This category will show all files that could use a better version of the existing picture. A better version would be one that is crisper/less blurry, doesn't have a logo on it and/or is a widescreen version.
Before uploading a widescreen version, check the bottom of the file's page to see if it's being used in a template. If it is, the template may look better using the current size of the picture. However, the widescreen version could still be uploaded with a matching name, such as Babyclap - HD.jpg.
When the picture has been updated, remove the "Picture needed" category from the page.