I just looked at the NEX-7 manual that has been posted to see the details on the "level" function. Quoting from the manual:

"Indicates whether the camera is level in
both the horizontal and front-back
directions. When the camera is level in
both directions, the indicator turns to

So it looks like the indicator shows the camera is level in the horizontal orientation both in terms of deviation from horizontal, & elevation.

Question for anyone who has a NEX-7 -- does the level work in in vertical orientation? I couldn't find this addressed in the manual.