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


                                    FORM 10-Q


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

                       For the Quarter Ended July 1, 2001
                         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   X     No       .
                                  ------     ------

On July 1, 2001, 11,924,983 shares of the Registrant's common stock, $0.01 par
value, were issued and outstanding.


<PAGE>   2

                                      INDEX

                               KOMAG, INCORPORATED

<TABLE>
<CAPTION>

                                                                                  Page No.
    <S>          <C>                                                              <C>
    PART I.      FINANCIAL INFORMATION

    Item 1.      Consolidated Financial Statements (Unaudited)

                 Consolidated statements of operations--Three
                 and six months ended July 1, 2001 and July 2, 2000 ..............     3

                 Consolidated balance sheets--July 1, 2001
                 and December 31, 2000 ...........................................     4

                 Consolidated statements of cash flows--Six
                 months ended July 1, 2001 and July 2, 2000 ......................     5

                 Notes to consolidated financial statements--
                 July 1, 2001 ....................................................  6-14

    Item 2.      Management's Discussion and Analysis of
                 Financial Condition and Results of Operations ................... 15-34

    PART II.     OTHER INFORMATION

    Item 1.      Legal Proceedings ...............................................    35

    Item 2.      Changes in Securities ...........................................    35

    Item 3.      Defaults Upon Senior Securities .................................    35

    Item 4.      Submission of Matters to a Vote of Security Holders .............    35

    Item 5.      Other Information ...............................................    37

    Item 6.      Exhibits and Reports on Form 8-K ................................    37

    SIGNATURES ...................................................................    38

</TABLE>




                                      -2-



<PAGE>   3

PART I. FINANCIAL INFORMATION


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


<TABLE>
<CAPTION>
                                                                         Three Months Ended               Six Months Ended
                                                                     -------------------------       -------------------------
                                                                         JUL 1           Jul 2           JUL 1           Jul 2
                                                                          2001            2000            2001            2000
                                                                     ---------       ---------       ---------       ---------
<S>                                                                  <C>             <C>             <C>             <C>
Net sales to unrelated parties                                       $  42,053       $  38,305       $  89,508       $  65,712
Net sales to related parties                                            35,298          45,163          75,699          97,389
                                                                     ---------       ---------       ---------       ---------
          NET SALES                                                     77,351          83,468         165,207         163,101

Cost of sales                                                           79,251          73,534         172,681         140,329
                                                                     ---------       ---------       ---------       ---------
          GROSS PROFIT (LOSS)                                           (1,900)          9,934          (7,474)         22,772

Operating expenses:
     Research, development and engineering                               9,825           8,343          20,494          16,892
     Selling, general and administrative                                 6,361           3,769          12,072           7,414
     Amortization of intangibles                                         6,505           2,555          14,070           5,110
     Impairment/restructuring charges (credits)                         43,020            (711)         43,020          (2,661)
                                                                     ---------       ---------       ---------       ---------
                                                                        65,711          13,956          89,656          26,755
                                                                     ---------       ---------       ---------       ---------
          OPERATING LOSS                                               (67,611)         (4,022)        (97,130)         (3,983)

Other income (expense):
     Interest income                                                       404           1,168           1,256           2,150
     Interest expense                                                  (21,565)         (7,457)        (43,728)        (13,908)
     Other, net                                                            609             196           1,634             571
                                                                     ---------       ---------       ---------       ---------
                                                                       (20,552)         (6,093)        (40,838)        (11,187)
                                                                     ---------       ---------       ---------       ---------
Loss before income taxes, minority interest,
   equity in unconsolidated company loss and extraordinary gain        (88,163)        (10,115)       (137,968)        (15,170)
Provision for income taxes                                                 321             450             781             826
                                                                     ---------       ---------       ---------       ---------
Loss before minority interest, equity in
   unconsolidated company loss and extraordinary gain                  (88,484)        (10,565)       (138,749)        (15,996)
Minority interest in net loss of consolidated subsidiary                  (449)           (319)           (437)           (456)
Equity in net loss of unconsolidated company                              (928)             --          (1,665)             --
                                                                     ---------       ---------       ---------       ---------
          LOSS BEFORE EXTRAORDINARY GAIN                               (88,963)        (10,246)       (139,977)        (15,540)
Extraordinary gain                                                          --           3,772              --           3,772
                                                                     ---------       ---------       ---------       ---------
          NET LOSS                                                   $ (88,963)      $  (6,474)      $(139,977)      $ (11,768)
                                                                     =========       =========       =========       =========
Basic and diluted loss before extraordinary gain per share           $   (0.80)      $   (0.16)      $   (1.25)      $   (0.24)
Basic and diluted extraordinary gain per share                              --            0.06              --            0.06
                                                                     ---------       ---------       ---------       ---------
Basic and diluted net loss per share                                 $   (0.80)      $   (0.10)      $   (1.25)      $   (0.18)
                                                                     =========       =========       =========       =========
Number of shares used in basic and diluted computations                111,828          66,039         111,737          65,958
                                                                     =========       =========       =========       =========

</TABLE>


                 See notes to consolidated financial statements.




                                      -3-


<PAGE>   4

                               KOMAG, INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                JUL 1       Dec 31
                                                                 2001         2000
                                                           ----------    ---------
ASSETS                                                     (UNAUDITED)       (note)
<S>                                                        <C>           <C>
Current assets
      Cash and cash equivalents                            $  25,613     $  71,067
      Short-term investments                                   2,360         9,597
      Accounts receivable (including $15,986 and
       $19,498 due from related parties in 2001
       and 2000, respectively) less allowances
       of $2,285 in 2001 and $5,348 in 2000                   24,157        40,243
      Inventories:
         Raw materials                                         9,290         8,883
         Work-in-process                                       3,355         5,778
         Finished goods                                        3,717         6,781
                                                           ---------     ---------
             Total inventories                                16,362        21,442
      Prepaid expenses and deposits                            2,976         6,299
                                                           ---------     ---------
             Total current assets                             71,468       148,648

Investment in unconsolidated company                           6,335        12,000

Property, plant and equipment
      Land                                                     7,785         7,785
      Buildings                                              162,096       136,149
      Equipment                                              491,242       497,233
      Furniture                                                7,521         7,517
      Leasehold improvements                                  30,478        31,931
                                                           ---------     ---------
                                                             699,122       680,615
      Less allowances for depreciation and amortization     (431,332)     (396,097)
                                                           ---------     ---------
             Net property, plant and equipment               267,790       284,518
      Land and buildings held for sale                        35,000        70,355

Goodwill and other net intangible assets (see Note 3)        102,061       116,131
Deposits and other assets                                      1,465         1,409
                                                           ---------     ---------
                                                           $ 484,119     $ 633,061
                                                           =========     =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
      Current portion of long-term debt                    $ 201,740     $ 216,740
      Trade accounts payable                                  29,867        29,014
      Accounts payable to related parties                      1,570         2,487
      Accrued compensation and benefits                       13,401        13,866
      Other liabilities                                       21,336        18,704
      Other liabilities to related parties                     9,343        12,000
      Costs to exit certain business activities                6,458        17,927
      Income taxes payable                                        39             6
      Restructuring liabilities                                6,612        14,277
                                                           ---------     ---------
             Total current liabilities                       290,366       325,021
Note payable to related party                                 27,285        25,649
Convertible subordinated debt                                133,692       111,896
Deferred income taxes                                         11,783        11,813
Other long-term liabilities                                    8,571         5,441
Minority interest in consolidated subsidiary                     943         1,380

Stockholders' equity
      Preferred stock                                             --            --
      Common stock                                             1,119         1,116
      Additional paid-in capital                             586,304       586,133
      Accumulated deficit                                   (575,944)     (435,967)
      Accumulated other comprehensive income                      --           579
                                                           ---------     ---------
             Total stockholders' equity                       11,479       151,861
                                                           ---------     ---------
                                                           $ 484,119     $ 633,061
                                                           =========     =========

</TABLE>



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


                 See notes to consolidated financial statements.




