As rominggnome showed, the iPhone does have a GPS receiver, and has since the iPhone 3G. And as Rudegar pointed out, the iPhone also has A-GPS capability, which lets the GPS receiver determine its current location much faster than normal. Without A-GPS, the GPS receiver has to wait -- sometimes multiple minutes -- before it can determine its location, because it doesn't know where the satellites are. A-GPS allows the phone to download satellite almanac data over the cellular network, so the GPS receiver can immediately know where all the satellites are. A-GPS is not necessary, however, for GPS operation -- even if you have no cellular service, you can still use the GPS receiver in the iPhone. I have done this many times, so I have no idea why your friends have had trouble. I recommend the MotionX GPS app, and it works really well out in the woods. You can even download offline map data.
But what the iPhone does NOT have is WAAS capability. The GPS receiver works by measuring how long it takes for the radio signals to propagate between the satellites and the receiver. The propagation time varies based on the current density of the atmosphere between each satellite and the receiver. Because of the density flucuations, a standard GPS receiver can only get a fix that is accurate to about 10 meters. However, some geostationary satellites transmit atmospheric density information that lets GPS receivers compensate for current atmospheric conditions, and this enables accuracies in the neighborhood of about 1 meter. Garmin has had WAAS capable receivers for years, as have other hand-held and aviation-based GPS receivers, so it is a bit surprising that Apple has not incorporated WAAS into their GPS radio -- especially since WAAS density data can be downloaded via the Internet, eliminating the need for increased radio weight. I and others have submitted requests for a WAAS capable GPS receiver in the iPhone, but Apple has not delivered. Perhaps it is because WAAS is only available in North America. However, according to the specs for the iPhone 4S and 5, it now supports GLONASS, which provides near-WAAS accuracy when combined with standard GPS, and is available worldwide. At least that is the next best thing to WAAS.
Now, the CoreLocation service on the iPhone combines 3 completely separate technologies: GPS, cell tower triangulation, and Wifi-based location. I don't know the algorithm they use, but I presume that they use whatever service is currently providing the most accurate location information.
Note that cell tower triangulation has nothing to do with GPS.