Internet cookies is simply a text file placed by a web site on your computer. The text file is read every time you visit the web site. The cookie can be used to keep track of what pages you visites, what you ordered, what ads you saw etc.
A demonstration of cookies is found at CookieDemo.com. At that site you can place and change cookies and display custom content.
Other types of cookies can also be placed in web applications such as Flash can also place cookies on your system. Flash cookies can be set at http://www.macromedia.com/support/documentation/en/flashplayer/help/settings_manager07.html