It does use the built in WordPress function get_avatar. Though, WordPress does not provide a default method for setting the picture within WordPress itself. If you have a method of doing this, without a plugin, to set your picture then it must be doing so by some function of your theme. What theme are you using?
I just tested this with a brand new install of WordPress 3.4. With no plugins, other than Social Author Bio, installed and with my user account it uses the Gravatar (http://avatar.com) that is setup for my email address. With a test account, configured with a bogus email, it uses the default user icon (a white silhouette on a grey background).
I'd like to help but I will need to know more about your current installation of WordPress. (i.e. version, theme, plugins installed, etc). The more descriptive you can be the more able I will be able to setup my dev environment to match.
Feel free to send me the info to my email: nick AT nickpowers DOT info as I understand you might not want to post that info here.