I have to say that this is nothing really new conceptually. This is essentially the interactions that have been taking place is SecondLife for years. The interface is different though. This is likely using something similar to Playstations video or Microsoft Kinect.

The latter is probably the one that will have the most impact on a project like this. Kinect (with the Xbox) will make interfaces like this much easier for developers to integrate into their software.

From the article, I can’t tell what the role of the guy in the picture is. Does this software require a real life dialog partner? That could be cool for practicing more realistic dialogs between language learners, even without the teacher. Otherwise, I’m wondering what the purpose really is. Having smart bots engage and respond would be much better overall.