This has been bumping around various forums today so I thought I'd bring it here. Visit www.theprodukkt.com to see screenshots if you need proof. Now I just have to figure out exactly how it works.
It's simple actually, the entire thing is basically a 3D compiler with all the instructions needed to run the game, so everything is created on the fly.
It's all math algorithms. Creates all the textures and models when you run it. Quite neat, actually. Check out the demos the company has made to see some similar work.
And half of the graphics are actually using built-in directX libraries, so they don't need to include that code.
Unless your machine is an absolute beast, I strongly suggest you NOT to even attempt to run this. It takes 200mb+ of memory loaded, and I know people who can only get decent framerates on a 3.0ghz + ATI 9800xt, but their algorithms to basically recreate an artist's brushstrokes to generate the textures is very innovative, but not very useful. I mean... Say you wanted to go for a quick game of UT2k4, I doubt anyone would want to sit there and load for an hour. As technology progress, such methods of "compression" (It's not REALLY compression) isn't nessesary.