Internet Explorer address bar search - how does it work?

Say you type in a site name without the top level domain, how does Microsoft decide where you want to go?
It seems like sometimes it figures out the right website by itself and sometimes it shows just a search for that term.

When IE5 came out, it was rumored that eg. by typing "widgets" your IE would try
widgets.com
widgets.net
widgets.org
and then return a search for that term if the first 3 return nothing, but that doesn't seem to be true anymore - especially not for longer terms.

I'd love to read your thoughts on this topic. (aka "I'm lost here, please help"

 

Every time I do that it just brings up a "could not be displayed error" ...?

 

or if you have a favourites folder, and you type Cars it will open that folder.