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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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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 June 30, 2003 or
| |  |  | -----------------------------------------------



| ̈ |  | 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



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CENTILLIUM COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)



|Delaware                                                       |  | 94-3263530                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification Number)



47211 Lakeview
Boulevard

Fremont, California 94538

(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 ̈.



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).  Yes  x  No ̈



On July 17, 2003, approximately 36,595,400 shares of the Registrants
Common Stock, $0.001 par value, were outstanding.



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##### Table of Contents

Centillium Communications, Inc.

TABLE OF CONTENTS



|                              |  |                                                                                                          
|----------------------------- |  | ---------------------------------------------------------------------------------------------------------
|                              |  |                                                                                                          
|                             
|PART I. Financial Information
|                              |  |                                                                                                          
|Item 1.                       |  | Financial Statements (Unaudited)                                                                         
|                              |  |                                                                                                          
|                              |  | Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002                          
|                              |  |                                                                                                          
|                              |  | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002
|                              |  |                                                                                                          
|                              |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002          
|                              |  |                                                                                                          
|                              |  | Notes to Condensed Consolidated Financial Statements                                                     
|                              |  |                                                                                                          
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                    
|                              |  |                                                                                                          
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                               
|                              |  |                                                                                                          
|Item 4.                       |  | Controls and Procedures                                                                                  
|                             
|PART II. Other Information   
|                              |  |                                                                                                          
|Item 1.                       |  | Legal Proceedings                                                                                        
|                              |  |                                                                                                          
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                                
|                              |  |                                                                                                          
|Item 3.                       |  | Defaults Upon Senior Securities                                                                          
|                              |  |                                                                                                          
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                      
|                              |  |                                                                                                          
|Item 5.                       |  | Other Information                                                                                        
|                              |  |                                                                                                          
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                         
|                              | 
|Signatures                    |  | 24                                                                                                       
|                              | 
|Certifications                |  |                                                                                                          



2



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##### Table of Contents

PART IFINANCIAL INFORMATION



ITEM 1.    FINANCIAL STATEMENTS





CENTILLIUM COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)



|                                                                                                                    |  | June 30, 2003 |          |   | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ----------------- | -
|ASSETS                                                                                                              |  |               |          |   |                   |  
|Current assets:                                                                                                     |  |               |          |   |                   |  
|Cash and cash equivalents                                                                                           |  | $             | 59,334   |   |                   | $
|Short-term investments                                                                                              |  |               | 39,851   |   |                   |  
|Accounts receivable - net of allowance for doubtful accounts of $122 at June 30, 2003 and $160 at December 31, 2002 |  |               | 18,256   |   |                   |  
|Inventories                                                                                                         |  |               | 4,001    |   |                   |  
|Other current assets                                                                                                |  |               | 4,145    |   |                   |  
|                                                                                                                    |  |               |          |   |                   |  
|Total current assets                                                                                                |  |               | 125,587  |   |                   |  
|Property and equipment, net                                                                                         |  |               | 8,188    |   |                   |  
|Other intangible assets, net                                                                                        |  |               |         |   |                   |  
|Other assets                                                                                                        |  |               | 487      |   |                   |  
|                                                                                                                    |  |               |          |   |                   |  
|Total assets                                                                                                        |  | $             | 134,262  |   |                   | $
|                                                                                                                    |  |               |          |   |                   |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                |  |               |          |   |                   |  
|Current liabilities:                                                                                                |  |               |          |   |                   |  
|Accounts payable                                                                                                    |  | $             | 12,420   |   |                   | $
|Accrued payroll & related expenses                                                                                  |  |               | 4,321    |   |                   |  
|Accrued liabilities                                                                                                 |  |               | 15,268   |   |                   |  
|Deferred revenue                                                                                                    |  |               | 2,466    |   |                   |  
|Accrued taxes                                                                                                       |  |               | 229      |   |                   |  
|Capital leases - current portion                                                                                    |  |               | 960      |   |                   |  
|                                                                                                                    |  |               |          |   |                   |  
|Total current liabilities                                                                                           |  |               | 35,664   |   |                   |  
|Capital leases - long-term portion                                                                                  |  |               |         |   |                   |  
|Other liabilities                                                                                                   |  |               | 213      |   |                   |  
|Commitments and contingencies                                                                                       |  |               |          |   |                   |  
|Stockholders equity:                                                                                               |  |               |          |   |                   |  
|Common stock                                                                                                        |  |               | 37       |   |                   |  
|Additional paid in capital                                                                                          |  |               | 235,612  |   |                   |  
|Accumulated other comprehensive income                                                                              |  |               | 37       |   |                   |  
|Deferred compensation                                                                                               |  |               | (1,096   | ) |                   |  
|Accumulated deficit                                                                                                 |  |               | (136,205 | ) |                   |  
|                                                                                                                    |  |               |          |   |                   |  
|Total stockholders equity                                                                                          |  |               | 98,385   |   |                   |  
|                                                                                                                    |  |               |          |   |                   |  
|Total liabilities and stockholders equity                                                                          |  | $             | 134,262  |   |                   | $
|                                                                                                                    |  |               |          |   |                   |  



