If you want to see what this hack should look like, go over and register at my forums. I have it working as intended, with CSS navigation to boot.
All you have to do to hide custom avatars is assign them to a specific catagory and then set that catagory's permissions for use only by specific groups (such as admins or mods). You can also assign post counts a user must have in order to use certain avatars, although they will still show up - users just won't be able to use them.
I used to have a catagory called Admins which only admins and mods could see in the UserCP. It's currently disabled, because 1.25.1 of this hack has a bug when use permissions is activated. Madman has indicated this is fixed the the new version, which I am patiently awaiting