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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K





(Mark One)



|[X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|--- | ------------------------------------------------------------------------------------

For the fiscal year ended December 30, 2001

OR



|[   ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|----- | ----------------------------------------------------------------------------------------

For the transition period from            to

Commission file number 0-16852

KOMAG, INCORPORATED

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


(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-2914864                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)

1710 Automation Parkway, San Jose, California 95131

(Address of Principal Executive Offices, including Zip Code)


Registrants telephone number, including area code: (408) 576-2000
Securities registered pursuant to Section 12(b) of the Act:


|                    |  |                      
|------------------- |  | ---------------------
|                    |  | Name of each exchange
|Title of each class |  | on which registered  
|                    |  |                      
|None                |  | None                 

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value

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 [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment of this Form 10-K.  [   ]

The aggregate market value of voting stock held by non-affiliates of the
Registrant as of February 15, 2002, was approximately $2,427,562 based on the
closing sale price for shares of the Registrants Common Stock as reported by
the Nasdaq National Market for the last trading date prior to that date).
Shares of Common Stock held by each officer, director and holder of 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

On December 30, 2001, 111,924,983 shares of the Registrants Common Stock,
$0.01 par value, were outstanding.

Documents Incorporated by Reference

None.



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TABLE OF CONTENTS



|              |                                                                                                |  |  |  |  |  |  | 
|------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|              | ITEM 1. BUSINESS                                                                              
|              | ITEM 2. PROPERTIES                                                                            
|              | ITEM 3. LEGAL PROCEEDINGS                                                                     
|              | ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS                                     
|              | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                 
|              | ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                  
|              | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS
|              | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|              | ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                              
|              | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  
|              | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS                                                     
|              | ITEM 11. EXECUTIVE COMPENSATION                                                               
|              | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                       
|              | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                       
|              | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.                     
|SIGNATURES   
|EXHIBIT INDEX
|EXHIBIT 21   
|EXHIBIT 23   
|EXHIBIT 23.1 



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KOMAG, INCORPORATED
(DEBTOR-IN-POSSESSION)
TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K

|         |  |                                                                                       |  |      |    | 
|-------- |  | ------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                       |  | Page
|         |  |                                                                                       |  |     
|Item 1.  |  | Business                                                                              |  |      | 3  | 
|Item 2.  |  | Properties                                                                            |  |      | 25 | 
|Item 3.  |  | Legal Proceedings                                                                     |  |      | 25 | 
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  |      | 25 | 
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  |      | 26 | 
|Item 6.  |  | Selected Consolidated Financial Data                                                  |  |      | 27 | 
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |      | 28 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  |      | 39 | 
|Item 8.  |  | Consolidated Financial Statements and Supplementary Data                              |  |      | 40 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  |      | 75 | 
|Item 10. |  | Directors and Executive Officers                                                      |  |      | 76 | 
|Item 11. |  | Executive Compensation                                                                |  |      | 79 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  |      | 83 | 
|Item 13. |  | Certain Relationships and Related Transactions                                        |  |      | 85 | 
|Item 14. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  |      | 86 | 



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PART I

This Annual Report on Form 10-K contains forward-looking statements. In
some cases, these forward-looking statements may be identified by the usage of
words such as may, will, should, expects, plans, anticipates,
believes, estimates, predicts, potential, or continue, or the
negative of such words and other comparable terminology. These statements
involve known and unknown risks and uncertainties that may cause Komag,
Incorporateds or its industrys results, level of activity, performance or
achievements to be materially different from those expressed or implied by the
forward-looking statements. Factors that may cause or contribute to such
differences include, among others, those discussed under the captions
Business, Risk Factors, Managements Discussion and Analysis of Financial
Condition and Results of Operations, and Legal Proceedings. Forward-looking
statements not specifically described above also may be found in these and
other sections of this report.




