<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             Amendment Number 1 to

                                    FORM 10-Q

                   QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                                       OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                    For the Quarter Ended September 30, 2001
                         Commission File Number 0-16852

                               KOMAG, INCORPORATED
                  (Debtor-in-Possession as of August 24, 2001)
                                  (Registrant)

                      Incorporated in the State of Delaware
                I.R.S. Employer Identification Number 94-2914864
               1710 Automation Parkway, San Jose, California 95131
                            Telephone: (408) 576-2000

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 such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                               Yes   X   No      .
                                   -----   -----

On September 30, 2001, 111,924,983 shares of the Registrant's common stock,
$0.01 par value, were issued and outstanding.


<PAGE>

                                      INDEX

                               KOMAG, INCORPORATED


<TABLE>
<CAPTION>
                                                                                              Page No.
                                                                                              --------
<S>         <C>                                                                               <C>
PART I.      FINANCIAL INFORMATION

Item 1.      Consolidated Financial Statements (Unaudited)

             Consolidated statements of operations -Three and nine months
             ended September 30, 2001 and October 1, 2000 ...............................           3

             Consolidated balance sheets - September 30, 2001
             and December 31, 2000 ......................................................           4

             Consolidated statements of cash flows - Nine
             months ended September 30, 2001 and October 1, 2000 ........................           5

             Notes to consolidated financial statements - September 30, 2001 ............        6-18

Item 2.      Management's Discussion and Analysis of
             Financial Condition and Results of Operations ..............................       19-38

PART II.     OTHER INFORMATION

Item 1.      Legal Proceedings ..........................................................          38

Item 2.      Changes in Securities ......................................................          38

Item 3.      Defaults Upon Senior Securities ............................................          38

Item 4.      Submission of Matters to a Vote of Security Holders. .......................          39

Item 5.      Other Information ..........................................................          39

Item 6.      Exhibits and Reports on Form 8-K ...........................................          39

SIGNATURES ..............................................................................          40
</TABLE>


                                      -2-

<PAGE>

PART I.   FINANCIAL INFORMATION


                               KOMAG, INCORPORATED
                             (DEBTOR-IN-POSSESSION)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)



<TABLE>
<CAPTION>
                                                                Three Months Ended                Nine Months Ended
                                                            --------------------------        --------------------------
                                                             SEPT 30           Oct 1           SEPT 30           Oct 1
                                                               2001            2000              2001            2000
                                                            ---------        ---------        ---------        ---------
<S>                                                         <C>              <C>              <C>              <C>
Net sales to unrelated parties                              $  18,380        $  39,684        $ 107,888        $ 105,396
Net sales to related parties                                   41,011           44,485          116,710          141,874
                                                            ---------        ---------        ---------        ---------
          NET SALES                                            59,391           84,169          224,598          247,270

Cost of sales                                                  58,246           74,396          230,927          214,725
                                                            ---------        ---------        ---------        ---------
          GROSS PROFIT (LOSS)                                   1,145            9,773           (6,329)          32,545

Operating expenses:
     Research, development, and engineering                     9,690            8,276           30,184           25,168
     Selling, general, and administrative                       4,704            2,985           16,776           10,399
     Amortization of intangibles                                6,505            2,555           20,575            7,665
     Impairment/restructuring charges (credits)                    --               --           43,020           (2,661)
                                                            ---------        ---------        ---------        ---------
                                                               20,899           13,816          110,555           40,571
                                                            ---------        ---------        ---------        ---------
          OPERATING LOSS                                      (19,754)          (4,043)        (116,884)          (8,026)

Other income (expense):
     Interest income                                              181              734            1,437            2,884
     Interest expense (contractual interest was
     $115.0 million and $158.7 million for the three-
     and nine-month periods ended September 30, 2001)        (111,464)          (8,906)        (155,192)         (22,814)
     Other, net                                                 2,458             (285)           4,092              286
                                                            ---------        ---------        ---------        ---------
                                                             (108,825)          (8,457)        (149,663)         (19,644)
                                                            ---------        ---------        ---------        ---------
Loss before reorganization costs, income taxes,
   minority interest, equity in unconsolidated
   company loss, and extraordinary gain                      (128,579)         (12,500)        (266,547)         (27,670)
Reorganization costs, net                                       2,837               --            2,837               --
Provision for (benefit from) income taxes                     (10,519)             366           (9,738)           1,192
                                                            ---------        ---------        ---------        ---------
Loss before minority interest, equity in
   unconsolidated company loss, and
   extraordinary gain                                        (120,897)         (12,866)        (259,646)         (28,862)
Minority interest in net income (loss)
  of consolidated subsidiary                                      396             (291)             (41)            (747)
Equity in net loss of unconsolidated company                      999               --            2,664               --
                                                            ---------        ---------        ---------        ---------
          LOSS BEFORE EXTRAORDINARY GAIN                     (122,292)         (12,575)        (262,269)         (28,115)
Extraordinary gain                                                 --               --               --            3,772
                                                            ---------        ---------        ---------        ---------
          NET LOSS                                          $(122,292)       $ (12,575)       $(262,269)       $ (24,343)
                                                            =========        =========        =========        =========

Basic and diluted loss before extraordinary
  gain per share                                            $   (1.09)       $   (0.19)       $   (2.35)       $   (0.42)
Basic and diluted extraordinary
  gain per share                                                   --               --               --             0.06
                                                            ---------        ---------        ---------        ---------
Basic and diluted net loss per share                        $   (1.09)       $   (0.19)       $   (2.35)       $   (0.36)
                                                            =========        =========        =========        =========

Number of shares used in basic and
  diluted computations                                        111,925           66,792          111,800           66,236
                                                            =========        =========        =========        =========
</TABLE>


                 See notes to consolidated financial statements.


                                      -3-
<PAGE>

                               KOMAG, INCORPORATED
                             (DEBTOR-IN-POSSESSION)
                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands)



<TABLE>
<CAPTION>
                                                                       SEPT 30            Dec 31
                                                                         2001              2000
                                                                      ---------          ---------
                                                                     (UNAUDITED)          (note)
<S>                                                                   <C>                <C>
ASSETS
Current assets
       Cash and cash equivalents                                      $  10,813          $  71,067
       Short-term investments                                             1,323              9,597
       Accounts receivable (including $25,737 and $19,498 due
         from related parties in 2001and 2000, respectively)
         less allowances of $2,287 in 2001 and $5,348 in 2000            32,386             40,243
       Inventories:
            Raw materials                                                 6,402              8,883
            Work-in-process                                               2,394              5,778
            Finished goods                                                3,333              6,781
                                                                      ---------          ---------
                  Total inventories                                      12,129             21,442
       Prepaid expenses and deposits                                      3,308              6,299
                                                                      ---------          ---------
                  Total current assets                                   59,959            148,648
Investment in unconsolidated company                                      5,336             12,000
Property, plant and equipment
       Land                                                               7,785              7,785
       Buildings                                                        163,238            136,149
       Equipment                                                        480,159            497,233
       Furniture                                                          7,549              7,517
       Leasehold improvements                                            30,478             31,931
                                                                      ---------          ---------
                                                                        689,209            680,615
       Less allowances for depreciation and amortization               (438,577)          (396,097)
                                                                      ---------          ---------
                  Net property, plant and equipment                     250,632            284,518
       Land and buildings held for sale                                  35,000             70,355

Goodwill and other net intangible assets (see Note 5)                    95,556            116,131
Deposits and other assets                                                 1,372              1,409
                                                                      ---------          ---------
                                                                      $ 447,855          $ 633,061
                                                                      =========          =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities

       Current portion of long-term debt                              $      --          $ 216,740
       Trade accounts payable                                            10,148             29,014
       Accounts payable to related parties                                9,096              2,487
       Accrued compensation and benefits                                 12,189             13,866
       Other liabilities                                                    589             18,704
       Other liabilities to related party                                 6,756             12,000
       Accrued costs to exit certain business activities                    807             17,927
       Income taxes payable                                                  25                  6
       Restructuring liabilities                                          1,191             14,277
                                                                      ---------          ---------
                  Total current liabilities                              40,801            325,021
Note payable to related party                                                --             25,649
Convertible subordinated debt                                                --            111,896
Deferred income taxes                                                     1,006             11,813
Other long-term liabilities                                                 910              5,441
                                                                      ---------          ---------
                  Total liabilities not subject to compromise            42,717            479,820

Liabilities subject to compromise (Note 3)                              514,612                 --
Minority interest in consolidated subsidiary                              1,339              1,380

Stockholders' equity (deficit)
       Preferred stock                                                       --                 --
       Common stock                                                       1,119              1,116
       Additional paid-in capital                                       586,304            586,133
       Accumulated deficit                                             (698,236)          (435,967)
       Accumulated other comprehensive income                                --                579
                                                                      ---------          ---------
                  Total stockholders' equity (deficit)                 (110,813)           151,861
                                                                      ---------          ---------
                                                                      $ 447,855          $ 633,061
                                                                      =========          =========
</TABLE>

Note: The balance sheet at December 31, 2000 has been derived from the audited
      financial statements at that date.


                 See notes to consolidated financial statements.


                                      -4-




<PAGE>

                               KOMAG, INCORPORATED
                             (DEBTOR-IN-POSSESSION)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)



<TABLE>
<CAPTION>
                                                                                          Nine Months Ended
                                                                                      ----------------------------
                                                                                       SEPT 30              Oct 1
                                                                                         2001                2000
                                                                                      ---------          ---------
<S>                                                                                   <C>                <C>
OPERATING ACTIVITIES
      Net loss                                                                        $(262,269)         $ (24,343)
      Adjustments to reconcile net loss to net cash
           provided by (used in) operating activities, excluding
           reorganization items:
            Impairment charge related to property, plant, and equipment                  43,020                 --
            Depreciation and amortization                                                53,339             56,644
            Amortization of intangibles                                                  20,575              7,665
            Extraordinary gain                                                               --             (3,772)
            Provision for losses on accounts receivable                                    (312)               200
            Interest accrual on note payable to related party                             3,196              3,190
            Accretion and amortization of interest on debt                              130,861              2,302
            Equity in net loss of unconsolidated company                                  2,664                 --
            Realized gain on cumulative translation adjustment                             (579)                --
            Loss on disposal of property, plant and equipment                               145                248
            Deferred income taxes                                                       (10,807)                --
            Deferred rent                                                                    --                147
            Minority interest in net loss of consolidated subsidiary                        (41)              (747)
            Changes in operating assets and liabilities:
                  Accounts receivable                                                    14,408             (8,946)
                  Accounts receivable from related parties                               (6,239)             8,144
                  Inventories                                                             9,313                274
                  Prepaid expenses and deposits                                              22             (4,252)
                  Trade accounts payable                                                 (6,456)             4,646
                  Accounts payable to related parties                                      (147)             1,516
                  Accrued compensation and benefits                                      (1,677)                15
                  Other liabilities                                                       6,002            (10,718)
                  Other liabilities to related party                                     (7,827)                --
                  Income taxes refundable                                                    27                629
                  Accrued costs to exit certain business activities                     (14,080)                --
                  Restructuring liabilities                                              (5,320)           (16,793)
                                                                                      ---------          ---------
                                                                                        (32,182)            16,049
          Reorganization items:
                   Accretion of discount on note payable to related party                 2,270                 --
                   Professional fees                                                        600                 --
                                                                                      ---------          ---------
                          Net cash provided by (used in) operating activities           (29,312)            16,049

INVESTING ACTIVITIES
      Acquisition of property, plant and equipment                                      (24,947)           (13,875)
      Purchases of short-term investments                                                (5,133)            (5,382)
      Proceeds from short-term investments at maturity                                   13,407              7,091
      Proceeds from disposal of property, plant and equipment                               520              1,233
      Deposits and other assets                                                              37              2,307
                                                                                      ---------          ---------
                         Net cash used in investing activities                          (16,116)            (8,626)

FINANCING ACTIVITIES
      Repayment of debt                                                                 (15,000)           (22,500)
      Sale of common stock, net of issuance costs                                           174              1,776
                                                                                      ---------          ---------
                         Net cash used in financing activities                          (14,826)           (20,724)

                      Decrease in cash and cash equivalents                             (60,254)           (13,301)

      Cash and cash equivalents at beginning of year                                     71,067             65,116
                                                                                      ---------          ---------

                      Cash and cash equivalents at end of period                      $  10,813          $  51,815
                                                                                      =========          =========
</TABLE>


                 See notes to consolidated financial statements.


                                       -5-

<PAGE>

                               KOMAG, INCORPORATED
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

                               SEPTEMBER 30, 2001


NOTE 1 - BASIS OF PRESENTATION AND POLICY

        The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all normal recurring
adjustments considered necessary for a fair presentation of the financial
position, operating results, and cash flows for the periods presented, have been
included. Operating results for the three and nine-month periods ended September
30, 2001 are not necessarily indicative of the results that may be expected for
the year ending December 30, 2001.

