i resize it in photoshop and then open in imageready which reduces the file size and turns it into a gif. otherwise i kept resizing it but the file size was too big. i'm guessing this won't be helpful though if you're not used to doing this sort of thing.
that shrinkpictures site that OneStepBeyond posted a link to works very nicely and is much easier, as long as you're happy with the avatar being square. set avatar size to 130 pixels (max allowable is 150 h, 130 w - so that will give you 130 x 130)
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Now a penguin may look very strange in a living room, but a living room looks very strange to a penguin.