See accompanying notes



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CENTILLIUM COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands except per share data)



|                                                                             |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|---------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | -
|                                                                             |  | 2003                        |        |   | 2002                      |  
|Net revenues                                                                 |  | $                           | 33,928 |   |                           | $
|Cost of revenues                                                             |  |                             | 17,870 |   |                           |  
|                                                                             |  |                             |        |   |                           |  
|Gross profit                                                                 |  |                             | 16,058 |   |                           |  
|                                                                             |  |                             |        |   |                           |  
|Operating expenses:                                                          |  |                             |        |   |                           |  
|Research and development                                                     |  |                             | 11,294 |   |                           |  
|Sales and marketing                                                          |  |                             | 3,192  |   |                           |  
|General and administrative                                                   |  |                             | 2,264  |   |                           |  
|Amortization of other acquisition - related intangibles                      |  |                             | 41     |   |                           |  
|                                                                             |  |                             |        |   |                           |  
|Total operating expenses                                                     |  |                             | 16,791 |   |                           |  
|                                                                             |  |                             |        |   |                           |  
|Operating loss                                                               |  |                             | (733   | ) |                           |  
|Interest income, net                                                         |  |                             | 247    |   |                           |  
|Gain on non-current investment                                               |  |                             |       |   |                           |  
|                                                                             |  |                             |        |   |                           |  
|Loss before provision for income taxes                                       |  |                             | (486   | ) |                           |  
|Provision for income taxes                                                   |  |                             | (25    | ) |                           |  
|                                                                             |  |                             |        |   |                           |  
|Net loss                                                                     |  | $                           | (511   | ) |                           | $
|                                                                             |  |                             |        |   |                           |  
|Basic and diluted net loss per share                                         |  | $                           | (0.01  | ) |                           | $
|                                                                             |  |                             |        |   |                           |  
|Weighted average shares used to compute basic and diluted net loss per share |  |                             | 35,819 |   |                           |  
|                                                                             |  |                             |        |   |                           |  



See accompanying notes



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CENTILLIUM COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



|                                                                            |  | Six Months Ended June 30, |        
|--------------------------------------------------------------------------- |  | ------------------------- | -------
|                                                                            |  | 2003                      |        
|OPERATING ACTIVITIES                                                        |  |                           |        
|Net loss                                                                    |  | $                         | (3,471 
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                           |        
|Depreciation and amortization expense                                       |  |                           | 3,284  
|Stock based compensation expense                                            |  |                           | 677    
|Loss on retirements of property and equipment                               |  |                           | 18     
|Amortization of other acquisition-related intangibles                       |  |                           | 83     
|Gain on non-current investment                                              |  |                           |       
|Changes in operating assets and liabilities:                                |  |                           |        
|Accounts receivable                                                         |  |                           | (15,392
|Inventories                                                                 |  |                           | 129    
|Other current assets                                                        |  |                           | (1,523 
|Other assets                                                                |  |                           | (138   
|Accounts payable                                                            |  |                           | 3,935  
|Accrued payroll and related expenses                                        |  |                           | 330    
|Deferred revenue                                                            |  |                           | 2,248  
|Accrued liabilities                                                         |  |                           | 1,896  
|Other liabilities                                                           |  |                           | (55    
|                                                                            |  |                           |        
|Net cash used in operating activities                                       |  |                           | (7,979 
|INVESTING ACTIVITIES                                                        |  |                           |        
|Purchases of short-term investments                                         |  |                           | (38,871
|Sales and maturities of short-term investments                              |  |                           | 7,538  
|Purchases of property and equipment                                         |  |                           | (1,101 
|Proceeds from sale of non-current investment                                |  |                           |       
|                                                                            |  |                           |        
|Net cash provided by (used in) investing activities                         |  |                           | (32,434
|FINANCING ACTIVITIES                                                        |  |                           |        
|Principal payments on capital lease obligations                             |  |                           | (1,093 
|Principal payments on long term debt obligations                            |  |                           |       
|Proceeds from issuance of common stock, net of repurchases                  |  |                           | 6,470  
|Proceeds from shareholder                                                   |  |                           | 857    
|                                                                            |  |                           |        
|Net cash provided by financing activities                                   |  |                           | 6,234  
|                                                                            |  |                           |        
|Net increase (decrease) in cash and cash equivalents                        |  |                           | (34,179
|Cash and cash equivalents at beginning of period                            |  |                           | 93,513 
|                                                                            |  |                           |        
|Cash and cash equivalents at end of period                                  |  | $                         | 59,334 
|                                                                            |  |                           |        



See accompanying notes







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CENTILLIUM COMMUNICATIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



(UNAUDITED)



JUNE 30, 2003



1. Description of Business



The Company



Centillium Communications, Inc. (Centillium or the Company) was incorporated in California on February 21,
1997. The Company provides semiconductor products that enable broadband communications. Our products are used in telecommunications equipment targeting the Digital Subscriber Line (DSL) and Voice over Packet (VoP) markets.



We provide semiconductor products that enable broadband communications to the home and
business enterprise. We serve the DSL and the Voice over Packet markets. Our current customers are 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.



2. Summary of Significant Accounting Policies



Basis of Presentation



The accompanying condensed consolidated financial statements herein are unaudited; however,
they have been prepared in accordance with generally accepted accounting principles 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 June 30, 2003, the consolidated results of
operations for the three and six months ended June 30, 2003 and 2002, and the consolidated cash flows for the six months ended June 30, 2003 and 2002. Operating results for the three and six months ended June 30, 2003 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2003.



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, 2002 included in the Companys Annual Report on Form 10-K/A, filed with the Securities and Exchange Commission on April 21, 2003.



Use of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management
to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company regularly evaluates the estimates and assumptions related to the allowances for doubtful accounts, sales returns and
allowances, inventory valuation, warranty reserves, impairment of long-lived assets, deferred income tax asset valuation allowances and other contingencies. The Company bases the estimates and assumptions on historical experience and on various
other factors that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.



Reclassifications



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Certain prior year balance sheet and cash flow balances have been reclassified to conform to current year presentation.



Recent Accounting Pronouncements



In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability
for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition
provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption
of FIN No. 45 did not have a material effect on our condensed consolidated financial position, results of operations, or cash flows.



At the November 2002 Emerging Issues Task Force (EITF) meeting, the Task Force reached a consensus on EITF No. 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21). EITF 00-21 provides guidance on how to determine whether an arrangement involves multiple deliverables and contains more than one unit of accounting. EITF 00-21 will be effective for arrangements entered into after
June 15, 2003. The adoption of EITF 00-21 is not expected to have a material effect on the Companys consolidated financial position, results of operations, or cash flows.



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46).FIN 46
addresses the consolidation and financial reporting of variable interest entities. FIN No. 46 is effective for financial statements of interim or annual periods beginning after June 15, 2002 for variable interest entities created before February 1,
2003, or immediately for variable interest entities created after January 31, 2003. The adoption of this interpretation is not expected to have a material effect on the Companys consolidated financial position, results of operations, or cash
flows.



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) and elected the disclosure-only alternative under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123), as amended by SFAS No. 148, Accounting for Stock Based Compensation-Transition and Disclosure.



Had compensation expense for the Companys stock options been recognized based upon the estimated fair value on the grant date under
the fair value methodology prescribed by SFAS No. 123, as amended by SFAS No. 148, the Companys net loss and loss per share would have been as follows (in thousands, except per share amounts):



7



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|                                                                                                                               |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------ | - | ------------------------- | -
|                                                                                                                               |  | 2003                        |        |   | 2002                      |  
|Net loss as reported                                                                                                           |  | $                           | (511   | ) |                           | $
|Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects                       |  |                             | 376    |   |                           |  
|Less: Total stock-based employee compensation expense under fair value based method for all awards, net of related tax
effects |  |                             | (6,859 | ) |                           |  
|                                                                                                                               |  |                             |        |   |                           |  
|Pro forma net loss                                                                                                             |  | $                           | (6,994 | ) |                           | $
|                                                                                                                               |  |                             |        |   |                           |  
|Basic and diluted net loss per share - as reported                                                                             |  | $                           | (0.01  | ) |                           | $
|                                                                                                                               |  |                             |        |   |                           |  
|Basic and diluted net loss per share - pro forma                                                                               |  | $                           | (0.20  | ) |                           | $
|                                                                                                                               |  |                             |        |   |                           |  



4. Commitments and Contingencies



The Company enters into standard indemnification agreements in the
ordinary course of business. Pursuant to these agreements, the Company 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 our products. The term of these indemnification agreements is generally perpetual. We have not incurred significant
costs to defend lawsuits or settle claims related to these indemnification agreements and we have no liabilities recorded for these agreements as of June 30, 2003.



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 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.



On June 19, 2003, Credit Suisse First Boston Corporation and
approximately 12 of its clients, including Centillium, were named as defendants in a securities class action lawsuit filed in United States District Court for the Southern District of Florida. The complaint asserts wrongdoing relating to various
initial public offerings in which Credit Suisse First Boston was involved between 1999 and 2001. Among other things, the complaint alleges that Centillium violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended.
Centillium has not responded to the complaint. Although we believe this lawsuit against Centillium is without merit, no assurance can be given about its outcome, and an unfavorable outcome could have a material adverse effect on Centilliums
operating results.



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. As of June 30, 2003, the
Companys non-cancelable purchase obligations for wafers expected to be delivered within the next six months, is $26.7 million.



5. Balance Sheet Information



Inventories:



8



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The components of inventories are as follows (in thousands):



|                |  | June 30, 2003 |       | December 31, 2002
|--------------- |  | ------------- | ----- | -----------------
|Work-in-process |  | $             | 2,712 |                  
|Finished goods  |  |               | 1,289 |                  
|                |  |               |       |                  
|                |  | $             | 4,001 |                  
|                |  |               |       |                  



Accrued Liabilities:



The components of accrued liabilities are as follows (in thousands):



|                          |  | June 30, 2003 |        | December 31, 2002
|------------------------- |  | ------------- | ------ | -----------------
|Accrued royalties         |  | $             | 12,750 |                  
|Accrued other liabilities |  |               | 2,518  |                  
|                          |  |               |        |                  
|                          |  | $             | 15,268 |                  
|                          |  |               |        |                  



Warranty:



Warranty activity for the six months ended June 30, 2003 was as follows (in thousands):



|                                   |  | 2003 |     
|---------------------------------- |  | ---- | ----
|Balances at beginning of period    |  | $    | 608 
|Provision for current period sales |  |      | 218 
|Warranty costs incurred            |  |      | (287
|                                   |  |      |     
|Balances at end of period          |  | $    | 539 
|                                   |  |      |     



