does this mean that other people can see my pics??
That means that it will record your current location using your iphone‘s GPS functionality and note that information in the picture’s "metadata." This is information that’s attached to the picture but not shown on the picture. Some applications can make use of this information in cool ways. For instance, if you tag all your pictures for location, then you import them all into iPhoto on a Mac then it can show you a map with the locations where you took each picture noted on it.
Also, if you upload the picture to a service like Flickr, then it can use the information to let people search for pictures by location.
Unless you have something to hide about where you took the picture, I suggest you go ahead and let the phone tag it. You never know when this might be useful.