In a specific case, I was targeting only the state of Florida. So to sum up, I only wanted people in Florida to be able to find my ads. The problem is, my tracking shows a majority of clicks from outside the state, namely New Jersey. How can this be? Here's Google's answer:
I. IP Address Does Not Match User's Location- the good old AOL example, where all AOL users have an IP of Virginia, their home base.
II. Target Region Larger Than Expected- this makes no sense. I have a preset area called a STATE selected.
III. Ad Showing on Location-Specific Queries- technically my ad will still come up when searchers outside the state of Florida specifying Florida in the search query like 'Florida shoe shine'.
IV. Ad Showing on Country-Specific Domain- like point 3, searchers specifying my target area from outside the country will still find my ad.
So to sum up- the geo-targeting is not going to be able to limit the ads as advertised, although for points 3 and 4 seem to still be targeted results.
If you have information outside these 4 Google rep. points- please share.