                                      -4-


<PAGE>   5

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

<TABLE>
<CAPTION>
                                                                                         Six Months Ended
                                                                                    -------------------------
                                                                                        JUL 1           Jul 2
                                                                                         2001            2000
                                                                                    ---------        --------
<S>                                                                                 <C>              <C>
OPERATING ACTIVITIES
      Net loss                                                                      $(139,977)       $(11,768)
      Adjustments to reconcile net loss to net cash
          provided by (used in) operating activities:
            Impairment charge related to property, plant, and equipment                43,020              --
            Depreciation and amortization                                              36,480          39,115
            Amortization of intangibles                                                14,070           5,110
            Extraordinary gain                                                             --          (3,772)
            Provision for losses on accounts receivable                                  (593)            309
            Interest accrual on note payable to related party                           2,441           2,070
            Accretion and amortization of interest on debt                             25,161            (537)
            Equity in net loss of unconsolidated company                                1,665              --
            Realized gain on cumulative translation adjustment                           (579)             --
            Gain on disposal of property, plant and equipment                            (104)           (113)
            Deferred income taxes                                                         (30)             --
            Deferred rent                                                                  --             126
            Minority interest in net loss of consolidated subsidiary                     (437)           (456)
            Changes in operating assets and liabilities:
                  Accounts receivable                                                  13,168          (6,291)
                  Accounts receivable from related parties                              3,511           1,040
                  Inventories                                                           5,080          (2,879)
                  Prepaid expenses and deposits                                           328          (1,557)
                  Trade accounts payable                                                  853           1,702
                  Accounts payable to related parties                                    (917)          1,484
                  Accrued compensation and benefits                                      (465)            432
                  Other liabilities                                                    (3,078)         (8,246)
                  Other liabilities to related party                                    1,343              --
                  Income taxes (payable) refundable                                        33             677
                  Costs to exit certain business activities                           (11,469)             --
                  Restructuring liabilities                                            (3,380)        (15,390)
                                                                                    ---------       ---------
                           Net cash provided by (used in) operating activities        (13,876)          1,056

INVESTING ACTIVITIES
      Acquisition of property, plant and equipment                                    (24,428)         (4,927)
      Purchases of short-term investments                                              (3,810)         (2,681)
      Proceeds from short-term investments at maturity                                 11,047           4,410
      Proceeds from disposal of property, plant and equipment                             495           1,139
      Deposits and other assets                                                           (56)          1,631
                                                                                    ---------       ---------
                         Net cash used in investing activities                        (16,752)           (428)

FINANCING ACTIVITIES
      Repayment of debt                                                               (15,000)        (15,000)
      Sale of common stock, net of issuance costs                                         174           1,704
                                                                                    ---------       ---------
                         Net cash used in financing activities                        (14,826)        (13,296)

                      Decrease in cash and cash equivalents                           (45,454)        (12,668)

      Cash and cash equivalents at beginning of year                                   71,067          65,116
                                                                                    ---------       ---------
                      Cash and cash equivalents at end of period                    $  25,613       $  52,448
                                                                                    =========       =========

</TABLE>



                 See notes to consolidated financial statements.



                                      -5-


<PAGE>   6

                               KOMAG, INCORPORATED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                  JULY 1, 2001

NOTE 1 - BASIS OF PRESENTATION AND POLICY

        The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all normal recurring
adjustments considered necessary for a fair presentation of the financial
position, operating results, and cash flows for the periods presented, have been
included. Operating results for the three and six-month periods ended July 1,
2001, are not necessarily indicative of the results that may be expected for the
year ending December 30, 2001.

        The financial statements have been prepared on a going-concern basis.
The Report of Independent Auditors on the Company's financial statements for the
year ended December 31, 2000, included in the Company's Annual Report on Form
10-K contained an explanatory paragraph which indicated substantial doubt about
the Company's ability to continue as a going concern because of recent operating
losses, as well as significant debt which matured on June 30.

        As of July 1, 2001, the Company has $201.7 million in senior debt
outstanding which matured on June 30, 2001. Additionally the Company has $30.1
million (principal value) of notes payable to a related party which mature in
2002, $230.0 million (principal value) of convertible subordinated notes
outstanding which are due in January 2004, and $9.3 million of convertible
subordinated debt which matures in 2005.

        Under the terms of the senior bank debt loan restructure agreement and
the subordination provisions of the HMT debt, the Company did not pay the
interest on the HMT notes that became due on July 15, 2001. As a result, the
Company is now in interest payment default under the HMT notes. In addition, the
Company's failure to pay the bank debt when due caused a default under the HMT
notes as of July 30, 2001, and, as a result, the holders could accelerate the
outstanding principal on the notes. If the HMT debt is accelerated, the Company
would be further unable to meet its obligations as they become due.

        The Company needs to restructure its debt obligations, as well as raise
additional funds, to operate its business. If the Company cannot refinance its
debt and raise additional funds, it may be forced to reduce, or possibly
suspend, its operations, and/or sell additional securities on terms that would
be highly dilutive to the Company's current stockholders. The Company is
currently working on restructuring its debt. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
assets and liabilities that may result from the outcome of this uncertainty.


                                      -6-



<PAGE>   7

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

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

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

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

NOTE 2 - INVESTMENT IN DEBT SECURITIES

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

<TABLE>
<CAPTION>
                                                      (in thousands)

                                                     JUL 1       Dec 31
                                                      2001         2000
                                                   -------      -------
<S>                                                <C>          <C>
Municipal auction rate certificates                $    --      $28,500
Corporate debt securities                            6,722       17,153
Mortgage-backed securities                              --       13,991
Government-backed securities                         3,170        8,045
                                                   -------      -------
                                                   $ 9,892      $67,689
                                                   =======      =======

Amounts included in cash and cash equivalents      $ 7,532      $58,092
Amounts included in short-term investments           2,360        9,597
                                                   -------      -------
                                                   $ 9,892      $67,689
                                                   =======      =======

</TABLE>

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



                                      -7-


<PAGE>   8

NOTE 3 - GOODWILL AND OTHER NET INTANGIBLE ASSETS

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


<TABLE>
<CAPTION>
                                                             (in thousands)

                                                           JUL 1        Dec 31
                                                            2001          2000
                                                        --------      --------
<S>                                                     <C>           <C>
Goodwill associated with purchase of assets
      and volume purchase agreement from
      Western Digital, net                              $  7,666      $ 12,776

Goodwill associated with HMT merger, net                  88,455        95,532
Other intangibles associated with HMT merger, net:
      Current technology                                   3,464         3,996
      Patents                                              2,476         2,768
      Other                                                   --         1,059
                                                        --------      --------
                                                          94,395       103,355
                                                        --------      --------
Net goodwill and other intangible assets                $102,061      $116,131
                                                        ========      ========

</TABLE>

        The remaining goodwill and volume purchase agreement associated with the
purchase of assets from Western Digital as of July 1, 2001, will be amortized
using the straight-line method through December 31, 2001, and will be subject to
potential impairment charges thereafter. The goodwill and other intangibles
associated with the merger with HMT are being amortized using the straight-line
method. The remaining useful lives as of July 1, 2001, of current technology and
patents are three and one-fourth and four and one-fourth years, respectively.
The goodwill will continue to be amortized through December 31, 2001, and will
be subject to potential impairment charges thereafter.

NOTE 4 - INCOME TAXES

        The Company's income tax provisions, which represent foreign withholding
taxes on royalty and interest payments, were $0.3 million and $0.8 million for
the three- and six-month periods ended July 1, 2001, versus $0.5 and $0.8
million for the same periods ended July 2, 2000. The Company's wholly-owned
thin-film media operation, Komag USA (Malaysia) Sdn. (KMS) received a five-year
extension of its initial tax holiday through June, 2003, for its first plant
site. KMS has also been granted an additional eight-year and ten-year tax
holiday through December 2006 and 2008 for its second and third plant sites in
Malaysia, respectively, based on achieving certain investment criteria.

