UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

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[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

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



Centillium Communications, Inc.



|Delaware                                                       | 94-3263530                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

215 Fourier Avenue
Fremont, California      94539

(510) 771-3700




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.     x YES
      ̈ NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer      ̈ Accelerated filer    x Non-accelerated filer     ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
 ̈ YES     
x NO

The number of shares of the registrant's common stock, $0.001 par value, outstanding as of April 24, 2006 was 40,447,547.




Centillium Communications, Inc.
                                 TABLE OF CONTENTS



|PART I.   FINANCIAL INFORMATION                                                                                         | Page No.
|----------------------------------------------------------------------------------------------------------------------- | --------
|Item 1.   Financial Statements:                                                                                         |         
|Condensed Consolidated Balance Sheets at
         March 31, 2006 and December 31, 2005                                  | 3       
|Condensed Consolidated Statements of Operations for the three
          
          months ended March 31, 2006 and 2005 | 4       
|Condensed Consolidated Statements of Cash Flows for the three
          
         months ended March 31, 2006 and 2005  | 5       
|Notes to Unaudited Condensed Consolidated Financial Statements                                                          | 6       
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations   | 14      
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                    | 23      
|Item 4.   Controls and Procedures                                                                                       | 23      
|PART II.  OTHER INFORMATION                                                                                             |         
|Item 1.   Legal Proceedings                                                                                             | 23      
|Item 1A.   Risk Factors                                                                                                 | 24      
|Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds                                                   | 35      
|Item 3.   Defaults Upon Senior Securities                                                                               | 35      
|Item 4.   Submission of Matters to a Vote of Security Holders                                                           | 35      
|Item 5.   Other Information                                                                                             | 35      
|Item 6.   Exhibits                                                                                                      | 35      
|Signatures                                                                                                              | 37      

Centillium Communications, Palladia, Maximus, eXtremeDSLMAX, Entropia, Voice Services
Platform, Atlanta and the Centillium Logo are trademarks of Centillium Communications, Inc. in the United States and certain other
countries. All rights reserved.

2

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Part I -- FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

CENTILLIUM COMMUNICATIONS, INC. 
                     CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                                                                                          |  |  | March 31,                                       |  | December 31,                
|----------------------------------------------------------------------------------------------------------------------------------------- |  |  | ----------------------------------------------- |  | ----------------------------
|                                                                                                                                          |  |  | 2006 (Unaudited)                                |  | 2005(*)                     
|ASSETS                                                                                                                                    |  |  | (In thousands, except share and per share data)
|Current assets:                                                                                                                           |  |  |                                                 |  |                             
|Cash and cash equivalents                                                                                                                 |  |  | $                    41,010                     |  | $                    39,440 
|Short-term investments                                                                                                                    |  |  | 22,447                                          |  | 21,900                      
|Accounts receivable (net of allowance for doubtful accounts of $151
            at March 31, 2006 and $169 at December 31, 2005)          |  |  | 8,245                                           |  | 7,177                       
|Inventories                                                                                                                               |  |  | 3,194                                           |  | 3,609                       
|Other current assets                                                                                                                      |  |  | 1,758                                           |  | 1,780                       
|Total current assets                                                                                                                      |  |  | 76,654                                          |  | 73,906                      
|Property and equipment, net                                                                                                               |  |  | 3,235                                           |  | 3,529                       
|Other assets                                                                                                                              |  |  | 794                                             |  | 912                         
|Total assets                                                                                                                              |  |  | $                    80,683                     |  | $                    78,347 
|                                                                                                                                          |  |  |                                                 |  |                             
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                      |  |  |                                                 |  |                             
|Current liabilities:                                                                                                                      |  |  |                                                 |  |                             
|Accounts payable                                                                                                                          |  |  | $                      7,326                    |  | $                      5,987
|Accrued compensation and related expenses                                                                                                 |  |  | 3,887                                           |  | 4,247                       
|Accrued liabilities                                                                                                                       |  |  | 19,722                                          |  | 19,133                      
|Total current liabilities                                                                                                                 |  |  | 30,935                                          |  | 29,367                      
|                                                                                                                                          |  |  |                                                 |  |                             
|Long-term liabilities:                                                                                                                    |  |  |                                                 |  |                             
|Other long-term liabilities                                                                                                               |  |  | 2,201                                           |  | 2,368                       
|Total liabilities                                                                                                                         |  |  | 33,136                                          |  | 31,735                      
|                                                                                                                                          |  |  |                                                 |  |                             
|Commitments and contingencies (Note 4)                                                                                                    |  |  |                                                 |  |                             
|Stockholders' equity:                                                                                                                     |  |  |                                                 |  |                             
|Common stock; $0.001 par value:                                                                                                           |  |  |                                                 |  |                             
|Authorized shares: 100,000,000; Issued and outstanding shares:
             40,360,588 at March 31, 2006, 40,205,940 at December 31, 2005 |  |  | 40                                              |  | 40                          
|Additional paid-in capital                                                                                                                |  |  | 248,296                                         |  | 247,081                     
|Deferred compensation                                                                                                                     |  |  | -                                               |  | (24)                        
|Accumulated deficit                                                                                                                       |  |  | (200,753)                                       |  | (200,440)                   
|Accumulated other comprehensive loss                                                                                                      |  |  | (36)                                            |  | (45)                        
|Total stockholders' equity                                                                                                                |  |  | 47,547                                          |  | 46,612                      
|Total liabilities and stockholders' equity                                                                                                |  |  | $                    80,683                     |  | $                    78,347 

_____________

*   Derived from audited financial statements at December 31, 2005

See accompanying notes.

3

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CENTILLIUM COMMUNICATIONS, INC. 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 
                                     (Unaudited)

|                                                            |  |  | Three Months Ended March 31,         
|----------------------------------------------------------- |  |  | -------------------------------------
|                                                            |  |  | 2006                                 
|                                                            |  |  | (In thousands, except per share data)
|Net revenues                                                |  |  | $                    20,254          
|Cost of revenues (a)                                        |  |  | 8,741                                
|Gross profit                                                |  |  | 11,513                               
|                                                            |  |  |                                      
|Operating expenses:                                         |  |  |                                      
|Research and development (a)                                |  |  | 6,636                                
|Selling, general and administrative (a)                     |  |  | 5,772                                
|Total operating expenses                                    |  |  | 12,408                               
|Operating loss                                              |  |  | (895)                                
|Interest income and other, net                              |  |  | 616                                  
|Loss before provision for income taxes                      |  |  | (279)                                
|Provision for income taxes                                  |  |  | 34                                   
|Net loss                                                    |  |  | $                       (313)        
|                                                            |  |  |                                      
|Basic and diluted net loss per share                        |  |  | $                      (0.01)        
|                                                            |  |  |                                      
|Shares used to compute basic and diluted net loss per share |  |  | 40,282                               
|                                                            |  |  |                                      
|(a) Includes employee stock-based compensation as follows:  |  |  |                                      
|Cost of revenues                                            |  |  | $                           22       
|Research and development                                    |  |  | 349                                  
|Selling, general and admininstrative                        |  |  | 523                                  
|                                                            |  |  | $                           894      

See accompanying notes.

4

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CENTILLIUM COMMUNICATIONS, INC. 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
                                     (Unaudited)

|                                                       |  |  | Three Months Ended March 31, 
|------------------------------------------------------ |  |  | -----------------------------
|                                                       |  |  | 2006                         
|                                                       |  |  | (In thousands)               
|OPERATING ACTIVITIES                                   |  |  |                              
|Net loss                                               |  |  | $                       (313)
|Adjustments to reconcile net loss to net cash provided |  |  |                              
|by (used in) operating activities:                     |  |  |                              
|Depreciation and amortization expense                  |  |  | 633                          
|Stock-based compensation expense                       |  |  | 911                          
|Loss on retirement of property and equipment           |  |  | -                            
|Changes in operating assets and liabilities:           |  |  |                              
|Accounts receivable                                    |  |  | (1,068)                      
|Inventories                                            |  |  | 415                          
|Other current assets                                   |  |  | 22                           
|Other assets                                           |  |  | 118                          
|Accounts payable                                       |  |  | 1,339                        
|Accrued compensation and related expenses              |  |  | (360)                        
|Accrued liabilities                                    |  |  | 589                          
|Other long-term liabilities                            |  |  | (167)                        
|Net cash provided by (used in) operating activities    |  |  | 2,119                        
|INVESTING ACTIVITIES                                   |  |  |                              
|Purchases of short-term investments                    |  |  | (28,000)                     
|Sales and maturities of short-term investments         |  |  | 27,462                       
|Purchases of property and equipment                    |  |  | (339)                        
|Net cash provided by (used in) investing activities    |  |  | (877)                        
|FINANCING ACTIVITIES                                   |  |  |                              
|Proceeds from issuance of common stock                 |  |  | 328                          
|Net cash provided by financing activities              |  |  | 328                          
|                                                       |  |  |                              
|Net increase in cash and cash equivalents              |  |  | 1,570                        
|Cash and cash equivalents at beginning of period       |  |  | 39,440                       
|Cash and cash equivalents at end of period             |  |  | $                    41,010  
|                                                       |  |  |                              
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW                  |  |  |                              
|Cash paid for income taxes                             |  |  | $        6                   

See accompanying notes.

5

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CENTILLIUM COMMUNICATIONS, INC.
                  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                  (UNAUDITED)

1. Description of Business

Centillium Communications, Inc. which we refer to as Centillium or the Company, was incorporated in California
in February 1997 and was reincorporated in Delaware in December 1999. Centillium designs, develops and supplies highly-integrated
programmable system-on-a-chip (SoC) solutions that enable high-speed broadband access, which is the delivery of high capacity
bandwidth to consumers and enterprises for networking of data, voice and video signals. Our SoC products incorporate digital and
mixed-signal semiconductors and related software. We serve the Digital Subscriber Line (DSL), Voice over Internet Protocol (VoIP) and
Fiber-To-The-Premises (FTTP), which is also known as optical networking, markets. Our customers are systems vendors and original
equipment manufacturers who sell DSL and optical network equipment, for deployment in central offices and customer premises, and
VoIP equipment, for use in carrier-class and enterprise-class gateways and consumer telephony applications.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial information and 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 Centillium's consolidated financial position at
March 31, 2006, the consolidated results of operations for the three months ended March 31, 2006 and its consolidated cash flows for
the three months ended March 31, 2006. Operating results for the three months ended March 31, 2006 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2006.

The unaudited condensed consolidated financial statements include all the accounts of Centillium 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 disclosures required under U.S. generally accepted accounting principles for audited financial statements. Therefore,
these financial statements should be read in conjunction with Centillium's audited consolidated financial statements and footnotes
thereto for the year ended December 31, 2005 included in Centillium's Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on March 13, 2006.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting
principles requires Centillium to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures of contingent assets and liabilities reported in the condensed consolidated financial
statements and accompanying notes. On an on-going basis, Centillium evaluates its estimates and assumptions related to revenue
recognition, sales returns and allowances, allowance for doubtful accounts, inventories, warranty and litigation and contingencies.
Estimates on historical experience and on various other assumptions are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from
these estimates under different assumptions or conditions.

6

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Recent Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, "Accounting
Changes and Error Corrections-a Replacement of APB Opinion No. 20 and FASB Statement No. 3" (SFAS 154), which requires
retrospective application to prior periods' financial statements of every voluntary change in accounting principal unless it is
impracticable to do so. SFAS 154 is effective for accounting changes and corrections of errors beginning in fiscal 2007.  Centillium does
not expect the adoption of this standard to have a material effect on Centillium's financial position or results of operations.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of
APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of assets exchanged. The guidance in that Opinion,
however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets that do not have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for
nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 did not have a
material impact on the Company's financial position and results of operations.

In November 2004, the FASB issued Statement No. 151 "Inventory  Costs, an amendment of ARB No. 43,
Chapter 4," (SFAS 151), which amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing" to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage. This statement now requires that these
costs be expensed as current period charges. In addition, this statement requires that the allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The Company's adoption of SFAS 151 on January 1, 2006
did not have a material effect on its financial position, results of operations or cash flows.

3. Stock-based Compensation

Adoption of SFAS 123R

The Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment," (SFAS 123(R)) effective January 1, 2006. SFAS 123(R) requires the
recognition of the fair value of stock compensation in net income. The Company recognizes the stock compensation expense over the
requisite service period of the individual grantees, which generally equals the vesting period of the stock-based award. Prior to
January 1, 2006, the Company followed Accounting Principles Board ("APB") Opinion 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its stock compensation.

The Company elected the modified prospective transition method for adopting SFAS
123(R).

Determining Fair Value

Valuation and amortization method

Expected Term

Expected Volatility

7

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Expected Dividend-The Black-Scholes valuation model calls for a single expected dividend yield as an
input. The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to
pay cash dividends in the future.

Risk-Free Interest Rate

Estimated Forfeitures

Fair Value

|                         |  |  | Three Months Ended March 31,
|------------------------ |  |  | ----------------------------
|                         | 
|                         |  |  | 2006                        
|Option Plan Shares       |  |  |                             
|Expected term (in years) |  |  | 2.7 years                   
|Volatility               |  |  | 71%                         
|Expected dividend        |  |  | -%                          
|Risk free interest rate  |  |  | 4.84%                       
|Estimated forfeitures    |  |  | 6.60%                       
|                         |  |  |                             
|ESPP Shares              |  |  |                             
|Expected term (in years) |  |  | 0.5 years                   
|Volatility               |  |  | 72%                         
|Expected dividend        |  |  | -%                          
|Risk free interest rate  |  |  | 4.37%                       



Under the provisions of SFAS 123(R), the Company recorded $894,000 of stock
compensation expense on our unaudited condensed consolidated statement of operations for the three months ended March 31,
2006. The Company utilized the Black-Scholes valuation model for estimating the fair value of the stock compensation granted both
before and after the adoption of SFAS 123(R).

At March 31, 2006, the total compensation cost related to unvested stock-
based awards granted to employees under the Company's stock option plans but not yet recognized was approximately $3.5 million,
net of estimated forfeitures of $524,000. This cost will be amortized on a ratable basis over a weighted-average period of approximately
2.7 years and will be adjusted for subsequent changes in estimated forfeitures.

8

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Pro-forma DisclosuresFAS 123(R) requires the Company to present pro forma information for the
comparative period prior to adoption as if it had accounted for all our employee stock options under the fair value method of the original
SFAS 123. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation to the prior-year period (dollars in thousands, except per
share data):

Three Months EndedMarch 31,2005Net loss as reported




$                    (6,353)Add:  Stock-based compensation expense included in reported net loss, net of
recovery




-Less:  Total stock-based compensation expense
under fair value based method for all awards, net of related tax effects




(2,155)Pro forma net loss




$                    (8,508)Basic and diluted net loss per share:As reported




$                      (0.16)Pro forma




$                      (0.22)4. Commitments and Contingencies


The Company leases its facilities under operating leases, expiring through March 2011. In conjunction with its
lease of new facilities in Fremont, California, in March 2004 the Company capitalized $731,000 of incentives, which is being amortized
over the seven year lease period. Rental expense was approximately $3.7 million, $2.2 million and $2.4 million in 2005, 2004 and 2003,
respectively. The rental expense in 2005 includes $2.2 million in surplus space charges. Additionally, the Company leases certain
software under operating leases expiring through December 2010.

Changes to the surplus space liability as of March 31, 2006 are as below (in thousands):

Surplus space charges:




AmountSurplus space charges recorded in the year ended December 31, 2005




$            2,186Leasehold improvements abandoned




(386)Facility costs incurred and offset against liability




(223)Ending surplus space liability balance at December 31, 2005




1,577Facility costs incurred and offset against liability during the three months ended
March 31, 2006
(121)Ending surplus space liability balance at March 31, 2006




$            1,456The 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 non-cancelable
purchase orders. As of March 31, 2006, the Company's non-cancelable purchase obligations for wafers, all expected to be delivered
within the next nine months, is $10.7 million.

9
Centillium enters into standard indemnification agreements in the ordinary course of business. Pursuant to
these agreements, Centillium indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or
incurred by the indemnified party, generally its business partners or customers, in connection with certain patent, copyright or other
intellectual property infringement claims by any third parties with respect to its products. The term of these indemnification agreements
is generally perpetual but is typically subject to an overall cap on liability. Centillium has not incurred significant costs to defend lawsuits
or settle claims related to these indemnification agreements and it has no liabilities recorded for these agreements as of March 31,
2006.

The semiconductor and telecommunications industries are characterized by substantial litigation regarding
patent and other intellectual property rights. In August 2004, Fujitsu Limited filed a suit against Centillium Communications, Inc. and
Centillium Japan K.K. ("Centillium Japan") in the Tokyo District Court alleging that Centillium and Centillium Japan infringe
one Japanese patent jointly owned by Fujitsu and Ricoh Co. Ltd. The complaint seeks monetary damages against Centillium and
Centillium Japan. The suit is in process and we do not believe it is feasible to predict or determine the outcome or resolution of this
litigation with any certainty at this point. The Company believes it has meritorious defenses and is continuing to defend itself against
these claims vigorously. The Company has incurred and is likely to continue to incur substantial expenses in its defense against these
claims. In the event of a determination adverse to the Company, it may incur substantial liability and this could have a material adverse
effect on its financial position, results of operations or cash flows.

The Company is involved in other litigation and responding to claims arising in the ordinary course of
business. In December 2005, Accton Technology Corporation ("Accton") filed a suit against Centillium in the Superior
Court of the State of California for the County of Alameda alleging a variety of claims, including breach of contract, breach of express
warranty and fraud and concealment in connection with certain products that Accton purchased in 2002 and 2003.  The complaint
seeks monetary damages against Centillium. Centillium is in the process of evaluating the complaint, and the probable outcome of this
suit cannot be predicted with any certainty and a reasonable range of loss, if any, cannot be estimated. The Company believes it has
meritorious defenses and is continuing to defend itself against these claims vigorously. The Company has incurred and is likely to
continue to incur substantial expenses in its defense against these claims. In the event of a determination adverse to the Company, it
may incur substantial liability and this could have a material adverse effect on its financial position, results of operations or cash
flows.

In addition, Centillium is responding to other claims arising in the ordinary course of business. 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 Centillium 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. 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 Centillium's financial position or results of
operations.


5. Balance Sheet Information

Inventories (in thousands):

March 31,

December 31,2006

2005Work-in-process




$            1,464

$            1,371Finished goods




1,730

2,238$            3,194

$            3,60910
Property and equipment, net (in thousands):

March 31,

December 31,2006

2005Equipment and software




$          28,931

$          28,742Furniture and fixtures




1,107

1,107Leasehold improvements




1,439

1,43931,477

31,288Accumulated depreciation and amortization




(28,242)

(27,759)Property and equipment, net




$            3,235

$            3,529Accrued liabilities:
The components of accrued liabilities are as follows (in thousands):

March 31,

December 31,2006

2005Accrued royalties




$          16,745

$          16,323Accrued other liabilities




2,977

2,810$          19,722

$          19,133Warranty:
Warranty activity for the three months ended March 31, 2006 and 2005 was as follows (in thousands):

March 31,

March 31,2006

2005Balance at beginning of period




$               112

$               164Product warranty accruals




14

(60)Warranty costs incurred




(4)

(14)Balance at end of period




$               122

$                 906. Cash Equivalents and Short-term Investments

Cash equivalents and short-term investments (in thousands):

March 31, 2006GrossUnrealizedAmortized

Gains/

EstimatedCost

(Losses)

Fair ValueCash EquivalentsMoney market funds


$      29,656

$             -

$      29,656Short-term  InvestmentsObligations of the U.S. government and affiliated agencies


22,483

(36)

22,447Total


$      52,139

$           (36)

$      52,10311
December 31, 2005GrossUnrealizedAmortized

Gains/

EstimatedCost

(Losses)

Fair ValueCash EquivalentsMoney market funds


$      29,620

$             -

$      29,620Short-term  InvestmentsObligations of the U.S. government and affiliated agencies


21,945

(45)

21,900Total


$      51,565

$           (45)

$      51,5207. Provision for Income Taxes 


The provision for income taxes for the three months ended March 31, 2006 and 2005 relates to current taxes
payable for Centillium's subsidiaries located in foreign jurisdictions. Income tax expense differs from the expected benefit that was
derived by applying the applicable U.S. federal statutory rate to the loss from operations primarily due to losses that are not currently
benefited. Due to Centillium's loss position, a full valuation allowance has been established against Centillium's deferred tax assets,
consisting primarily of net operating loss carryforwards.

8.	Net Loss Per Share


Basic and diluted net loss per share have been computed using the weighted average number of shares of
common stock outstanding during the period. The following table presents the computation of basic and diluted net loss per share (in
thousands, except per share amounts):

Three Months Ended March 31,2006

2005Net loss


$               (313)

$           (6,353)Basic and diluted weighted average shares used to compute basic and diluted net
loss per share


40,282

38,845Basic and diluted net loss per common share


$             (0.01)

$                (0.16)Centillium has excluded all outstanding warrants and stock options from the calculation of diluted net loss per
share because these securities are antidilutive for all periods presented. These excluded common share equivalents could be dilutive in
the future. Options and warrants of approximately 8,763,000 and 7,183,000 shares of common stock have been excluded at March 31,
2006 and 2005, respectively.


12
9. Comprehensive Net Loss

The following table presents the computation of comprehensive net loss (in thousands):

Three Months Ended March 31,2006

2005Net loss as reported


$              (313)

$           (6,353)Change in unrealized gain on available-for-sale investments


9

(11)Total comprehensive loss


$              (304)

$           (6,364)10. Business Segment Information and Customer Concentration


Centillium operates in one operating segment, broadband communications. Centillium's foreign operations
consist primarily of design centers in India and France, and sales and marketing offices in several locations around the world.
Long-lived assets outside the United States are not significant. Geographic sales information is based on the location of the Company's end
customer.

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

Three Months Ended March 31,2006

2005NEC


32%

29%Sumitomo Electric Industries


32%

36%Lucent Technologies Inc


11%

18%The following is a summary of net revenues by major geographic area (in thousands):

Three Months Ended March 31,2006

2005Japan


$          13,223

$          11,168United States


2,601

3,977Other Asia-Pacific


3,373

1,572Europe


1,057

479$          20,254

$          17,19611. Related Party Transactions


One of Centillium's directors, elected in the first quarter of 2004, is a director of Cadence Design Systems,
Inc. , a company from which Centillium licenses software tools. In December 2005, Centillium entered into an arrangement to license
certain software tools from Cadence under an operating lease that requires quarterly payments through the fourth quarter of 2008. The
first payment of $88,000 was paid to Cadence during the three months ended March 31, 2006 and a liability of $59,000 was recorded
as of March 31, 2006. During 2003, the Company entered into an agreement to license certain software tools from Cadence under an
operating lease that required quarterly payments through the third quarter of 2005. This agreement was amended in December 2004
resulting in a $1.4 million charge for termination of certain licensed software tools that had no future use. The13
Company expanded its
access to these software tools in 2006 due to increased program development levels from the substantially reduced levels in 2005.
Payments to Cadence were $1.1 million for the year ended December 31, 2005. As of December 31, 2005,  the Company had no
liability to Cadence.

This director is also a director of Semiconductor Manufacturing International Corporation (SMIC), a company
from which Centillium purchases foundry services and products. The Company purchased $3.5 million and $2.8 million of foundry
services and products from SMIC for the three months ended March 31, 2006 and 2005, respectively. As of March 31, 2006 and 2005,
the Company had recorded a liability of $1.8 million and $1.1 million due to SMIC, respectively.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



You should read the following discussion and analysis in conjunction with our consolidated financial statements
and the related notes thereto included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on
March 13, 2006. The information in this report is not a complete description of our business or the risks associated with an investment
in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other
reports filed with the SEC.

All statements included or incorporated by reference in this report, other than statements or characterizations of
historical fact, are "forward-looking statements" that are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to, statements concerning
projected net revenues, costs and expenses and gross margin; our accounting estimates, assumptions and judgments; the impact of
new accounting rules related to the expensing of stock options on our future reported results; the impact of the maturation of the DSL
market; our ability to deepen and diversify our DSL business; our ability to continue to control expenses; and the impact of competition
and technological change in the DSL market. Additional forward-looking statements may be 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". These forward-looking statements are based on our current expectations, estimates and projections about our
industry and business, management's beliefs, and certain assumptions made by us, all of which are subject to change. Investors are
cautioned that all forward-looking statements involve risks and uncertainties and that actual results could be materially different from
those expressed in any forward-looking statement. We undertake no obligation to revise or update publicly any forward-looking
statements for any reason.

The section entitled "Risk Factors" and similar discussions in our other SEC reports filed with the
SEC discuss some of the important risk factors that may affect our business, results of operations and financial condition. Copies of our
reports filed with the SEC are available from us without charge and on the SEC's website at www.sec.gov. You should carefully
consider those risks, in addition to the other information in this report and in our other filings with the SEC, before deciding to invest in
Centillium or to maintain or increase your investment.
Overview

Centillium Communications, Inc. (Centillium or the Company) designs, develops and supplies highly-integrated
programmable system-on-a-chip (SoC) solutions that enable high-speed broadband access, which is the delivery of high capacity
bandwidth to consumers and enterprises for networking of data, voice and video signals. Our SoC products incorporate digital and
mixed-signal semiconductors and related software. We serve the Digital Subscriber Line (DSL), Voice over Internet Protocol (VoIP) and
Fiber-To-The-Premises (FTTP), which is also known as optical networking, markets. Our customers are systems vendors and original
equipment manufacturers who sell DSL and optical network equipment, for deployment in central offices and customer premises, and
VoIP equipment, for use in carrier-class and enterprise-class gateways and consumer telephony applications.

We currently market and sell through our direct sales force and through independent sales representatives in
the Asia-Pacific region, Europe, and North America.

14
Since inception, our net revenues have been derived primarily from the sale of our DSL products to two
customers in Japan. These two customers are NEC Corporation (NEC) and Sumitomo Electric Industries, Ltd. (Sumitomo). The low
number of net new DSL subscribers in Japan has continued to impact our DSL revenues compared to its last peak in 2003. The
Asymmetric DSL (ADSL) new subscriber market in Japan shrank dramatically in 2004 and 2005 compared to 2003 and has adversely
impacted our financial performance. We expect that the incremental net subscriber rate in Japan will continue to decrease in 2006 and
beyond.

We have not reported an operating profit for any year since inception and have experienced net losses of
approximately $313,000 and $6.4 million for the three months ended March 31, 2006 and 2005, respectively. We expect to continue to
incur operating losses and negative cash flows.

We must achieve substantial revenue growth and continue to control expenses to improve our financial position.
Our ability to achieve the necessary revenue growth will depend on how successful we are in diversifying our DSL business to markets
outside of Japan and diversifying our business by targeting opportunities in the FTTP and VoIP markets. During the first quarter of
2006, we announced our MaximusTM III and PharosTM III ADSL chipsets for the central office. These chipsets are optimized to
bring high definition quality to next-generation video and IPTV applications for service providers worldwide. Additionally, we announced
during the first quarter of 2006 our newest optical transceiver chipset families, ZeusTM 2 and ApolloTM 2. The Zeus 2 and
Apollo 2 are the industry's first fully integrated optical transceiver product families in CMOS technology that provide optical module
vendors and service providers with transmission rates up to 2.5Gbps, with a high level of reliability, increased flexibility, faster
time-to-market and reduced bill of materials cost. During the third quarter of 2005, we announced our entry into the VDSL market with
eXtremeVDSL2TM, a highly optimized and flexible solution that will complement our FTTP initiative and extend our DSL product
portfolio. In the second quarter of 2005, we announced the PalladiaTM 400, which delivers
the industry's first integrated VoIP solution for the ADSL market. In 2004, we introduced Atlanta 100, which provides a secure high
performance router solution for the CPE market with superior VoIP capability, and our Voice Services Platform (VSP), which is
designed as the consumer electronics industry's turnkey platform for the development and deployment of carrier-grade VoIP
products.

We announced in 2004 a line of optical access products for the developing FTTP market. Our FTTP revenues
were $1.2 million in the three months ended March 31, 2006, and $3.8 million and $877,000 for the years ended December 31, 2005
and 2004, respectively. Growth, if any, in our FTTP revenues in 2006 and beyond is dependent on qualification of our FTTP products
and the purchase of significant quantities of these products by our customers.  One such customer in Japan, which we had expected to
account for a significant percentage of this growth, has postponed purchases because our product did not meet a previously waived
requirement. Moreover, for this customer, our product must now meet additional requirements and we are in the process of redesigning
this product. This is expected to significantly slow our anticipated growth in optical revenues in 2006. We will also incur further costs to
implement these customer requirements. Even if we are successful, we expect the delay to defer revenue to at best the fourth quarter
of 2006 and possibly beyond. However, there can be no assurance that our product will meet customer requirements now or in the
future and that even if they do meet these requirements, that our customers will purchase our product.

