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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 September 29, 2002
Commission File Number 0-16852

KOMAG, INCORPORATED
(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 [ ] No [X]

On September 29, 2002, 22,826,283 shares of the Registrants common
stock, $0.01 par value, were issued and outstanding.





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TABLE OF CONTENTS



|                              |                                                                                               |                                            |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                                        
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                              | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION   
|                              | ITEM 1. Legal Proceedings                                                                    
|                              | ITEM 2. Changes in Securities                                                                
|                              | ITEM 3. Defaults Upon Senior Securities                                                      
|                              | ITEM 4. Submission of Matters to a Vote of Security Holders                                  
|                              | ITEM 5. Other Information                                                                    
|                              | ITEM 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|EXHIBIT INDEX                
|EXHIBIT 99.1                 



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##### Table of Contents



INDEX
KOMAG, INCORPORATED

|                       |  |                                                                                                                                                                                 |       |  |       |          |  | 
|---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- |  | ----- | -------- |  | 
|                       |  |                                                                                                                                                                                 |       |  |       | Page No.
|PART I.                |  | FINANCIAL INFORMATION                                                                                                                                                           |       |  |       |         
|Item 1.                |  | Consolidated Financial Statements (Unaudited)                                                                                                                                   |       |  |       |         
|                       |  | Consolidated statements of operations - three months ended September 29, 2002 and September 30, 2001,  six months ended June 30, 2002, and nine months ended September 30, 2001 |       |  | 3     |         
|                       |  | Consolidated balance sheets - at September 29, 2002 and December 30, 2001                                                                                                       |       |  | 4     |         
|                       |  | Consolidated statements of cash flows - three months ended September 29, 2002, six months ended June 30, 2002, and nine months ended September 30, 2001                         |       |  | 5     |         
|                       |  | Notes to consolidated financial statements                                                                                                                                      |       |  | 6-16  |         
|Item 2.                |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                                                           |       |  | 17-44 |         
|Item 3.                |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                                                      |       |  | 44    |         
|Item 4.                |  | Controls and Procedures                                                                                                                                                         |       |  | 45    |         
|PART II.               |  | OTHER INFORMATION                                                                                                                                                               |       |  |       |         
|Item 1.                |  | Legal Proceedings                                                                                                                                                               |       |  | 45    |         
|Item 2.                |  | Changes in Securities                                                                                                                                                           |       |  | 45    |         
|Item 3.                |  | Defaults Upon Senior Securities                                                                                                                                                 |       |  | 45    |         
|Item 4.                |  | Submission of Matters to a Vote of Security Holders                                                                                                                             |       |  | 45    |         
|Item 5.                |  | Other Information                                                                                                                                                               |       |  | 45    |         
|Item 6.                |  | Exhibits and Reports on Form 8-K                                                                                                                                                |       |  | 45    |         
|SIGNATURES             |  |                                                                                                                                                                                 | 47    | 
|OFFICER CERTIFICATIONS |  |                                                                                                                                                                                 | 48-49 | 

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




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



|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |          |          |          |   |  | 
|------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------- | ------------- | ----------- | ----- | ------------- | -------- | ----------------- | -------- | ----- | ----------------- | ---------- | ------------- | ----- | ----- | ----------- | ----------- | ----------- | ----- | -------- | -------- | -------- | - |  | 
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            | Successor     |             |       | Predecessor   |          | **Successor**     |          |       | **Predecessor**   |            | Predecessor  
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            | Company       |             |       | Company       |          | **Company**       |          |       | **Company**       |            | Company      
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |              
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            | Three Months  |             |       | Three Months  |          | **Three Months**  |          |       | **Six Months**    |            | Nine Months  
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            | Ended         |             |       | Ended         |          | **Ended**         |          |       | **Ended**         |            | Ended        
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            | Sept 29, 2002 |             |       | Sept 30, 2001 |          | **Sept 29, 2002** |          |       | **June 30, 2002** |            | Sept 30, 2001
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |              
|Net
          sales to unrelated parties                                                                                 |                                                  | **$**                                                                                                                                                                                                           | **70,241** |               |             |       | $             | 18,380   |                   |          | **$** | **70,241**        |            |               |       | **$** | **42,633**  |             |             | $     | 107,888  |         
|Net
          sales to related parties                                                                                   |                                                  |                                                                                                                                                                                                                 | ****      |               |             |       |               | 41,011   |                   |          |       | ****             |            |               |       |       | **69,322**  |             |             |       | 116,710  |         
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |          |         
|                                                                                                                         |                                                  | Net
          sales                                                                                                                                                                                             |            |               | **70,241**  |       |               |          |                   | 59,391   |       |                   |            | **70,241**    |       |       |             |             | **111,955** |       |          |          | 224,598  |  
|Cost
          of sales                                                                                                  |                                                  |                                                                                                                                                                                                                 | **61,927** |               |             |       |               | 58,246   |                   |          |       | **61,927**        |            |               |       |       | **106,788** |             |             |       | 230,927  |         
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |          |         
|                                                                                                                         |                                                  | Gross
          profit (loss)                                                                                                                                                                                   |            |               | **8,314**   |       |               |          |                   | 1,145    |       |                   |            | **8,314**     |       |       |             |             | **5,167**   |       |          |          | (6,329   | )
|Operating
          expenses:                                                                                            |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |         
|                                                                                                                         | Research,
          development, and engineering |                                                                                                                                                                                                                 |            | **8,708**     |             |       |               |          | 9,690             |          |       |                   | **8,708**  |               |       |       |             | **18,796**  |             |       |          | 30,184   |         
|                                                                                                                         | Selling,
          general, and administrative   |                                                                                                                                                                                                                 |            | **4,235**     |             |       |               |          | 4,704             |          |       |                   | **4,235**  |               |       |       |             | **8,256**   |             |       |          | 16,776   |         
|                                                                                                                         | Amortization
          of intangible assets      |                                                                                                                                                                                                                 |            | **926**       |             |       |               |          | 6,505             |          |       |                   | **926**    |               |       |       |             | **3,609**   |             |       |          | 20,575   |         
|                                                                                                                         | Restructuring/impairment
          charges       |                                                                                                                                                                                                                 |            | **740**       |             |       |               |          |                  |          |       |                   | **740**    |               |       |       |             | **4,318**   |             |       |          | 43,020   |         
|                                                                                                                         | In-process
          research and development    |                                                                                                                                                                                                                 |            | **6,784**     |             |       |               |          |                  |          |       |                   | **6,784**  |               |       |       |             | ****       |             |       |          |         |         
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |          |         
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 | **21,393** |               |             |       |               | 20,899   |                   |          |       | **21,393**        |            |               |       |       | **34,979**  |             |             |       | 110,555  |         
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |          |         
|                                                                                                                         |                                                  | Operating
          loss                                                                                                                                                                                        |            |               | **(13,079** | **)** |               |          |                   | (19,754  | )     |                   |            | **(13,079**   | **)** |       |             |             | **(29,812** | **)** |          |          | (116,884 | )
|Other
          income (expense):                                                                                        |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |          |         
|                                                                                                                         | Interest
          income                        |                                                                                                                                                                                                                 |            | **66**        |             |       |               |          | 181               |          |       |                   | **66**     |               |       |       |             | **193**     |             |       |          | 1,437    |         
|                                                                                                                         | Interest
          expense                       |                                                                                                                                                                                                                 |            | **(3,226**    | **)**       |       |               |          | (111,464          | )        |       |                   | **(3,226** | **)**         |       |       |             | ****       |             |       |          | (155,192 | )       
|                                                                                                                         | Other
          income, net                      |                                                                                                                                                                                                                 |            | **2,138**     |             |       |               |          | 2,458             |          |       |                   | **2,138**  |               |       |       |             | **399,147** |             |       |          | 4,092    |         
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |          |         
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 | **(1,022** | **)**         |             |       |               | (108,825 | )                 |          |       | **(1,022**        | **)**      |               |       |       | **399,340** |             |             |       | (149,663 | )       
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |          |         
|                                                                                                                         |                                                  | Income
          (loss) before reorganization costs, income taxes, minority interest,
          equity in net loss of unconsolidated company, and cumulative effect
          of change in accounting principle |            |               | **(14,101** | **)** |               |          |                   | (128,579 | )     |                   |            | **(14,101**   | )     |       |             |             | **369,528** |       |          |          | (266,547 | )
|Reorganization
          costs, net                                                                                      |                                                  |                                                                                                                                                                                                                 | ****      |               |             |       |               | 2,837    |                   |          |       | ****             |            |               |       |       | **6,511**   |             |             |       | 2,837    |         
|Provision
          for (benefit from) income taxes                                                                      |                                                  |                                                                                                                                                                                                                 | **304**    |               |             |       |               | (10,519  | )                 |          |       | **304**           |            |               |       |       | **719**     |             |             |       | (9,738   | )       
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |          |         
|                                                                                                                         |                                                  | Income
          (loss) before minority interest, equity in net loss of unconsolidated
          company, and cumulative effect of change in accounting principle                                               |            |               | **(14,405** | )     |               |          |                   | (120,897 | )     |                   |            | **(14,405**   | **)** |       |             |             | **362,298** |       |          |          | (259,646 | )
|Minority
          interest in net income (loss) of consolidated subsidiary                                              |                                                  |                                                                                                                                                                                                                 | ****      |               |             |       |               | 396      |                   |          |       | ****             |            |               |       |       | ****       |             |             |       | (41      | )       
|Equity
          in net loss of unconsolidated company                                                                   |                                                  |                                                                                                                                                                                                                 | ****      |               |             |       |               | (999     | )                 |          |       | ****             |            |               |       |       | **(2,374**  | **)**       |             |       | (2,664   | )       
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |          |         
|                                                                                                                         |                                                  | Income
          (loss) before cumulative effect of change in accounting principle                                                                                                                              |            |               | **(14,405** | **)** |               |          |                   | (122,292 | )     |                   |            | **(14,405**   | )     |       |             |             | **359,924** |       |          |          | (262,269 | )
|Cumulative
          effect of change in accounting principle                                                            |                                                  |                                                                                                                                                                                                                 | ****      |               |             |       |               |         |                   |          |       | ****             |            |               |       |       | **(47,509** | **)**       |             |       |         |         
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |          |         
|                                                                                                                         |                                                  | Net
          income (loss)                                                                                                                                                                                     |            | **$**         | **(14,405** | **)** |               |          | $                 | (122,292 | )     |                   | **$**      | **(14,405**   | **)** |       |             | **$**       | **312,415** |       |          | $        | (262,269 | )
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |          |         
|Pro
          forma net loss assuming change in accounting principle applied retroactively
          (see Note 4)        |                                                  |                                                                                                                                                                                                                 |            |               |             |       | $             | (116,593 | )                 |          |       |                   |            |               |       |       |             |             |             | $     | (245,171 | )       
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |          |         
|Basic
          and diluted income (loss) before cumulative effect of change in
          accounting principle per share |                                                  | **$**                                                                                                                                                                                                           | **(0.63**  | **)**         |             |       | $             | (1.09    | )                 |          | **$** | **(0.63**         | )          |               |       | **$** | **3.22**    |             |             | $     | (2.35    | )       
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |          |         
|Basic
          and diluted cumulative effect of change in accounting principle per
          share                      |                                                  | **$**                                                                                                                                                                                                           | ****      |               |             |       | $             |         |                   |          | **$** | ****             |            |               |       | **$** | **(0.43**   | **)**       |             | $     |         |         
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |          |         
|Basic
          and diluted net income (loss) per share                                                                  |                                                  | **$**                                                                                                                                                                                                           | **(0.63**  | **)**         |             |       | $             | (1.09    | )                 |          | **$** | **(0.63**         | **)**      |               |       | **$** | **2.79**    |             |             | $     | (2.35    | )       
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |          |         
|Number
          of shares used in basic and diluted computations                                                        |                                                  |                                                                                                                                                                                                                 | **22,826** |               |             |       |               | 111,925  |                   |          |       | **22,826**        |            |               |       |       | **111,925** |             |             |       | 111,800  |         
|                                                                                                                         |                                                  |                                                                                                                                                                                                                 |            |               |             |       |               |          |                   |          |       |                   |            |               |       |       |             |             |             |       |          |         

See notes to consolidated financial statements.

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KOMAG, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands)

ASSETS



|                                                                                              |                                                                                                                                                                              |                                                |         |               |         |  |                   |             |          |          |   | 
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------- | ------------- | ------- |  | ----------------- | ----------- | -------- | -------- | - | 
|                                                                                              |                                                                                                                                                                              |                                                |         | Successor     |         |  |                   | Predecessor
|                                                                                              |                                                                                                                                                                              |                                                |         | Company       |         |  | Company          
|                                                                                              |                                                                                                                                                                              |                                                |         |               |         |  |                  
|                                                                                              |                                                                                                                                                                              |                                                |         | Sept 29, 2002 |         |  | December 30, 2001
|                                                                                              |                                                                                                                                                                              |                                                |         |               |         |  |                  
|                                                                                              |                                                                                                                                                                              |                                                |         | (unaudited)   |         |  | (note)           
|Current
          assets                                                                      |                                                                                                                                                                              |                                                |         |               |         |  |                   |             |         
|                                                                                              | Cash
          and cash equivalents                                                                                                                                          |                                                | $       | 17,972        |         |  |                   | $           | 17,486   |         
|                                                                                              | Short-term
          investments                                                                                                                                             |                                                |         |              |         |  |                   |             | 335      |         
|                                                                                              | Accounts
          receivable (including amounts due from related parties of zero in 2002
          and $23,905 in 2001, less allowances of $837 in 2002 and $2,593 in 2001) |                                                |         | 30,055        |         |  |                   |             | 25,148   |         
|                                                                                              | Inventories                                                                                                                                                                  |                                                |         | 15,256        |         |  |                   |             | 11,766   |         
|                                                                                              | Prepaid
          expenses and deposits                                                                                                                                      |                                                |         | 2,961         |         |  |                   |             | 1,878    |         
|                                                                                              |                                                                                                                                                                              |                                                |         |               |         |  |                   |             |         
|                                                                                              |                                                                                                                                                                              | Total
          current assets                 |         |               | 66,244  |  |                   |             |          | 56,613   |  
|Investment
          in unconsolidated company                                                |                                                                                                                                                                              |                                                |        |               |         |  |                   | 4,076       |         
|Property,
          plant, and equipment, net                                                 |                                                                                                                                                                              |                                                | 203,827 |               |         |  |                   | 232,256     |         
|Land
          and buildings held for sale                                                    |                                                                                                                                                                              |                                                | 24,600  |               |         |  |                   | 24,600      |         
|Reorganization
          value in excess of amounts allocable to identifiable assets/goodwill |                                                                                                                                                                              |                                                | 33,870  |               |         |  |                   | 83,540      |         
|Other
          intangible assets, net                                                        |                                                                                                                                                                              |                                                | 10,003  |               |         |  |                   | 6,645       |         
|Deposits
          and other assets                                                           |                                                                                                                                                                              |                                                | 70      |               |         |  |                   | 120         |         
|                                                                                              |                                                                                                                                                                              |                                                |         |               |         |  |                   |             |         
|                                                                                              |                                                                                                                                                                              | $                                              | 338,614 |               |         |  | $                 | 407,850     |         
|                                                                                              |                                                                                                                                                                              |                                                |         |               |         |  |                   |             |         
|LIABILITIES
          AND STOCKHOLDERS EQUITY (DEFICIT)                                      |                                                                                                                                                                              |                                                |         |              
|Current
          liabilities                                                                 |                                                                                                                                                                              |                                                |         |               |         |  |                   |             |         
|                                                                                              | Current
          portion of long-term debt                                                                                                                                  |                                                | $       | 5,372         |         |  |                   | $           |         |         
|                                                                                              | Trade
          accounts payable                                                                                                                                             |                                                |         | 30,159        |         |  |                   |             | 13,376   |         
|                                                                                              | Accounts
          payable to related parties                                                                                                                                |                                                |         |              |         |  |                   |             | 1,627    |         
|                                                                                              | Accrued
          compensation and benefits                                                                                                                                  |                                                |         | 7,837         |         |  |                   |             | 7,585    |         
|                                                                                              | Cash
          distributions payable under plan of reorganization                                                                                                            |                                                |         | 486           |         |  |                   |             |         |         
|                                                                                              | Other
          liabilities                                                                                                                                                  |                                                |         | 2,363         |         |  |                   |             | 1,763    |         
|                                                                                              | Other
          liabilities due to related party                                                                                                                             |                                                |         | 1,734         |         |  |                   |             | 6,583    |         
|                                                                                              | Restructuring
          liabilities                                                                                                                                          |                                                |         | 3,126         |         |  |                   |             | 2,371    |         
|                                                                                              |                                                                                                                                                                              |                                                |         |               |         |  |                   |             |         
|                                                                                              |                                                                                                                                                                              | Total
          current liabilities            |         |               | 51,077  |  |                   |             |          | 33,305   |  
|Long-term
          debt                                                                      |                                                                                                                                                                              |                                                | 133,463 |               |         |  |                   |            |         
|Other
          long-term liabilities                                                         |                                                                                                                                                                              |                                                | 1,003   |               |         |  |                   | 1,913       |         
|Liabilities
          subject to compromise                                                   |                                                                                                                                                                              |                                                |        |               |         |  |                   | 516,173     |         
|Minority
          interest in consolidated subsidiary                                        |                                                                                                                                                                              |                                                |        |               |         |  |                   | 1,398       |         
|Stockholders
          equity (deficit)                                                      |                                                                                                                                                                              |                                                |         |               |         |  |                   |             |         
|                                                                                              | Common
          stock                                                                                                                                                       |                                                |         | 228           |         |  |                   |             | 1,119    |         
|                                                                                              | Additional
          paid-in capital                                                                                                                                         |                                                |         | 167,248       |         |  |                   |             | 586,304  |         
|                                                                                              | Accumulated
          deficit                                                                                                                                                |                                                |         | (14,405       | )       |  |                   |             | (732,362 | )       
|                                                                                              |                                                                                                                                                                              |                                                |         |               |         |  |                   |             |         
|                                                                                              |                                                                                                                                                                              | Total
          stockholders equity (deficit) |         |               | 153,071 |  |                   |             |          | (144,939 | )
|                                                                                              |                                                                                                                                                                              |                                                |         |               |         |  |                   |             |         
|                                                                                              |                                                                                                                                                                              | $                                              | 338,614 |               |         |  | $                 | 407,850     |         
|                                                                                              |                                                                                                                                                                              |                                                |         |               |         |  |                   |             |         

Note: The balance sheet at December 30, 2001 was derived from the audited consolidated financial statements
at that date.

See notes to consolidated financial statements.

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KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)



|                                                                                                                      |                                                                                           |                                                               |         |               |        |       |               |             |               |             |       |          |         |         |   | 
|--------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------- | ------------- | ------ | ----- | ------------- | ----------- | ------------- | ----------- | ----- | -------- | ------- | ------- | - | 
|                                                                                                                      |                                                                                           |                                                               |         | Successor     |        |       |               | Predecessor |               | Predecessor
|                                                                                                                      |                                                                                           |                                                               |         | Company       |        |       | Company       |             | Company      
|                                                                                                                      |                                                                                           |                                                               |         |               |        |       |               |             |              
|                                                                                                                      |                                                                                           |                                                               |         | Three Months  |        |       | Six Months    |             | Nine Months  
|                                                                                                                      |                                                                                           |                                                               |         | Ended         |        |       | Ended         |             | Ended        
|                                                                                                                      |                                                                                           |                                                               |         | Sept 29, 2002 |        |       | June 30, 2002 |             | Sept 30, 2001
|                                                                                                                      |                                                                                           |                                                               |         |               |        |       |               |             |              
|OPERATING
          ACTIVITIES                                                                                        |                                                                                           |                                                               |         |               |        |       |               |             |               |             |       |          |        
|Net
          income (loss)                                                                                           |                                                                                           | **$**                                                         | (14,405 | **)**         |        |       | **$**         | 312,415     |               |             | $     | (262,269 | )      
|Adjustments
          to reconcile net income (loss) to net cash provided by (used in)
          operating activities |                                                                                           |                                                               |         |               |        |       |               |             |               |             |       |          |        
|                                                                                                                      | Gain
          on extinguishment of debt                                                  |                                                               |         |              |        |       |               |             | (379,027      | **)**       |       |          |        |        
|                                                                                                                      | Gain
          on revaluation of assets and liabilities pursuant to fresh-start reporting |                                                               |         |              |        |       |               |             | (17,349       | **)**       |       |          |        |        
|                                                                                                                      | Cumulative
          effect of change in accounting principle                             |                                                               |         |              |        |       |               |             | 47,509        |             |       |          |        |        
|                                                                                                                      | Impairment
          charge related to property, plant, and equipment                     |                                                               |         |              |        |       |               |             | 216           |             |       |          | 43,020  |        
|                                                                                                                      | Depreciation
          and amortization on property, plant, and equipment                 |                                                               |         | 12,729        |        |       |               |             | 25,998        |             |       |          | 53,339  |        
|                                                                                                                      | Amortization
          of intangible assets                                               |                                                               |         | 926           |        |       |               |             | 3,609         |             |       |          | 20,575  |        
|                                                                                                                      | In-process
          research and development                                             |                                                               |         | 6,784         |        |       |               |             |              |             |       |          |        |        
|                                                                                                                      | Provision
          for doubtful accounts receivable                                      |                                                               |         | (7            | **)**  |       |               |             | (295          | **)**       |       |          | (312    | )      
|                                                                                                                      | Interest
          accrual on long-term note payable to related party                     |                                                               |         |              |        |       |               |             |              |             |       |          | 3,196   |        
|                                                                                                                      | Accretion
          and amortization of interest on debt                                  |                                                               |         | 1,514         |        |       |               |             |              |             |       |          | 130,861 |        
|                                                                                                                      | Equity
          in net loss of unconsolidated company                                    |                                                               |         |              |        |       |               |             | 2,374         |             |       |          | 2,664   |        
|                                                                                                                      | Gain
          on liquidation of subsidiary                                               |                                                               |         |              |        |       |               |             |              |             |       |          | (579    | )      
|                                                                                                                      | Loss
          (gain) on disposal of property, plant, and equipment, net                  |                                                               |         | 38            |        |       |               |             | (1,783        | **)**       |       |          | 145     |        
|                                                                                                                      | Deferred
          income taxes                                                           |                                                               |         |              |        |       |               |             |              |             |       |          | (10,807 | )      
|                                                                                                                      | Minority
          interest in net loss of consolidated subsidiary                        |                                                               |         |              |        |       |               |             |              |             |       |          | (41     | )      
|                                                                                                                      | Restructuring
          charges                                                           |                                                               |         |              |        |       |               |             | 4,102         |             |       |          |        |        
|Changes
          in operating assets and liabilities                                                                 |                                                                                           |                                                               |         |               |        |       |               |             |               |             |       |          |        
|                                                                                                                      | Accounts
          receivable                                                             |                                                               |         | (9,134        | **)**  |       |               |             | (5,547        | **)**       |       |          | 14,408  |        
|                                                                                                                      | Accounts
          receivable from related parties                                        |                                                               |         |              |        |       |               |             | 10,076        |             |       |          | (6,239  | )      
|                                                                                                                      | Inventories                                                                               |                                                               |         | (1,619        | **)**  |       |               |             | (2,069        | **)**       |       |          | 9,313   |        
|                                                                                                                      | Prepaid
          expenses and deposits                                                   |                                                               |         | 397           |        |       |               |             | (1,480        | **)**       |       |          | 22      |        
|                                                                                                                      | Trade
          accounts payable                                                          |                                                               |         | 9,286         |        |       |               |             | 5,631         |             |       |          | (6,456  | )      
|                                                                                                                      | Accounts
          payable to related parties                                             |                                                               |         |              |        |       |               |             | 239           |             |       |          | (147    | )      
|                                                                                                                      | Accrued
          compensation and benefits                                               |                                                               |         | (669          | **)**  |       |               |             | 921           |             |       |          | (1,677  | )      
|                                                                                                                      | Other
          liabilities                                                               |                                                               |         | (3,713        | **)**  |       |               |             | (1,753        | **)**       |       |          | 6,029   |        
|                                                                                                                      | Other
          liabilities to related party                                              |                                                               |         | (850          | **)**  |       |               |             | (999          | **)**       |       |          | (7,827  | )      
|                                                                                                                      | Restructuring
          liabilities                                                       |                                                               |         | (2,352        | **)**  |       |               |             | (956          | **)**       |       |          | (19,400 | )      
|                                                                                                                      | Liabilities
          subject to compromise                                               |                                                               |         |              |        |       |               |             | 378           |             |       |          |        |        
|                                                                                                                      |                                                                                           |                                                               |         |               |        |       |               |             |               |             |       |          |        
|                                                                                                                      |                                                                                           |                                                               | (1,075  | **)**         |        |       |               | 2,210       |               |             |       | (32,182  | )      
|Reorganization
          costs, net                                                                                   |                                                                                           |                                                               |        |               |        |       |               | 6,511       |               |             |       | 2,870    |        
|                                                                                                                      |                                                                                           |                                                               |         |               |        |       |               |             |               |             |       |          |        
|                                                                                                                      |                                                                                           | Net
          cash provided by (used in) operating activities |         |               | (1,075 | **)** |               |             |               | 8,721       |       |          |         | (29,312 | )
|INVESTING
          ACTIVITIES                                                                                        |                                                                                           |                                                               |         |               |        |       |               |             |               |             |       |          |        
|Acquisition
          of property, plant, and equipment                                                               |                                                                                           |                                                               | (3,033  | **)**         |        |       |               | (6,855      | **)**         |             |       | (24,947  | )      
|Purchases
          of short-term investments                                                                         |                                                                                           |                                                               |        |               |        |       |               | (338        | **)**         |             |       | (5,133   | )      
|Proceeds
          from short-term investments at maturity                                                            |                                                                                           |                                                               | 338     |               |        |       |               | 335         |               |             |       | 13,407   |        
|Proceeds
          from disposal of property, plant, and equipment                                                    |                                                                                           |                                                               | 40      |               |        |       |               | 2,688       |               |             |       | 520      |        
|Change
          in deposits and other assets                                                                         |                                                                                           |                                                               | (129    | **)**         |        |       |               | (41         | **)**         |             |       | 37       |        
|                                                                                                                      |                                                                                           |                                                               |         |               |        |       |               |             |               |             |       |          |        
|                                                                                                                      |                                                                                           | Net
          cash used in investing activities               |         |               | (2,784 | **)** |               |             |               | (4,211      | **)** |          |         | (16,116 | )
|FINANCING
          ACTIVITIES                                                                                        |                                                                                           |                                                               |         |               |        |       |               |             |               |             |       |          |        
|Payment
          of debt                                                                                             |                                                                                           |                                                               | (165    | **)**         |        |       |               |            |               |             |       | (15,000  | )      
|Proceeds
          from issuance of common stock                                                                      |                                                                                           |                                                               |        |               |        |       |               |            |               |             |       | 174      |        
|                                                                                                                      |                                                                                           |                                                               |         |               |        |       |               |             |               |             |       |          |        
|                                                                                                                      |                                                                                           | Net
          cash used in financing activities               |         |               | (165   | **)** |               |             |               |            |       |          |         | (14,826 | )
|                                                                                                                      |                                                                                           |                                                               |         |               |        |       |               |             |               |             |       |          |        
|Increase
          (decrease) in cash and cash equivalents                                                            |                                                                                           |                                                               | (4,024  | **)**         |        |       |               | 4,510       |               |             |       | (60,254  | )      
|Cash
          and cash equivalents at beginning of period                                                            |                                                                                           |                                                               | 21,996  |               |        |       |               | 17,486      |               |             |       | 71,067   |        
|                                                                                                                      |                                                                                           |                                                               |         |               |        |       |               |             |               |             |       |          |        
|                                                                                                                      | Cash
          and cash equivalents at end of period                                      |                                                               | **$**   | 17,972        |        |       |               | **$**       | 21,996        |             |       | $        | 10,813  |        
|                                                                                                                      |                                                                                           |                                                               |         |               |        |       |               |             |               |             |       |          |        
|Supplemental
          disclosure of cash flow information                                                            |                                                                                           |                                                               |         |               |        |       |               |             |               |             |       |          |        
|                                                                                                                      | Cash
          paid for interest                                                          |                                                               | **$**   | 1,423         |        |       |               | **$**       |              |             |       | $        | 14,703  |        
|                                                                                                                      | Cash
          paid for income taxes                                                      |                                                               | **$**   | 591           |        |       |               | **$**       | 561           |             |       | $        | 990     |        

See notes to consolidated financial statements.

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KOMAG, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 29, 2002

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America 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 accounting
principles generally accepted in the United States of America. In the opinion
of management, all normal recurring adjustments considered necessary for a fair
presentation of the consolidated financial position, operating results, and
cash flows for the periods presented, have been included. Operating results for
the three months ended September 29, 2002, and the six months ended June 30,
2002, are not necessarily indicative of the results that may be expected for
the year ending December 29, 2002.

As discussed in Note 2, Komag, Incorporated (KUS) filed a voluntary
petition for reorganization under chapter 11 of the United States Code (the
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 petition related only to the Companys U.S. corporate parent,
KUS, and did not include any of its subsidiaries, including Komag Material
Technology (KMT), and Komag USA (Malaysia) Sdn (KMS).

