If you’ve already got the avatar module installed and you’re going to upgrade to version 3.5 like I did last night – you might well break every avatar on your site. That’s what happened to me, & I was pulling my hair out till I remembered that there was some kind of re-write magic in the .htaccess file which re-writes the avatar path.
Specifically this line:
RewriteRule ^(.*/)?avatar/(.*) wp-content/avatar.php?file=$2 [L]
I got rid of it (well, commented it out anyway) and that seemed to fix the problem. Hope this is of use to someone.