ITEM 1. BUSINESS

General

Komag, Incorporated (we, our, or us) designs, manufactures and markets
thin-film media, or disks, that are incorporated into disk drives, the primary
storage devices for digital data. We believe we are the worlds largest
independent manufacturer of thin-film media and are well positioned as a
broad-based strategic supplier for the industrys leading disk drive
manufacturers. Our business strategy relies on the combination of advanced
technology, low cost and manufacturing excellence. Disk drives incorporating
thin-film disks are used wherever large amounts of data are stored, including
applications such as the Internet, enterprise databases, communications
systems, personal computers and consumer appliances such as peer-to-peer
servers, digital video recorders, and game boxes. The cost per unit of storage
has declined dramatically on an annual basis throughout the history of the disk
drive industry. We believe that as the cost per unit of storage declines, new
applications for disk drives will emerge, presenting growth opportunities for
our industry and our company. We were organized in 1983 and are incorporated in
the State of Delaware.

Reorganization Under Chapter 11

Our company, Komag, Incorporated (KUS), filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code on August
24, 2001 (the Petition Date). The petition was filed with the United States
Bankruptcy Court for the Northern District of California. The petition relates
only to our U.S. corporate parent, KUS, and does not include any of our
subsidiaries, including Komag Material Technology (KMT), or Komag USA
(Malaysia) Sdn (KMS). We are operating our business as a debtor-in-possession,
subject to the supervision and orders of the Bankruptcy Court. Accordingly,
the existing directors and executive officers continue to operate and manage
our affairs under court supervision.

The Chapter 11 bankruptcy petition was directly related to the convergence
of four factors: 1) a continuing decline in units shipped, resulting from
rapidly deteriorating economic conditions in fiscal 2001; 2) a continuing
decline in average unit selling prices, resulting from excess industry disk
production capacity; 3) high costs associated with carrying, and ultimately
closing down, excess capacity assumed through the merger with HMT Technology,
Inc. (HMT) after a transition of manufacturing operations to overseas
locations; and 4) reaching the maturity date of the Companys $201.7 million
senior debt facility.

The first three factors contributed to significant operating losses and
decreased liquidity in fiscal 2001. As a consequence, we were unable to repay
or refinance the $201.7 million in senior debt when the debt matured on June
30, 2001. Additionally, we did not pay accrued interest of $1.4 million on
this debt as of June 30, 2001, or the $6.6 million in bond interest that became
due on July 15, 2001.



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In accordance with an agreement we reached with creditors holding more
than one-half, or approximately $275 million, of our debt, we filed a proposed
Plan of Reorganization (the Plan) on September 21, 2001, which was amended on
November 7, 2001. The Plan was accepted by seven of the nine classes voting on
the Plan. The Plan was rejected by the Subordinated Notes Claims and
Stockholder classes. A hearing regarding confirmation of the Plan will be held
in mid-2002.

If the Plan is confirmed and becomes effective, we will issue new debt
securities and new shares of common stock to our creditors. The existing
common stock will be canceled and existing stockholders will not receive a
distribution.

At this time, we cannot predict the outcome of the bankruptcy proceedings,
or its effect on our business. See Item 7  Managements Discussion and
Analysis of Financial Condition and Results of Operations, Footnote 1 to the
audited consolidated financial statements and the report of independent
auditors, all of which indicate substantial doubt about our ability to continue
as a going concern.

If we emerge from bankruptcy, we expect to adopt fresh-start reporting,
and create a new reporting entity. Under fresh-start reporting, the
reorganization value of the Company will be allocated to the emerging entitys
specific tangible and identified intangible net assets based on their fair
value. Excess reorganization value, if any, will be reported as
reorganization value in excess of amounts allocable to identifiable net
assets. As a result of the adoption of such fresh-start reporting, our
post-emergence (successor) financial statements will not be comparable with
our pre-emergence (predecessor) financial statements, including the
historical financial statements included in this annual report.

On September 17, 2001, we voluntarily delisted our common stock from the
Nasdaq National Market (Nasdaq). Our stock is currently trading on the OTC
Bulletin Board under the symbol KMAGQ.

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

See also Item 6  Selected Consolidated Financial Data, for additional
financial information.