        As discussed in Note 2, Komag, Incorporated (KUS) filed a voluntary
petition for reorganization under Chapter 11 of the United States Bankruptcy
Code on August 24, 2001 (the "Petition Date"). The petition was filed with the
United States Bankruptcy Court for the Northern District of California. The case
has been assigned to the Honorable James R. Grube under case number
01-54143-JRG. The petition affects only the Company's U.S. corporate parent,
KUS, and does not include any of its subsidiaries, including Komag Material
Technology (KMT), or Komag USA (Malaysia) Sdn (KMS). The Company is operating
its business as a debtor-in-possession.

        The financial statements have been prepared on a going-concern basis,
which contemplates continuity of operations, realization of assets, and
liquidation of liabilities in the normal course of business. As a result of the
Company's recurring losses, as well as the Chapter 11 Bankruptcy and related
circumstances (including the Company's substantial debt and current economic
conditions), realization of assets and liquidation of liabilities are subject to
significant uncertainty. These matters, among others, raise substantial doubt
about the Company's ability to continue as a going concern. The Company's
ability to continue as a going concern depends on, among other things, the
ability to: 1) develop a Plan of Reorganization acceptable to the Bankruptcy
Court; 2) achieve satisfactory levels of future profitable operations; 3)
maintain adequate financing; and 4) generate adequate cash from operations to
meet future obligations.

        In connection with the Chapter 11 Bankruptcy, the Company is required to
prepare its financial statements as of September 30, 2001 in accordance with
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code," issued by the American Institute of Certified Public
Accountants (SOP 90-7). In accordance with SOP 90-7, all of the Company's
pre-petition liabilities that are subject to compromise under the proposed Plan
of Reorganization (as defined in Note 2) are segregated in the Company's
consolidated balance sheet as liabilities subject to compromise. These
liabilities are recorded at the amounts expected to be allowed as claims in the
Chapter 11 case rather than as estimates of the amounts for which those allowed
claims may be settled as a result of the approved Plan of Reorganization. As of
the effective date of the Plan of Reorganization, the Company expects to adopt
"fresh start" reporting as defined in SOP 90-7. In accordance with "fresh start"
reporting, the reorganization value of the Company will be allocated to the
emerging entity's specific tangible and



                                      -6-
<PAGE>


identified intangible assets. Excess reorganization value, if any, will be
reported as "reorganization value in excess of amounts allocable to identifiable
assets." As a result of the adoption of such "fresh start" reporting, the
Company's post-emergence financial statements ("successor") will not be
comparable with its pre-emergence financial statements ("predecessor"),
including the historical financial statements included in this quarterly report.

        The accompanying statements of operations reflect certain reorganization
costs, including professional fees and accretion to full value of the note
payable to a related party. Interest expense on the Company's senior bank debt,
subordinated convertible notes, subordinated unsecured convertible debt, and
note payable has been recorded to the petition date. Such interest expense was
not recorded subsequent to that date because it will not be paid during the
bankruptcy case (except from distributions otherwise allocable to subordinated
creditors) and will not be an allowed claim under the Plan of Reorganization.
The difference between recorded interest expense and stated contractual interest
expense is approximately $3.5 million for the period from August 25 to September
30, 2001.

        In accordance with SOP 90-7, a significant portion of the Company's
outstanding debt, related accrued interest, and pre-petition accounts payable is
classified as "liabilities subject to compromise" at September 30, 2001.
Comparable items in the prior year have not been reclassified to the
presentation required by SOP 90-7. See Note 3 for a complete description of
liabilities subject to compromise.

        The accompanying consolidated financial statements include the
consolidated financial position and results of operations of all of the
Company's entities, including KUS. The following condensed financial statements
reflect the financial position and results of operations of KUS only, using the
equity method of accounting for reporting the results of operations of all
subsidiaries of the Company which are not debtors in the Chapter 11 case.


Komag, Incorporated (KUS)
Debtor-In-Possession
Condensed Statement of Operations (Unaudited)
(In Thousands)


<TABLE>
<CAPTION>
                                                                   Three               Nine
                                                                   Months             Months
                                                                   Ended              Ended
                                                                 ---------          ---------
                                                                  Sept 30            Sept 30
                                                                    2001               2001
                                                                 ---------          ---------
<S>                                                              <C>                <C>
Net sales                                                        $   1,776          $  30,848
Cost of sales                                                       (6,935)           (65,535)
                                                                 ---------          ---------
      Gross loss                                                    (5,159)           (34,687)

Research, development, and engineering expenses                      7,779             19,957
Selling, general, and administrative expenses                        3,468             12,965
Amortization of intangible assets                                    3,950             12,910
Impairment/restructuring charges (credits)                              --             43,020
                                                                 ---------          ---------
      Operating loss                                               (20,356)          (123,539)

Interest income                                                         89              1,158
Interest expense                                                  (111,464)          (155,192)
Intercompany income from non-debtor subsidiaries, net               17,329             70,606
Other income, net                                                    2,769              3,541
Equity in net income (loss) of non-debtor subsidiaries             (17,974)           (52,244)
                                                                 ---------          ---------
Loss before reorganization costs, income taxes, minority
   interest and equity in unconsolidated company loss             (129,607)          (255,670)
Reorganization costs, net                                            2,837              2,837
Provision for (benefit from) income taxes                          (10,152)            (9,436)
                                                                 ---------          ---------
     Loss before extraordinary gain                               (122,292)          (262,269)
Extraordinary gain                                                      --                 --
                                                                 ---------          ---------
     Net loss                                                    $(122,292)         $(262,269)
                                                                 =========          =========
</TABLE>




                                      -7-
<PAGE>

Komag, Incorporated (KUS)
Debtor-In-Possession
Condensed Balance Sheet (Unaudited)
(In Thousands)


<TABLE>
<CAPTION>
                                                                September 30,
                                                                   2001
                                                               -------------
<S>                                                               <C>
ASSETS

Current Assets
     Cash and cash equivalents                                    $   3,551
     Accounts receivable, net                                         2,707
     Intercompany receivables with companies not
          debtors in bankruptcy                                      13,851
     Inventories, net                                                   726
     Prepaid expenses and deposits                                    1,736
                                                                  ---------
              Total current assets                                   22,571

Investment in subsidiaries not debtors in bankruptcy                258,325
Investment in unconsolidated company                                  5,336
Net property, plant and equipment                                    63,006
Goodwill and other net intangible assets                             90,445
Deposits and other assets                                             1,299
Long-term intercompany receivables with companies
   not debtors in bankruptcy                                        195,572
                                                                  ---------
              Total assets                                        $ 636,553
                                                                  =========

Liabilities and Stockholders' Equity
Current liabilities

     Trade accounts payable                                       $   1,348
     Intercompany payables with companies not
          debtors in bankruptcy                                         454
     Accrued compensation and benefits                                7,092
     Other liabilities                                                   97
     Other liabilities to related parties                             6,756
     Costs to exit certain business activities                          807
     Restructuring liabilities
                                                                  ---------
              Total current liabilities                              16,554

Deferred income taxes                                                 1,006
Other long-term liabilities                                             910
Minority interest in consolidated subsidiary                              0
                                                                  ---------
              Total liabilities not subject to compromise            18,470

Liabilities subject to compromise                                   514,612

Stockholders' equity
     Common stock                                                     1,119
     Additional paid-in capital                                     586,205
     Accumulated deficit                                           (483,853)
                                                                  ---------
              Total stockholders' equity                            103,471
                                                                  ---------
              Total liabilities and stockholders' equity          $ 636,553
                                                                  =========
</TABLE>



                                      -8-
<PAGE>

        For further information, refer to the consolidated financial statements
and related footnotes included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000.

        The Company uses a 52-53 week fiscal year ending on the Sunday closest
to December 31. The three-month reporting periods included in this report are
comprised of thirteen weeks.



                                      -9-
<PAGE>

        Certain reclassifications have been made to the prior year balances in
order to conform to the current year presentation.

        Long-lived assets and certain identifiable intangible assets are
generally evaluated for impairment on an individual acquisition, market, or
product basis whenever events or changes in circumstances indicate that such
assets may be impaired or the estimated useful lives are no longer appropriate.
The Company considers the primary indicators of impairment to include
significant decreases in unit volumes, unit prices or significant increases in
production costs. Periodically, the Company reviews its long-lived assets and
certain identifiable intangible assets for impairment based on estimated future
undiscounted cash flows attributable to the assets. In the event such cash flows
are not expected to be sufficient to recover the recorded value of the assets,
the assets are written down to their estimated fair values utilizing discounted
cash flows. The discount rate that will be used will be based on the estimated
incremental borrowing rate at the date of the event that triggered the
impairment.

NOTE 2 - REORGANIZATION UNDER CHAPTER 11

        On August 24, 2001, Komag, Incorporated filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code. The
Company has continued operations since the petition date, and expects to
continue its operations during the Chapter 11 process.

        The Company filed a proposed Plan of Reorganization on September 21,
2001, which it amended on November 9, 2001, and by which it intends to satisfy
and discharge the claims underlying the liabilities discussed in Note 3 below.
As amended, the proposed Plan of Reorganization, which must be confirmed by the
Bankruptcy Court, currently has the support of creditors holding more than
one-half, or $260 million, of the Company's estimated outstanding debt.

        On November 9, 2001, the Bankruptcy Court held a hearing regarding the
adequacy of information in the amended Disclosure Statement that was previously
filed with respect to the amended Plan of Reorganization. The Court
preliminarily approved the amended Disclosure Statement, subject to some changes
which are not substantive. The Company made the necessary modifications, and
sent the Disclosure Statement and the proposed Plan of Reorganization to all of
its creditors and shareholders on November 14, 2001.

        The proposed Plan of Reorganization may be modified materially before it
is confirmed.

NOTE 3 - LIABILITIES SUBJECT TO COMPROMISE

        Liabilities included in the accompanying consolidated balance sheet at
September 30, 2001, which are subject to compromise under the terms of the Plan
of Reorganization, are summarized as follows (in thousands):


<TABLE>
<S>                                                      <C>
Priority Tax Claims                                       $  1,861
Loan Restructure Agreement Claims                          206,140
Western Digital Note Claim                                  33,783
Western Digital Rejection Claims                             9,087
Convertible Notes Claims                                    10,193
Subordinated Notes Claims                                  238,258
General Unsecured Claims                                    15,290
                                                          --------
          Total liabilities subject to compromise         $514,612
                                                          ========
</TABLE>



                                      -10-
<PAGE>

        The above balance sheet amounts may differ from the estimates included
in the amended Disclosure Statement filed on November 9, 2001. The estimates in
the amended Disclosure Statement reflect the Company's best estimate as of
November 9, 2001, as to the claims that will be allowed in the bankruptcy case.

Priority Tax Claims

        This reflects the liability for property, sales, and income taxes that
were unpaid as of August 24, 2001.

Loan Restructure Agreement Claims

        This reflects the outstanding $201.7 million principal balance of the
senior unsecured bank debt. In June 2000, the Company entered into a senior
unsecured loan restructure agreement with its senior lenders. Under the loan
restructure agreement, the bank debt became due and payable on June 30, 2001.
The amount includes accrued interest of $4.4 million through August 24, 2001.

Western Digital Note Claim

        This reflects a note to Western Digital in the principal amount of $30.1
million in connection with the purchase of the assets of Western Digital's media
operation in April 1999. The note is subordinate to the Company's senior bank
debt. The note was originally due in April 2002 and was subordinated to the
Company's senior bank debt. The amount includes $3.7 million in accrued interest
through August 24, 2001.

Western Digital Rejection Claims

        This reflects the liability for all unused equipment leases in
connection with the closure of the media operation acquired from Western Digital
in April 1999.

Convertible Notes Claims

        This reflects the outstanding $9.3 million of subordinated unsecured
convertible debt that was scheduled to mature in 2005. This convertible debt was
issued in June 2000 as part of the restructuring of the senior bank debt. The
convertible debt lenders have the right to purchase additional convertible notes
in an aggregate principal amount of up to $35.7 million. The original $9.3
million in convertible notes is convertible into shares of the Company's common
stock, at the lenders' option, at any time on or after the issuance date of the
convertible notes, at a conversion price of $2.53. The convertible notes bear
interest of 8%, payable on the maturity date of the convertible notes. At the
Company's option, the convertible notes are convertible into the Company's
common stock, with no forced conversion for two years, on any date on which the
closing sale price of the common stock has been, for seven of ten consecutive
trading days, greater than 200% of the conversion price in effect on the
issuance date of the applicable convertible notes. This amount includes $0.9
million in accrued interest through August 24, 2001.



