I see "internet connection" or "no internet connection" on the network chooser in windows 7. How does it knows if it has an internet connection at all? What site does it ping? (or access, or lookup.... or ???)
It checks for DNS. If you have a loaded DNS list then it considers you connected to the internet.
If you don't have DNS then it assumes you're on LAN only.
It will mistakenly tell you you're connected to the internet if you're on a LAN that has a local DNS server that is not actually able to reach the external network.
Actually this feature is called Network Connectivity Status Indicator (NCSI), it basically does a DNS resolution of a specific Microsoft server, then requests a file from it that should contain a certain phrase.. More details can be found from the superuser blog post that discussed a superuser Question of the Week...
*The mentioned question and blog post were written AFTER the time this question was asked.. But I don't think that question will ever be closed as duplicated after all those upvotes :D