Images below the visible area (the ones lower than container bottom) are not loaded. When scrolling down they are loaded when needed. Empty cache and shift-reload to test again. Compare this to page where plugin is disabled or same page with fadein effect.
$("img.lazy").lazyload({ effect : "fadeIn", container: $("#container") });
#container { height: 600px; overflow: scroll; }
<img class="lazy" data-original="img/example.jpg" width="765" height="574">