##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the quarterly period ended September 30, 2005 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the transition period from ___ to ___
 Commission File Number 000-30649
 
 CENTILLIUM COMMUNICATIONS, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of
incorporation or organization)
    
    94-3263530
(IRS Employer
Identification Number)
 215 Fourier Avenue
Fremont, California 94539
(Address of principal executive offices including zip code)
 (510) 771-3700
(Registrants telephone number, including area code)
 
 þ o
 þ o
 o þ




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Centillium Communications, Inc.
TABLE OF CONTENTS
 Page No.PART I. Financial InformationItem 1. Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    28PART II. Other InformationItem 1. Legal Proceedings
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    
    28Item 5. Other Information
    
    
    28Item 6. Exhibits
    
    
    29Signatures
    
    
    30EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART IFINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 CENTILLIUM COMMUNICATIONS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2005 (Unaudited)
    
    
    2004 (*)(In thousands except shareand per share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    43,522
    
    
    $
    31,996Short-term investments
    
    
    15,544
    
    
    
    30,195Accounts receivable  net of allowance
for doubtful accounts of $167 at
September 30, 2005 and $151 at December
31, 2004
    
    
    3,981
    
    
    
    5,348Inventories
    
    
    5,521
    
    
    
    6,100Prepaids and other current assets
    
    
    2,165
    
    
    
    1,225Total current assets
    
    
    70,733
    
    
    
    74,864Property and equipment, net
    
    
    4,029
    
    
    
    6,528Other assets
    
    
    852
    
    
    
    553Total assets
    
    $
    75,614
    
    
    $
    81,945LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,776
    
    
    $
    5,599Accrued payroll and related expenses
    
    
    4,141
    
    
    
    3,364Accrued liabilities
    
    
    19,087
    
    
    
    16,786Total current liabilities
    
    
    28,004
    
    
    
    25,749Other long-term liabilities
    
    
    1,599
    
    
    
    864Commitments and contingenciesStockholders equity:Common stock; $0.001 par value:Authorized shares: 100,000,000; Issued
and outstanding shares: 39,716,086 at
September 30, 2005, 38,810,001 at
December 31, 2004
    
    
    40
    
    
    
    39Additional paid-in capital
    
    
    246,108
    
    
    
    244,493Accumulated deficit
    
    
    (200,046
    )
    
    
    (189,155
    )Deferred compensation
    
    
    (40
    )
    
    
    Accumulated other comprehensive loss
    
    
    (51
    )
    
    
    (45
    )Total stockholders equity
    
    
    46,011
    
    
    
    55,332Total liabilities and stockholders equity
    
    $
    75,614
    
    
    $
    81,945
 
 *
    
    Derived from audited financial statements at December 31, 2004  3




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CENTILLIUM COMMUNICATIONS, INC.
 
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except per share data)
    
    
    (In thousands, except per share data)Net revenues
    
    $
    19,993
    
    
    $
    20,368
    
    
    $
    55,836
    
    
    $
    54,740Cost of revenues
    
    
    8,690
    
    
    
    10,281
    
    
    
    26,987
    
    
    
    29,179Gross profit
    
    
    11,303
    
    
    
    10,087
    
    
    
    28,849
    
    
    
    25,561Operating expenses:Research and development
    
    
    7,399
    
    
    
    11,958
    
    
    
    22,299
    
    
    
    39,780Selling, general and administrative
    
    
    5,135
    
    
    
    5,924
    
    
    
    18,449
    
    
    
    17,775Total operating expenses
    
    
    12,534
    
    
    
    17,882
    
    
    
    40,748
    
    
    
    57,555Operating loss
    
    
    (1,231
    )
    
    
    (7,795
    )
    
    
    (11,899
    )
    
    
    (31,994
    )Interest income, net
    
    
    448
    
    
    
    219
    
    
    
    1,128
    
    
    
    791Loss before provision for income taxes
    
    
    (783
    )
    
    
    (7,576
    )
    
    
    (10,771
    )
    
    
    (31,203
    )Provision for income taxes
    
    
    39
    
    
    
    37
    
    
    
    120
    
    
    
    109Net loss
    
    $
    (822
    )
    
