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The Wacom works by emitting a RF signal that provides power to the stylus, this is why Wacom's are not low power devices and hence why the iLiad tries to keep it turned off.
The stylus uses the energy provided to emit a signal back to the pad. It can encode several pieces of information in the signal it sends back: tip pressure, eraser pressure, right button pressed. THe pad has wires running vertically and horizontally that allow it to detect where the emitted signal comes from. This allows determination of X, Y position.
The stylus can transmit up to 1 inch from the surface. This is referred to as "hovering" and is used in various ways to provide even more features. Vista for example uses them to provide "pen flicks" to scroll windows etc...
Right now iRex has barely managed to get the X, Y part working. And with the lack of pen calibration some would argue they haven't even fully accomplished that task.
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