How does SL deal with sizes of photos?

Does any body understand exactly what SL does with the size of photos? I keep getting photos with changed proportions (aspect ratio) from the one I want, and the picture stretched or squashed accordingly, and thus pretty useless. I can find no guideleines and since it costs money to download photos I don' feel inclined to use the trial and error method.
I get the impression that pictures imported (however it is done), are changed to square proportions or multiples of square, but I don't follow the logic. Sometines a 4:3 (like 1024x76 picture is squashed to square like 512x512, sometimes it is stretched to double width square, like 1024x512. My assumption so far is, for snapshots inside SL, always take square pictures, and if you import from hard disk prepare them to square first.
But is you want to use a photo in the 4:3 Profile box, you have to import a 4:3 picture, which is squashed and distorted to square in the photo or textures folder, but stretches back to 4:3 and looks OK when you pull it into the profile box.
Maybe basic photography (including picture size rules) that would be a good subject for one of Torley Lindens videos

see:

/327/f0/232988/1.html

/327/70/215905/1.html#post1713392

It works on powers of 2. So, 512 x 512 or 512 x 1024 etc... Always a good idea NOT to use anything bigger than 512 x 512 as it causes lag on video rendering.