    $
    (7,613
    )
    
    $
    (10,891
    )
    
    $
    (31,312
    )Basic and diluted net loss per share
    
    $
    (0.02
    )
    
    $
    (0.20
    )
    
    $
    (0.28
    )
    
    $
    (0.82
    )Shares used to compute basic and diluted net loss per share
    
    
    39,427
    
    
    
    38,340
    
    
    
    39,105
    
    
    
    38,099
  4




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CENTILLIUM COMMUNICATIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Nine Months Ended September 30,2005
    
    
    2004(In thousands)OPERATING ACTIVITIESNet loss
    
    $
    (10,891
    )
    
    $
    (31,312
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization expense
    
    
    2,952
    
    
    
    3,861Stock-based compensation expense
    
    
    20
    
    
    
    242Loss on retirement of property and equipment
    
    
    404
    
    
    
    82Changes in operating assets and liabilities:Accounts receivable
    
    
    1,367
    
    
    
    5,593Inventories
    
    
    579
    
    
    
    2,558Prepaids and other current assets
    
    
    (940
    )
    
    
    414Other assets
    
    
    (299
    )
    
    
    (22
    )Accounts payable
    
    
    (823
    )
    
    
    827Accrued payroll and related expenses
    
    
    777
    
    
    
    (559
    )Accrued liabilities
    
    
    2,301
    
    
    
    (478
    )Other liabilities
    
    
    735
    
    
    
    81Net cash used in operating activities
    
    
    (3,818
    )
    
    
    (18,713
    )INVESTING ACTIVITIESPurchases of short-term investments
    
    
    (43,091
    )
    
    
    (18,239
    )Sales and maturities of short-term investments
    
    
    57,736
    
    
    
    44,043Purchases of property and equipment
    
    
    (857
    )
    
    
    (2,991
    )Net cash provided by investing activities
    
    
    13,788
    
    
    
    22,813FINANCING ACTIVITIESPrincipal payments on capital lease obligations
    
    
    
    
    
    
    (527
    )Proceeds from issuance of common stock
    
    
    1,556
    
    
    
    1,251Net cash provided by financing activities
    
    
    1,556
    
    
    
    724Net increase in cash and cash equivalents
    
    
    11,526
    
    
    
    4,824Cash and cash equivalents at beginning of period
    
    
    31,996
    
    
    
    24,734Cash and cash equivalents at end of period
    
    $
    43,522
    
    
    $
    29,558
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CENTILLIUM COMMUNICATIONS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1. Description of Business
  2. Summary of Significant Accounting Policies
 Basis of Presentation
    Use of Estimates
  Recent Accounting Pronouncements
  6




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3. Stock-based Compensation
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss as reported
    
    $
    (822
    )
    
    $
    (7,613
    )
    
    $
    (10,891
    )
    
    $
    (31,312
    )Add: Stock-based employee compensation expense
included in reported net loss, net of recovery
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    242Less: Total stock-based employee compensation
expense under fair value based method for all
awards, net of related tax effects
    
    
    (1,465
    )
    
    
    (2,448
    )
    
    
    (3,459
    )
    
    
    (9,032
    )Pro forma net loss
    
    $
    (2,287
    )
    
    $
    (10,013
    )
    
    $
    (14,350
    )
    
    $
    (40,102
    )Basic and diluted net loss per share  as reported
    
    $
    (0.02
    )
    
    $
    (0.20
    )
    
    $
    (0.28
    )
    
    $
    (0.82
    )Basic and diluted net loss per share  pro forma
    
    $
    (0.06
    )
    
    $
    (0.26
    )
    
    $
    (0.37
    )
    
    $
    (1.05
    )
  4. Commitments and Contingencies
   7




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Surplus space charges recorded in the three months ended June 30, 2005
    
    $
    1,450Leasehold improvements abandoned
    
    
    (386
    )Accrued liability for surplus space charges at June 30, 2005
    
    
    1,064Facility costs incurred and set-off against reserve
    
    
    (126
    )Surplus space charges recorded in the three months ended September 30, 2005
    
