The mini projector uses a prism to direct the projection right at the user's retina.
Gizmodo has posted a infographic from Brille-kaufen that not only shows how Google Glass projects an image directly into the user's eye, but also labels each major hardware location on the device.
The right side of the device houses the hardware with the battery situated at the edge behind the user's ear. In the corner closest to the user's right eye is the speaker, CPU, GPS, camera, projector and prism. The projector shoots the image at a perpendicular vector from the user and into the prism. The prism directs the image into the user's eye transparently, which provides the overlay/augmented reality effect.
There is a focus adjustment available by twisting the Glass apparatus. The location of the overlay is dependent on how the user wears the glasses. Google's SXSW presentation made it clear that the intention is to have the overlay just above the user's eye line.
Brille Kaufen concludes by stating, "Google Glass is a technical masterpiece. It is based on a projector and a very clever prism, that projects the image directly on the retina... The biggest challenge for Google will now be to make the Google Glass also usable for people with normal glasses."