From an old thread,
The way the iPod Touch works is it sends the MAC addresses (Unique identifiers) of the wireless base stations around you to a service. This service essentially sends cars out all over the country to record the MACS of base stations it picks up, and where it picked them up at and stores them in a huge database.When you use locate me on an iTouch, it sends off the MAC of the wireless base station(s) around you, and if it's in the database, it returns the coordinates, which Google displays on the map. If the base stations around you are new and not in their database yet, Locate Me will not work. Your iPod Touch does not have GPS. End of story.
It's a completely passive system. The GPS device does not 'connect' to anything. Please go read wikipedia, or just use the damn search function on this forum.