Tried c:geo for the first time this weekend after reading this forum thread. It was great! We had always wanted to try geocaching but didn't want to shell out for a handheld GPS. For the most part, the Droid/app led us straight to the cache (although we had some issues with snow cover). It was a little frustrating, however, that sometimes it would get confused and the GPS would be way off. I have been having trouble with my GPS accuracy lately, however, so I don't think I can blame the app. I was disappointed that the map feature in the app didn't work, however. That would have been incredibly helpful. I don't know if it's broken for everyone or just me. The experience was really, really fun though! We'll do it again for sure.
I've noticed that the built-in GPS on the droid is pretty much dead-on accurate, however it seems that it can go nuts and not be accurate at all.
Download an app called GPS Status. Fire that up, and let it get a good fix on some satellites. Spin around a few times with the droid held flat (screen facing the sky), then do it a few times with the droid on its side, and then again with the top (where the lock button is) facing the sky. This seems to work the same as the calibration mode that can be found on many standalone GPSr units.
I also noticed that it seems like my accuracy is worse if I have turned off GPS and then turned it back on a few times. To fix this, reboot the phone with GPS on.
I was getting 7+- yard accuracy on Saturday under heavy cloud cover. My dedicated GPS hardly ever gets that accurate under optimal conditions!
Geocaching itself is very fun. I am glad you enjoyed it. Be sure you read all the getting started information that can be found on geocaching.com