KUS proposed, and the Bankruptcy Court confirmed, the Further Modified
First Amended Plan of Reorganization, (the Plan) which became effective on June
30, 2002 (see Note 2). KUS emerged from bankruptcy on that date. Thus, in
accordance with Statement of Position 90-7 (SOP 90-7), Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code, issued by the American
Institute of Certified Public Accountants, the Company adopted fresh-start
reporting and reflected the effects of the adoption in the consolidated
financial statements for the six months ended June 30, 2002. Fresh-start
reporting requires the recording of assets and liabilities at fair value, and
stockholders equity based on the reorganization (enterprise) value.
Accordingly, the September 29, 2002 consolidated balance sheet is not
comparable to the December 30, 2001 consolidated balance sheet because it is,
in effect, that of a new entity. Further, as a result of the adoption of
fresh-start reporting, the statements of operations and statements of cash
flows for periods ended after June 30, 2002 are prepared on a different basis
of accounting. Therefore, these financial statements, as well as the related
earnings per share calculations, are not comparable to the financial statements
for periods ended on or prior to June 30, 2002. See Note 3 for the effects of
the adoption of fresh-start reporting.

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 13 weeks.

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

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Note 2. Emergence from Chapter 11 and Plan of Reorganization

KUSs Plan was orally confirmed by the Bankruptcy Court on May 9, 2002.
Thereafter, on May 14, 2002, the Bankruptcy Court entered the Order confirming
the Plan (the Confirmation Order). Pursuant to the Confirmation Order and the
Plan, there were certain conditions precedent to the effectiveness of the Plan,
all of which were later satisfied. The effective date of the Plan was June 30,
2002 (the Effective Date).

Under the Plan, all of the Companys old common stock, as well as
outstanding warrants and common stock options, were cancelled. All of the
Companys pre-bankruptcy debt and certain other liabilities (totaling $521.6
million) were discharged and satisfied through several means, including: 1)
cash distributions of $5.0 million; 2) the issuance of shares of new common
stock; 3) the issuance of warrants to purchase shares of new common stock; 4)
the issuance of $135.8 million of new cash pay notes and new paid-in-kind (PIK)
notes (Senior Secured Notes), and new subordinated PIK notes (Junior Secured
Notes); and 5) the issuance of $1.7 million of secured and unsecured promissory
notes.

At September 29, 2002, and June 30, 2002 (the date of emergence from
bankruptcy), debt was comprised of the following (in thousands):

|                         |                |   |               |        |               |   |         |        | 
|------------------------ | -------------- | - | ------------- | ------ | ------------- | - | ------- | ------ | 
|                         |                |   | Sept 29, 2002 |        | June 30, 2002
|                         |                |   |               |        |              
|Senior Secured Notes:    |                |   |               |        |               |   |         |       
|                         | Cash pay notes |   | $             | 85,332 |               |   | $       | 85,332 | 
|                         | PIK notes      |   |               | 44,804 |               |   |         | 43,500 | 
|                         |                |   |               |        |               |   |         |       
|                         |                |   | 130,136       |        |               |   | 128,832 |       
|Junior Secured PIK Notes |                |   | 7,210         |        |               |   | 7,000   |       
|Promissory Notes         |                |   | 1,489         |        |               |   | 1,654   |       
|                         |                |   |               |        |               |   |         |       
|                         |                |   | 138,835       |        |               |   | 137,486 |       
|Less current portion     |                |   | (5,372        | )      |               |   | (518    | )     
|                         |                |   |               |        |               |   |         |       
|Long-term debt           |                | $ | 133,463       |        |               | $ | 136,968 |       
|                         |                |   |               |        |               |   |         |       

Summary information from the Plan for each creditor class is as follows:



| |  |  | Class 1  Holders of Allowed Priority Claims, Class 2 
Holders of Allowed Secured Claims, and Holders of Cure Claims
received or will receive an aggregate amount of $1.2 million in
cash, and promissory notes in the aggregate amount of $1.7
million. The promissory notes provide for deferred cash payments
and a lien satisfying the requirements of the Bankruptcy Code.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Class 3  Holders of Allowed Loan Restructure Agreement
Claimsreceived $82.5 million of new cash pay Senior Secured Notes
and $32.5 million of new PIK Senior Secured Notes, and 12.5 million
shares of new common stock. Additionally, the Company made a payment
of $1.5 million in administrative expenses.                                                                  

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| |  |  | Class 4-A  Holders of Western Digital Note Claimsreceived
$11.0 million of new PIK Senior Secured Notes and 3.0 million shares
of new common stock.                                                                                                                                                                                                                                                                                                          
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Class 4-B  Holders of Western Digital Rejection Claims
received 0.9 million shares of new common stock.                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | Class 5  Holders of Convertible Notes Claimsreceived 1.2
million shares of new common stock.                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | Class 6  Holders of Subordinated Notes Claimsreceived 4.5
million shares of new common stock, $7.0 million of new PIK Junior
Secured Notes, and new warrants to purchase 1.0 million shares of
new common stock. Additionally, the Company made a payment of $0.5
million in administrative expenses.                                                                                                                                                        
|
| |  |  | Class 7  Holders of General Unsecured Claimsreceived their
pro rata share of $1.0 million in cash, $2.5 million of new cash
pay Senior Secured Notes, and 0.6 million shares of new common
stock. The majority of the Class 7 distribution has been made. A
few claims within this class are in the process of being settled. A
final distribution of the allocated amounts for this creditor class
will be made upon final settlement of all allowed claims.
|
| |  |  | Class 8  Holders of Convenience Claimsreceived their pro
rata share of $0.7 million in cash.                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | Class 9  Holders of Equity Interestvoted to reject the Plan
and therefore will receive no distributions and retain no interests
in the reorganized company under the Plan.                                                                                                                                                                                                                                                                                   
|
| |  |  | Class 10  Holders of Magnetic Media Development LLC (MMD)
Claimsreceived $0.1 million in cash, $0.3 million of new cash pay
Senior Secured Notes, and 0.1 million shares of new common stock.                                                                                                                                                                                                                                                                

In accordance with the Plan, current employees will receive up to 1.625
million shares of new common stock pursuant to the Companys 2002 Qualified
Stock Plan. This distribution was approved by the Companys board of
directors in July 2002, and approved by stockholders on October 3, 2002. The
distribution process to employees commenced after the October 3, 2002,
stockholder meeting.

As of the Effective Date, the Company was authorized to issue 50.0 million
shares of new common stock with a par value of $0.01. As of September 29, 2002,
the Company had a total of 22.7 million shares of new common stock issued, and
0.1 million shares that are subject to a distribution process whereby the
remaining shares will be distributed to class 7 claim-holders upon settlement
of all allowed claims within the class. Additionally, as of September 29,
2002, the Company had outstanding warrants to purchase up to 1.0 million shares
of new common stock at $9.00 a share.

Under the Plan, the Company entered into a Registration Rights Agreement
(the Agreement) with four of the holders of Allowed Loan Restructure Agreement
(i.e., Class 3) claims, under which the shares

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of new common stock issued to them, as well as the Senior Secured Notes,
are to be registered under federal securities laws. The Agreement requires the
filing and effectiveness of a registration statement within specified periods
of time and other matters. This registration statement has been filed, and
became effective in October 2002.

In accordance with the Plan, a new $15.0 million Secured Loan Facility
(the Exit Facility) was entered into as of the Effective Date. The Exit
Facility is a revolving credit facility of up to $15.0 million, expiring in
June 2005. The Companys total outstanding borrowings under the Exit Facility
at any one time may not exceed the lesser of $15.0 million or 70% of the fair
market value of certain owned properties (less a reserve, as defined). The
Exit Facility is secured by a first-priority security interest in substantially
all of the Companys assets, including tangible and intangible assets (except
in the case of the Companys ownership interest in its foreign subsidiaries,
which will be subject to a pledge of not more than 65%). Interest is payable
monthly at the rate of 12% per annum on outstanding borrowings. A commitment
fee of $0.3 million was paid in order to obtain the Exit Facility, and there
will be ongoing unused commitment fees due quarterly at an annual rate of 0.5%
on the unused portion of the $15.0 million. As of September 29, 2002, no
borrowings have been made against the Exit Facility.

Note 3. Fresh-Start Reporting

As of June 30, 2002, the Effective Date, the reorganized (successor)
Company adopted fresh-start reporting in accordance with SOP 90-7. Fresh-start
reporting resulted in material changes to the consolidated balance sheet as of
June 30, 2002, including the valuation of assets and liabilities at fair value
in accordance with principles of the purchase method of accounting.
Stockholders equity was valued based on the enterprise valuation (reflecting
the value of the restructured debt and equity) agreed to between the Company
and all classes of its creditors.

The enterprise valuation of $310.0 million was based on the consideration
of many factors and various valuation methods, including the income approach
and application of the discounted cash flow method based on projected five and
one-quarter year financial information, selected publicly traded company market
multiples for certain companies operating businesses viewed to be similar to
that of the Company, and other applicable ratios and valuation techniques
believed by the Company and its financial advisors to be representative of the
Companys business and industry. The discount rate applied to the five and
one-quarter year cash flow was 20%, the income tax rate utilized ranged from
zero to approximately 30%, and the residual value approximated $500 million
based on the last years projected operating income plus depreciation times a
market multiple of 6. The predecessor Companys stockholders deficit was
eliminated as of June 30, 2002, on adoption of fresh-start reporting.

The enterprise valuation was based on a number of estimates and
assumptions, which are inherently subject to significant uncertainties and
contingencies beyond the control of the Company. Accordingly, there can be no
assurance that the estimates, assumptions, and values reflected in the
valuation will be realized, and actual results could vary materially. Moreover,
the actual market value of the Companys common stock may differ materially
from the valuation used to calculate the enterprise value.

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The five and one-quarter year cash flow projections utilized in the
enterprise valuation were based on estimates and assumptions about
circumstances and events, which have not yet taken place. These estimates and
assumptions are inherently subject to significant economic and competitive
uncertainties beyond the control of the Company, including, but not limited to,
those with respect to the future course of the Companys business activity. Any
difference between the Companys projected and actual results following its
emergence from chapter 11 bankruptcy will not alter the determination of the
fresh-start reorganization equity value as of June 30, 2002, because this value
is not contingent on the Company achieving the projected results.

As a result of the adoption of fresh-start reporting, the Companys
post-emergence (successor company) consolidated financial statements are not
comparable with its pre-emergence (predecessor company) consolidated financial
statements, because they are, in effect, the financial statements of a new
entity.

The Companys emergence from the chapter 11 bankruptcy proceeding and the
adoption of fresh-start reporting resulted in the following adjustments to the
Companys consolidated balance sheet as of June 30, 2002 (dollars in
thousands):

|                                                                                    |  |               |          |                                |  |           |         |               |  |   |         |         |  |   |         | 
|----------------------------------------------------------------------------------- |  | ------------- | -------- | ------------------------------ |  | --------- | ------- | ------------- |  | - | ------- | ------- |  | - | ------- | 
|                                                                                    |  | Predecessor   |          | Reorganization and Fresh-Start |  | Successor
|                                                                                    |  | Company       |          | Reporting Adjustments          |  | Company  
|                                                                                    |  |               |          |                                |  |          
|                                                                                    |  | June 30, 2002 |          | Debit                          |  | Credit    |         | June 30, 2002
|                                                                                    |  |               |          |                                |  |           |         |              
|ASSETS                                                                              |  |               |          |                                |  |           |         |               |  |   |         |         |  |   |         | 
|Total current assets                                                                |  | $             | 60,243   |                                |  |           |         |               |  |   |         |         |  | $ | 60,243  | 
|Property, plant, and equipment, net                                                 |  |               | 210,820  |                                |  | $         | 2,847   | (a)           |  |   |         |         |  |   | 213,667 | 
|Land and buildings held for sale                                                    |  |               | 24,600   |                                |  |           |         |               |  |   |         |         |  |   | 24,600  | 
|Reorganization value in excess of
amounts allocable to
identifiable assets/goodwill |  |               | 33,870   |                                |  |           |         |               |  |   |         |         |  |   | 33,870  | 
|Other intangible assets, net                                                        |  |               | 5,267    |                                |  |           | 12,296  | (a)           |  |   |         |         |  |   | 17,563  | 
|Other assets                                                                        |  |               | 1,793    |                                |  |           |         |               |  | $ | 1,702   | (a)     |  |   | 91      | 
|                                                                                    |  |               |          |                                |  |           |         |               |  |   |         |         |  |   |         | 
|                                                                                    |  | $             | 336,593  |                                |  | $         | 15,143  |               |  | $ | 1,702   |         |  | $ | 350,034 | 
|                                                                                    |  |               |          |                                |  |           |         |               |  |   |         |         |  |   |         | 
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                      |  |               |          |                                |  |           |         |               |  |   |         |         |  |   |         | 
|Current portion of long-term debt                                                   |  |               |          |                                |  |           |         |               |  | $ | 518     | (b)     |  | $ | 518     | 
|Total current liabilities, excluding
current portion
of long-term debt              |  | $             | 42,030   |                                |  |           |         |               |  |   | 2,039   | (a) (b) |  |   | 44,069  | 
|Noncurrent liabilities                                                              |  |               | 1,911    |                                |  |           |         |               |  |   | 136,060 | (b)     |  |   | 137,971 | 
|Liabilities subject to compromise                                                   |  |               | 521,551  |                                |  | $         | 521,551 | (b)           |  |   |         |         |  |   |         | 
|                                                                                    |  |               |          |                                |  |           |         |               |  |   |         |         |  |   |         | 
|                                                                                    |  |               | 565,492  |                                |  |           | 521,551 |               |  |   | 138,617 |         |  |   | 182,558 | 
|Stockholders equity (deficit)
Common stock                                         |  |               | 1,119    |                                |  |           | 891     | (c)           |  |   |         |         |  |   | 228     | 
|Paid-in-capital                                                                     |  |               | 586,304  |                                |  |           | 419,056 | (c)           |  |   |         |         |  |   | 167,248 | 
|Accumulated deficit                                                                 |  |               | (816,322 | )                              |  |           |         |               |  |   | 816,322 | (d)     |  |   |         | 
|                                                                                    |  |               |          |                                |  |           |         |               |  |   |         |         |  |   |         | 
|                                                                                    |  |               | (228,899 | )                              |  |           | 419,947 |               |  |   | 816,322 |         |  |   | 167,476 | 
|                                                                                    |  |               |          |                                |  |           |         |               |  |   |         |         |  |   |         | 
|                                                                                    |  | $             | 336,593  |                                |  | $         | 941,498 |               |  | $ | 954,939 |         |  | $ | 350,034 | 
|                                                                                    |  |               |          |                                |  |           |         |               |  |   |         |         |  |   |         | 

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Explanations for the reorganization and fresh-start reporting adjustment
columns of the balance sheet are as follows:



|(a) |  | To adjust property, plant, and equipment, other intangible assets, and
certain current liabilities to their estimated current fair values. These
adjustments have been recorded as Other income, net in the consolidated
statement of operations for the three and six-month periods ended June 30,
2002.                           
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | To reflect the extinguishment of debt and other liabilities subject to
compromise, and to record the issuance of new debt and promissory notes
pursuant to the Plan. These adjustments have been recorded as Other
income, net in the consolidated statements of operations for the three
and six-month periods ended June 30, 2002.
|   
|(c) |  | To reflect the cancellation of old common stock and the issuance of new
common stock in accordance with the Plan.                                                                                                                                                                                                                     
|   
|(d) |  | To eliminate accumulated deficit on emergence from chapter 11 bankruptcy.                                                                                                                                                                                                                                                             

