Let's try with a different method. Do you have ImageReady? Because I basically use only that. My version is 9.0 CS2.
I'm starting with the following image and I want to do an avatar with rounded borders of Madoka in the bottom.
1) In ImageReady, load your pic and crop a square, then resize it to 100x100 (this is the standard procedure for an avatar)
2) Select the Rounded Rectangle Marque Tool
3) Put the mouse cursor on one of the corners of the image (let's say top left) and drag it into the opposite direction (let's say bottom right). Now you should have this:
4) Menu: Select --> Inverse
5) Menu: Edit --> Clear (or the "Canc" button). At this point of time you should have this:
6) Menu: Select --> Inverse (yes, again)
7a) At this point it's time to stroke it. Menu: Edit --> Stroke --> Background Colour (White) 3 px.
8a) Then again, Menu: Edit --> Stroke --> Foreground Colour (your choice, black for generic avatars, or a colour of choice, or the protagonist's hairs like I've done here) --> 1 px.
[[ 7b) Alternative. This step can be done instead of 7a and 8a
in case you want a simple 1 px black border. The procedure is even simpler. Menu: Edit --> Stroke --> Foreground Colour --> 1 px (black). ]]
9) Save optimized as... (as you wish).
The final result: