Summary
The active camouflage light-bending energy is stored in much the same way as the Covenant Overshield. When the user breaks the active camouflage container, the energy envelops the wearer and bends light around the skin, armor, or shielding, conforming to it's user's form, rendering him invisible. This effect wears off as the energy dissipates.
When any projectiles pass through this shielding, it is temporarily deactivated causing the user to become visible. It should be noted that this is speculation based on field reports, and has not been proven because no one has yet captured an intact device.
Combat Usage
The coverage does not extend to the entirety of the user's equipment. Lights like on the Plasma Pistol and Plasma Rifle can be seen, as can the Energy Sword, giving away the user's position.
In Halo 2, it is noted that the Arbiter's armour, while possessing an in-built active camouflage generator, is not permanent until turned off, unlike the more modern generators used by the SpecOps Grunts and Elites. There is a circle on the player's HUD that shows the amount of time left for both the usage of the active camouflage and the recharging sequence. The Master Chief can gain this ability with the Envy Skull.
Unlike in Halo: Combat Evolved where one could attack without breaking active camouflage permanently, in Halo 2 usage of a weapon causes active camouflage to deactivate until it is recharged and can be used again.
Images
http://img169.exs.cx/img169/6332/activecamoelitethumb2rx.jpghttp://img169.exs.cx/img169/5493/activecamothumb6in.jpg