As far as I can tell, the program figures out where your face is in the webcam and then superimposes a famous person's face on yours, and adapts to your facial expressions.

There is a guy (Kyle McDonald) who has a version that works WAY better than the one below, but Kyle's version is on Vimeo and not YouTube. The more interesting ones below are at the 1:30 mark:

[YOUTUBE]cRvhMhmpq4s[/YOUTUBE]