Virtual Reality is great until you trip over the coffee table and have to go to the emergency room. Merged Reality takes your surrounding environment into account for VR experiences. Your coffee table becomes a boulder. Your dog becomes an Ewok. This allows you to interact with real world objects in the VR environment by visually reskining them.
VR headsets are able to do this by having cameras on the outside of the headset and are able to send what they see to the VR computer.