Version: (using KDE 4.0.3) Installed from: Ubuntu Packages Configuration / Contact List / Use contact photos when available setting does not apply before Kopete is restarted.
The "Use contact photos when available" setting seems to apply right away in Kopete 0.50.08 (Using KDE 4.00.83 (KDE 4.1 Beta2)) on Kubuntu 8.04. Could you update your KDE4 packages and confirm this?
Yes it's fixed. Commit 814314.