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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
  
 FORM 10-Q (Mark One) þ
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended March 31, 2005 or   ̈
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934  For the transition period fromto Commission File Number 000-30649  CENTILLIUM COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of
incorporation or organization)
    
    94-3263530
(IRS Employer
Identification Number)
 215 Fourier Avenue
Fremont, California 94539
(Address of principal executive offices including zip code) (510) 771-3700
(Registrants telephone number, including area code)  Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO  ̈ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No  ̈ On April 30, 2005, approximately 38,914,833 shares of the Registrants Common Stock, $0.001
par value, were outstanding.




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Centillium Communications, Inc.
TABLE OF CONTENTS Page No.PART I. Financial InformationItem 1. Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22PART II. Other InformationItem 1. Legal Proceedings
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    23Signatures
    
    
    24EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART IFINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS CENTILLIUM COMMUNICATIONS, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
 March 31,
    
    
    December 31,2005
    
    
    2004(In thousands except shareand per share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    36,823
    
    
    $
    31,996Short-term investments
    
    
    17,463
    
    
    
    30,195Accounts receivable  net of allowance
for doubtful accounts of $170 at March
31, 2005 and $151 at December 31, 2004
    
    
    7,610
    
    
    
    5,348Inventories
    
    
    5,225
    
    
    
    6,100Prepaids and other current assets
    
    
    2,677
    
    
    
    1,225Total current assets
    
    
    69,798
    
    
    
    74,864Property and equipment, net
    
    
    5,607
    
    
    
    6,528Other assets
    
    
    543
    
    
    
    553Total assets
    
    $
    75,948
    
    
    $
    81,945LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,750
    
    
    $
    5,599Accrued payroll and related expenses
    
    
    3,838
    
    
    
    3,364Accrued liabilities
    
    
    17,401
    
    
    
    16,786Total current liabilities
    
    
    25,989
    
    
    
    25,749Other long-term liabilities
    
    
    847
    
    
    
    864Commitments and contingenciesStockholders equity:Common stock; $0.001 par value:Authorized shares: 100,000,000; Issued
and outstanding shares: 38,914,833 at
March 31, 2005, 38,810,001 at December
31, 2004
    
    
    39
    
    
    
    39Additional paid-in capital
    
    
    244,637
    
    
    
    244,493Accumulated deficit
    
    
    (195,508
    )
    
    
    (189,155
    )Accumulated other comprehensive loss
    
    
    (56
    )
    
    
    (45
    )Total stockholders equity
    
    
    49,112
    
    
    
    55,332Total liabilities and stockholders equity
    
    $
    75,948
    
    
    $
    81,945
 See accompanying notes 3




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CENTILLIUM COMMUNICATIONS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months Ended March 31,2005
    
    
    2004(In thousands, except per sharedata)Net revenues
    
    $
    17,196
    
    
    $
    15,839Cost of revenues
    
    
    8,733
    
    
    
    8,784Gross profit
    
    
    8,463
    
    
    
    7,055Operating expenses:Research and development
    
    
    8,983
    
    
    
    14,261Selling, general and administrative
    
    
    6,092
    
    
    
    5,734Total operating expenses
    
    
    15,075
    
    
    
    19,995Operating loss
    
    
    (6,612
    )
    
    
    (12,940
    )Interest income, net
    
    
    299
    
    
    
    277Loss before provision for income taxes
    
    
    (6,313
    )
    
    
    (12,663
    )Provision for income taxes
    
    
    40
    
    
    
    26Net loss
    
    $
    (6,353
    )
    
    $
    (12,689
    )Basic and diluted net loss per share
    
    $
    (0.16
    )
    
    $
    (0.33
    )Shares used to compute basic and diluted net loss per share
    
    
    38,845
    
    
    
    37,891
 See accompanying notes 4




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CENTILLIUM COMMUNICATIONS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Three Months Ended March 31,2005
    
    
    2004(In thousands)OPERATING ACTIVITIESNet loss
    
    $
    (6,353
    )
    
    $
    (12,689
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization expense
    
    
    1,074
    
    
    
    1,405Stock-based compensation expense
    
    
    
    
    
    
    150Loss on retirements of property and equipment
    
    
    4
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,262
    )
    
    
    6,932Inventories
    
    
    875
    
    
    
    4,959Prepaids and other current assets
    
    
    (1,452
    )
    
    
    654Other assets
    
    
    10
    
    
    
    (7
    )Accounts payable
    
    
    (849
    )
    
    
    (1,002
    )Accrued payroll and related expenses
    
    
    474
    
    
    
    (740
    )Accrued liabilities
    
    
    615
    
    
    
    (817
    )Other liabilities
    
    
    (17
    )
    
    
    31Net cash used in operating activities
    
    
    (7,881
    )
    
    
    (1,124
    )INVESTING ACTIVITIESPurchases of short-term investments
    
    
    (7,564
    )
    
    
    (9,459
    )Sales and maturities of short-term investments
    
    
    20,285
    
    
    
    12,650Purchases of property and equipment
    
    
    (157
    )
    
    
    (1,154
    )Net cash provided by investing activities
    
    
    12,564
    
    
    
    2,037FINANCING ACTIVITIESPrincipal payments on capital lease obligations
    
    
    
    
    
    
    (527
    )Proceeds from issuance of common stock, net of repurchases
    
    
    144
    
    
    
    183Net cash provided by (used in) financing activities
    
    
    144
    
    
    
    (344
    )Net increase in cash and cash equivalents
    
    
    4,827
    
    
    
    569Cash and cash equivalents at beginning of period
    
    
    31,996
    
    
    
