It seems from the news reports that the system will attempt to simulate the physical properties of individual neurons and their connections – a science known as neuroinformatics. Both the New Scientist story, and another from Business Week, are a little light on detail however.
They both suggest that an initial project will be to simulate the structure and function of neocortical columns – the three dimensional, highly interconnected layers of neurons, famously found to be an essential part of the visual cortex.
This assumes, of course, there is a good enough understanding of how each neuron and synpase works – a science which is still very much in development.
The project is long-term however (a decade is mentioned), so hopefully it will allow for some important developments, even if physically simulating the entire brain might be a little far fetched – even in the near future.