\
looks to me like a square piece of carpet was laid down in the insert then the corners were cut with a utility knife. im talking about carpeting an additional piece of wood like this.
http://img517.imageshack.us/my.php?image=dsc00918ko4.jpg
and pressing it down into the insert. thsi makes the side of the box flush (no more insert since it is filled in)
ah, well the way i do it is fold the sides down so there is overlay on the center piece of the side and cut it with a putty knife and a razor. Then i glue the square piece in the middle and instead of cutting down on the center piece of the side, i cut up on the edges just a little bit, so there is some overlay, and with that I tuck it in underneath the origonal tucked piece so there are no gaps and it is perfectly flush. But whatever way works for you is the best way!