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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
  FORM 10-Q  (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004
 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)  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports), and (2) has been subject to such
filing requirements for the past 90 days.    YES    x    
NO    o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).    YES    x    
NO    o On October 15, 2004, approximately 38,374,243 shares of the Registrants
Common Stock, $0.001 par value, were outstanding.




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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, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003
    
    
    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
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    22PART II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    23Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3.
    
    Defaults Upon Senior Securities
    
    
    23Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    23Item 5.
    
    Other Information
    
    
    23Item 6.
    
    Exhibits
    
    
    23Signatures
    
    
    
    
    24EXHIBIT 10.40EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 2




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PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS CENTILLIUM COMMUNICATIONS, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited, in thousands)
 September 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    29,558
    
    
    $
    24,734Short-term investments
    
    
    38,997
    
    
    
    64,892Accounts
receivable - net of allowance
for doubtful accounts
of $151at September 30, 2004 and $109 at
December 31, 2003
    
    
    6,883
    
    
    
    12,476Inventories
    
    
    9,350
    
    
    
    11,908Prepaid and other current assets
    
    
    3,304
    
    
    
    3,718Total current assets
    
    
    88,092
    
    
    
    117,728Property and equipment, net
    
    
    6,433
    
    
    
    7,385Other assets
    
    
    533
    
    
    
    511Total assets
    
    $
    95,058
    
    
    $
    125,624LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    8,261
    
    
    $
    7,434Accrued payroll and related expenses
    
    
    4,756
    
    
    
    5,315Accrued liabilities
    
    
    15,690
    
    
    
    16,168Capital
leases - current portion
    
    
    
    
    
    
    527Total current liabilities
    
    
    28,707
    
    
    
    29,444Other liabilities
    
    
    224
    
    
    
    143Commitments and contingenciesStockholders equity:Common stock
    
    
    38
    
    
    
    38Additional paid-in capital
    
    
    243,599
    
    
    
    242,348Deferred compensation
    
    
    (50
    )
    
    
    (292
    )Accumulated other comprehensive income
(loss)
    
    
    (55
    )
    
    
    36Accumulated deficit
    
    
    (177,405
    )
    
    
    (146,093
    )Total stockholders equity
    
    
    66,127
    
    
    
    96,037Total liabilities and stockholders equity
    
    $
    95,058
    
    
    $
    125,624
 See accompanying notes 3




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CENTILLIUM COMMUNICATIONS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited, in thousands except per share data)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net revenues
    
    $
    20,368
    
    
    $
    37,498
    
    
    $
    54,740
    
    
    $
    99,255Cost of revenues
    
    
    10,281
    
    
    
    20,706
    
    
    
    29,179
    
    
    
    52,852Gross profit
    
    
    10,087
    
    
    
    16,792
    
    
    
    25,561
    
    
    
    46,403Operating expenses:Research and development
    
    
    11,958
    
    
    
    11,117
    
    
    
    39,780
    
    
    
    33,996Sales and marketing
    
    
    3,292
    
    
    
    2,874
    
    
    
    9,880
    
    
    
    8,855General and administrative
    
    
    2,632
    
    
    
    2,675
    
    
    
    7,895
    
    
    
    7,319Amortization of other acquisition-related intangibles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83Total operating expenses
    
    
    17,882
    
    
    
    16,666
    
    
    
    57,555
    
    
    
    50,253Operating income (loss)
    
    
    (7,795
    )
    
    
    126
    
    
    
    (31,994
    )
    
    
    (3,850
    )Interest income, net
    
    
    219
    
    
    
    280
    
    
    
    791
    
    
    
    851Income (loss) before provision for income taxes
    
    
    (7,576
    )
    
    
    406
    
    
    
    (31,203
    )
    
    
    (2,999
    )Provision for income taxes
    
    
    37
    
    
    
    24
    
    
    
    109
    
    
    
    90Net income (loss)
    
    $
    (7,613
    )
    
    $
    382
    
    
    $
    (31,312
    )
    
    $
    (3,089
    )Basic earnings (loss) per share
    
    $
    (0.20
    )
    
    $
    0.01
    
    
    $
    (0.82
    )
    
    $
    (0.09
    )Diluted earnings (loss) per share
    
    $
    (0.20
    )
    
    $
    0.01
    
    
    $
    (0.82
    )
    
    $
    (0.09
    )Common shares outstanding
    
    
    38,340
    
    
    
    36,972
    
    
    
    38,099
    
    
    
    36,009Common shares outstanding assuming dilution
    
    
    38,340
    
    
    
    41,099
    
    
    
    38,099
    
    
    
    36,009
 See accompanying notes 4




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CENTILLIUM COMMUNICATIONS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited, in thousands)
 Nine Months Ended September 30,2004
    
    2003Operating activitiesNet loss
    
    $
    (31,312
    )
    
    $
    (3,089
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization expense
    
    
    3,861
    
    
    
    4,717Stock based compensation expense
    
    
    242
    
    
    
    1,058Loss on retirements of property and equipment
    
    
    82
    
    
    
    19Amortization of other acquisition-related intangibles
    
    
    
    
    
    
    83Changes in operating assets and liabilities:Accounts receivable
    
    
    5,593
    
    
    
    (5,456
    )Inventories
    
    
    2,558
    
    
    
    (10,369
    )Prepaid and other current assets
    
    
    414
    
    
    
    (1,809
    )Other assets
    
    
    (22
    )
    
    
    (152
    )Accounts payable
    
    
    827
    
    
    
    6,142Accrued payroll and related expenses
    
    
    (559
    )
    
    
    390Accrued liabilities
    
    
    (478
    )
    
    
    3,124Other liabilities
    
    
    81
    
    
    
    (83
    )Net cash used in operating activities
    
    
    (18,713
    )
    
    
    (5,425
    )Investing activitiesPurchases of short-term investments
    
    
    (18,239
    )
    
    
    (51,508
    )Sales and maturities of short-term investments
    
    
    44,043
    
    
    
    25,238Purchases of property and equipment
    
    
    (2,991
    )
    
    
    (2,327
    )Net cash provided by (used in) investing activities
    
    
    22,813
    
    
    
    (28,597
    )Financing activitiesPrincipal payments on capital lease obligations
    
    
    (527
    )
    
    
    (1,533
    )Proceeds from issuance of common stock, net of repurchases
    
    
    1,251
    
    
    
    12,216Proceeds from shareholder
    
    
    
    
    
    
    857Net cash provided by financing activities
    
    
    724
    
    
    
    11,540Net increase (decrease) in cash and cash equivalents
    
    
    4,824
    
    
    
    (22,482
    )Cash and cash equivalents at beginning of period
    
    
    24,734
    
    
    
    93,513Cash and cash equivalents at end of period
    
    $
    29,558
    
    
    $
    71,031
 See accompanying notes 5




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CENTILLIUM COMMUNICATIONS, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) September 30, 2004 1. Description of Business Centillium Communications, Inc. (Centillium or the Company) was
incorporated in California on February 21, 1997. The Company designs, develops
and supplies products that enable broadband communications to the consumer,
enterprise and service provider markets. We primarily serve the Digital
Subscriber Line (DSL) and Voice-over-Internet Protocol (VoIP) markets. The
Company is also developing Fiber-To-The-Premises (FTTP) products, which it
expects to begin shipping to customers in the fourth quarter of 2004. Our
revenues are currently derived primarily from the sale of our DSL and VoIP
products. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying condensed consolidated financial statements are
unaudited; however, they have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. In the opinion of management, the unaudited condensed consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) that are necessary for a fair presentation of the Companys
consolidated financial position at September 30, 2004 and the consolidated
results of its operations and cash flows for the three and nine months ended
September 30, 2004 and 2003. Operating results for the three and nine months
ended September 30, 2004 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2004. The unaudited condensed consolidated financial statements include all the
accounts of the Company and those of its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements do
not include certain financial footnotes and financial information normally
required under accounting principles generally accepted in the United States.
Therefore, these financial statements should be read in conjunction with the
Companys audited consolidated financial statements and footnotes thereto for
the year ended December 31, 2003 included in the Companys Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on March 5, 2004. Use of Estimates The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
Centillium to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts
of sales and expenses during the reporting periods. Such management estimates
include allowances for doubtful accounts receivable, provisions for inventories
to reflect net realizable value, sales returns and allowances, product warranty
and other liabilities. Actual results could differ from those estimates. 3. Stock-based Compensation The Company has elected to account for its employee stock plans in
accordance with the intrinsic value method under Accounting Principles Board
Opinion No. 25, Accounting For Stock Issued to Employees (APB Opinion No.
25). The following table illustrates the effect on net loss and loss per share
had compensation expense for the Companys stock-based award plans been
determined based on the awards fair value on the grant date consistent with
the preferred method of Statement of Financial Accounting Standards No. 123,
Accounting For Stock Issued to Employees (FAS 123). For purposes of FAS 123
pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options vesting period (in thousands, except per share
amounts): 6




