So, earlier today, I said this:
I arrived at that conclusion by enabling the Personal Hotspot on my iPhone 4, connecting my iPad to it, launching Maps, and hitting the Location arrow to find my location.
Only my laboratory was my home office, with my desk six feet from my Airport Extreme Base Station. And I was using my 3G iPad. Okay, rookie mistakes. I got Amber’s WiFi iPad and tried it again. Running Maps on both showed the blue dot in the same spot. Still wasn’t conclusive. I wanted to take Amber’s iPad far from a known WiFi network.
Luckily, Lex’s school was putting on a program this evening for family. On the ride over there, I started up the Personal Hotspot on my iPhone 4, connected her iPad to it, and launched Maps.
Huzzah! The blue dot followed us for a mile and a bit, around every turn. I’m not sure if the iPhone provides fully-granular GPS coordinates to its connected clients, but the blue dot was definitely staying on the roads.
I had decided to forgo the 3G version of the iPad this time around, but the only thing that was gnawing at my resolve was the built-in GPS on the 3G models. Those concerns are gone, as far as I’m concerned.
Also, Lex’s recital was killer. The boy knows about Madagascar. Mike Lee would be proud.
[Edit 16 March, post Fireballing] Clarification: I used original iPads in this test, both with 3G and WiFi. Disclaimer: Don’t base your absolute location on this. Hasn’t been tested with turn-by-turn navigation apps. Don’t rely on it for a mountain rescue.
[Edit 24 March] John Marshall pretty thoroughly debunks this.