Re: Avatar Upload Problems
blogs.dir and some other folders will probably need to be chown’d to the user and group that runs the webserver. Apache2 by default (I think) uses the nobody user account, so I’m assuming that’s what your host uses.
Whilst 777 will let everything access it, from a security perspective, you should really go for 755 permissions and check that the owner/group of the files is the same as that of the webserver.
BTW if you’d have tested uploading an avatar on a plain WordPress MU install, you’d have had exactly the same problem. This isn’t buddypress.