Industry Background

Increasing demand for digital data storage and low-cost, high-performance
hard disk drives has resulted in growing demand for thin-film disks.
International Data Corporation estimates that worldwide disk drive unit
shipments in 2002 through 2005 will grow at a 14.0% compounded annual growth
rate. Greater processing power, more sophisticated operating systems and
application software, high-resolution graphics, larger databases, the Internet,
and emerging demand for consumer appliances are among the developments that
have required and benefited from ever higher disk drive performance at ever
lower cost. For example, the first 5 1/4-inch hard disk drive, introduced in
1980, offered a capacity of five megabytes (one million bytes is a megabyte or
MB) with an areal density of less than two megabits (one million bits is a
megabit; eight bits is one byte) per square inch. Current-generation 3
1/2-inch drives typically have capacities of 20 to 120 gigabytes (one billion
bytes is a gigabyte or GB). Todays areal densities allow for approximately 40
GB of storage per 3 1/2-inch disk platter. By the end of 2002, we expect that
increases in areal densities will allow for approximately 80 GB of storage per
3 1/2-inch disk. We believe that our technical advances, along with those of
other component suppliers, have improved the performance and storage capacity
of disk drives and dramatically lowered the cost per bit stored.

From 1990 through approximately 1996, the disk industry struggled to keep
up with rapidly increasing demand. As a result, most companies in our industry
undertook aggressive expansion plans beginning in 1995 and 1996. The lead-time
to expand disk



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capacity is generally one to two years, including the time necessary to
construct facilities and to purchase and install equipment. Therefore,
significant new capacity became available to the industry in 1997.

Also in 1997, the disk drive industry widely adopted magneto-resistive, or
MR, head technology. MR heads, and subsequent product generations incorporating
giant MR, or GMR, technology, are more sensitive than prior technology,
allowing heads to read smaller bits of data packed more tightly together on the
surface of a disk. The result of widespread adoption of MR heads was that the
industry was able to advance the rate of improvement in data storage density
from 30% to 40% per year to 100% or more per year. The increased rate of
improvement in storage density allowed disk drive manufacturers to meet
consumer demand for higher capacity disk drives with drives incorporating fewer
heads and disks. Because of this lower disk-per-drive ratio, demand for disks
was relatively flat during the period from 1997 through 2000, resulting in
substantial excess capacity for producing disks. The impact of excess capacity
fell disproportionately on the independent disk manufacturers, because disk
drive manufacturers, such as Seagate Technology, Maxtor Corporation (Maxtor),
and IBM, chose to fill their internal disk production capacity before buying
from independent disk manufacturers. We estimate that these captive disk
operations have increased their market share from approximately one-third of
the market before 1997 to over 50% in each of the last three years.

We believe that the imbalance between supply and demand has been largely
responsible for falling disk selling prices. Current prices are sharply lower
than industry pricing in 1997. As a result of lower demand and lower prices,
the industry has undergone substantial consolidation. We estimate that over
45% of the disk manufacturing capacity that was in place at the end of 1997 is
either no longer capable of producing current generation disks or is no longer
available.

Merger with HMT

On October 2, 2000, we completed a merger with HMT. We expected to
benefit from the merger by leveraging the combined technology and manufacturing
expertise of both companies. By merging, we believe we brought together the
best of the technology from each company and developed the scale necessary to
achieve the lowest cost structure in the industry.

During fiscal 2001, we closed HMTs U.S. manufacturing facilities and
consolidated all of our manufacturing activities in Malaysia, where we can
achieve significantly lower costs. As a result, we lowered our fixed
manufacturing costs by approximately $27 million per quarter in the fourth
quarter of 2001 compared to the fourth quarter of 2000. Also, comparing the
fourth quarter of 2001 to 2000, we have combined technologies, lowered variable
costs, and improved manufacturing yields substantially, which resulted in
significantly lower manufacturing costs and considerably stronger operating
performance by the end of fiscal 2001.

Because of very weak industry market conditions and continuing excess
industry capacity during 2001, net sales decreased by 48% from $111.2 million
in the fourth quarter of 2000 to $58.0 million in the fourth quarter of 2001.
But as a result of the consolidation of our manufacturing operations and the
significant reduction of manufacturing costs discussed above, our gross margin,
operating loss, and operating loss without restructuring/impairment charges
improved in the fourth quarter of 2001 compared to the fourth quarter of 2000.

