do custom textures are just pictures in a 2x1 ratio? any requirements?
Not on the dimensions, I think (as long as the images aren't huge). I've read that a power of 2 might look best (like 256, 512, 1024, 2048, 4096). Only a few image filetypes work, but ofc you always use .png anyway, so why even consider that.
The shape of the image shouldn't matter.
and how does a rectangle turn into a spherical object, wheres the distortion?
Check this article:
http://en.wikipedia.org/wiki/UV_mappingThe top and bottom are the poles, and the middle equator. So obviously the equator part will be stretched out a lot from the original image, and the areas close to the poles will look very small when applied to the sphere. The distortion is everywhere, but biggest near equator and the poles.