We report the development of a specialty optical fiber preform fabrication system based on carbon monoxide (CO) laser heating. The laser heating is accomplished via a single-beam optical arrangement integrated into a rotating glass lathe. The CO laser output power and its beam quality are affected by absorption of the laser radiation by water vapor present in the surrounding air. This is addressed by construction of an enclosed and fully motorized system to enable preform processing in a dry air environment. The performance of the system is evaluated, and the ability to maintain a desired preform processing temperature is demonstrated. Relevant aspects of preform manufacturing, such as glass cutting, splicing, tapering, and overcladding, are described in detail. The process of using these aspects to fabricate optical fiber preforms made of highly dissimilar materials and of various core-to-cladding ratios is discussed. Specialty fibers drawn from these preforms exhibit low-loss and show good optical performance.