Other acquisition related intangible
assets subject to amortization were as follows (in thousands):



|                                 |  | June 30,2003 |      |   | December 31,2002 |  
|-------------------------------- |  | ------------ | ---- | - | ---------------- | -
|Other purchased intangibles      |  | $            | 500  |   |                  | $
|Less accumulated amortization    |  |              | (500 | ) |                  |  
|                                 |  |              |      |   |                  |  
|Other purchased intangibles, net |  | $            |     |   |                  | $
|                                 |  |              |      |   |                  |  



6. Provision for Income Taxes



The provision for income taxes for the three and six months ended June
30, 2003 and 2002 relates to current taxes payable for 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 and Comprehensive Net
Loss



9



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Basic and diluted net 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. The following table presents the computation of basic and diluted net loss per share (in thousands, except per share amounts):



|                                                                             |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|---------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | -
|                                                                             |  | 2003                        |        |   | 2002                      |  
|Net loss                                                                     |  | $                           | (511   | ) |                           | $
|                                                                             |  |                             |        |   |                           |  
|Basic and diluted:                                                           |  |                             |        |   |                           |  
|Weighted average shares of common stock outstanding                          |  |                             | 35,833 |   |                           |  
|Less weighted average shares subject to repurchase                           |  |                             | (14    | ) |                           |  
|                                                                             |  |                             |        |   |                           |  
|Weighted average shares used to compute basic and diluted net loss per share |  |                             | 35,819 |   |                           |  
|                                                                             |  |                             |        |   |                           |  
|Basic and diluted net loss per share                                         |  | $                           | (0.01  | ) |                           | $
|                                                                             |  |                             |        |   |                           |  



The Company has excluded all
outstanding warrants, stock options, and shares subject to repurchase by the Company from the calculation of basic and diluted net loss per share because these securities are antidilutive for all periods presented. These excluded common share
equivalents could be dilutive in the future. Options and warrants to purchase approximately 12,084,224 and 12,158,188 shares of common stock have been excluded for the three and six months ended June 30, 2003 and 2002, respectively.



The components of comprehensive net loss were as follows (in thousands):



|                                                            |  | ThreeMonths Ended June 30, |      |   | Six Months Ended June 30, |  
|----------------------------------------------------------- |  | -------------------------- | ---- | - | ------------------------- | -
|                                                            |  | 2003                       |      |   | 2002                      |  
|Net loss                                                    |  | $                          | (511 | ) |                           | $
|Change in unrealized gain on available-for-sale investments |  |                            | 30   |   |                           |  
|                                                            |  |                            |      |   |                           |  
|Total comprehensive loss                                    |  | $                          | (481 | ) |                           | $
|                                                            |  |                            |      |   |                           |  



8. Business Segment Information and
Customer Concentration



Through June 30, 2003, the Companys revenues
have been derived from one business segment, the sale of broadband communication products for the DSL and VoP markets. The Company sells its products to 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.



The Chief Executive Officer has been identified as the Chief
Operating Decision Maker (CODM) because he has final authority over resource allocation decisions and performance assessment. The CODM does not receive discrete financial information about any individual components.



The following customers, both of whom are located in Japan, accounted for more than 10% of
net revenues:



10



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##### Table of Contents

|                             |  | Three Months Ended June 30, |   |  | Six Months Ended June 30, |  
|---------------------------- |  | --------------------------- | - |  | ------------------------- | -
|                             |  | 2003                        |   |  | 2002                      |  
|Sumitomo Electric Industries |  | 31                          | % |  | 44                        | %
|NEC                          |  | 56                          | % |  | 42                        | %



The following is a summary of net
revenues by major geographic area (in thousands):



|                     |  | Three Months Ended June 30, |        | Six Months Ended June 30,
|-------------------- |  | --------------------------- | ------ | -------------------------
|                     |  | 2003                        |        | 2002                     
|Japan                |  | $                           | 29,500 |                          
|United States        |  |                             | 1,868  |                          
|AsiaExcluding Japan |  |                             | 2,235  |                          
|All other            |  |                             | 325    |                          
|                     |  |                             |        |                          
|Total                |  | $                           | 33,928 |                          
|                     |  |                             |        |                          



9. Related Party Transactions



In the second quarter of 2000, the Company invested $990,000 in equity
securities of Broadxent, Inc., a majority owned subsidiary of Creative Technology Ltd. In the second quarter of 2001, in connection with an ongoing evaluation of this non-current equity investment, the Company wrote down the basis of this investment
to zero as a result of impairment in the value of this asset. In the first quarter of 2002, the Company sold this non-current equity investment for $440,000 and reported this amount as a gain. Broadxent, Inc., is a wholly owned subsidiary of
Creative Technology Ltd. One of the Companys directors is also a director of Creative Technology Ltd.



The Company sold $1,123,000 and $2,010, 000 of products to Broadxent, Inc. during the three and six months ended June 30, 2002, respectively. There were no sales to Broadxent, Inc. during 2003.



During the quarter ended June 30, 2003, a shareholder sold shares of Centillium stock in a
transaction deemed to be a short-swing sale. Under Section 16(b) of the Securities Exchange Act of 1934, the shareholder was required to disgorge to the Company the profit realized from the stock sale in the amount of approximately $857,000. The
Company accounted for the cash receipt as a contribution from a shareholder and reflected the proceeds as an increase to additional paid in capital in its financial statements. Proceeds from this sale did not effect the Companys condensed
consolidated statement of operations.



|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/A, filed with the Securities and Exchange Commission on April 21, 2003. 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.



