I heard this on a different post but I want to help clarify this, especially because local search seems to be in strong momentum under Google's 7-pack Places results and other mobile local technologies: If you specify your geo-target locations in Adwords, is this applicable to the Content network as well? Or is the Content network completely separate and, even if you're only marketing to select cities, your ads will be displayed to the entire...country?
Yes, geo-targeting affects the Content network. Therefore, if you target a specific city, only visitors from that city should see your ads.
As Lucid pointed out, the Content/Display network can be targeted to specific locations. In case you run a "hybrid" campaign, targeted to both Search and Content networks - it's highly recommended you split the campaign - one for Search and the other for Content - these have completely different algorithms/CPCs/CTRs. AdWords has some relatively new features regarding the Search network's Geo-targeting - check out settings --> Advanced location options, or here