There have been whispers that Pirelli's optical systems business, which Cisco Systems Inc. (Nasdaq: CSCO) bought earlier this year for $2 billion, isn't exactly running like a fine-tuned Italian sports car.

"I don't know why they paid that much," said one venture capitialist familiar with the Pirelli technology, asking not to be named.

"The accounting was very aggressive and they're having lots of manufacturing problems," said a Wall Street analyst, also asking not to be named.

And this, from a former networking executive at a Cisco competitor, who looked at Pirelli's optical business himself: "It was ill-spent money."

So what exactly is going on at Pirelli optical systems, which has now become part of a European Cisco unit known as the Worldwide Photonics Networking Division? Well, in Cisco's marketing lingo: It's become a "center of excellence" for DWDM (Dense Wavelength-Division Multiplexing) technology that will be integrated into existing Cisco products.

For example, Cisco is using the Pirelli DWDM technology to make 10-gigabit optical interfaces for its Gigabit Switch Router (GSR). It has kept Pirelli's ONS 15800, an optical multiplexer, as a distinct product line, and it will fold Qeyton Systems Inc.'s metropolitan-area DWDM product into the same European business unit. Cisco bought Qeyton earlier this year for $800 million.

"We have a new strategic direction," says Stephen Harbour, marketing manager for Cisco's worldwide photonics optical unit based in Milan, Italy. "We've changed our profile; we're switching from shipping volume product to becoming a center of excellence."

But what about the rumored problems? Harbour admits it has taken time for the former Pirelli division to adapt to the Cisco way, which involves the religious pursuit of combining IP and optical technologies. He also says that the unit has been consumed with integrating its products into Cisco's network management platform.

As for the manufacturing problems, Harbour acknowledged that the business unit has been constrained by limits on manufacturing capacity. He says that problem will be alleviated with the construction of a 674,000-square-foot facility in Salem, N.H. "Some of the components remain on the critical list," says Harbour. "It's a problem for everyone in the industry."

Harbour declined to give revenue projections for his business unit for the rest of the year, but he did say that the unit recently sold $60 million worth of DWDM gear to Cogent Communications. For the rest of the year, at least, it looks as if the Sonet products coming out of Cerent, the company Cisco bought last year for $7 billion, will continue to account for the bulk of Cisco's optical sales.

-- By R. Scott Raynovich, executive editor, Light Reading http://www.lightreading.com