Optically induced nematic liquid crystal axis reorientation results in extraordinarily large nonlinear refractive index changes that could find practical applications in conjunction with cw or long-pulse lasers. We discuss the origins of these nonlinearities, and present the results of recent experimental studies of image conversion, optical limiting and sensor protection using aligned dye-doped nematic liquid crystal films in all-optical configurations. These processes are characterized by unprecedented low threshold laser powers, thus presenting nonlinear photosensitive nematic liquid crystals as promising next generation image processing and optical switching/limiting material.