Inside the .kml file are the geographical coordinates stiored of the associating image.
The location of the file is not mandatory as long as it is in the same folder with the raster image file that it is associated with.
The KML file is described by Google in the KML Tutorial. More information can be found there: http://code.google.com/intl/nl/apis/kml/documentation/kml_tut.html
|See KML Tutorial at Google||See KML Tutorial at Google|