Want to learn more about what you are seeing with Earthviewer? Can we really "See" the ocean floors? How was the "Night Sky" overlay made? Why some vegatation looks bright and others look dark? Then take a look at this page.
Quote: One question I wasn't able to answer: how was a 2-d image formed that looks right when you overlay it on a 3d object?
That is indeed a simple question with a complex answer. The keyword is "projection". I could just say, "by bending and stretching it properly", but that wouldn't do justice to the enormous amount of mathematical effort involved.
Google must have a way to just lay it over the given location. There is something called GeoTIFF. Geo data is embedded in the TIFF image. JPG also has a way to embed info, but I haven't heard of geographic data being included in that.