I'm messing around with some layout stuff right now, and I thought it would be cool to show online members as little thumbnails of their forum avatars instead of names. Is that possible?

That's kind of a neat idea. It's not currently possible, but that would indeed be a very cool idea.

I was thinking of it mostly to pull one more thing out of my sidebar. The little 10x10 thumbnails would fit perfectly in a horizontal row in the top corner of the content section in most site layouts.

It would definitely be cool to see. That, and being able to tweak the layout of the login box.