The following amounts show the detail of Other income, net for the
three-month periods ended September 29, 2002 and September 30, 2001, the
six-month period ended June 30, 2002, and the nine-month period ended September
30, 2001 (in thousands):



|                                                                                          |  |               |       |  |               |              |               |           |  |               |   |               |  |              |  |   |         |  |  |   |       |  |  | 
|----------------------------------------------------------------------------------------- |  | ------------- | ----- |  | ------------- | ------------ | ------------- | --------- |  | ------------- | - | ------------- |  | ------------ |  | - | ------- |  |  | - | ----- |  |  | 
|                                                                                          |  | Successor     |       |  |               | Predeccessor |               | Successor |  |               |   | Predeccessor  |  | Predeccessor
|                                                                                          |  | Company       |       |  | Company       |              | Company       |           |  | Company       |   | Company      
|                                                                                          |  |               |       |  |               |              |               |           |  |               |   |              
|                                                                                          |  | Three Months  |       |  | Three Months  |              | Three Months  |           |  | Six Months    |   | Nine Months  
|                                                                                          |  | Ended         |       |  | Ended         |              | Ended         |           |  | Ended         |   | Ended        
|                                                                                          |  | Sept 29, 2002 |       |  | Sept 30, 2001 |              | Sept 29, 2002 |           |  | June 30, 2002 |   | Sept 30, 2001
|                                                                                          |  |               |       |  |               |              |               |           |  |               |   |              
|Gain
          on extinguishment of debt                                                  |  | $             |      |  |               |              | $             |          |  |               | $ |              |  |              |  | $ | 379,027 |  |  | $ |      | 
|Gain
          on revaluation of assets and liabilities pursuant to fresh-start reporting |  |               |      |  |               |              |               |          |  |               |   |              |  |              |  |   | 17,349  |  |  |   |      | 
|Other
          income, net                                                               |  |               | 2,138 |  |               |              |               | 2,458     |  |               |   | 2,138         |  |              |  |   | 2,771   |  |  |   | 4,092 | 
|                                                                                          |  |               |       |  |               |              |               |           |  |               |   |               |  |              |  |   |         |  |  |   |       | 
|                                                                                          |  | $             | 2,138 |  |               |              | $             | 2,458     |  |               | $ | 2,138         |  |              |  | $ | 399,147 |  |  | $ | 4,092 | 
|                                                                                          |  |               |       |  |               |              |               |           |  |               |   |               |  |              |  |   |         |  |  |   |       | 

Included in other income, net in the third quarter of 2002 was a net $2.2
million property tax refund in connection with the former HMT facilities in
Fremont, California. Included in other income, net in the third quarter of
2001 was a $1.8 million refund for certain R&D manufacturing equipment work
which was not completed by a vendor. Other income, net in the nine months ended
September 30, 2001, also included $0.6 million in realized gain on cumulative
translation adjustments.

Note 4. Reorganization Value in Excess of Amounts Allocable to Identifiable
Assets/Goodwill and Other Intangible Assets

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
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 No. 142 is effective for fiscal years beginning
after December 15, 2001, and requires that goodwill should not

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be amortized, but should 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 must be subsumed into
goodwill upon adoption. In addition, the useful lives of recognized intangible
assets acquired in transactions completed before July 1, 2001 must be
reassessed, and the remaining amortization periods adjusted accordingly.

On adoption of SFAS No. 142, the Company was required to complete a
transitional impairment analysis of its goodwill as of January 1, 2002. The
Company completed this transitional impairment analysis during the three months
ended June 30, 2002 and recorded a transitional impairment loss of $47.5
million. The transitional impairment loss of $47.5 million was recognized as
the cumulative effect of a change in accounting principle in the Companys
consolidated statement of operations as of January 1, 2002, resulting in a
restatement of the net loss and loss per share, respectively, for the three
months ended March 31, 2002 from $10.2 million and $0.09 per share to a net
loss of $57.7 million and $0.52 per share, respectively. Upon the adoption of
fresh-start reporting as of June 30, 2002, the Company had a goodwill balance
of $33.9 million, which equals the reorganization value in excess of amounts
allocable to identifiable net assets recorded in accordance with SOP 90-7, and
other intangible assets in the amount of $17.6 million. In accordance with
SFAS 142, goodwill is no longer being amortized. As of June 30, 2002, the
other intangible assets included developed technology of $3.1 million, which is
being amortized on a straight-line basis over its estimated useful life of four
years, a volume purchase agreement of $7.7 million, which is being amortized on
a straight-line basis over its remaining useful life of three and one-quarter
years, and in-process research and development of $6.8 million, which was
expensed in the third quarter of 2002. The remaining goodwill was renamed,
and will hereafter be referred to as, Reorganization Value in Excess of Amounts
Allocable to Identifiable Assets. The Company will perform its first annual
impairment test in the fourth quarter of 2002.

The following tables show the effect on the three and nine-month periods
ended September 29, 2001 of applying the change in accounting principle
retroactively (in thousands, except per share data):



|                                                                                                          |  |               |         |   |               |              |               |           |   |               |   |               |   |              |  |   |         |   |  |   |          |   |  | 
|--------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------------- | ------------ | ------------- | --------- | - | ------------- | - | ------------- | - | ------------ |  | - | ------- | - |  | - | -------- | - |  | 
|                                                                                                          |  | Successor     |         |   |               | Predeccessor |               | Successor |   |               |   | Predeccessor  |   | Predeccessor
|                                                                                                          |  | Company       |         |   | Company       |              | Company       |           |   | Company       |   | Company      
|                                                                                                          |  |               |         |   |               |              |               |           |   |               |   |              
|                                                                                                          |  | Three Months  |         |   | Three Months  |              | Three Months  |           |   | Six Months    |   | Nine Months  
|                                                                                                          |  | Ended         |         |   | Ended         |              | Ended         |           |   | Ended         |   | Ended        
|                                                                                                          |  | Sept 29, 2002 |         |   | Sept 30, 2001 |              | Sept 29, 2002 |           |   | June 30, 2002 |   | Sept 30, 2001
|                                                                                                          |  |               |         |   |               |              |               |           |   |               |   |              
|Reported
          net income (loss) before cumulative effect of change in accounting
          principle |  | $             | (14,405 | ) |               |              | $             | (122,292  | ) |               | $ | (14,405       | ) |              |  | $ | 359,924 |   |  | $ | (262,269 | )
|Add:
          goodwill amortization                                                                      |  |               |        |   |               |              |               | 5,699     |   |               |   |              |   |              |  |   |        |   |  |   | 17,098   |  
|                                                                                                          |  |               |         |   |               |              |               |           |   |               |   |               |   |              |  |   |         |   |  |   |          |  
|Adjusted
          net income (loss) before cumulative effect of change in accounting
          principle |  |               | (14,405 | ) |               |              |               | (116,593  | ) |               |   | (14,405       | ) |              |  |   | 359,924 |   |  |   | (245,171 | )
|Cumulative
          effect of change in accounting principle                                             |  |               |        |   |               |              |               |          |   |               |   |              |   |              |  |   | (47,509 | ) |  |   |         |  
|                                                                                                          |  |               |         |   |               |              |               |           |   |               |   |               |   |              |  |   |         |   |  |   |          |  
|Adjusted
          net income (loss)                                                                      |  | $             | (14,405 | ) |               |              | $             | (116,593  | ) |               | $ | (14,405       | ) |              |  | $ | 312,415 |   |  | $ | (245,171 | )
|                                                                                                          |  |               |         |   |               |              |               |           |   |               |   |               |   |              |  |   |         |   |  |   |          |  
|Basic
          and diluted income (loss) per share                                                       |  |               |         |   |               |              |               |           |   |               |   |               |   |              |  |   |         |   |  |   |          |  
|As reported
          before cumulative effect of change in accounting principle                          |  | $             | (0.63   | ) |               |              | $             | (1.09     | ) |               | $ | (0.63         | ) |              |  | $ | 3.22    |   |  | $ | (2.35    | )
|Goodwill
          amortization                                                                           |  |               |        |   |               |              |               | 0.05      |   |               |   |              |   |              |  |   |        |   |  |   | 0.15     |  
|                                                                                                          |  |               |         |   |               |              |               |           |   |               |   |               |   |              |  |   |         |   |  |   |          |  
|As adjusted
          before cumulative effect of change in accounting principle                          |  |               | (0.63   | ) |               |              |               | (1.04     | ) |               |   | (0.63         | ) |              |  |   | 3.22    |   |  |   | (2.20    | )
|Cumulative
          effect of change in accounting principle                                             |  |               |        |   |               |              |               |          |   |               |   |              |   |              |  |   | (0.43   | ) |  |   |         |  
|                                                                                                          |  |               |         |   |               |              |               |           |   |               |   |               |   |              |  |   |         |   |  |   |          |  
|Adjusted
          basic and diluted net income (loss) per share                                          |  | $             | (0.63   | ) |               |              | $             | (1.04     | ) |               | $ | (0.63         | ) |              |  | $ | 2.79    |   |  | $ | (2.20    | )
|                                                                                                          |  |               |         |   |               |              |               |           |   |               |   |               |   |              |  |   |         |   |  |   |          |  

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Note 5. Restructuring Liabilities

On October 2, 2000, the Company merged with HMT Technology Corporation
(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
restructuring 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.

In accordance with purchase accounting, the Company recorded certain
liabilities associated with the merger. In the first nine months of 2002, $1.0
million of payments were made against these liabilities. As of September 29,
2002, the liability balance was $0.4 million, and the remaining liabilities are
expected to be paid by the second quarter of 2003.

In December 2000, the Company implemented a restructuring plan to cease
KMTs U.S. manufacturing operations in May 2001, and convert the facility into
a research and development operation. In June 2002, the Company announced that
it would end research and development activities at the KMT location, and
implemented a restructuring plan to close the KMT facility. The closure was
complete in September 2002, and reduced the Companys headcount by
approximately 75 employees. The Company recorded a $0.2 million impairment
charge and a $4.1 million restructuring charge in the second quarter of 2002 to
account for the shutdown. The Company recorded a $0.7 million restructuring
charge in the third quarter of 2002, representing additional costs associated
with the shutdown. At September 29, 2002, the liability balance for these two
restructurings was $2.7 million. Cash payments in the first nine months of
2002 were $2.3 million. The remaining liabilities are expected to be paid
through 2004, the remaining facility lease term.

Note 6. Investment in Unconsolidated Company

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

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
Chahayas cancellation of shares related to the future $4.0 million cash
contribution.

In the first half of 2002, the Company recorded a $2.4 million loss as its
equity share of Chahayas net loss. In accordance with fresh-start reporting
discussed in Note 3, the Companys remaining investment balance of $1.7
million was written down to its estimated fair value of zero in the second

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quarter of 2002. The Companys remaining liability for facilities and
facility services was $1.7 million as of September 29, 2002.

Note 7. Reorganization Costs

In connection with the Companys chapter 11 bankruptcy filing, the Company
recorded reorganization costs of $6.5 million in the first half of 2002. These
costs included a $5.0 million adjustment to increase liabilities subject to
compromise to the court allowable amount for the Class 10 MMD claim, and
professional fees related to the bankruptcy filing.

Note 8. Inventories

Inventories are stated at the lower of cost (first-in, first-out method)
or market, and consist of the following (in thousands):



|                          |  |                    |        |  |                   |             |   |        |  | 
|------------------------- |  | ------------------ | ------ |  | ----------------- | ----------- | - | ------ |  | 
|                          |  | Successor          |        |  |                   | Predecessor
|                          |  | Company            |        |  | Company          
|                          |  |                    |        |  |                  
|                          |  | September 29, 2002 |        |  | December 30, 2001
|                          |  |                    |        |  |                  
|Raw
          material    |  | $                  | 6,626  |  |                   |             | $ | 5,232  | 
|Work
          in process |  |                    | 3,229  |  |                   |             |   | 1,608  | 
|Finished
          goods  |  |                    | 5,401  |  |                   |             |   | 4,926  | 
|                          |  |                    |        |  |                   |             |   |        | 
|                          |  | $                  | 15,256 |  |                   |             | $ | 11,766 | 
|                          |  |                    |        |  |                   |             |   |        | 

Note 9. 2002 Qualified Stock Plan and 2002 Employee Stock Purchase Plan

The Companys stockholders approved the 2002 Qualified Stock Plan (the
Stock Plan) in October 2002. The Stock Plan provides for the grant of incentive
stock options to the Companys employees, and for the grant of nonstatutory
stock options and stock purchase rights to the Companys employees, directors,
and consultants.

A total of 2,825,000 shares of the Companys common stock was reserved for
issuance under the Stock Plan. The number of shares available for issuance
under the Stock Plan will be increased on January 1, 2005, by 750,000 shares.
Of the total shares currently reserved for issuance under the Stock Plan,
750,000 shares will have a per share exercise price equal to the greater of (i)
$4.00 or (ii) the fair market value on March 17, 2003, 450,000 shares will have
a per share exercise price equal to the fair market value on March 15, 2004,
and the Stock Plan administrator shall have the right to grant options and
stock purchase rights for the purchase of up to 1,625,000 shares with a per
share exercise price determined by the administrator. The additional shares
issued in 2005 will have a per share exercise price equal to the fair market
value on March 15, 2005. Up to 1,625,000 of the available shares under the
Stock Plan will be issued to employees in accordance with the Plan of
Reorganization (see Note 2).

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The term of an incentive stock option may not exceed ten years, except
that with respect to any participant who owns 10% of the voting power of all
classes of the Companys outstanding capital stock, the term must not exceed
five years and the exercise price must equal at least 110% of the fair market
value on the grant date.

Stock purchase rights, which represent the right to purchase the Companys
common stock, may be issued under the Stock Plan. The administrator determines
the purchase price of stock purchase rights granted under the Stock Plan.
Unless the administrator determines otherwise, the Company may exercise a
repurchase option upon the voluntary or involuntary termination of the
purchasers service with the Company for any reason. The purchase price for
shares the Company repurchases will generally be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser.

Employees at the director level and above are eligible to participate in
the Companys Deferred Compensation Plan, which provides for the deferral of
compensation on a pre-tax basis. Eligible employees may elect to defer the cash
value of any restricted stock award they are eligible to receive during any
calendar year the plan remains in effect. All deferrals must equal 100% of the
fair market value, calculated on the date of grant, of the restricted stock
award that would have otherwise been received. Distributions shall be paid in
the form of shares of the Companys common stock at such time as may be elected
by each participant. The Deferred Compensation Plan, which is unfunded, is
administered by a committee appointed by the Companys board of directors.

