The employer is being a dick/asshole because he/she wants to be/can. He/She may also want to see your response, which is kind of lame. 

Sizing up the competition (if it's someone they want to hire who their competing against for your services, otherwise just to see who everyone is applying to); seeing how potential candidates look for work.

I see that kind of question as testing one's ability to think on their feet.  If you've never answered the question before, it puts you on the spot.  It will probably make you uncomfortable.  I think the best thing to do is be honest.  If you are apply at other firms it allows them to get a grasp in what type of architecture you may be interested in; or have even been interviewed or offered a position, you can use it as leverage to negotiate salary/benefits.

Or as BulgarBlogger said, the interviewer could just be a jerk.

While Bulgar may be right, there could be other legitimate reasons for the question.

For example, if you're applying for a position that will involve client contact, the employer might want to see how you respond to a question you might not want to answer. He/she may want to see how you handle a question you probably didn't expect. Do you stammer and evade, or do you produce a polite but diplomatic 'well, that's really none of your business' response.

In the end, the information is of little to no use to the employer.

Maybe I don't understand what the problem is with the question. Why would it be a question you don't want to answer? Of course you are applying at other firms - you'd be a fool not to. I have been asked this, and told them the other firms I applied at. They sometimes say "oh yes, I know so-and-so. Great guy." I always just chalked it up to curiosity about how you have decided which firms to apply at. 

It's not a big deal.

as an employer who asks this kind of question in interviews, i agree with stephanie. it's curiosity. it's potential that i know someone and could maybe help an interviewee who's not a fit for us. it's anything BUT an attempt to trip someone up. 

i think it's generally been taken that way, too, in our interviews. i genuinely hope to help young architect-types find positions that are right for them. we're a small enough market that i know most of the firms around and can offer advice and maybe some help. 

i'll have to reconsider it in the future, though, if it's taken as a challenge... 

Steve, I don't take it as a challenge, personally.  I know that some might ask out of genuine solidarity - in hopes to help.  Apparently, not everyone shares this perspective and would like to hear an elaboration as to why it's a "jerk" move.

I have to admit I raise this question because I'm tearing it apart with post-analysis while I lose patience in hearing a definitive response. :-) I strongly want to work with them.

I should add that in an informational interview last year a partner asked me this. After he heard who I'd already applied to he asked if I knew of this other firm nearby - a young firm that hadn't got their website up and running yet. The partner thought my work looked similar to this firm, which I didn't know about.

Two weeks later I started at that other firm :)

i agree with steven - if we ask, it's probably because we've realized that (as great as you may be), you're probably not a fit for our firm but we'd be happy to make an introduction if we can. you'd be surprised how often we get people who come to us by reference or who we reference along to other firms. i'd be way more concerned about an employer asking what kind of salary offers you've received. that's a little dicier proposition. 

I think its a little like the first date, one's just asking "oh, so are you seeing anyone else" ... harmless, but also gives the employer a sense of what the employee is looking for.