Why do pupils dilate in response to emotional state?
The dilation of the pupil is under control of the sympathetic nervous system. The main role of the sympathetic nervous system is to get the body ready for fast response. The typical example is the 'fight-or-flight' response, but that can also occur in the presence of a potential sexual partner. Therefore, dilated pupils can be a sign of sexual arousal. 
Now, that's the response of the person showing the dilated pupils, but your question related to the effect on the other person. People with more dilated pupils are rated as more attractive by observers unaware of this manipulation Tombs &amp; Silverman, 2004 - at least for males looking at females. As an aside, people in ancient Egypt are said to have used atropine, which is a poison extracted from the belladonna plant, as a cosmetic to artificially dilate their pupils.