Basically, Mizrach means east and that is the direction most Jews pray, depending on your current location. In America, you point eastward because that is the direction of Jerusalem or the Kodesh Hakodashim. When you are in Israel, you might not pray eastward, depending on your current location. So this compass plots the longitude and latitude of the Kodesh Hakodashim (the most widely accepted opinion) and then based on your current long/lat and direction (based on the digital compass in the 3GS), we point you in that direction.
Here is a preview of how it works on my iPhone 3GS. We hope to release it shortly.