The Companys stockholders approved its 2002 Employee Stock Purchase Plan
(ESPP) in October of 2002. The Company has reserved a total of 300,000 shares
of its common stock for issuance under the ESPP. The board has appointed the
Companys Compensation Committee as administrator of the ESPP. The ESPP is
implemented by offering periods lasting approximately six months in duration
with a new offering period commencing on the first trading day on or following
the first day of the fiscal month of March and September of each year. The
first offering period, however, will commence on March 1, 2003, and end on the
last trading day before the end of fiscal month of August, 2003.

Employees may elect to have payroll deductions not to exceed 10% of a
participants compensation. The purchase price per share at which shares will
be sold in an offering under the ESPP is the lower of 85% of the fair market
value of a share of our common stock on the first day of an offering period, or
85% of the fair market value of a share of our common stock on the last day of
each offering period.

Note 10. Related Parties

Prior to June 30, 2002, sales to Western Digital were reported as related
party transactions, as Western Digital owned more than five per cent of the
Companys outstanding common stock. As a result of the confirmed Plan of
Reorganization, which became effective on June 30, 2002, all of the Companys
shares of common stock were cancelled. Accordingly, commencing June 30, 2002,
Western Digital is no longer a related party.

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Note 11. Earnings (Loss) per Share

The Company determines earnings (loss) per share in accordance with SFAS
No. 128, Earnings per Share.

Basic earnings (loss) per common share is computed by dividing income
(loss) available to common stockholders by the weighted-average number of
shares of common stock outstanding during the period. Diluted earnings (loss)
per share is computed by dividing income (loss) available to common
stockholders by the weighted-average number of additional shares of common
stock outstanding during the period presented to include the number of
additional shares of common stock that would have been outstanding if the
dilutive potential shares of common stock had been issued. The dilutive effect
of outstanding options is reflected in diluted earnings per share by
application of the treasury stock method. Dilutive potential shares of common
stock related to stock options, warrants and convertible debt were excluded
from the calculation of diluted income (loss) per common share for all periods
presented in the Statement of Operations because their effect would have been
antidilutive.

Incremental common shares attributable to the exercise of outstanding
options (assuming proceeds would be used to purchase treasury stock) of zero
for both the three months ended September 29, 2002 and the six months ended
June 30, 2002 as well as 84,672 for the three months ended September 30, 2001,
and 300,850 for the nine months ended September 30, 2001, were not included in
the net income (loss) per share computation because the effect would have been
antidilutive.

There were no incremental common shares attributable to the exercise of
outstanding warrants (assuming proceeds would be used to purchase treasury
stock) for the three months ended September 29, 2002, the six months ended June
30, 2002, and the three and nine months ended September 30, 2001.

Incremental common shares attributable to convertible debt of zero for
both the three months ended September 29, 2002 and the six months ended June
30, 2002 as well as 12,474,181 for both the three and nine months ended
September 30, 2001, were not included in the net loss per share computation
because the effect would be antidilutive.

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##### Table of Contents






ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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.
The Company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, these 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, and general
economic conditions, as well as those discussed below in Other Factors that
May Affect Future Operating Results.

Results of Operations

Overview

Our business is capital-intensive, and is characterized by high fixed
costs, making it imperative that we sell disks in high volume. Our
contribution margin per disk sold varies with changes in selling price, input
material costs, and production yield. As demand for our disks increases, our
total contribution margin increases proportionally, improving our financial
results because we do not have to increase our fixed cost structure in
proportion to increases in demand and resultant capacity utilization.
Conversely, our financial results would deteriorate rapidly if the disk market
were to worsen.

Adverse conditions in the thin-film media market, which began in mid-1997,
continued to impact our business. 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 companies), in
1996 we committed to expansion programs and substantially increased media
manufacturing capacity in 1997. In 1997, the rate of growth in demand for disk
drives fell. Disk drive manufacturers abruptly reduced their orders for media
from independent suppliers and relied more heavily on internal capacity to
supply a larger proportion of their media requirements. The media industrys
capacity expansion, coupled with the decrease in the rate of demand growth,
resulted in excess media production capacity. Due to classic micro-economic
forces, this excess industry capacity caused sharp declines in average selling
prices for disk products as independent suppliers struggled to utilize their
capacity.

In addition, by the end of 1998, most disk drives manufactured were
transitioned to the use of advanced magneto-resistive media and recording
heads. This transition led to unprecedented increases in areal density and,
therefore, the amount of data that could be stored on a single disk platter.
Increased storage capacity per disk allows drive manufacturers to offer
lower-priced disk drives by incorporating fewer components into their disk
drives. Because of this lower disk-per-drive ratio, demand for disks decreased
overall during the period from 1997 through the first three quarters of 2002,
resulting in substantial excess disk production capacity. The significant
amount of captive capacity employed by

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certain disk drive manufacturers also continues to impair the market
opportunities for independent disk suppliers such as our company.

As a result of the continuing excess disk production capacity in our
industry, we closed U.S. manufacturing operations, merged with another company,
and consolidated the combined U.S. based manufacturing operations in Malaysia
over the three year period from 1999 through 2001. In June 2002, we announced
that we would close the KMT research and development facility. The closure was
completed in the third quarter of 2002.

With the relocation of our manufacturing operations to our Malaysian
facilities, our San Jose, California site is focused solely on activities
related to research, process development, and product prototyping. Our
selling, general, and administrative functions also remain in California. The
shift of high-volume production to our cost-advantaged Malaysian manufacturing
plants has improved our overall cost structure, resulting in lower unit
production costs, and has improved our ability to respond to the continuing
price pressures in the disk industry.

As discussed in Note 1, we emerged from chapter 11 bankruptcy on June 30,
2002. In accordance with SOP 90-7, we adopted fresh-start reporting and
reflected the effects of the adoption in the consolidated financial statements
for the six months ended June 30, 2002.

To facilitate an understanding of our operating performance, the following
discussion is presented on a traditional comparative basis for all periods;
that is, the discussion compares the results of operations for the three-month
and nine-month periods ended September 29, 2002, to the three-month and
nine-month periods ended September 30, 2001. As a result of the adoption of
fresh-start reporting, the statements of operations for periods ended after
June 30, 2002, are prepared on a different basis of accounting. Therefore,
these financial statements are not comparable to the financial statements for
periods ended subsequent to August 24, 2001, the date on which we filed for
bankruptcy protection, and prior to June 30, 2002.

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The following table shows the Companys results of operations (in
thousands):

|                                                                  |                                                                          |   |                    |         |                   |   |                   |          |               |   |          |         |  |   |         |          |  
|----------------------------------------------------------------- | ------------------------------------------------------------------------ | - | ------------------ | ------- | ----------------- | - | ----------------- | -------- | ------------- | - | -------- | ------- |  | - | ------- | -------- | -
|                                                                  |                                                                          |   | Three Months Ended |         | Nine Months Ended
|                                                                  |                                                                          |   |                    |         |                  
|                                                                  |                                                                          |   | Sept 29, 2002      |         | Sept 30, 2001     |   | Sept 29, 2002 (1) |          | Sept 30, 2001
|                                                                  |                                                                          |   |                    |         |                   |   |                   |          |              
|Net sales                                                         |                                                                          | $ | 70,241             |         |                   | $ | 59,391            |          |               | $ | 182,196  |         |  | $ | 224,598 |         
|Cost of sales                                                     |                                                                          |   | 61,927             |         |                   |   | 58,246            |          |               |   | 168,715  |         |  |   | 230,927 |         
|                                                                  |                                                                          |   |                    |         |                   |   |                   |          |               |   |          |         |  |   |         |         
|                                                                  | Gross profit (loss)                                                      |   |                    | 8,314   |                   |   |                   | 1,145    |               |   |          | 13,481  |  |   |         | (6,329   | )
|Research, development, and engineering expense                    |                                                                          |   | 8,708              |         |                   |   | 9,690             |          |               |   | 27,504   |         |  |   | 30,184  |         
|Selling, general, and administrative expense                      |                                                                          |   | 4,235              |         |                   |   | 4,704             |          |               |   | 12,491   |         |  |   | 16,776  |         
|Amortization of intangible assets                                 |                                                                          |   | 926                |         |                   |   | 6,505             |          |               |   | 4,535    |         |  |   | 20,575  |         
|Restructuring/impairment charges                                  |                                                                          |   | 740                |         |                   |   |                  |          |               |   | 5,058    |         |  |   | 43,020  |         
|In- process research and development                              |                                                                          |   | 6,784              |         |                   |   |                  |          |               |   | 6,784    |         |  |   |        |         
|Interest income                                                   |                                                                          |   | (66                | )       |                   |   | (181              | )        |               |   | (259     | )       |  |   | (1,437  | )       
|Interest expense                                                  |                                                                          |   | 3,226              |         |                   |   | 111,464           |          |               |   | 3,226    |         |  |   | 155,192 |         
|Other income, net                                                 |                                                                          |   | (2,138             | )       |                   |   | (2,458            | )        |               |   | (401,285 | )       |  |   | (4,092  | )       
|Reorganization costs, net                                         |                                                                          |   |                   |         |                   |   | 2,837             |          |               |   | 6,511    |         |  |   | 2,837   |         
|Provision for (benefit from) income taxes                         |                                                                          |   | 304                |         |                   |   | (10,519           | )        |               |   | 1,023    |         |  |   | (9,738  | )       
|Minority interest in net income (loss)
of consolidated subsidiary |                                                                          |   |                   |         |                   |   | 396               |          |               |   |         |         |  |   | (41     | )       
|Equity in net loss of unconsolidated company                      |                                                                          |   |                   |         |                   |   | (999              | )        |               |   | (2,374   | )       |  |   | (2,664  | )       
|                                                                  |                                                                          |   |                    |         |                   |   |                   |          |               |   |          |         |  |   |         |         
|                                                                  | Income (loss) before cumulative effect of change
in accounting principle |   |                    | (14,405 | )                 |   |                   | (122,292 | )             |   |          | 345,519 |  |   |         | (262,269 | )
|Cumulative effect of change in accounting principle               |                                                                          |   |                   |         |                   |   |                  |          |               |   | (47,509  | )       |  |   |        |         
|                                                                  |                                                                          |   |                    |         |                   |   |                   |          |               |   |          |         |  |   |         |         
|                                                                  | Net income (loss)                                                        |   | $                  | (14,405 | )                 |   | $                 | (122,292 | )             |   | $        | 298,010 |  |   | $       | (262,269 | )
|                                                                  |                                                                          |   |                    |         |                   |   |                   |          |               |   |          |         |  |   |         |         

(1)  Comprises combined operating results for the three months ended September
29, 2002, (successor company) and the six months ended June 30, 2002
(predecessor company).

Net Sales

Consolidated net sales increased by 18.3% to $70.2 million in the third
quarter of 2002, from $59.4 million in the third quarter of 2001. The overall
increase reflected an increase in finished unit sales volume to 12.3 million
units in the third quarter of 2002 from 9.7 million units in the third quarter
of 2001. The volume increase was somewhat offset by a decline in the finished
unit average selling price, from $6.00 in the third quarter of 2001 to $5.43 in
the third quarter of 2002. The unit shipment increase and revenue increase in
the third quarter were primarily the result of market share gains.

Consolidated net sales in the first nine months of 2002 were $182.2
million, an 18.9% decrease from $224.6 million in the first nine months of
2001. Unit sales volume decreased by 10.2%, from 33.4 million units in the
first nine months of 2001 to 30.0 million units in the first nine months of
2002. The finished disk average selling price declined by 9.0%, from $6.25
during the first nine months of 2001 to $5.69 in the first nine months of 2002.

Substrate sales in the third quarter of 2002 were $3.5 million, compared
to $1.0 million in the third

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quarter of 2001. Net sales of substrate and single-sided disks in the
first nine months of 2002 were $11.8 million, compared to $16.2 million in the
first nine months of 2001. Substrate sales vary from period to period based on
customer requirements.

In the fourth quarter of 2002, we expect continued strong shipment volume
and revenue, continued pricing pressure, and high volume shipments of our
advanced disk products.

Net sales to Western Digital decreased to 64% in the third quarter of
2002, compared to 69% in the third quarter of 2001. Net sales to Maxtor
increased to 29% in the third quarter of 2002, from 24% in the third quarter of
2001. Net sales to Western Digital in the first nine months of 2002 were 63%,
compared to 52% in the first nine months of 2001. Net sales to Maxtor in the
first nine months of 2002 were 29%, compared to 31% in the first nine months of
2001.

We expect to continue to derive a substantial portion of our sales from
Western Digital and Maxtor, and from a small number of other customers. The
distribution of sales among customers may vary from quarter to quarter based on
the qualifications of our disks in specific customers drive programs, and the
success of those programs in the disk drive marketplace. As a result of the
April 1999 acquisition of Western Digitals media operation and the related
volume purchase agreement, we expect our sales to remain highly concentrated
with Western Digital.

Sales of 60GB and 80GB per platter disks increased to 27% of net sales in
the third quarter of 2002, compared to less than one per cent in the same
period of 2001. Sales of 40GB disks and greater were 99% of net sales in the
third quarter of 2002 compared to 3% of net sales in the third quarter of 2001.
The increase was the result of the continued rapid evolution to higher storage
densities.

Gross Margin

Our overall gross margin for the third quarter of 2002 was 11.8 % compared
to a gross margin of 1.9% for the third quarter of 2001. Higher sales volume,
as well as significantly lower fixed costs resulting from the completion of the
consolidation of all manufacturing activities in Malaysia, accounted for the
improvement.

For the first nine months of 2002, we achieved a gross margin percentage
of 7.4 %, compared to a gross loss percentage of 2.8% for the first nine months
of 2001. Although unit sales volume decreased from 33.4 million units to 30.0
million units, the volume and average selling price declines were more than
offset by the significant improvement in fixed costs (i.e., payroll,
depreciation, and equipment and facilities-related expenses) associated with
the transfer of all manufacturing activities to Malaysia.

We expect to maintain our variable cost per unit at levels similar to the
last three quarters while continuing to advance our technology. With all of
our manufacturing now being performed in Malaysia, we expect our fixed cost per
unit in the remainder of 2002 to vary based on changes in production volumes
from the first nine months of 2002.

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Operating Expenses

Research, development, and engineering expenses of $8.7 million in the
third quarter of 2002 were $1.0 million lower compared to the $9.7 million in
the third quarter of 2001. Research, development, and engineering expenses of
$27.5 million in the first nine months of 2002 were $2.7 million less than the
$30.2 million in the first nine months of 2001. The year-over-year decrease
reflected lower costs associated with the KMT plant shutdown, and higher costs
in the first half of 2001, reflecting additional costs incurred in Malaysia to
qualify customer programs on equipment relocated from the U.S. We expect
research, development, and engineering spending in the fourth quarter of 2002
to be similar to the third quarter of 2002.

