Once you drag-and-drop your picture on the iChat icon, the Buddy Picture editing window will appear. The clear rectangle in the middle of the dialog shows what area of your photo will appearthe shaded areas will be cropped away. To reposition your photo so it better fits in that clear rectangle, you can click-and-hold directly on your photo, then drag your photo around to where you want it. You can also change the size of your photo by dragging the slider directly under the photo editing area. When the position and sizing look good to you, click the Set button (in the bottom right of the window), and you're set (sorry, that was lame).
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