Strategy

We are focused on meeting the needs of disk drive manufacturers with a
proven record for technological leadership because we believe that these
customers have the greatest ability to exploit fully the value of
technologically superior disks. By working with these high-end customers and
their head vendors, we aim to influence disk drive designs and earn a strong
position as a supplier of disks for their products.



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The key elements of our strategy are as follows:



| |  |  | Establish and Maintain Leadership in High-End Product
Technology.We focus our research and development resources
principally on performance improvements for disks sold to the
high-end, high-capacity segment of the disk drive industry. In order
to improve product performance characteristics, including magnetics,
glide height, durability and stiction, we continually enhance our
proprietary technologies and processes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Commit to Advanced Technology.We have dedicated part of our
research and development team to working on advanced technology. This
group is responsible for investigating the elements of technology
required more than two years into the future, as well as application
of our technological skills to alternative businesses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | Strengthen Collaborative Relationships with Leading Head and
Disk Drive Manufacturers.We work closely with head manufacturers
developing new technologies, including Giant MR, Proximity MR and
pad slider head compatible disks. This collaboration enables the
parties to develop compatible products that can be effectively
incorporated together into high-performance disk drives. These
efforts include demonstrations of advanced technology required
sufficiently far into the future so that we can plan our development
efforts to stay at the forefront of the industry. We also seek to
establish strong relationships with our customers, enabling us to
participate in establishing technological and design requirements for
new products. We believe that close technical collaboration with our
customers and their other component suppliers during the design phase
of the new disk drives, facilitates integration of our products into
new disk drives, improves our ability to reach cost-effective
high-volume manufacturing rapidly, and enhances the likelihood that
we will remain a primary supplier of thin-film disks for high
performance disk drive products.
|
| |  |  | Improve Advanced Manufacturing Processes to Drive Volume
Production.We develop our advanced processes on a full scale,
production-capable, pilot line located in our research and
development facility in San Jose, California. By performing our
development activities in a production-like environment, we can
quickly and efficiently transition to high- volume commercial
production of new products in our Malaysian factories. Our ability to
implement new processes quickly also helps us meet our customers
increasingly rapid time-to-market demands, advancing our goal of
having our products designed into our customers disk drives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | Continue to Improve Yields and Reduce Cost Through Quality and
Process Improvement.We believe that strict attention to quality
control is critical to our customer relationships. To this end, we
have consistently maintained our ISO 9002 certification. Our
objective is to be the supplier of choice in our customers
factories. Attention to quality has the dual benefit of producing
high-performance disks and lowering our cost of production through
improved yield and more consistent output.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | Further Reduce Our Cost Structure By Fully Utilizing Malaysian
Operations.We believe that demand for disk drives is elastic and
that low disk drive prices are necessary to continue growth in
demand. We contribute to our customers success by maintaining low
prices. In order to attain a healthy business model in a low price
environment, low manufacturing costs are necessary. We believe we can
achieve lower costs than other disk manufacturers by fully utilizing
our Malaysian factories. This cost reduction is a critical element
in our strategy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

Technology

We have capitalized on our technological strength in thin-film processes
and our manufacturing capabilities to achieve and maintain our position as a
leading independent supplier to the thin-film media market. Our technological
strength stems from the depth



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of our understanding of materials science and the interplay between disks,
heads, and other disk drive components. Our manufacturing expertise in
thin-film media is evidenced by our long, uninterrupted history of delivering
reliable products in high volume. We manufacture thin-film media primarily in
Malaysia, where we have a significant cost advantage compared to our U.S. and
Japan-based competitors.

We manufacture and sell thin-film magnetic media on rigid disk platters
for use in hard disk drives. These drives are used to record, store and
retrieve digital information. Inside a disk drive, the disk rotates at speeds
of up to 15,000 rpm. The head scans across the disk as it spins, magnetically
recording or reading information. The domains where each bit of magnetic code
is stored are extremely small and precisely placed. The tolerances of the disks
and recording heads are extremely demanding and the interaction between these
components is one of the most critical design aspects in an advanced disk
drive.