                                      -11-
<PAGE>

Subordinated Notes Claims

        This reflects the outstanding $230.0 million in subordinated convertible
notes assumed in the merger with HMT Technology. The HMT notes originally bore
interest at 5 3/4% payable semiannually on January 15 and July 15, were
convertible into shares of common stock of the Company at a conversion price of
$26.12, and were scheduled to mature in January 2004. The Company has not paid
the interest on the HMT notes that was due on July 15, 2001. This amount
includes $8.3 million in accrued interest through August 24, 2001.

General Unsecured Claims

        This reflects the liability for: 1) all materials and services that were
received by KUS but not yet paid as of August 24, 2001; 2) remaining lease
payments for unused equipment leased by HMT Technology; and 3) unpaid severance
costs as of August 24, 2001.

NOTE 4 - INVESTMENT IN DEBT SECURITIES

        The Company invests its excess cash in high-quality, short-term debt
instruments. None of the Company's investments in debt securities have
maturities greater than one year. The following is a summary of the Company's
investments by major security type at amortized cost, which approximates fair
value:

<TABLE>
<CAPTION>
                                                         SEPTEMBER 30,         December 31,
                                                             2001                  2000
                                                         -------------         ------------
                                                                   (in thousands)
<S>                                                         <C>                   <C>
Municipal auction rate certificates                         $    --               $28,500
Corporate debt securities                                     3,149                17,153
Mortgage-backed securities                                       --                13,991
Government-backed securities                                  3,157                 8,045
                                                            -------               -------
                                                            $ 6,306               $67,689
                                                            =======               =======

Amounts included in cash and cash equivalents               $ 4,983               $58,092
Amounts included in short-term investments                    1,323                 9,597
                                                            -------               -------
                                                            $ 6,306               $67,689
                                                            =======               =======
</TABLE>

The Company utilizes zero-balance accounts and other cash management tools to
invest all available funds including bank balances in excess of book balances.


                                      -12-
<PAGE>
NOTE 5 - GOODWILL AND OTHER NET INTANGIBLE ASSETS

The following table presents the details of the goodwill and other net
intangible assets:

<TABLE>
<CAPTION>
                                                            SEPT 30          Dec 31
                                                             2001             2000
                                                           --------         --------
                                                                (in thousands)
<S>                                                        <C>              <C>
Goodwill associated with purchase of assets
      and volume purchase agreement from
      Western Digital, net                                 $  5,111         $ 12,776

Goodwill associated with HMT merger, net                     84,917           95,532
Other intangibles associated with HMT merger, net:
      Current technology                                      3,198            3,996
      Patents                                                 2,330            2,768
      Other                                                      --            1,059
                                                           --------         --------
                                                             90,445          103,355
                                                           --------         --------
Net goodwill and other intangible assets                   $ 95,556         $116,131
                                                           ========         ========
</TABLE>

        The remaining goodwill will be amortized using the straight-line method
through December 30, 2001. The other intangibles are being amortized using the
straight-line method. Subsequent to December 30, 2001, the Company will follow
the guidance prescribed by FAS 142. See Note 16.

NOTE 6 - INCOME TAXES

        The Company derived income tax benefits of $10.5 million and $9.7
million for the three- and nine-month periods ended September 30, 2001,
primarily related to the expiration of a statutory period to audit the Company's
state tax returns, net of foreign withholding taxes on royalty and interest
payments, and foreign taxes of subsidiaries.

        The Company's income tax provisions for the three- and nine-month
periods ended October 1, 2000, were $0.4 and $1.2 million, respectively, and
represented foreign withholding taxes on royalty and interest payments, and
foreign taxes of subsidiaries.

        The Company's wholly-owned thin-film media operation, KMS, received a
five-year extension of its initial tax holiday through June 2003, for its first
plant site in Malaysia. KMS has also been granted an additional eight-year and
ten-year tax holiday through December 2006 and 2008 for its second and third
plant sites in Malaysia, respectively, based on achieving certain investment
criteria.



                                      -13-
<PAGE>

NOTE 7 - COMPREHENSIVE LOSS

        Comprehensive loss for the three- and nine-month periods ended September
30, 2001, and October 1, 2000, in the accompanying Consolidated Statements of
Operations is the same as the Company's net loss.

        Accumulated other comprehensive income at December 31, 2000, in the
accompanying Consolidated Balance Sheets consists entirely of accumulated
foreign currency translation adjustments. These accumulated foreign currency
translation adjustments were realized as a gain due to the liquidation of the
Company's joint venture in Japan in the three-month period ended April 1, 2001,
resulting in a zero balance in accumulated other comprehensive income at
September 30, 2001.

NOTE 8 - RESTRUCTURING CHARGES

        In the third quarter of 1999, the Company implemented a restructuring
plan based on an evaluation of the size and location of its existing production
capacity relative to the short-term and long-term market demand outlook. Under
the 1999 restructuring plan, the Company decided to close its U.S. manufacturing
operations in San Jose, California. The restructuring actions resulted in a
charge of $139.3 million and included $98.5 million for leasehold improvements
and equipment write-offs, $17.7 million for future liabilities under
non-cancelable equipment leases associated with equipment no longer being used,
$15.6 million for severance pay associated with approximately 980 terminated
employees (all in the U.S. and predominately all from the manufacturing area),
and $7.5 million in plant closure costs. Non-cash items included in the
restructuring charge totaled $98.5 million for the write-off of leasehold
improvements and equipment.

        The following table summarizes these 1999 restructuring activities
during the first nine months of 2001:


<TABLE>
<CAPTION>
                                     Liabilities Under
                                       Non-Cancelable
                                         Equipment
(in millions)                              Leases              Total
                                     -----------------         ------
<S>                                        <C>                 <C>
Balance at December 31, 2000               $ 6.3               $ 6.3
Charged to Reserve                          (2.4)               (2.4)
Reclassifications                           (3.9)               (3.9)
                                           -----               -----
Balance at September 30, 2001              $ 0.0               $ 0.0
                                           =====               =====
</TABLE>

        In the third quarter of 2001, the remaining reserve balance of $3.9
million associated with certain Western Digital unused equipment leases was
reclassified to Liabilities Subject to Compromise (see Note 3). In 2001, 2000,
and 1999, the Company made cash payments totaling $39.2 million.

        In the first quarter of 2000, the 1999 restructuring reserves were
reduced by a total of $2.0 million. The writedown of net book value of equipment
and leasehold improvements was increased by $2.4 million during the first
quarter of 2000 for additional equipment that was determined unusable due to the
restructure. The facility closure liability was reduced by $3.7 million in the
first quarter of 2000 due to successfully terminating the leases on
manufacturing facilities and subleasing the administrative facility earlier than
originally expected. The severance costs liability was reduced by $0.7 million
due to lower than expected payments in the first quarter of 2000.

        In December 2000, the Company implemented a restructuring plan related
to KMT's U.S. manufacturing operations in May 2001. This restructuring action
resulted in a charge of $8.0 million, and included $2.6 million of severance pay
associated with eliminating approximately 160 positions, primarily in
manufacturing, $4.5 million associated with the write-down of equipment and
leasehold improvements, and $0.9 million associated with related facility
closing costs. Through the first nine months of 2001, charges to the reserve of
$6.8 million had been made. The balance of the restructuring costs is expected
to be paid through 2004, the remaining lease term of the facility.



                                      -14-
<PAGE>

        The following table summarizes these 2000 restructuring activities:

2000 Restructuring Reserve


<TABLE>
<CAPTION>
                                     Writedown Net Book
                                     Value of Equipment     Facility
                                        and Leasehold        Closure        Severance
(in millions)                           Improvements          Costs           Costs          Total
                                     ------------------     --------        ---------        ------
<S>                                  <C>                   <C>              <C>             <C>
Balance at December 31, 2000               $ 4.5              $ 0.9           $ 2.6          $ 8.0
Charged to Reserve                          (4.5)              (0.1)           (2.2)          (6.8)
                                           -----              -----           -----          -----
Balance at September 30, 2001              $  --              $ 0.8           $ 0.4          $ 1.2
                                           =====              =====           =====          =====
</TABLE>

NOTE 9 - IMPAIRMENT/RESTRUCTURING CHARGES

        In the second quarter of 2001, the Company recorded impairment charges
of $43.0 million. A charge of $35.4 million reflected the write-down of land and
buildings held for sale in Eugene, Oregon, and Fremont, California. The
write-down reflected currently depressed market conditions for commercial real
estate and was based on estimated fair market value quotes received from local
realtors, less estimated selling expenses. The remaining $7.6 million charge
primarily reflected the recognition of lease obligations for equipment no longer
in service due to the general slowdown in the economy and the related weak media
market.

NOTE 10 - LOSS PER SHARE

        The net loss per share was computed using only the weighted average
number of shares of common stock outstanding during the period.

        Incremental common shares attributable to the exercise of outstanding
options (assuming proceeds would be used to purchase treasury stock) of 84,672
and 120,559 for the three months ended September 30, 2001 and October 1, 2000,
respectively, and 300,850 and 227,656 for the nine months ended September 30,
2001 and October 1, 2000, respectively, were not included in the net loss per
share computation because the effect would be antidilutive.

        Incremental common shares attributable to the exercise of outstanding
warrants (assuming proceeds would be used to purchase treasury stock) of zero
and 200,693 for the three months ended September 30, 2001 and October 1, 2000,
and of zero and 87,635 for the nine months ended September 30, 2001 and October
1, 2000, respectively, were not included in the net loss per share computation
because the effect would be antidilutive.

        Incremental common shares attributable to convertible debt of 12,474,181
and 3,668,668 for the three months ended September 30, 2001, and October 1,
2000, respectively, and of 12,474,181 and 2,479,375 for the nine months ended
September 30, 2001, and October 1, 2000, respectively, were not included in the
net loss per share computation because the effect would be antidilutive.



                                      -15-
<PAGE>

NOTE 11 - USE OF ESTIMATES

        The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

NOTE 12 - LIABILITIES ASSOCIATED WITH PURCHASE OF ASSETS

        In April 1999, the Company purchased the assets of Western Digital
Corporation's (Western Digital) media operation. In conjunction with the
purchase, under purchase accounting rules, the Company recorded liabilities that
increased the amount of goodwill recognized. These liabilities included
estimated costs of $5.6 million for the closure of the former Western Digital
media operation as well as costs of $26.5 million related to the remaining lease
obligations for equipment taken out of service due to the closure, and $4.7
million of costs for purchase order cancellations and other costs.

        During 1999, 2000 and the first nine months of 2001, liabilities arising
from this transaction were reduced by $32.4 million, including equipment lease
obligations ($23.3 million), rent ($1.9 million) and other liabilities ($7.1
million). In the third quarter of 2001, the remaining liability of $4.4 million,
representing unused equipment lease payments, was reclassified to Liabilities
subject to Compromise (see Note 3).

NOTE 13 - LIABILITIES ASSOCIATED WITH MERGER

        On October 2, 2000, the Company merged with HMT. HMT was headquartered
in Fremont, California, and designed, developed, manufactured, and marketed
high-performance thin-film disks. In connection with the merger, in the fourth
quarter of 2000, the Company implemented a reorganization plan which included a
reduction in the Company's U.S. workforce and the cessation of manufacturing
operations in the U.S. This transition was completed in the second quarter of
2001. U.S. production ended at all U.S. facilities by the end of April 2001.

        Under purchase accounting rules, the Company recorded liabilities that
included $12.2 million for estimated severance pay associated with the
termination of approximately 980 employees and $5.7 million for estimated
facility closure costs for the closure of certain former HMT U.S. manufacturing
operations. Payments against these liabilities are expected to be paid by the
fourth quarter of 2001. In 2000 and the first nine months of 2001, $15.5 million
of payments were made against these liabilities. Certain of the remaining
liabilities for severance and prior years' property taxes were reclassified to
Liabilities Subject to Compromise (see Note 3).

NOTE 14 - EQUITY IN UNCONSOLIDATED COMPANY

        In November 2000, the Company formed Chahaya Optronics, Inc. (Chahaya)
with two venture capital firms. The Company contributed key personnel, design
and tooling, manufacturing systems, equipment, facilities, and support services
in exchange for a 45% interest in Chahaya. Chahaya currently occupies facilities
located in Fremont, California, and was formed to provide manufacturing
services, primarily in the field of optical components and subsystems.



                                      -16-
<PAGE>

        The Company recorded an investment in Chahaya for $12.0 million in the
fourth quarter of 2000. The investment included $4.0 million for future cash
payments and $8.0 million for facilities, facility services, and equipment. In
June 2001, the Company's investment was reduced by $4.0 million due to
cancellation of the shares related to the future $4 million cash contribution.
This reduced the Company's ownership percentage to 35%. As of September 30,
2001, the Company's remaining liability for facilities and facility services is
$6.8 million.

        In the third quarter and first nine months of 2001, the Company recorded
losses of $1.0 million and $2.7 million as its 35% equity share of Chahaya's net
loss. The Company uses the equity method to account for its investment in
Chahaya.

