Wally need's Bitmap images that can be divided by 16: such as 16x16 up to 256 x 256 and of course other sizes like 48x80... as long as you can get 16 into the X and Y values it works. Another less know fact is that you should make sure the .bmp as a 24 bit image, it will transfer across easier even though when it is saved as a wad file it is in 8 bit.... The name of your new texture must be less than 15 characters long and can't have any spaces. A great little program for resizing textures is
IrfanView . I normally start by copying a bitmap into MSPaint and do the cropping. Then transfer it to IrfanView and adjust the size so that it fit's the 16 rule. Then just drag it into an open Wally file where I can do more work on it using the range of pallettes in the list and save it into the wad.
This is all covered in the tutorial by atom on Custom Textures.....Or you could get Black cat to download a copy of PSP