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss) as reported
    
    $
    (7,613
    )
    
    $
    382
    
    
    $
    (31,312
    )
    
    $
    (3,089
    )Add: Stock-based employee compensation expense included
in reported net income (loss), net of related tax effects
    
    
    48
    
    
    
    381
    
    
    
    242
    
    
    
    1,058Less: Total stock-based employee compensation
expense under fair value based method for all
awards, net of related tax effects
    
    
    (2,448
    )
    
    
    (5,502
    )
    
    
    (9,032
    )
    
    
    (19,530
    )Pro forma net loss
    
    $
    (10,013
    )
    
    $
    (4,739
    )
    
    $
    (40,102
    )
    
    $
    (21,561
    )Basic and
diluted net earnings (loss) per share - as reported
    
    $
    (0.20
    )
    
    $
    0.01
    
    
    $
    (0.82
    )
    
    $
    (0.09
    )Basic and
diluted net loss per share - pro forma
    
    $
    (0.26
    )
    
    $
    (0.13
    )
    
    $
    (1.05
    )
    
    $
    (0.60
    )
 4. Commitments and Contingencies From time to time, claims are made against the Company in the ordinary
course of its business, which could result in litigation. Claims and associated
litigation are subject to inherent uncertainties and unfavorable outcomes could
occur, such as monetary damages, fines, penalties or injunctions prohibiting
the Company from selling one or more products or engaging in other activities.
The occurrence of an unfavorable outcome in any specific period could have a
material adverse affect on the Companys results of operations for that period
or future periods. The Company enters into standard indemnification agreements in the
ordinary course of business. Pursuant to these agreements, the Company
generally indemnifies, holds harmless and agrees to reimburse the indemnified
party for losses suffered or incurred by the indemnified party, generally our
business partners or customers, in connection with certain patent, copyright or
other intellectual property infringement claims by any third parties with
respect to its products. The term of these indemnification agreements is
generally perpetual. The Company has not incurred significant costs to defend
lawsuits or settle claims related to these indemnification agreements as of
September 30, 2004. The semiconductor and telecommunications industries are characterized by
substantial litigation regarding patent and other intellectual property rights.
From time to time, the Company receives various inquiries or claims in
connection with these rights and may become a party to associated claims. In
certain cases, management has accrued estimates of the amounts it expects to
pay upon resolution of such matters and such amounts are included in accrued
liabilities. Should the Company not be able to secure the terms it expects,
these estimates may change and will be recognized in the period in which they
are identified, resulting in decreased profits. Although the ultimate outcome
of such inquiries is not presently determinable, management believes that the
resolution of these matters will not have a material adverse effect on the
Companys financial position or results of operations. In August 2004, Fujitsu Limited filed a suit against Centillium
Communications, Inc. and Centillium Japan K.K (Centillium Japan) in the Tokyo
District Court alleging that Centillium and Centillium Japan infringe one
Japanese patent jointly owned by Fujitsu and Ricoh Co., Ltd. The complaint
seeks monetary damages against Centillium and Centillium Japan. The Company is
in the process of evaluating the complaint, and the probable outcome of this
suit cannot be predicted with any certainty. An unfavorable ruling could have a
material adverse impact on the Companys financial position or results of
operations. The Company does not own or operate a fabrication facility, and foundries
located in Asia currently supply substantially all of its wafer requirements.
The Companys purchase obligations to these foundries are based on wafer supply
agreements or non-cancelable purchase orders. At September 30, 2004, the
Companys non-cancelable purchase obligations for wafers, all expected to be
delivered within the next three months, are $4.5 million. 7




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5. Balance Sheet Information Inventories: The components of inventories are as follows (in thousands): September 30,
    
    December 31,2004
    
    2003Work-in-process
    
    $
    3,608
    
    
    $
    5,475Finished goods
    
    
    5,742
    
    
    
    6,433$
    9,350
    
    
    $
    11,908
 Accrued Liabilities: The components of accrued liabilities are as follows (in thousands): September 30,
    
    December 31,2004
    
    2003Accrued royalties
    
    $
    13,438
    
    
    $
    13,211Accrued other liabilities
    
    
    2,252
    
    
    
    2,957$
    15,690
    
    
    $
    16,168
 Warranty: Warranty
activity for the three and nine months ended September 30, 2004
and 2003 was as follows
(in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 30
    
    September 30
    
    September 302004
    
    2003
    
    2004
    
    2003Balances at beginning of period
    
    $
    320
    
    
    $
    539
    
    
    $
    460
    
    
    $
    608Product warranty accruals
    
    
    (46
    )
    
    
    91
    
    
    
    (147
    )
    
    
    309Warranty costs incurred
    
    
    (25
    )
    
    
    (84
    )
    
    
    (64
    )
    
    
    (371
    )Balances at end of period
    
    $
    249
    
    
    $
    546
    
    
    $
    249
    
    
    $
    546
 6. Provision for Income Taxes The provision for income taxes for the three and nine months ended
September 30, 2004 and 2003 relates to current taxes payable for income
generated by the Company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 the Companys
loss position, a full valuation allowance has been established against the
Companys deferred tax assets, consisting primarily of net operating loss
carryforwards. 7. Net Loss Per Share Basic earnings (loss) per share have been computed using the weighted
average number of shares of common stock outstanding during the period, less
shares subject to repurchase. Diluted earnings (loss) per share is computed
using the weighted-average number of common shares and dilutive potential
common shares outstanding during the period. Dilutive potential common shares
result from the assumed exercise of outstanding stock options, by application
of the treasury stock method, that have a dilutive effect on earnings per
share, and from the assumed conversion of an outstanding warrant if it has a
dilutive effect on earnings per share. The following table presents the
computation of basic and diluted net earnings (loss) per share (in thousands,
except per share amounts): 8




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss) as reported
    
    $
    (7,613
    )
    
    $
    382
    
    
    $
    (31,312
    )
    
    $
    (3,089
    )Basic and diluted:Weighted average shares of common stock outstanding
    
    
    38,340
    
    
    
    36,976
    
    
    
    38,099
    
    
    
    36,030Less: Weighted average shares subject to repurchase
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (21
    )Weighted average shares used to compute common
shares outstanding
    
    
    38,340
    
    
    
    36,972
    
    
    
    38,099
    
    
    
    36,009Add effect of dilutive potential common shares
    
    
    
    
    
    
    4,127
    
    
    
    
    
    
    
    Common shares outstanding-assuming dilution
    
    
    38,340
    
    
    
    41,099
    
    
    
    38,099
    
    
    
    36,009Basic earnings (loss) per share
    
    $
    (0.20
    )
    
    $
    0.01
    
    
    $
    (0.82
    )
    
    $
    (0.09
    )Diluted earnings (loss) per share
    
    $
    (0.20
    )
    
    $
    0.01
    
    
    $
    (0.82
    )
    