NOTE 15 - LEGAL PROCEEDINGS

        Komag, Incorporated (KUS) filed a voluntary petition for reorganization
under Chapter 11 of the United States Bankruptcy Code on August 24, 2001 (the
"Petition Date"). The petition was filed with the United States Bankruptcy Court
for the Northern District of California. The case has been assigned to the
Honorable James R. Grube under case number 01-54143-JRG. The petition affects
only the Company's U.S. corporate parent, KUS, and does not include any of its
subsidiaries, including Komag Material Technology (KMT), or Komag USA (Malaysia)
Sdn (KMS). The Company is operating its business as a debtor-in-possession. See
Notes 1, 2, and 3 for additional information.

        Asahi Glass Company, Ltd. (Asahi) has asserted that a technology
cooperation agreement (the agreement) between the Company and Asahi gives Asahi
exclusive rights, even as to Komag, to certain low-cost glass substrate-related
intellectual property developed by the Company. In connection with the Chapter
11 Bankruptcy filing, the Bankruptcy Court, on October 19, 2001, ordered that
the agreement be rejected, effective as of the petition date. The Company
suspended the development of its low-cost glass substrate program on October 17,
2001. The Company currently has entered into a settlement Stipulation with Asahi
to resolve the dispute regarding ownership of intellectual property and
"know-how" developed by the Company prior to June 29, 2001, the agreed date of
termination of the agreement. As part of that Stipulation, Asahi waived claims
against the Company relating to the agreement.

NOTE 16 - NEW ACCOUNTING PRONOUNCEMENTS

        In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, or SFAS 141, on Business
Combinations and SFAS 142 on Goodwill and Other Intangible Assets. SFAS 141 is
effective for any business combinations initiated after June 30, 2001, and also
includes the criteria for the recognition of intangible assets separately from
goodwill. SFAS 142 is effective for fiscal years beginning after December 15,
2001, and will require that goodwill not be amortized, but rather be subject to
an impairment test at least annually. Separately identified and recognized
intangible assets resulting from business combinations completed before July 1,
2001 that do not meet the new criteria for separate recognition of intangible
assets will be subsumed into goodwill upon adoption. In addition, the useful
lives of recognized intangible assets acquired in transactions completed before
July 1, 2001 will be reassessed and the remaining amortization periods adjusted
accordingly. Upon the adoption of SFAS 142, the Company will be required to
perform a transitional impairment analysis of its goodwill. Any transitional
impairment loss will be recognized as the cumulative effect of



                                      -17-
<PAGE>

a change in accounting principle in the Company's statement of operations. At
the date of adoption of SFAS 142, the Company expects to have unamortized
goodwill and other intangibles in the amount of $89 million which will be
subject to the transition provisions of SFAS 142. Amortization expense related
to goodwill and other intangibles was $16.4 million, $17.3 million, and zero for
the fiscal years ended December 2000, 1999, and 1998, respectively. Because of
the extensive effort needed to comply with adopting SFAS 142, it is not
practicable to reasonably estimate the impact of adoption on the Company's
financial statements at the date of this report, including the amount of any
transitional impairment losses; however, such transitional impairment losses may
be significant and may have a material adverse effect on the Company's financial
position and results of operations.

        In June 2001, the FASB issued SFAS 143 "Accounting for Asset Retirement
Obligations." SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development or normal use of the asset. As used in
this Statement, a legal obligation results from existing law, statute,
ordinance, written or oral contract, or by legal construction of a contract
under the doctrine of promissory estoppel. SFAS 143 is effective for fiscal
years beginning after June 15, 2002. We do not expect the adoption of SFAS 143
to have a material impact on our financial position or results of operations.

        In October 2001, the FASB issued SFAS 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and also supersedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. SFAS 144 is
effective for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years. The Company is in the process of determining
the impact of this new accounting standard.

NOTE 17 - NASDAQ DELISTINGS

        On September 17, 2001, the Company withdrew its appeal to the Nasdaq
Listing Qualifications Panel, and voluntarily delisted its common stock from the
Nasdaq National Market. The Company's stock is currently trading on the OTC
Bulletin Board under the symbol KMAGQ.

        On October 19, 2001, Nasdaq delisted the 5 3/4% subordinated convertible
bonds due in January, 2004, that were originally issued by HMT Technology
Corporation.



                                      -18-
<PAGE>

                               KOMAG, INCORPORATED

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


RESULTS OF OPERATIONS

        The following discussion contains predictions, estimates, and other
forward-looking statements that involve a number of risks and uncertainties
about our business. These statements may be identified by the use of words such
as "expects," "anticipates," "intends," "plans," and similar expressions.
Komag's business is subject to a number of risks and uncertainties. While this
discussion represents our current judgment on the future direction of our
business, such risks and uncertainties could cause actual results to differ
materially from any future performance suggested herein. Some of the important
factors that may influence possible differences are continued competitive
factors, pricing pressures, changes in customer demand, developments in and the
outcome of the Chapter 11 proceedings described below, and general economic
conditions.

OVERVIEW

        Our business is characterized by high fixed costs, and is therefore
volume-sensitive, making it imperative that we plan for the efficient use of
capacity. The key factors in determining our profitability are physical
capacity, utilization of this physical capacity, yields, input material costs,
and average unit sales price. If we fix capacity and product price at a given
level, and demand is sufficient to support a higher level of output, then the
increased output achieved by improved utilization rates and higher manufacturing
yields will directly increase sales and improve gross margins. Alternatively, if
demand decreases, falling average selling prices and lower capacity utilization
will adversely affect our operating results.

        Demand for disk drives grew rapidly during the mid-1990s, and industry
forecasts were for continued strong growth. Along with many of our competitors
(both independent disk manufacturers and captive disk manufacturers owned by
vertically- integrated disk drive customers), in 1996 we committed to expansion
programs and substantially increased media manufacturing capacity in 1997.

        In addition, the disk drive industry transitioned to and widely adopted
magneto-resistive, or MR, media and recording head technology. This transition
to MR components led to unprecedented increases in areal density and, therefore,
the amount of data that could be stored on a single disk platter. The rate of
increased storage per disk platter increased from 30% to 40% per year to over
100% per year. Increased storage capacity per disk allows drive manufacturers to
offer lower-priced disk drives by incorporating fewer disk and head components
into their disk drives. Because of this lower disk-per-drive ratio, demand for
disks was relatively flat during the period from 1997 to 2001, resulting in
substantial excess disk production capacity and sharp declines in average
selling prices. The significant amount of captive capacity employed by certain
disk drive manufacturers also continued to reduce the market opportunities for
independent disk suppliers such as our company.



                                      -19-
<PAGE>

        In response to continuing excess industry capacity and the sharp decline
in average selling prices, we ended volume production of finished disks in the
U.S. by the end of 1999, and consolidated finished disk production in our
low-cost plants in Malaysia.

        In October 2000, we merged with HMT. The merger was accounted for under
purchase accounting rules. The Company's consolidated financial statements
include the operating results of HMT since the fourth quarter of 2000. In the
fourth quarter of 2000, in connection with the merger, we implemented a
reorganization plan to end volume production at the HMT U.S. facilities, and
cease substrate manufacturing operations in Santa Rosa, California. Volume
production ended at all of these U.S. sites in April 2001.

        Our California sites in San Jose and Santa Rosa are now focused solely
on activities related to research, process development, and product prototyping.
Our selling, general, and administrative functions also remain in California. We
believe that completion of the shift of high-volume production to our
cost-advantaged Malaysian manufacturing plants will improve our overall cost
structure, result in lower unit production costs, and improve our ability to
respond to the continuing price pressures in the disk industry.

Net Sales

        Net sales decreased to $59.4 million in the third quarter of 2001, down
29.4% compared to $84.2 million in the third quarter of 2000. The year-over-year
decrease was primarily due to the net effect of a 20.5% decrease in unit sales
volume (from 12.2 million disks in the third quarter of 2000 to 9.7 million
disks in the third quarter of 2001), and an 8.1% decrease in the finished disk
average selling price (from $6.53 in the third quarter of 2000 to $6.00 in the
third quarter of 2001).

        Net sales in the first nine months of 2001 decreased by $22.7 million to
$224.6 million, a 9.2% decrease from $247.3 million in the first nine months of
2000. Unit sales volume decreased by 4.0%, to 33.4 million units from 34.8
million units. Additionally, the finished disk average selling price declined by
6.2% during this period, to $6.25 from $6.66.

        Net sales of substrate and single-sided disks were $1.0 million in the
third quarter of 2001, and $4.6 million in the third quarter of 2000. Net sales
of substrate and single-sided disks in the first nine months of 2001 were $16.2
million, and $15.7 million in the first nine months of 2000.

        The moderate year-over-year price decline is an indication that pricing
has somewhat stabilized, compared to the trend over the past few years. Also,
because industry capacity decreased during the last year, pricing pressure is
moderating, and we expect average selling prices to remain flat during the
remainder of 2001.

        During the third quarter of 2001, 69% of our consolidated net sales were
to Western Digital and 24% were to Maxtor Corporation. Net sales to each of our
other customers were less than 10% during the third quarter of 2001. We expect
that we will continue to derive more than 90% of our sales from Western Digital
and Maxtor. The distribution of sales among customers may vary from quarter to
quarter based on the relative success of customer programs for which we are
qualified and shipping. However, as a result of the April 1999, acquisition of
Western Digital's media operation and related volume purchase agreement, we
expect our sales to remain highly dependent on Western Digital's performance in
the disk drive industry.



                                      -20-
<PAGE>

Gross Margin

        Our overall gross profit percentage of 1.9% in the third quarter of 2001
declined from a gross margin percentage of 11.6% in the third quarter of 2000,
an overall decline of 9.7 percentage points. The reduction in the finished disk
average selling price accounted for 7.8 percentage points of the decline. Higher
per-unit costs resulting from lower production volume (9.2 million units in the
third quarter of 2001 versus 11.4 million units in the third quarter of 2000)
accounted for the remaining 1.9 percentage points of the decline. The decrease
in unit production corresponds with the decreased sales volume compared to the
same quarter in the prior year.

        For the first nine months of 2001, we sustained a gross loss percentage
of 2.8%, compared to a gross margin percentage of 13.2% for the first nine
months of 2000. The overall 16.0 point decrease was the result of a lower
finished disk average selling price (5.7 percentage points) and higher per unit
fixed costs associated with lower unit production and production at our U.S.
production facilities prior to their closure (10.3 points).

Operating Expenses

        Research, development, and engineering (R&D) expenses increased to $9.7
million in the third quarter of 2001 from $8.3 million in the third quarter of
2000, and increased to $30.2 million in the first nine months of 2001 from $25.2
million in the first nine months of 2000. The increases were the result of
increased U.S. R&D headcount subsequent to the HMT merger. The combined R&D team
has increased its focus on advanced technologies and new production processes
for the multiple manufacturing equipment types of the combined company.

        Selling, general and administrative (SG&A) expenses increased to $4.7
million in the third quarter of 2001, from $3.0 million in the third quarter of
2000, and increased to $16.8 million in the first nine months of 2001 from $10.4
million in the first nine months of 2000. The year-over-year quarterly increase
was primarily due to higher payroll and related expenses due to increased U.S.
headcount from the HMT merger. The year-over-year nine-month increase was
primarily due to higher payroll and related expenses due to increased U.S.
headcount from the HMT merger, as well as higher discretionary bonus expenses
and higher professional fees associated with the withdrawn financial
restructuring plan.

        Amortization of intangible assets increased to $6.5 million in the third
quarter of 2001 from $2.6 million in the third quarter of 2000, and increased to
$20.6 million in the first nine months of 2001 from $7.7 million in the first
nine months of 2000. The increases reflect amortization of goodwill associated
with the HMT merger.

Restructuring Charges

        In the third quarter of 1999, the Company implemented a restructuring
plan based on an evaluation of the size and location of its existing production
capacity relative to the short-term and long-term market demand outlook. Under
the 1999 restructuring plan, the Company decided to close its U.S. manufacturing
operations in San Jose, California. The restructuring actions resulted in a
charge of $139.3 million and included $98.5 million for leasehold improvements
and equipment write-offs, $17.7 million for future liabilities under
non-cancelable equipment leases associated with equipment no longer being used,
$15.6 million for severance pay associated with approximately 980 terminated
employees (all in the U.S. and predominately all from the manufacturing area),
and $7.5 million in plant



                                      -21-
<PAGE>

closure costs. Non-cash items included in the restructuring charge totaled $98.5
million for the write-off of leasehold improvements and equipment.

