PQ Labs G4 Overlay Frame -- The touch frames have Infrared (IR) sensors that detect a change in the IR plane inside the frame/image area. The frames have Infrared LEDs that create a light plane between the frame. There are IR sensors around the frame that detect the IR plane and if an object, such as your finger, interrupts the IR plane, there is a change in IR intensity. This change is calculated very quickly by the IR sensors to figure out where your fingers are. The locations of objects in the plane are then sent to the computer OS as x,y points and the applications react according to the x,y points, like multiple mice on a computer screen.
From Peau Productions FAQ: http://peauproductions.com/store/index.php?main_page=faq_info&fcPath=3&faqs_id=3