    $
    (0.09
    )
 The Company incurred a loss for the three and nine month periods ended
September 30, 2004 and for the nine month period ended September 30, 2003. The
effect of dilutive securities totaling approximately 12,483,000 and 11,157,000
in 2004 and 2003, respectively, have been excluded from the computation of
diluted loss per share, as their impact would be anti-dilutive. Stock options
to purchase approximately 2,700,702 shares for the three month period ended
September 30, 2003 were outstanding, but were not included in the computation
of diluted earnings per share because the exercise price of the options was
greater than the average share price of the common shares and, therefore, the
effect would have been anti-dilutive. 8. Comprehensive Net Loss The following table presents the computation of comprehensive net loss (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss) as reported
    
    $
    (7,613
    )
    
    $
    382
    
    
    $
    (31,312
    )
    
    $
    (3,089
    )Change in unrealized gain (loss) on available-for-sale investments
    
    
    24
    
    
    
    (10
    )
    
    
    (91
    )
    
    
    19Total comprehensive income (loss)
    
    $
    (7,589
    )
    
    $
    372
    
    
    $
    (31,403
    )
    
    $
    (3,070
    )
 9. Business Segment Information and Customer Concentration The Companys operations involve the design, development, marketing and
technical support of semiconductor products that enable broadband
communications to the consumer, enterprise and service provider markets.
Through September 30, 2004, the Companys revenues have been primarily derived
from one business segment, the sale of broadband communication products for the
DSL and VoIP markets. The Company sells primarily to original equipment
manufacturers and companies in the communications industries. The following customers, both of whom are located in Japan, accounted for more
than 10% of net revenues: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003NEC
    
    
    52
    %
    
    
    53
    %
    
    
    46
    %
    
    
    51
    %Sumitomo Electric Industries
    
    
    34
    %
    
    
    31
    %
    
    
    36
    %
    
    
    34
    %
 9




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Revenues are attributed to geographic areas based on the location of the
customer to which products are sold. The following is a summary of net revenues
by major geographic area (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Japan
    
    $
    17,378
    
    
    $
    31,417
    
    
    $
    45,584
    
    
    $
    84,150United States
    
    
    1,636
    
    
    
    3,575
    
    
    
    5,921
    
    
    
    8,661Asia  Excluding Japan
    
    
    945
    
    
    
    2,289
    
    
    
    2,575
    
    
    
    5,534All other
    
    
    409
    
    
    
    217
    
    
    
    660
    
    
    
    910Total
    
    $
    20,368
    
    
    $
    37,498
    
    
    $
    54,740
    
    
    $
    99,255
 10. Related Party Transactions In the first quarter of 2004, one of the Companys directors, was elected
to the Board of Directors of Cadence Design Systems, Inc. (Cadence). During
2003, the Company entered into an agreement to license certain software tools
from Cadence under an operating lease that requires quarterly payments through
the third quarter of 2005. During the three and nine months ended September 30,
2004, the Company paid $430,000 and $1,164,000, respectively, to Cadence under
the license agreement. As of September 30, 2004, the Company has recorded a
liability of $430,000 to Cadence. This director is also a director of Semiconductor Manufacturing
International Corporation (SMIC). The Company purchased $4,427,000 and
$7,891,000 of foundry services and products from SMIC during the three and nine
months ended September 30, 2004, respectively. The Company did not purchase any
foundry services or products from SMIC during the nine months ended September
30, 2003. As of September 30, 2004, the Company has $1,086,000 of accounts
payable due to SMIC. 11. Subsequent Event On October 28, 2004, the Company announced a corporate restructuring plan.
Under the plan, the Company initiated a workforce reduction affecting
approximately 70 employees. The cost of severance benefits for the affected
employees is estimated to be approximately $1.5 million. The actions under the
plan are expected to be effected primarily in the fourth quarter of 2004 and
completed in the first quarter of 2005. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS You should read the following discussion and analysis in conjunction with
our consolidated financial statements and the related notes thereto included in our Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on March 5, 2004. The information in this report is not a complete
description of our business or the risks associated with an investment in our
common stock. We urge you to carefully review and consider the various
disclosures made by us in this report and in our other reports filed with the
SEC. All statements included or incorporated by reference in this report, other
than statements or characterizations of historical fact, are forward-looking
statements that are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
generally preceded by words that imply a future state such as expected or
anticipated or imply that a particular future event or events will occur such
as will. Investors are cautioned that all forward-looking statements involve
risks and uncertainties and that actual results could be materially different
from those expressed in any forward-looking statement. We undertake no
obligation to revise or update publicly any forward-looking statements for any
reason. The section entitled Risk Factors and similar discussions in our other
reports filed with the SEC discuss some of the important risk factors that may
affect our business, results of operations and financial condition. Copies of
our reports filed with the SEC are available from us without charge and on the
SECs website at www.sec.gov. You should carefully consider those risks, in
addition to the other information in this report and in our other filings with
the SEC, before deciding to invest in our Company or to maintain or increase
your investment. 10




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Overview Founded in 1997, Centillium Communications, Inc. (Centillium or the
Company) designs, develops and supplies products that enable broadband
communications to the consumer, enterprise and service provider markets. We
primarily serve the Digital Subscriber Line (DSL) and Voice-over-Internet
Protocol (VoIP) markets. The Company is also developing Fiber-To-The-Premises
(FTTP) products. Our current customers are primarily broadband access equipment
vendors who manufacture DSL equipment for use in the phone companies
communications infrastructure or in the customer premise for high-speed
Internet or other network access in a home or small business. Our customers
also include equipment vendors who supply products that allow convergence of
data and voice networks. Our revenues are derived primarily from the sale of
our DSL and VoIP semiconductor products, which include the Maximus, Palladia,
CopperFlite and Entropia families of products. Critical Accounting Policies There have been no significant changes in our critical accounting policies
during the three and nine months ended September 30, 2004 as compared to the
accounting policies previously disclosed in our Annual Report on Form 10-K for
the year ended December 31, 2003, as filed with the Securities and Exchange
Commission on March 5, 2004. Results of Operations for the Three and Nine Months Ended September 30, 2004
and 2003 The following table sets forth, for the periods presented, certain data
from our unaudited condensed consolidated statements of operations expressed as
a percentage of net revenues. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenues
    
    
    50
    
    
    
    55
    
    
    
    53
    
    
    
    53Gross profit
    
    
    50
    
    
    
    45
    
    
    
    47
    
    
    
    47Operating expenses:Research and development
    
    
    59
    
    
    
    30
    
    
    
    73
    
    
    
    35Sales and marketing
    
    
    16
    
    
    
    8
    
    
    
    18
    
    
    
    9General and administrative
    
    
    13
    
    
    
    7
    
    
    
    14
    
    
    
    7Amortization of other acquisition
-related intangibles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Total operating expenses
    
    
    88
    
    
    
    45
    
    
    
    105
    
    
    
    51Operating loss
    
    
    (38
    )
    
    
    
    
    
    
    (58
    )
    
    
    (4
    )Interest income, net
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Provision for income taxes
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Net income (loss)
    
    
    (37
    )%
    
    
    1
    %
    
    
    (57
    )%
    
    
    (3)
    %
 Net Revenues. Net revenues for the three months ended September 30, 2004
were $20.4 million compared to $37.5 million for the three months ended
September 30, 2003, a decrease of $17.1 million or 46%. Net revenues for the
nine months ended September 30, 2004 were $54.7 million compared to $99.3
million for the nine months ended September 30, 2003, a decrease of $44.5
million or 45%. The decreases in net revenues for the three and nine months
ended September 30, 2004 as compared with the three and nine months ended
September 30, 2003 primarily resulted from the significant decreases in total
unit shipments of our DSL products and to a slight decrease in the weighted
average selling price of our DSL products. Revenue from our DSL products accounted for $19.3 million or 95% of net
revenues for the three months ended September 30, 2004, as compared to $36.8
million or 98% of net revenues for the three months ended September 30, 2003.
DSL revenues during the nine months ended September 30, 2004 accounted for
$52.3 million or 96% of net revenues as compared to $97.4 million or 98% of net
revenues for the nine months ended September 30, 2003. Revenues from VoIP
products accounted for $1.1 million of revenues in the three months ended
September 30, 2004 as compared to $700,000 for the three months ended September
30, 2003, or approximately 5% and 2% of net revenues, respectively. VoIP
revenues accounted for $1.6 million of revenues in each of the nine months
ended September 30, 2004 and 2003 or approximately 3% and 2% of net revenues in
each period. Competition and technological change in the rapidly evolving DSL market
has influenced and may continue to influence our quarterly and annual net
revenues and results of operations. Average selling prices of our products tend
to be higher at the time we 11