NOTE 5 - COMPREHENSIVE LOSS

        Comprehensive loss for the three- and six-month periods ended July 1,
2001, and July 2, 2000, in the accompanying Consolidated Statements of
Operations is the same as the Company's net loss.

        Accumulated other comprehensive income at December 31, 2000, in the
accompanying Consolidated Balance Sheets consists entirely of accumulated
foreign currency translation adjustments. These accumulated foreign currency
translation adjustments were realized as a gain in the three-month period ended
April 1, 2001, resulting in a zero balance in accumulated other comprehensive
income at July 1, 2001.



                                      -8-




<PAGE>   9

NOTE 6 - RESTRUCTURING CHARGES

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

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

<TABLE>
<CAPTION>
                              Liabilities Under
                               Non-Cancelable
                                  Equipment
(in millions)                      Leases                 Total
                              -----------------           -----
<S>                           <C>                         <C>
Balance at December 31, 2000        $6.3                  $6.3
Charged to Reserve                  (2.4)                 (2.4)
                                    ----                  ----
Balance at July 1, 2001             $3.9                  $3.9
                                    ====                  ====

</TABLE>

        At July 1, 2001, $3.9 million related to the 1999 restructuring
activities remained in current liabilities. In 2001, 2000, and 1999, the Company
made cash payments totaling $39.2 million. Cash payments of $3.9 million under
the equipment leases are due in monthly instalments through June 2002.

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

        In December 2000, the Company implemented a restructuring plan to cease
Komag Material Technology Inc.'s (KMT) U.S. manufacturing operations in May
2001. This restructuring action resulted in a charge of $8.0 million, and
included $2.6 million of severance pay associated with eliminating approximately
160 positions, primarily in manufacturing, $4.5 million associated with the
write-down of equipment and leasehold improvements, and $0.9 million associated
with related facility closing costs. Through the first six months of 2001,
charges to the reserve of $5.3 million had been made. The balance of the
severance pay and the facilities closing costs is expected to be paid by August
2001.




                                      -9-


<PAGE>   10


        The following table summarizes these 2000 restructuring activities:

2000 Restructuring Reserve

<TABLE>
<CAPTION>
                              Writedown Net Book
                              Value of Equipment     Facility
                                and Leasehold         Closure       Severance
(in millions)                    Improvements          Costs          Costs         Total
                              ------------------     --------       ---------      -------
<S>                           <C>                    <C>            <C>            <C>
Balance at December 31, 2000        $4.5               $0.9            $2.6         $8.0
Charged to Reserve                  (4.5)                --            (0.8)        (5.3)
                                    ----               ----            ----         ----
Balance at July 1, 2001             $ --               $0.9            $1.8         $2.7
                                    ====               ====            ====         ====
</TABLE>

NOTE 7 - IMPAIRMENT CHARGES

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

NOTE 8 - LOSS PER SHARE

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

        Incremental common shares attributable to the exercise of outstanding
options (assuming proceeds would be used to purchase treasury stock) of 202,473
and 189,100 for the three months ended July 1, 2001 and July 2, 2000,
respectively, and 199,832 and 281,205 for the six months ended July 1, 2001 and
July 2, 2000, respectively, were not included in the net loss per share
computation because the effect would be antidilutive.

        Incremental common shares attributable to the exercise of outstanding
warrants (assuming proceeds would be used to purchase treasury stock) of zero
and 144,417 for the three months ended July 1, 2001 and July 2, 2000, and of
zero and 108,637 for the six months ended July 1, 2001 and July 2, 2000,
respectively, were not included in the net loss per share computation because
the effect would be antidilutive.

        Incremental common shares attributable to convertible debt of 12,474,181
and 1,290,081 for the three months ended July 1, 2001, and July 2, 2000,
respectively, and of 12,474,181 and 645,041 for the six months ended July 1,
2001, and July 2, 2000, respectively, were not included in the net loss per
share computation because the effect would be antidilutive.



                                      -10-



<PAGE>   11

NOTE 9 - USE OF ESTIMATES

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

NOTE 10 - LIABILITIES ASSOCIATED WITH PURCHASE OF ASSETS

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

        During 1999, 2000 and the first six months of 2001, liabilities arising
from this transaction were reduced by $31.9 million, including equipment lease
obligations ($22.9 million), rent ($1.9 million) and other liabilities ($7.1
million). The $3.6 million balance for equipment lease obligations is due in
monthly instalments through mid-2002. The $1.3 million balance for other costs
is expected to be paid by June 2002.

NOTE 11 - LIABILITIES ASSOCIATED WITH MERGER

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

        Under purchase accounting rules, the Company recorded liabilities that
include $12.2 million for estimated severance pay associated with the
termination of approximately 980 employees and $5.7 million for estimated
facility closure costs for the closure of certain former HMT U.S. manufacturing
operations. Payments against these liabilities are expected to be paid by the
fourth quarter of 2001. In 2000 and the first six months of 2001, $12.7 million
of payments were made against these liabilities.

NOTE 12 - TERM DEBT, CONVERTIBLE SUBORDINATED DEBT, AND NOTE PAYABLE TO RELATED
PARTY

        In June 2000, the Company entered into a senior unsecured loan
restructure agreement with its senior lenders and a separate subordinated
unsecured convertible debt agreement with other creditors. Under the loan
restructure agreement, the bank debt became due and payable on June 30, 2001. To
date, the outstanding $201.7 million principal balance of the restructured bank
debt and interest from June 1, 2001, have not been repaid. The Company continues
to negotiate with the holders of the senior bank debt to restructure the senior
bank debt. Under the terms of the senior bank debt loan restructure agreement
and the subordination provisions of the HMT debt (which is described below), the
Company did not pay the interest on the HMT notes that became due on July 15,




                                      -11-


<PAGE>   12

2001. As a result, the Company is now in interest payment default under
the HMT notes. In addition, the Company's failure to pay the bank debt when due
caused a default under the HMT notes as of July 30, 2001, and, as a result, the
holders could accelerate the outstanding principal on the notes. If the HMT debt
is accelerated, the Company would be further unable to meet its obligations as
they become due.

        On October 2, 2000, in connection with the HMT merger, the Company
assumed $230.0 million in subordinated convertible notes. The HMT notes bear
interest at 5 3/4% payable semiannually on January 15 and July 15, are
convertible into shares of common stock of the Company at a conversion price of
$26.12, and mature in January 2004. The Company may redeem the HMT notes
initially at 103.286%, and at decreasing prices thereafter to 100% at maturity.
Under accounting rules for business combinations accounted for under the
purchase method, the HMT notes were valued at their fair market value of $92.0
million at October 2, 2000, and will be accreted back up to the face value of
$230.0 million through January 2004. At July 1, 2001, the carrying value of the
HMT notes was $124.4 million. As discussed above, the Company has not paid the
interest on the HMT notes that was due on July 15, 2001.

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

        In April 1999, in connection with the purchase of the assets of Western
Digital's media operation, the Company issued a note to Western Digital in the
principal amount of $30.1 million. Principal and interest accrued on the note
are due in April 2002, and the note is subordinated to the Company's senior bank
debt. The Company discounted the principal amount of the note payable to $21.2
million based on the Company's estimated incremental borrowing rate of 18% for
this class of financial instrument at the time of the asset acquisition. As of
July 1, 2001, the note has been accreted up to $27.3 million.

NOTE 13 - EQUITY IN UNCONSOLIDATED COMPANY

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

        The Company recorded an investment in Chahaya for $12.0 million in the
fourth quarter of 2000. The investment included $4.0 million for future cash
payments and $8.0 million for facilities, facility services, and equipment. In
June 2001, the Company's investment was reduced by $4.0 million due to
cancellation of the shares



                                      -12-

<PAGE>   13

related to the future $4 million cash contribution. This reduced the Company's
ownership percentage to 36%. As of July 1, 2001, the Company owed Chahaya $9.3
million, including $7.7 million related to the original investment for
facilities and facilities services.

