Although I understand that WordPress 3 is still in beta (RC2) and BuddyPress hasn't been updated, but it looks like uploading Group Avatars is broken. The Group Avatar tries to upload the files to http://domain.com/files/group-avatars/1/filename.jpg. I created the directories in hopes of getting this to work, but no luck.
I hope this issue will be addressed as WP3 goes final and BuddyPress gets updated. Exciting times!