Address Book integration
Adium can use information in your Mac OS X Address Book to enhance the display of the ContactList. It does this by default, and it does it transparently, without you needing to intervene.
Address Book integration is configurable in the Address Book section of the Advanced pane of Adium's Preferences.
Names
By default, Adium will import contacts' names from the Address Book. It does this using the IM usernames listed on each AB card; if a username in your Contact List is found on one of the Address Book cards, the name on that card will be shown on that contact's row in the contact list in place of their username (unless you have the Contact List explicitly set to display usernames rather than display names).
For example, if you have user “jdoe” on your AIM contact list, and a card for John Doe in your Address Book that has jdoe listed as his AIM screen name, then Adium will display John Doe rather than jdoe on that row of its Contact List.
By default, Adium does import nicknames but does not import middle names. You can change these settings, as well as the order (First Last or Last First), in the Preferences.
Images
Adium can import photos from the Address Book and use them as your Adium contacts' buddy icons, or it can export buddy icons from the contact list to the cards in the Address Book. Again, the matching of cards is determined by IM usernames. All of this is turned off by default.
In the Preferences, you can set whether to import images from the Address Book (“Use Address Book as contacts' icons”) or export images to the Address Book (“Overwrite Address Book images with contacts' icons”). If you have Adium set to import, you can also allow it to override the Adium contact's icon using the Address Book photo.
TODO: What happens when both are turned on?
Combining contacts
Rather than force you to combine contacts manually, Adium will use the Address Book to do it for you. This feature is turned on by default, so if your Address Book is already well-populated, you don't need to do anything—it's already working for you.
Of course, if you do not have very many IM usernames listed in your Address Book, this feature won't do much for you. Filling out your Address Book has other benefits, as Apple Mail, iCal, and Quicksilver integrate with it as well.