HTC People Widget: Changing Pictures
Yes. From the widget, select the contact name (not image). This brings you to the contact info. Select the chain link in the upper right hand corner (it should say Linked in your specific example). Finally, select the image in the upper left corner. You can select the image source from there. I tested it on the HTC incredible.

EDIT: I was originally referring to the Favorites Widget but basically, the Favorites Widget is just an example of the People widget which can be the any-group-at-all widget.

(I apologize if this is obvious, caffeine has not fully sunk in yet.)