I don't know any more than the Wired article, but the clear way to do it is with something analogous to VMware or VirtualPC. Emulating a low-level piece of hardware is much easier than trying to build a bridge for system calls, services, and everything else to work at the application level.

Once you look at it as a VM emulation issue, then the only issue is performance. The claim is that they take blocks of code and translate them whole, presumably caching the result. In some respect, that's exactly what Transmeta does, and it's also comparable to how Apple ran 68K software on PowerPC. When they talk about emulating Xbox 1 on Xbox 2 hardware, they're glossing over just how much faster an Xbox 2 is. There's a lot of room for slop.

There may well be some seriously cool stuff under the hood to make this all go extra super fast. But, on the surface at least, you can achieve your design goals without requiring anything exotic.