    24,734Cash and cash equivalents at end of period
    
    $
    36,823
    
    
    $
    25,303
 See accompanying notes 5




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CENTILLIUM COMMUNICATIONS, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31 2005 1. Description of Business Centillium Communications, Inc. (Centillium or the Company) was incorporated in California in
February 1997 and was reincorporated in Delaware in December 1999. The Company designs, develops
and supplies highly-integrated programmable semiconductors that enable broadband communications,
which are the high-speed networking of data, voice and video signals. Our system-level 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 original equipment manufacturers
(OEMs) 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. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying condensed consolidated financial statements are unaudited; however, they have been
prepared in accordance with U.S. generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion
of management, the unaudited condensed consolidated financial statements contain all adjustments
(consisting of normal recurring adjustments) that are necessary for a fair presentation of the
Companys consolidated financial position at March 31, 2005, the consolidated results of operations
for the three months ended March 31, 2005 and 2004, and the consolidated cash flows for the three
months ended March 31, 2005 and 2004. Operating results for the three months ended March 31, 2005
are not necessarily indicative of the results that may be expected for the year ending December 31,
2005. The unaudited condensed consolidated financial statements include all the accounts of the Company
and those of its wholly owned subsidiaries. All intercompany accounts and transactions have been
eliminated. The accompanying unaudited condensed consolidated financial statements do not include certain
financial footnotes and financial information normally required under U.S. generally accepted
accounting principles. Therefore, these financial statements should be read in conjunction with the
Companys audited consolidated financial statements and footnotes thereto for the year ended
December 31, 2004 included in the Companys Annual Report on Form 10-K, filed with the Securities
and Exchange Commission on March 11, 2005. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. generally accepted
accounting principles requires Centillium to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of sales and expenses
during the reporting periods. Such management estimates include allowances for doubtful accounts
receivable, provisions for inventories to reflect net realizable value, sales returns and
allowances, product warranty and other liabilities. Actual results could differ from those
estimates. 3. Stock-based Compensation The Company has elected to account for its employee stock plans in accordance with the intrinsic
value method under Accounting Principles Board Opinion No. 25, Accounting For Stock Issued to
Employees (APB Opinion No. 25). The following table illustrates the effect on net loss and loss
per share had compensation expense for the Companys stock-based award plans been determined on the
fair value at the grant dates for awards under the plan consistent with the method of Statement of
Financial Accounting Standards No. 123, Accounting For Stock Issued to Employees (FAS 123). For
purposes of FAS 123 pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options vesting period (in thousands, except per share amounts): 6




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Three Months Ended March 31,2005
    
    
    2004Net loss as reported
    
    $
    (6,353
    )
    
    $
    (12,689
    )Add: Stock-based employee compensation expense
included in reported net loss, net of recovery
    
    
    
    
    
    
    150Less: Total stock-based employee compensation
expense under fair value based method for all
awards, net of related tax effects
    
    
    (2,155
    )
    
    
    (3,746
    )Pro forma net loss
    
    $
    (8,508
    )
    
    $
    (16,285
    )Basic and diluted net loss per share  as reported
    
    $
    (0.16
    )
    
    $
    (0.33
    )Basic and diluted net loss per share  pro forma
    
    $
    (0.22
    )
    
    $
    (0.43
    )
 4. Commitments and Contingencies The Company enters into standard indemnification agreements in the ordinary course of business.
Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the
indemnified party for losses suffered or incurred by the indemnified party, generally our business
partners or customers, in connection with certain patent, copyright or other intellectual property
infringement claims by any third parties with respect to our products. The term of these
indemnification agreements is generally perpetual. The Company has not incurred significant costs
to defend lawsuits or settle claims related to these indemnification agreements and we have no
liabilities recorded for these agreements as of March 31, 2005. The semiconductor and telecommunications industries are characterized by substantial litigation
regarding patent and other intellectual property rights. From time to time, the Company receives
various inquiries or claims in connection with these rights and may become party to associated
claims. In certain cases, management has accrued estimates of the amounts it expects to pay upon
resolution of such matters and such amounts are included in accrued liabilities. Should the company
not be able to secure the terms it expects, these estimates may change and will be recognized in
the period in which they are identified. Although the ultimate outcome of such inquiries is not
presently determinable, management believes that the resolution of these matters will not have a
material adverse effect on the Companys financial position or results of operations. The Company does not own or operate a fabrication facility and foundries located in Asia currently
supply substantially all of its wafer requirements. The Companys purchase obligations to these
foundries are based on non-cancelable purchase orders. As of March 31, 2005, the Companys
non-cancelable purchase obligations for wafers expected to be delivered within the next six months
are $4.5 million. Included in this amount is approximately $155,000 and $185,000 of excess wafers
that have been expensed in the 2004 operating results and the three months ended March 31, 2005,
respectively. 5. Balance Sheet Information Inventories (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Work-in-process
    
    $
    3,172
    
    
    $
    3,694Finished goods
    
    
    2,053
    
    
    
    2,406$
    5,225
    
    
    $
    6,100
 7




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Accrued Liabilities: The components of accrued liabilities are as follows (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Accrued royalties
    
    $
    14,539
    
    
    $
    13,773Accrued other liabilities
    
    
    2,862
    
    
    
    3,013$
    17,401
    
    
    $
    16,786
 Warranty: Warranty activity for the three months ended March 31, 2005 and 2004 was as follows (in thousands): March 31,
    
    
    March 31,2005
    
    
    2004Balances at beginning of period
    
    $
    164
    
    
    $
    460Product warranty accruals
    
    
    (60
    )
    
    
    (101
    )Warranty costs incurred
    
    
    (14
    )
    
    
    (23
    )Balances at end of period
    
    $
    90
    
    
    $
    336
 6. Provision for Income Taxes The provision for income taxes for the three months ended March 31, 2005 and 2004 relates to
current taxes payable for the Companys subsidiaries located in foreign jurisdictions. Income tax
expense differs from the expected benefit that was derived by applying the applicable U.S. federal
statutory rate to the loss from operations primarily due to losses that are not currently
benefited. Due to the Companys loss position, a full valuation allowance has been established
against the Companys deferred tax assets, consisting primarily of net operating loss
carryforwards. 7. Net Loss Per Share Basic and diluted net loss per share have been computed using the weighted average number of shares
of common stock outstanding during the period, less shares subject to repurchase. The following
table presents the computation of basic and diluted net loss per share (in thousands, except per
share amounts): Three Months Ended March 31,2005
    
    
    2004Net loss
    
    $
    (6,353
    )
    
    $
    (12,689
    )Basic and diluted:Weighted average shares of common stock outstanding
    
    
    38,845
    
    
    
    37,891Less weighted average shares subject to repurchase
    
    
    
    
    
    
    Weighted average shares used to compute basic and diluted net loss per share
    
    
    38,845
    
    
    
    37,891Basic and diluted net loss per share
    
    $
    (0.16
    )
    