Our discussion contains 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 those actual results could be materially different from those discussed in this report. We undertake no obligation to publicly release any revisions to the
forward-looking statements or reflect events or circumstances after the date of this document.



The section entitled Risk Factors and similar discussions in our other SEC reports filed with the SEC discuss some of the



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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.



Overview



Founded in 1997, Centillium Communications, Inc
(Centillium or the Company) provides semiconductor products that enable broadband communications to the home and business enterprise. We serve the DSL and the Voice over Packet markets. Our current customers are 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 Voice over Packet semiconductor products, which include the CopperFlite, Palladia and
Entropia families of products.



Critical Accounting Policies



There have been no significant changes in our critical accounting policies during the
three and six months ended June 30, 2003 as compared to the accounting policies previously disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on April 21, 2003.



Results of Operations for the Three and Six Months Ended June 30, 2003 and
2002



The following table sets forth, for the periods presented, certain
data from our unaudited consolidated statements of operations expressed as a percentage of net revenues.



|                                                      |  | Three Months Ended |    |  | Six Months Ended |   
|----------------------------------------------------- |  | ------------------ | -- |  | ---------------- | --
|                                                      |  | June 30, 2003      |    |  | June 30, 2002    |   
|Net revenues                                          |  | 100                | %  |  | 100              | % 
|Cost of revenues                                      |  | 53                 |    |  | 62               |   
|                                                      |  |                    |    |  |                  |   
|Gross profit                                          |  | 47                 |    |  | 38               |   
|                                                      |  |                    |    |  |                  |   
|Operating expenses:                                   |  |                    |    |  |                  |   
|Research and development                              |  | 33                 |    |  | 42               |   
|Sales and marketing                                   |  | 9                  |    |  | 12               |   
|General and administrative                            |  | 7                  |    |  | 7                |   
|Amortization of other acquisition-related intangibles |  |                   |    |  |                 |   
|                                                      |  |                    |    |  |                  |   
|Total operating expenses                              |  | 49                 |    |  | 61               |   
|                                                      |  |                    |    |  |                  |   
|Operating loss                                        |  | (2                 | )  |  | (23              | ) 
|Interest income, net                                  |  | 1                  |    |  | 1                |   
|Gain on non-current investment                        |  |                   |    |  |                 |   
|Provision for income taxes                            |  |                   |    |  |                 |   
|                                                      |  |                    |    |  |                  |   
|Net loss                                              |  | (1                 | )% |  | (22              | )%
|                                                      |  |                    |    |  |                  |   



Net Revenues. Net revenues for
the three months ended June 30, 2003 were $33.9 million compared to $34.4 million for the three months ended June 30, 2002, a decrease of $485,000 or 1%. This decrease in net revenues resulted primarily from a 21% decline in the average selling
price of our DSL products offset by a 21% increase in the total unit volume shipments of our DSL products in the second quarter of 2003 as compared to the same period in 2002.



Net revenues for the six months ended June 30, 2003 were $61.8 million compared to $57.0 million for the six months



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ended June 30, 2002, an increase of $4.8 million or 8%. The increase in net revenues for the six months ended June 30, 2003 as compared with the six months
ended June 30, 2002 primarily reflects a change in product mix of our DSL products and a 51% increase in total unit shipments of our DSL products offset by a 20% decrease in the average selling price of our DSL products.



Revenue from our DSL products accounted for $33.4 million or 98% of net revenues for the
three months ended June 30, 2003, as compared to $33.6 million or 98% of net revenues for the three months ended June 30, 2002. DSL revenues during the six months ended June 30, 2003 accounted for $60.6 million or 98% of net revenues as compared to
$55.4 million or 97% of net revenues for the six months ended June 30, 2002. Revenues from Voice over Packet products accounted for $448,000 of revenues in the three months ended June 30, 2003 as compared to $719,000 for the three months ended
June 30, 2002, or approximately 1% and 2% of net revenues, respectively. Voice over Packet revenues accounted for $913,000 of revenues in the six months ended June 30, 2003 as compared to $1.6 million for the six months ended June 30, 2002, or
approximately 1% and 3% of net revenues, respectively. We anticipate that revenues from our DSL products will continue to account for greater than 90% of our net revenues for the balance of 2003.



The following customers, both of whom are located in Japan, accounted for more than 10% of
net revenues:



|                             |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|---------------------------- |  | -------------------------- | - |  | ------------------------ | -
|                             |  | 2003                       |   |  | 2002                     |  
|Sumitomo Electric Industries |  | 31                         | % |  | 44                       | %
|NEC                          |  | 56                         | % |  | 42                       | %



Net revenues to international
customers, who were primarily located in Japan, comprised 95% and 91% of our net revenues for the three months ended June 30, 2003 and 2002, respectively. For the six months ended June 30, 2003 and 2002, net revenues to international customers
accounted for 92% and 90% of net revenues, respectively.



