Where does Microsoft IIS stores its settings?

IIS 7 and above introduced an XML based configuration system found in the following directory:

%WinDir%\System32\Inetsrv\Config

By physical path I'm assuming you mean a website's, which is found in:

%WinDir%\System32\Inetsrv\Config\applicationHost.config

For further information visit:

http://www.iis.net/ConfigReference