show up as screen savers if you don't touch the machine for 15 minutes!
Also, if you have a different text (i.e., what's supposed to be a hand-written note in the book), it shows up in an italic-y font.
Having said that, I don't think all books are great for the Kindle:
I let my daughter buy a Manga comic book on my Kindle, and that was a mistake. The pictures are clear, but they're quite small, as is the text. I wouldn't buy another Kindle comic book.
I just bought a gardening book -- a book with lots of graphs and layouts, lots of photographs. Although I love my Kindle, I bought this graphic-heavy book in paper form. Likewise, I have a couple house-decorating books, which I wouldn't buy in Kindle format because the photographs might show up on a separate page, and photograph-heavy books just aren't ideal with the Kindle.
Also, although I have both the King James and the New International Version Bibles on my Kindle, I don't like to take it to church. By the time I can look up . . . the Bible . . . the chapter . . . the verse . . . everyone else is already there. It's great for Bible reading at home, of course. No different in format from reading a fiction book, and I love that your stopping place is held for you. But you can't flip around fast enough when you want to find multiple verses fairly quickly.
And cookbooks. I want cookbooks with big color pictures and paper pages.
A bit off topic, I know. I tend to do that. I love-love-love my Kindle, but few things are good for EVERYTHING.