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It stores in a structure which it maintains internally.
I am not understanding your question correctly.
VSS maintains the multiple versions of the same file. If some one wants to change something in a file, they have to check out that file and and checkin the file so that the checked in code becomes the latest one. If you want a different version you can check in that version of the file and work on some changes. Basically the VSSDB maintains the differences between versions of the same file. When required it reconstructs the file based on the version you are requesting.
If you want to have a test site which displays the latest code, you have to checkout the files in to that folder ( and compile; if you use code-behind files).
You have to do it manually, I think. I have not come across any tool which satisfies your requirement ( and I have not tried in VSS). Or you can run a scheduler to checkout the latest files into that folder and compile ( use some build tool like NANT) and run the site.
Hope that helps.
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