No information about you, including your name, password, or any information retrieved from del.icio.us, is stored on any server. Your name and password are transmitted through the network to a server at Dreamhost and from there to del.icio.us, and your post list is transmitted back, but they are not saved to a file or database and they are only stored in memory for the duration of the request (typically on the order of seconds).

Your name and password are transmitted over the network in plain text. This is a limitation of the del.icio.us API and the basic authentications scheme that it uses.

You can examine the server code here.