Silvery - 4:06 pm on Feb 10, 2010 (gmt 0)
The geolocation capability is accomplished by calculating your position based on WiFi locations in relation to your laptop.
I didn't see anyone else post the link to Google's info page about this, so here it is:
I believe that quite a number of free public Wi-Fi locations may tell partners on the backend where their individual network places are located. So, quite a few companies which contract for geolocation data may already be able to "know" where an individual user is located when they hook into one of these networks.
I'm not necessarily suggesting there should be no concern about opting-in, because if one has already disclosed other identity information to Google, it would make attaching extra geoloc data to one's online usage much more revealing. But, I'm pointing out that Google as well as a number of companies would already know one's geolocation connected to the "anonymity" of IP addresses and cookies, if one is using a public Wi-Fi hotspot.
Amusingly, my supposition is that if you are using a desktop computer at home or at work, opting into this toolbar functionality wouldn't really be giving them anything extra at all.