The diagram is a rough, 2 dimensional representation of how the mic "hears" the sound. For a typical hand held mic, the mic would be pointing up.
This really doesn't show the whole picture however. The real pattern is 3 dimensional and looks more like a mushroom.
Another thing to remember is that the edges are gradual: as you move away from the mic, the sound gradually get softer.
All microphones respond to high frequencies (cymbals, strings) and low frequencies (bass, kick drum) differently. This is referred to as its "frequency response" and is also affected by the pattern of the mic. As you move around a mic you'll notice that the sound of the mic changes. High frequencies drop off as you move to the edges while mid frequencies stay pretty loud. Ultimately, sound is changes in air pressure like ripples on water and small ripples (high frequencies) dissipate faster than big ones (low frequencies). The pattern gives you an idea of how the mic will respond but only a very rough approximation.
When recording, it's best to run some tests with the mics at different angles (only change one mic at a time when using more than one).
Like the human ear, frequency response of a mic is also affected by the level of the sound. The frequency response at low levels is different than at high levels. This one of the things that gives particular microphones their character. The effect is a lot like overdriving a guitar amp: louder sounds tend to get compressed/flattened.
Check the wikipedia microphone patters page for a great break down of the various mic patterns.
Background image by Pauline Moss. at http://paulinemoss.deviantart.com/art/Stars-307119758