The relationships between optical component vendors and optical system vendors seems to be getting cozier with each new S-1 filing.

Take Cidra Corp. (proposed Nasdaq: CIDC), an optical component vendor providing parts for dense wavelength-division multiplexing (DWDM) systems, as an example. The company filed for a $150 million public offering with the Securities and Exchange Commission on Wednesday, but its relationship to its only two named customers, Cisco Systems Inc. (Nasdaq: CSCO) and Corvis Corp. (Nasdaq: CORV), raises eyebrows.

David Huber, who is chairman of the board of Cidra and owns more than 10 million shares of its stock, is also chairman, president, chief executive officer, and the leading shareholder at Corvis. The agreement, which was inked in August, obligates Corvis to purchase optical networking products from Cidra for a period of two years, based on a schedule forecast by Corvis, according to the S-1. But no specific dollar amount is given.

Huber’s venture capital fund, Optical Capital Group (OCG), also contributed to the company’s $100 million round of funding, which closed in June (see Huber Extends His Reach).

Cisco, also listed as a customer in the S-1, contributed to the June round of funding, as well (see Cisco's Components Feast). But the connection doesn’t end there. Cidra has also agreed to give Cisco first dibs on the company if it is approached by a buyer.

"Upon receiving a Notice of Sale that a sale of the Company hasbeen initiated, Cisco (or its assignee as described below) shall have ten (10) business days (which time period may be extended by mutual written agreement) (the 'Offer Period') following its receipt of the Notice in which to present an offer (the 'Offer') to acquire the Company (the 'Right of Offer')."But some analysts don't think that the close ties to two competitive customers are necessarily a bad sign for Cidra.

"This is an incredibly incestuous business," says Paul Johnson, senior technology analyst for Robertson Stephens. "Nobody is as pure as snow. But the [Cidra] technology is pretty significant. And they already had to sell them on that to convince them to invest."

The company, which was started in 1996 to manufacture industrial optical sensing products, has shifted its focus in the last year to make optical networking products that include Bragg gratings and wave guides. A good strategy, say analysts, because Bragg gratings and waveguide technology can be used to build both types of products.

“The market pull for telecom applications is a lot more than for non-telecom applications,” says John Lively, senior analyst with RHK Inc. “Of course when you have limited resources, you’re going to focus on applications with the greatest upside.”

Overall, Cidra’s financial picture is not much to look at. In 1999, the company realized no revenue from any of its products -- including the industrial parts -- and it incurred losses of $21 million. In the last six months it has realized $423,000 in revenue, but none of it has come from optical networking components. And again, the company has racked up huge amounts of losses -- $12.6 million for the six months ending in June.

"These are all good things to point out," says Johnson. "But we just don't know how it will turn out. It could all prove to be a giant house of cards that will collapse, or they could get six more customers and ramp up revenue and everyone will say that is just how new businesses evolve." Morgan Stanley Dean Witter is leading the deal with CIBC World Markets and UBS Warburg LLC comanaging. Share pricing and the number of shares to be sold have not yet been determined.

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com