I was about to mention ImageReady, maybe this tutorial will help, it shows how to use video layers and the timeline maybe you'kk understand it more than I did;
http://www.youtube.com/watch?v=oZ7m9BY1cq8
With the avatar question I guess you just work on a transparent canvas? Unless you mean animated ones? I thing you'll need to put underneath another layer and then erase or select and cut the shape you want to be visible.