Here's the fix. Edit editbasic.inc.php. Line 267 has this:

Code
if (isset($config['ALLOW_STOCK_AVATARS']) && $config['ALLOW_STOCK_AVATARS'] && $allowpics) {

That, needs to be:

Code
if (isset($config['ALLOW_STOCK_AVATARS']) && $config['ALLOW_STOCK_AVATARS']) { 
    $allowpics = 1;