Hmmm... we used to be able to do that. I checked the admin panel and all the avatar options are set to "yes", but when I go to Profile -> Edit Avatar, the only option I see is to link off-site.
The only thing I can think of off-hand is that the path to the avatars may not be a valid path on our new server. But I can't check that from work.
In the meantime, if you have a photobucket account, you can upload your avatar there and link to it from here.
It's a mystery
Edit: I think the option is still there - I suspect it's not showing for me because I already have one uploaded, and that if I deleted the existing one the option would reappear.
Are you looking in the right place? Go to User Control Panel -> Profile -> Edit avatar