    $
    (0.33
    )
 8




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The Company has excluded all outstanding warrants, stock options, and shares subject to repurchase
by the Company 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, warrants and shares subject to repurchase of approximately 7,183,000 and
12,828,000 shares of common stock have been excluded for the three months ended March 31, 2005 and
2004, respectively. 8. Comprehensive Net Loss The following table presents the computation of comprehensive net loss (in thousands): Three Months Ended March 31,2005
    
    
    2004Net loss
    
    $
    (6,353
    )
    
    $
    (12,689
    )Change in unrealized gain on available-for-sale investments
    
    
    (11
    )
    
    
    10Total comprehensive loss
    
    $
    (6,364
    )
    
    $
    (12,679
    )
 9. Business Segment Information and Customer Concentration The Company operates in one operating segment, broadband communications. The Company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 have not been
significant. Geographic sales information is based on the location of the 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 31,2005
    
    
    2004NEC
    
    
    29
    %
    
    
    36
    %Sumitomo Electric Industries
    
    
    36
    %
    
    
    35
    %Lucent Technologies Inc.
    
    
    18
    %
    
    
    19
    %
 The following is a summary of net revenues by major geographic area (in thousands): Three Months Ended March 31,2005
    
    
    2004Japan
    
    $
    11,168
    
    
    $
    11,590United States
    
    
    3,977
    
    
    
    3,201Other Asia-Pacific
    
    
    1,572
    
    
    
    1,043Other
    
    
    479
    
    
    
    5$
    17,196
    
    
    $
    15,839
 10. Related Party Transactions In the first quarter of 2004, one of the Companys directors, was elected to the Board of Directors
of Cadence Design Systems, Inc. (Cadence). During 2003, the Company entered into an agreement to
license certain software tools from Cadence under an operating lease that required quarterly
payments through the third quarter of 2005. This agreement was amended in December 2004 resulting
in a $1.4 million charge for early termination of a portion of this license. During 2004, the
Company paid $1.6 million under the license agreement. As of December 31, 2004, the Company had
recorded a liability of $1.1 million due to Cadence which was paid during the three months ended
March 31, 2005. This director is also a director of Semiconductor Manufacturing International Corporation (SMIC).
The Company purchased $2.8 million and $954,000 of foundry services and products for the three
months ended March 31, 2005 and 2004, respectively. As of March 31, 2005 and 2004, the Company had
recorded a liability of $1.1 million and $511,000 due to SMIC, respectively. 9




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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 11, 2005. The information in this report
is not a complete description of our business or the risks associated with an investment in our
common stock. We urge you to carefully review and consider the various disclosures made by us in
this report and in our other reports filed with the SEC. All statements included or incorporated by reference in this report, other than statements or
characterizations of historical fact, are forward-looking statements that are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are generally preceded by words that imply a future state such as expected or
anticipated or imply that a particular future event or events will occur such as will.
Investors are cautioned that all forward-looking statements involve risks and uncertainties and
that actual results could be materially different from those expressed in any forward-looking
statement. We undertake no obligation to revise or update publicly any forward-looking statements
for any reason. The section entitled Risk Factors and similar discussions in our other 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 our Company or to maintain or increase your investment. Overview Centillium designs, develops and supplies highly-integrated programmable semiconductors that enable
broadband communications, which are the high-speed networking of data, voice and video signals. Our
system-level 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
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. Critical Accounting Policies There have been no significant changes in our critical accounting policies during the three months
ended March 31, 2005 as compared to the accounting policies previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange
Commission on March 11, 2005. 10




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Results of Operations for the Three months Ended March 31, 2005 and 2004 The following table sets forth, for the periods presented, certain data from our unaudited
consolidated statements of operations expressed as a percentage of net revenues. Three Months Ended March 31,2005
    
    
    2004Net revenues
    
    
    100
    %
    
    
    100
    %Cost of revenues
    
    
    51
    
    
    
    55Gross profit
    
    
    49
    
    
    
    45Operating expenses:Research and development
    
    
    52
    
    
    
    90Selling, general and administrative
    
    
    35
    
    
    
    37Total operating expenses
    
    
    87
    
    
    
    127Operating loss
    
    
    (38
    )
    
    
    (82
    )Interest income and other, net
    
    
    1
    
    
    
    2Net loss
    
    
    (37
    )%
    
    
    (80
    )%
 Net
Revenues: Net revenues for the three months ended March 31,
2005 increased by $1.4 million, or 9%, to $17.2 million
compared to $15.8 million for the three months ended
March 31, 2004, primarily as a result of an increase in the total unit shipments
of our Voice over Internet Protocol (VoIP) products. Revenues from our DSL products accounted for $15.0 million or 87% of net revenues for the three
months ended March 31, 2005, as compared to $15.3 million or 96% of net revenues for the three
months ended March 31, 2004. Revenues from our VoIP products accounted for $2.2 million of revenues
for the three months ended March 31, 2005 as compared to $33,000 for the three months ended March
31, 2004, or approximately 13% and 0.2% of net revenues, respectively. We anticipate that revenues
from our VoIP products will continue to grow and account for a larger percentage of our net
revenues during the balance of 2005. The following customers accounted for more than 10% of net revenues: Three Months Ended March 31,2005
    
    
    2004NEC
    
    
    29
    %
    
    
    36
    %Sumitomo Electric Industries
    
    
    36
    %
    
    
    35
    %Lucent Technologies Inc.
    
    
    18
    %
    
    
    19
    %
 Net revenues from international customers, who were primarily located in Japan, comprised 77% and 80%
of our net revenues for the three months ended March 31, 2005 and 2004, respectively. Japans DSL
market is an important part of our business and net new DSL subscribers are a significant driver of
consumption for Centilliums DSL products. The recent lower number of new subscribers in Japan will
likely contribute to comparable or lower quarterly revenue in the second quarter as compared to the first
quarter of 2005. Competition and technological change in the rapidly evolving DSL market have influenced and
may continue to influence our quarterly and annual net revenues and results of operations. Average
selling prices of our DSL and VoIP products tend to be higher at the time we introduce new products
and decline over time due to competitive pressures. We expect this pattern to continue with
existing and future products. Our average selling prices are also impacted by our customer
concentration and product mix. Gross Profit:Gross profit represents net revenues less the cost of revenues. Gross profit
increased to $8.5 million in the three months ended March 31, 2005 as compared to $7.1 million in
the three months ended March 31, 2004 while the gross margin increased to 49% from 45% in the
respective periods. The increases were primarily due to lower manufacturing costs. Our future gross 11