Cost of Revenues and Gross Profit.Cost of revenues includes the cost of the finished silicon wafers manufactured by independent foundries, costs associated with assembly, packaging, test and quality assurance, and internal
manufacturing and operations functions. Cost of revenues was $17.9 million and $21.3 million for the three months ended June 30, 2003 and 2002, resulting in a gross profit of $16.1 million and $13.1 million or a gross profit margin of 47% and 38%,
respectively. Cost of revenues was $32.1 million and $33.3 million for the six months ended June 30, 2003 and 2002, resulting in a gross profit of $29.6 million and $23.7 million or a gross margin of 48% and 42%, respectively. The increase in
gross profit and gross profit margin resulted primarily from the write off of inventory in the second quarter of 2002, reduced manufacturing costs and product mix. Our gross profit margins in the future may be affected by competitive pricing
strategies, product mix, fluctuation in silicon wafer costs and the fluctuation on manufacturing yields.



Research and Development Expenses.Research and development expense consists primarily of salaries and related personnel costs of employees engaged
in research, design and development activities, fees paid to consultants and outside service providers, prototype costs, amortization of deferred compensation, software licensing and maintenance costs, and depreciation associated with software
design tools and equipment. Research and development expenditures decreased by approximately $3.1 million, or 21%, to $11.3 million for the three months ended June 30, 2003 as compared to $14.4 million for the three months ended June 30, 2002.
Research and development expenses decreased by approximately $5.1 million, or 18%, to $22.9 million for the six months ended June 30, 2003 as compared to $28.0 million for the six months ended June 30, 2002. These decreases were primarily due
to decreases in the amortization of deferred compensation, software tool expense, and salaries and related costs due to fewer employees, partially offset by higher consulting expense, equipment rental expense and employee performance bonus expense.



Sales and Marketing Expenses.Sales and marketing
expense consists primarily of personnel-related expenses, amortization of deferred compensation, costs associated with promotional and marketing efforts, and travel expenses. Sales and marketing expenditures decreased by approximately $915,000, or
22%, to $3.2 million for the three months ended June 30, 2003 as compared to $4.1 million for the three months ended June 30, 2002. Spending on sales and marketing decreased by approximately $3.0 million, or 34%, to $6.0 million for the six
months ended June 30, 2003 as compared to $9.0 million for the six months ended June 30, 2002. The decrease was due primarily to a decrease in the amortization of deferred compensation, and a decrease in salaries and related costs, partially offset
by higher commission



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expense for the internal sales force, consulting and public relations expenses.



General and Administrative Expenses.General and administrative
expense consists primarily of personnel-related expenses, amortization of deferred compensation, legal and professional fees, and other corporate expenses. General and administrative expenditures decreased by approximately $237,000, or 9%, to $2.3
million for the three months ended June 30, 2003 from $2.5 million for the three months ended June 30, 2002. General and administrative expenses decreased by approximately $900,000, or 16%, to $4.6 million for the six months ended June 30, 2003
from $5.5 million for the six months ended June 30, 2002. This decrease was primarily due to a decrease in the amortization of deferred compensation, a decrease in training and recruiting expense and decreases in salaries and related costs,
partially offset by higher employee bonus expense.



Stock-Based Compensation Expense. Stock-based compensation expense, which is allocated among the above expense categories, was $376,000 and $677,000 in the three and six months ended June 30, 2003 as compared to $1.4 million and
$3.5 million in the three and six months ended June 30, 2002, a decrease of $1.0 million and $2.8 million, respectively. These decreases are primarily related to the use of the graded vesting method, which results in accelerated amortization of
deferred compensation expense in the earlier years of the awards expected life. As required by APB 25, we record an adjustment to equity-based compensation related to employees who forfeit options for which compensation expense had been
recognized using the graded vesting method, but which are unvested on the date their employment terminated.



Amortization of Other Acquisition Intangibles. Amortization of goodwill and other acquisition-related intangibles was $41,000 and $83,000 in each
of the three and six months ended June 30, 2003 and 2002, respectively. No unamortized balance remains as of June 30, 2003.



Interest Income, Net.Interest income, net, was $247,000 and $571,000 for the three and six month periods ended June 30, 2003 as compared to
$502,000 and $1,012,000 for the three and six months ended June 30, 2002, a decrease of $255,000 and $441,000 or 51% and 44%, respectively. This decrease was primarily due to lower interest rates obtained on our cash, cash equivalents and short-term
investment portfolio.



Provision for Income Taxes.
Income tax expense was $25,000 and $27,000 for the three months ended June 30, 2003 and 2002, respectively, and $66,000 and $51,000 for the six months ended June 30, 2003 and 2002, respectively. The provisions for income taxes relate to current
taxes payable for 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 through a combination of sales of
equity securities and cash generated by operations. At June 30, 2003, we had $99.2 million in cash, cash equivalents and short-term investments as compared to $102.0 million at December 31, 2002. Cash and cash equivalents decreased to $59.3
million at June 30, 2003 from $93.5 million at December 31, 2002 primarily as a result of the purchase of short-term investments.



Operating activities for the six months ended June 30, 2003 used $8.0 million in cash. The net cash used in operating activities was primarily the result of our net loss
of $3.5 million, an increase in our accounts receivable of $15.4 million, and an increase in other current assets of $1.5 million partially offset by non-cash charges of $3.3 million for depreciation and amortization and $677,000 for stock based
compensation, an increase in accounts payable of $3.9 million, an increase in deferred revenue of $2.2 million, and an increase in accrued liabilities of $1.9 million. Increases to both accounts payable and accounts receivable were the result of the
timing of the receipt of inventories from our manufacturing partners and subsequent shipment of the products to our customers in the last month of the quarter. Deferred revenue increased due to the shipment of our Maximus product during the second
quarter for which we are obligated to deliver an upgrade expected to be available in the third quarter of 2003.