    
    163Accrued liability for surplus space charges at September 30, 2005
    
    $
    1,101
 5. Balance Sheet Information
  September 30,
    
    
    December 31,2005
    
    
    2004Work-in-process
    
    $
    1,726
    
    
    $
    3,694Finished goods
    
    
    3,795
    
    
    
    2,406$
    5,521
    
    
    $
    6,100
  September 30,
    
    
    December 31,2005
    
    
    2004Accrued royalties
    
    $
    16,045
    
    
    $
    13,773Accrued other liabilities
    
    
    3,042
    
    
    
    3,013$
    19,087
    
    
    $
    16,786
 8




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##### Table of Contents



Warranty activity (in thousands):Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Balances at beginning of period
    
    $
    140
    
    
    $
    320
    
    
    $
    164
    
    
    $
    460Product warranty accruals
    
    
    
    
    
    
    (46
    )
    
    
    40
    
    
    
    (147
    )Warranty costs incurred
    
    
    
    
    
    
    (25
    )
    
    
    (64
    )
    
    
    (64
    )Balances at end of period
    
    $
    140
    
    
    $
    249
    
    
    $
    140
    
    
    $
    2496. Provision for Income TaxesThe provision for income taxes for the three months and nine months ended September 30, 2005
and 2004 relates to current taxes payable for Centilliums subsidiaries located in foreign
jurisdictions. Income tax expense differs from the expected benefit that was derived by applying
the applicable U.S. federal statutory rate to the loss from operations primarily due to losses that
are not currently benefited. Due to Centilliums loss position, a full valuation allowance has been
established against Centilliums deferred tax assets, consisting primarily of net operating loss
carryforwards.7. Net Loss Per ShareBasic and diluted net loss per share have been computed using the weighted average number of shares
of common stock outstanding during the period. The following table presents the computation of
basic and diluted net loss per share (in thousands, except per share amounts):Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss
    
    $
    (822
    )
    
    $
    (7,613
    )
    
    $
    (10,891
    )
    
    $
    (31,312
    )Basic and diluted weighted average
shares used to compute basic and
diluted net loss per share
    
    
    39,427
    
    
    
    38,340
    
    
    
    39,105
    
    
    
    38,099Basic and diluted net loss per share
    
    $
    (0.02
    )
    
    $
    (0.20
    )
    
    $
    (0.28
    )
    
    $
    (0.82
    )Centillium has excluded all outstanding warrants and stock options from the calculation of
diluted net loss per share because these securities are antidilutive for all periods presented.
These excluded common share equivalents could be dilutive in the future. Options and warrants of
approximately 9,201,000 and 12,483,000 shares of common stock have been excluded at September 30,
2005 and 2004, respectively.8. Comprehensive Net LossThe following table presents the computation of comprehensive net loss (in thousands):Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss
    
    $
    (822
    )
    
    $
    (7,613
    )
    
    $
    (10,891
    )
    
    $
    (31,312
    )Change in unrealized
gain on
available-for-sale
investments
    
    
    (12
    )
    
    
    24
    
    
    
    (6
    )
    
    
    (91
    )Total comprehensive loss
    
    $
    (834
    )
    
    $
    (7,589
    )
    
    $
    (10,897
    )
    
    $
    (31,403
    )9. Business Segment Information and Customer ConcentrationCentillium operates in one operating segment, broadband communications. Centilliums foreign
operations consist primarily of design centers in India and France, and sales and marketing offices
in several locations around the world. Long-lived assets outside the United States are not
significant. Geographic sales information is based on the location of the end customer.
 9




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The following customers, the first two of whom are located in Japan, accounted for more than 10% of
net revenues:Three Months Ended September 30,
    
    Nine Months Ended September 30,2005
    
    2004
    
    2005
    
    2004NEC
    
    
    22
    %
    
    
    52
    %
    
    
    24
    %
    
    
    46
    %Sumitomo Electric Industries
    
    
    30
    %
    
    
    34
    %
    
    
    32
    %
    
    
    36
    %Lucent Technologies Inc.
    