Selling, general, and administrative expenses of $4.2 million in the third
quarter of 2002 were $0.5 million less than the $4.7 million incurred in the
third quarter of 2001. Selling, general, and administrative expenses of $12.5
million in the first nine months of 2002 were $4.3 million less than the $16.8
million incurred in the first nine months of 2001. The year-over-year decrease
reflected significantly lower headcount and related payroll costs.
Additionally, we recorded substantial professional fees in the second quarter
of 2001 related to a withdrawn financial restructuring plan. We expect
selling, general, and administrative spending in the fourth quarter of 2002 to
be similar to spending in the third quarter of 2002.

In accordance with fresh-start reporting, we recorded new intangible asset
valuations at the end of the second quarter of 2002 as follows: 1) developed
technology of $3.1 million; 2) fair value of the Western Digital volume
purchase agreement (VPA) extension of $7.7 million; and 3) in-process research
and development of $6.8 million. In the third quarter of 2002, we amortized
$0.2 million of the developed technology intangible asset, $0.7 million of VPA
extension, and all of the in-process research and development. In the third
quarter of 2001, we recorded amortization of $6.5 million, which included $3.9
million of intangible and goodwill amortization associated with the HMT merger,
and $2.6 million related to the initial Western Digital volume purchase
agreement. Beginning in 2002, no further amortization of goodwill associated
with the HMT merger was recorded. For the first nine months of 2002,
amortization of intangible assets was $11.3 million, compared
to $20.6 million in the first nine months of 2001. The decrease primarily
reflected the termination of amortization of the HMT goodwill after 2001 on
adoption of FAS 142.

Restructuring/impairment charges of $0.7 million were recorded in the
third quarter of 2002, and primarily included professional fees related to the
chapter 11 bankruptcy case, and Exit Facility fees. No
restructuring/impairment charges were recorded in the third quarter of 2001.
Through the first nine months of 2002, we recorded restructuring/impairment
charges of $5.1 million, which included $4.3 million connected with the KMT
shutdown, and $0.7 million of fees as discussed above. Through the first nine
months of 2001, we recorded restructuring/impairment charges of $43.0 million.
The 2001 amount included a charge of $36.4 million reflecting the write-down
of land and buildings held for sale in Eugene, Oregon, and Fremont, California,
and $6.6 million related to the recognition of lease obligations for equipment
no longer in service.

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Interest Income and Interest Expense

Overall interest income in the third quarter of 2002 was $0.1 million
compared to $0.2 million in the third quarter of 2001. Interest income for
the first nine months of 2002 was $0.3 million, compared to $1.4 million
through the first nine months of 2001. The decrease reflected lower interest
rates and lower average cash balances during the nine-month period of 2002.

In the third quarter of 2002, we recorded $3.2 million in interest
expense, which primarily represented interest on the new long-term debt and
promissory notes. Of the $3.2 million, $1.5 million was non-cash interest on
the PIK notes. In the third quarter of 2001, we recorded $111.5 million in
interest expense, which included $99.1 million in accretion on the value of
subordinated convertible notes to face value in the third quarter of 2001 (due
to the default on such notes prior to the bankruptcy filing). Interest
expense for the first nine months of 2002 was $3.2 million, compared to $155.2
million for the first nine months of 2001. The decrease primarily reflected
the changes discussed above.

Other Income

Other income, net in the third quarter of 2002 was $2.1 million, and
primarily reflected a net $2.2 million property tax refund related to the
former HMT properties. The $2.5 million of other income in the third quarter
of 2001 primarily included a refund for certain R&D manufacturing equipment
work which was not completed by a vendor.

For the first nine months of 2002, other income was $401.3 million,
compared to $4.1 million for the first nine months of 2001. The 2002 total
included a net $2.2 million property tax refund, a gain of $396.4 million
associated with the chapter 11 debt cancellation and fresh-start reporting, and
a $2.4 million gain on the sale of certain idle manufacturing equipment. The
2001 total primarily reflected the $2.5 million discussed above, plus a $0.6
million foreign translation currency adjustment that was taken to income due to
the liquidation of a joint venture.

Reorganization Costs

No reorganization costs were recorded in the third quarter of 2002,
compared to $2.8 million in the third quarter of 2001. The 2001 charges
primarily included $0.6 million in professional fees, and $2.3 million in
accretion to bring the note payable to Western Digital up to its face value.

For the first nine months of 2002, we recorded reorganization costs of
$6.5 million, which primarily included a $5.0 million charge associated with
the MMD claim, and professional fees related to the bankruptcy filing.
Through the first nine months of 2001, we recorded reorganization costs of $2.8
million, which primarily included $0.6 million in professional fees, and $2.3
million in accretion to bring the note payable to Western Digital up to its
face value.

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Income Taxes

The $0.3 million tax provision in the third quarter of 2002 represents
foreign withholding taxes on royalty and interest payments. We derived an
income tax benefit of $10.5 million in the third quarter of 2001, which was
primarily related to a reversal of an income tax accrual resulting from 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.

The $1.0 million tax provision during the first nine months of 2002
represents foreign withholding taxes on royalty and interest payments. We
recorded an income tax benefit of $9.7 million for the first nine months of
2001. The was primarily related to a reversal of an income tax accrual
resulting from the expiration of a statutory period to audit our state tax
returns, as discussed above.

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.

Due to the uncertainty of the timing and amount of future income, we
continue to provide a full valuation allowance against our deferred tax assets.

Minority Interest in KMT

In April 2002, we repurchased Kobe USAs 20% share of KMT in exchange for
certain idle assets. As a result, we owned 100% of KMT as of September 29,
2002.

Equity in Unconsolidated Company

In the second quarter of 2002, in accordance with fresh-start reporting
requirements, our remaining investment in Chahaya of $1.7 million was written
down to its estimated fair value of zero. Accordingly, no further equity in
the net losses of Chahaya was recorded in the third quarter of 2002.

For the first six months of 2002, we recorded a loss of $2.4 million as
our equity share of Chahayas net loss. Through the first nine months of
2001, we recorded a loss of $2.7 million as our equity share of Chahayas net
loss. The Companys remaining liability for facilities and facility-related
services was $1.7 million at September 29, 2002.

Cumulative Effect of Change in Accounting Principle

As discussed in Note 4, we adopted SFAS No. 142 and recorded the effects
of adoption in June 2002 on a cumulative effect basis as of the first day of
the 2002 fiscal year.

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Under SFAS No. 142, we were required to perform a transitional impairment
analysis of our goodwill. The transitional impairment loss of $47.5 million was
recognized as the cumulative effect of a change in accounting principle in our
consolidated statement of operations. We had a remaining goodwill balance of
$33.9 million, which equals the reorganization value in excess of amounts
allocable to identifiable assets recorded in accordance with SOP 90-7 as of
June 30, 2002, and other intangible assets of $17.6 million. In accordance
with SFAS 142, goodwill is no longer being amortized, but will be subject to an
impairment assessment at least annually.

Critical Accounting Policies

In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates if our
assumptions are incorrect. We believe that the following discussion addresses
our most critical accounting policies. These policies are most important to the
portrayal of our financial condition and results and require managements most
difficult, subjective and complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.

Fresh-Start Reporting

As of June 30, 2002, the Effective Date, the reorganized Company adopted
fresh-start reporting in accordance with SOP 90-7. The implementation of
fresh-start reporting resulted in material changes to the consolidated balance
sheet as of June 30, 2002, including the valuation of assets and liabilities at
fair value in accordance with principles of the purchase method of accounting,
valuation of liabilities in accordance with the provisions of the Plan, and
valuation of stockholders equity.

The enterprise valuation of $310.0 million (the value of the restructured
debt and equity) was based on the consideration of many factors and various
valuation methods, including the income approach and application of the
discounted cash flow method based on projected five and one-quarter year
financial information, selected publicly traded company market multiples of
certain companies operating businesses viewed to be similar to that of our
company, and other applicable ratios and valuation techniques that we and our
financial advisors believed to be representative of our business and industry.
However, the valuation was based on a number of estimates and assumptions,
which are inherently subject to significant uncertainties and contingencies
beyond our control. Accordingly, there can be no assurance that the estimates,
assumptions, and values reflected in the valuation will be realized, and actual
results could vary materially. Moreover, the market value of our common stock
may differ materially from the valuation.

The five and one-quarter year cash flow projections utilized in the
enterprise valuation were based on estimates and assumptions about
circumstances and events which have not yet taken place. These estimates and
assumptions are inherently subject to significant economic and competitive
uncertainties beyond our control including, but not limited to, those with
respect to the future course of our business activity. Any difference between
our projected and actual results following our emergence from chapter

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11 will not alter the determination of the fresh-start reorganization
equity value, as of June 30, 2002, because that value is not contingent on our
achieving the projected results.

As a result of the adoption of fresh-start reporting, our post-emergence
financial statements are not comparable with our pre-emergence financial
statements because they are, in effect, those of a new entity.

Allowance for Sales Returns

We estimate our allowance for sales returns based on historical data as
well as current knowledge of product quality. Historically, we have not
experienced material differences between our estimated reserves for sales
returns and actual results. However, it is possible that the failure rate on
products sold could be higher than it has historically been, which could result
in significant changes in future returns. Since estimated sales returns are
recorded as a reduction in revenues, any significant difference between our
estimated and actual experience or changes in our estimate would be reflected
in our reported revenues in the period we determine that difference.

From December 30, 2001, to September 29, 2002, our allowance for sales
returns has decreased by $0.5 million. The decline reflects the reduction in
requirements for specifically identified items.

Allowance for Doubtful Accounts

We record an allowance for doubtful accounts based on estimates of
potential uncollectability of our accounts receivable. We specifically analyze
our accounts receivable and analyze historical bad debts, customer
concentrations, customer credit-worthiness, current economic trends, and
changes in our customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. The majority of our sales and resulting
accounts receivable are concentrated among a few large customers. As a result
of this sales concentration, at September 29, 2002, 69% of our accounts
receivable was with one customer for which no allowance was provided.
Historically, we have not experienced material differences between our
estimated allowance for doubtful accounts and actual results. However, if the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, our results would suffer and
additional allowances may be required.

From December 30, 2001, to September 29, 2002, our allowance for doubtful
accounts has decreased by $1.2 million. The decline reflects a $0.9 million
write-off of fully-reserved receivables during the first quarter of 2002, as
well as a $0.3 million reduction, reflecting the customers payment history.

Restructuring Liabilities

We have estimated and accrued restructuring liabilities based on
historical data on prior costs for these activities, coupled with assumptions
on expected timeframes for these activities and specific actions necessary to
complete such transitions. It is possible that future costs incurred to exit
related business activities could vary from historical costs, assumptions on
timeframes could change or different actions

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may be determined necessary than were assumed in our original estimates,
which could result in significant changes in costs to exit certain business
activities. Any significant difference between our estimated restructuring
liabilities and actual experience or changes in our estimate would be reflected
in our reported operating expenses in the period in which that difference is
determined.

Long-lived Assets

Long-lived assets are generally evaluated for impairment on an individual
acquisition, market, or product basis whenever events or changes in
circumstances indicate that these 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 for impairment based on estimated future undiscounted cash
flows attributable to the assets. In the event that these 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
estimates of future cash flows. The discount rate used is based on the
estimated incremental borrowing rate at the date of the event that triggers the
impairment. Land and buildings held for sale are evaluated for impairment
periodically when there are significant changes in market conditions for
commercial real estate, and carried at amounts based on independent valuation
less estimated selling costs.

Reorganization Value in Excess of Amounts Allocable to Identifiable
Assets/Goodwill and Other Intangible Assets

On January 1, 2002, we adopted SFAS No. 142. As a result of adopting this
standard, we will continue to amortize intangible assets with finite lives, but
will no longer amortize goodwill. SFAS 142 requires that goodwill be evaluated
for impairment at least on an annual basis.

We consider the primary indicators of impairment of goodwill and other
intangible assets to include significant variation in the market price of our
stock, decreases in unit volumes, decreases in unit prices, or significant
increases in production costs. We review our goodwill for impairment by
applying a fair value-based test in accordance with SFAS No. 142. Additionally,
we make judgements about the valuation of other intangible assets, whenever
events or changes in circumstances indicate an impairment in the value of
these assets. These judgements are typically based on assumptions about future
prospects for our business, and generally involve computations of the estimated
cash flows to be generated by the business. Any identified writedowns are
recorded as impairment charges and included in operating expenses in the period
in which the impairment is determined.

On adoption of SFAS No. 142, we were required to complete a transitional
impairment analysis of our goodwill as of January 1, 2002. We completed the
transitional impairment analysis during the three months ended June 30, 2002
and recorded a transitional impairment loss of $47.5 million. The transitional
impairment loss of $47.5 million was recognized as the cumulative effect of a
change in accounting principle in our consolidated statement of operations as
of January 1, 2002, resulting in a restatement of the net loss and loss per
share for the three-month period ended March 31, 2002 from $10.2 million and
$0.09 per share to a net loss of $57.7 million and $0.52 per share.

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Upon the adoption of fresh-start reporting as of June 30, 2002, we had a
goodwill balance of $33.9 million, which equaled the reorganization value in
excess of amounts allocable to identifiable net assets recorded in accordance
with SOP 90-7. We also had other intangible assets in the amount of $17.6
million, which consisted of: 1) developed technology of $3.1 million, which
will be amortized on a straight-line basis over its estimated useful life of
four years; 2) a volume purchase agreement of $7.7 million, which will be
amortized on a straight-line basis over its remaining useful life of three and
one-quarter years; and 3) in-process research and development of $6.8 million,
which was expensed in the third quarter of 2002.

In accordance with SFAS 142, goodwill (which was renamed, and will
hereafter be referred to as Reorganization Value in Excess of Amounts Allocable
to Identifiable Assets) will no longer be amortized.

Liquidity and Capital Resources

The liquidity summary presented below is intended to identify significant
sources and uses of cash and cash equivalents for the period indicated. This
information was developed by combining cash flow activity of the successor
Company and the predecessor Company for the first nine months of 2002, and is
not intended to replace our statements of cash flows prepared in accordance
with GAAP.

