Their database uses IP addresses, not ISP's.
The database is built essentially by war driving. Cars drive around with devices listening for IP addresses being broadcast by routers. When it picks up address XXX.XXX it uses a GPS in the car to note the approximate location of that signal and stores it in the database.
In your situation, your signal may be so strong that the car picked it up near your neighbor's house and logged it into the database for that location.
Note that these database entries are static and based solely on the location at the time the car drove by. You're in Montana. If your neighbor moves his router (and associated IP address) to Arizona, then if his new neighbor (in Arizona) uses MobileMe solely with IP (not GPS) it will show that he's in Montana if the only nearby IP his iPad can pick up is your old neighbor.
The database Apple uses is maintained by a company called Skyhook. Here is their page explaining how it works.
Skyhook: How It Works > Coverage
You can submit your IP to make the database more accurate.