Good question that in its simplicity makes you question what seems the obvious answer and think about it more deeply.
According to SQL Books Online, the parser actually checks all conditions and returns the first true condition, if none then returns "else" if its coded otherwise NULL. That's how it seems to be described.
Yeah, I had the right answer in 5 seconds, but took another 3 minutes to answer the question because I was sure it couldn't be that simple...
As for the Books Online reference, anyone know of a good way to introduce a condition with side-effects so we could verify if it does indeed check all conditions?