        The following table summarizes these 1999 restructuring activities
during the first nine months of 2001:

<TABLE>
<CAPTION>
                                                      Liabilities Under
                                                        Non-Cancelable
                                                          Equipment
                 (in millions)                              Leases              Total
                                                      -----------------         ------
                <S>                                         <C>                 <C>
                 Balance at December 31, 2000               $ 6.3               $ 6.3
                 Charged to Reserve                          (2.4)               (2.4)
                 Reclassifications                           (3.9)               (3.9)
                                                            -----               -----
                 Balance at September 30, 2001              $ 0.0               $ 0.0
                                                            =====               =====
</TABLE>

        In the third quarter of 2001, the remaining reserve balance of $3.9
million associated with certain Western Digital unused equipment leases was
reclassified to Liabilities Subject to Compromise (see Note 3). In 2001, 2000,
and 1999, the Company made cash payments totaling $39.2 million.

        In the first quarter of 2000, the 1999 restructuring reserves were
reduced by a total of $2.0 million. The writedown of net book value of equipment
and leasehold improvements was increased by $2.4 million during the first
quarter of 2000 for additional equipment that was determined unusable due to the
restructure. The facility closure liability was reduced by $3.7 million in the
first quarter of 2000 due to successfully terminating the leases on
manufacturing facilities and subleasing the administrative facility earlier than
originally expected. The severance costs liability was reduced by $0.7 million
due to lower than expected payments in the first quarter of 2000.

        In December 2000, the Company implemented a restructuring plan related
to KMT's U.S. manufacturing operations in May 2001. This restructuring action
resulted in a charge of $8.0 million, and included $2.6 million of severance pay
associated with eliminating approximately 160 positions, primarily in
manufacturing, $4.5 million associated with the write-down of equipment and
leasehold improvements, and $0.9 million associated with related facility
closing costs. Through the first nine months of 2001, charges to the reserve of
$6.8 million had been made. The balance of the restructuring costs is expected
to be paid through 2004, the remaining lease term of the facility.

        The following table summarizes these 2000 restructuring activities:

<TABLE>
<CAPTION>
                                     Writedown Net Book
                                     Value of Equipment     Facility
                                        and Leasehold        Closure        Severance
(in millions)                           Improvements          Costs           Costs          Total
                                     ------------------     --------        ---------        ------
<S>                                  <C>                   <C>              <C>             <C>
Balance at December 31, 2000               $ 4.5              $ 0.9           $ 2.6          $ 8.0
Charged to Reserve                          (4.5)              (0.1)           (2.2)          (6.8)
                                           -----              -----           -----          -----
Balance at September 30, 2001              $  --              $ 0.8           $ 0.4          $ 1.2
                                           =====              =====           =====          =====
</TABLE>


                                      -22-
<PAGE>

Impairment Charges

        In the second quarter of 2001, the Company recorded impairment charges
of $43.0 million. A charge of $35.4 million reflected the write-down of land and
buildings held for sale in Eugene, Oregon, and Fremont, California. The
write-down reflected currently depressed market conditions for commercial real
estate and was based on estimated fair market value quotes received from local
realtors. The remaining $7.6 million charge primarily reflected the recognition
of lease obligations for equipment no longer in service due to the general
slowdown in the economy and the related weak media market.

        We review and evaluate our long-lived assets and certain identifiable
intangible assets for impairment on an individual acquisition, market, or
product basis whenever events or changes in circumstances indicate that such
assets may be impaired or the estimated useful lives are no longer appropriate.
We consider the primary indicators of impairment to include significant
decreases in unit volumes, unit prices, or significant increases in production
costs. Periodically, we review our long-lived assets and certain identifiable
intangible assets for impairment based on estimated future undiscounted cash
flows attributable to the assets. In the event such cash flows are not expected
to be sufficient to recover the recorded value of the assets, the assets are
written down to their estimated fair values utilizing discounted cash flows.

        At September 30, 2001, we had approximately $95.6 million of goodwill
and other net intangible assets which were primarily related to the merger in
October 2000. During 2001, we have periodically reviewed our long-lived assets
as described in Note 1. Due to the continuing market weakness for products, we
expect to perform further impairment review of our long-lived assets prior to
the end of the fiscal year. Further, as discussed in Note 16, the Company has
not determined its transitional impairment losses upon adoption of FAS 142;
however, such transitional impairment losses may be significant and may have a
material adverse effect on the Company's financial position and results of
operations.

Interest and Other Income/Expense

        Interest income decreased by $0.6 million and $1.4 million in the three
and nine-month periods ended September 30, 2001, versus the same periods ended
October 1, 2000 due to lower average cash and short-term investment balances.

        Interest expense increased by $102.6 million and $132.4 million in the
three and nine-month periods ended September 30, 2001, versus the same periods
ended October 1, 2000. The increases primarily reflect accretion on the value of
the subordinated convertible notes to face value of $230 million in the third
quarter of 2001 (due to the default on such notes prior to the application for
bankruptcy), interest on the subordinated convertible notes, and amortization of
loan fees and warrant expense associated with the completion of the loan
restructure agreement with our senior lenders in the second quarter of 2000.



                                      -23-
<PAGE>

        Other income increased by $2.7 million and $3.8 million in the three and
nine-month periods ended September 30, 2001, versus the same periods ended
October 1, 2000. The quarter-over-quarter increase resulted primarily from a
one-time $1.8 million refund for certain R&D manufacturing equipment work which
was not completed by a vendor. The year-over-year increase also included $0.6
million in realized gain on cumulative translation adjustments.

Income Taxes

        We derived income tax benefits of $10.5 million and $9.7 million for the
three- and nine-month periods ended September 30, 2001, primarily related to the
expiration of a statutory period to audit our state tax returns, net of foreign
withholding taxes on royalty and interest payments, and foreign taxes of
subsidiaries.

        Our income tax provisions for the three- and nine-month periods ended
October 1, 2000, were $0.4 and $1.2 million, respectively, and represented
foreign withholding taxes on royalty and interest payments, and foreign taxes of
subsidiaries.

        Our wholly-owned thin-film media operation, KMS, received a five-year
extension of its initial tax holiday through June, 2003, for its first plant
site. KMS has also been granted an additional eight-year and ten-year tax
holiday through December 2006 and 2008 for its second and third plant sites in
Malaysia, respectively, based on achieving certain investment criteria.

Minority Interest in KMT

        The minority interest in the net income (loss) of consolidated
subsidiary represented Kobe Steel USA Holdings Inc.'s (Kobe USA) 20% share of
KMT's net income (loss). KMT recorded net income of $2.0 and a $0.2 million net
loss for the three- and nine-month periods ended September 30, 2001, compared to
net losses of $1.5 million and $3.7 million for the same periods ended October
1, 2000.

Equity in Unconsolidated Company

        In November 2000, we formed Chahaya Optronics, Inc. (Chahaya) with two
venture capital firms. We contributed key personnel, design and tooling,
manufacturing systems, equipment, facilities, and support services in exchange
for a 45% interest in Chahaya. Chahaya currently occupies facilities located in
Fremont, California, and was formed to provide manufacturing services, primarily
in the field of optical components and subsystems.

        We recorded an investment in Chahaya for $12.0 million in the fourth
quarter of 2000. The investment included $4.0 million for future cash payments
and $8.0 million for facilities, facility services, and equipment. In June 2001,
our investment was reduced by $4.0 million due to cancellation of the shares
related to the future $4 million cash contribution. This reduced our ownership
percentage to 35%. As of September 30, 2001, our remaining liability for
facilities and facility services is $6.8 million.

        In the third quarter and first nine months of 2001, we recorded losses
of $1.0 million and $2.7 million as our 35% equity share of Chahaya's net loss.
We use the equity method to account for our investment in Chahaya.



                                      -24-
<PAGE>

Reorganization Costs

        In connection with the Chapter 11 filing, we recorded reorganization
costs of $2.8 million in the third quarter of 2001. This included $0.6 million
in professional fees, and $2.3 million in accretion to bring the note payable to
Western Digital to its face value of $30.1 million, offset by interest received
on accumulated cash due to the Chapter 11 proceeding.

LIQUIDITY AND CAPITAL RESOURCES

        Cash and short-term investments of $12.1 million at the end of the third
quarter of 2001 decreased by $68.5 million from the end of the previous fiscal
year. Based on current operating forecasts, the Company estimates that the cash
balance is adequate to support its continuing operations. Additionally, the
Company is currently in negotiations to complete a debtor-in-possession
financing agreement for up to $20 million.

        Working capital increased by $195.5 million compared to the end of the
previous fiscal year, which resulted primarily from the reclassification of the
senior unsecured bank debt to Liabilities Subject to Compromise.

        Consolidated operating activities used $29.3 million in cash during the
first nine months of 2001. The components of this change include the following:

        -       The year-to-date 2001 net loss of $262.3 million, net of
                non-cash depreciation and amortization of $73.9 million,
                impairment charges of $43.0 million, accretion and amortization
                of interest on debt of $134.1 million, other non-cash charges of
                $1.9 million, and a $10.8 million non-cash deferred income tax
                credit used $20.2 million in cash.

        -       Lower accounts receivable, a direct consequence of the revenue
                declines over the last three quarters, generated $8.2 million in
                cash.

        -       Lower inventories, reflecting the revenue declines over the last
                three quarters, as well as anticipated flat shipments throughout
                the remainder of 2001, generated $9.3 million in cash.

        -       Lower accounts payable, reflecting reduced manufacturing
                operations as well as a reclassification to Liabilities Subject
                to Compromise, used $6.6 million.

        -       Lower other liabilities, reflecting payments for severance and
                building exit costs, continuing payments on equipment leases,
                and a reclassification to Liabilities Subject to Compromise,
                used $22.9 million.

        We spent $24.9 million on fixed assets during the first nine months of
2001. Net short-term investment activity provided $8.3 million in cash, while
other net investing activities provided $0.6 million in cash. Repayment of debt
used $15.0 million in cash, while sales of common stock generated $0.2 million.

        Current noncancellable capital commitments as of September 30, 2001
totaled $1.9 million. Year-to-date capital expenditures were $24.9 million, and
primarily included costs for facilities and installation costs for certain
production equipment transferred from the closed U.S. HMT manufacturing plants
to Malaysia. For the remainder of 2001, we plan to spend less than $5 million on
property, plant, and equipment.

        In June 2000, we replaced our credit facilities with a senior unsecured
loan restructure agreement with our lenders, and a separate subordinated
unsecured convertible debt agreement with other creditors. As a result, we have



                                      -25-
<PAGE>

$201.7 million in senior unsecured bank debt outstanding that matured on June
30, 2001, and $9.3 million of convertible debt that was originally scheduled to
mature in 2005. In addition, we have a note payable to Western Digital with a
principal balance of $30.1 million which was originally scheduled to mature in
April, 2002. Upon completion of the HMT merger in the fourth quarter of 2000,
our debt increased with HMT's convertible debt which was originally scheduled to
mature in 2004. The principal amount of these notes is $230.0 million. As a
result, under the terms of the loan restructure agreement for the senior bank
debt and the subordination provisions for the HMTconvertible notes, we did not
pay interest on the HMT subordinated notes when it became due on July 15, 2001.
In addition, our failure to pay our senior bank debt when due caused a default
under the HMT subordinated notes as of July 30, 2001.

        As of August 24, 2001 (the petition date for reorganization under
Chapter 11) and currently, we have $201.7 million in senior unsecured bank debt
outstanding that matured on June 30, 2001, and $9.3 million of convertible debt
that was originally scheduled to mature in 2005. Also, we have a note payable to
Western Digital with a principal balance of $30.1 million which was originally
scheduled to mature in April, 2002. In addition, we have $230 million of HMT
subordinated convertible debt which was originally scheduled to mature in 2004.
The repayment of all of this indebtedness is subject to the Plan of
Reorganization. Through the Chapter 11 Bankruptcy petition date of August 24,
2001, unpaid accrued interest on the aforementioned debt was $17.3 million.
Additionally, contractual interest expense for the period from August 25, 2001,
to September 30, 2001, was $3.5 million.

        Our independent auditors have included a going-concern explanatory
paragraph in our Form 10-K for our fiscal year ended December 31, 2000. This
emphasis paragraph represents our auditors' conclusion that there is substantial
doubt as to our ability to continue as a going-concern for a reasonable time.

OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

        You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below include all of
the risks and uncertainties which we believe to be material at this time, but
are not the only ones facing our company. Additional risks and uncertainties
that we do not presently know of, or we currently deem immaterial, may also
impair our business operations.

        If any of the following risks actually occur, they could materially
adversely affect our business, financial condition or operating results. In that
case, the trading price of our common stock could decline, and you may lose all
or part of your investment.

RISKS RELATED TO OUR FINANCIAL POSITION AND OUR COMMON STOCK

ON AUGUST 24, 2001, WE FILED A VOLUNTARY PETITION FOR REORGANIZATION UNDER
CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE, WHICH WILL NEGATIVELY IMPACT
OUR OPERATING RESULTS.

