Hey there PHACK, Welcome to the forum.
Simple answer - you can do both. Data can be stored in each of the individual xml files, like any other office document or it can be stored in a backend data source.
I am a big believer in the latter since then it is much easier to work with the data for reporting, aggregation, and logic.
I would recommend you check out the Database Accelerator Package. Qdabra Database Accelerator Suite Version 2.1 - Developer
In InfoPath the best way to interact with Data Sources is via web service. The Database Accelerator is a installable package of Web Services that includes what you need to to dynamically query and submit to SQL. It also includes several others. If you are looking at exposing your SQL data to the end users and being able to enjoy the rapid development of InfoPath it is the way to go.
Especially if you are going to use browser based forms. You need a web server to render the forms in the browser for clients without InfoPath, which requires either IFS, part of MOSS, or there is a forms viewer included with the Database Accelerator.
What exactly are you looking to accomplish?