These modes must be set in the viewports or use the SetObjectDisplayMode command to set per object display modes. The setting to show object materials is on the top level page of the mode under Shading settings> Color and material usage.) The rendered mode is set this way by default, but it is possible to make new modes that have this set as well.
Since this is a material channel, it is only displayed in the viewport when in Rendered viewport mode or, in V4, some other display mode that shows material (Options>Appearance>Advanced Settings. The plane has a Basic material assigned and the image is in the texture channel. You can see this texture assignment in the plane's object Properties >Material page. The plane is automatically assigned the image as a texture map, the image being mapped to the surface UV. The first point picked for the plane corresponds to the lower left corner of the image, the second to the lower right, and the third pick places the top edge. Note that the plane can be any size but is constrained to being of the same aspect ratio as the image. Once you select the image, you are prompted to place the plane as in the Plane 3Point command, with a Vertical option. Start the PictureFrame command (Surface toolbar>Planes flyout>PictureFrame, or type PictureFrame and Enter.) You will see the File Open dialog as Rhino sends you off to locate the image you wish to use.