The company makes two pieces of the system: a laser diode that shoots a signal at the player, recognizes her motions and reflects them back to the console, at which point they hit a second JDSU part, an optical filter.

FORBES: Magazine Article

Then, they move on to clean rooms, where the Dragon sensor and new optical low-pass filter are installed.

ENGADGET: After hours at NAB: A closer look at Red's Dragon upgrade operation (video)