In addition to our expanded product lines, we have also increased our sales and marketing presence outside of
Japan.  We reduced our operating expenses, primarily in the research and development area. The investments we made in our design
center in India and in attracting talented engineers resulted in our ability to reduce expenses by conducting more of our research and
development in India, where costs are substantially lower than in the United States.

In 2005, we recorded total charges of $2.2 million for surplus space in a building at our Fremont, California
location, which we abandoned. In addition during 2005, we recorded a $1.0 million charge for licensed software tools, which were
written off as these tools are not expected to have future alternative uses. During the fourth quarter of 2004, we restructured our
organization by implementing a workforce reduction and terminating a $1.4 million license for certain software design tools. We also
cancelled certain development programs to better focus on higher growth opportunities. The total expense related to the reduction in
force was $1.3 million, of which $1.0 million related to research and development personnel. These initiatives coupled with a 7%
increase in 2005 revenues, an increase in the 2005 gross margin, as well as further expense reductions resulted in a significant
decrease in our net

15
loss for 2005. Our net loss decreased by approximately $31.8 million, or 74%, to a net loss of $11.3 million for 2005
as compared to $43.1 million for 2004.

Our planned actions for 2006 are based on certain assumptions concerning the adoption of broadband
technologies, the rate of DSL subscriber growth, the successful deployment of our FTTP products in Japan and the cost and expense
structure of our business. These assumptions could prove to be inaccurate. If current economic conditions deteriorate to an unexpected
degree, or if our planned actions are not successful in achieving our goals, there could be additional adverse impacts on our revenues,
profitability, financial position, or cash flows. In that case, we might need to modify our strategic focus and restructure our business to
realign our resources and achieve additional cost and expense savings.

Net Revenues:  DSL revenues accounted for 82%, 79%, 94% and 98% of our net revenues for the three
months ended March 31, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively. NEC accounted for 32%,
26%, 42% and 49% of our net revenues for the three months ended March 31, 2006 and for the years ended December 31, 2005, 2004
and 2003, respectively. Sumitomo accounted for 32%, 35%, 35% and 31% of our net revenues for the three months ended March 31,
2006 and for the years ended December 31, 2005, 2004 and 2003, respectively. Lucent Technologies accounted for 11% and 13% of
net revenues for the three months ended March 31, 2006 and for the year ended December 31, 2005. No other customer accounted for
10% or more of our net revenues in any period during the three months ended March 31, 2006 and during the years ended December
31, 2005, 2004 and 2003.

We believe revenues from our DSL products will continue to decrease as a percentage of net revenues due to
expected decreases in DSL revenue in Japan and to the anticipated growth in revenues from VoIP and FTTP products. We believe that
our three largest customers will continue to account for a substantial portion of our net revenues in 2006.

Our sales have historically been denominated in U.S. dollars, and major fluctuations in currency and exchange
rates could materially impact our customers' demand and pricing overall.

The cycle for test, evaluation and adoption of our products by customers can range from three to more than six
months, with an additional three to more than nine months before a customer commences volume production of equipment
incorporating our products. Additionally, this cycle may be as long as 18 to 24 months for our VoIP products. Due to this lengthy sales
cycle, we may experience significant delays from the time we incur expenses for research and development, marketing and selling, and
investment in inventory, to the time we generate corresponding revenues, if any. We anticipate that the rate of orders may vary
significantly from quarter to quarter. If anticipated shipments in any quarter do not occur when expected, expenses and inventory levels
could be disproportionately high or low, and our results of operations for that quarter, and potentially for future quarters, would be
materially and adversely affected.

Competition and technological change in the rapidly evolving DSL market has and may continue to influence
our quarterly and annual net revenues and results of operations. Average selling prices of our products tend to be higher at the time of
introduction and decline over time due to competitive pressures. We expect this pattern to continue with existing and future products.
Our average selling prices are also impacted by our customer concentration and product mix.

Cost of Revenues:  We are a fabless semiconductor company and we outsource the wafer fabrication,
assembly and testing of our products. Our cost of revenues primarily consists of purchased finished wafers, assembly and test services,
royalties, overhead associated with procurement and production engineering, provisions for excess and obsolete inventories, and
product warranty costs.

Research and Development Expenses:  Research and development expenses consist primarily of
employee compensation and related personnel expenses, fees paid to consultants, non-recurring engineering, prototype costs,
evaluation and testing of pre-production parts and engineering design tools. We expense our research and development costs as they
are incurred. Several components of our research and development effort require significant expenditures, the timing of which can
cause significant quarterly variability in our expenses.

16
Selling, General and Administrative Expenses:  Selling, general and administrative (SG&A)
expenses include employee compensation and related personnel expenses in sales and marketing, product marketing, applications
engineering, and corporate functions including accounting, finance, legal, human resources and information systems.

Interest Income and Other, Net:  Interest income consists of interest earned on cash and cash equivalent
balances and short-term investments.

Provision for Income Taxes:  Income tax expense was $34,000 and $40,000 for the three months ended
March 31, 2006 and 2005, respectively. The provisions for income taxes relate to current taxes payable for income generated by the
Company's subsidiaries located in foreign jurisdictions. Income tax expense differs from the expected benefit that was derived by
applying the applicable U.S. federal statutory rate to the loss from operations primarily due to losses that are not currently benefited.
Due to our loss position, a full valuation allowance has been established against our deferred tax assets, consisting primarily of net
operating loss carry-forwards.

Critical Accounting Policies
General:  Our discussion and analysis of our financial condition and results of operations are based
upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires that we make assumptions, estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities reported in the condensed consolidated financial statements and accompanying notes. On an on-going basis, we evaluate
our estimates and assumptions related to revenue recognition, sales returns and allowances, allowance for doubtful accounts,
inventories, warranty and litigation and contingencies.  We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in
the preparation of our consolidated financial statements.

Revenue Recognition:  Revenues related to product sales are generally recognized when the products
have been shipped and risk of loss has passed to the customer, collection of the resulting receivable is reasonably assured, persuasive
evidence of an arrangement exists, and the price is fixed or determinable. If sales arrangements contain customer-specific acceptance
requirements, revenue is deferred and is recognized upon receipt of customer acceptance.

Stock Compensation:  We adopted Statement of Financial Accounting Standards ("SFAS")
No. 123 (revised 2004), "Share-Based Payment," effective January 1, 2006. SFAS 123(R) requires the
recognition of the fair value of stock compensation in net income. SFAS 123(R) is a new and very complex accounting standard, the
application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such
as stock price volatility and expected option lives, as well as expected option forfeiture rates to value equity-based compensation.

Sales Returns and Allowances:  We establish, upon shipment of our products, a provision for estimated
returns. Under certain circumstances, we allow our customers to return products and a provision is made for such returns. Our estimate
of product returns is based on contractual terms or sales agreements, historical experience and expectation of future conditions.
Additional provisions and allowances may be required, resulting in decreased net revenue and gross profit, should we experience
increased product returns.

Allowance for Doubtful Accounts:  We perform ongoing credit evaluations of our customers and adjust
credit limits, as determined by our review of current credit information. We record allowances for doubtful accounts for estimated losses
based upon specifically identified amounts that we believe to be uncollectible. We record additional allowances based on certain
percentages of our aged receivables, which are determined based on historical experience and our assessment of the general financial
condition of our customer base. If our actual collections experience changes, revisions to our allowances may be required. We have a
limited number of customers with

17
individually large amounts due at any given balance sheet date. Any unanticipated change in one of
those customers' creditworthiness or other matters affecting the collectibility of amounts due from such customers could have a material
effect on our results of operations in the period in which such changes or events occur.

Inventories:  Inventories are stated at the lower of standard cost, which approximates actual cost, or net
realizable value. Cost is based on a first-in, first-out basis. We perform detailed reviews of the net realizable value of inventories, both
on hand as well as for inventories we are committed to purchase with consideration given to deterioration, obsolescence, and other
factors. Currently, we use a nine-month rolling forecast based on the type of products, anticipated product orders, product order history,
forecasts and backlog. We compare our current or committed inventory levels to these forecasts on a regular basis and any adverse
changes to our future product demand may result in increased writedowns, resulting in decreased gross profit. In the event we
experience unanticipated demand and are able to sell previously written down inventories, gross profit will increase.

Warranty:  A limited warranty is provided on our products generally for a period of one year and
allowances for estimated warranty costs are recorded during the period of sale. While we engage in product quality programs and
processes, including monitoring and evaluating the quality of our suppliers, our warranty obligation is affected by product failure rates,
the cost of replacing chipsets, rework costs and freight incurred in replacing a chipset after failure. We monitor chipset returns for
warranty and maintain a reserve for the related warranty expenses based on historical experience of similar products. The
determination of such allowances requires us to make estimates of product return rates and expected costs to repair or replace the
products under warranty. We periodically assess the adequacy of the warranty liability and adjust such amounts as necessary.

Litigation and Contingencies:  From time to time, we receive various inquiries or claims in connection
with patent and other intellectual property rights. In certain cases, we have accrued estimates of the amounts we expect to pay upon
resolution of such matters. Should we not be able to secure the terms we expect or should the terms become more favorable than the
terms we expect, these estimates may change and may result in increased accruals, resulting in decreased profit or decreased
accruals, resulting in increased profit, respectively.

The above items are not a comprehensive list of all of our accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated by generally accepted accounting principles in the United States with no
need for our management's judgment in their application. There are also areas in which our management's judgment in selecting any
available alternative would not produce a materially different result.

