We all know that Google uses geographic-IP technology to determine what ads to show you. For example, if you enter in hotel into Google, you most likely will get listings of hotels in your geo-specific location (not always but sometimes). But this geo technology can and is overridden when searchers use specific geo-qualifying terms such as "new york hotels" in their queries.
A WebmasterWorld thread has confirmation from AdWordsAdvisor2 that this is indeed the case.
You are correct in that there are certain geo-related terms that the ads system will use as qualifiers for determining which ads are displayed. If it is recognized as a specific location, you will see ads that have the remainder of your query as a keyword and are targeted to the region specified in your query.
Our favorite example is 'new york hotels'. Chances are pretty good that when you enter that as a query, you're not looking for hotels in whatever city you may be in. You will see ads that have the keyword 'hotels' and are geo-targeted to New York, as well as the standard ads that have 'new york hotels' or 'hotels' and are nationally targeted.
This also doesn't work across international borders, as you've all noticed.
Forum discussion at WebmasterWorld.