In short, yes, there were Muslims in the Waffen-SS.

Despite (or often because of) its deeply racist philosophies, the Waffen-SS was actually a rather multi-ethnic entity, with divisions drawn up from volunteers (or, in the Baltic states, conscripts) from across German-dominated Europe. A rather famous example of this is the mainly French "Charlemagne Division," whose men were some of the last to surrender during the fall of Berlin.

The picture in question seems to be of men from the "13th Waffen Mountain Division of the SS Handschar", which was made up of mostly Bosnian Muslims and some Croatians with German officers. Another SS division that was primarily Muslim was the "21st Waffen Mountain Division of the SS Skanderbeg" (though it never actually reached divisional strength), which was mainly made up of Albanians. Both the 13th and 21st divisions mainly fought in the counter-insurgency campaigns against partisan forces in Yugoslavia. The 13th was a fairly effective division, whilst the 21st is mainly known for its various war crimes.

I can't really speak about how the German people perceived these foreign soldiers. Their main area of operation, after all, was not in or near Germany, though some members of this division did retreat back towards Austria near the end of the war.

Wikipedia has a list of Waffen-SS divisions, including their ethnic origins. As for further reading, quite a while ago I did have in my possession one of the Osprey Publishing "Men-at-Arms" series of books that focused on the foreign legions in the SS, though I read that quite a while ago and don't really recall much of it. The Men-at-Arms books in general provide good introductions (and nice illustrations) to various types of military forces throughout history.