It is a marvelous resource.
It mainly works through some type of automated scanning (usually of microfilm of hard copy newspapers) and then through use of Optical Character Recognition to provide searchable text.
The Australian Newspapers website and systems behind it are still under development. Some of the known problems are that the readability of the microfilms from which scans are taken are sometimes less than good, which in turn effects the quality of the OCR text, which in turn degrades the searchability of the text and hence newspaper articles.
For my needs, it has also been problematic that the Sydney Morning Herald and Melbourne's The Age newspapers have not thus far been included in the searchable newspapers online.
Although we now know that the Sydney Morning Herald is on the way:
"The Sydney Morning Herald 1831-1954 has now been digitised and is awaiting OCR processing. There are 600,000 pages containing approximately 6 million articles to be processed in 2009 - 2010, which will be made available progressively."
I gather that it is a very expensive process.
Today, I found outthat Google, through Google News has an archive service which makes many historical (old) newspapers searchable. The quality of the on screen scanned image of the newspapers is far superior to newspapers of a similar age shown on the NLA's Australian Newspapers site.
See what I mean?
To do with another piece of research about The Siege of Ladysmith, a few months ago I went to the State Library of New South Wales to view their microfilm copies of the Sydney Morning Herald for November 1899. They were very hard to read and interpret.
But Google News Archive now has some Sydney Morning Heralds from November 1899 available, for example this.
Let me tell you, there is no comparison. It is much easier to read Google online version than the microfilms at the State Library of New South Wales. Hard copies of such newspapers are no longer available to general researchers due to their fragile condition.
Google has this problem licked.
I suspect that Google is not scanning from microfilm, and is scanning from original old newspapers. Somehow. From somewhere.
And the results are outstanding.
I wonder if the National Library of Australia should reconsider their Australian Newspapers project and outsource it to Google?
I think it's time to take it a step further. Let Google take it over. Cheaper. Better result.