http://en.wikipedia.org/wiki/Air-cooled_engine
Most modern internal combustion engines are cooled by a closed circuit carrying liquid coolant through channels in the engine block, where the coolant absorbs heat, to a heat exchanger or radiator where the coolant releases heat into the air. Thus, while they are ultimately cooled by air, because of the liquid-coolant circuit they are known as water-cooled. In contrast, heat generated by an air-cooled engine is released directly into the air. Typically this is facilitated with metal fins covering the outside of the cylinders which increase the surface area that air can act on.
In all combustion engines, a great percentage of the heat generated (around 44%) escapes through the exhaust, not through either a liquid cooling system nor through the metal fins of an air-cooled engine (12%). About 8% of the heat energy finds its way into the oil, which although primarily meant for lubrication, also plays a role in heat dissipation via a cooler. [1]