iPod touch, unlike the iPhone, doesn't have a GPS to help it know where it is. Yet the iPod touch manages to know its location using its wi-fi capability. How does it do this? The term "wi-fi triangulation" has been bandied about, but there's no triangulation involved.
Instead, Apple utilizes the services of a company called Skyhook Wireless. What Skyhook does is maintain a worldwide database of wi-fi hotspots containing their GPS coordinates and MAC addresses. Once you connect to a wi-fi network, your iPod can then submit the MAC address of the network's router to Skyhook's servers, and if that hotspot is registered with them, it will return the latitude and longitude of your location to your iPod touch. (You can also enable wi-fi location awareness on your laptop or desktop, by installing a plug-in here.)
What this means is that an iPod touch can benefit from most of the advantages of GPS-enabled devices without having a GPS. In fact, when in large urban areas and indoors, where it can take a long while for a GPS to acquire a satellite lock, an iPod touch can be aware of it's location in seconds.
To submit your wireless router's MAC address and location to Skyhook's database, click here. If you're a location offering wi-fi access to the public, you'll help improve the iPod's location-awareness. If you submit your home router's info, you'll enable location-awareness for your personal devices at home. You gotta admit that's kinda cool.