The new iPhone 3G will have a GPS chip inside enabling GPS based navigation and location based services. With the intuitive user experience, big screen and the iPhone SDK location based services could get their break through on the iPhone.

Mashable has a good article on that topic identifying location based applications that exist today and could be available soon on the iPhone 3G.
Engadget has a related report that looks at the iPhone SDK license agreement, which is forbidding applications that offer real time route guidance. This could just mean Apple laywers are protecting Apple against any kind of liabilities or it really means that we will not see navigation software on the iPhone 3G. Most likely the former is true.
More iPhone 3G news.