Favorites Icons

So when I save a web-page to my favorites, the site usually creates it's own custom icon in the favorites list ..

For example, when I saved Home Depot the little HD icon appears next to its name in my favorites list ..

There are a couple thought that only show and Internet Explorer icon next to them, and when I choose in properties to change the icon the choices are limited to some standardized icons ..

Which has me asking .. where do all the 'custom' icons that the other sites have for themselves get stored ?? ... Are they actually on my computer somewhere as a .jpeg ?? .. (assuming .jpeg)

.. How does it work ?? ..

.. Bill