I would think that it all depends on the downloading program. iTunes has to 'know' that tracks have been added so, unless the downloading program interfaces *directly* with the 'iTunes Music Library' files, this isn't automatic and you have to 'tell' iTunes to add the files manually with the File>Add to Library.
Not sure about Windows but on the Mac, iTunes stores its music by default in a folder called iTunes Music (which for the Mac, is inside the iTunes folder, which is inside the Music folder, which is inside the user's Home folder). This is all set in iTunes' Preferences though, where you see exactly where the folder is and change it to any other folder if you want. I expect you *could* set the downloading program to dump the music into this folder, but you'd still then have to Add to Library, unless the downloading program lets iTunes know automatically.
I'm not familar with Kazaa (as I'm on a Mac), but I've heard that most of the music people download from the internet is usually badly ID tagged or not ID tagged at all, so anyone downloading it probably wouldn't want to put the music straight into their iTunes library anyway. At a guess, I'd say that it would be best to drag the music album by album into iTunes, so people can properly ID tag them as they go. On the other hand, I expect that music downloaded from people who use iTunes may be properly ID tagged, so this may not be the case.
Hope this gives you some pointers as to where the files are. Keep us posted.