As far as I know there is no way to make the 3D portrait other than circle. Some UI's has rectangle shaped portrait so at least there was a way to do it earlier - no idea do they work anymore. Im pretty certain that you can modify the shape but most likely have to do some compromises how to do it like in many things while you skin Lotro.
You can change lots of skin elements and move stuff around but there are lots of odd stuff too that you just have to live with :/
I don't know why Frosty has seperated Skindefinition.xml and SkinDictionary.txt in separate files. Probably so it would be more clear to find stuff from each. Getting the skindictionary stuff to work you have to add them to your Skindefinition.xml and that's the only code file your skin should have.
Mind that there are lots of stuff in SkinDictionary.txt that doesn't take effect in game no matter how much you try to change the values. I don't know why they want to show us the code that we can't even use for our skins (like there is defitions for minimap buttons, the code is there but you can't actually move the buttons in new locations).