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profit margins may be affected by competitive pricing strategies, fluctuation in the volume of
our product sales, fluctuations in silicon wafer costs, possible changes in product mix and the
introduction of certain lower margin products, among other factors. Research and Development Expenses:Research and development expenditures decreased by
approximately $5.3 million, or 37%, to $9.0 million for the three months ended March 31, 2005 as
compared to $14.3 million for the three months ended March 31, 2005. The decrease primarily
resulted from the focusing of our engineering development efforts on fewer programs, decrease in
personnel, lower tapeout costs and lower development tool software expense. Selling, General and Administrative Expenses:Selling, general and administrative expenses
increased by approximately $0.4 million, or 6%, to $6.1 million for the three months ended March 31,
2005 as compared to $5.7 million for the three months ended March 31, 2004. The increase was
largely due to an increase in sales compensation and an increase in costs associated with
complying with new corporate governance and public disclosure standards, partially offset by a
decrease in expensed evaluation boards. Interest Income and Other, Net:Interest income and other, net, was $299,000 for the three
months ended March 31, 2005 as compared to $277,000 for the three months ended March 31, 2004. The
increase in 2005 was due to the impact of higher interest rates in 2005 which offset the decrease
in funds available for investment in 2005. Provision for Income Taxes:The provision for income tax expense was $40,000 for the three
months ended March 31, 2005 as compared to $26,000 in the three months ended March 31, 2004. The
provisions for income taxes relate to current taxes payable for income generated by the Companys
subsidiaries located in foreign jurisdictions. Income tax expense differs from the expected benefit
that was derived by applying the applicable U.S. federal statutory rate to the loss from operations
primarily due to losses that are not currently benefited. Due to the Companys loss position, a
full valuation allowance has been established against the Companys deferred tax assets, consisting
primarily of net operating loss carryforwards. Liquidity and Capital Resources Since our inception, we have financed our operations primarily through the sale of equity
securities. At March 31, 2005, we had $54.3 million in cash, cash equivalents and short-term
investments as compared to $62.2 million at December 31, 2004. Operating activities for the three months ended March 31, 2005 used $7.9 million in cash
primarily due to our net loss of $6.4 million, an increase in accounts receivable of $2.3 million,
an increase in prepaids and other current assets of $1.5 million, and a decrease in accounts
payable of $849,000. These uses of cash were partially offset by non-cash expenses of $1.1 million
for depreciation and amortization and cash provided by a decrease in inventory of $875,000, an
increase in accrued liabilities of $615,000 and an increase in accrued payroll and related expenses
of $474,000. The increase in accounts receivable resulted from later shipments and higher net
revenues in the three months ended March 31, 2005 as compared to the three months ended December
31, 2004. Net cash provided by investing activities was $12.6 million for the three months ended March
31, 2005. Net cash provided by investing activities related to sales and maturities of short-term
investments of $20.3 million, partially offset by purchases of short-term investments of $7.6
million and the purchase of $157,000 of property and equipment Net cash provided by financing activities was $144,000 for the three months ended March 31,
2005 and related to proceeds from the issuance of common stock under employee stock plans. Our principal source of liquidity as of March 31, 2005 consisted of $54.3 million of cash and
cash equivalents and short-term investments. We believe our cash, cash equivalents and investment
securities will be sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next twelve months. The rate at which we will consume cash will be
dependent on the cash needs of future operations that will, in turn, be directly affected by the
actions we have taken in our corporate restructuring and various risks and uncertainties,
including, but not limited to, the levels of demand for our products and other risks listed in the
Risk Factors section. Significant contractual obligations and commercial commitments are shown in the table below
(in thousands): Less than
    
    
    
    
    
    
    AfterTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3 YearsOperating leases  facilities
    
    $
    6,493
    
    
    $
    1,409
    
    
    $
    3,116
    
    
    $
    1,968Operating leases  software
    
    
    4,925
    
    
    
    361
    
    
    
    3,324
    
    
    
    1,240Inventory purchases
    
    
    4,467
    
    
    
    4,467
    
    
    
    
    
    
    
    Total cash obligations
    
    $
    15,885
    
    
    $
    6,237
    
    
    $
    6,440
    
    
    $
    3,208
 12




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We have taken substantial steps to reduce losses and preserve cash by decreasing anticipated
expenses in 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 flow from operations will be sufficient to support our current
operating plan for 2005. 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 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. 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 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. 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 $6.4 million in the first quarter of 2005 and net
losses of $43.1 and $13.4 million in
2004 and 2003, respectively. Our success may depend in large part upon the adoption and utilization of our products and
technology, as well as our ability to effectively maintain existing relationships and develop new
relationships with customers and strategic partners. If we do not succeed in doing so, we may not
achieve or maintain profitability on a timely basis or at all. In particular, we intend to expend
significant financial and management resources on product development, sales and marketing,
strategic relationships, technology and operating infrastructure. As a result, we may incur
additional losses and continued negative cash flow from operations for the foreseeable future and
may not achieve or maintain profitability. THE SLOWDOWN IN DEPLOYMENT OF DSL IN JAPAN HAS AND MAY CONTINUE TO ADVERSELY AFFECT OUR
BUSINESS AND OPERATING RESULTS. Sales to customers in Japan accounted for 65% and 73% of net revenues for the three months
ended March 31, 2005 and 2004, respectively. To date, our sales have been dependent on the
continuous growth of new DSL subscribers in Japan. Fluctuations in new subscribers in Japan impact
our revenues on a quarterly basis and a sustained slow down in such a growth may cause our revenue
to decline. Our sales have been historically denominated in U.S. dollars and major fluctuations in
currency exchange rates could materially affect our Japanese customers demand, thereby forcing
them to reduce their orders, which could adversely affect our operating results. 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. 13




