People usually think that location does not matter when it comes to the internet... and they may be right in terms of doing business, but with the internet, location makes quite a bit of difference.

When you use a regional search engine such as www.google.co.uk, it places a preference to web sites that are "UK-oriented".  There are two ways that the search engine's detect a regional-bias - top-level domain and geolocation. 

The top-level domain (TLD) is a type of domain name - such as ".com", ".org" or ".co.uk".  Google (and the other major engines such as Yahoo) uses the TLD to determine if your site is appropriate for the regionally-based search results.  It naturally assumes that for a UK-based search, ".co.uk" domains are relevant no matter where the site is physically located.

The region or country in which your site is physically located (aka the "Geolocation"), also plays a factor when the search engines are trying to determine regional-bias.  If you have a ".com" domain, but you site is located in Australia, then your site will be deemed relevant to an Australian audience.

The problems usually occur when companies have a ".com" domain name and their site is hosted in a different country.  This happens a lot - there are plenty of ISPs all over the world who resell web hosting and where the servers are located is rarely considered at the time.

The other area where Geolocation can have an impact is if the sites that link to you are located in a specific country.  And so if you have a ".com" domain and your site is hosted in Germany, but all of your inbound links are from UK-biased sites (".co.uk" or geolocated in the UK), then this can help minimize the issues mentioned above.

Checking the Geolocation of a site is a regular part of our process plan at Vertical Leap and we have recently decided to expose this functionality publicly via our new "SEO Tools and Gadgets" section.  You can try it now (did I mention that it's free?) - http://www.vertical-leap.co.uk/seo-tools/geolocation.asp - and see where your site is located.