The built in magnetometer (compass) on the Droid is used in apps like Google Sky Map and street level navigation.
The sensor provides information to the Droid about how the position of the phone is changing, useful when GPS is static.
Google Sky Map is an app that uses this to plot a real-time perspective of heavenly bodies. It works inside and out because it uses the strong magnetic force of the earth to orientate.
Google's street level navigation uses the compass to give you perspective when standing in one place.
Other sensors detecting gravity, an accelerometer, proximity and ambient light give app developers tools to develop interesting ways for us to interact with our environment.
And there there are several compass apps you can download from the Android Market if you just want to look at a compass.
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