in the canister filter;
the bio happens in the mechanical parts (like sponge, or fluffy white stuff) that catches the poo, the goopy brown stuff is biological filtration.
about the pellets;
the ceramic pellets (bio element) of the aquaclear are just porus ceramic pellets, they allow bacteria to grow, that bacteria grows everywhere in your tank including gravel.
I stopped using the ceramic pellets in one tank because the filter is off balance (tank is too close to the wall, and full so it can't really be moved out, any who this causes it to be slightly off balance and makes the sponge sit too high to run properly with the pellets) Tank maintains the same readings as it always has, no noticeable diff with out the pellets.
On the topic of under-gravel;
The goo you saw under the gravel wasn't poop, it was bacterial colonies. You aren't supposed to clean it out. It works like a compost heap. the various bacteria do their work and break the crud down, then they get more crud, i recently moved and had to do a full break down of all of my tanks, most of these tanks have been up and running for YEARS, the goop was the same as it would have been after 60 days after years of running, it doesn't build up higher then the gravel.
I personally hate canister filters because when you clean them they make a hell-of-a mess. lose carbon, sand, poly fill, fish goop yuck. They also have been known to blow a seal from time to time in which case they cause a syphon to form and make a huge water mess (plus drain your tank)
I know that there are people out there who think they are great. But I just had a couple bad exps with them and won't go that route again.
Since what you have isn't big enough to do what you need it to, i would suggest going with a hang on back.