        In the second quarter and first half of 2001, the Company recorded
losses of $0.9 million and $1.7 million as its 45% equity share of Chahaya's net
loss for the quarter. The Company uses the equity method to account for its
investment in Chahaya.

NOTE 14 - LEGAL PROCEEDING

        Asahi Glass Company, Ltd. (Asahi) has asserted that a technology
cooperation agreement between the Company and Asahi gives Asahi exclusive
rights, even as to Komag, to certain glass substrate-related intellectual
property developed by the Company. The Company has sent Asahi a notice of
termination of the agreement and believes that Asahi has no rights to the glass
substrate technology developed by the Company. The Company believes that it has
full control of its glass-related intellectual property, and is proceeding to
commercialize the technology with the support of other glass makers.

        The Company is currently engaged in discussions with Asahi to resolve
the dispute. The Company believes that the resolution of the dispute, whether
favorable or unfavorable, would not have a significant financial impact on the
Company's financial results.

NOTE 15 - NEW ACCOUNTING PRONOUNCEMENTS

        On June 29, 2001, the Financial Accounting Standards Board, or FASB,
approved the final standards resulting from its deliberations on the business
combinations project. The FASB issued two statements in July 2001, Statement of
Financial Accounting Standards No. 141, or FAS 141, on Business Combinations and
FAS 142 on Goodwill and Other Intangible Assets. FAS 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. FAS
142 is effective for fiscal years beginning after December 15, 2001, and will
require that goodwill not be amortized, but rather be subject to an impairment
test at least annually. Separately identified and recognized intangible assets
resulting from business combinations completed before July 1, 2001 that do not
meet the new criteria for separate recognition of intangible assets will be
subsumed into goodwill upon adoption. In addition, the useful lives of
recognized intangible assets acquired in transactions completed before July 1,
2001 will be reassessed and the remaining amortization periods adjusted
accordingly.

        The adoption of FAS 141 and 142 is not expected to have a significant
impact on our financial position at transition. We expect that the elimination
of goodwill amortization would have a positive impact on reported net income in
2002 of approximately $23.5 million.

NOTE 16 - PENDING NASDAQ DELISTING

        On April 25, 2001, we received a letter from the Office of Nasdaq
Qualifications indicating that if we did not comply with the minimum bid price
rule by July 24, 2001, Nasdaq intended to delist our stock. In order to gain
compliance, our common stock was required to trade at or above $1.00 for a
minimum of 10 consecutive trading



                                      -13-


<PAGE>   14

days. We have failed to comply with this test. On July 25, 2001 we received an
additional letter from Nasdaq indicating that our stock would be delisted as of
August 2, 2001, unless we requested a hearing to consider the merits of
continuing the listing our stock. We have requested a hearing to appeal Nasdaq's
delisting determination, and our stock will continue to be listed pending the
outcome of the hearing.
































                                      -14-







<PAGE>   15


                               KOMAG, INCORPORATED

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


RESULTS OF OPERATIONS

        The following discussion contains predictions, estimates, and other
forward-looking statements that involve a number of risks and uncertainties
about our business. These statements may be identified by the use of words such
as "expects," "anticipates," "intends," "plans," and similar expressions.
Komag's business is subject to a number of risks and uncertainties. While this
discussion represents our current judgment on the future direction of our
business, such risks and uncertainties could cause actual results to differ
materially from any future performance suggested herein.

OVERVIEW

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

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

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

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


                                       15



<PAGE>   16

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

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

Net Sales

        Net sales decreased to $77.4 million in the second quarter of 2001, down
7.3% compared to $83.5 million in the second quarter of 2000. The year-over-year
decrease was primarily due to the net effect of an 6.8% decrease in unit sales
volume (from 11.8 million disks in the second quarter of 2000 to 11.0 million
disks in the second quarter of 2001), and a 2.9% decrease in the finished disk
average selling price (from $6.55 in the second quarter of 2000 to $6.36 in the
second quarter of 2001),.

        Net sales in the first half of 2001 increased by $2.1 million to $165.2
million, a 1.3% increase from $163.1 million in the first half of 2000. Unit
sales volume increased by 4.8%, to 23.7 million units from 22.6 million units.
However, the sales volume increase was partially offset by a 5.6% decline in the
finished disk average selling price, to $6.35 from $6.73.

        Net sales of substrate and single-sided disks were $7.2 million in the
second quarter of 2001, and $6.1 million in the second quarter of 2000. Net
sales of substrate and single-sided disks in the first half of 2001 were $15.2
million and $11.1 million in the first half of 2000.

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

        During the second quarter of 2001, 46% of our consolidated net sales
were to Western Digital, 32% were to Maxtor Corporation, and 10% were to Seagate
Technology. Net sales to each of our other customers were less than 10% during
the second quarter of 2001. We expect that we will continue to derive more than
90% of our sales from Western Digital, Maxtor, and Seagate. The distribution of
sales among customers may vary from quarter to quarter based on the relative
success of customer programs for which we are qualified and shipping. However,
as a result of the April 1999, acquisition of Western Digital's media operation
and related volume purchase agreement, we expect our sales to remain highly
dependent on Western Digital's performance in the disk drive industry.

Gross Margin

        Our overall gross loss percentage of 2.5% in the second quarter of 2001
declined from a gross margin



                                      -16-


<PAGE>   17

percentage of 11.9% in the second quarter of 2000, an overall decline of 14.4
percentage points. The reduction in the finished disk average selling price
accounted for 2.6 percentage points of the decline. Higher per-unit costs
resulting from lower production volume (10.1 million units in the second quarter
of 2001 versus 11.9 million units in the second quarter of 2000) and higher
fixed costs associated with U.S. production facilities prior to their closure
accounted for the remaining 11.8 percentage points of the decline. The decrease
in unit production corresponds with the decreased sales volume compared to the
same quarter in the prior year.

        For the first half of 2001, we sustained a gross loss percentage of
4.5%, compared to a gross margin percentage of 14.0% for the first six months of
2000. The overall 18.5 point decrease was the result of a lower finished disk
average selling price (5.1 percentage points) and higher fixed costs associated
with U.S. production facilities prior to their closure (13.4 points).

Operating Expenses

        Research, development, and engineering (R&D) expenses increased to $9.8
million in the second quarter of 2001 from $8.3 million in the second quarter of
2000, and increased to $20.5 million in the first half of 2001 from $16.9
million in the first half of 2000. The increases were the result of increased
U.S. R&D headcount subsequent to the HMT merger. The combined R&D team has
increased its focus on advanced technologies and new production processes for
the multiple manufacturing equipment types of the combined company.

        Selling, general and administrative (SG&A) expenses increased to $6.4
million in the second quarter of 2001, from $3.8 million in the second quarter
of 2000, and increased to $12.1 million in the first half of 2001 from $7.4
million in the first half of 2000. The increases were primarily due to higher
payroll and related expenses due to increased U.S. headcount from the HMT
merger, as well as higher discretionary bonus expenses and higher professional
fees associated with the withdrawn financial restructuring plan.

        Amortization of intangible assets increased to $6.5 million in the
second quarter of 2001 from $2.6 million in the second quarter of 2000, and
increased to $14.1 million in the first half of 2001 from $5.1 million in the
first half of 2000. The increases reflect amortization of goodwill associated
with the HMT merger.

Restructuring Charges

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




                                      -17-


<PAGE>   18
        The following table summarizes these 1999 restructuring activities
during the first six months of 2001:

<TABLE>
<CAPTION>
                                Liabilities Under
                                 Non-Cancelable
                                   Equipment
(in millions)                        Leases                Total
                                -----------------          -----
<S>                             <C>                         <C>
Balance at December 31, 2000         $ 6.3                 $ 6.3
Charged to Reserve                    (2.4)                 (2.4)
                                     -----                 -----
Balance at July 1, 2001              $ 3.9                 $ 3.9
                                     =====                 =====
</TABLE>

        At July 1, 2001, $3.9 million related to the 1999 restructuring
activities remained in current liabilities. In 2001, 2000, and 1999, the Company
made cash payments totaling $39.2 million. Cash payments of $3.9 million under
the equipment leases are due in monthly installments through June 2002.