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introduce new products and decline over time due to competitive pressures. We
expect this pattern to continue with existing and future products. Our average
selling prices are also impacted by our customer concentration and product mix. The following customers accounted for more than 10% of net revenues: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003NEC
    
    
    52
    %
    
    
    53
    %
    
    
    46
    %
    
    
    51
    %Sumitomo Electric Industries
    
    
    34
    %
    
    
    31
    %
    
    
    36
    %
    
    
    34
    %
 Net revenues to international customers, who were primarily located in
Japan, comprised 92% and 89% of our net revenues for the three and nine months
ended September 30, 2004, respectively, and 90% and 91% for the three and nine
months ended September 30, 2003, respectively. Japans DSL market is an
important part of our business, and net new DSL subscribers are a significant
driver of consumption for Centilliums DSL products. Cost of Revenues, Gross Profit and Gross Profit Margin.Cost of revenues
principally consist of the cost of purchased finished silicon wafers, costs
associated with assembly, packaging, test and quality assurance, royalties and
manufacturing overhead, including the cost of personnel associated with
manufacturing support. Cost of revenues was $10.3 million and $20.7 million for
the three months ended September 30, 2004 and 2003, respectively, resulting in
a gross profit of $10.1 million and $16.8 million and a gross profit margin of
50% and 45%, respectively. Cost of revenues was $29.2 million and $52.9 million
for the nine months ended September 30, 2004 and 2003, respectively, resulting
in a gross profit of $25.6 million and $46.4 million and a gross profit margin
of 47% and 47%, respectively. The decrease in gross profit for the three and
nine month periods ended September 30, 2004 compared to the comparable periods
last year was primarily due to lower revenue. The increase in gross profit
margin for the three months ended September 30, 2004 compared to the comparable
three month period last year was primarily due to lower manufacturing costs and
product mix. Our future gross profit margins may be affected by pricing
pressures from our customers and competitors, fluctuation in unit volume,
changes in the costs charged by our manufacturing and packaging subcontractors
and changes in product mix, among other factors. Research and Development Expenses.Research and development expenses
consist primarily of salaries and related personnel costs, fees paid to
consultants and outside service providers, prototype costs, and depreciation,
amortization and maintenance of development tools. We expense our research and
development costs as they are incurred. Several components of our research and
development effort require significant expenditures, the timing of which can
cause significant quarterly variability in our expenses. Research and
development expenditures increased by approximately $841,000, or 8%, to $12.0
million for the three months ended September 30, 2004 as compared to $11.1
million for the three months ended September 30, 2003. Research and development
expenditures increased by approximately $5.8 million, or 17%, to $39.8 million
for the nine months ended September 30, 2004 as compared to $34.0 million for
the nine months ended September 30, 2003. These increases were primarily due to
increases in salaries, consultant expenses, software tools and equipment
expense and travel offset by lower amortization of deferred compensation. As a
result of the corporate restructuring announced on October 28, 2004, research
and development expenses in 2005 for salaries and consultants in particular and
other research and development expenses in general are anticipated to decrease
by more than $2.0 million per quarter as compared to expenses in the three
months ended June 30, 2004. Sales and Marketing Expenses.Sales and marketing expenses consist
primarily of salaries, commissions and related expenses for personnel engaged
in marketing, sales, customer service and applications engineering support and
costs associated with promotional and other marketing expenses. Sales and
marketing expenditures increased by approximately $418,000, or 15%, to $3.3
million for the three months ended September 30, 2004 as compared to $2.9
million for the three months ended September 30, 2003. Sales and marketing
expenditures increased by approximately $1.0 million, or 12%, to $9.9 million
for the nine months ended September 30, 2004 as compared to $8.9 million for
the nine months ended September 30, 2003. These increases for the nine months
ended September 30, 2004 as compared to the same period in 2003 was due
primarily to an increase in salaries and related costs, evaluation board costs,
consultants, recruiting and travel expenses, partially offset by lower
commissions. We expect that sales and marketing expenses will increase slightly
as we continue to develop our sales and marketing force outside of Japan. General and Administrative Expenses.General and administrative expenses
consist primarily of salaries and related personnel costs for executives,
finance, accounting, facilities, information services and human resources;
corporate insurance, recruiting expenses, legal, audit and accounting fees.
General and administrative expenditures decreased by approximately $43,000, or
2%, to $2.6 million for the three month period ended September 30, 2004 as
compared to $2.7 million for the three months ended September 30, 2003. General
and administrative expenditures increased by approximately $576,000, or 8%, to
$7.9 million for the nine months ended September 30, 2004 as compared to $7.3
million for the nine months ended September 30, 2003. These increases were 12




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primarily due to increases in salaries and related costs, recruiting, travel
and legal and accounting expenses offset by lower business insurance expense
and amortization of deferred compensation. We expect that future general and
administrative expenses will increase due to compliance with the Sarbanes-Oxley
Act of 2002. Stock-Based Compensation Expense. Stock-based compensation expense, which
is allocated among the above expense categories, was $48,000 in the three
months ended September 30, 2004 as compared to $381,000 in the three months
ended September 30, 2003. Stock-based compensation expense was $242,000 in the
nine months ended September 30, 2004 as compared to $1.1 million in the nine
months ended September 30, 2003. The decrease in expense for the three and nine
month periods is primarily related to the use of the graded vesting method,
which resulted in accelerated amortization of deferred compensation expense in
earlier periods. Deferred compensation will be fully amortized by December 31,
2004. Interest Income, Net.Interest income, net, was $219,000 for the three
months ended September 30, 2004 as compared to $280,000 for the three months
ended March 31, 2003, a decrease of $61,000 or 22%. Interest income, net, was
$791,000 for the nine months ended September 30, 2004 as compared to $851,000
for the nine months ended September 30, 2003, a decrease of $60,000 or 7%.
These decreases were primarily due to lower invested cash balances. Provision for Income Taxes.Income tax expense was $37,000 and $109,000
for the three and nine months ended September 30, 2004, respectively, and
$24,000 and $90,000 for the three and nine months ended September 30, 2003,
respectively. The provisions for income taxes relate to current taxes payable
for income generated by the Company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 the
Companys loss position, a full valuation allowance has been established
against the Companys deferred tax assets, consisting primarily of net
operating loss carryforwards. Liquidity and Capital Resources Since our inception, we have financed our operations primarily through the
sale of equity securities. At September 30, 2004, we had $68.6 million in cash,
cash equivalents and short-term investments as compared to $89.6 million at
December 31, 2003. Operating activities for the nine months ended September 30, 2004 used
$18.7 million in cash. The net cash used in operating activities was primarily
the result of our net loss of $31.3 million, a decrease in accrued payroll and
related expenses of $559,000 and a decrease in accrued liabilities of $478,000
offset by non-cash expenses of $3.9 million for depreciation and amortization
and $242,000 for stock based compensation, a decrease in our accounts
receivable of $5.6 million, a decrease in inventory of $2.6 million, an
increase in accounts payable of $827,000 million and a decrease in prepaid and
other current assets of $414,000. Inventories decreased in the nine months
ended September 30, 2004 as we managed down inventories from the high levels at
December 31, 2003. The decrease in accounts receivable was the result of lower
net revenue and increased linearity of product shipments in the three months
ended September 30, 2004 as compared to the three months ended December 31,
2003. We anticipate that our operating expenses will remain relatively constant
for the three months ended December 31, 2004, as we incur expenses for the
corporate restructuring announced on October 28, 2004 and continue to expand
our sales force and incur expenses related to the compliance requirements of
the Sarbanes-Oxley Act of 2002. For the nine months ended September 30, 2004, net cash provided by
investing activities was $22.8 million. Net cash provided by investing
activities related to sales and maturities of short-term investments of $44.0
million, partially offset by purchases of short-term investments of $18.2
million and the purchase of $3.0 million of property and equipment. Property
and equipment purchases relate principally to the purchase of software
development tools, lab equipment and computer hardware to support our research
and development activities. We expect expenditures for the property and
equipment to decrease in the near term as we implement our corporate
restructuring. Net cash provided by financing activities was $724,000 for the nine months
ended September 30, 2004, which consisted of net proceeds of $1.3 million from
the issuance of common stock under employee stock plans, offset by principal
payments on a capital lease obligation of $527,000. Our principal source of liquidity as of September 30, 2004 consisted of
$68.6 million of cash and cash equivalents and short-term investments. We
believe our cash, cash equivalents and investment securities will be sufficient
to meet our anticipated cash needs for working capital and capital expenditures
for at least the next twelve months. The rate at which we will consume cash
will be dependent on the cash needs of future operations that will, in turn, be
directly affected by the actions we have taken in our corporate restructuring
and various risks and uncertainties, including, but not limited to, the levels
of demand for our products and other risks listed in the Risk Factors
section. 13