For the six months ended June 30, 2003, net cash used by investing activities was $32.4 million. Net cash used by investing activities related to net purchases of
short-term investments of $38.9 million and purchases of property and equipment of $1.1 million, partially offset by sales and maturities of short-term investments of $7.5 million. Property and equipment purchases relate principally to the purchase
of software development tools, lab equipment and computer hardware



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to support our research and development activities.



Net cash provided by financing activities was $6.2 million for the six months ended June 30, 2003. Net cash provided by financing activities
consisted of net proceeds of $6.5 million from the issuance of common stock under employee stock plans and approximately $857,000 in proceeds from a shareholder partially offset by principal payments on capital lease obligations of $1.1 million.
During the quarter ended June 30, 2003, a shareholder sold shares of Centillium stock in a transaction deemed to be a short-swing sale. Under Section 16(b) of the Securities and Exchange Act of 1934, the shareholder was required to disgorge to
the Company the profits realized from the stock sale. Proceeds from this sale did not effect the Companys condensed consolidated statement of operations.



Due to the significant increase in our stock price, we received approximately $5.8 million from the exercise of stock options during the six months ended June 30, 2003
as compared to $601,000 for the six months ended June 30, 2002, as significantly more options, with higher exercise prices, were exercised by our employees.



During the past two fiscal quarters, we reduced our capital expenditures and implemented a number of expense reduction initiatives to improve our operating cost
structure. However, we expect that the capital expenditure in the second half of fiscal 2003 will rise to support new product research and development activities.



Our principal source of liquidity as of June 30, 2003 consisted of $99.2 million of cash and cash equivalents and short-term investments. We
believe our current cash, cash equivalents and marketable securities together with our anticipated cash flows from operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least 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 various risks and uncertainties, including but not limited to, the levels of demand for our products
and other risks listed in the Risk Factor section.



Our principal
commitments as of June 30, 2003 consist of obligations under operating leases, a capital lease, royalty agreements and non-cancelable purchase obligations. Significant contractual obligations and commercial commitments as of June 30, 2003 are shown
in the table below (in thousands):



|                              |  | Total |        | Less than 1Year |   | 1 - 3 Years |  | After 3 Years
|----------------------------- |  | ----- | ------ | --------------- | - | ----------- |  | -------------
|                              |  |       |       
|Operating leases - facilities |  | $     | 3,292  |                 | $ | 975         |  | $            
|Capital leases - software     |  |       | 1,427  |                 |   | 899         |  |              
|Operating leases - software   |  |       | 5,307  |                 |   | 1,527       |  |              
|Inventory purchases           |  |       | 26,659 |                 |   | 26,659      |  |              
|                              |  |       |        |                 |   |             |  |              
|Total cash obligations        |  | $     | 36,685 |                 | $ | 30,060      |  | $            
|                              |  |       |        |                 |   |             |  |              



If we are able to sustain our current
business plan and general economic conditions stabilize, we anticipate achieving profitability on a quarterly basis in the second half of 2003. We believe our revenue forecast and the steps we have taken to reduce spending will allow us to achieve
that objective. Our profitability 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 continue our research and development efforts, 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



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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 announced the filing of 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, warrants or debt securities, are being registered on a delayed basis because Centillium does 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/A, filed
with the Securities and Exchange Commission on April 21, 2003. 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 WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.



We have not reported an operating profit for any year since our incorporation and have experienced net losses of approximately $3.5 million for the six months ended June 30, 2003, and $33.3 million and $19.7 million for the years ended
December 31, 2002 and 2001, respectively.



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;
| | - |  | --------------------------------------------------------



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| |  |  | ability to achieve cost reductions; and
| | - |  | ---------------------------------------



| |  |  | fluctuations in the timing and amount of customer requests for product shipments.
| | - |  | ---------------------------------------------------------------------------------



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.



A SLOWDOWN IN DEPLOYMENT OF DSL IN JAPAN WOULD ADVERSELY AFFECT OUR BUSINESS AND
OPERATING RESULTS.



Sales to customers located in Japan accounted for
87% and 85% of net revenues for the three and six months ended June 30, 2003, compared to 85% and 86% of net revenues for the three and six months ended June 30, 2002. Any slowdown in the demand for our customers equipment in Japan may cause
our revenues 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.



COMPETING DSL TECHNOLOGIES
MAY BE DEPLOYED IN JAPAN, WHICH MAY ADVERSELY IMPACT THE DEMAND FOR OUR DSL PRODUCTS, MARKET SHARE AND OPERATING RESULTS.



We have worked in partnership with local telecommunications companies to develop the Annex C standard for the DSL market in Japan and have been able to achieve the
majority market share of DSL equipment purchases, based on our products, in Japan. In July 2001, a certain service provider announced plans to deploy lower priced competing DSL technologies in Japan and has subsequently deployed these competing
technologies. If these competing technologies continue to be successful, our market share in the DSL market in Japan may decline and our business and operating results may be adversely affected.



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 six months ended June 30, 2003, 94% and 91%, 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
| | - |  | --------------------------------------------------



| |  |  | 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



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currency of a particular country, leading to a reduction in sales and profitability in that country.



WE DEPEND ON A FEW CUSTOMERS AND IF WE LOSE ANY OF THEM OUR SALES AND OPERATIONS WILL
SUFFER.



