Apparently the SetCPU app allows the Droid to adjust
the clock, going from 950 Mhz at full throttle to 125 Mhz at idle. So it's not cooking the CPU all the time, just at peak demand. I think it's a good tradeoff, seeing that I don't use it hardcore all that much. It'll give you about a 50% gain in performance at peak, and reduces the speed (and temp) at idle.
BTW all these chips are engineered with a HUGE fudge factor, meaning that the chip can perform at higher speeds indefinitely with little or no loss in performance (though the benchmarks indicate 800Mhz as the Droid's "sweet spot"). I believe that there would be little risk of long-term damage over the limited life span of the device.