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A summary of condensed cash flows for the nine months ended September 29,
2002 follows (in thousands):

|                                                                                  |                                                                                 |                                           |         |               |        |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ----------------------------------------- | ------- | ------------- | ------ | -
|                                                                                  |                                                                                 |                                           |         | Nine Months  
|                                                                                  |                                                                                 |                                           |         | Ended        
|                                                                                  |                                                                                 |                                           |         | Sept 29, 2002
|                                                                                  |                                                                                 |                                           |         |              
|Net income                                                                        |                                                                                 | $                                         | 298,010 |              
|Adjustments to reconcile net income to net
cash provided by operating activities: |                                                                                 |                                           |         |              
|                                                                                  | Gain on extinguishment of debt                                                  |                                           |         | (379,027      | )     
|                                                                                  | Gain on revaluation of assets and liabilities pursuant to fresh-start reporting |                                           |         | (17,349       | )     
|                                                                                  | Cumulative effect of change in accounting principle                             |                                           |         | 47,509        |       
|                                                                                  | Depreciation and amortization on property, plant, and equipment                 |                                           |         | 38,727        |       
|                                                                                  | Amortization of intangible assets                                               |                                           |         | 4,535         |       
|                                                                                  | In-process research and development                                             |                                           |         | 6,784         |       
|                                                                                  | Restructuring charges                                                           |                                           |         | 4,102         |       
|                                                                                  | Other non-cash adjustments                                                      |                                           |         | 2,057         |       
|                                                                                  | Reorganization costs, net                                                       |                                           |         | 6,511         |       
|                                                                                  | Accounts receivable (related and unrelated)                                     |                                           |         | (4,605        | )     
|                                                                                  | Inventories                                                                     |                                           |         | (3,688        | )     
|                                                                                  | Accounts payable (related and unrelated)                                        |                                           |         | 15,156        |       
|                                                                                  | Restructuring liabilities                                                       |                                           |         | (3,308        | )     
|                                                                                  | Other liabilities (related and unrelated)                                       |                                           |         | (7,315        | )     
|                                                                                  | Other operating assets and liabilities                                          |                                           |         | (453          | )     
|                                                                                  |                                                                                 |                                           |         |              
|                                                                                  |                                                                                 | Net cash provided by operating activities |         |               | 7,646  |  
|Acquisition of property, plant, and equipment                                     |                                                                                 |                                           | (9,888  | )            
|Proceeds from disposal of property, plant, and equipment                          |                                                                                 |                                           | 2,728   |              
|Other investing activities                                                        |                                                                                 |                                           | 165     |              
|                                                                                  |                                                                                 |                                           |         |              
|                                                                                  |                                                                                 | Net cash used in investing activities     |         |               | (6,995 | )
|Payment of debt                                                                   |                                                                                 |                                           | (165    | )            
|                                                                                  |                                                                                 |                                           |         |              
|Increase in cash and cash equivalents                                             |                                                                                 |                                           | 486     |              
|Cash and cash equivalents at December 30, 2001                                    |                                                                                 |                                           | 17,486  |              
|                                                                                  |                                                                                 |                                           |         |              
|Cash and cash equivalents at September 29, 2002                                   |                                                                                 | $                                         | 17,972  |              
|                                                                                  |                                                                                 |                                           |         |              

Nine-Month Period Ended September 29, 2002

Cash and cash equivalents and short-term investments of $18.0 million at
the end of the third quarter of 2002 increased by $0.5 million from the end of
the 2001 fiscal year. The increase primarily reflected a $7.6 million increase
resulting from consolidated operating activities, offset by $9.9 million of
spending on property, plant, and equipment, plus $2.7 million in proceeds from
the sale of idle manufacturing equipment. Based on current operating forecasts,
we estimate that the cash balance is adequate to support our continuing
operations for at least the next twelve months. Additionally, we can borrow
under the Exit Facility (until it matures on June 30, 2005), which is a
revolving credit facility of up to $15.0 million that we entered into on our
emergence from chapter 11 bankruptcy. We currently have no borrowings under
the Exit Facility.

Consolidated operating activities generated $7.6 million in cash in the
first nine months of 2002. The primary components of this change include the
following:

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| |  |  | $298.0 million of net income;                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | non-cash adjustments totaling a reduction of $286.2 million,
which primarily included a $396.4 million adjustment to net income
for the non-cash gain on extinguishment of debt and revaluation of
assets for fresh-start reporting related to the emergence from
chapter 11, a $47.5 million non-cash loss reflecting the cumulative
effect of change in accounting principle on adoption of FAS 142, and
$38.7 million of depreciation and amortization;
|
| |  |  | increase of accounts receivable by $4.6 million due to
increased sales; and                                                                                                                                                                                                                                                                                                                                                                               
|
| |  |  | increase in accounts payable by $15.2 million due to
increased spending to support higher production volumes.                                                                                                                                                                                                                                                                                                                                             

For the first nine months of 2002, total restructuring payments were $3.3
million, total payments for the Chahaya facilities obligation were $1.8
million, total reorganization expense payments were $1.5 million, and total
chapter 11 cash distributions were $4.5 million. We anticipate that the
remaining facilities obligation payments of $1.7 million will be paid by the
end of 2002, and the remaining chapter 11 distributions of $0.5 million will be
paid upon settlement of the remaining claims. Remaining claims are expected to
be settled by the end of 2002. Substantially all of the chapter 11-related
expenses have been paid.

In the first nine months of 2002, we received $2.7 million in cash
proceeds from the sale of equipment, and we spent $9.9 million on fixed asset
acquisitions. We repaid $0.2 million of debt in the first nine months of 2002.

Current noncancellable capital commitments as of September 29, 2002
totaled $4.1 million. Year-to-date capital expenditures were $9.9 million. For
the remainder of 2002, we plan to spend approximately $6.0 million on property,
plant and equipment for projects designed to improve yield and productivity, as
well as costs to improve equipment capability for the manufacture of advanced
products. In addition, due to the increasing sales volumes, we are installing
additional manufacturing equipment in Malaysia, which was previously
transferred from the former HMT facilities in the U.S.

We lease certain research and administrative facilities under operating
leases that expire at various dates between 2004 and 2007. Certain of these
leases include renewal options varying from five to twenty years. At September
29, 2002, the future minimum commitments for non-cancelable operating facility
leases, an equipment lease, and a facility sublease are as follows (in
thousands):

|                  |  |          |        |          |  |   |       | 
|----------------- |  | -------- | ------ | -------- |  | - | ----- | 
|                  |  | Minimum  |        |          |  |  
|                  |  | Lease    |        | Sublease
|                  |  | Payments |        | Income  
|                  |  |          |        |         
|Remainder of 2002 |  | $        | 964    |          |  | $ | 364   | 
|2003              |  |          | 3,763  |          |  |   | 1,494 | 
|2004              |  |          | 3,458  |          |  |   | 1,539 | 
|2005              |  |          | 3,308  |          |  |   | 1,585 | 
|2006              |  |          | 3,308  |          |  |   | 1,633 | 
|Thereafter        |  |          | 446    |          |  |   | 414   | 
|                  |  |          |        |          |  |   |       | 
|                  |  | $        | 15,247 |          |  | $ | 7,029 | 
|                  |  |          |        |          |  |   |       | 

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As of September 29, 2002, the future minimum principal payments due under
the debt agreements, as discussed in the preceeding paragraphs, are as follows
(in thousands):

|                  |  |           |         | 
|----------------- |  | --------- | ------- | 
|                  |  | Minimum  
|                  |  | Principal
|                  |  | Payments 
|                  |  |          
|Remainder of 2002 |  | $         | 259     | 
|2003              |  |           | 10,229  | 
|2004              |  |           | 20,283  | 
|2005              |  |           | 20,298  | 
|2006              |  |           | 20,314  | 
|Thereafter        |  |           | 67,452  | 
|                  |  |           |         | 
|                  |  | $         | 138,835 | 
|                  |  |           |         | 

In accordance with the Plan, a new $15.0 million Exit Facility was entered
into as of the Effective Date. Additionally, we issued an Indenture for our
Senior Secured Notes, an Indenture for our Junior Secured Notes, and secured
and unsecured Promissory Notes as of the Effective Date.

The Exit Facility is a revolving credit facility of up to $15.0 million,
expiring in June 2005. As of September 29, 2002, there were no borrowings under
the Exit Facility. Our total outstanding borrowings under the Exit Facility at
any one time may not exceed the lesser of $15.0 million or 70% of the fair
market value of certain owned properties (less a reserve, as set forth in the
Exit Facility). The Exit Facility is secured by a first-priority security
interest in substantially all of our assets, including tangible and intangible
assets (except in the case of our ownership interest in our foreign
subsidiaries, which will be subject to a pledge of not more than 65%).
Interest is payable monthly at the rate of 12% per annum on outstanding
borrowings. A commitment fee of $0.3 million was paid in order to obtain the
Exit Facility, and there will be ongoing unused commitment fees due quarterly
at an annual rate of 0.5% on the unused portion of the $15.0 million.

Under the Senior Secured Notes Indenture, the Senior Secured Notes were
issued. The Senior Secured Notes have a cash pay portion of $85.3 million and
a paid-in-kind (PIK) portion of $43.5 million. The cash pay portion of the
Senior Secured Notes: a) is due on June 30, 2007; b) is payable in quarterly
installments over a four-year period on a straight-line basis beginning on the
first anniversary of the Effective Date; c) pays interest monthly in arrears in
cash, and bears interest at a rate equal to the prime rate of interest plus
three hundred basis points (with such rate not to be less than 8% per annum);
and d) is secured by a second priority security interest in substantially all
of our assets (except in the case of our ownership interest in our foreign
subsidiaries, which will be subject to a pledge of not more than 65%). The PIK
portion of the Senior Secured Notes: a) is due on June 30, 2007; b) pays
interest in-kind (i.e., by increasing the principal amount of the Senior
Secured Notes) monthly in arrears, and bears interest at a rate of 12% per
annum; and c) is secured by a second priority security interest in all of our
assets (except in the case of our ownership interest in our foreign
subsidiaries, which will be subject to a pledge of not more than 65%). Each
Senior Secured Note has been issued as one instrument having both a cash pay
portion

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and a PIK portion. These portions will not trade independently of each
other. The Senior Secured Notes and all additional notes for in-kind interest
are due and payable in cash on June 30, 2007.

Under the Senior Secured Notes Indenture, we have an obligation to make
certain payments with the net proceeds of the sale of assets which are allowed
to be sold under the indenture. All net proceeds from the sale of these assets
must first be used to pay down the outstanding balance, if any, under the Exit
Facility, and would permanently reduce the loan commitment under the Exit
Facility. We will use 50% of any remaining proceeds to place up to $20.0
million into an escrow account and then to redeem the principal amount of the
Senior Secured Notes under this indenture based on specific criteria.

Under the Junior Secured Notes Indenture, $7.0 million of Junior Secured
Notes were issued. The Junior Secured Notes: a) have a maturity date of
December 31, 2007; b) pay interest entirely in-kind (i.e., in the form of
additional notes rather than paying interest amounts in cash) monthly in
arrears, and bear interest at a rate of 12% per annum; c) are fully
subordinated to the Exit Facility and Senior Secured Notes Indenture; d) are
secured by a third priority interest in the collateral pledged to secure the
Exit Facility and Senior Secured Notes, which security interest will be fully
subordinated to the security interest granted in respect of the Exit Facility
and Senior Secured Notes; and e) have cross-acceleration provisions to the Exit
Facility and Senior Secured Notes. The Junior Secured Notes and all additional
notes for in-kind interest are due and payable in cash on December 31, 2007.

We are subject to various covenants under the Senior Secured Notes
Indenture and Junior Secured Notes Indenture, and the Exit Facility, including
reporting and financial covenants, business operation covenants, restrictive
covenants which prohibit us from incurring certain indebtedness, change in
control, merging, or disposing of equipment, as well as other covenants.

In connection with the treatment of the Class 2 Allowed Secured Claims and
Allowed Priority Tax Claims, we issued four promissory notes to various city
and county taxing authorities in the aggregate amount of $1.7 million. These
notes bear interest at rates ranging from 1.68% to 10.0% and have maturity
dates through June 2008.

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RISK FACTORS

Investing in our securities involves a high degree of risk. You should
carefully consider the risks and uncertainties described below when considering
whether or not to invest in our company. 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, our
business, financial condition or results of operations could be materially
adversely affected, the value of our stock could decline, our ability to repay
our notes could be affected, and you may lose part or all of your investment.

RISKS RELATED TO OUR FINANCIAL POSITION AND OUR COMMON STOCK

We recently emerged from a chapter 11 bankruptcy reorganization and have a
history of losses.

We sought protection under chapter 11 of the Bankruptcy Code in August
2001. We incurred net losses of approximately $283.0 million, $68.1 million,
and $296.4 million during the three fiscal years ended January 2, 2000,
December 31, 2000, and December 30, 2001, respectively. For the nine-month
period ended September 29, 2002, we incurred a $50.9 million loss before a gain
of $396.4 million for extinguishment of indebtedness and revaluation of assets
and liabilities for fresh-start reporting, and before a cumulative change in
accounting principle loss of $47.5 million. See Managements Discussion and
Analysis of Financial Condition and Results of Operations. Our equity
ownership changed in June 2002, and a majority of our board of directors was
replaced in connection with our reorganization. We cannot assure you that we
will grow or achieve profitability in the near future, or at all.

We continue to be leveraged and our debt service requirements make us more
vulnerable to economic downturn in the technology markets we serve or in the
economy generally.

Even after our emergence from bankruptcy, our long term debt was
approximately $133.5 million as of September 29, 2002. While we believe that
our future operating cash flow, together with our financing arrangements, will
be sufficient to finance our operating requirements, our indebtedness restricts
our ability to obtain additional financing in the future and, because we may be
more leveraged than some of our competitors, may place us at a competitive
disadvantage. Also, the new Exit Facility, Senior Notes Indenture, and Junior
Notes Indenture that we entered into as part of our emergence from bankruptcy
contain covenants that impose operating and financial restrictions on us. These
covenants could adversely affect our ability to finance future operations,
potential acquisitions or capital needs or to engage in other business
activities that may be in our interest. In addition, if we cannot achieve the
financial results necessary to maintain compliance with these covenants, we
could be declared in default and be required to sell or liquidate our assets to
repay outstanding debt.

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Our historical financial information is not comparable to our current financial
condition and results of operations, making it difficult to analyze our
financial prospects.

As a result of our emergence from bankruptcy, we are operating our
business with a new capital structure. We were also subject to the fresh-start
reporting prescribed by generally accepted accounting principles, and our
balance sheet as of June 30, 2002 reflects the application of these rules.
Accordingly, our financial condition and results of operations are not
comparable to the financial condition and results of operations reflected in
our historical financial statements, making it difficult to assess our future
prospects based on historical performance.

We have significant stockholders who own a large percentage of our common stock
and could substantially influence all matters requiring stockholder approval.

We have several significant stockholders who own approximately 70% of our
common stock, and together are able to significantly influence all matters
requiring approval by our stockholders, including new financing, the election
of directors and the approval of mergers or other business combinations. To the
extent that the interests of these stockholders are different than those of
other stockholders, important company decisions may not reflect the interests
of all stockholders.

Sales of stock by significant stockholders holders may negatively affect the
market price.

We have several significant stockholders who own 70% of our common stock,
and who are not restricted as to the prices at which they may sell the stock.
Shares sold below the current level at which the shares of our common stock are
trading may adversely affect the market price of our common stock. This large
amount of stock, if sold all at once or in blocks, could have a negative effect
on the market price of our common stock.

We expect to experience volatility in our stock price, which could negatively
affect your investment.

An investment in our common stock involves substantial risks. The stock
market generally, and the market for stocks of companies with lower market
capitalizations, like us, in particular, have from time to time experienced and
likely will again experience significant price and volume fluctuations that are
unrelated to the operating performance of a particular company.