Results of Operations -- Comparison of First Quarters of 2006 and 2005

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

Three Months Ended March 31,2006

2005Net revenues



100 %

100 %Cost of revenues



43

51Gross profit



57

49Operating expenses:Research and development



33

52Selling, general and administrative



28

35Total operating expenses



61

87Operating loss



(4)

(38)Interest income and other, net



2

1Loss before provision for income taxes



(2)

(37)Provision for income taxes



*

*Net loss



(2)%

(37)%_____________
* Less than 1%

18
Net Revenues. The following tables present net revenues, cost of revenues and gross profit for
the three months ended March 31, 2006 and 2005 (in thousands except for percentages):

Three Months Ended

Three Months EndedMarch 31, 2006

March 31, 2005% of Net


% of Net

Increase/

%Amount

Revenues

Amount

Revenues

(Decrease)

ChangeNet revenues
$    20,254

100%

$      17,196

100%

$       3,058

18%Cost of revenues
8,741

43%

8,733

51%

8

*Gross Profit
$       11,513

57%

$       8,463

49%

$       3,050

36%_____________
* Less than 1%

Our revenues are generated principally by sales of our DSL, VoIP and FTTP products. The following tables
present net revenues for each of our major product lines (in thousands except for percentages):

Three Months Ended

Three Months EndedMarch 31, 2006

March 31, 2005% of Net


% of Net

Increase/

%Products
Amount

Revenues

Amount

Revenues

(Decrease)

ChangeDSL
$     16,509

82%

$     14,960

87%

$        1,549

10%VoIP
2,535

12%

2,236

13%

299

13%FTTP
1,210

6%

-

-%

1,210

*Net revenues
$    20,254

100%

$      17,196

100%

$       3,058

18%_____________
* Not meaningful


Net revenues in the three months ended March 31, 2006 were $20.3 million, compared with $17.2 million in the
three months ended March 31, 2005, an increase of $3.1 million, or 18%. Revenues from our DSL products accounted for $16.5 million,
or 82%, of net revenues in the three months ended March 31, 2006, as compared to $15.0 million, or 87%, of net revenues in the
comparable period of 2005. The growth in DSL revenues was primarily due to higher unit shipments and to a lesser extent, offset by a
decrease in the average selling price of our DSL products. Average selling prices of products are expected to decline as they mature.
Historically, competition in the semiconductor industry has driven down the average selling prices of products. Japan's DSL market has
been an important part of our business, and new DSL subscribers in Japan has been a significant driver of consumption for Centillium's
DSL products. However, we expect that the incremental net subscriber rate in Japan will continue to decrease in 2006 and beyond.


Revenues from VoIP products accounted for $2.5 million of revenues in the three months ended March 31,
2006 as compared to $2.2 million in the three months ended March 31, 2005, or 12% and 13% of net revenues, respectively. We
expect our VoIP revenues to continue to grow in absolute dollars and as a percentage of revenues in 2006. Revenues from our FTTP
products accounted for $1.2 million of revenues in the three months ended March 31, 2006 as compared to none in the three months
ended March 31, 2005, or 6% and 0% of net revenues, respectively. We expect our FTTP revenues to continue to grow in 2006, but
this growth is highly dependent on qualification of our FTTP products and the purchase of significant quantities of these products by our
customers. One such customer in Japan has postponed purchases because our product did not meet a previously waived

19
requirement.
This is expected to significantly slow our anticipated growth in optical revenues in 2006 and we expect the delay to defer revenue to at
best the fourth quarter of 2006 and possibly beyond.


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

Three Months Ended March 31,2006

2005NEC


32%

29%Sumitomo Electric Industries


32%

36%Lucent Technologies Inc


11%

18%Japan's DSL market has been an important part of our business, and net new DSL subscribers in Japan has
been a significant driver of consumption for Centillium's DSL products. Therefore, the continuing low number of net new DSL
subscribers in Japan will likely continue to impact our future revenues. Revenues from Japan comprised 65% of our net revenues in
both the three months ended March 31, 2006 and 2005. Revenues from Japan, which have been largely attributable to our DSL
products, increased by $2.0 million to $13.2 million in the three months ended March 31, 2006 as compared to $11.2 million in the three
months ended March 31, 2005. However, we believe there will be a decreasing number of new DSL subscribers in Japan in the
remaining nine months of 2006, which will likely impact our future revenues.

Gross Profit.  Gross profit represents net revenues less the cost of revenues. Gross profit
increased to $11.5 million in the three months ended March 31, 2006, as compared to $8.5 million in the three months ended March 31,
2005 while the gross margin increased to 57% from 49% for the respective periods. The increase in gross profit was  attributable to the
significant increases in DSL, VoIP and FTTP revenues and lower wafer, assembly and test costs and product mix. Our future gross
margins may be affected by pricing pressures from our customers and competitors, fluctuations in unit volume, fluctuation in silicon
wafer costs, changes in the costs charged by our assembly and test subcontractors and changes in product mix, among other
factors.

Research and Development Expenses.  Research and development expenditures decreased by
26% to $6.6 million for the three months ended March 31, 2006 from $9.0 million for the three months ended March 31, 2005. The $2.4
million decrease resulted primarily from $0.3 million in decreased employee compensation and related personnel expenses, $0.6 million
in consulting expense, $0.2 million in engineering design tools expense, $1.3 million in engineering evaluation board and pre-production
expenses and $0.3 million in facilities partially offset by an increase of $0.3 million in stock compensation expense due to the adoption
of SFAS 123(R). The decreased expenses in employee compensation and related personnel expenses was primarily attributable to
lower headcount in the United States due to decreases in headcount in 2005. The decrease in engineering evaluation board and pre-
production expenses was due to the low level of tapeouts during the quarter. However, we expect research and development expenses
to be significantly higher in the second quarter of 2006 compared to the first quarter of 2006 as we anticipate a higher level of program
development. We hold 32 U.S. patents and 8 foreign patents, and we maintain an active program of filing for and acquiring additional
U.S. and foreign patents in the broadband communications field.
Selling, General and Administrative Expenses.  Selling, general and administrative expenses
decreased by 5% to $5.8 million for the three months ended March 31, 2006 from $6.1 million for the three months ended March 31,
2005. The $0.3 million decrease resulted primarily from $0.8 million in decreased employee compensation and related personnel
expenses, $0.2 million in public company compliance, and $0.1 million in travel partially offset by an increase of $0.5 million in stock
compensation expense due to the adoption of SFAS 123(R) and $0.3 million in legal expenses. We expect that selling, general and
administrative expenses in the second quarter of 2006 will be flat in absolute dollars and higher as a  percentage of revenues compared
to the first quarter of 2006. However, there can be no assurance that our selling, general and administrative expenses will not further
increase in the future or that we will develop a cost structure, which will lead to profitability under current and expected revenue
levels.

20
Interest Income, Net.  Interest income, net, was $616,000 for the three months ended March 31,
2006 as compared to $299,000 for the three months ended March 31, 2005. The increase was due to the impact of higher interest rates
in 2006 and an increase in funds available for investment in 2006.
Provision for Income Taxes.  Income tax expense was $34,000 for the three months ended March
31, 2006, as compared to $40,000 for the three months ended March 31, 2005. The provisions for income taxes relate to current taxes
payable for income generated by Centillium 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 our loss position, a full valuation allowance has been established against our deferred tax assets,
consisting primarily of net operating loss carry-forwards.

Recent Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, "Accounting
Changes and Error Corrections-a Replacement of APB Opinion No. 20 and FASB Statement No. 3" (SFAS 154), which requires
retrospective application to prior periods' financial statements of every voluntary change in accounting principal unless it is
impracticable to do so. SFAS 154 is effective for accounting changes and corrections of errors beginning in fiscal 2007.  We do not
expect the adoption of this standard to have a material effect on our financial position or results of operations.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of
APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of assets exchanged. The guidance in that Opinion,
however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets that do not have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for
nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 did not have a
material impact on the our financial position and results of operations.

In November 2004, the FASB issued Statement No. 151 "Inventory  Costs, an amendment of ARB No. 43,
Chapter 4," (SFAS 151), which amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing" to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage. This statement now requires that these
costs be expensed as current period charges. In addition, this statement requires that the allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. Our adoption of SFAS 151 on January 1, 2006 did not have
a material effect on our financial position, results of operations or cash flows.

In various areas, including revenue recognition and stock option accounting, accounting standards and
practices continue to evolve. Additionally, the SEC and the FASB's Emerging Issues Task Force continue to address revenue and stock
option related accounting issues. The management of Centillium believes it is in compliance with all of the rules and related guidance
as they currently exist. However, any changes to U.S. generally accepted accounting principles in these areas could impact Centillium's
future accounting.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through operating activities and the sale of
equity securities. At March 31, 2006, we had $63.5 million in cash, cash equivalents and short-term investments as compared to $61.3
million at December 31, 2005.

Operating activities for the three months ended March 31, 2006 provided $2.1 million in cash primarily due to
our $0.3 million net loss adjusted for non-cash expenses of $0.9 million for stock compensation expense and $0.6 million for
depreciation and amortization, increases in accounts payable of $1.3 million and $0.6 million in accrued


21
liabilities and decreases in
inventories of $0.4 million and $0.1 million in other current assets. Net cash provided in operating activities was partially offset by
increases in accounts receivable of $1.1 million and decreases of $0.4 million in accrued compensation and related expenses and $0.2
million in other long-term liabilities. Both the inventories decrease and the accounts payable increase at March 31, 2006 was primarily
due to the timing of inventory purchases related to the first quarter revenues. The increase in accounts receivable resulted from higher
shipments in the three months ended March 31, 2006 as compared to the three months ended March 31, 2005.

Net cash used in investing activities was $0.9 million in the three months ended March 31, 2006. Net cash used
in investing activities related to sales and maturities of short-term investments of $27.5 million, offset by purchases of short-term
investments of $28.0 million and the purchase of $0.3 million of property and equipment. Property and equipment purchases relate
principally to the purchase of engineering design tools, lab equipment and computer hardware to support our research and
development. We expect expenditures for property and equipment to continue at a similar level in the near term to support our current
operating and research and development activities.

