Cookies are either stored in memory (session cookies) or placed on your hard disk (persistent cookies). Persistent cookies are written to the Cookies folder under either your user profile folder or the Windir\Cookies folder. The Temporary Internet Files index is updated with pointers to the actual cookies files.
Here is a description of Persistent and Per-Session Cookies in Internet Explorer:
http://support.microsoft.com/kb/223799/EN-US/