While in War of the Worlds 3D animation showed Steven Spielberg what his shot would look like after post production, James Cameron developed what he calls a Simulcam that caputres the virtual with the actual in real time. During shooting the actors wore motion capture suits and rigs that recorded their facial expressions. Their Avatar and Na’vi selves were already created in preproduction and the Simulcam takes the virtual production and superimposes it onto the physical production.
A hand held screen allowed Cameron to see the actors as their avatar or Na’vi selves in Pandora. This means that there is no more guessing as to what a shot will look like after the completed CGI animation because he can already see it.
The video above is from Hollywood Dailies and shows pretty well how the technology works. There are lots of other great videos found on YouTube that also demonstrate Avatar's Simulcam that I recommend you check out.
This technology certainly is a game changer for the field of animation and I'm excited to see future movie projects where directors further develop this technology.