Basically, rules based AI has given way to machine learning. Unstructured data is “understood” by checking it in parallel against structured data, and statistically analyzing the evidence.
Have a look at my January 2011 blog post, “How Many PlayStations Make A Watson?” [1]. I’ve also got a page of “Best IBM Watson Videos” [2].
[1] http://www.mendicott.com/2011/01/how-many-playstations-make-watson.html
[2] http://www.meta-guide.com/ibmwatson