hey john,
to set the avatars for easyblog categories there are 2 steps:
1 go to easyblog backend -> settings -> layout and set the option "Enable category avatar" to YES, see here: http://screencast.com/t/izubtA3uB
2 once that's in place go to easyblog backend -> categories -> then select (click on) the category you want to change the avatar. there at the bottom of the category details page you now have an option to upload your category avatar. http://screencast.com/t/7u3yBEVBgL

hope that helps

Thanks for sharing this Alex

When I try to upload a photo as explained in step 2 above, the query returns a blank screen. Bug? Note that Category avatars is enabled as in step 1 above.

Hello SMAS,

Can you try turning on error reporting through Joomla's Global Configuration and see if you hit any errors? If you did, please post them here.

I do think that probably GD library wasn't compiled with PHP on your site.