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

        In December 2000, the Company implemented a restructuring plan to cease
Komag Material Technology Inc.'s (KMT) U.S. manufacturing operations in May
2001. This restructuring action resulted in a charge of $8.0 million, and
included $2.6 million of severance pay associated with eliminating approximately
160 positions, primarily in manufacturing, $4.5 million associated with the
write-down of equipment and leasehold improvements, and $0.9 million associated
with related facility closing costs. Through the first six months of 2001,
charges to the reserve of $5.3 million had been made. The balance of the
severance pay and the facilities closing costs is expected to be paid by August
2001.

        The following table summarizes these 2000 restructuring activities:

2000 Restructuring Reserve

<TABLE>
<CAPTION>
                              Writedown Net Book
                              Value of Equipment     Facility
                                and Leasehold         Closure       Severance
(in millions)                    Improvements          Costs          Costs         Total
                              ------------------     --------       ---------      -------
<S>                           <C>                    <C>            <C>            <C>
Balance at December 31, 2000       $ 4.5               $0.9           $ 2.6         $ 8.0
Charged to Reserve                  (4.5)                --            (0.8)         (5.3)
                                   -----               ----           -----         -----
Balance at July 1, 2001            $  --               $0.9           $ 1.8         $ 2.7
                                   =====               ====           =====         =====
</TABLE>





                                      -18-



<PAGE>   19

Impairment Charges

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

Interest and Other Income/Expense

        Interest income decreased by $0.8 million and $0.9 million in the three
and six-month periods ended July 1, 2001, versus the same periods ended July 2,
2000 due to lower average cash and short-term investment balances.

        Interest expense increased by $14.1 million and $29.8 million in the
three and six-month periods ended July 1, 2001, versus the same periods ended
July 2, 2000. The increases primarily reflect accretion on the value of the HMT
convertible debt, interest on the HMT convertible debt, and amortization of loan
fees and warrant expense associated with the completion of the loan restructure
agreement with our senior lenders in the second quarter of 2000.

        Other income increased by $0.4 million and $1.1 in the three and
six-month periods ended July 1, 2001, versus the same periods ended July 2,
2000. The increase in the six-month period ended July 1, 2001, versus July 2,
2000, included $0.6 million in realized gain on cumulative translation
adjustments.

Income Taxes

        Our income tax provisions, which represent foreign withholding taxes on
royalty and interest payments, were $0.3 million and $0.8 million for the three-
and six-month periods ended July 1, 2001, versus $0.5 and $0.8 million for the
same periods ended July 2, 2000. Our wholly-owned thin-film media operation,
Komag USA (Malaysia) Sdn. (KMS) received a five-year extension of its initial
tax holiday through June, 2003, for its first plant site. KMS has also been
granted an additional eight-year and ten-year tax holiday through December 2006
and 2008 for its second and third plant sites in Malaysia, respectively, based
on achieving certain investment criteria.

Minority Interest in KMT

        The minority interest in the net income (loss) of consolidated
subsidiary represented Kobe Steel USA Holdings Inc.'s (Kobe USA) 20% share of
KMT's net income (loss). KMT recorded net losses of $2.2 million for the three-
and six-month periods ended July 1, 2001, compared to net losses of $1.6 million
and $2.3 million for the same periods ended July 2, 2000.

Equity in Unconsolidated Company

        In November 2000, we formed Chahaya Optronics, Inc. (Chahaya) with two
venture capital firms. We contributed key personnel, design and tooling,
manufacturing systems, equipment, facilities, and support services in



                                      -19-


<PAGE>   20

exchange for a 45% interest in Chahaya. Chahaya currently occupies facilities
located in Fremont, California, and was formed to provide manufacturing
services, primarily in the field of optical components and subsystems.

        We recorded an investment in Chahaya for $12.0 million in the fourth
quarter of 2000. The investment included $4.0 million for future cash payments
and $8.0 million for facilities, facility services, and equipment. In June 2001,
our investment was reduced by $4.0 million due to cancellation of the shares
related to the future $4 million cash contribution. This reduced our ownership
percentage to 36%. As of July 1, 2001, we owed Chahaya $9.3 million, including
$7.7 million related to the original investment for facilities and facilities
services.

        In the second quarter and first half of 2001, we recorded losses of $0.9
million and $1.7 million as our 45% equity share of Chahaya's net loss for the
quarter. We use the equity method to account for our investment in Chahaya.

LIQUIDITY AND CAPITAL RESOURCES

        Cash and short-term investments of $28.0 million at the end of the
second quarter of 2001 decreased by $52.7 million from the end of the previous
fiscal year. Working capital declined by $42.5 million compared to the end of
the previous fiscal year.

        Consolidated operating activities used $13.9 million in cash during the
first six months of 2001. The primary components of this change include the
following:

        -  The year-to-date 2001 net loss of $140.0 million, net of non-cash
           depreciation and amortization of $50.5 million, impairment charges of
           $43.0 million, and other non-cash charges of $27.5 million, used
           $19.0 million in cash.

        -  Lower accounts receivable, reflecting the sales declines over the
           last two quarters, generated $16.7 million in cash.

        -  Lower inventories, reflecting the sales declines over the last two
           quarters as well as anticipated flat shipments throughout the
           remainder of 2001, generated $5.1 million in cash.

        -  Lower liabilities connected with exiting certain business activities,
           which primarily reflected payments for severance and building exit
           costs, used $11.5 million in cash.

        -  Decreases in other assets generated $0.3 million in cash.

        -  Decreases in other liabilities, primarily reflecting continuing
           payments on equipment leases, used $5.5 million in cash.

        We spent $24.4 million on fixed assets during the first half of 2001.
Net short-term investment activity provided $7.2 million in cash, while other
net investing activities provided $0.4 million in cash. Repayment of debt used
$15.0 million in cash, while sales of common stock generated $0.2 million.

        Current noncancellable capital commitments as of July 1, 2001, totaled
$3.4 million. Year-to-date capital expenditures were $24.4 million, and
primarily included costs for facilities and installation costs for certain
production equipment transferred from the closed U.S. HMT manufacturing plants
to Malaysia. For the remainder of 2001, we plan to spend less than $10 million
on property, plant, and equipment.


                                      -20-


<PAGE>   21

        In March 2000, we entered into an agreement with an institutional
investor to sell up to $20.0 million of common stock. The shares of common stock
may be sold pursuant to a private equity line of credit, under which we may
exercise "put options" to sell shares for a price equal to 90%, 92%, or 94% of
market, depending on the level of the actual market price at the time of
exercise of the "put option." The shares may be sold periodically in maximum
increments of $1.5 million to $3.5 million over a period of up to thirty months.
On signing the agreement, we issued warrants to the investor to acquire 80,000
shares of common stock at an exercise price of $4.6875 a share. The warrants are
exercisable during a three-year period beginning in September, 2000. We valued
the warrants using the Black-Scholes model and determined the value to be
immaterial.

        In June 2000, we replaced our credit facilities with a senior unsecured
loan restructure agreement with our lenders, and a separate subordinated
unsecured convertible debt agreement with other creditors. As a result, as of
July 1, 2001, we have $201.7 million in senior unsecured bank debt outstanding
that matured on June 30, 2001, and $9.3 million of convertible debt that matures
in 2005. In addition, we have a note payable to Western Digital with a principal
balance of $30.1 million which is due in April, 2002, unless Western Digital
realizes a return on its Komag equity holdings in excess of a targeted amount by
April, 2002. In the event the excess is realized, then the excess amount will
reduce the balance due under the note. Upon completion of the HMT merger in the
fourth quarter of 2000, our debt increased with HMT's convertible debt due in
January 2004. The principal amount of these notes is $230.0 million.