    
    11
    %
    
    
    *
    
    
    
    15
    %
    
    
    *Marconi Corporation Plc
    
    
    12
    %
    
    
    *
    
    
    
    *
    
    
    
    **      Less than 10%The following is a summary of net revenues by major geographic area (in thousands):Three Months Ended September 30,
    
    Nine Months Ended September 30,2005
    
    2004
    
    2005
    
    2004Japan
    
    $
    10,917
    
    
    $
    17,378
    
    
    $
    33,210
    
    
    $
    45,584United States
    
    
    4,315
    
    
    
    1,636
    
    
    
    12,085
    
    
    
    5,921Other Asia-Pacific
    
    
    2,227
    
    
    
    945
    
    
    
    5,754
    
    
    
    2,575Other
    
    
    2,534
    
    
    
    409
    
    
    
    4,787
    
    
    
    660$
    19,993
    
    
    $
    20,368
    
    
    $
    55,836
    
    
    $
    54,740
 10. Related Party Transactions
   
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   10




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Overview
     TM TM
    11




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##### Table of Contents



Net Revenues.
     Cost of Revenues.
 Research and Development Expenses.
 Selling, General and Administrative Expenses.
 Interest Income, Net.
 Provision for Income Taxes.
 Critical Accounting Policies
 General.
 12




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Revenue Recognition.
 Sales Returns and Allowances.
 Allowance for Doubtful Accounts.
 Inventories.
 Warranty.
 Litigation and Contingencies.
 13




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Results of Operations for the three and nine months ended September 30, 2005 and 2004
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2005
    
    2004
    
    2005
    
    2004Net revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenues
    
    
    43
    
    
    
    50
    
    
    
    48
    
    
    
    53Gross profit
    
    
    57
    
    
    
    50
    
    
    
    52
    
    
    
    47Operating expenses:Research and development
    
    
    37
    
    
    
    59
    
    
    
    40
    
    
    
    73Selling, general and
administrative
    
    
    26
    
    
    
    29
    
    
    
    33
    
    
    
    32Total operating expenses
    
    
    63
    
    
    
    88
    
    
    
    73
    
    
    
    105Operating loss
    
    
    (6
    )
    
    
    (38
    )
    
    
    (21
    )
    
    
    (58
    )Interest income and other, net
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    1Net loss
    
    
    (4
    )%
    
    
    (37
    )%
    
    
    (20
    )%
    
    
    (57
    )%
 Net Revenues
 Three Months Ended
    
    
    Three Months EndedSeptember 30, 2005
    
    
    September 30, 2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    Increase/Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    Decrease
    
    

% ChangeNet revenues
    
    $
    19,993
    
    
    
    100
    %
    
    $
    20,368
    
    
    
    100
    %
    
    $
    (375
    )
    
    
    (2
    )%Cost of revenues
    
    
    8,690
    
    
    
    43
    %
    
    
    10,281
    
    
    
    50
    %
    
    
    (1,591
    )
    
    
    (15
    )%Gross profit
    
    $
    11,303
    
    
    
    57
    %
    
    $
    10,087
    
    
    
    50
    %
    
    $
    1,216
    
    
    
    12
    %
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    Increase/Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    Decrease
    
    

% ChangeNet revenues
    
    $
    55,836
    
    
    
    100
    %
    
    $
    54,740
    
    
    
    100
    %
    
    $
    1,096
    
    
    
    2
    %Cost of revenues
    
    
    26,987
    
    
    
    48
    %
    
    
    29,179
    
    
    
    53
    %
    
    
    (2,192
    )
    
    
    (8
    )%Gross profit
    
    $
    28,849
    
    
    
    52
    %
    
    $
    25,561
    
    
    
    47
    %
    
    $
    3,288
    
    
    
    13
    %
 14




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Three Months Ended
    
    
    Three Months EndedSeptember 30, 2005
    
    
    September 30, 2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    Increase/Products
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    Decrease
    
    

% ChangeDSL
    
    $
    14,639
    
    
    
    73
    %
    
    $
    19,253
    
    
    
    95
    %
    
    $
    (4,614
    )
    
    
    (24
    )%VOIP
    
    
    4,664
    
    
    
    23
    %
    
    
    1,109
    
    
    
    5
    %
    
    
    3,555
    
    
    
    321
    %FTTP
    
    
    690
    
    
    
