EDIT What error do you get when trying to upload an avatar? I checked the forum permissions and you should be able to upload an avatar fine, providing it's jpg, bmp, png or gif. Else, can you just put a link to it in your profile?
EDIT 2: I see now. If you link to an avatar, the site will resizes it automatically, but if you upload it from your computer, it will get refused if it's larger than 128x128 pixels.