Visual SourceSafe stores files using an 8 letter naming convention and in sets or filepairs. When you create a sourcesafe databse, the first item created in the database is the aaaaaaaa and aaaaaaaa.a. This is essentialy root or "$/". The next file or project you add or create (foo.c) will take on baaaaaaa and baaaaaaa.a. and so on. When you check out your first file foo.c or whatever, you go into the VSS database and open that baaaaaaa.a file. When you make a change to it, the new version is saved as baaaaaaa.b and a log is made in the baaaaaaa file.
So, to answer your question, VSS stores the most recent version of the file and then records the recursive delta information (as SeanGriffin stated) to the log file.
Hope that helps
Brett Keown
VSS / Team Development
Microsoft Developer Communities Team
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