Found It...
Sorry for the delay - my schedule is getting hellish again.
I finally found the switch for the custom avatars (the problem was in the permissions for the user group). If you go to the CP and follow the route to the avatar setup, you should now see an option for uploading your own avatar. Please note that the size/dimension has to be correct (it will tell you what it has to be).
Again - sorry for the delay. This should kill this as an issue.
Thanks,
//sse