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The following table summarizes our contractual obligations as of September
30, 2004 and the effect such obligations are expected to have on our liquidity
and cash flow in future periods (in thousands): Less than
    
    
    
    AfterTotal
    
    1 Year
    
    1-3 Years
    
    3 YearsOperating
leases - facilities
    
    $
    6,903
    
    
    $
    1,372
    
    
    $
    3,062
    
    
    $
    2,469Operating
leases - software
    
    
    8,715
    
    
    
    2,742
    
    
    
    5,973
    
    
    
    Inventory purchases
    
    
    4,454
    
    
    
    4,454
    
    
    
    
    
    
    
    Total cash obligations
    
    $
    20,072
    
    
    $
    8,568
    
    
    $
    9,035
    
    
    $
    2,469
 Our future capital requirements depend on many factors that affect our
research, development, collaboration and sales and marketing activities. We
believe that existing cash, cash equivalents and investment securities will be
sufficient to support our current operating plan for the next twelve months.
These cash flow and operating expectations are subject to numerous assumptions,
many of which may not actually occur. If some or all of such assumptions do not
occur, our results may be substantially lower or different than expected. Such
assumptions include, without limitation, assumptions that new product
introductions will occur on a timely basis and achieve market acceptance, that
our existing and potential customer base will continue to grow and that our
industrys competitive landscape will not change adversely. For more
information about the risks relating to our business, please read carefully the
Risk Factors set forth below. We expect to devote capital resources to support our sales, marketing, and
product development programs and to fund other general corporate activities.
From time to time, we receive various inquiries or claims in connection with
intellectual property and other rights and may become party to associated
claims. In certain cases, management has accrued estimates of the amounts it
expects to pay upon resolution of such matters. Depending on the amount and
timing of the resolutions of these claims, our future cash flows could be
materially adversely affected in a particular period. If our existing resources and cash generated from operations are
insufficient to satisfy our liquidity requirements, we may seek to raise
additional funds through public or private debt or equity financings. The sale
of equity or convertible debt securities could result in additional dilution to
our stockholders, and we cannot be certain that additional financing will be
available in amounts or on terms acceptable to us, if at all. If we are unable
to obtain this additional financing, we may be required to reduce the scope of
our planned product development and sales and marketing efforts, which could
harm our business, financial condition and operating results. On July 29, 2003, Centillium filed a universal shelf registration
statement on Form S-3 with the Securities and Exchange Commission (SEC) for
the registration and potential issuance of up to $90 million of Centillium
securities. The securities covered by the universal shelf, which may include
common stock, preferred stock, depositary shares, warrants or debt securities,
are being registered on a delayed basis because Centillium did not intend to
sell securities immediately upon the effectiveness of the registration
statement. The actual amount and type of securities, or combination of
securities, to be issued and the terms of those securities, will be determined
at the time of sale, if such sale occurs. At the time any of the securities covered by the registration statement
are offered for sale, a prospectus supplement will be provided containing
specific information about the terms of any such offering. Centillium currently
anticipates that the net proceeds from any sale of the shares will be used for
general corporate purposes, including the investment in and development of new
products, capital expenditures and acquisitions. However, Centillium currently
has no commitments or agreements for any specific acquisitions or investments
that require additional capital. Risk Factors You should carefully consider the risks described below and all of the
information contained in this Form 10-Q and on our Form 10-K, filed with the
Securities and Exchange Commission on March 5, 2004. If any of the following
risks actually occurs, our business, financial condition and results of
operations could be harmed and the trading price of our common stock could
decline and you may lose all or part of your investment in our common stock. WE HAVE A HISTORY OF LOSSES AND MAY EXPERIENCE LOSSES IN THE FUTURE. We have not reported an operating profit for any year since our inception
and have experienced a net loss of approximately $31.3 million in the nine
months ended September 30, 2004 and net losses of $13.4 million and $33.3
million for the years ended December 31, 2003 and 2002, respectively. 14




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Our success may depend in large part upon the adoption and utilization of
our products and technology, as well as our ability to effectively maintain
existing relationships and develop new relationships with customers and
strategic partners. If we do not succeed in doing so, we may not achieve or
maintain profitability on a timely basis or at all. In particular, we intend to
expend significant financial and management resources on product development,
sales and marketing, strategic relationships, technology and operating
infrastructure. As a result, we may incur additional losses and continued
negative cash flow from operations for the foreseeable future and may not
achieve or maintain profitability. SIGNIFICANT FLUCTUATIONS OR A SLOWDOWN IN DEPLOYMENT OF DSL IN JAPAN WOULD
ADVERSELY AFFECT OUR BUSINESS AND OPERATING RESULTS. Sales to customers located in Japan accounted for 85% and 83% of net
revenues for the three and nine months ended September 30, 2004, respectively,
compared to 84% and 85% of net revenues for the three and nine months ended
September 30, 2003, respectively. To date, our sales have been dependent on the
continuous growth of new DSL subscribers in Japan. Fluctuations in new
subscribers in Japan impact our revenues on a quarterly basis and a sustained
slow down in such a growth may cause our revenue to decline. Our sales have
been historically denominated in U.S. dollars and major fluctuations in
currency exchange rates could materially affect our Japanese customers demand,
thereby forcing them to reduce their orders, which could adversely affect our
operating results. OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE. The market price of our common stock has been volatile and will likely
continue to fluctuate significantly in response to the following factors, some
of which are beyond our control:  
    
    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 ARE EXPOSED TO INCREASED COSTS AND RISKS ASSOCIATED WITH COMPLYING WITH
INCREASING AND NEW REGULATION OF CORPORATE GOVERNANCE AND DISCLOSURE STANDARDS. We are spending an increased amount of management time and internal and
external resources to comply with changing laws, regulations and standards
relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Stock Market rules.
In particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires
managements annual review and evaluation of our internal control systems and
attestations of the effectiveness of these systems by our independent auditors.
We are currently documenting and testing our internal control systems and
procedures and considering improvements that 15