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Sales of our products depend on the increased use and widespread adoption of broadband access
services, and DSL services in particular, and the ability of telecommunications service providers
to market and sell broadband access services. Our business would be harmed, and our results of
operations and financial condition would be adversely affected, if the use of broadband access
services does not increase as anticipated. Certain critical factors will likely continue to affect
the development of the broadband access service market. These factors include:  
    inconsistent quality and reliability of service;
    lack of availability of cost-effective, high-speed service;
    lack of interoperability among multiple vendors network equipment;
    congestion in service providers networks;
    inadequate security; and
    slow deployment of new broadband services over DSL lines. OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE. The market price of our common stock has been volatile and will likely continue to fluctuate
significantly in response to the following factors, some of which are beyond our control:  
    variations in our quarterly operating results;
    changes in financial estimates of our revenues and operating results by securities analysts;
    changes in market valuations of integrated circuit companies;
    announcements by us, our competitors or others in related market segments of significant
contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
    loss or decrease in sales to a major customer or failure to complete significant transactions;
    loss or reduction in manufacturing capacity from one or more of our key suppliers;
    additions or departures of key personnel;
    future sales of our common stock;
    inconsistent or low levels of trading volume of our common stock;
    commencement of or involvement in litigation;
    announcements by us or our competitors of key design wins and product introductions;
    a decrease in the average selling price of our products;
    ability to achieve cost reductions; and
    fluctuations in the timing and amount of customer requests for product shipments. WE ARE EXPOSED TO INCREASED COSTS AND RISKS ASSOCIATED WITH COMPLYING WITH INCREASING AND NEW
REGULATION OF CORPORATE GOVERNANCE AND DISCLOSURE STANDARDS. We are spending an increased amount of management time and internal and external resources to
comply with changing laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Stock Market
rules. In particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires managements annual
review and evaluation of the Companys internal control systems and attestations of the
effectiveness of these systems by our 14




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independent registered public accounting firm. This process has required us to hire additional
outside advisory services and has resulted in additional accounting and legal expenses. We may
encounter problems or delays in completing the review and evaluation, the implementation of
improvements and the receipt of a positive attestation by our independent registered public
accounting firm for any given year. While we believe that we currently have effective internal
controls over financial reporting, in the event that for any given year our chief executive
officer, chief financial officer or independent registered public accounting firm determine that
our controls over financial reporting are not effective as defined under Section 404, investor
perceptions of our company may be adversely affected and could cause a decline in the market price
of our stock. CHANGES IN THE ACCOUNTING TREATMENT OF STOCK OPTIONS WILL ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS. In December 2004, the FASB issued SFAS 123R which requires the measurement of all employee
share-based payments to employees, including grants of employee stock options, using a
fair-value-based method and the recording of such expense in the Companys consolidated statements
of operations. The accounting provisions of SFAS 123R were to take effect for reporting periods
beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission announced the
adoption of a new rule that amends the compliance dates for SFAS 123R. The Commissions new rule
allows companies to implement SFAS 123R at the beginning of their next fiscal year, instead of the
next reporting period, that begins after June 15, 2005. The Company is therefore required to adopt
SFAS 123R in the first quarter of 2006. The pro forma disclosures previously permitted under SFAS
123 no longer will be an alternative to financial statement recognition. Although the Company has
not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the
current pro forma disclosures under SFAS 123, it believes the adoption will have a material adverse
impact on operating results. 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. WE OPERATE IN THE HIGHLY CYCLICAL SEMICONDUCTOR INDUSTRY, WHICH IS SUBJECT TO SIGNIFICANT
DOWNTURNS. The semiconductor industry is highly cyclical and is characterized by constant and rapid
technological change, rapid product obsolescence and price erosion, evolving technical standards,
short product life cycles and wide fluctuations in product supply and demand. From time to time
these and other factors, together with changes in general economic conditions, cause significant
upturns and downturns in the industry, and in our business in particular. Periods of industry
downturns have been characterized by diminished product demand, production overcapacity, high
inventory levels and accelerated erosion of average selling prices. These factors have caused
substantial fluctuations in our revenues and results of operations. We have experienced these
cyclical fluctuations in their businesses in the past and we may experience cyclical fluctuations
in the future. 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; 15




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
    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 will 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. A GENERAL ECONOMIC SLOWDOWN, AND A SLOWDOWN IN SPENDING IN THE TELECOMMUNICATIONS INDUSTRY, HAS
AFFECTED AND MAY CONTINUE TO NEGATIVELY AFFECT OUR BUSINESS AND OPERATING RESULTS. There have been announcements throughout the worldwide telecommunications industry of current
and planned reductions in component inventory levels and equipment production volumes, and of
delays in the build-out of new infrastructure. Any of these trends, if continued, could result in
lower than expected demand for our products, which could have a material adverse effect on our
revenues and results of operations generally, and could cause the market price of our common stock
to decline. Specifically, we have experienced:  
    reduced demand for our products;
    increased price competition for our products;
    increased risk of excess and obsolete inventories;
    higher research and development and general and administrative costs, as a percentage of revenue. Recent geopolitical and social turmoil in many parts of the world, including actual incidents
and potential future acts of terrorism and war, may continue to put pressure on global economic
conditions. These geopolitical and social conditions, together with the resulting economic
uncertainties, make it extremely difficult for our company, our customers and our vendors to
accurately forecast and plan future business activities. This reduced predictability challenges our
ability to operate profitably or to increase revenues. In particular, it is difficult to develop
and implement strategies to create sustainable business models and efficient operations, and to
effectively manage outsourced relationships for services such as contract manufacturing and
information technology. If the current uncertain economic conditions continue or deteriorate, there
could be additional material adverse impact on our financial position, revenues, results of
operations, or cash flow. WE DERIVE A SUBSTANTIAL AMOUNT OF OUR REVENUES FROM JAPAN, AND OUR FAILURE TO DIVERSIFY THE
GEOGRAPHIC SOURCES OF OUR REVENUE COULD HARM OUR BUSINESS AND OPERATING RESULTS. Because a substantial portion of our revenues have been derived from sales into Japan, our
revenues have been heavily dependent on developments in the Japan market. For the three months
ended March 31, 2005 and for the year ended December 31, 2004, 65% and 73% of our net revenues,
respectively, were from customers in Japan. While part of our strategy is to diversify the
geographic sources of our revenues, failure to further penetrate markets outside of Japan could
harm our business and results of operations. WE DERIVE A SUBSTANTIAL MAJORITY OF OUR REVENUES FROM DSL PRODUCTS, AND OUR FAILURE TO
DIVERSIFY OUR SOURCES OF OUR REVENUE COULD HARM OUR BUSINESS AND OPERATING RESULTS. 16