Net cash provided by financing activities was $0.3 million in the three months ended March 31, 2006, which
consisted of net proceeds from the exercise of stock options under the Company's stock plans.

Our principal source of liquidity as of March 31, 2006 consisted of $63.5 million of cash and cash equivalents,
and short-term investments. We believe our cash, cash equivalents and investment securities will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next twelve months. The rate at which we will consume cash will
be dependent on the cash needs of future operations that will, in turn, be directly affected by various risks and uncertainties, including,
but not limited to, the levels of demand for our products and other risks listed in the "Risk Factors" section.

Contractual Obligations

Significant contractual obligations and commercial commitments are shown in the table below (in thousands):

Payments Due by PeriodLess than 1





More ThanTotal

Year

1-3 Years

3-5 Years

5 YearsOperating leases
$      12,423

$        3,432

$        8,045

$           946

$               -Purchase obligations
10,664

10,664

-

-

-Total
$      23,087

$      14,096

$        8,045

$           946

$               -We have taken substantial steps during the second half of 2004 and during 2005 to reduce losses and preserve
cash and anticipate operating expenses in 2006 to be less than 2005. Our future capital requirements depend on many factors that
affect our research and development, and sales and marketing activities. We believe that existing cash and investment securities and
anticipated cash flows from operations will be sufficient to support our current operating plan for 2006. These cash flow and operating
results 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
and marketing, and to fund 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
in the long term, we may seek to raise additional funds through public or private debt or equity financings. The sale of22
of equity or debt
securities could result in additional dilution to our stockholders, and we cannot be certain that additional financing will be available in
amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to reduce the
scope of our planned product development and sales and marketing efforts, which could harm our business, financial condition and
operating results.

Off-Balance Sheet Arrangements

As of March 31, 2006, we did not have any significant off-balance-sheet arrangements, as defined in Item
303(a)(4)(ii) of SEC Regulation S-K.ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKThe primary objective of our 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, with maturities of less than eighteen months. 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 March 31, 2006, all of our investments were in money market funds, high quality commercial paper and government and non-
government debt securities. A hypothetical 100 basis point increase in interest rates would result in an approximate $72,000 decrease
in the fair value of our available-for-sale securities as of March 31, 2006.ITEM 4. CONTROLS AND PROCEDURESEvaluation 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 defined in Rules 13a-15(c) and 15(d)-15(e) under the Exchange Act) as of the end of the period covered by
this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our management, including our Chief
Financial Officer has 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 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.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In August 2004, Fujitsu Limited filed a suit against Centillium and Centillium Japan
K.K. ("Centillium Japan") in the Tokyo District Court alleging that Centillium and Centillium Japan infringe one Japanese
patent jointly owned by Fujitsu and Ricoh Co. Ltd. The complaint seeks monetary damages against Centillium and Centillium Japan.
Centillium is in the process of evaluating the complaint, and the probable outcome of this suit cannot be predicted with any certainty
and a reasonable range of loss, if any, cannot be estimated. An unfavorable ruling could have a material adverse impact on Centillium's
financial position or results of operations.

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In December 2005, Accton Technology Corporation ("Accton") filed a suit
against Centillium in the Superior Court of the State of California for the County of Alameda alleging a variety of claims, including
breach of contract, breach of express warranty and fraud and concealment in connection with certain products that Accton purchased in
2002 and 2003. The complaint seeks monetary damages against Centillium. Centillium is in the process of evaluating the complaint,
and the probable outcome of this suit cannot be predicted with any certainty and a reasonable range of loss, if any, cannot be
estimated. An unfavorable ruling could have a material adverse impact on Centillium's financial position or results of operations.

In addition, we are responding to other claims arising in the ordinary course of
business. We intend to defend ourselves vigorously in these matters. Our management believes that it is unlikely that the outcome of
these matters will have a material adverse effect on our financial statements, although there can be no assurance in this regard.

ITEM 1A. RISK FACTORS

Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks
described below, in addition to the other cautionary statements and risks described elsewhere and the other information contained in
our Annual Report on Form 10-K, this Report and in our other filings with the SEC, including subsequent reports on Forms 10-Q and 8-K.
The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually
occurs, our business, financial condition and results of operations could be seriously be harmed.

Risks Related to Our Business

We have a history of losses and may experience losses in the future.

We have not reported an operating profit for any year since our inception and have experienced a net loss of
$0.3 million in the first quarter of 2006 and net losses of $11.3 million, $43.1 million and $13.4 million in 2005, 2004 and 2003,
respectively. With the adoption of SFAS 123(R), we will not be profitable in the foreseeable future and it will have a material adverse
impact on our operating results.

Our success may depend in large part upon the adoption and utilization of our products and technology, as well
as our ability to effectively maintain existing relationships and develop new relationships with customers and strategic partners. If we do
not succeed in doing so, we may not achieve or maintain profitability on a timely basis or at all. In particular, we intend to expend
significant financial and management resources on product development, sales and marketing, strategic relationships, technology and
operating infrastructure. This includes our focus on development of new optical network products and improvements to our DSL
products. As a result, we may incur additional losses and continued negative cash flow from operations for the foreseeable future and
may not achieve or maintain profitability.

Because of our lack of diversity in geographic sources of revenues, the slowdown in deployment of
DSL in Japan and other factors have affected and may continue to adversely affect our business and operating results.

Historically, our revenues have been largely dependent on the growth of new DSL subscribers in Japan.
Revenues from Japan comprised 65% of our net revenues in both the three months ended March 31, 2006 and 2005. Revenues from
Japan, which have been largely attributable to our DSL products, increased by $2.1 million to $13.2 million in the three months ended
March 31, 2006 as compared to $11.2 million in the three months ended March 31, 2005. However, we believe there will be a
decreasing number of new DSL subscribers in Japan in the remaining nine months of 2006 and beyond, which will likely impact our
future revenues.

Because a substantial portion of our revenues have been derived from sales into Japan, our revenues have
been heavily dependent on developments in the Japanese market. Our sales in Japan have been historically denominated

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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. While part of our strategy is to diversify the geographic
sources of our revenues, failure to further penetrate markets outside of Japan could harm our business and results of operations and
subject us to increased currency risk.

We derive a substantial majority of our revenues from DSL products, and our failure to diversify our
sources of our revenues could harm our business and operating results.

Historically, our revenues have been derived primarily from the sale of our DSL products. DSL revenues
accounted for 82%, 79%, 94% and 98% of our net revenues for the three months ended March 31, 2006 and the years ended
December 31, 2005, 2004 and 2003, respectively. If we are unsuccessful in generating meaningful sales of our VoIP and FTTP
products, we may not be able to achieve or sustain profitability.

We depend on a few customers, and if we lose any of them, our sales and operations will
suffer.

We sell our products primarily to network equipment manufacturers. NEC accounted for 32%, 26%, 42% and
49% of our net revenues for the three months ended March 31, 2006 and the years ended December 31, 2005, 2004 and 2003,
respectively. Sumitomo accounted for 32%, 35%, 35% and 31% of net revenues for the three months ended March 31, 2006 and the
years ended December 31, 2005, 2004 and 2003, respectively. Lucent Technologies accounted for 11% and 13% of net revenues for
the three months ended March 31, 2006 and year ended December 31, 2005. No other customer accounted for 10% or more of our net
revenues in any period during the three months ended March 31, 2006 and during the years ended December 31, 2005, 2004 and
2003. We do not have contractual volume commitments with these customers; instead we sell our products to them on an order-by-
order basis. Our ability to maintain relationships with these large customers is essential to our ability to meet financial metrics. However,
this dependence means that we are especially susceptible to factors that affect their purchasing decisions that are, in many instances,
outside of our direct control. These factors include, among other things:

- the fact that many of our customers have pre-existing or concurrent relationships with our competitors that
may affect the customers' decision to purchase our products;
- the success of our largest OEM customers; and
- the continued demand for our customers' systems products.

As a result, we may not be able to maintain or increase sales to certain of our large customers for various
reasons. Our concentration of business and on-going relationships with our major customers may also deter other potential customers
who compete with these existing customers from buying our products. 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.

We anticipate lower margins as products mature and as we experience aggressive competition, which could
adversely affect our profitability.

We expect the average selling prices of our products to decline as they mature. Historically, competition in the
semiconductor industry has driven down the average selling prices of products. If we price our products too high, our customers may
use a competitor's product or an in-house solution. To maintain profit margins, we must reduce our costs sufficiently to offset declines in
average selling prices, or successfully sell proportionately more new products with higher average selling prices. Yield or other
production problems, or shortages of supply may preclude us from lowering or maintaining current product costs.

We have also experienced more aggressive price competition from competitors in market segments in which we
are attempting to expand our business. These circumstances may make some of our products less competitive and we may be forced
to decrease our prices significantly to win a design. We may lose design opportunities or may experience overall declines in gross
margins as a result of increased price competition.

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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 entered or may enter the market
segments adjacent to or addressed by our products. These competitors may 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.

Third-party claims regarding intellectual property matters could cause us to stop selling our products,
pay monetary damages or obtain licenses on adverse terms.

