There are one or more (usually two) high resolution, high FOV, global shutter IR cameras, connected to the same PC as the Rift is via USB 3.0. Either 60 or 120 FPS, not sure.
They can be mounted
on your desk (the desk lamp stand comes with it), on
stands, or
on the wall, but always pointing slightly inwards towards the main tracking area.
On the Touch controllers, there is an array of
flashing IR LEDs (hidden in the
consumer version) that flash in a certain pattern (to identify the object), and basically, the IR cameras see this pattern, and through complicated computer vision algorithms, fusing this optical data with the IMU (gyro and accelerometer data) sent by the IMU inside the Touch controllers, can determine the position of the controllers down to sub-mm accuracy.
The exact algorithms are proprietary (called 'Constellation'), and the general concept is extremely complicated, but effectively the accelerometer value can be integrated to determine velocity, and then that value can be integrated to get change in change in distance. Unfortunately, that double integration means event the most minute fluctuation gives exponential drift, and thus this needs to be corrected. The optical system of the IR LEDs is what does this correction.
So the end result is
1:1, sub-mm accurate tracking with near zero latency.
Video on the Touch controllers:
https://www.youtube.com/watch?v=s6BuN1uyq48