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Historically, our revenues have been derived primarily from the sale of our DSL products. 87%
and 96% of our net revenues were from sales of our DSL products for the three months ended March
31, 2005 and 2004, 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. For the three months ended
March 31, 2005 and the year ended December 31, 2004, NEC accounted for 29% and 42% and Sumitomo
accounted for 36% and 35% of net revenues, respectively. Lucent Technologies, Inc. accounted for
18% of our net revenues for the three months ended March 31, 2005. No other customer accounted for
10% or more of net revenues for the above periods. We do not have contractual volume commitments
with these customers but rather sell our products to them on an order-by-order basis. We expect to
be dependent upon a relatively small number of large customers in future periods, although the
specific customers may vary from period to period. If we are not successful in maintaining
relationships with key customers and winning new customers, our business and results of operations
will suffer. THIRD-PARTY CLAIMS REGARDING INTELLECTUAL PROPERTY MATTERS COULD CAUSE US TO STOP SELLING OUR
PRODUCTS, PAY MONETARY DAMAGES OR OBTAIN LICENSES ON ADVERSE TERMS. There is a significant risk that third parties, including current and potential competitors,
will claim that our products, or our customers products, infringe on their intellectual property
rights. From time to time, third parties have asserted and may in the future assert patent,
copyright, trademark or other intellectual property rights to technologies that are important to
our business and have demanded or in the future may demand that we license their patents and
technology. Any such litigation, whether or not determined in our favor or settled by us, would be
costly and divert the attention of our management and technical personnel. Inquiries with respect
to the coverage of our intellectual property could develop into litigation. We cannot assure you
that we would prevail in litigation given the complex technical issues and inherent uncertainties
in intellectual property litigation. In the event of an adverse ruling for an intellectual property
infringement claim, we could be required to obtain a license or pay substantial damages or have the
sale of our products stopped by an injunction. Such a license may not be available on reasonable
terms, or at all. In addition, if a customer of our products cannot acquire a required license on
commercially reasonable terms, that customer may choose not to use our products. We have
obligations to indemnify our customers under some circumstances for infringement of third-party
intellectual property rights. If any intellectual property claims from third parties against one of
our customers whom we have indemnified is held to be valid, the costs to us could be substantial
and our business could be harmed. In August 2004, Fujitsu Limited filed a suit against Centillium Communications, Inc. and
Centillium Japan K.K (Centillium Japan) in the Tokyo District Court alleging that Centillium and
Centillium Japan infringe one Japanese patent jointly owned by Fujitsu and Ricoh Co., Ltd. The
complaint seeks monetary damages against Centillium and Centillium Japan. The suit is in process
and the probable outcome of this suit cannot be predicted with any certainty. An unfavorable ruling
could have a material adverse impact on the Companys financial position or results of operations. WE ANTICIPATE LOWER MARGINS AS PRODUCTS MATURE 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. 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 17




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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. 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 in demand for the services that our products support. A delay in, or cancellation of, the
sale of our products could adversely affect our results from operations or cause them to
significantly vary from quarter to quarter. BECAUSE THE SALES CYCLE FOR OUR PRODUCTS TYPICALLY LASTS UP TO ONE YEAR OR LONGER, AND MAY BE
SUBJECT TO DELAYS, IT IS DIFFICULT TO FORECAST SALES FOR ANY GIVEN PERIOD. If we fail to realize forecasted sales for a particular period, our stock price could decline
significantly. The sales cycle of our products is lengthy and typically involves a detailed initial
technical evaluation of our products by our prospective customers, followed by the design,
construction and testing of prototypes incorporating our products. Only after these steps are
complete will we receive a purchase order from a customer for volume shipments. This process
generally takes from 9 to 12 months, and may last longer. Given this lengthy sales cycle, it is
difficult to accurately predict when sales to a particular customer will occur. In addition, we may
experience unexpected delays in orders from customers, which may prevent us from realizing
forecasted sales for a particular period. Our products are typically sold to equipment
manufacturers, who incorporate our products in the products that they in turn sell to consumers or
to network service providers. As a result, any delay by our customers, or by our customers
customers, in the manufacture or distribution of their products will result in a delay in obtaining
orders for our products, which could cause our business and results to suffer. RAPID CHANGES IN THE MARKET FOR DSL CHIP SETS MAY RENDER OUR CHIP SETS OBSOLETE OR
UNMARKETABLE. The market for chip sets for DSL products is characterized by:  
    intense competition;
    rapid technological change;
    frequent new product introductions by our competitors;
    changes in customer demands; and
    evolving industry standards. Any of these factors could make our products obsolete or unmarketable. In addition, the life
cycles of some of our products may depend upon the life cycles of the end products into which our
products will be designed. Products with short life cycles require us to closely manage production
and inventory levels. Unanticipated changes in the estimated total demand for our products and/or
the estimated life cycles of the end products into which our products are designed may result in
obsolete or excess inventories, which in turn may adversely affect our operating results. To
compete, we must innovate and introduce new products. If we fail to successfully introduce new
products on a timely and cost-effective basis that meet customer requirements and are compatible
with evolving industry standards, then our business, financial condition and results of operations
will be seriously harmed. BECAUSE OUR PRODUCTS ARE COMPONENTS OF OTHER EQUIPMENT, IF BROADBAND EQUIPMENT MANUFACTURERS
DO NOT INCORPORATE OUR PRODUCTS IN THEIR EQUIPMENT, WE MAY NOT BE ABLE TO GENERATE SALES OF OUR
PRODUCTS IN VOLUME QUANTITIES. 18




