The prototype uses Google's machine translation technology and image recognition capabilities to create an additional layer of useful context. So should the user take a photo from his Android device, the application can translate the text in that photo -- though right now it only supports German-to-English translations.
Here's how Google describes the process:
"You may wonder what's happening in the background. On the simplest level, this prototype connects the phone's camera to an optical character recognition (OCR) engine, recognizes the image as text and then translates that text into English with Google Translate."
You can't get your hands on the updated application yet, and Google is being coy about when it will release an update, but you can expect the application to eventually support photo-to-text translation in each of the 52 languages supported by Google Translate.
Once translation makes its way into Google Goggles we can only imagine how useful the application could become to travelers looking to quickly translate menu items, street signs and transit information.
You can see the the prototype in action below: