##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT UNDER SECTION
13 OR 15 (d)

OF

THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarter Ended July 2, 2006
 Commission File Number 0-16852
 KOMAG, INCORPORATED
  
 þ o
  þ o o
 o þ
 
 þ o




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##### 



INDEX
KOMAG, INCORPORATED
  
 PagePART I. FINANCIAL INFORMATIONItem1.
    
    Condensed Consolidated Financial Statements (Unaudited)
    
    
    4Condensed Consolidated Statements of Income  three and six months ended July 2, 2006 and July 3, 2005
    
    
    4Condensed Consolidated Balance Sheets  July 2, 2006 and January 1, 2006
    
    
    5Condensed Consolidated Statements of Cash Flows  six months ended July 2, 2006 and July 3, 2005
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7-14Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15-22Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONItem 1A.
    
    Risk Factors
    
    
    24Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    38Item 6.
    
    Exhibits
    
    
    40SIGNATURES
    
    
    41EXHIBIT 3.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
   3




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 KOMAG, INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJuly 2, 2006
    
    
    July 3, 2005
    
    
    July 2, 2006
    
    
    July 3, 2005Net sales
    
    $
    233,627
    
    
    $
    172,740
    
    
    $
    442,139
    
    
    $
    313,015Cost of sales
    
    
    168,659
    
    
    
    124,660
    
    
    
    318,078
    
    
    
    229,872Gross profit
    
    
    64,968
    
    
    
    48,080
    
    
    
    124,061
    
    
    
    83,143Operating expenses:Research, development, and engineering
    
    
    16,081
    
    
    
    12,834
    
    
    
    31,156
    
    
    
    23,989Selling, general, and administrative
    
    
    9,125
    
    
    
    5,787
    
    
    
    17,149
    
    
    
    11,322Gain on disposal of assets
    
    
    (26
    )
    
    
    (1,360
    )
    
    
    (86
    )
    
    
    (1,749
    )25,180
    
    
    
    17,261
    
    
    
    48,219
    
    
    
    33,562Operating income
    
    
    39,788
    
    
    
    30,819
    
    
    
    75,842
    
    
    
    49,581Other income (expense):Interest income
    
    
    1,867
    
    
    
    1,044
    
    
    
    3,938
    
    
    
    1,794Interest expense
    
    
    (441
    )
    
    
    (442
    )
    
    
    (882
    )
    
    
    (883
    )Other income (expense), net
    
    
    41
    
    
    
    (23
    )
    
    
    (435
    )
    
    
    (51
    )1,467
    
    
    
    579
    
    
    
    2,621
    
    
    
    860Income before income taxes
    
    
    41,255
    
    
    
    31,398
    
    
    
    78,463
    
    
    
    50,441Provision for income taxes
    
    
    966
    
    
    
    1,505
    
    
    
    1,937
    
    
    
    2,021Net income
    
    $
    40,289
    
    
    $
    29,893
    
    
    $
    76,526
    
    
    $
    48,420Basic net income per share
    
    $
    1.35
    
    
    $
    1.04
    
    
    $
    2.57
    
    
    $
    1.70Diluted net income per share
    
    $
    1.21
    
    
    $
    0.92
    
    
    $
    2.31
    
    
    $
    1.51Number of shares used in basic per share computations
    
    
    29,883
    
    
    
    28,834
    
    
    
    29,784
    
    
    
    28,549Number of shares used in diluted per share computations
    
    
    33,544
    
    
    
    32,971
    
    
    
    33,525
    
    
    
    32,669
  4




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KOMAG, INCORPORATED
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except par value)
 (Unaudited)
 July 2, 2006
    
    
    January 1, 2006ASSETSCurrent assetsCash and cash equivalents
    
    $
    132,199
    
    
    $
    99,984Short-term investments
    
    
    58,000
    
    
    
    105,050Accounts receivable (less allowances of $2,824 and $2,866, respectively)
    
    
    127,978
    
    
    
    116,217Inventories
    
    
    75,421
    
    
    
    54,000Prepaid expenses and deposits
    
    
    1,370
    
    
    
    1,846Total current assets
    
    
    394,968
    
    
    
    377,097Property, plant, and equipment (net of accumulated depreciation of $172,978
and $140,658, respectively)
    
    
    517,671
    
    
    
    351,046Other assets
    
    
    3,212
    
    
    
    3,308$
    915,851
    
    
    $
    731,451LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesTrade accounts payable
    
    $
    161,777
    
    
    $
    97,901Customer advances
    
    
    140,160
    
    
    
    102,898Accrued expenses and other liabilities
    
    
    22,514
    
    
    
    28,585Total current liabilities
    
    
    324,451
    
    
    
    229,384Long-term debt
    
    
    80,500
    
    
    
    80,500Deferred rent
    
    
    2,827
    
    
    
    2,562Total liabilities
    
    
    407,778
    
    
    
    312,446Stockholders equityCommon stock, $0.01 par value per share:Authorized - 120,000 sharesIssued and outstanding - 30,856 and 30,092 shares, respectively
    
    
    309
    
    
    
    301Additional paid-in capital
    
    
    270,657
    
    
    
    267,920Deferred stock-based compensation
    
    
    
    
    
    
    (9,695
    )Accumulated other comprehensive loss
    
    
    (532
    )
    
    
    (634
    )Retained earnings
    
    
    237,639
    
    
    
    161,113Total stockholders
equity
    
    
    508,073
    
    
    
    419,005$
    915,851
    
    
    $
    731,451
  5




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KOMAG, INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six Months EndedJuly 2, 2006
    
    
    July 3, 2005Operating ActivitiesNet income
    
    $
    76,526
    
    
    $
    48,420Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization of property, plant, and equipment
    
    
    32,753
    
    
    
    20,747Tax provision charged to additional paid-in capital
    
    
    1,572
    
    
    
    1,651Amortization and adjustments of intangible assets
    
    
    88
    
    
    
    986Stock-based compensation
    
    
    8,713
    
    
    
    2,526Deferred rent
    
    
    265
    
    
    
    1,281Non-cash interest charges
    
    
    77
    
    
    
    77Gain on disposal of assets
    
    
    (86
    )
    
    
    (1,749
    )Foreign exchange loss
    
    
    502
    
    
    
    Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (11,737
    )
    
    
    (12,864
    )Inventories
    
    
    (21,421
    )
    
    
    (12,484
    )Prepaid expenses and deposits
    
    
    476
    
    
    
    (1,112
    )Trade accounts payable
    
    
    40,206
    
    
    
    12,460Customer advances
    
    
    37,262
    
    
    
    Accrued expenses and other liabilities
    
    
    (5,946
    )
    
    
    13,351Net cash provided by operating activities
    
    
    159,250
    
    
    
    73,290Investing ActivitiesAcquisition of property, plant, and equipment
    
    
    (177,409
    )
    
    
    (40,520
    )Purchases of short-term investments
    
    
    (77,850
    )
    
    
    (138,900
    )Proceeds from sales and maturities of short-term investments
    
    
    124,900
    
    
    
    112,450Proceeds from disposal of property, plant, and equipment
    
    
    162
    
    
    
    3,062Other
    
    
    (67
    )
    
    
    Net cash used in investing activities
    
    
    (130,264
    )
    
    
    (63,908
    )Financing ActivitiesRepurchase of common stock
    
    
    (1,080
    )
    
    
    Proceeds from sale of common stock
    
    
    3,235
    
    
    
    5,969Net cash provided by financing activities
    
    
    2,155
    
    
    
    5,969Effect of exchange rate changes on cash and cash equivalents
    
    
    1,074
    
    
    
    Increase in cash and cash equivalents
    
    
    32,215
    
    
    
    15,351Cash and cash equivalents at beginning of period
    
    
    99,984
    
    
    
    26,410Cash and cash equivalents at end of period
    
    $
    132,199
    
    
    $
    41,761
  6




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Note 1. Basis of Presentation and Summary of Significant Accounting Policies
  Use of Estimates in the Preparation of Financial Statements:
 Fiscal Year:
 Cash and Cash Equivalents:
 Short-Term Investments:
 7




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Inventories:
 July 2, 2006
    
    
    January 1, 2006Raw materials
    
    $
    58,522
    
    
    $
    39,230Work in process
    
    
    9,845
    
    
    
    6,489Finished goods
    
    
    7,054
    
    
    
    8,281$
    75,421
    
    
    $
    54,000
 Computation of Net Income Per Share: Earnings per Share
   Three Months Ended
    
    
    Six Months EndedJuly 2, 2006
    
    
    July 3, 2005
    
    
    July 2, 2006
    
    
    July 3, 2005Numerator for basic net income per share:Net income as reported
    
    $
    40,289
    
    
    $
    29,893
    
    
    $
    76,526
    
    
    $
    48,420Numerator for diluted net income per share:Net income as reported
    
    $
    40,289
    
    
    $
    29,893
    
    
    $
    76,526
    
    
    $
    48,420Interest adjustment related to contigently convertible debt
    
    
    441
    
    
    
    442
    
    
    
    882
    
    
    
    883$
    40,730
    
    
    $
    30,335
    
    
    $
    77,408
    
    
    $
    49,303Denominator for basic income per share:Weighted average shares outstanding
    
    
    29,883
    
    
    
    28,834
    
    
    
    29,784
    
    
    
    28,549Denominator for diluted income per share:Weighted average shares outstanding
    
    
    29,883
    
    
    
    28,834
    
    
    
    29,784
    
    
    
    28,549Effect of dilutive securities:Contingently convertible shares under convertible debt
    
    
    3,049
    
    
    
    3,049
    
    
    
    3,049
    
    
    
    3,049Stock options
    
    
    369
    
    
    
    598
    
    
    
    429
    
    
    
    560Warrants
    
    
    
    
    
    
    303
    
    
    
    
    
    
    
    395Stock purchase rights
    
    
    243
    
    
    
    187
    
    
    
    263
    
    
    
    11633,544
    
    
    
    32,971
    
    
    
    33,525
    
    
    
    32,669Basic net income per share
    
    $
    1.35
    
    
    $
    1.04
    
    
    $
    2.57
    
    
    $
    1.70Diluted net income per share
    
    $
    1.21
    
    
    $
    0.92
    
    
    $
    2.31
    
    
    $
    1.51
 8




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Recent Accounting Pronouncements: Inventory Costs .
 Accounting Changes and Error Corrections
 Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109
 Note 2. Stock-Based Compensation
 Share-Based Payment
 Accounting for Stock-Based Compensation Accounting for Stock Issued
to Employees
 9




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Plan Description
   Summary of Assumptions and Activity
  10




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Weighted-averageRemaining
    
    
    AggregateWeighted-average
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term
    
    
    Value(per share)
    
    
    (years)Outstanding at January 1, 2006
    
    
    868,853
    
    
    $
    12.99Exercised
    
    
    (188,434
    )
    
    $
    11.79Cancelled
    
    
    (607
    )
    
    $
    13.41Outstanding at April 2, 2006
    
    
    679,812
    
    
    $
    13.33
    
    
    
    7.58
    
    
    $
    23,297,419Exercised
    
    
    (85,025
    )
    
    $
    11.88Cancelled
    
    
    (1,011
    )
    
    $
    12.82Outstanding at July 2, 2006
    
    
    593,776
    
    
    $
    13.54
    
    
    
    7.36
    
    
    $
    19,381,777Exercisable at July 2, 2006
    
    
    299,106
    
    
    $
    12.05
    
    
    
    7.14
    
    
    $
    10,209,680
   Weighted-averageGrant DateShares
    
    
    Fair Value(per share)Outstanding at January 1, 2006
    
    
    573,201
    
    
    $
    22.34Granted
    
    
    473,374
    
    
    
    46.76Vested
    
    
    (145,437
    )
    
    
    20.65Cancelled
    
    
    (1,814
    )
    
    
    30.98Outstanding at April 2, 2006
    
    
    899,324
    
    
    $
    35.45Granted
    
    
    45,660
    
    
    
    42.62Vested
    
    
    (18,500
    )
    
    
    23.87Cancelled
    
    
    (3,185
    )
    
    
    34.78Outstanding at July 2, 2006
    
    
    923,299
    
    
    $
    36.04
  11




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Pro forma information for Periods Prior to the Adoption of SFAS 123R
 Accounting for Stock-Based
Compensation Accounting for Stock-Based Compensation  Transition and Disclosure  an Amendment of SFAS
123
 12




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Three
    
    
    SixMonths
    
    
    MonthsEnded
    
    
    EndedJuly 3, 2005
    
    
    July 3, 2005Net income, as reported
    
    $
    29,893
    
    
    $
    48,420Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects
    
    
    1,685
    
    
    
    2,526Deduct: Stock-based compensation expense determined under
the fair value method for all awards, net of related tax effects
    
    
    (2,350
    )
    
    
    (3,916
    )Pro forma net income
    
    $
    29,228
    
    
    $
    47,030Net income per share:Basic  as reported
    
    $
    1.04
    
    
    $
    1.70Diluted  as reported
    
    $
    0.92
    
    
    $
    1.51Basic  pro forma
    
    $
    1.01
    
    
    $
    1.65Diluted  pro forma
    
    $
    0.91
    
    
    $
    1.48
 Note 3. Concentration of Customer, Supplier, and Geographic Risk
  Three Months Ended
    
    Six Months EndedJuly 2, 2006
    
    July 3, 2005
    
    July 2, 2006
    
    July 3, 2005Western Digital Corporation
    
    
    38
    %
    
    
    19
    %
    
    
    37
    %
    
    
    19
    %Seagate Technology (1)
    
    
    32
    %
    
    
    21
    %
    
    
    26
    %
    
    
    18
    %Hitachi Global Storage Technologies (2)
    
    
    26
    %
    
    
    25
    %
    
    
    24
    %
    
    
    25
    %Maxtor Corporation (1)
    
    
    
    
    
    
    30
    %
    
    
    10
    %
    
    
    32
    %
 
 (1)
    
    Seagate Technology acquired Maxtor Corporation in the second quarter of 2006.
Sales to Maxtor beginning in the second quarter of 2006 have been presented on a
combined basis with Seagate Technology.(2)
    
    Includes sales to Hitachi Global Storage Technologies contract manufacturer.  13




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Note 4. Accrued Expenses and Other Liabilities
  July 2, 2006
    
    
    January 1, 2006Accrued compensation and benefits
    
    $
    19,783
    
    
    $
    24,986Other liabilities
    
    
    2,731
    
    
    
    3,599$
    22,514
    
    
    $
    28,585
 Note 5. Customer Advances
  14




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    15




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Results of Operations
 Overview
      16




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Three Months Ended
    
    
    Six Months EndedJuly 2, 2006
    
    
    July 3, 2005
    
    
    July 2, 2006
    
    
    July 3, 2005Net sales
    
    $
    233,627
    
    
    
    100.0
    %
    
    $
    172,740
    
    
    
    100.0
    %
    
    $
    442,139
    
    
    
    100.0
    %
    
    $
    313,015
    
    
    
    100.0
    %Cost of sales
    
    
    168,659
    
    
    
    72.2
    %
    
    
    124,660
    
    
    
    72.2
    %
    
    
    318,078
    
    
    
    71.9
    %
    
    
    229,872
    
    
    
    73.4
    %Gross profit
    
    
    64,968
    
    
    
    27.8
    %
    
    
    48,080
    
    
    
    27.8
    %
    
    
    124,061
    
    
    
    28.1
    %
    
    
    83,143
    
    
    
    26.6
    %Research, development, and engineering
    
    
    16,081
    
    
    
    6.9
    %
    
    
    12,834
    
    
    
    7.3
    %
    
    
    31,156
    
    
    
    7.1
    %
    
    
    23,989
    
    
    
    7.8
    %Selling, general, and administrative expense
    
    
    9,125
    
    
    
    3.9
    %
    
    
    5,787
    
    
    
    3.4
    %
    
    
    17,149
    
    
    
    3.9
    %
    
    
    11,322
    
    
    
    3.6
    %Gain on disposal of assets
    
    
    (26
    )
    
    
    (0.0
    %)
    
    
    (1,360
    )
    
    
    (0.8
    %)
    
    
    (86
    )
    
    
    (0.0
    %)
    
    
    (1,749
    )
    
    
    (0.6
    %)Interest income
    
    
    (1,867
    )
    
    
    (0.8
    %)
    
    
    (1,044
    )
    
    
    (0.6
    %)
    
    
    (3,938
    )
    
    
    (0.9
    %)
    
    
    (1,794
    )
    
    
    (0.6
    %)Interest expense
    
    
    441
    
    
    
    0.2
    %
    
    
    442
    
    
    
    0.3
    %
    
    
    882
    
    
    
    0.2
    %
    
    
    883
    
    
    
    0.3
    %Other (income) expense, net
    
    
    (41
    )
    
    
    (0.0
    %)
    
    
    23
    
    
    
    0.0
    %
    
    
    435
    
    
    
    0.1
    %
    
    
    51
    
    
    
    0.0
    %Provision for income taxes
    
    
    966
    
    
    
    0.4
    %
    
    
    1,505
    
    
    
    0.9
    %
    
    
    1,937
    
    
    
    0.4
    %
    
    
    2,021
    
    
    
    0.6
    %Net income
    
    $
    40,289
    
    
    
    17.2
    %
    
    $
    29,893
    
    
    
    17.3
    %
    
    $
    76,526
    
    
    
    17.3
    %
    
    $
    48,420
    
    
    
    15.5
    %
 Net Sales
      17




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Gross Profit
   Research, Development, and Engineering Expenses
   18




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##### Table of Contents



Selling, General, and Administrative Expenses
    Interest Expense
  Tax provision
 Accounting For Income Taxes
 Critical Accounting Policies
  19




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Allowance for Sales Returns
  Inventory Obsolescence
  Liquidity and Capital Resources
    
    
    net income of $76.5 million, net of non-cash depreciation and amortization of
property, plant and equipment of $32.8 million and other net non-cash charges of $11.1
million;
    
    an accounts receivable increase of $11.7 million, which reflected an increase
in sales during the first six months of 2006;
    
    an inventory increase of $21.4 million, which primarily reflected increased
inventory to support increased production and sales volumes;
 20




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
    
    an accounts payable increase of $40.2 million, which primarily reflected
increased inventory and higher capital spending;
    
    a customer advance increase of $37.3 million; and
    
    an accrued expenses and other liabilities decrease of $5.9 million, which
primarily reflected payments of incentive compensation accruals.
      21




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Remainderof2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    TotalLong-Term Debt Obligations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    80,500
    
    
    $
    80,500Operating Lease Obligations
    
    
    1,404
    
    
    
    2,149
    
    
    
    2,051
    
    
    
    3,154
    
    
    
    3,146
    
    
    
    13,241
    
    
    
    25,145Unconditional Purchase Obligations (1)
    
    
    3,576
    
    
    
    2,339
    
    
    
    2,289
    
    
    
    2,289
    
    
    
    2,289
    
    
    
    10,824
    
    
    
    23,606Total Contractual Cash Obligations
    
    $
    4,980
    
    
    $
    4,488
    
    
    $
    4,340
    
    
    $
    5,443
    
    
    $
    5,435
    
    
    $
    104,565
    
    
    $
    129,251
 
 (1)
    
    Unconditional purchase obligations are defined as agreements to purchase goods or
services that are enforceable and legally binding, and that specify all significant terms,
including: fixed or minimum quantities to be purchased; fixed, minimum, or variable pricing
provisions; and the approximate timing of the transactions. The amounts are based on our
contractual commitments.  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Internal Control over Financial Reporting
  
    
    pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company;
    
    provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and
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expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and
    
    provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the companys assets that could have a
material effect on the financial statements.
  Changes in Internal Control Over Financial Reporting
  Limitations on the Effectiveness of Controls
  
 PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
 These risks and uncertainties are not the only ones facing our company. Additional risks and
uncertainties that we are unaware of or currently deem immaterial may also become important factors
that may harm our business. If any of the following risks actually occur, or other unexpected
events occur, our business, financial condition and results of operations could be materially
adversely affected, the value of our stock could decline, and investors may lose part or all of
their investment. Further, this Form 10-Q contains forward-looking statements, and actual results
may differ significantly from the results contemplated by our forward-looking statements.
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Risks Related to Our Business
 Our business is concentrated in the disk drive market, so downturns in the disk drive manufacturing
market and related markets may decrease our revenues and margins, which would materially and
adversely affect our business.
  The disk drive market in which our business is concentrated is seasonal and cyclical, so it is
difficult to predict our revenues and margins, which could make our stock price more volatile.
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If we are unable to perform successfully in the highly competitive and increasingly concentrated
disk industry, we may not be able to maintain or gain additional market share, and our business and
operating results would be harmed.
  We are continuing to significantly increase the scope of our manufacturing operations in Malaysia,
and if we fail to successfully manage and integrate our expanding operations, we may be unable to
exploit potential market opportunities, which would materially and adversely affect our business.
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We receive a large percentage of our net sales from only a few disk drive manufacturing customers,
the loss of any of which would materially and adversely affect our business and sales.
   The Seagate acquisition of Maxtor has reduced our total number of significant customers, which may
result in reduced sales and thereby adversely affect our business, revenues and operating results.
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Our agreements with each of our major customers require us to meet certain production volumes, and
if we fail to successfully perform under these agreements, we may incur substantial costs and
expenses, and our business could be materially and adversely affected.
  Because we depend on a limited number of suppliers, if our suppliers experience capacity
constraints or production failures, our production, operating results and growth potential could be
harmed.
  If we do not keep pace with the rapid technological change in the disk drive industry, we will not
be able to compete effectively, and our operating results could suffer.
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If we are not able to attract and retain key personnel our business and operation results could be harmed.
  If our production capacity is underutilized, our gross margin will be adversely affected and we
could sustain significant losses.
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Internal disk operations of disk drive manufacturers may adversely affect our ability to sell our
disk products.
  All of our manufacturing operations are in Malaysia and our foreign operations and international
sales subject us to additional risks inherent in doing business on an international level that
could make it more costly and difficult to conduct our business.
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
    
    compliance with changing legal and regulatory requirements of foreign jurisdictions;
    
    fluctuations in tariffs or other trade barriers;
    
    difficulties in staffing and managing foreign operations;
    
    political, social, and economic instability;
    
    increased exposure to threats and acts of terrorism;
    
    exposure to taxes in multiple jurisdictions;
    
    local infrastructure problems or failures including but not limited to loss of
power and water supply; and
    
    transportation delays and interruptions.
  Because our products require a lengthy sales cycle with no assurance of high volume sales, we may
expend significant financial and other resources without a return.
  Disk drive programs are highly customized. If we fail to respond to our customers demanding
requirements, we will not be able to compete effectively.
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If we fail to improve the quality of, and control contamination in our manufacturing processes, we
will lose our ability to remain competitive.
  An industry trend towards glass-based applications could negatively impact our ability to remain
competitive.
  If we do not protect our patents and other intellectual property rights, our net sales could
suffer.
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We may face intellectual property infringement claims that are costly to resolve, may divert our
managements attention, and may negatively impact our business and operating results.
  Historical quarterly results may not accurately predict our performance due to a number of
uncertainties and market factors, and as a result it is difficult to predict our future results.
  
    
    timing of significant orders, or order cancellations;
    
    changes in our product mix and average selling prices;
    
    modified, adjusted, or rescheduled shipments;
    
    actions by our competitors, including announcements of new products or technological innovations;
    
    availability of disks versus demand for disks;
    
    the cyclical nature of the disk drive industry;
    
    our ability to develop and implement new and efficient manufacturing process technologies;
    
    increases in our production and engineering costs associated with initial
design and production of new product programs;
    
    our ability to execute future product development and production ramps effectively;
    
    fluctuations in exchange rates, particularly between the US dollar and the Malaysian ringgit;
    
    the ability 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;
    
    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;
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
    
    changes in the cost of or limitations on availability of labor;
    
    structural changes within the disk industry, including combinations, failures,
and joint venture arrangements; and
    
    changes in tax regulations in foreign jurisdictions that could potentially
reduce our tax incentives in areas such as Malaysian capital allowances, tax holidays,
and exemptions on withholding tax on royalty payments made by our Malaysian operations
to our subsidiary in the Netherlands.
  If we make unprofitable acquisitions or are unable to successfully integrate future acquisitions,
our business could suffer.
  
    
    difficulties in integrating the operations, technologies, products and
personnel of the acquired companies, especially given the specialized nature of our
technology;
    
    diversion of managements attention from normal daily operations of the business;
    
    potential difficulties in completing projects associated with in-process research and development;
    
    initial dependence on unfamiliar supply chains or relatively small supply partners; and
    
    the potential loss of key employees of the acquired companies.
  
    
    issue stock that would dilute our current stockholders percentage ownership;
    
    assume liabilities;
    
    record goodwill and non-amortizable intangible assets that will be subject to
impairment testing and potential periodic impairment charges;
    
    incur amortization expenses related to certain intangible assets;
    
    incur large and immediate write-offs; or
    
    become subject to litigation.
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The nature of our operations makes us susceptible to material environmental liabilities, which
could result in significant compliance and clean-up expenses and adversely affect our financial
condition.
  
    
    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 could be subject to significant penalties;
    
    our ability to expand or operate in California or 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.
  From time to time, we may have to defend lawsuits in connection with the operation of our business.
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Earthquakes, tsunamis or other natural or man-made disasters could disrupt our operations.
  Terrorist attacks may adversely affect our business and operating results.
  Compliance with the rules and regulations concerning corporate governance may be costly,
time-consuming, and difficult to achieve, which could harm our operating results and business.
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In the future, we may need additional capital, which may not be available on favorable terms, or at
all.
  
    
    the rate of our sales growth;
    
    the level of our profits or losses;
    
    the timing and extent of our spending to expand manufacturing capacity, support
facilities upgrades and product development efforts;
    
    the timing and size of business or technology acquisitions;
    
    the timing of introductions of new products and enhancements to our existing products; and
    
    the length of product life cycles.
  Anti-takeover provisions in our certificate of incorporation could discourage potential acquisition
proposals or delay or prevent a change of control.
  Risks Related to our Indebtedness
 We are leveraged, and our debt obligations will continue to make us vulnerable to economic
downturns.
  We are dependent on cash flow from our subsidiaries to meet our obligations.
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The assets of our subsidiaries may not be available to make payments on our debt obligations.
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  TotalNumber ofShares
    
    
    Maximum NumberPurchased
    
    
    (or Approximateas Part of
    
    
    Dollar Value)Total
    
    
    Average
    
    
    Publicly
    
    
    of SharesNumber of
    
    
    Price
    
    
    Announced
    
    
    that May Yet BeShares
    
    
    Paid per
    
    
    Plans or
    
    
    Purchased under thePeriod
    
    Purchased (1)
    
    
    Share
    
    
    Programs
    
    
    Plans or ProgramsApril 3 to April 30
    
    
    714
    
    
    $
    42.99
    
    
    
    
    
    
    
    May 1 to May 28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    May 29 to July 2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    714
    
    
    $
    42.99
    
    
    
    
    
    
    
    
 
 (1)
    
    Shares repurchased from certain of our officers pursuant to net share tax settlement
transactions upon the vesting of shares of restricted common stock held by such officers. 
 ITEM 4. Submission of Matters to a Vote of Security Holders
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   Item No. 2  a proposal to amend and restate our Amended and Restated 2002 Qualified Stock Plan
to increase the number of shares reserved for issuance thereunder by 5,000,000 shares, from
4,242,054 shares to 9,242,054 shares, and make certain other changes;   Item No. 3  a proposal to amend our Amended and Restated Certificate of Incorporation to
increase the number of our authorized shares of common stock by 70,000,000 shares, from 50,000,000
shares to 120,000,000 shares; and   Item No. 4  a proposal to ratify the appointment of KPMG LLP as our independent auditors for the
fiscal year ending December 31, 2006.
  Total VoteTotal Vote
    
    WithheldFor Each
    
    From EachDirector
    
    DirectorItem No. 1(Election of Class I Directors)Chris A. Eyre
    
    
    15,418,167
    
    
    
    12,247,416David G. Takata
    
    
    27,249,308
    
    
    
    416,275Harry G. Van Wickle
    
    
    27,217,319
    
    
    
    448,264
 BrokerFor
    
    Against
    
    Abstain
    
    Non - VoteItem No. 2(Proposal to
amend and restate the Amended and Restated 2002 Qualified Stock Plan)
    
    
    14,781,415
    
    
    
    7,137,320
    
    
    
    26,178
    
    
    
    5,720,670Item No. 3(Proposal to amend and restate the Certificate of Incorporation )
    
    
    19,611,539
    
    
    
    8,025,971
    
    
    
    28,073
    
    
    
    Item No. 4(Ratification of independent auditors)
    
    
    27,471,040
    
    
    
    172,681
    
    
    
    21,862
    
    
    
    
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ITEM 6. Exhibits
 3.1
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of
Komag, Incorporated.31.1
    
    Rule 13a-14 (a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14 (a) Certification of Chief Financial Officer32
    
    Section 1350 Certification of Chief Executive Officer and Chief Financial Officer,
furnished herewith
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SIGNATURES
  KOMAG, INCORPORATED
 DATE: August 4, 2006
    
    BY:
    
    /s/ Thian Hoo TanThian Hoo TanChief Executive OfficerKomag, IncorporatedDATE: August 4, 2006
    
    BY:
    
    /s/ Kathleen A. BaylessKathleen A. BaylessSenior Vice President, Chief Financial OfficerKomag, Incorporated
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EXHIBIT INDEX
 3.1
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of
Komag, Incorporated.31.1
    
    Rule 13a-14 (a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14 (a) Certification of Chief Financial Officer32
    
    Section 1350 Certification of Chief Executive Officer and Chief Financial Officer,
furnished herewith