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Our products are not sold directly to the end-user; they are components of other products. As
a result, we rely upon equipment manufacturers to design our products into their equipment. We
further rely on the manufacturing and deployment of the equipment to be successful. If equipment
that incorporates our products is not accepted in the marketplace, we may not achieve sales of our
products in volume quantities, which would have a negative impact on our results of operations. BECAUSE MANUFACTURERS OF COMMUNICATIONS EQUIPMENT MAY BE RELUCTANT TO CHANGE THEIR SOURCES OF
COMPONENTS, IF WE DO NOT ACHIEVE DESIGN WINS WITH SUCH MANUFACTURERS, WE MAY BE UNABLE TO SECURE
SALES FROM THESE CUSTOMERS IN THE FUTURE. Once a manufacturer of communications equipment has designed a suppliers semiconductor into
its products, the manufacturer may be reluctant to change its source of semiconductors due to the
significant costs associated with qualifying a new supplier. Accordingly, our failure to achieve
design wins with equipment manufacturers, who have chosen a competitors semiconductor could create
barriers to future sales opportunities with these manufacturers. WE MAY NEED TO RAISE ADDITIONAL CAPITAL WHICH MIGHT NOT BE AVAILABLE OR WHICH, IF AVAILABLE,
COULD BE ON TERMS ADVERSE TO OUR COMMON STOCKHOLDERS. We expect that our current cash and cash equivalents and investment securities balances will
be adequate to meet our working capital and capital expenditure needs for at least twelve months.
After that, we may need to raise additional funds, and we cannot be certain that additional
financing will be available in amounts or on terms acceptable to us, if at all. We may also require
additional capital for the acquisition of businesses, products and technologies that are
complementary to ours. Further, if we issue equity securities, the ownership percentage of our
stockholders would be reduced, and the new equity securities may have rights, preferences or
privileges senior to those existing holders of our common stock. If we are unable to obtain this
additional financing, we may not be able to develop or enhance our products, take advantage of
future opportunities or respond to competitive pressures or unanticipated requirements, which could
seriously harm our business, operating results and financial condition. WE DEPEND ON SOLE SOURCE SUPPLIERS FOR SEVERAL KEY COMPONENTS OF OUR PRODUCTS. We obtain certain parts, components and packaging used in the delivery of our products from
sole sources of supply. For example, we obtain certain semiconductor wafers on a sole source basis
from Taiwan Semiconductor Manufacturing Co., Ltd and Semiconductor Manufacturing International
Corporation. If we fail to obtain components in sufficient quantities when required or if we cannot
adequately control manufacturing process quality, product yields or production costs, our business
could be harmed. Developing and maintaining these strategic relationships with our vendors is
critical for us to be successful. Any of our sole source suppliers may:  
    enter into exclusive arrangements with our competitors;
    stop selling their products or components to us at commercially reasonable prices;
    refuse to sell their products or components to us at any price; or
    be subject to production disruptions such as earthquakes. BECAUSE OTHER BROADBAND TECHNOLOGIES MAY COMPETE EFFECTIVELY WITH DSL SERVICES OR OTHER
SERVICES ADDRESSED BY OUR PRODUCTS, A SLOWDOWN IN DEPLOYMENT OF DSL SERVICES, THE LACK OF
SIGNIFICANT GROWTH IN NON-DSL MARKETS THAT WE ARE TARGETING AND OUR LACK OF SUCCESS IN PENETRATING
SUCH MARKETS WOULD ADVERSELY AFFECT OUR BUSINESS AND OPERATING RESULTS. Our revenues are heavily dependent on the increase in demand for DSL services. DSL services
are competing with a variety of different broadband data transmission technologies, including cable
modems, satellite and other wireless technologies. While part of our strategy is to diversify our
product markets beyond DSL into such areas as 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. 19




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WE ARE SUBJECT TO ORDER AND SHIPMENT UNCERTAINTIES, AND ANY SIGNIFICANT ORDER CANCELLATIONS OR
DEFERRALS COULD ADVERSELY AFFECT OUR BUSINESS. We typically sell products pursuant to purchase orders that customers can generally cancel or
defer on short notice without incurring a significant penalty. Any significant cancellations or
deferrals in the future could materially and adversely affect our business, financial condition and
results of operations. In addition, cancellations or deferrals of product orders, the return of
previously sold products or the overproduction of products due to the failure of anticipated orders
to materialize could cause us to hold excess or obsolete inventory, which could reduce our profit
margins, increase product obsolescence and restrict our ability to fund our operations.
Furthermore, we generally recognize revenue upon shipment of products to a customer. If a customer
refuses to accept shipped products, we could incur significant charges against our revenue. WE DERIVE A SUBSTANTIAL AMOUNT OF OUR REVENUES FROM INTERNATIONAL SOURCES, AND DIFFICULTIES
ASSOCIATED WITH INTERNATIONAL OPERATIONS COULD HARM OUR BUSINESS. A substantial portion of our revenues has been derived from customers located outside of the
United States. 75% and 78% of our net revenues for the three months ended March 31, 2005 and 2004,
respectively, were to customers located in Asia. We may be unable to successfully overcome the
difficulties associated with international operations. These difficulties include:  
    staffing and managing foreign operations;
    changes in regulatory requirements;
    licenses, tariffs and other trade barriers;
    political and economic instability;
    difficulties in protecting intellectual property rights in some foreign countries;
    a limited ability to enforce agreements and other rights in some foreign countries;
    obtaining governmental approvals for products; and
    complying with a wide variety of complex foreign laws and treaties. Because sales of our products are denominated exclusively in United States dollars, increases
in the value of the United States dollar could increase the price of our products so that they
become relatively more expensive to customers in the local currency of a particular country,
leading to a reduction in sales and profitability in that country. IF WE DELIVER PRODUCTS WITH DEFECTS, OUR CREDIBILITY WILL BE HARMED, AND THE SALES AND MARKET
ACCEPTANCE OF OUR PRODUCTS WILL DECREASE. Our products are complex and have contained errors, defects and bugs when introduced and
revised. If we deliver products with errors, defects or bugs or products that have reliability,
quality or compatibility problems, our credibility and the market acceptance and sales of our
products could be harmed, which could adversely affect our ability to retain existing customers or
attract new customers. Further, if our products contain errors, defects and bugs, then we may be
required to expend significant capital and resources to alleviate such problems and may have our
sales to customers interrupted or delayed. If any of these problems are not found until we have
commenced commercial production, we may be required to incur additional development costs and
product repair or replacement costs. Defects could also lead to potential liability as a result of
product liability lawsuits against us or against our customers. We have agreed to indemnify our
customers in some circumstances against liability from defects in our products. A successful
product liability claim could seriously harm our business, financial condition and results of
operations, and may divert our technical and other resources from other development efforts. WE MAY EXPERIENCE DIFFICULTIES IN TRANSITIONING TO SMALLER GEOMETRY PROCESS TECHNOLOGIES OR IN
ACHIEVING HIGHER LEVELS OF DESIGN INTEGRATION AND THAT MAY RESULT IN REDUCED MANUFACTURING YIELDS,
DELAYS IN PRODUCT DELIVERIES AND INCREASED EXPENSES. In order to remain competitive, we expect to continue to transition our products to
increasingly smaller line width geometries. This transition will require us to modify the
manufacturing processes for our products and redesign some products. We periodically evaluate the
benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to
reduce our costs, and we have designed some of our products to be manufactured in .35 micron, .25
micron, .18 micron and .13 micron geometry processes. 20




