With youtube tags, you only need the code after the v= bit. i.e.:
[youtube]Vdx8i49Avbg[/youtube]
This is just textured 3d. Create your character using something like Blender (draw the shape, and then extrude slightly to give a little depth), then apply a texture (the 2d image). Export the object in a format that AppGameKit likes and you're sorted
There are some nice 3D particle effects going on there too which could be a little tricky as you'd have to code those yourself. The effect where a flat image always faces the camera (such as the shield seen at 2:38 in the above vid) is known as billboarding. There are AppGameKit commands available to achieve this effect too.