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may be necessary in order for us to comply with the requirements of Section 404
by the end of 2004. This process has required us to hire additional personnel
and outside advisory services and has resulted in additional accounting and
legal expenses. In addition, the evaluation and attestation processes required
by Section 404 are new and neither companies nor auditing firms have
significant experience in testing or complying with these requirements.
Accordingly, we may encounter problems or delays in completing the review and
evaluation, the implementation of improvements and the receipt of a positive
attestation by our independent auditors. While we believe that we currently
have adequate internal controls over financial reporting, in the event that our
chief executive officer, chief financial officer or independent auditors
determine that our controls over financial reporting are not effective as
defined under Section 404, investor perceptions of our company may be adversely
affected and could cause a decline in the market price of our stock. 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. Sales of our products depend on the increased use and widespread adoption
of broadband access services, and DSL services in particular, and the ability
of telecommunications service providers to market and sell broadband access
services. Our business would be harmed, and our results of operations and
financial condition would be adversely affected, if the use of broadband access
services does not increase as anticipated. Certain critical factors will likely
continue to affect the development of the broadband access service market.
These factors include:  
    
    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. OUR MARKETS ARE HIGHLY COMPETITIVE AND MANY OF OUR COMPETITORS ARE ESTABLISHED
AND HAVE GREATER RESOURCES THAN WE HAVE. The market for communications semiconductor and software solutions is
intensely competitive. Given our stage of development, there is a substantial
risk that we will not have the financial resources, technical expertise or
marketing and support capabilities to compete successfully. In addition, a
number of other semiconductor companies have announced their intent to enter
the market segments adjacent to or addressed by our products. These competitors
have longer operating histories, greater name recognition, larger installed
customer bases and significantly greater financial, technical and marketing
resources than we have. We may also face competition from customers or
prospective customers own internal development efforts. Any of these
competitors may be able to introduce new technologies, respond more quickly to
changing customer requirements or devote greater resources to the development,
promotion and sale of their products than we can. WE OPERATE IN THE HIGHLY CYCLICAL SEMICONDUCTOR INDUSTRY, WHICH IS SUBJECT TO
SIGNIFICANT DOWNTURNS. The semiconductor industry is highly cyclical and is characterized by
constant and rapid technological change, rapid product obsolescence and price
erosion, evolving technical standards, short product life cycles and wide
fluctuations in product supply and demand. From time to time these and other
factors, together with changes in general economic conditions, cause
significant upturns and downturns in the industry, and in our business in
particular. Periods of industry downturns have been characterized by diminished
product demand, production overcapacity, high inventory levels and accelerated
erosion of average selling prices. These factors have caused substantial
fluctuations in our revenues and results of operations. We have experienced
these cyclical fluctuations in their businesses in the past and we may
experience cyclical fluctuations in the future. 16




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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. There have been announcements throughout the worldwide telecommunications
industry of current and planned reductions in component inventory levels and
equipment production volumes, and of delays in the build-out of new
infrastructure. Any of these trends, if continued, could result in lower than
expected demand for our products, which could have a material adverse effect on
our revenues and results of operations generally, and could cause the market
price of our common stock to decline. Specifically, we have experienced:  
    
    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 revenue. Recent geopolitical and social turmoil in many parts of the world,
including actual incidents and potential future acts of terrorism and war, may
continue to put pressure on global economic conditions. These geopolitical and
social conditions, together with the resulting economic uncertainties, make it
extremely difficult for our company, our customers and our vendors to
accurately forecast and plan future business activities. This reduced
predictability challenges our ability to operate profitably or to increase
revenues. In particular, it is difficult to develop and implement strategies to
create sustainable business models and efficient operations, and to effectively
manage outsourced relationships for services such as contract manufacturing and
information technology. If the current uncertain economic conditions continue
or deteriorate, there could be additional material adverse impact on our
financial position, revenues, results of operations, or cash flow. WE DERIVE A SUBSTANTIAL AMOUNT OF OUR REVENUES FROM JAPAN, AND OUR FAILURE TO
DIVERSIFY THE GEOGRAPHIC SOURCES OF OUR REVENUE COULD HARM OUR BUSINESS AND
OPERATING RESULTS. Because a substantial portion of our revenues have been derived from sales
into Japan, our revenues have been heavily dependent on developments in the
Japan market. While part of our strategy is to diversify the geographic sources
of our revenues, failure to further penetrate markets outside of Japan could
harm our business and results of operations. WE DEPEND ON A FEW CUSTOMERS, AND IF WE LOSE ANY OF THEM, OUR SALES AND
OPERATIONS WILL SUFFER. We sell our products primarily to network equipment manufacturers. Our top
two customers for the nine month period ended September 30, 2004 were NEC and
Sumitomo, accounting for 46% and 36% of our net revenues, respectively. For the
year ended December 31, 2003, NEC and Sumitomo accounted for 49% and 31% of our
net revenues, respectively. We do not have contractual volume commitments with
these customers but rather sell our products to them on an order-by-order
basis. We expect to be dependent upon a relatively small number of large
customers in future periods, although the specific customers may vary from
period to period. If we are not successful in maintaining relationships with
key customers and winning new customers, our business and results of operations
will suffer. THIRD-PARTY CLAIMS REGARDING INTELLECTUAL PROPERTY MATTERS COULD CAUSE US TO
STOP SELLING OUR PRODUCTS, PAY MONETARY DAMAGES OR OBTAIN LICENSES ON ADVERSE
TERMS. There is a significant risk that third parties, including current and
potential competitors, will claim that our products, or our customers
products, infringe on their intellectual property rights. From time to time,
third parties have asserted and may in the future assert patent, copyright,
trademark or other intellectual property rights to technologies that are
important to our business and have demanded or in the future may demand that we
license their patents and technology. Any such litigation, whether or not
determined in our favor or settled by us, would be costly and divert the
attention of our management and technical personnel. Inquiries with respect to
the coverage of our intellectual property could develop into litigation. We
cannot assure you that we would prevail in litigation given the complex
technical issues and inherent uncertainties in intellectual property
litigation. In the event of an adverse ruling for an intellectual property
infringement claim, we could be required to obtain a license or pay substantial
damages or have the sale of our products stopped by an injunction. Such a
license may not be available on reasonable terms, or at all. In addition, if a
customer of our products cannot acquire a required license on commercially
reasonable terms, that customer may choose not to use our products. We have
obligations to indemnify our customers under some circumstances for
infringement of third-party intellectual property rights. If 17