We may be unable to list our stock on a national securities exchange, the
Nasdaq National Market System or the Nasdaq Small Cap Market.

We are currently traded on the Nasdaq Over the Counter Bulletin Board.
Pursuant to our plan of reorganization, we are obligated to use commercially
reasonable best efforts to list our securities on a national securities
exchange, The Nasdaq National Market or the Nasdaq Small Cap Market. Despite
our efforts, we may not be able to meet the applicable listing requirements and
therefore, our securities may not become listed on a national securities
exchange, the Nasdaq National Market System or the Nasdaq Small Cap Market. If
our stock is not traded through a market system, it, as well as our notes, may
not be

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liquid and we may be unable to obtain future equity financing, or use our
common stock as consideration for mergers or other business combinations.

Because the Senior Secured Notes and Junior Secured Notes are subordinated to
the Exit Facility, if we are unable to make payments or if we default on the
Exit Facility, then the holders of Senior Secured Notes will not be paid until
the Exit Facility is paid in full and if we are unable to make payments or
default on the Senior Secured Notes, the holders of Junior Secured Notes will
not be paid until the Senior Secured Notes are paid in full.

We currently have no balance outstanding under the Exit Facility, but we
can choose to make a draw under the Exit Facility. The Senior Secured Notes are
subordinated in right of payment to the Exit Facility, and the Junior Secured
Note are in turn subordinated in right of payment to the Senior Secured Notes.
As a result of such subordination, in the event of an acceleration declared
because of (1) our liquidation or insolvency, (2) a payment default, (3) a
covenant default or (4) the occurrence of other events of default, our assets
will be available to pay obligations on the Senior Secured Notes only after the
Exit Facility is paid in full and on the Junior Secured Notes only after the
Senior Secured Notes have been paid in full. There may not be sufficient assets
remaining to pay amounts due on any or all of the Senior Secured Notes or the
Junior Secured Notes then outstanding.

If there is not an active market for our notes, the trading price and liquidity
of the notes could be materially adversely affected.

We cannot assure you that any market for our notes will develop more fully
or, if it does develop more fully, that it will be maintained. If an active
market for the notes fails to be maintained or sustained, the trading price and
liquidity of the notes could be materially adversely affected.

Since emerging from bankruptcy, we have not paid any dividends on our common
stock and do not anticipate doing so in the foreseeable future.

We currently anticipate that all of our earnings, if any, will be retained
for repayment of our outstanding debt and for development and expansion of our
business. We do not anticipate paying any cash dividends on our common stock in
the foreseeable future. In addition, our credit facility contains covenants
that restrict payment of cash dividends.

RISKS RELATED TO OUR BUSINESS

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 75% of the disks consumed during 2001 were
incorporated into disk drives for the desktop personal computer market. Because
of this concentration in a single market, which we expect to continue, our
business is tightly linked to the success of the personal computer market.

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Historically, demand for personal computers has been seasonal and
cyclical. Current external forecasts reflect small increases in PC demand in
the fourth quarter of 2002, and small increases in 2003. 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 continue
to 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 is characterized by high 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 for our products;
|
| |  |  | 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. Acquiring talented personnel who possess the unique skills
we require has been difficult. Our bankruptcy filing and our financial
performance have increased the difficulty of attracting and retaining skilled
engineers and other knowledgeable workers. We expect that it will continue to
be difficult to attract and retain key personnel, even though we have emerged
from bankruptcy. We may not be able to attract, assimilate, or retain
highly-qualified personnel to maintain the capabilities that are 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.

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;
|
| |  |  | the complexity of integrating components from a variety of
suppliers; and                                                         

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| |  |  | the increases in storage densities that have led to decreases
in the platter count per drive. With lower platter counts, disk
drive manufacturers with captive disk manufacturing operations have
excess capacity and they rely less on independent sources of media,
such as our company.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In the first nine months of 2002, 63% of our net sales were to Western
Digital and 29% were to Maxtor. During fiscal 2001, 59% of our net sales were
to Western Digital and 27% were to Maxtor. In fiscal 2000, 50% of our net sales
were to Western Digital, 28% were to Maxtor, 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 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 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 mainly into two groups: Asian based manufacturers and U.S.
captive manufacturers. Our Asian based competitors include Fuji Electric,
Mitsubishi Chemical Corporation, Trace Storage, Showa Denko, and Hoya. In
October 2002, Showa Denko and Mitsubishi Chemical announced that they are
combining operations. The U.S. captive manufacturers include the disk media
operations of Seagate Technology, IBM and Maxtor. 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 2002 to date, as in 2001 and 2000, media supply exceeded media demand.
As independent suppliers like our company 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 inexpensive personal computers and consumer devices.
Further, structural changes in the disk media industry, including business
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, which will continue to put pressure
on our profit margin.

Price competition may force us to lower our prices and our revenues and gross
margins will suffer.

We face fierce price competition in the disk media industry. Continued
high levels of competition have continued to put downward pressure on prices
per unit as reflected in the decrease in our average selling price in the third
quarter of 2002. We may be forced to continue to lower our prices or add new
products and features at lower prices to remain competitive, and we may
otherwise be unable to introduce new products at higher prices. We cannot
assure you that we will be able to compete successfully in this kind of price
competitive environment. Lower prices would reduce our ability to generate
revenue, and our

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gross margin would suffer. If we fail to mitigate the effect of these
pressures through reducing the cost of our products or changing our product
mix, our business, financial condition and results of operations could be
adversely affected.

If we are not able to fund our business with cash generated by operations or
raise future capital we may be forced to reduce or suspend operations.

The disk media business has historically been capital-intensive, and we
believe that in order to remain competitive, we will likely have to make
continued investments over the next several years for capital expenditures,
working capital, and research and development. If we cannot generate
sufficient cash flows from operations, or raise additional funds required by
our business, we may be forced to reduce or suspend operations.

Because our products require a lengthy sales cycle with no assurance of high
volume sales, we may expend financial and other resources without a return.

With short product life cycles and rapid technological change, we must
qualify new products frequently, and we must also achieve high volume
production and sales 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 new disk drive products
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 6 to 12 months. During this 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. To the extent we expend significant resources to
qualify products without realizing sales, our operations will suffer.

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.
As a result, if a customer cancels, modifies, or reschedules an order, we may
have already made expenditures that are not recoverable, and our profitability
will suffer. Furthermore, if our current customers do not continue to place
orders with us 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.

Disk drive manufacturers such as Seagate Technology and IBM have large
internal media manufacturing operations. During 2001 and the first nine months
of 2002, IBM and Seagate Technology

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produced more than 95% of their media requirements internally, and MMC
Technology supplied approximately 50% of Maxtors requirement for media. In
2001, Maxtor purchased MMC Technology. 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 have been 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. 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 Steel, Ltd. is our sole supplier of
aluminum substrates. Further, the supplier base has been weakened by the poor
financial condition of the industry, and some suppliers have either exited the
business or failed. 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 sources of materials
and supplies were unavailable for a significant period of time, our production
and operating results could be adversely affected.

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
will not be able to compete effectively.

Our industry has experienced rapid technological change, and if we are
unable to timely anticipate and develop products and production technologies,
our competitive position could be harmed. In general, the life cycles of recent
disk drive programs have been shortening. For example, since 1999, the industry
has doubled storage density annually compared to a slower pace in prior years.
Additionally, media must be more customized to each disk drive program. Short
program life cycles and customization have increased the risk of product
obsolescence, and as a result, 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 new
products and technologies in a timely fashion 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 will 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, and our profitability would be negatively
impacted.

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If we do not keep pace with rapid technological change and continue to improve
the quality of, and control contamination in, our manufacturing processes, we
will not be able to compete effectively and our operating results would suffer.

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 particles 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.

It is commonplace to protect technology through patents and other forms of
intellectual property rights in technically sophisticated fields. 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

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technologies. Either of these actions may affect our production, which
would materially reduce our revenues and harm our operating results.

We may face intellectual property infringement claims that are costly to
resolve, and that may divert our managements attention.

We have occasionally received, and may receive in the future,
communications from third parties that 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, or at all. 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, and such infringements could have a negative impact on our
ability to compete effectively.

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,                                                                                                                                  
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | changes in our product mix and average selling prices;                                                                                                                              
|
| |  |  | modified, adjusted or rescheduled shipments;                                                                                                                                        
|
| |  |  | availability of media versus demand for media;                                                                                                                                      
|
| |  |  | 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;
|
| |  |  | 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; 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. Further, because we were required to implement fresh-start reporting
when we emerged from Chapter 11 proceedings, our historical information prior
to June 30, 2002 is significantly less meaningful.

Because we depend on our Malaysian operations, we are exposed to unavoidable
risks in transmitting technology from U.S. facilities to Malaysian facilities.
These risks could adversely 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. Currently, aluminum substrates are primarily manufactured by a
Malaysian vendor. In addition, we ended production of polished disks in our
Eugene, Oregon, facility in the second quarter of 2001. We acquired this
facility as part of our merger with HMT Technology Corporation in October 2000.
All polished disks are manufactured by our Malaysian factories. Further, in the
second quarter of 2001, we transferred the manufacturing capacity of HMTs
Fremont, California, facility to Malaysia, and 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
specifications and procedures, diagnose operational issues, and meet customer
requirements. If our operations in Malaysia or overseas communications are
disrupted for a prolonged period for any reason, including a failure in
electronic communications with our U.S. operations, the manufacture and
shipment 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. While customers assemble a

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substantial portion of their disk drives in Asia, they subsequently sell
these products throughout the world. Therefore, our high concentration of Asian
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 account for substantially all of our sales. 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 including but not
limited to loss of power and water supply; and                                                                                                                                                                                 
|
| |  |  | transportation delays and interruptions.                                                                                                                                                                                                                                                   

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, we may not be able to finance our
U.S.-based research and development and/or repay our U.S. debt obligations.

If we are unable to control contamination in our manufacturing processes, we
may have to suspend or reduce our manufacturing operations, and our operations
would suffer.

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 would 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:

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| |  |  | 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 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.

Furthermore, our manufacturing processes rely on the use of hazardous
materials and 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 the event of such a
downturn, 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 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 and threats 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, particularly in light of that
fact that we rely heavily on production and sales overseas. 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 an energy
crisis in California could disrupt our operations and increase our expenses.

From time to time in the past, California has experienced energy
shortages. An energy crisis 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

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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 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, California. In addition, Kobe
and other Japanese suppliers of our 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.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, including foreign currency
exchange rates. We currently do not use derivative financial instruments to
hedge such risks.

The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. We invest primarily in high-quality, short-term debt
instruments.

A substantial majority of our revenue, expense, and capital purchasing
activities are transacted in U.S. dollars. However, a large portion of our
payroll, certain operating expenses, and capital purchases are transacted in
other currencies, primarily Malaysian ringgit. Since late 1998, the ringgit has
been pegged at a conversion rate of 3.8 Malaysian ringgit to the U.S. dollar.
If the pegging is lifted in the future, we will evaluate whether or not we will
enter any hedging contracts for the Malaysian ringgit. Expenses recorded in
Malaysian ringgit in the first nine months of 2002 totalled approximately $27.8
million.

We have $85.3 million in senior secured cash pay notes outstanding which
bear interest at the prime rate plus 3% (such rate not to be less than 8% per
annum) and mature in June 2007. A hypothetical

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100 basis point increase in interest rates would result in approximately $0.9
million of additional interest expense each year.




ITEM 4. CONTROLS AND PROCEDURES

We maintain a rigorous set of disclosure controls and procedures and
internal controls designed to ensure that information required to be disclosed
in our filings under the Securities Exchange Act of 1934 is recorded,
processed, and summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms. Our principal executive
and financial officers including our Chief Executive Officer and our Chief
Financial Officer have evaluated our disclosure controls and procedures
pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 within 90 days
prior to the filing of this Quarterly Report on Form 10-Q and have determined
that such disclosure controls and procedures are effective in timely alerting
them to material information relating to our company required to be disclosed
in our filings under periodic Securities and Exchange Commission filings.

Subsequent to our evaluation, there were no significant changes in
internal controls or other factors that could significantly affect our internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.




PART II. OTHER INFORMATION




ITEM 1. Legal Proceedings

Not Applicable.




ITEM 2. Changes in Securities

Not Applicable.




ITEM 3. Defaults Upon Senior Securities

Not Applicable.




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

Not Applicable




ITEM 5. Other Information

Not Applicable.




ITEM 6. Exhibits and Reports on Form 8-K

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| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Exhibits                                                                                                                                                                                                                       
|
| | 99.1 Certifications of Chief Executive Officer and Chief Financial Officer                                                                                                                                                        
|
| | b) Reports on Form 8-K                                                                                                                                                                                                            
|
| | On July 11, 2002, the Company filed Form 8-K related to its press release
of July 1, 2002, which announced that the Companys Chapter 11 Plan of
Reorganization became effective and that the Company had emerged from
bankruptcy.
|
| | On September 13, 2002, the Company filed Form 8-K related to its press
release of September 12, 2002, which announced that Kathleen A. Bayless
was appointed as the Companys Vice President and Chief Financial
Officer.         

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SIGNATURES

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

KOMAG, INCORPORATED
(Registrant)

|                       |                                       |                  
|---------------------- | ------------------------------------- | -----------------
|DATE: November 8, 2002 | BY:                                   | /s/ Thian Hoo Tan
|                       |                                      
|                       | Thian Hoo Tan
Chief Executive Officer

|                       |                                                             |                        
|---------------------- | ----------------------------------------------------------- | -----------------------
|DATE: November 8, 2002 | BY:                                                         | /s/ Kathleen A. Bayless
|                       |                                                            
|                       | Kathleen A. Bayless
Vice President, Chief Financial Officer

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CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Thian Hoo Tan, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Komag, Incorporated;                                                                                                                                                                                                                                                    
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                      



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors:
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | any significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                       |                                       |                  
|---------------------- | ------------------------------------- | -----------------
|DATE: November 8, 2002 | BY:                                   | /s/ Thian Hoo Tan
|                       |                                      
|                       | Thian Hoo Tan
Chief Executive Officer

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CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kathleen A. Bayless, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Komag, Incorporated;                                                                                                                                                                                                                                                    
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                      



| |  |  | a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | b) evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| |  |  | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors:
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a) any significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                       |                                                             |                        
|---------------------- | ----------------------------------------------------------- | -----------------------
|DATE: November 8, 2002 | BY:                                                         | /s/ Kathleen A. Bayless
|                       |                                                            
|                       | Kathleen A. Bayless
Vice President, Chief Financial Officer

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EXHIBIT INDEX

|        |  |                                                                      
|------- |  | ---------------------------------------------------------------------
|Exhibit |  |                                                                      
|Number  |  | Description                                                          
|        |  |                                                                      
|99.1    |  | Certifications of Chief Executive Officer and Chief Financial Officer

50