There is a significant risk that third parties, including current and potential competitors, will claim that our
products, or our customers' products, infringe on their intellectual property rights. From time to time, third parties have asserted, and
may in the future assert, patent, copyright, trademark or other intellectual property rights to technologies that are important to our
business and have demanded or in the future may demand that we license their patents and technology. Any such litigation, whether or
not determined in our favor or settled by us, would be costly and divert the attention of our management and technical personnel.
Inquiries with respect to the coverage of our intellectual property could develop into litigation. In such a litigation, a court could issue a
preliminary injunction that would require us to withdraw or recall certain products. Moreover, we cannot assure you that we would
prevail in litigation given the complex technical issues and inherent uncertainties in intellectual property litigation. In the event of an
adverse ruling for an intellectual property infringement claim, we could be required to obtain a license or pay substantial damages
(including treble damages) or have the sale of our products stopped by a permanent 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 also have obligations to indemnify our customers under some circumstances for infringement of third-party
intellectual property rights. We have also received requests from certain customers to include increasingly broad indemnification
provisions in our agreements with them. These indemnification provisions may, in some circumstances, result in liability for
combinations of components or system level designs and consequential damages and/or lost profits and the costs to us could be
substantial and our business could be harmed. Even if claims against us are not valid or successfully asserted, these claims could
result in significant costs and a diversion of the attention of management and other key employees to defend. 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.

In August 2004, Fujitsu Limited filed a suit against Centillium and Centillium Japan K.K ("Centillium
Japan") in the Tokyo District Court alleging that Centillium and Centillium Japan infringe one Japanese patent jointly owned by
Fujitsu and Ricoh Co., Ltd. The complaint seeks significant monetary damages against Centillium and Centillium Japan. The suit is in
process and we do not believe it is feasible to predict or determine the outcome or resolution of this litigation with any certainty at this
point.  We believe we have meritorious defenses and we are continuing to defend ourselves against these claims vigorously. We have
already incurred and are likely to continue to incur substantial expenses in our defense against these claims. In the event of a
determination adverse to us, we may incur substantial liability and this could have a material adverse effect on our financial position,
results of operations or cash flows.

We operate in the highly cyclical semiconductor industry, which is subject to significant downturns.

The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change,
rapid product obsolescence and price erosion, evolving technical standards, short product life cycles and wide fluctuations in product
supply and demand. From time to time these and other factors, together with changes in

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general economic conditions, cause significant
upturns and downturns in the industry, and in our business in particular. Periods of industry downturns have been characterized by
diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. The
semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our
ability to ship product compared to our competitors and result in deteriorating market share. These factors have caused substantial
fluctuations in our revenues and results of operations. We have experienced these cyclical fluctuations in our businesses in the past
and we may experience cyclical fluctuations in the future.

If we are unable to develop and introduce new products successfully and in a cost-effective and
timely manner or to achieve market acceptance of our new products, our operating results would be adversely affected.

Our future success is dependent upon our ability to develop new semiconductor products for existing and new
markets, introduce these products in a cost-effective and timely manner and have these products selected by leading equipment
manufacturers for design into their own new products. The development of new silicon products is highly complex, and from time to
time we have experienced delays in completing the development and introduction of new products and lower than anticipated
manufacturing yields in the early production of such products. Our ability to develop and deliver new products successfully will depend
on various factors, including our ability to:

- timely and accurately predict market requirements and evolving industry standards;
- successfully define new products;
- timely and accurately identify opportunities in new markets;
- timely complete and introduce new product designs;
- scale our operations in response to changes in demand for our products and services;
- license any desired third party technology or intellectual property rights;
- timely qualify and obtain industry interoperability certification of our products and the products of our
customers into which our products will be incorporated;
- obtain sufficient foundry capacity and packaging materials;
- achieve high manufacturing yields;
- shift our products to smaller geometry process technologies to achieve lower cost and higher levels of
design integration; and
- gain market acceptance of our products and our customers' products.

If we are not able to develop and introduce new products successfully and in a cost-effective and timely
manner, we may need to explore purchasing new products and if unsuccessful, we may be unable to attract new customers or to retain
our existing customers as these customers may choose or transition to other companies that can meet their product development
needs, which would materially and adversely affect our results of operations. For example, one such FTTP customer in Japan has
delayed orders due to its customers' requirements until at best the fourth quarter of 2006 and possibly beyond.

We depend on sole or limited source suppliers for the manufacture of our products.

As a fabless semiconductor that neither owns nor operates a fabrication or manufacturing facility, we are heavily
dependent on certain suppliers. We obtain certain parts, components and packaging used in the delivery of our products from sole or
limited sources of supply. For example, we obtain certain semiconductor wafers on a sole source basis from Taiwan Semiconductor
Manufacturing Co., Ltd and Semiconductor Manufacturing International

27

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Corporation. Developing and maintaining these strategic
relationships with our vendors is critical for us to be successful. Any of our sole or limited source suppliers may:

- experience delays in meeting our customer demand on a timely basis, or at all;
- enter into exclusive arrangements with our competitors;
- stop selling their products or components to us at commercially reasonable prices;
- refuse to sell their products or components to us at any price; or
- be subject to production disruptions caused by power outages, earthquakes and financial difficulties.

Developing and maintaining these strategic relationships with our vendors is critical for us to be successful,
but our business is susceptible to disruption, and our results of operations can be adversely affected, by any inability to do so.  In
periods of high demand in the semiconductor market, we may experience delays in meeting our capacity demand for components and
as a result may be unable to deliver products to our customers on a timely basis. In addition, we could experience similar delays due to
technical and quality control problems at our suppliers' facilities. If any of these events occur, or if our suppliers' facilities suffer any
damage or disruption, we may not be able to meet our customer demand on a timely basis, or at all, and may need to successfully
qualify an alternative supplier in a timely manner in order to not disrupt our business. We typically require a significant period of time to
qualify a new supplier or process before we can begin shipping products. If we cannot accomplish this qualification in a timely manner,
we would experience a significant interruption in supply of the affected products. If we are unable to secure sufficient capacity at our
suppliers' existing facilities, or in the event of a closure or significant delay at any of these facilities, our relationships with our customers
would be harmed and our market share and operating results would suffer as a result.

Sales of our products depend on the widespread adoption of broadband access services,
especially DSL, VoIP and FTTP. If the demand for broadband access service does not increase, we may not be able to
generate substantial sales.

Sales of our products depend on the increased use and widespread adoption of broadband access services,
and DSL services in particular, and the ability of telecommunications service providers to market and sell broadband access services.
Our business would be harmed, and our results of operations and financial condition would be adversely affected, if the use of
broadband access services does not increase as anticipated. Certain critical factors will likely continue to affect the development of the
broadband access service market. These factors include:

- inconsistent quality and reliability of service;
- lack of availability of cost-effective, high-speed service;
- lack of interoperability among multiple vendors' network equipment;
- congestion in service providers' networks;
- inadequate security; and
- slow deployment of new broadband services over DSL lines.

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Rapid changes in the market for broadband access chip sets may render our chip sets obsolete or
unmarketable.

The market for chip sets for our 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 the sales cycle for our products typically lasts up to one year or longer, and may be subject to
delays, it is difficult to forecast sales for any given period.

The sales cycle of our products is lengthy and typically involves a detailed initial technical evaluation of our
products by our prospective customers, followed by the design, construction and testing of prototypes incorporating our products. Only
after these steps are complete will we receive a purchase order from a customer for volume shipments. This process generally takes
from 9 to 12 months, and may last longer. Additionally, this cycle may be as long as 18 to 24 months for our VoIP products. 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 and in turn
adversely impact our stock price. 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.

Because other broadband technologies may compete effectively with DSL services or other
services addressed by our products, a slowdown in deployment of DSL services, the lack of significant growth in non-DSL
markets that we are targeting and our lack of success in penetrating such markets would adversely affect our
business and operating results.

Our revenues are heavily dependent on the increase in demand for DSL services. DSL services are competing
with a variety of different broadband data transmission technologies, including cable modems, satellite and other wireless technologies.
While part of our strategy is to diversify our product markets beyond DSL into such areas as FTTP and VoIP, if any technology that is
competing with the technologies that we offer is more reliable, faster and/or less expensive or has any other advantages over the
technologies for which we have products, then the demand for our products may decrease. The lack of significant growth in those
markets we are targeting in general and the lack of success of our products in particular would also adversely affect our business and
results of operations.

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Because our products are components of other equipment, if broadband equipment manufacturers do
not incorporate our products in their equipment, or if the equipment incorporating our products are not successful, we may not
be able to generate sales of our products in volume quantities.

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. Our customers are typically not obligated to purchase our products and can choose at any time to stop
using our products if their own products are not commercially successful or for any other reason. 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.

We are subject to order and shipment uncertainties, and any significant order cancellations or
deferrals could adversely affect our business.

We typically sell products pursuant to purchase orders that customers can generally cancel or defer on short
notice without incurring a significant penalty. Any significant cancellations or deferrals in the future could materially and adversely affect
our business, financial condition and results of operations. In addition, cancellations or deferrals of product orders, the return of
previously sold products or the overproduction of products due to the failure of anticipated orders to materialize could cause us to hold
excess or obsolete inventory, which could reduce our profit margins, increase product obsolescence and restrict our ability to fund our
operations. Furthermore, we generally recognize revenues upon shipment of products to a customer. If a customer refuses to accept
shipped products, we could incur significant charges against our revenues.

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.
Customers located in Asia accounted for 82%, 74%, 86% and 87% of our net revenues for the three months ended March 31, 2006 and
the years ended December 31, 2005, 2004 and 2003, respectively.  We may be unable to successfully overcome the difficulties
associated with international operations. These difficulties include:

- political, social and economic instability;
- exposure to different legal standards, particularly with respect to intellectual property;
- natural disasters and public health emergencies;
- nationalization of business and blocking of cash flows;
- trade and travel restrictions;
- the imposition of governmental controls and restrictions;
- burdens of complying with a variety of foreign laws;
- import and export license requirements and restrictions of the United States and each other country in
which we operate;
- unexpected changes in regulatory requirements;
- foreign technical standards;
- changes in taxation and tariffs;

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- difficulties in staffing and managing international operations;
- foreign currency exchange rates;
- difficulties in collecting receivables from foreign entities or delayed revenue recognition; and
- potentially adverse tax consequences.

