The points are binned in the following way:
For each pair of points, a vector is created between them. One point in the pair is plotted at the origin, and the other point in the pair is plotted according to it's distance in the x and y direction (the point chosen to be at the origin is the one that will keep the vector in the first or second quadrant). For example, if one point was located at (5,5), and the other point was at (8,9), then the semivariance between the two points would be plotted at (3,4). After all pairs are plotted this way, the result is a scatterplot of semivariance values in the first and second quadrants. These semivariance values are then binned together using a grid of cells that are each 1 lag by 1 lag. The average semivariance is calculated for each cell. Then, each of these binned averages is plotted on the semivariogram in the wizard.
We use binned values because plotting a point for every pair would overburden the semivariogram; with that many points, it would be hard to visually determine what is going on.
I've attached a rough picture of how the semivariances are binned. Let me know if you need more detail or clarification.