Layar is an augmented reality “browser” that uses your Android’s camera, data connection, compass, GPS, and accelerometer to figure out where you are and what you’re looking at, then superimpose a layer of information on top of what the camera sees.

Version 3.5 (released earlier this month) finally makes Layar a useful application, not just a novelty. This version opens to a list of what’s around you with a compass at the top of the screen. Pointing your Android in another direction updates the list accordingly. In my experience, the augmented reality view has gotten better, too.

According to Layar, “Layar’s Reality Browser revolutionizes mobile content discovery, by simply presenting the most interesting mobile content based on a user’s location and preferences. When launching the Layar Reality Browser users will be presented with a dynamic list of the most interesting content at their location. The list is sorted by time, location, proximity, popularity and preferences. The benefit of a list is that discovery is now possible without the need to hold the device up” in front of you.

Even Verizon is impressed with Layar and recently devoted an entire “Droid Does” commercial featuring the augmented reality of Layar.

The new Layar Reality Browser is available free in the Android Market. An iPhone release will be available soon.