Any of the factors described above may have a material adverse effect on our ability to increase or maintain our
foreign sales.

Because sales of our products are denominated exclusively in United States dollars, increases in the value of
the United States dollar could increase the price of our products so that they become relatively more expensive to customers in the
local currency of a particular country, leading to a reduction in sales and profitability in that country.

We are exposed to increased costs and risks associated with complying with increasing and new
regulation of corporate governance and disclosure standards.

We are spending an increased amount of management time and internal and external resources to comply with
changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of
2002, new SEC regulations and NASDAQ Stock Market rules. In particular, our management, including our CEO and CFO, does not
expect that our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further,
the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, involving Centillium have been, or will be, detected. These inherent
limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error
or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood
of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance
with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud
may occur and not be detected.

Although our management has determined, and our independent registered public accounting firm has attested,
that our internal control over financial reporting was effective as of December 31, 2005, we cannot assure you that we or our
independent registered public accounting firm will not identify a material weakness in our internal controls in the future. A material
weakness in our internal controls over financial reporting would require management and our independent registered public accounting
firm to evaluate our internal controls as ineffective. If our internal controls over financial reporting are not considered adequate, we may
experience a loss of public confidence, which could have an adverse effect on our business and our stock price.

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
semiconductors could create barriers to future sales opportunities with these manufacturers.

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We may need to raise additional capital which might not be available or which, if available, could
be on terms adverse to our common stockholders.

We expect that our current cash and cash equivalents and investment securities balances will be adequate to
meet our working capital and capital expenditure needs for at least twelve months. After that, we may need to raise additional funds,
and we cannot be certain that additional financing will be available in amounts or on terms acceptable to us, if at all. We may also
require additional capital for the acquisition of businesses, products and technologies that are complementary to ours. Further, if we
issue equity securities, the ownership percentage of our stockholders would be reduced, and the new equity securities may have rights,
preferences or privileges senior to those existing holders of our common stock. If we are unable to obtain this additional financing, we
may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, which could seriously harm our business, operating results and financial condition.

A general economic slowdown and a slowdown in spending in the telecommunications industry
have affected and may continue to negatively affect our business and operating results.

There have been announcements throughout the worldwide telecommunications industry of current and
planned reductions in component inventory levels and equipment production volumes, and of delays in the build-out of new
infrastructure. Any of these trends, if continued, could result in lower than expected demand for our products, which could have a
material adverse effect on our revenues and results of operations generally, and could cause the market price of our common stock to
decline. Specifically, we have experienced:

- reduced demand for our products;
- increased price competition for our products;
- increased risk of excess and obsolete inventories; and
- higher research and development and general and administrative costs, as a percentage of revenues.

Recent geopolitical and social turmoil in many parts of the world, including actual incidents and potential future
acts of terrorism and war, may continue to put pressure on global economic conditions. These geopolitical and social conditions,
together with the resulting economic uncertainties, make it extremely difficult for us, our customers and our vendors to accurately
forecast and plan future business activities. This reduced predictability challenges our ability to operate profitably or to increase
revenues. In particular, it is difficult to develop and implement strategies to create sustainable business models and efficient operations,
and to effectively manage outsourced relationships for services such as contract manufacturing and information technology. If the
current uncertain economic conditions continue or deteriorate, there could be additional material adverse impact on our financial
position, revenues, results of operations, or cash flow.

Our customers may demand preferential terms or lengthen 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

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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.

We may be unable to attract, retain and motivate qualified personnel, which could seriously harm
our business.

Our future success depends on our ability to attract, retain and motivate qualified personnel, including executive
officers and other key management and technical personnel. As the source of our technological and product innovations, our key
technical personnel represent a significant asset. The competition for such personnel can be intense in the semiconductor industry. We
do not have employment agreements with these executives, or any other key employees, that govern the length of their service. We
have had, and may continue to have, particular difficulty attracting and retaining key personnel during periods of poor operating
performance. The loss of the services of certain key senior management or technical personnel, or our inability to attract, retain and
motivate qualified personnel, could materially and adversely affect our business, financial condition and results of operations.

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.

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. In the
future we may experience further errors, defects and bugs. 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 some of our customers in some
circumstances against liability from defects in our products. A successful product liability claim could seriously harm our business,
financial condition and results of operations, and may divert our technical and other resources from other development efforts.

We may experience difficulties in transitioning to smaller geometry process technologies or in
achieving higher levels of design integration and that may result in reduced manufacturing yields, delays in product deliveries
and increased expenses.

In order to remain competitive, we expect to continue to transition our products to increasingly smaller line width
geometries. This transition will require us to modify the manufacturing processes for our products and redesign some products. We
periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our
costs, and we have designed some of our products to be manufactured in .35 micron, .25 micron, .18 micron and .13 micron geometry
processes.

In the past, we have experienced some difficulties in shifting to smaller geometry process technologies or new
manufacturing processes, which resulted in reduced manufacturing yields, delays in product deliveries and increased

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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.

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.

Risks Related to Our Common Stock

Our stock price may continue to be volatile.

The market price of our common stock has been volatile. Since January 1, 2002 our common stock has traded
at prices as low as $1.08 and as high as $14.58 per share. The price of our common stock 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;

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- announcements by us or our competitors of key design wins and product introductions;
- a decrease in the average selling price of our products;
- ability to achieve cost reductions; and
- fluctuations in the timing and amount of customer requests for product shipments.

Class action litigation due to stock price volatility or other factors could cause us to incur substantial
costs and divert our management's attention and resources.

In the past, securities class action litigation often
has been brought against a company following periods of volatility in the market price of its securities. Companies such as ours in the
semiconductor industry and other technology industries are particularly vulnerable to this kind of litigation due to the high volatility of
their stock prices. While we are not aware of any such contemplated class action litigation against us, we may in the future be the target
of securities litigation. Any securities litigation could result in substantial costs and could divert the attention and resources of our
management.

If securities or industry analysts do not publish research or reports about our business or if they issue an
adverse opinion regarding our stock, our stock price and trading volume could decline.

The trading market for our common stock is
influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the
analysts who cover us issue an adverse opinion regarding our stock, our stock price would likely decline. If one or more of these
analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which
in turn could cause our stock price or trading volume to decline.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

|3.1(1)    | Certificate of Incorporation of the Registrant                                                        
|--------- | ------------------------------------------------------------------------------------------------------
|          |                                                                                                       
|4.2(1)    | Bylaws of the Registrant                                                                              
|          |                                                                                                       
|10.48(18) | Change of Control Severance Agreement between the Registrant and Jitesh Vadhia dated
February 16, 2006
|          |                                                                                                       
|10.49(19) | 2005 Executive Bonus Summary                                                                          
|          |                                                                                                       

35

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|31.1 | Certification of the Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                  
|31.2 | Certification of the Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|     |                                                                                                                                                                                                  
|32.1 | Certification of the Chief Executive Officer of Centillium Communications, Inc., Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.       
|     |                                                                                                                                                                                                  
|32.2 | Certification of the Chief Financial Officer of Centillium Communications, Inc., Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.       
|     |                                                                                                                                                                                                  
|(1)  | Incorporated by reference to the Exhibits filed with the Registration Statement of Form S-1
(No. 333-30772), declared effective by the Commission on May 23, 2000.                               
|     |                                                                                                                                                                                                  
|(18) | Incorporated by reference to the Exhibits filed with the Registrant's Current Report on
Form 8-K filed with the Commission on February 16, 2006.                                                 
|     |                                                                                                                                                                                                  
|(19) | Incorporated by reference to the Exhibits filed with the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2005 filed with the Commission on March 13, 2006.               

36

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.



|                   | CENTILLIUM COMMUNICATIONS, INC. (Registrant)                                                                                                                                                       
|------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Dated: May 5, 2006 | /s/ J. Scott Kamsler
                     J. Scott Kamsler 
                        Vice President and Chief Financial Officer
                        (Principal Financial and Accounting Officer)

37

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Exhibit Index

|3.1(1)    | Certificate of Incorporation of the Registrant                                                                                                                                                                                  
|--------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                 
|4.2(1)    | Bylaws of the Registrant                                                                                                                                                                                                        
|          |                                                                                                                                                                                                                                 
|10.48(18) | Change of Control Severance Agreement between the Registrant and Jitesh Vadhia dated February 16, 2006                                                                                                                          
|          |                                                                                                                                                                                                                                 
|10.49(19) | 2005 Executive Bonus Summary                                                                                                                                                                                                    
|          |                                                                                                                                                                                                                                 
|31.1      | Certification of the Chief Executive Officer Pursuant to Rules  13a-14 and 15d-14 under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.
     PDF files as a courtesy
|          |                                                                                                                                                                                                                                 
|31.2      | Certification of the Chief Financial Officer Pursuant to Rules  13a-14 and 15d-14 under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.
     PDF files as a courtesy
|          |                                                                                                                                                                                                                                 
|32.1      | Certification of the Chief Executive Officer of Centillium  Communications, Inc., Pursuant to 18
U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.
     PDF files as a courtesy      
|          |                                                                                                                                                                                                                                 
|32.2      | Certification of the Chief Financial Officer of Centillium  Communications, Inc., Pursuant to 18
U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.
     PDF files as a courtesy      
|          |                                                                                                                                                                                                                                 
|(1)       | Incorporated by reference to the Exhibits filed with the  Registration Statement of Form S-1
(No. 333-30772), declared  effective by the Commission on May 23, 2000.                                                            
|          |                                                                                                                                                                                                                                 
|(18)      | Incorporated by reference to the Exhibits filed with the Registrant's Current Report on
Form 8-K filed with the Commission on February 16, 2006.                                                                                
|          |                                                                                                                                                                                                                                 
|(19)      | Incorporated by reference to the Exhibits filed with the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2005 filed with the Commission on March 13, 2006.                                              

38

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