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On the original Moto Droid (the two that I have are Android version 2.2.3)
1. Tap menu and go to Settings : Wireless & networks : Wi-Fi Settings
2. Tap menu again and select Advanced
3. Select Use static IP and setup the rest.
There are many reasons why someone might want to use a static IP address. Here are a few: The router can route traffic on a particular port to a device which is needed or desirable for some programs. My cable company's DNS server is flaky, so I can use a better one, such as Open DNS. Connections are faster to make (no waiting for the router to assign an IP) and often more reliable. Some syncing programs want to know what the IP is before they will work properly.
The downside is that if I take my phone away from home, I have to remember to switch it back.