How does adsense's ads no where i live. they are abs that relate to me.

I don't think they know where you live, unless your location is somewhere on the page you're viewing. Adsense is "context sensitive", meaning it scans the page the ads are displayed on and chooses ads that related to keywords that are on that page.

For example, the ads that are showing on this page right now are "Amazing AdSense Websites", "Get Paid for Every Click", "Wierd AdSense Tricks" and "Cruise The Search Engines", all are related to "Adsense" in one way or another.

It reads your IP address and then finds out your location. It can decide which country or city you are in.

Yep it does. I don't think that there is really an effective way to hide your ip.

Yep adsense reads your ip and can decide were you are. clever actually!