        Chapter 11 permits us to remain in control of our business, protected by
a stay of all creditor action, while we attempt to negotiate and confirm a Plan
of Reorganization with our creditors. Due to our Chapter 11 case, our
deteriorating financial condition and our inability to date to restructure our
existing debt, we believe our stakeholders are concerned about our bankruptcy
proceedings. Some of our customers, suppliers and employees have expressed



                                      -26-
<PAGE>

this apprehension, which may have an adverse effect on our ability to continue
to run our operations at the level at which they currently operate.

THERE IS A SIGNIFICANT LIKELIHOOD THAT HOLDERS OF EQUITY IN OUR COMPANY WILL NOT
RECEIVE ANY DISTRIBUTIONS UNDER OUR PLAN OF REORGANIZATION.

        The Plan of Reorganization contemplates a complete change of equity
ownership in our company as it exists today, with existing shares cancelled and
current shareholders receiving only a small fraction of ownership in the
reorganized company. Moreover, in a bankruptcy case, in the absence of the
consent of all classes of impaired claims, all creditors generally would have to
be paid prior to our stockholders receiving any distribution. As a result, it is
possible - if not likely - that equity holders in our company ultimately will
have their shares cancelled and will not receive any distributions at all under
the Plan of Reorganization.

        We may be unsuccessful in our attempts to confirm a Plan of
Reorganization with our creditors. Many Chapter 11 cases are unsuccessful, and
virtually all involve substantial expense and damage to the business. If we are
unsuccessful in obtaining confirmation of a Plan of Reorganization, our assets
would be liquidated. In addition, the fact that our assets are located in
Malaysia may make it more difficult to distribute our assets on liquidation. In
a liquidation, all other creditors would be paid prior to our shareholders.

THE VALUATION OF NEWLY-ISSUED SECURITIES SUCH AS NEW COMMON STOCK IS SUBJECT TO
ADDITIONAL UNCERTAINTIES AND CONTINGENCIES, ALL OF WHICH ARE DIFFICULT TO
PREDICT.

        Under a Plan of Reorganization, we may issue new common stock. Actual
market prices of such securities at issuance will depend upon, among other
things, prevailing interest rates, conditions in the financial markets, the
anticipated initial holdings of pre-petition creditors, some of which may prefer
to liquidate their investment rather than hold it on a long-term basis, and
other factors which generally influence the prices of securities. It should be
noted that there is presently no trading market for new common stock and there
can be no assurance that a trading market will develop. Further, there is a
significant likelihood that the existing holders of our common stock will not
receive any newly-issued securities under the Plan of Reorganization.

UPON CONSUMMATION OF A PLAN OF REORGANIZATION, CERTAIN HOLDERS OF CLAIMS MAY
RECEIVE A MAJORITY OF SHARES OF NEW COMMON STOCK WHICH WOULD PUT THEM IN A
POSITION TO CONTROL THE OUTCOME OF ACTIONS REQUIRING STOCKHOLDER APPROVAL.

        If holders of significant numbers of shares of new common stock were to
act as a group, such holders may be in a position to control the outcome of
actions requiring stockholder approval, including the election of directors and
approval of significant corporate transactions, as well as to influence the
management and affairs of the reorganized company. This concentration of
ownership could also facilitate or hinder a negotiated change of control of the
reorganized debtor and, consequently, impact upon the value of the new common
stock.

        Further, the possibility that one or more of the holders of significant
numbers of shares of new common stock may determine to sell all or a large
portion of their shares of new common stock in a short period of time may
adversely affect the market price of the new common stock



                                      -27-
<PAGE>

THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN DEPRESSED, AND MAY DECLINE
FURTHER.

        The market price of our common stock has been depressed in response to
actual and anticipated events, including:

        -       our filing under Chapter 11;

        -       variations in our operating results;

        -       variations in macroeconomic conditions;

        -       changes in demand for computers and data storage;

        -       perceptions of the disk drive industry's relative strength or
                weakness;

        -       developments in our relationships with our customers and/or
                suppliers;

        -       announcements of alliances, mergers or other relationships by or
                between our competitors and/or customers;

        -       announcements of technological innovations or new products by us
                or our competitors;

        -       the success or failure of new product qualifications in programs
                with certain manufacturers; and;

        -       developments related to patents or other intellectual property
                rights.

        We expect this volatility to continue in the future. In addition, any
shortfall or changes in our revenue, gross margins, earnings, or other financial
results, could cause the price of our common stock to fluctuate significantly.
In recent years, the stock market in general has experienced extreme price and
volume fluctuations, which have particularly affected the market price of many
technology companies, and which may be unrelated to the operating performance of
those companies. These broad market fluctuations may adversely affect the market
price of our common stock. Volatility in the price of stocks of companies in the
hard disk drive industry has been particularly high. From the second quarter of
1997 through December 19, 2001, the price of our stock fell to a low of $0.01
from a high of $35.13.

        The market price of our common stock may decline further if we continue
to be unable to reorganize our existing debt.

OUR SECURITIES HAVE BEEN DELISTED FROM NASDAQ FOR FAILURE TO COMPLY WITH
NASDAQ'S MINIMUM BID REQUIREMENT, WHICH WILL HARM THE TRADING MARKET AND PRICE
OF OUR SECURITIES.

        The trading of our common stock on the Nasdaq National Market System
depended on our meeting certain asset, revenue, and stock price tests. We were
out of compliance with Nasdaq's minimum bid requirement because our stock has
traded below $1.00 per share for more than 30 consecutive trading days. Our
stock was delisted from Nasdaq on September 17, 2001 and is now trading on the
OTC Bulletin Board. In addition, low-priced stocks are subject to additional
risks, including additional state regulatory requirements and the potential loss
of effective trading markets. After the Plan of Reorganization is confirmed by
the Bankruptcy Court, we will attempt to list our common stock for trading on
the Nasdaq National Market System. However, it is possible that we will not be
able to meet the Nasdaq listing requirements.



                                      -28-
<PAGE>

RISKS RELATED TO OUR BUSINESS

CONCERNS ABOUT THE GOING-CONCERN EXPLANATORY PARAGRAPH IN OUR AUDIT REPORT COULD
DETRIMENTALLY AFFECT OUR OPERATING RESULTS AND FINANCIAL CONDITION.

        Our independent auditors have included a going-concern explanatory
paragraph for our fiscal year ended December 31, 2000. This emphasis paragraph
represents our auditors' conclusion that there is substantial doubt as to our
ability to continue as a going-concern for a reasonable time. If we are unable
to restructure our debt and raise additional funds, our auditors may not remove
the explanatory paragraph from their opinion, and our operating results and
financial conditions could be detrimentally affected due to any of the
following:

        -       our customer relationships and orders with our customers could
                deteriorate;

        -       suppliers could reduce their willingness to extend credit;

        -       employee attrition could increase; and/or

        -       new lenders could be unwilling to refinance our existing debt.

DEMAND FOR DISK DRIVES IS LARGELY TIED TO DEMAND FOR PERSONAL COMPUTERS AND
FLUCTUATIONS IN AND REDUCED DEMAND FOR PERSONAL COMPUTERS MAY RESULT IN
CANCELLATIONS OR REDUCTIONS IN DEMAND FOR OUR PRODUCT.

        Trend Focus estimates that 74% of the disks consumed during 2000 were
incorporated into disk drives for the desktop personal computer market. Because
of this concentration in a single market, our business is tightly linked to the
success of the personal computer market. Historically, demand for personal
computers has been seasonal and cyclical. During the first nine months of 2001,
personal computer manufacturers generally announced lower expectations for
sales. Due to the high fixed costs of our business, fluctuations in demand
resulting from this seasonality and cyclicality can lead to disproportionate
changes in the results of our operations. If cancellations or reductions in
demand for our products occur in the future, our business, financial condition,
and results of operations could be seriously harmed.

DELAYS AND CANCELLATIONS OF OUR CUSTOMER ORDERS MAY CAUSE US TO UNDERUTILIZE OUR
PRODUCTION CAPACITY, WHICH COULD SIGNIFICANTLY REDUCE OUR GROSS MARGINS AND
RESULT IN SIGNIFICANT LOSSES.

        Our business has a large amount of fixed costs. If there is a decrease
in demand for our products, our production capacity could be underutilized, and,
as a result, we may experience:

        -       equipment write-offs;

        -       restructuring charges;

        -       reduced average selling prices;

        -       increased unit costs; and

        -       employee layoffs.

IF WE ARE NOT ABLE TO ATTRACT AND RETAIN KEY PERSONNEL, OUR OPERATIONS COULD BE
HARMED.

        Our future success depends on the continued service of our executive
officers, our highly-skilled research, development, and engineering team, our
manufacturing team, and our key administrative, sales, and marketing and support
personnel. Competition for skilled personnel is intense. In particular, our
bankruptcy filing and our financial performance have increased the difficulty of
attracting and retaining skilled scientists and other knowledgeable workers.
Recently, we have experienced higher rates of turnover in the last year than at
other times in our history, and we may not be able to attract, assimilate, or
retain highly-qualified personnel to maintain the capabilities that are



                                      -29-
<PAGE>

necessary to compete effectively. If we are unable to retain existing or hire
key personnel, our business, financial condition, and operating results could be
harmed.

OUR FUTURE EARNINGS MAY BE REDUCED BECAUSE OF THE MERGER WITH HMT.

        The merger has been treated as a purchase for accounting purposes. This
creates expenses in our future statement of operations that we would not have
otherwise incurred, which could have a material adverse effect on the market
price of our common stock. We incurred direct transaction costs of $9.0 million
in connection with the merger. Under current purchase accounting rules, we have
recorded intangible assets totaling $109.6 million related to patents, existing
technology, assembled workforce, and goodwill in connection with the merger.
These amounts will continue to be amortized through December 31, 2001, and will
be subject to potential amortization and/or impairment charges thereafter.
Further, as discussed in Note 16, the Company has not determined its
transitional impairment losses upon adoption of FAS 142; however, such
transitional impairment losses may be significant and may have a material
adverse effect on the Company's financial position and results of operations.

THERE IS A HIGH CONCENTRATION OF CUSTOMERS IN THE DISK DRIVE MARKET, AND WE
RECEIVE A LARGE PERCENTAGE OF OUR REVENUES FROM ONLY A FEW CUSTOMERS, THE LOSS
OF ANY OF WHICH WOULD ADVERSELY AFFECT OUR SALES.

        Our customers consist of disk drive manufacturers. Given the relatively
small number of disk drive manufacturers, we expect that we will continue to
depend on a limited number of customers. This high customer concentration is due
to the following factors:

        -       the high-volume requirements of the dominant disk drive
                manufacturers;

        -       a tendency to rely on a few suppliers because of the close
                interrelationship between media performance and disk drive
                performance; and the complexity of integrating components from a
                variety of suppliers; and

        -       the increases in storage densities which have led to decreases
                in the platter count per drive. With lower platter counts,
                captive disk drive manufacturers have excess internal media
                capacity and they rely less on independent sources of media.

        During the third quarter of 2001, 69% of our sales were to Western
Digital and 24% were to Maxtor Corporation. In fiscal 2000, 50% of our sales
were to Western Digital, 28% were to Maxtor Corporation, and 17% were to Seagate
Technology. If our customers reduce their media requirements or develop capacity
to produce thin-film disks for internal use, our sales will be reduced. As a
result, our business, financial condition and operating results could suffer.

IF WE ARE NOT ABLE TO RAISE FUTURE CAPITAL FOR THE SUBSTANTIAL CAPITAL
EXPENDITURES NEEDED TO OPERATE OUR BUSINESS COMPETITIVELY, WE MAY BE FORCED TO
REDUCE OR SUSPEND OPERATIONS.

        The disk media business is capital-intensive, and we believe that in
order to remain competitive, we will likely require additional financing
resources over the next several years for capital expenditures, working capital
and research and development. If we cannot raise additional funds, we may be
forced to reduce or suspend operations.

        BECAUSE OUR PRODUCTS REQUIRE A LENGTHY SALES CYCLE WITH NO ASSURANCE OF
A SALE OR HIGH VOLUME PRODUCTION, WE MAY EXPEND FINANCIAL AND OTHER RESOURCES
WITHOUT MAKING A SALE.



                                      -30-
<PAGE>

        With short product life cycles and rapid technological change, we must
qualify new products frequently, and we must also achieve high volume production
rapidly. Hard disk drive programs have increasingly become "bimodal" in that a
few programs are high-volume and the remaining programs are relatively small in
terms of volume. Supply and demand balance can change quickly from customer to
customer and from program to program. Further, qualifying thin-film disks for
incorporation into a new disk drive product requires us to work extensively with
the customer and the customer's other suppliers to meet product specifications.
Therefore, customers often require a significant number of product presentations
and demonstrations, as well as substantial interaction with our senior
management, before making a purchasing decision. Accordingly, our products
typically have a lengthy sales cycle, which can range from six to 12 months,
during which time we may expend substantial financial resources and management
time and effort, while not being sure that a sale will result, or that our share
of the program ultimately will result in high-volume production.

