By default the OS and all preloaded applications are physically stored on the 128GB of NAND flash. But what happens when you go to write to the array?

With Fusion Drive enabled, Apple creates a 4GB write buffer on the NAND itself. Any writes that come in to the array hit this 4GB buffer first, which acts as sort of a write cache. Any additional writes cause the buffer to spill over to the hard disk. The idea here is that hopefully 4GB will be enough to accommodate any small file random writes which could otherwise significantly bog down performance. Having those writes buffer in NAND helps deliver SSD-like performance for light use workloads.

That 4GB write buffer is the only cache-like component to Apple's Fusion Drive. Everything else works as an OS directed pinning algorithm instead of an SSD cache. In other words, Mountain Lion will physically move frequently used files, data and entire applications to the 128GB of NAND Flash storage and move less frequently used items to the hard disk. The moves aren't committed until the copy is complete (meaning if you pull the plug on your machine while Fusion Drive is moving files around you shouldn't lose any data). After the copy is complete, the original is deleted and free space recovered.