The character creator saves files locally, called Avatar1.dat, Avatar2.dat, etc up to 5. When the client runs, it first gets all the characters from the server on the account, then checks locally and fills in any empty slot (empty on the server side) with character creator avatars (locally stored). What [b]used[/b] to happen to my knowledge was as soon as you picked a character creator avatar, and logged it into the server, it would delete the Avatar#.dat file. Currently, it appears that it creates a backup. What's possible is that in 'overwriting' the same avatar slot, some of the data from the old Avatar#.dat file for that slot is being pulled in.
In Windows XP the default path is [font="Courier New"]C:\Documents and Settings\All Users\Application Data\Westwood Studios\Earth and Beyond\Character and Starship Creator[/font]
I'm not home with my windows 7 machine, but i think its something like [font="Courier New"]C:\[b]Users[/b]\All Users\...[/font] (like the XP location)
An interesting note, if you have an avatar in one slot (say, slot 1) from the character and starship creator, but your account is already using slots 1-3, you can simply rename the file Avatar4.dat and it will move to slot 4. Just change the number to match the slot you want.