IF OUR CUSTOMERS CANCEL ORDERS THEY MAY NOT BE REQUIRED TO PAY ANY PENALTIES AND
OUR SALES COULD SUFFER.

        Our sales are generally made pursuant to purchase orders that are
subject to cancellation, modification, or rescheduling without significant
penalties. If our current customers do not continue to place orders with us, if
orders by existing customers do not recover to the levels of earlier periods, or
if we are unable to obtain orders from new customers, our sales and operating
results will suffer.

        OUR CUSTOMERS' INTERNAL DISK OPERATIONS MAY LIMIT OUR ABILITY TO SELL
OUR PRODUCT.

        During 2000, IBM and Seagate Technology produced more than 85% of their
media requirements internally, and MMC Technology supplied approximately half of
Maxtor's requirement for media. Recently, Maxtor agreed to purchase MMC
Technology. To date, MMC Technology and the captive media operations of IBM and
Seagate Technology have sold minimal quantities of disks in the merchant market.

        Disk drive manufacturers such as Seagate Technology and IBM have large
internal media manufacturing operations. We compete with these internal
operations directly, when we market our products to these disk drive companies,
and indirectly, when we sell our disks to customers who must compete with
vertically-integrated disk drive manufacturers. Vertically-integrated companies
have the ability to keep their disk-making operations fully utilized, thus
lowering their costs of production. This cost advantage contributes to the
pressure on us and other independent media manufacturers to sell disks at prices
so low that we are unprofitable, and we cannot be sure when, if ever, we can
achieve a low enough cost structure to return to profitability.
Vertically-integrated companies are also able to achieve a large scale that
supports the development resources necessary to advance technology rapidly. As a
result, we may not have sufficient resources to be able to compete effectively
with these companies. Therefore, our business, financial condition, and
operations could suffer.

BECAUSE WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS, IF OUR SUPPLIERS EXPERIENCE
CAPACITY CONSTRAINTS OR PRODUCTION FAILURES, OUR PRODUCTION AND OPERATING
RESULTS COULD BE HARMED.

        We rely on a limited number of suppliers for some of the materials and
equipment used in our manufacturing processes, including aluminum substrates,
nickel plating solutions, polishing and texturing supplies, and sputtering
target materials. For instance, Kobe is our sole supplier of aluminum blanks.
Further, the supplier base



                                      -31-
<PAGE>

has been weakened by the poor financial condition of the industry, and some
suppliers have either exited the business or failed. Additionally, several
suppliers have expressed concern about continuing to supply us because of our
financial condition. Our production capacity would be limited if one or more of
these materials were to become unavailable or available in reduced quantities,
or if we were unable to find alternative suppliers. If our source of materials
and supplies were unavailable for a significant period of time, our production
and operating results could be adversely affected.

IF WE ARE UNABLE TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE THIN-FILM
MEDIA INDUSTRY, WE MAY NOT BE ABLE TO GAIN ADDITIONAL MARKET SHARE OR WE MAY
LOSE OUR EXISTING MARKET SHARE, AND OUR OPERATING RESULTS WOULD BE HARMED. THE
IMBALANCE BETWEEN DEMAND AND SUPPLY HAS FURTHER INTENSIFIED THE COMPETITION IN
THE INDUSTRY.

        The market for our products is highly competitive, and we expect
competition to continue in the future. Competitors in the thin-film disk
industry fall into two groups: Asian-based manufacturers and U.S. captive
manufacturers. Our Asian-based competitors include Fuji, Mitsubishi, Trace,
Showa Denko, and Hoya. The U.S. captive manufacturers include the disk media
operations of Seagate Technology, IBM, and for all intents and purposes, MMC
Technology. Many of these competitors have greater financial resources than we
have. If we are not able to compete successfully in the future, we would not be
able to gain additional market share for our products, or we may lose our
existing market share, and our operating results could be harmed.

        In 2000 and the first nine months of 2001, as in 1999, media supply
exceeded media demand. As independent suppliers struggled to utilize their
capacity, the excess media supply caused average selling prices for disk
products to decline. Pricing pressure on component suppliers has also been
compounded by high consumer demand for sub-$1,000 personal computers. Further,
structural change in the disk media industry, including combinations, failures,
and joint venture arrangements, may be required before media supply and demand
are in balance. However, structural changes would intensify the competition in
the industry.

DISK DRIVE PROGRAM LIFE CYCLES ARE SHORT, AND DISK DRIVE PROGRAMS ARE HIGHLY
CUSTOMIZED. IF WE FAIL TO RESPOND TO OUR CUSTOMERS' DEMANDING REQUIREMENTS, WE
WOULD NOT BE ABLE TO COMPETE EFFECTIVELY.

        Our industry experiences rapid technological change, and our inability
to timely anticipate and develop products and production technologies could harm
our competitive position. In general, the life cycles of recent disk drive
programs have been shortening. Additionally, media must be more customized to
each disk drive program. Short program life cycles and customization have
increased the risk of product obsolescence. Supply chain management, including
just-in-time delivery, has become a standard industry practice. In order to
sustain customer relationships and achieve profitability, we must be able to
develop in a timely fashion new products and technologies that can help
customers reduce their time-to-market performance, and continue to maintain
operational excellence that supports high-volume manufacturing ramps and tight
inventory management throughout the supply chain. If we cannot respond to this
rapidly changing environment or fail to meet our customers' demanding product
and qualification requirements, we would not be able to compete effectively. As
a result, we would not be able to maximize the use of our production facilities
and minimize our inventory losses.

IF WE DO NOT KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE AND CONTINUE TO IMPROVE
THE QUALITY OF OUR MANUFACTURING PROCESSES, WE WILL NOT BE ABLE TO COMPETE
EFFECTIVELY AND OUR OPERATING RESULTS WOULD SUFFER.



                                      -32-
<PAGE>

        Our thin-film disk products primarily serve the 3 1/2-inch hard disk
drive market, where product performance, consistent quality, price, and
availability are of great competitive importance. To succeed in an industry
characterized by rapid technological developments, we must continuously advance
our thin-film technology at a pace consistent with, or faster than, our
competitors'.

        Advances in hard disk drive technology demand continually lower glide
heights and higher storage densities. Over the last several years, storage
density has roughly doubled each year, requiring significant improvement in
every aspect of disk design. These advances require substantial on-going process
and technology development. New process technologies must support
cost-effective, high-volume production of thin-film disks that meet these
ever-advancing customer requirements for enhanced magnetic recording
performance. We may not be able to develop and implement such technologies in a
timely manner in order to compete effectively against our competitors' products
and/or entirely new data storage technologies. In addition, we must transfer our
technology from our U.S. research and development center to our Malaysian
manufacturing operations. If we cannot advance our process technologies or do
not successfully implement those advanced technologies in our Malaysian
operations, or if technologies that we have chosen not to develop prove to be
viable competitive alternatives, we would not be able to compete effectively. As
a result, we would lose our market share and face increased price competition
from other manufacturers, and our operating results would suffer.

        The manufacture of our high-performance, thin-film disks requires a
tightly controlled multi-stage process, and the use of high-quality materials.
Efficient production of our products requires utilization of advanced
manufacturing techniques and clean room facilities. Disk fabrication occurs in a
highly controlled, clean environment to minimize dust and other yield- and
quality-limiting contaminants. In spite of stringent manufacturing controls,
weaknesses in process control or minute impurities in materials may cause a
substantial percentage of the disks in a lot to be defective. The success of our
manufacturing operations depends in part on our ability to maintain process
control and minimize such impurities in order to maximize yield of acceptable
high-quality disks. Minor variations from specifications could have a
disproportionately adverse impact on our manufacturing yields. If we are not
able to continue to improve on our manufacturing processes, our operating
results would be harmed.

IF WE DO NOT PROTECT OUR PATENTS AND INFORMATION RIGHTS, OUR REVENUES WILL
SUFFER.

        Protection of technology through patents and other forms of intellectual
property rights in technically sophisticated fields is commonplace. In the disk
drive industry, it is common for companies and individuals to initiate actions
against others in the industry to enforce intellectual property rights. Although
we attempt to protect our intellectual property rights through patents,
copyrights, trade secrets, and other measures, we may not be able to protect our
technology adequately. Competitors may be able to develop similar technology and
also may have or may develop intellectual property rights and enforce those
rights to prevent us from using such technologies, or demand royalty payments
from us in return for using such technologies. Either of these actions may
affect our production, which would materially reduce our revenues and harm our
results of operations.

WE MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS WHICH ARE COSTLY TO
RESOLVE, AND WHICH MAY DIVERT OUR MANAGEMENT'S ATTENTION.



                                      -33-
<PAGE>

        We have occasionally received, and may receive in the future,
communications from third parties which assert violation of intellectual rights
alleged to cover certain of our products or manufacturing processes or
equipment. We evaluate whether it would be necessary to defend against the
claims or to seek licenses to the rights referred to in such communications. In
those cases, we may not be able to negotiate necessary licenses on commercially
reasonable terms. Also, if we have to defend those claims, we could incur
significant expenses and our management's attention could be diverted from our
other business. Any litigation resulting from such claims could have a material
adverse effect on our business and financial results.

        We may not be able to anticipate claims by others that we infringe their
technology or successfully defend ourselves against such claims. Similarly, we
may not be able to discover significant infringements of our technology or
successfully enforce our rights to our technology if we discover infringing uses
by others.

HISTORICAL QUARTERLY RESULTS MAY NOT ACCURATELY PREDICT OUR FUTURE PERFORMANCE,
WHICH IS SUBJECT TO FLUCTUATION DUE TO MANY UNCERTAINTIES.

        Our operating results historically have fluctuated significantly on both
a quarterly and annual basis. As a result, our operating results in any quarter
may not reflect our future performance. We believe that our future operating
results will continue to be subject to quarterly variations based on a wide
variety of factors, including:

        -       timing of significant orders, order cancellations,
                modifications, and quantity adjustments and rescheduled
                shipments;

        -       availability of media versus demand;

        -       the cyclical nature of the hard disk drive industry;

        -       our ability to develop and implement new manufacturing process
                technologies;

        -       increases in our production and engineering costs associated
                with initial design and production of new product programs;

        -       the extensibility of our process equipment to meet more
                stringent future product requirements;

        -       our ability to introduce new products that achieve
                cost-effective high-volume production in a timely manner, timing
                of product announcements, and market acceptance of new products;

        -       changes in our product mix and average selling prices;

        -       the availability of our production capacity, and the extent to
                which we can use that capacity;

        -       changes in our manufacturing efficiencies, in particular product
                yields and input costs for direct materials, operating supplies
                and other running costs;

        -       prolonged disruptions of operations at any of our facilities for
                any reason;

        -       changes in the cost of or limitations on availability of labor;
                and

        -       structural changes within the disk media industry, including
                combinations, failures, and joint venture arrangements.

        We cannot forecast with certainty the impact of these and other factors
on our revenues and operating results in any future period. Our expense levels
are based, in part, on expectations as to future revenues. If our revenue levels
are below expectations, our operating results are likely to suffer. Because
thin-film disk manufacturing requires a high level of fixed costs, our gross
margins are extremely sensitive to changes in volume. At constant average
selling prices, reductions in our manufacturing efficiency cause declines in our
gross margins. Additionally, decreasing market demand for our products generally
results in reduced average selling prices and/or low capacity utilization that,
in turn, adversely affect our gross margins and operating results.



                                      -34-
<PAGE>

OUR DEPENDENCE ON OUR MALAYSIAN OPERATIONS EXPOSES US TO UNAVOIDABLE RISKS IN
TRANSMITTING TECHNOLOGY FROM U.S. FACILITIES TO MALAYSIAN FACILITIES, AND WHICH
COULD IMPACT OUR RESULTS OF OPERATIONS.

        During the third quarter of 1999, we announced that all media production
would be consolidated into our Malaysian factories. In the fourth quarter of
2000, we decided to end the manufacture of aluminum substrates in Santa Rosa,
California, and end production of polished disks in HMT's Eugene, Oregon,
facility. Currently, all aluminum substrates are manufactured by our Malaysian
factory and a Malaysian vendor. In addition, all polished disks are manufactured
by our Malaysian factories. Further, we recently transferred the manufacturing
capacity of HMT's Fremont, California, facility to Malaysia, and have closed all
of our U.S. media manufacturing operations, leaving us fully dependent on our
Malaysian manufacturing operations.

        Technology developed at our U.S. research and development center must
now be first implemented at our Malaysian facilities without the benefit of
being implemented at a U.S. factory. Therefore, we rely heavily on electronic
communications between our U.S. facilities and Malaysia to transfer technology,
diagnose operational issues, and meet customer requirements. If our operations
in Malaysia or overseas communications are disrupted for a prolonged period for
any reason, shipments of our products would be delayed, and our results of
operations would suffer.