        Our independent auditors have included a going-concern explanatory
paragraph in our Form 10-K for our fiscal year ended December 31, 2000. This
emphasis paragraph represents our auditors' conclusion that there is substantial
doubt as to our ability to continue as a going-concern for a reasonable time. If
we are unable to restructure our debt and raise additional funds, our auditors
will not remove the explanatory paragraph from their opinion, and our operating
results and financial conditions would be detrimentally effected.

        As previously discussed in NOTE 12, the outstanding $201.7 million
principal balance of the restructured bank debt and interest from June 1, 2001,
have not been repaid. We do not currently have the financial resources to repay
this debt; therefore, we need to restructure our debt obligations within the
next few months and raise additional funds (see the first risk factor under the
"RISKS RELATED TO THE DEBT RESTRUCTURE AND OUR COMMON STOCK" section below). We
are currently engaged in negotiations with our senior lenders, and are actively
considering other financing options.

        Under the terms of the loan restructure agreement for the senior bank
debt and the subordination provisions of the HMT notes (as discussed in NOTE
12), we did not pay the interest on the HMT notes that became due on July 15,
2001. We are now in interest payment default under the HMT notes. In addition,
the company's failure to pay the bank debt when due caused a default under the
HMT notes as of July 30, 2001, and, as a result, the holders could accelerate
the outstanding principal on the notes. If the HMT debt is accelerated, we would
be further unable to meet our obligations as they become due.

        We believe that in order to achieve our long-term growth objectives and
maintain and enhance our competitive position, such additional financial
resources will be required. We may not be able to secure such financial
resources on commercially reasonable terms. If we are unable to obtain adequate
financing, we will be required to significantly reduce and/or possibly suspend
our operations, and/or sell additional securities on terms that would be highly
dilutive to current stockholders.



                                      -21-


<PAGE>   22

        The Company continues to negotiate with the holders of the senior bank
debt to restructure the senior bank debt.

OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

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

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

RISKS RELATED TO THE DEBT RESTRUCTURE AND OUR COMMON STOCK

IF WE DO NOT REFINANCE OUR EXISTING DEBT, WE MAY NOT BE ABLE TO SUCCESSFULLY
IMPLEMENT THE FINANCIAL STRATEGY NECESSARY TO RETURN US TO PROFITABLE
OPERATIONS.

        As of July 1, 2001, the outstanding principal amount of our debt
consisted of the following:

        -  $201.7 million of unsecured senior bank debt that matured on June 30,
           2001, which has not been repaid;

        -  an unsecured $30.1 million promissory note due April 8, 2002, issued
           to Western Digital, and referred to as our "senior subordinated
           note;"

        -  $9.3 million in convertible subordinated debt maturing in February,
           2005; and

        -  $230.0 million principal amount of convertible subordinated notes
           that we assumed following our merger with HMT, which matures on
           January 15, 2004, and referred to as the "convertible junior notes."

        We may not be able to successfully refinance our existing debt. Our
ability to refinance our debt will depend substantially on our ability to reach
an agreement with our debtholders to restructure our outstanding debt.

        On June 29, 2001, we withdrew our Form S-4/S-3 Registration Statement
that was filed with the SEC on April 5 and 6, 2001 because we were not able to
implement the refinancing contemplated in the Form S-4/S-3.

        The $201.7 million principal amount of our senior bank debt became due
on June 30, 2001, and we do not have sufficient funds to repay it. As a result,
under the terms of the loan restructure agreement for the senior bank debt and
the subordination provisions of the indenture for the convertible junior notes,
we did not pay interest on the convertible junior notes when it became due on
July 15, 2001. In addition, our failure to pay our senior bank debt when due
caused a default under the convertible junior notes as of July 30, 2001, and, as
a result, the holders can accelerate the outstanding principal on the
convertible junior notes. If the convertible junior notes are accelerated, we
would be further unable to meet our obligations as they become due. Our current
strategy for a return to profitability requires the timely refinancing of our
debt, and, accordingly, if we are unsuccessful in promptly



                                      -22-

<PAGE>   23

refinancing our senior bank debt and do not remedy the other events of default
that have occurred because of our failure to make the June 30, 2001 payment for
the matured senior bank debt and the July 15, 2001 interest payment on the
convertible junior notes, our return to profitability will be delayed or
unachievable. Furthermore, if any of our creditors exercise their rights arising
because of the events of default, we may be unable to proceed with any
refinancing arrangements and our operations as a going concern will be
substantially hindered.

IF OUR FINANCIAL CONDITION DOES NOT PROMPTLY IMPROVE SUBSTANTIALLY, WE MAY HAVE
TO SEEK RELIEF UNDER CHAPTER 11 OF THE BANKRUPTCY CODE OR MAY BE FORCED INTO
BANKRUPTCY PROCEEDINGS.

        If our financial condition continues to deteriorate and we are unable to
promptly restructure our indebtedness, reduce our losses, and obtain additional
financing, we may be forced to seek relief under Chapter 11 of the Bankruptcy
Code, or may be forced into bankruptcy. Chapter 11 would permit us to remain in
control of our business, protected by a stay of all creditor action, while we
attempt to negotiate and confirm a plan of reorganization with our creditors. If
we commenced a case under Chapter 11, we may experience deterioration in our
customer relationships, a reduction in orders, the loss of suppliers, and an
erosion of employee morale. We may be unsuccessful in our attempts to confirm a
plan of reorganization with our creditors. Many Chapter 11 cases are
unsuccessful, and virtually all involve substantial expense and damage to the
business. If we sought relief under Chapter 11 and were unsuccessful in
obtaining confirmation of a plan of reorganization, our assets would be
liquidated. In addition, the fact that our assets are located in Malaysia may
make it more difficult to distribute our assets on liquidation. In a bankruptcy
case, all other creditors would be paid prior to our shareholders.

BECAUSE OF CONCERN THAT WE MAY HAVE TO SEEK RELIEF UNDER CHAPTER 11 OF THE
BANKRUPTCY CODE OR MAY BE FORCED INTO BANKRUPTCY PROCEEDINGS IN THE NEAR FUTURE,
OUR FINANCIAL CONDITION HAS SUFFERED.

        Due to our deteriorating financial condition and our inability to date
to restructure our existing debt, we believe our stakeholders are concerned that
we may become the subject of reorganization or bankruptcy proceedings. Some of
our customers, suppliers and employees have expressed this apprehension, which
may have an adverse effect on our ability to continue to run our operations at
the level at which they currently operate.

BECAUSE WE HAVE A LARGE AMOUNT OF DEBT, OUR FUTURE OPERATING PERFORMANCE MUST
GENERATE CASH FLOWS SUFFICIENT TO MEET OUR DEBT PAYMENT OBLIGATIONS AND, EVEN IF
WE COMPLETE A DEBT RESTRUCTURING, OUR LARGE AMOUNT OF DEBT COULD NEGATIVELY
IMPACT OUR SHAREHOLDERS.

        We incurred a $140.0 million loss in the first half of fiscal year 2001.
We incurred net losses of $68.1 million in fiscal 2000 and $283.0 million in
fiscal 1999. These losses could continue. As of August 7, 2001, we have
outstanding debt in the principal amount of $471.1 million. Of this debt, $201.7
million matured on June 30, 2001. If we do not make the July 15, 2001 interest
payment on the $230.0 million of convertible notes by August 15, 2001, the
holders of the convertible notes will have the right to accelerate the maturity
of those notes.

        Even if we are able to complete a restructuring of our existing debt,
our ability to make scheduled debt payments, even at reduced levels, will depend
on our future operating performance and cash flow. Our operating performance and
cash flow, in part, are subject to economic factors beyond our control,
including prevailing interest rates. We may not be able to generate enough cash
flow to meet our obligations and commitments even if we successfully refinance
our existing debt. As a result, we may need to further refinance our debt,
dispose of assets, or



                                      -23-


<PAGE>   24

issue equity to obtain the necessary funds. We do not know whether we will be
able to refinance our debt, issue equity, or dispose of assets to raise funds on
a timely basis or on terms satisfactory to us. If our financial condition
continues to deteriorate, if we are unable to reduce our losses or obtain
additional financing, or if we are unable to further refinance our debt, raise
funds through asset sales, sales of equity or otherwise, we will continue to be
unable to pay principal and interest on our outstanding debt when due.