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In the past, we have experienced some
difficulties in shifting to smaller geometry process technologies or new manufacturing processes,
which resulted in reduced manufacturing yields, delays in product deliveries and increased
expenses. We may face similar difficulties, delays and expenses as we continue to transition our
products to smaller geometry processes. We are dependent on our relationships with our foundries to
transition to smaller geometry processes successfully. We cannot assure you that our foundries will
be able to effectively manage the transition or that we will be able to maintain our foundry
relationships. If our foundries or we experience significant delays in this transition or fail to
efficiently implement this transition, our business, financial condition and results of operations
could be materially and adversely affected. As smaller geometry processes become more prevalent, we
expect to continue to integrate greater levels of functionality, as well as customer and third
party intellectual property, into our products. However, we may not be able to achieve higher
levels of design integration or deliver new integrated products on a timely basis, or at all. FUTURE CONSOLIDATION IN THE TELECOMMUNICATIONS EQUIPMENT INDUSTRY MAY INCREASE COMPETITION
THAT COULD HARM OUR BUSINESS. The markets in which we compete are characterized by increasing consolidation both within the
telecommunications equipment sector and by companies combining or acquiring data communications
assets and assets for delivering voice-related services. We cannot predict with certainty how
industry consolidation will affect our competitors. We may not be able to compete successfully in
an increasingly consolidated industry. Increased competition and consolidation in our industry may
require that we reduce the prices of our products or result in a loss of market share, which could
materially adversely affect our business, financial condition and results of operations.
Additionally, because we are now, and may in the future be, dependent on certain strategic
relationships with third parties in our industry, any additional consolidation involving these
parties could reduce the demand for our products and otherwise harm our business prospects. WE MAY MAKE FUTURE ACQUISITIONS AND ACQUISITIONS INVOLVE NUMEROUS RISKS. Our business is highly competitive and, as such, our growth is dependent upon market growth,
our ability to enhance our existing products and our ability to introduce new products on a timely
basis. One of the ways we have addressed and may continue to address the need to develop new
products is through acquisitions of other companies. Acquisitions involve numerous risks, including
the following:  
    difficulties in integration of the operations, technologies and products of the acquired companies;
    the risk of diverting managements attention from normal daily operations of the business;
    potential difficulties in completing projects associated with purchased in-process research and development;
    risks of entering markets in which we have no or limited direct prior experience and
where competitors in such markets have stronger market positions; and
    the potential loss of key employees of the acquired company. Mergers and acquisitions of high-technology companies are inherently risky, and no assurance
can be given that our previous or future acquisitions will be successful and will not materially
adversely affect our business, operating results or financial condition. We must also maintain our ability to manage such growth effectively. Failure to manage growth
effectively and successfully integrate acquisitions could harm our business and operating results. OUR FUTURE SUCCESS WILL DEPEND IN PART ON OUR ABILITY TO PROTECT OUR PROPRIETARY RIGHTS AND
THE TECHNOLOGIES USED IN OUR PRINCIPAL PRODUCTS, AND IF WE DO NOT ENFORCE AND PROTECT OUR
INTELLECTUAL PROPERTY, OUR BUSINESS WILL BE HARMED. We rely on a combination of patent, copyright and trademark laws, trade secrets,
confidentiality agreements and other contractual provisions to protect our proprietary rights.
However, these measures afford only limited protection. Our failure to adequately protect our
proprietary rights may adversely affect us. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain and use trade secrets
or other information that we regard as proprietary. The laws of some foreign countries do not protect our proprietary rights to the same extent as
do the laws of the United States, and many U.S. companies have encountered substantial infringement
problems in these countries. There is a risk that our efforts to protect proprietary rights may not
be adequate. For example, our competitors may independently develop similar technology, duplicate
our products or design around our patents or our other intellectual property
rights. If we fail to
adequately protect our intellectual property 21




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or if the laws of a foreign jurisdiction do not
effectively permit such protection, it would be easier for our competitors to sell competing
products. 
 ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary objective of our 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, 2005, all
of our investments were in money market funds, high quality commercial paper, government and
non-government debt securities and auction rate preferred securities. A hypothetical 100 basis
point increase in interest rates would result in an approximate $75,000 decrease in the fair value
of our available-for-sale securities as of March 31, 2005. 
 ITEM 4. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures.Our management evaluated, with the participation
of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure that information we
are required to disclose in reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Changes in internal control over financial reporting.There was no change in our internal control
over financial reporting that occurred during the period covered by this Quarterly Report on Form
10-Q that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. 
 PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS In August 2004, Fujitsu Limited filed a suit against Centillium Communications, Inc. and
Centillium Japan K.K. (Centillium Japan) in the Tokyo District Court alleging that Centillium and
Centillium Japan infringe one Japanese patent jointly owned by Fujitsu and Ricoh Co. Ltd. The
complaint seeks monetary damages against Centillium and Centillium Japan. The Company is in the
process of evaluating the complaint, and the probable outcome of this suit cannot be predicted with
any certainty and a reasonable range of loss, if any, cannot be estimated. An unfavorable ruling
could have a material adverse impact on the Companys financial position or results of operations. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 
 ITEM 5. OTHER INFORMATION None 22




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ITEM 6. EXHIBITS  31.1
    Certification of the Chief Executive Officer Pursuant to Rules 13a-14
and 15d -14 under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    Certification of the Chief Financial Officer Pursuant to Rules 13a-14
and 15d -14 under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    Certification of the Chief Executive Officer of Centillium
Communications, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    Certification of the Chief Financial Officer of Centillium
Communications, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 23




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CENTILLIUM COMMUNICATIONS, I NC.(Registrant)Dated: May 9, 2005
    
    By:
    
    /s/ J. SCOTT KAMSLERJ. Scott KamslerVice President and Chief Financial Officer(Principal Financial and Accounting
Officer)
 24




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Exhibit Index  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.