nice one :)

Yes, it should still work with 3.5.

Are all the avatars white people?

and

What if people want to upload their own, is that option still available?

There are various avatar packs you can download:
http://www.livingavatars.com/avatar_packs

Yes, the option of creating/uploading/downloading packs is still available.

how can i enable GD .....

Almost all hosting companies have GD2 enabled by default. If not then you'll have to contact your hosting company and tell them you want GD2 enabled on your server, it will only take them a minute to do.

i am moving my server few days ago

now i have problem in living avatars hack, i had chmod avatars folder to 777

everytime member change they living avatars, they get this message, but the avatars is changed, its working but only get this warning :

Warning: imagepng() [function.imagepng]: Unable to open '../avatars/la_123.png' for writing: Permission denied in /home/myaccount/public_html/living_avatars/includes/saveavatar.php on line 176
Avatar Saved

from the error message its say cant write the past avatar
the error only showing to member that register and using living avatars before my server move up, new member not get that message

so to repair it i change to CHMOD 666 all la_*.png avatar files, then the error never came again

how about you guys my fixing above, is it save or not, or is there other options, again i had chmod avatars folder to 777 before

i got the same error
what do i need to do ?

You don't have GD2 installed, ask your server admin (hosting company) to install it.

I had the same problem when I moved livingavatars.com to a new server. Just chmod all the avatars in the the 'avatars' folder to 777 and you'll be fine. All future users/avatars will be fine as well.