Tosa, welcome to the club of the avatarless, even if you are only passing through!
Edit: Yes, the primary purpose of the unfinished hack I mentioned was to conserve the bandwidth of the forum – it replaces remote avatar upload, with remote avatar linking. I installed the v2 version a while back for a friend for just this reason. The reason why it would be useful here, as TosaInu points out, is that the host does not allow uploads to this server: both the methods you highlight are just different ways of uploading the avatar to be stored locally on the server.
The default vBulletin custom avatar system, by design, does not allow remotely linked avatars. This allows a forum administrator to control the dimension and file size of every avatar on the board. I think we'd all like it if signature pictures had a similar option (such as this hack) as it would make enforcing the current restrictions much easier. Unfortunately, we can't have that hack, for exactly the same reason as the custom avatar system doesn't work.
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