    4
    %
    
    
    6
    
    
    
    
    
    
    
    684
    
    
    
    11,400
    %Net revenues
    
    $
    19,993
    
    
    
    100
    %
    
    $
    20,368
    
    
    
    100
    %
    
    
    (375
    )
    
    
    (2
    )%
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2004% of Net
    
    
    
    
    
    
    % of Net
    
    
    Increase/Products
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    Decrease
    
    

% ChangeDSL
    
    $
    43,638
    
    
    
    78
    %
    
    $
    52,303
    
    
    
    96
    %
    
    $
    (8,665
    )
    
    
    (17
    )%VOIP
    
    
    10,088
    
    
    
    18
    %
    
    
    1,630
    
    
    
    3
    %
    
    
    8,458
    
    
    
    519
    %FTTP
    
    
    2,110
    
    
    
    4
    %
    
    
    807
    
    
    
    1
    %
    
    
    1,303
    
    
    
    161
    %Net revenues
    
    $
    55,836
    
    
    
    100
    %
    
    $
    54,740
    
    
    
    100
    %
    
    $
    1,096
    
    
    
    2
    %
    Three Months Ended September 30,
    
    Nine Months Ended September 30,2005
    
    2004
    
    2005
    
    2004NEC
    
    
    22
    %
    
    
    52
    %
    
    
    24
    %
    
    
    46
    %Sumitomo Electric Industries
    
    
    30
    %
    
    
    34
    %
    
    
    32
    %
    
    
    36
    %Lucent Technologies Inc.
    
    
    11
    %
    
    
    *
    
    
    
    15
    %
    
    
    *Marconi Corporation Plc
    
    
    12
    %
    
    
    *
    
    
    
    *
    
    
    
    *
 
 *
    
    Less than 10%  15




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##### Table of Contents



Gross Profit
 Research and Development Expenses
 Selling, General and Administrative Expenses
 Interest Income, Net
 Provision for Income Taxes
 Recent Accounting Pronouncements
   16




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##### Table of Contents



Liquidity and Capital Resources
      Less than 1Total
    
    
    Year
    
    
    1-3 Years
    
    
    After 3 YearsOperating leases  facilities
    
    $
    5,756
    
    
    $
    1,229
    
    
    $
    3,075
    
    
    $
    1,452Operating leases  software
    
    
    4,685
    
    
    
    460
    
    
    
    2,985
    
    
    
    1,240Inventory purchases
    
    
    4,357
    
    
    
    4,357
    
    
    
    
    
    
    
    Total cash obligations
    
    $
    14,798
    
    
    $
    6,046
    
    
    $
    6,060
    
    
    $
    2,692
  17




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##### Table of Contents



Risk Factors
  We have a history of losses and may experience losses in the future.
   Because of our lack of diversity in geographic sources of revenues, the slowdown in deployment of
DSL in Japan and other factors have and may continue to adversely affect our business and operating
results.
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We derive a substantial majority of our revenues from DSL products, and our failure to diversify
our sources of our revenues could harm our business and operating results.
  We depend on a few customers, and if we lose any of them, our sales and operations will suffer.
  
    
    many of our customers have pre-existing or concurrent relationships with our current
or potential competitors that may affect the customers decision to purchase our
products;
    
    the success of our largest OEM customers; and
    
    the continued demand for our customers systems products.
  Sales of our products depend on the widespread adoption of broadband access services, especially
DSL, VoIP and FTTP. If the demand for broadband access service does not increase, we may not be
able to generate substantial sales.
  
    
    inconsistent quality and reliability of service;
    
    lack of availability of cost-effective, high-speed service;
    
    lack of interoperability among multiple vendors network equipment;
    
    congestion in service providers networks;
    
    inadequate security; and
    
    slow deployment of new broadband services over DSL lines.
 We depend on sole or limited source suppliers for several key components of our products.
  19




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##### Table of Contents




    
    experience delays in meeting our customer demand on a timely basis, or at all;
    
    enter into exclusive arrangements with our competitors;
    
    stop selling their products or components to us at commercially reasonable prices;
    
    refuse to sell their products or components to us at any price; or
    
    be subject to production disruptions caused by power outages, earthquakes, financial difficulties.
 Our markets are highly competitive and many of our competitors are established and have greater
resources than we have.
  Our stock price may continue to be volatile.
  