        Our large amount of debt negatively impacts our shareholders in many
        ways, including:

        -  increasing the likelihood that we may be forced to seek relief under
           Chapter 11 or that we may be forced into bankruptcy proceedings;

        -  reducing funds available to support our business operations and for
           other corporate purposes because portions of our cash flow from
           operations must be dedicated to the payment of principal and interest
           on our debt;

        -  impairing our ability to obtain additional financing for working
           capital, capital expenditures, acquisitions or general corporate
           purposes;

        -  increasing vulnerability to increases in interest rates;

        -  placing us at a competitive disadvantage because we may be
           substantially more leveraged than certain of our competitors;

        -  hindering our ability to adjust rapidly to changing market
           conditions; and making us more vulnerable to a downturn in general
           economic conditions or in our business.

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

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

        -  our failure to date to restructure our existing debt;

        -  concern by our stakeholders that we may be forced to seek relief
           under Chapter 11 or may be forced into bankruptcy proceedings;

        -  variations in our operating results;

        -  variations in macroeconomic conditions;

        -  changes in demand for computers and data storage;

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

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

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

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

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

        -  developments related to patents or other intellectual property
           rights.

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


                                      -24-


<PAGE>   25

particularly high. From the second quarter of 1997 through July 31, 2001, the
price of our stock fell to a low of $0.12 from a high of $35.13.

        The market price of our common stock may decline further if we continue
to be unable to restructure our existing debt or to pay when due principal and
interest under our debt.

        The recovery of our stock price depends on our ability to restructure
our debt, a correction in the industry supply and demand imbalance, and our
ability to achieve industry-mandated technology, costs, and yields.

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

        The trading of our common stock on the Nasdaq National Market System
depends on our meeting certain asset, revenue, and stock price tests. Currently,
we are not in compliance with Nasdaq's minimum bid requirement because our stock
has traded below $1.00 per share for more than 30 consecutive trading days. On
April 25, 2001, we received a letter from the Office of Nasdaq Qualifications
indicating that if we did not comply with the minimum bid price rule by July 24,
2001, Nasdaq intended to delist our stock. In order to gain compliance, our
common stock was required to trade at or above $1.00 for a minimum of 10
consecutive trading days. We have failed to comply with this test. On July 25,
2001 we received an additional letter from Nasdaq indicating that our stock
would be delisted as of August 2, 2001, unless we requested a hearing to
consider the merits of continuing the listing of our stock. We have requested a
hearing to appeal Nasdaq's delisting determination, and our stock will continue
to be listed pending the outcome of the hearing. If we do not prevail at this
hearing, our common stock will be delisted from trading on the Nasdaq System,
and the trading market and price for our common stock and the exchange notes
will be materially adversely affected. In addition, low-priced stocks are
subject to additional risks, including additional state regulatory requirements
and the potential loss of effective trading markets.

RISKS RELATED TO OUR BUSINESS

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

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

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

        -  suppliers could reduce their willingness to extend credit;

        -  employee attrition could increase; and/or

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



                                      -25-



<PAGE>   26

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

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

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

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

        -  equipment write-offs;

        -  restructuring charges;

        -  reduced average selling prices;

        -  increased unit costs; and

        -  employee layoffs.

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

        Our future success depends on the continued service of our executive
officers, our highly-skilled research, development, and engineering team, our
manufacturing team, and our key administrative, sales, and marketing and support
personnel. Competition for skilled personnel is intense. In particular, our
financial performance has increased the difficulty of attracting and retaining
skilled scientists and other knowledge workers. In our Silicon Valley
headquarters location, there are many employment opportunities for high-caliber
employees. Recently, we have experienced higher rates of turnover in the last
year than at other times in our history, and we may not be able to attract,
assimilate, or retain highly-qualified personnel to maintain the capabilities
that are necessary to compete effectively. If we are unable to retain existing
or hire key personnel, our business, financial condition, and operating results
could be harmed.

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

        The merger has been treated as a purchase for accounting purposes. This
creates expenses in our future statement of operations that we would not have
otherwise incurred, which could have a material adverse effect on the market
price of our common stock. We incurred direct transaction costs of $9.0 million
in connection with the merger. Under current purchase accounting rules, we have
recorded intangible assets totaling $109.6 million related to patents, existing
technology, assembled workforce, and goodwill in connection with the merger.
These amounts will continue to be amortized through December 31, 2001, and will
be subject to potential impairment charges thereafter.



                                      -26-

<PAGE>   27

        We also expect that interest accretion on the convertible junior notes
of $42.5 million per year will reduce our future earnings through January 2004.
If the benefits of the merger do not exceed the costs associated with the
merger, including the dilution to our stockholders resulting from the issuance
of 42.8 million shares in connection with the merger, our financial results,
including earnings per share, would be adversely affected.

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

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

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

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

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

        During the second quarter of 2001, 46% of our sales were to Western
Digital, 32% were to Maxtor Corporation, and 10% were to Seagate Technology. In
fiscal 2000, 50% of our sales were to Western Digital, 28% were to Maxtor
Corporation, and 17% were to Seagate Technology. If our customers reduce their
media requirements or develop capacity to produce thin-film disks for internal
use, our sales will be reduced. For example, as part of our purchase of Western
Digital's media operations in April 1999, we entered into a volume purchase
agreement with Western Digital whereby Western Digital is obligated, over the
three years following the acquisition date, to purchase a significant majority
of its media requirements from us. As a result, our sales are significantly
connected to Western Digital's performance. In addition, our customers are
headquartered in the U.S. Should U.S.-based drive companies lose market share to
foreign competitors, it could have a negative impact on our sales. As a result,
our business, financial condition and operating results could suffer.

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

        The disk media business is capital-intensive, and we believe that in
order to remain competitive, we will likely require additional financing
resources over the next several years for capital expenditures, working capital
and research and development. In connection with our purchase of Western
Digital's media operations in April 1999, we also acquired building and
equipment leases with remaining lease commitments. As of July 1, 2001, we have
continuing payment obligations totaling $7.4 million for the leased equipment
through the second quarter of 2002. We have not made the payments due in July
under these obligations. Because the leased assets are substantially unused, we
suffer a continued cash drain without deriving a benefit from this equipment. If
we cannot raise additional funds, we may be forced to reduce or suspend
operations.



                                      -27-



<PAGE>   28

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

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

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

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

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

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

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




                                      -28-


<PAGE>   29
BECAUSE WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS, IF OUR SUPPLIERS EXPERIENCE
CAPACITY CONSTRAINTS OR PRODUCTION FAILURES, OUR PRODUCTION AND OPERATING
RESULTS COULD BE HARMED.

        We rely on a limited number of suppliers for some of the materials and
equipment used in our manufacturing processes, including aluminum substrates,
nickel plating solutions, polishing and texturing supplies, and sputtering
target materials. For instance, Kobe is our sole supplier of aluminum blanks.
Further, the supplier base has been weakened by the poor financial condition of
the industry, and some suppliers have either exited the business or failed.
Additionally, several suppliers have expressed concern about continuing to
supply us because of our financial condition. Our production capacity would be
limited if one or more of these materials were to become unavailable or
available in reduced quantities, or if we were unable to find alternative
suppliers. If our source of materials and supplies were unavailable for a
significant period of time, our production and operating results could be
adversely affected.

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

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

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

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

        Our industry experiences rapid technological change, and our inability
to timely anticipate and develop products and production technologies could harm
our competitive position. In general, the life cycles of recent disk drive
programs have been shortening. Additionally, media must be more customized to
each disk drive program. Short program life cycles and customization have
increased the risk of product obsolescence. Supply chain management, including
just-in-time delivery, has become a standard industry practice. In order to
sustain customer relationships and achieve profitability, we must be able to
develop in a timely fashion new products and technologies that can help
customers reduce their time-to-market performance, and continue to maintain
operational excellence that supports high-volume manufacturing ramps and tight
inventory management throughout the supply



                                      -29-

<PAGE>   30
chain. If we cannot respond to this rapidly changing environment or fail to meet
our customers' demanding product and qualification requirements, we would not be
able to compete effectively. As a result, we would not be able to maximize the
use of our production facilities and minimize our inventory losses.

