Went thru this when we all got our Droid Eris. Some could see it, some couldnt. I had realized that you need to be in Direct Sunlight (Or some other bright light) to see the proximity Sensor.
So lessons learned and here you go guys!
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This is a Proximity Sensor. It is what turns your LCD Screen off when you are on a call and you place the phone up to your ear.
Also, this is used for the "Auto Speaker Phone". If enabled, this sensor along with the internal G-Sensor will turn speaker phone on when you are on a call and place the phone down on a surface screen down.