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any intellectual property claims from third parties against one of our
customers whom we have indemnified is held to be valid, the costs to us could
be substantial and our business could be harmed. In August 2004, Fujitsu Limited filed a suit against Centillium
Communications, Inc. and Centillium Japan K.K (Centillium Japan) in the Tokyo
District Court alleging that Centillium and Centillium Japan infringe one
Japanese patent jointly owned by Fujitsu and Ricoh Co., Ltd. The complaint
seeks monetary damages against Centillium and Centillium Japan. The Company is
in the process of evaluating the complaint, and the probable outcome of this
suit cannot be predicted with any certainty. An unfavorable ruling could have a
material adverse impact on the Companys financial position or results of
operations. WE ANTICIPATE LOWER MARGINS AS PRODUCTS MATURE, WHICH COULD ADVERSELY AFFECT
OUR PROFITABILITY. We expect the average selling prices of our products to decline as they
mature. Historically, competition in the semiconductor industry has driven down
the average selling prices of products. If we price our products too high, our
customers may use a competitors product or an in-house solution. To maintain
profit margins, we must reduce our costs sufficiently to offset declines in
average selling prices, or successfully sell proportionately more new products
with higher average selling prices. Yield or other production problems, or
shortages of supply may preclude us from lowering or maintaining current
product costs. We have also experienced more aggressive price competition from
competitors in market segments in which we are attempting to expand our
business. These circumstances may make some of our products less competitive
and we may be forced to decrease our prices significantly to win a design. We
may lose design opportunities or may experience overall declines in gross
margins as a result of increased price competition. WE MAY BE UNABLE TO ATTRACT, RETAIN AND MOTIVATE QUALIFIED PERSONNEL, WHICH
COULD SERIOUSLY HARM OUR BUSINESS. Our future success depends on our ability to attract, retain and motivate
qualified personnel, including executive officers and other key management and
technical personnel. As the source of our technological and product
innovations, our key technical personnel represent a significant asset. The
competition for such personnel can be intense in the semiconductor industry. We
do not have employment agreements with these executives, or any other key
employees, that govern the length of their service. The loss of the services of certain
key senior management or technical personnel, or our inability to attract,
retain and motivate qualified personnel, could materially and adversely affect
our business, financial condition and results of operations. OUR CUSTOMERS MAY DEMAND PREFERENTIAL TERMS OR DELAY OUR SALES CYCLE, WHICH
WOULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. Our customers are in most cases larger than us and are able to exert a
high degree of influence over us. These customers may have sufficient
bargaining power to demand low prices and other terms and conditions that may
materially adversely affect our business, financial condition and results of
operations. In addition, prior to selling our products to such customers, we
must typically undergo lengthy product approval processes, often taking up to
one year. Accordingly, we are continually submitting successive versions of our
products as well as new products to our customers for approval. The length of
the approval process can vary and is affected by a number of factors, including
customer priorities, customer budgets and regulatory issues affecting
telecommunication service providers. Delays in the product approval process
could materially adversely affect our business, financial condition and results
of operations. While we have been successful in the past in obtaining product
approvals from our customers, such approvals and the ensuing sales of such
products may not continue to occur. Delays can also be caused by late
deliveries by other vendors, changes in implementation priorities and slower
than anticipated growth in demand for the services that our products support. A
delay in, or cancellation of, the sale of our products could adversely affect
our results from operations or cause them to significantly vary from quarter to
quarter. BECAUSE THE SALES CYCLE FOR OUR PRODUCTS TYPICALLY LASTS UP TO ONE YEAR, AND
MAY BE SUBJECT TO DELAYS, IT IS DIFFICULT TO FORECAST SALES FOR ANY GIVEN
PERIOD. If we fail to realize forecasted sales for a particular period, our stock
price could decline significantly. The sales cycle of our products is lengthy
and typically involves a detailed initial technical evaluation of our products
by our prospective customers, followed by the design, construction and testing
of prototypes incorporating our products. Only after these steps are complete
will we receive a purchase order from a customer for volume shipments. This
process generally takes from 9 to 12 months, and may last longer. Given this
lengthy sales cycle, it is difficult to accurately predict when sales to a
particular customer will occur. In addition, we may experience unexpected
delays in orders from customers, which may prevent us from realizing forecasted
sales for a particular period. Our products are typically sold to equipment
manufacturers, who incorporate our products in the products that they in turn
sell to consumers or to network service providers. As a result, any delay by
our customers, or by our customers customers, in the 18




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manufacture or distribution of their products will result in a delay in
obtaining orders for our products, which could cause our business and results
to suffer. RAPID CHANGES IN THE MARKET FOR DSL CHIP SETS MAY RENDER OUR CHIP SETS OBSOLETE
OR UNMARKETABLE. The market for chip sets for DSL products is characterized by:  
    
    intense competition;
    
    rapid technological change;
    
    frequent new product introductions by our competitors;
    
    changes in customer demands; and
    
    evolving industry standards. Any of these factors could make our products obsolete or unmarketable. In
addition, the life cycles of some of our products may depend upon the life
cycles of the end products into which our products will be designed. Products
with short life cycles require us to closely manage production and inventory
levels. Unanticipated changes in the estimated total demand for our products
and/or the estimated life cycles of the end products into which our products
are designed may result in obsolete or excess inventories, which in turn may
adversely affect our operating results. To compete, we must innovate and
introduce new products. If we fail to successfully introduce new products on a
timely and cost-effective basis that meet customer requirements and are
compatible with evolving industry standards, then our business, financial
condition and results of operations will be seriously harmed. BECAUSE OUR PRODUCTS ARE COMPONENTS OF OTHER EQUIPMENT, IF BROADBAND EQUIPMENT
MANUFACTURERS DO NOT INCORPORATE OUR PRODUCTS IN THEIR EQUIPMENT, WE MAY NOT BE
ABLE TO GENERATE SALES OF OUR PRODUCTS IN VOLUME QUANTITIES. Our products are not sold directly to the end-user; they are components of
other products. As a result, we rely upon equipment manufacturers to design our
products into their equipment. We further rely on the manufacturing and
deployment of the equipment to be successful. If equipment that incorporates
our products is not accepted in the marketplace, we may not achieve sales of
our products in volume quantities, which would have a negative impact on our
results of operations. 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. Once a manufacturer of communications equipment has designed a suppliers
semiconductor into its products, the manufacturer may be reluctant to change
its source of semiconductors due to the significant costs associated with
qualifying a new supplier. Accordingly, our failure to achieve design wins with
equipment manufacturers, who have chosen a competitors semiconductor could
create barriers to future sales opportunities with these manufacturers. 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. We expect that our current cash and cash equivalents and investment
securities balances will be adequate to meet our working capital and capital
expenditure needs for at least twelve months. After that, we may need to raise
additional funds, and we cannot be certain that additional financing will be
available in amounts or on terms acceptable to us, if at all. We may also
require additional capital for the acquisition of businesses, products and
technologies that are complementary to ours. Further, if we issue equity
securities, the ownership percentage of our stockholders would be reduced, and
the new equity securities may have rights, preferences or privileges senior to
those existing holders of our common stock. If we are unable to obtain this
additional financing, we may not be able to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated
requirements, which could seriously harm our business, operating results and
financial condition. WE DEPEND ON SOLE SOURCE SUPPLIERS FOR SEVERAL KEY COMPONENTS OF OUR PRODUCTS. We obtain certain parts, components and packaging used in the delivery of
our products from sole sources of supply. For example, we obtain certain
semiconductor wafers on a sole source basis from Taiwan Semiconductor
Manufacturing Co., Ltd, 19




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Semiconductor Manufacturing International Corporation and United
Microelectronics Corporation. If we fail to obtain components in sufficient
quantities when required or if we cannot adequately control manufacturing
process quality, product yields or production costs, our business could be
harmed. Developing and maintaining these strategic relationships with our
vendors is critical for us to be successful. Any of our sole source suppliers may:  
    
    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 such as earthquakes. 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. Our revenues are heavily dependent on the increase in demand for DSL
services. DSL services are competing with a variety of different broadband data
transmission technologies, including cable modems, satellite and other wireless
technologies. While part of our strategy is to diversify our product markets
beyond DSL into such areas as Fiber-to-the-Premises and VoIP, if any technology
that is competing with the technologies that we offer is more reliable, faster
and/or less expensive or has any other advantages over the technologies for
which we have products, then the demand for our products may decrease. The lack
of significant growth in those markets we are targeting in general and the lack
of success of our products in particular would also adversely affect our
business and results of operations. WE ARE SUBJECT TO ORDER AND SHIPMENT UNCERTAINTIES, AND ANY SIGNIFICANT ORDER
CANCELLATIONS OR DEFERRALS COULD ADVERSELY AFFECT OUR BUSINESS. We typically sell products pursuant to purchase orders that customers can
generally cancel or defer on short notice without incurring a significant
penalty. Any significant cancellations or deferrals in the future could materially
and adversely affect our business, financial condition and results of
operations. In addition, cancellations or deferrals of product orders, the
return of previously sold products or the overproduction of products due to the
failure of anticipated orders to materialize could cause us to hold excess or
obsolete inventory, which could reduce our profit margins, increase product
obsolescence and restrict our ability to fund our operations. Furthermore, we
generally recognize revenue upon shipment of products to a customer. If a
customer refuses to accept shipped products, we could incur significant charges
against our revenue. WE DERIVE A SUBSTANTIAL AMOUNT OF OUR REVENUES FROM INTERNATIONAL SOURCES, AND
DIFFICULTIES ASSOCIATED WITH INTERNATIONAL OPERATIONS COULD HARM OUR BUSINESS. A substantial portion of our revenues has been derived from customers
located outside of the United States. For the three and nine months ended
September 30, 2004, 92% and 89%, respectively, of our net revenues were to
customers located in Asia. We may be unable to successfully overcome the
difficulties associated with international operations. These difficulties
include:  
    
