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Sorry to hear your friend got that stuff stolen -- it's been a few days now, so I hope you have notified the carrier that the phone was stolen to avoid any extra charges. Cellphone insurance is sometimes a good idea too for expensive phones. And don't bet on recovering the phone itself -- although on a technical level, it would theoretically be possible for the cell phone company to locate it.
The "location" option, from what I understand, is a service you can turn on, to allow friends to find out where you are through a website or something like that. As far as I know there aren't any providers in North America that offer that yet, though.
But for emergency purposes and black helicopter FBI stuff, all cellphones can be tracked to within about a block based on signal strength and direction from the tower(s) it's transmitting to. Someone just has to be watching. If it has GPS it's even more accurate, to a few meters or so. But this usually isn't done except for extreme situations.
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