There is a relevant thread on this topic (http://wordpress.com/forums/topic.php?id=4611&replies=17), but it's marked resolved, so I'm starting another.
When I upload an avatar, it comes thru as a black box. There seems to be bugs in the steps. I get errors under IE (6) that I don't get in FF (2.0).
Basically the image seems to upload, but then there is a problem on the page to choose the part of the image I want to use.
I've sent feedback with the specific steps I followed and the results.
I've tried it with a JPG and a GIF of just a white square. I've tried 48x48 and 40x40 images. It's not the image as far as I can tell (and it would be splendid if the upload page would actually tell us the rules for images).
Thanks to the WP for helping us out with this. I'd really like to get rid of the black square, at the very least.