Ok, for the game itself you would need to make a folder in "\pball\textures". Lets call it "thetextures" (I would thing of a better name, but I'm a little tired). Then you would put your textures in there. Which textures, or rather what format? The Jpegs or Targas (PCX too, but dont use those) go into this folder.
For the editor you need to 'make' a new texture. And by make I mean open up the texture that will be used in-game and copy it. Then go over to wally and hit "Ctrl+V". Select Quake II from the list in the box that pops up and hit "Ok" (that button might say something else). Now, chances are your texture is not the right size (wally screws this up in pasting for some reason), so to fix this select "Adjust Canvas Size" in the "Image" menu. When the box comes up, hit "Auto 16" then "Ok". After this you save the .wal file. "But it looks terrible" you say. Thats ok, only you are gonna see it in BSP. Now, close out of wally and find that file that you just saved and cut and paste it into a new folder called "thetextures" (same as above) in the "C:\bsp\pball2\quake2\pball\textures" directory.
To use the textures in the editor, hit "L" and the "Load Textures..." box will come up. From the drop down menu, select "thetextures" and hit "Ok".
I hope that answered your question.