    
    variations in our quarterly operating results;
    
    changes in financial estimates of our revenues and operating results by securities analysts;
    
    changes in market valuations of integrated circuit companies;
    
    announcements by us, our competitors or others in related market segments of
significant contracts, acquisitions, strategic partnerships, joint ventures or capital
commitments;
    
    loss or decrease in sales to a major customer or failure to complete significant transactions;
    
    loss or reduction in manufacturing capacity from one or more of our key suppliers;
    
    additions or departures of key personnel;
    
    future sales of our common stock;
    
    inconsistent or low levels of trading volume of our common stock;
    
    commencement of or involvement in litigation;
    
    announcements by us or our competitors of key design wins and product introductions;
    
    a decrease in the average selling price of our products;
    
    ability to achieve cost reductions; and
    
    fluctuations in the timing and amount of customer requests for product shipments.
 We operate in the highly cyclical semiconductor industry, which is subject to significant
downturns.
  20




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If we are unable to develop and introduce new products successfully and in a cost-effective and
timely manner or to achieve market acceptance of our new products, our operating results would be
adversely affected.
  
    
    timely and accurately predict market requirements and evolving industry standards;
    
    successfully define new products;
    
    timely and accurately identify opportunities in new markets;
    
    timely complete and introduce new product designs;
    
    scale our operations in response to changes in demand for our products and services;
    
    license any desired third party technology or intellectual property rights;
    
    timely qualify and obtain industry interoperability certification of our products and
the products of our customers into which our products will be incorporated;
    
    obtain sufficient foundry capacity and packaging materials;
    
    achieve high manufacturing yields;
    
    shift our products to smaller geometry process technologies to achieve lower cost and
higher levels of design integration; and
    
    gain market acceptance of our products and our customers products.
  We are exposed to increased costs and risks associated with complying with increasing and new
regulation of corporate governance and disclosure standards.
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##### Table of Contents



Changes in the accounting treatment of stock options will adversely affect our results of
operations.
  A general economic slowdown, and a slowdown in spending in the telecommunications industry, has
affected and may continue to negatively affect our business and operating results.
  
    
    reduced demand for our products;
    
    increased price competition for our products;
    
    increased risk of excess and obsolete inventories;
    
    higher research and development and general and administrative costs, as a percentage of revenues.
  Third-party claims regarding intellectual property matters could cause us to stop selling our
products, pay monetary damages or obtain licenses on adverse terms.
  22




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##### Table of Contents



We may be unable to attract, retain and motivate qualified personnel, which could seriously harm
our business.
  Our customers may demand preferential terms or lengthen our sales cycle, which would adversely
affect our results of operations.
  Because the sales cycle for our products typically lasts up to one year or longer, and may be
subject to delays, it is difficult to forecast sales for any given period.
  23




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##### Table of Contents



Rapid changes in the market for DSL chip sets may render our chip sets obsolete or unmarketable.
  
    
    intense competition;
    
    rapid technological change;
    
    frequent new product introductions by our competitors;
    
    changes in customer demands; and
    
    evolving industry standards.
  Because our products are components of other equipment, if broadband equipment manufacturers do not
incorporate our products in their equipment, or if the equipment incorporating our products are not
successful, we may not be able to generate sales of our products in volume quantities.
  Because manufacturers of communications equipment may be reluctant to change their sources of
components, if we do not achieve design wins with such manufacturers, we may be unable to secure
sales from these customers in the future.
  We may need to raise additional capital which might not be available or which, if available, could
be on terms adverse to our common stockholders.
  24




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##### Table of Contents



Because other broadband technologies may compete effectively with DSL services or other services
addressed by our products, a slowdown in deployment of DSL services, the lack of significant growth
in non-DSL markets that we are targeting and our lack of success in penetrating such markets would
adversely affect our business and operating results.
  We are subject to order and shipment uncertainties, and any significant order cancellations or
deferrals could adversely affect our business.
  We derive a substantial amount of our revenues from international sources, and difficulties
associated with international operations could harm our business.
  
