The creators tell us on their blog how it works:

I decided to embed the live 3D video into a virtual 3D model of an office, to show a possible setting for remote collaboration / tele-presence (more on that coming soon), and to contrast the "raw" nature of the 3D video with the much more polished look of the 3D model. One of the things we've noticed since we started working with 3D video to create "holographic" avatars many years ago was that, even with low-res and low-quality 3D video, the resulting avatars just feel real, in some sense even more real than higher-quality motion-captured avatars. I believe it's related to the uncanny valley principle, in that fuzzy 3D video that moves in a very lifelike fashion is more believable to the brain than high-quality avatars that don't quite move right.

Kinect = Microsoft and Oculus = Facebook. Interesting.

Gizmodo explains:

With no shortage of ingenuity, 3D video expert Oliver Kreylos managed to transplant his entire body into a virtual reality environment using three Microsoft Kinects and an Oculus Rift. It's a little fuzzy, but it's easy to recognize what he's really done. He's created a Holodeck—or something close to it.

It makes perfect sense. Video from the three first generation Kinects create a 3D rendering of Kreylos's body. That feed is then piped into a virtual world that he can see through his Oculus Rift headset. If he looks down, he can see his own body moving in real time. Kreylos says at one point in the video he made about the experience that he feels like he can actually reach out and touch the virtual objects—though of course, that's not the case. That's the last key feature for real holodeck technology, but in the meantime this is pretty good. It doesn't even require a clunky backpack!

Now just imagine if you cranked up the resolution with the latest Kinect technology, or the latest Oculus Rift. You could build your own worlds and send a virtual version of yourself to live in them. It's the Home of the Future, right inside your goggles. 

Cool.

Reminds me of Oblong. http://www.oblong.com/

Yes. Seriously cool and man when this tech gets a little better it's going to be awesome!