    staffing and managing foreign operations;
    
    changes in regulatory requirements;
    
    licenses, tariffs and other trade barriers;
    
    political and economic instability;
    
    difficulties in protecting intellectual property rights in some foreign countries;
    
    a limited ability to enforce agreements and other rights in some foreign countries;
    
    obtaining governmental approvals for products; and 20




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
    
    complying with a wide variety of complex foreign laws and treaties. Because sales of our products are denominated exclusively in United States
dollars, increases in the value of the United States dollar could increase the
price of our products so that they become relatively more expensive to
customers in the local currency of a particular country, leading to a reduction
in sales and profitability in that country. IF WE DELIVER PRODUCTS WITH DEFECTS, OUR CREDIBILITY WILL BE HARMED, AND THE
SALES AND MARKET ACCEPTANCE OF OUR PRODUCTS WILL DECREASE. Our products are complex and have contained errors, defects and bugs when
introduced and revised. If we deliver products with errors, defects or bugs or
products that have reliability, quality or compatibility problems, our
credibility and the market acceptance and sales of our products could be
harmed, which could adversely affect our ability to retain existing customers
or attract new customers. Further, if our products contain errors, defects and
bugs, then we may be required to expend significant capital and resources to
alleviate such problems and may have our sales to customers interrupted or
delayed. If any of these problems are not found until we have commenced
commercial production, we may be required to incur additional development costs
and product repair or replacement costs. Defects could also lead to potential liability as a
result of product liability lawsuits against us or against our customers. We
have agreed to indemnify our customers in some circumstances against liability
from defects in our products. A successful product liability claim could
seriously harm our business, financial condition and results of operations, and
may divert our technical and other resources from other development efforts. 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. In order to remain competitive, we expect to continue to transition our
products to increasingly smaller line width geometries. This transition will
require us to modify the manufacturing processes for our products and redesign
some products. We periodically evaluate the benefits, on a product-by-product
basis, of migrating to smaller geometry process technologies to reduce our
costs, and we have designed some of our products to be manufactured in .35
micron, .25 micron, .18 micron and .13 micron geometry processes. In the past,
we have experienced some difficulties in shifting to smaller geometry process
technologies or new manufacturing processes, which resulted in reduced
manufacturing yields, delays in product deliveries and increased expenses. We
may face similar difficulties, delays and expenses as we continue to transition
our products to smaller geometry processes. We are dependent on our
relationships with our foundries to transition to smaller geometry processes
successfully. We cannot assure you that our foundries will be able to
effectively manage the transition or that we will be able to maintain our
foundry relationships. If our foundries or we experience significant delays in
this transition or fail to efficiently implement this transition, our business,
financial condition and results of operations could be materially and adversely
affected. As smaller geometry processes become more prevalent, we expect to
continue to integrate greater levels of functionality, as well as customer and
third party intellectual property, into our products. However, we may not be
able to achieve higher levels of design integration or deliver new integrated
products on a timely basis, or at all. FUTURE CONSOLIDATION IN THE TELECOMMUNICATIONS EQUIPMENT INDUSTRY MAY INCREASE
COMPETITION THAT COULD HARM OUR BUSINESS. The markets in which we compete are characterized by increasing
consolidation both within the telecommunications equipment sector and by
companies combining or acquiring data communications assets and assets for
delivering voice-related services. We cannot predict with certainty how
industry consolidation will affect our competitors. We may not be able to
compete successfully in an increasingly consolidated industry. Increased
competition and consolidation in our industry may require that we reduce the
prices of our products or result in a loss of market share, which could
materially adversely affect our business, financial condition and results of
operations. Additionally, because we are now, and may in the future be,
dependent on certain strategic relationships with third parties in our
industry, any additional consolidation involving these parties could reduce the
demand for our products and otherwise harm our business prospects. WE MAY MAKE FUTURE ACQUISITIONS AND ACQUISITIONS INVOLVE NUMEROUS RISKS. Our business is highly competitive and, as such, our growth is dependent
upon market growth, our ability to enhance our existing products and our
ability to introduce new products on a timely basis. One of the ways we have
addressed and may continue to address the need to develop new products is
through acquisitions of other companies. Acquisitions involve numerous risks,
including the following:  
    
    difficulties in integration of the operations, technologies and products
of the acquired companies; 21




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
    
    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. Mergers and acquisitions of high-technology companies are inherently
risky, and no assurance can be given that our previous or future acquisitions
will be successful and will not materially adversely affect our business,
operating results or financial condition. We must also maintain our ability to manage such growth effectively.
Failure to manage growth effectively and successfully integrate acquisitions
could harm our business and operating results. 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. We rely on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality agreements and other contractual provisions to protect
our proprietary rights. However, these measures afford only limited protection.
Our failure to adequately protect our proprietary rights may adversely affect
us. Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use trade secrets
or other information that we regard as proprietary. The laws of some foreign countries do not protect our proprietary rights
to the same extent as do the laws of the United States, and many U.S. companies
have encountered substantial infringement problems in these countries. There is
a risk that our efforts to protect proprietary rights may not be adequate. For
example, our competitors may independently develop similar technology,
duplicate our products or design around our patents or our other intellectual
property rights. If we fail to adequately protect our intellectual property or
if the laws of a foreign jurisdiction do not effectively permit such
protection, it would be easier for our competitors to sell competing products. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary objective of our cash and short-term investment activities is
to preserve principal while concurrently maximizing the income we receive from
our investments without significantly increasing risk. Some of the securities
that we may invest in may be subject to market risk. This means that a change
in prevailing interest rates may cause the principal amount of the investment
to fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate
later rises, the current value of the principal amount of our investment will
decline. To minimize this risk in the future, we intend to maintain our
portfolio of cash equivalents and short-term investments in a variety of
securities, including commercial paper, money market funds, government and non-government debt securities and
certificates of deposit. In general, money market funds are not subject to
market risk because the interest paid on such funds fluctuates with the
prevailing interest rate. As of September 30, 2004, all of our investments were
in money market funds, high quality commercial paper, government and
non-government debt securities and auction rate preferred securities. A
hypothetical 100 basis point increase in interest rates would result in an
approximate $123,000 decrease in the fair value of our available-for-sale
securities as of September 30, 2004. 
 ITEM 4. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures.Our management
evaluated, with the participation of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports
that we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Changes in internal control over financial reporting.There was no change
in our internal control over financial reporting that occurred during the
period covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. 22




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PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS In August 2004, Fujitsu Limited filed a suit against Centillium
Communications, Inc. and Centillium Japan K.K. (Centillium Japan) in the
Tokyo District Court alleging that Centillium and Centillium Japan infringe one
Japanese patent jointly owned by Fujitsu and Ricoh Co. Ltd. The complaint seeks
monetary damages against Centillium and Centillium Japan. The Company is in the
process of evaluating the complaint, and the probable outcome of this suit
cannot be predicted with any certainty and a reasonable range of loss, if any,
cannot be estimated. An unfavorable ruling could have a material adverse impact
on the Companys financial position or results of operations. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 
 ITEM 5. OTHER INFORMATION None 
 ITEM 6. EXHIBITS 10.40
    
    Change of Control Severance Agreement dated as of September 29, 2004
by and between the Registrant and Wayne Gartin.31.1
    
    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.
 23




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. CENTILLIUM COMMUNICATIONS, I NC.(Registrant)Dated: November 5, 2004
    By:
    /s/ J. SCOTT KAMSLERJ. Scott KamslerVice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 24




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Exhibit Index 10.40
    
    Change of Control Severance Agreement dated as of September 29, 2004
by and between the Registrant and Wayne Gartin.31.1
    
    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.