    
    political, social and economic instability;
    
    exposure to different legal standards, particularly with respect to intellectual property;
    
    natural disasters and public health emergencies;
    
    nationalization of business and blocking of cash flows;
    
    trade and travel restrictions;
    
    the imposition of governmental controls and restrictions;
    
    burdens of complying with a variety of foreign laws;
    
    import and export license requirements and restrictions of the United States and each other country in which we operate;
    
    unexpected changes in regulatory requirements;
    
    foreign technical standards;
    
    changes in taxation and tariffs;
    
    difficulties in staffing and managing international operations;
    
    fluctuations in currency exchange rates;
    
    difficulties in collecting receivables from foreign entities or delayed revenue recognition; and
    
    potentially adverse tax consequences.
   25




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##### Table of Contents



If we deliver products with defects, our credibility will be harmed, and the sales and market
acceptance of our products will decrease.
  We may experience difficulties in transitioning to smaller geometry process technologies or in
achieving higher levels of design integration and that may result in reduced manufacturing yields,
delays in product deliveries and increased expenses.
   Future consolidation in the telecommunications equipment industry may increase competition that
could harm our business.
  We may make future acquisitions and acquisitions that could involve numerous risks, result in
unanticipated accounting charges or otherwise adversely affect our results of operations.
  26




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##### Table of Contents




    
    difficulties in integration of the operations, technologies and products of the acquired companies;
    
    the risk of diverting managements attention from normal daily operations of the business;
    
    potential difficulties in completing projects associated with purchased in-process research and development;
    
    risks of entering markets in which we have no or limited direct prior experience and
where competitors in such markets have stronger market positions; and
    
    the potential loss of key employees of the acquired company.
  Our future success will depend in part on our ability to protect our proprietary rights and the
technologies used in our principal products, and if we do not enforce and protect our intellectual
property, our business will be harmed.
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  27




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures.
 Changes in internal control over financial reporting.
 
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
   
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  28




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##### Table of Contents



ITEM 6. EXHIBITS
 3.1(1)
    
    Certificate of Incorporation of the Registrant4.2(1)
    
    Bylaws of the Registrant10.47(16)
    
    Executive Officer Annual Compensation for Selected Executives31.1
    
    Certification of the Chief Executive Officer Pursuant to Rules
13a-14 and 15d -14 under the Securities Exchange Act of 1934,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certification of the Chief Financial Officer Pursuant to Rules
13a-14 and 15d -14 under the Securities Exchange Act of 1934,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certification of the Chief Executive Officer of Centillium
Communications, Inc., Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2
    
    Certification of the Chief Financial Officer of Centillium
Communications, Inc., Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.(1)
    
    Incorporated by reference to the Exhibits filed with the
Registration Statement of Form S-1 (No. 333-30772), declared
effective by the Commission on May 23, 2000.(16)
    
    Incorporated by reference to the Exhibits filed with the
Registrants Current Report on Form 8-K filed with the
Commission on July 27, 2005.
 29




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##### Table of Contents



SIGNATURES
  CENTILLIUM COMMUNICATIONS, INC.(Registrant)Dated: November 3, 2005
    By:
    /s/ J. SCOTT KAMSLERJ. Scott Kamsler
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 30




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##### Table of Contents



3.1(1)
    
    Certificate of Incorporation of the Registrant4.2(1)
    
    Bylaws of the Registrant10.47(16)
    
    Executive Officer Annual Compensation for Selected Executives31.1
    
    Certification of the Chief Executive Officer Pursuant to Rules
13a-14 and 15d -14 under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certification of the Chief Financial Officer Pursuant to Rules
13a-14 and 15d -14 under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certification of the Chief Executive Officer of Centillium
Communications, Inc., Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2
    
    Certification of the Chief Financial Officer of Centillium
Communications, Inc., Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.(1)
    
    Incorporated by reference to the Exhibits filed with the
Registration Statement of Form S-1 (No. 333-30772), declared
effective by the Commission on May 23, 2000.(16)
    
    Incorporated by reference to the Exhibits filed with the
Registrants Current Report on Form 8-K filed with the
Commission on July 27, 2005.