How come DNS names resolve in this case?

I'm working on 70-640 and am finding it really cool to learn how some of this stuff is actually done. I'm on a helpdesk currently and we use AD a lot. Anyway, here is the scenario: I have a domain controller on my home network and it uses itself as the domain controller. Currently in the IPv4 settings, it points to 127.0.0.1. I joined another computer to the domain and pointed it to this domain controller as its DNS server. These devices have a valid default gateway configured with a connection to the internet. My question is, why am I able to still connect to websites using hostname instead of IP addresses? Neither computer points to my router as its DNS server nor do they point to any other DNS server. Are the computers somehow dynamically searching the network for a DNS server?
Currently reading: Network Warrior, Unix Network Programming by Richard Stevens
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Good luck on your 70-640 studies, lots of cool and some boring stuff ahead!
Complete: 55/120 credits SPAN 201, LIT 100, ETHS 200, AP Lang, MATH 120, WRIT 231, ICS 140, MATH 215, ECON 202, ECON 201, ICS 141, MATH 210, LING 111, ICS 240
In progress: CLEP US GOV,
Next up: MATH 211, ECON 352, ICS 340
Wikipedia has a nice article on DNS (Domain Name System - Wikipedia, the free encyclopedia)... especially check out the "Address resolution mechanism" to help understand how it works. Also, if you have a study guide for 70-640 it should have a section on DNS. One handy way to really "see" how it works is to do a packet capture on the DC and look at the packets with Wireshark.
MCSA 2003, LFCS, LFCE (expired), VCP6-DCV