You choose a filter or "layer" to overlay on top of your real-world view -- Wikipedia entries, bars and nightlife nearby, Twitter users nearby, etc. -- and point the camera at your surroundings. You'll get a visual overlay of relevant results close to you, determined by a range filter you can adjust in your settings.
Part of what makes Layar one of the most interesting augmented reality apps to date is its breadth: it's not just a one trick pony. New types of layers featuring different types of data are launching all the time thanks to a strong third-party developer platform. The app helps you find and filter the best by collecting featured and popular apps together in their own tabs, as well as providing a search mechanism to find new layers.
Another popular AR app, Wikitude, is taking a crowdsourced approach to gathering its data points. It will be interesting to see which approach fares better in the realm of augmented reality apps: the Apple-style third-party developer community or the Wikipedia-style wisdom of the crowds strategy.
Have you had a chance to use Layar yet, either on Android or the iPhone? What layers have you found to be the most interesting or useful?