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

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

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

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

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

        Protection of technology through patents and other forms of intellectual
property rights in technically sophisticated fields is commonplace. In the disk
drive industry, it is common for companies and individuals to initiate actions
against others in the industry to enforce intellectual property rights. Although
we attempt to protect our intellectual property rights through patents,
copyrights, trade secrets, and other measures, we may not be able to protect our
technology adequately. Competitors may be able to develop similar technology and
also may have or may develop intellectual property rights and enforce those
rights to prevent us from using such technologies, or



                                      -30-




<PAGE>   31

demand royalty payments from us in return for using such technologies. Either of
these actions may affect our production, which would materially reduce our
revenues and harm our results of operations.

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

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

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

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

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

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

        -  availability of media versus demand;

        -  the cyclical nature of the hard disk drive industry;

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

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

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

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

        -  changes in our product mix and average selling prices;

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

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

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

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

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

        We cannot forecast with certainty the impact of these and other factors
on our revenues and operating



                                      -31-


<PAGE>   32

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.

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

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

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

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

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

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

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

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

        -  fluctuations in tariffs or other trade barriers;



                                      -32-


<PAGE>   33

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

        -  difficulties in staffing and managing foreign operations;

        -  political, social and economic instability;

        -  exposure to taxes in multiple jurisdictions;

        -  local infrastructure problems or failures; and

        -  transportation delays and interruptions.

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

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

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

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

        We are subject to a variety of federal, state, local, and foreign
regulations relating to: the use, storage, discharge, and disposal of hazardous
materials used during our manufacturing process;

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

        -  air quality management.

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

        -  we could be subject to significant penalties;

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

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

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



                                      -33-


<PAGE>   34

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

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

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

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

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

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

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



                                      -34-




<PAGE>   35

PART II. OTHER INFORMATION

ITEM 1. Legal Proceeding

        Asahi Glass Company, Ltd. (Asahi) has asserted that a technology
cooperation agreement between the Company and Asahi gives Asahi exclusive
rights, even as to Komag, to certain glass substrate-related intellectual
property developed by the Company. The Company has sent Asahi a notice of
termination of the agreement and believes that Asahi has no rights to the glass
substrate technology developed by the Company. The Company believes that it has
full control of its glass-related intellectual property, and is proceeding to
commercialize the technology with the support of other glass makers.

        The Company is currently engaged in discussions with Asahi to resolve
the dispute. The Company believes that the resolution of the dispute, whether
favorable or unfavorable, would not have a significant financial impact on the
Company's financial results.

ITEM 2. Changes in Securities

        Not Applicable.

ITEM 3. Defaults Upon Senior Securities

        On June 30, 2001, the $201.7 million principal amount of the Company's
senior bank debt became due. As of August 7, 2001, this amount, as well as
accrued interest of $3.5 million from June 1, 2001, has not been repaid. As a
result, under the terms of the loan restructure agreement for the senior bank
debt and the subordination provisions of the indenture for the $230 million of
convertible junior notes, the Company did not pay interest of $6.6 million on
outstanding convertible junior notes when it became due on July 15, 2001. The
Company is now in interest payment default under the convertible junior notes.
As of August 7, 2001, accrued interest on the convertible junior notes is $7.6
million. In addition, the company's failure to pay the bank debt when due caused
a default under the convertible junior notes as of July 30, 2001, and, as a
result, the holders can accelerate the outstanding principal.

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

        (a) The Annual Meeting of Stockholders was held May 15, 2001.

The meeting included the election of the Board of Directors, submitted as Item
No. 1, whose names are as follows:

Donald Beadle
Chris A. Eyre
George A. Neil
Ronald L. Schauer
Anthony Sun
Thian Hoo Tan
Harry Van Wickle

Each of the individuals elected is a continuing member of the Board.



                                      -35-


<PAGE>   36
        (b) Other matters voted upon at the stockholders meeting were: Item No.
            2 - approve an amendment to our 1988 Employee Stock Purchase Plan to
            increase the number of shares reserved for issuance under the plan
            by 2,100,000 shares; Item No. 3 - approve our 2001 Employee Stock
            Purchase Plan; Item No. 4 - approve an amendment to our 1987
            Restated Stock Option Plan to increase the number of shares reserved
            for issuance under the plan by 3,000,000 and extend the term of the
            plan to January 31, 2005; and Item No. 5 - Ratify the appointment of
            Ernst & Young LLP as independent auditors of the Company for the
            fiscal year ending December 31, 2001.

      (c)Shares of Common Stock voted were as follows:

<TABLE>
<CAPTION>
                                          TOTAL VOTE FOR    TOTAL VOTE WITHHELD
                                           EACH DIRECTOR     FROM EACH DIRECTOR
<S>                                       <C>               <C>
Item No. 1
(Election of Board of Directors)
Donald Beadle                                98,284,404               1,542,735
Chris A. Eyre                                85,461,626              14,365,513
George A. Neil                               98,280,663               1,546,476
Ronald L. Schauer                            97,790,741               2,036,398
Anthony Sun                                  98,295,833               1,531,306
Thian Hoo Tan                                85,495,054              14,332,085
Harry Van Wickle                             98,291,992               1,535,147
</TABLE>

<TABLE>
<CAPTION>
                                               FOR        AGAINST       ABSTAIN     BROKER NON-VOTE
<S>                                         <C>          <C>            <C>         <C>
Item No. 2
(Approve amendment to the 1988 Employee     40,748,394   2,447,356      924,493     67,540,300
Stock Purchase Plan to increase the number
of shares reserved for issuance under the
plan by 2,100,000 shares)

Item No. 3
(Approve 2001 Employee Stock Purchase       27,230,746  16,036,750      852,747     67,540,300
Plan)

Item No. 4
(Approve an amendment to 1987 Restated      26,258,393   16,942,906     918,944     67,540,300
Stock Option Plan to increase the number
of shares reserved for issuance under
the plan by 3,000,000 and extend the term
of the plan to January 31, 2005)

Item No. 5
(Ratification of independent auditors)      99,074,681      641,958     110,500     11,833,404
</TABLE>



                                      -36-



<PAGE>   37

ITEM 5. Other Information

        On April 25, 2001, the Company received a letter from the Office of
Nasdaq Qualifications indicating that if the Company did not comply with the
minimum bid price rule by July 24, 2001, Nasdaq intended to delist the Company's
stock. In order to gain compliance, the Company's common stock was required to
trade at or above $1.00 for a minimum of 10 consecutive trading days. The
Company has failed to comply with this test. On July 25, 2001 the Company
received an additional letter from Nasdaq indicating that the Company's stock
would be delisted as of August 2, 2001, unless the Company requested a hearing
to consider the merits of continuing the listing the Company's stock. The
Company has requested a hearing to appeal Nasdaq's delisting determination, and
the Company's stock will continue to be listed pending the outcome of the
hearing.

ITEM 6. Exhibits and Reports on Form 8-K

        Not Applicable































                                      -37-



<PAGE>   38

                                   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:  August 7, 2001                BY:  /s/ Thian Hoo Tan
                                          --------------------------------
                                          Thian Hoo Tan
                                          Chief Executive Officer

DATE:  August 7, 2001                BY:  /s/ Edward H. Siegler
                                          --------------------------------
                                          Edward H. Siegler
                                          Vice President,
                                          Chief Financial Officer

DATE:  August 7, 2001                BY:  /s/ Kathleen A. Bayless
                                          --------------------------------
                                          Kathleen A. Bayless
                                          Vice President,
                                          Corporate Controller







                                      -38-