We sell our DSL products primarily to network equipment
manufacturers. Our top two customers for the six month period ended June 30, 2003 were NEC and Sumitomo, accounting for 50% and 36% of our net revenues. For the year ended December 31, 2002, NEC and Sumitomo accounted for 45% and 41% 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.



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.



SALES OF OUR PRODUCTS DEPEND ON THE WIDESPREAD ADOPTION OF BROADBAND ACCESS SERVICES,
ESPECIALLY DSL. 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.
| | - |  | ---------------------------------------------------------





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,



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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 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 OTHER BROADBAND TECHNOLOGIES MAY COMPETE EFFECTIVELY WITH DSL SERVICES, OUR
PRODUCTS MAY NOT CAPTURE MARKET SHARE.



DSL services are competing
with a variety of different broadband data transmission technologies, including cable modems, satellite and other wireless technologies. If any technology that is competing with DSL technology is more reliable, faster and less expensive or has other
advantages over DSL technology, then the demand for our DSL products may decrease.



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.



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.



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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.



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. The owners of these intellectual property rights may bring infringement claims against us or our customers. 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. 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 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.



We have received correspondence from certain parties, including Texas Instruments, Alcatel
and Ricoh, requesting us to discuss the potential need for non-exclusive licenses permitting us to utilize technology covered by various patents held by these parties. We could be subject to claims similar to the Texas Instruments, Alcatel and Ricoh
claims in the future. Depending on the amount and timing of any unfavorable resolutions of these claims, our future results of operations or cash flows could be materially adversely affected.



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 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 digital semiconductor wafers from Taiwan Semiconductor Manufacturing Co., Ltd and we obtain analog silicon wafers from 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;
| | - |  | ----------------------------------------------------------------------------------



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| |  |  | refuse to sell their products or components to us at any price; or
| | - |  | ------------------------------------------------------------------



| |  |  | be subject to production disruptions such as earthquakes.
| | - |  | ---------------------------------------------------------



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;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | 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.



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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 EXECUTIVE OFFICERS AND KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS, AND THESE OFFICERS AND PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.



We depend upon the continuing contributions of our key management, sales, customer support and product development personnel. The loss of
such personnel could seriously harm us. In addition, we have not obtained key-man life insurance on any of our executive officers or key employees.



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.



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 short-term
investment 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 we will be able to obtain additional
financing on favorable terms, 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 cannot raise needed funds on acceptable terms, 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.



|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 June 30, 2003, all of our investments were in money market funds and government debt securities. A
hypothetical 100 basis point increase in interest rates would result in an approximate $364,000 decrease in the fair value of our available-for-sale securities as of June 30, 2003.



|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



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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.



|PART II. |  | OTHER INFORMATION
|-------- |  | -----------------



|ITEM 1. |  | LEGAL PROCEEDINGS
|------- |  | -----------------



On June 19, 2003, Credit Suisse First Boston Corporation and approximately 12 of its clients, including Centillium, were named as defendants in a securities class action lawsuit filed in United States District Court
for the Southern District of Florida. The complaint asserts wrongdoing relating to various initial public offerings in which Credit Suisse First Boston was involved between 1999 and 2001. Among other things, the complaint alleges that Centillium
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. Centillium has not responded to the complaint. Although we believe this lawsuit against Centillium is without merit, no assurance can be given about its outcome,
and an unfavorable outcome could have a material adverse effect on Centilliums operating results.



|ITEM 2. |  | CHANGES IN SECURITIES AND USE OF PROCEEDS
|------- |  | -----------------------------------------



None



|ITEM 3. |  | DEFAULTS UPON SENIOR SECURITIES
|------- |  | -------------------------------



None



|ITEM 4. |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- |  | ---------------------------------------------------



The Annual Meeting of Stockholders was held on June 11, 2003. At the meeting, our stockholders voted on the following proposals and cast their votes as follows:



Proposal 1. To elect the following nominees as directors for a three-year term
ending in 2006:



|Election of Directors |  | Votes For  |  | Votes Withheld
|--------------------- |  | ---------- |  | --------------
|Faraj Aalaei          |  | 25,181,407 |  | 3,958,370     
|Jere Drummond         |  | 29,112,565 |  | 27,212        
|Shahin Hedayat        |  | 25,183,277 |  | 3,956,500     



Proposal 2. To ratify the appointment
of Ernst & Young LLP as our independent auditors for the year ending December 31, 2003:



|For        |  | Against |  | Abstain
|---------- |  | ------- |  | -------
|28,573,291 |  | 556,671 |  | 9,815  



|ITEM 5. |  | OTHER INFORMATION
|------- |  | -----------------



None.



|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K
|------- |  | --------------------------------



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|(a) |  | Exhibits
|--- |  | --------



|      | 
|----- | 
|31.1  | 
|      | 
|31.2  | 
|      | 
|32.1. | 
|      | 
|32.2. | 



|(b) |  | Reports on Form 8-K
|--- |  | -------------------



We filed or furnished the following current reports on Form 8-K during the quarter ended June 30, 2003:



(i) Form 8-K furnished on April 30, 2003 reporting first quarter earnings



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, INC.
|--------------------- |  |  |  | -------------------------------
|                      |  |  |  | (Registrant)                   
|                      |  |  | 
|Dated: August 8, 2003 |  |  |  | By:                            
|                      |  |  |  |                                



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