OUR FOREIGN OPERATIONS AND INTERNATIONAL SALES SUBJECT US TO ADDITIONAL RISKS
INHERENT IN DOING BUSINESS ON AN INTERNATIONAL LEVEL THAT MAKE IT MORE COSTLY OR
DIFFICULT TO CONDUCT OUR BUSINESS.

        We are subject to a number of risks of conducting business outside of
the U.S. Our sales to customers in Asia, including the foreign subsidiaries of
domestic disk drive companies, account for substantially all of our net sales
from our U.S. and Malaysian facilities. Our customers assemble a substantial
portion of their disk drives in the Far East and subsequently sell these
products throughout the world. Therefore, our high concentration of Far East
sales does not accurately reflect the eventual point of consumption of the
assembled disk drives. We anticipate that international sales will continue to
represent the majority of our net sales.

        We are subject to these risks to a greater extent than most companies
because, in addition to selling our products outside the U.S., our Malaysian
operations will account for a large majority of our sales in 2001.

        Accordingly, our operating results are subject to the risks inherent
with international operations, including, but not limited to:

        -       compliance with changing legal and regulatory requirements of
                foreign jurisdictions;

        -       fluctuations in tariffs or other trade barriers;

        -       foreign currency exchange rate fluctuations since certain costs
                of our foreign manufacturing and marketing operations are
                incurred in foreign currency, including purchase of certain
                operating supplies and production equipment from Japanese
                suppliers in yen-denominated transactions;

        -       difficulties in staffing and managing foreign operations;

        -       political, social and economic instability;

        -       exposure to taxes in multiple jurisdictions;

        -       local infrastructure problems or failures; and

        -       transportation delays and interruptions.



                                      -35-
<PAGE>

        In addition, our ability to transfer funds from our Malaysian operations
to the U.S. is subject to Malaysian rules and regulations. In 1999, the
Malaysian government repealed a regulation that restricted the amount of
dividends that a Malaysian company may pay to its stockholders. If not repealed,
this regulation would have potentially limited our ability to transfer funds to
the U.S. from our Malaysian operations. If similar regulations are enacted in
the future, the cost of our Malaysian operations would increase, and our
operating margin would be significantly reduced.

IF WE ARE UNABLE TO CONTROL CONTAMINATION IN OUR MANUFACTURING PROCESSES, WE MAY
HAVE TO SUSPEND OR REDUCE OUR MANUFACTURING OPERATIONS.

        It is possible that we will experience manufacturing problems from
contamination or other causes in the future. For example, if our disks are
contaminated by microscopic particles, they might not be fit for use by our
customers. If contamination problems arise, we would have to suspend or reduce
our manufacturing operations, and our operations could suffer.

THE NATURE OF OUR OPERATIONS MAKES US SUSCEPTIBLE TO MATERIAL ENVIRONMENTAL
LIABILITIES, WHICH COULD RESULT IN SIGNIFICANT CLEAN-UP EXPENSES AND ADVERSELY
AFFECT OUR FINANCIAL CONDITION.

We are subject to a variety of federal, state, local, and foreign regulations
relating to:

        -       the use, storage, discharge, and disposal of hazardous materials
                used during our manufacturing process;

        -       the treatment of water used in our manufacturing process; and

        -       air quality management.

        We are required to obtain necessary permits for expanding our
facilities. We must also comply with new regulations on our existing operations.
Public attention has increasingly been focused on the environmental impact of
manufacturing operations that use hazardous materials. If we fail to comply with
environmental regulations or fail to obtain the necessary permits:

        -       we could be subject to significant penalties;

        -       our ability to expand or operate at locations in California or
                our locations in Malaysia could be restricted;

        -       our ability to establish additional operations in other
                locations could be restricted; or

        -       we could be required to obtain costly equipment or incur
                significant expenses to comply with environmental regulations.

        Any accidental hazardous discharge could result in significant liability
and clean-up expenses, which could harm our business, financial condition, and
results of operations.

DOWNTURNS IN THE DISK DRIVE MANUFACTURING MARKET AND RELATED MARKETS MAY
DECREASE OUR REVENUES AND MARGINS.

        The market for our products depends on economic conditions affecting the
disk drive manufacturing and related markets. Downturns in these markets may
cause disk drive manufacturers to delay or cancel projects, reduce their
production or reduce or cancel orders for our products. In this environment,
customers may experience financial difficulty, cease operations or fail to
budget for the purchase of our products. This, in turn, may lead to longer sales
cycles, delays in payment and collection, and price pressures, causing us to
realize lower revenues and



                                      -36-
<PAGE>

margins. In particular, many of our customers and potential customers have
experienced declines in their revenues and operations. In addition, the
terrorist acts of September 11, 2001 and subsequent terrorist activities have
created an uncertain economic environment and we cannot predict the impact of
these events, or of any related military action, on our customers or business.
We believe that, in light of these events, some businesses may curtail or
eliminate spending on technology related to our products.

        WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR BUSINESS, AND
CALIFORNIA'S ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR
EXPENSES.

        California is in the midst of an energy crisis that could disrupt our
research and development activities and increase our expenses. In the event of
an acute power shortage, which occurs when power reserves for the State of
California fall below 1.5%, California has, on occasion, implemented, and may in
the future continue to implement, rolling blackouts throughout the state. We
currently do not have back-up generators or alternate sources of power in the
event of a blackout, and our insurance does not provide coverage for any damages
we or our customers may suffer as a result of any interruption in our power
supply. If blackouts interrupt our power supply, we would be temporarily unable
to continue operations at our California-based facilities. This could damage our
reputation, harm our ability to retain existing customers and to obtain new
customers, and could result in lost revenue, any of which could substantially
harm our business and results of operations.

        Furthermore, the regulatory changes affecting the energy industry
instituted in 1996 by the California government have caused power prices to
increase. Under the revised regulatory scheme, utilities were encouraged to sell
their plants, which had traditionally produced most of California's power, to
independent energy companies that were expected to compete aggressively on
price. Instead, due in part to a shortage of supply, wholesale prices have
increased dramatically over the past year. If wholesale prices continue to
increase, our operating expenses will likely increase, as our headquarters and
certain facilities are in California.

EARTHQUAKES OR OTHER NATURAL OR MAN-MADE DISASTERS COULD DISRUPT OUR OPERATIONS.

        Our U.S. facilities are located in San Jose, Fremont, and Santa Rosa in
California. In addition, Kobe and other Japanese suppliers of key manufacturing
supplies and sputtering machines are located in areas with seismic activity. Our
Malaysian operations have been subject to temporary production interruptions due
to localized flooding, disruptions in the delivery of electrical power, and, on
one occasion in 1997, by smoke generated by large, widespread fires in
Indonesia. If any natural or man-made disasters do occur, operations could be
disrupted for prolonged periods, and our business would suffer.

ADDITIONAL ASSET IMPAIRMENTS COULD ADVERSELY IMPACT OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

        As a result of recently issued financial accounting standards, in 2002
we will be required to evaluate our existing intangible assets and goodwill that
were acquired in prior purchase business combinations, and make any necessary
reclassifications in order to conform with the new criteria for recognition
apart from goodwill. We will also be required to reassess the useful lives and
residual values of all intangible assets acquired in purchase business
combinations. These changes could have a material adverse affect on our
accounting for goodwill and other intangible assets and could adversely affect
our financial condition and results of operations.



                                      -37-
<PAGE>

        Other risk factors that may affect our financial performance are listed
in our various SEC filings, including our Form 10-K for the fiscal year ended
December 31, 2000, which was filed on March 26, 2001 and our Form 10-Qs for the
fiscal quarter ended April 1, 2001, which was filed on May 15, 2001, July 1,
2001, which was filed on August 7, 2001, and September 30, 2001, which was filed
on November 20, 2001. We undertake no obligation to publicly release the result
of any revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

        Komag, Incorporated (KUS) filed a voluntary petition for reorganization
under Chapter 11 of the United States Bankruptcy Code on August 24, 2001 (the
"Petition Date"). The petition was filed with the United States Bankruptcy Court
for the Northern District of California. The case has been assigned to the
Honorable James R. Grube under case number 01-54143-JRG. The petition affects
only the Company's U.S. corporate parent, KUS, and does not include any of its
subsidiaries, including Komag Material Technology (KMT), or Komag USA (Malaysia)
Sdn (KMS). The Company is operating its business as a debtor-in-possession. See
Notes 1, 2, and 3 for additional information.

        Asahi Glass Company, Ltd. (Asahi) has asserted that a technology
cooperation agreement (the agreement) between the Company and Asahi gives Asahi
exclusive rights, even as to Komag, to certain low-cost glass substrate-related
intellectual property developed by the Company. In connection with the Chapter
11 Bankruptcy filing, the Bankruptcy Court, on October 19, 2001, ordered that
the agreement be rejected, effective as of the petition date. The Company
suspended the development of its low-cost glass substrate program on October 17,
2001. The Company currently has entered into a settlement Stipulation with Asahi
to resolve the dispute regarding ownership of intellectual property and
"know-how" developed by the Company prior to June 29, 2001, the agreed date of
termination of the agreement. As part of that Stipulation, Asahi waived claims
against the Company relating to the agreement.

ITEM 2. Changes in Securities

        Not Applicable.

ITEM 3. Defaults Upon Senior Securities

        On June 30, 2001, the $201.7 million principal amount of the Company's
senior bank debt became due. As of November 12, 2001, this amount, as well as
accrued interest of $4.4 million from June 1, 2001 through August 24, 2001, has
not been repaid. As a result, under the terms of the loan restructure agreement
for the senior bank debt and the subordination provisions for the $230 million
of HMT subordinated convertible notes, the Company did not pay interest of $6.6
million on the outstanding HMT subordinated convertible notes when it became due
on July 15, 2001. The Company then became in interest payment default under the
HMT subordinated convertible notes. As of November 7, 2001, accrued interest on
the HMT subordinated convertible notes is $8.3 million. In addition, the
Company's failure to pay the bank debt when due caused a default under the HMT
subordinated convertible notes as of July 30, 2001. This indebtedness and all of
the Company's other indebtedness and obligations are now the subject



                                      -38-
<PAGE>

of our bankruptcy proceedings, and will be restructured in accordance with the
Company's Plan of Reorganization.

ITEM 4. Submission of Matters to a Vote of Security Holders

        Not Applicable.

ITEM 5. Other Information

        On September 17, 2001, the Company withdrew its appeal to the Nasdaq
Listing Qualifications Panel, and voluntarily delisted its common stock from the
Nasdaq National Market. The Company's stock is currently trading on the OTC
Bulletin Board under the symbol KMAGQ.

        On October 19, 2001, Nasdaq delisted the 5 3/4% subordinated convertible
bonds due in January, 2004, that were originally issued by HMT Technology
Corporation.

ITEM 6. Exhibits and Reports on Form 8-K

        a)      Exhibits

        Exhibit 10.1 - Amendment Number 1 to Volume Purchase Agreement with
        Western Digital Corporation dated October 5, 2001.

        b)      Reports on Form 8-K

        On August 30, 2001, the Company filed Form 8-K, announcing that it had
        filed a voluntary petition for reorganization under Chapter 11 of the
        United States Bankruptcy Court.

        On September 27, 2001, the Company filed Form 8-K, relating to its
        September 17, 2001, press release announcing its withdrawal of its
        appeal to the Nasdaq Listing Qualifications Panel, and its September 21,
        2001, press release announcing its intent to file a Plan of
        Reorganization with the Bankruptcy Court in connection with its Chapter
        11 Bankruptcy filing.

        On October 19, 2001, the Company filed Form 8-K, relating to its October
        8, 2001, press release announcing that Western Digital has agreed to
        extend its Volume Purchase Agreement with the Company for an additional
        three-year term.

        On November 26, 2001, the Company filed Form 8-K, relating to its
        November 19, 2001, press release announcing that its auditors, Ernst &
        Young LLP, resigned after a 14-year period of engagement, and that it
        has engaged KPMG LLP as its principal accountants effective as of
        November 19, 2001.



                                      -39-
<PAGE>

                                   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.



                                           KOMAG, INCORPORATED

                                           (Registrant)



DATE: December 20, 2000                    BY: /s/ Thian  Hoo Tan
      --------------------                     --------------------------------
                                               Thian Hoo Tan
                                               Chief Executive Officer

DATE: December 20, 2001                    BY: /s/  Edward H. Siegler
      --------------------                     --------------------------------
                                               Edward H. Siegler
                                               Vice President,
                                               Chief Financial Officer

DATE: December 20, 2001                    BY: /s/  Kathleen A. Bayless
      --------------------                     --------------------------------
                                               Kathleen A. Bayless
                                               Vice President,
                                               Corporate Controller



                                      -40-
<PAGE>

                                 EXHIBIT INDEX


Exhibit 10.1 - Amendment Number 1 to Volume Purchase Agreement with Western
Digital Corporation dated October 5, 2001.



                                      -41-