I had to dig a bit on the site to find that yes, it's a full-on hand and rod puppet. (Sorry, no two-person Monsters or, er, Monsters of any kind.) Regardless, this concept is pretty awesome. Your finished version, at least, the finished online CGI-scripted construct you see at the end of the design process looks a little off (the round noses look kinda big) but I'm willing to bet the actual product has the proper proportions.
Now this, this is awesome, and for some reason now I've got Avenue Q songs stuck in my head.