If you're uploading the avatar you need to use FTP (only if you're hosting the avatars). Using the Admin CP won't work. Any directory is fine as long as the .swf file is pointing to it correctly.
If you're adding the Flash avatar's URL, it has to be in the Custom Profile Field that you created in Steps 1 and 2. Using vB's avatar field won't work.
If you're presented with a different problem let me know and I'll try to help you work it through.