"“Avatar” also raises the bar on “performance capture” technology, which creates computerized imágenes from real human action. The movie depicts an ex-soldier’s interactions with 10-foot-tall aliens on the luminous planet of Pandora."
The movie blends real actors into the digital animación during the 'non-human' scenes. Its kinda like how they made Gollum from LOTR using an actor, only on a much más elaborate and realistic scale.
The technology is actually so amazing tu won't be able to tell what is real and what is computer generated. Its that fantastic.
It was partial animación and partial reality. The did some sort of mix with animación and the real actors. Ever watched The Lord of the Rings? Somewhat like Goullum (did i spell that right?). Actually, quite a bit like what they did for him. Only with más than one person, that's why it was so expensive!