I am having issues with uploading custom avatars as well.
the folder is setup, whenI test it, it says it is all set.
when I try to upload an avatar, I get no errors, but nothing ever gets uploaded. the system looks for the avatar at mysite/threads/avatars/usernumber.gif , but as I said, nothing ever got uploaded, so nothing is there.
I only have it set for admins, I checked the permissions.. I'm startin to pull my hair out here.