Primary factors governing the density of storage achievable on a disks
surface are:



| |  |  | the minimum distance at which read/write heads can reliably
pass over the surface of the disk to detect a change in magnetic
polarity when reading from the disk, which is called glide height
(measured in microinches, or millionths of an inch);
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the strength of the magnetic field required to change the
polarity of a bit of data on the magnetic layer of a disk when
writing, which is called coercivity; and                                                                                  
|
| |  |  | the ability of the head to discriminate a signal from
background media noise, which is called the signal-to-noise ratio.                                                                                                                           

As glide height is reduced, the head can read smaller bits. The higher the
coercivity of the media, the smaller the width of the bit that can be stored.
The signal-to-noise ratio is determined by the choice of magnetic materials and
the method for depositing those materials on the disks surface.

Our plating, polishing and texturing processes produce a uniform disk
surface that is smooth at an atomic level. This smoothness permits the
read/write heads to fly over the disk surface at glide heights of 0.4 to 0.7
microinches. Disks must be made in a clean environment to limit surface
defects. Even a handful of defects, a fraction of a micron in diameter, could
cause the disk to fail. The magnetic alloys deposited on the surfaces of our
disks have high coercivity, low noise, and other desirable magnetic
characteristics.

Finally, a protective layer of diamond-hard carbon and a layer of
lubricant, each of which is controlled to a tolerance of a few angstroms, is
applied to the disk surface to prevent wear. The continued improvement in these
and other factors has resulted in rapid advancement in the amount of data a
disk is capable of storing.

Significant increases in areal densities continued in 2001. We believe
that the number of gigabits per square inch on a typical disk increased by over
100% during the year. In 2001, nearly all of our sales were based on GMR
technology. A GMR disk is optimized for use with GMR heads that use separate
read and write elements. The write element is made from conventional inductive
materials but the read element is made of a material whose electrical
resistance changes when subjected to changes in a magnetic field. GMR heads are
more sensitive to magnetic fields than prior inductive technology. This
increased sensitivity enables GMR heads to read more densely packed,
smaller-sized bits.



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Research, Development and Engineering

Historically, our R&D efforts emphasized key technology advancements in
disk functionality, reliability and quality. During the past three years, we
also increased our focus on improving yields and reducing costs, which we
believe are critical to improving our overall operating results. Most recently,
aided by our merger with HMT, we have also strengthened our efforts in advanced
technology, which is technology aimed at disk designs needed two to five years
from now.

Our ultra-super polished substrates, in conjunction with our automatic
optical inspection systems and the latest disk buff process, currently result
in historically high yields. At the same time, we have optimized our polishing,
texturing, final test, and packaging technology to achieve record low costs for
the materials and operating supplies needed to make a disk. Finally our
multi-layer sputter process, with nanometer-thin structures, provides magnetic
stability, mechanical durability and corrosion resistance, which we believe are
at the forefront of our industry. To improve durability and corrosion
resistance we have developed and qualified advanced diamond-like carbon films
specifically for each of our sputter tools. Each method enables production of
carbon films as thin as one-tenth microinch thick with extraordinary hardness
and durability.

Our advanced technology efforts have in part focused on partnering with
other disk drive component makers in key areas like magnetic recording heads
and data channels. We believe our most advanced longitudinal disks, that will
feature antiferromagnetically coupled layers to enhance thermal stability, will
support a recording density of 120GB per disk, approximately three times higher
than the most advanced disk in production today. We expect these advancements
will be achieved with straightforward extensions of our current production
equipment, which suggests a limited need to replace equipment to keep pace with
technology improvement during the next four to five years.

Our expenditures (and percentage of net sales) on research, development,
and engineering activities, were $39.5 million (14.0%) in fiscal 2001, $35.3
million (9.9%) in fiscal 2000, and $44.3 million (13.3%) in fiscal 1999.

Products, Customers, and Marketing

We sell primarily GMR media for 3 1/2-inch disk drives. Our products
offer a range of coercivities, glide height capabilities and other parameters
to meet specific customer requirements. Unit sales of 3 1/2-inch disks
capable of storing at least 20 GB per platter accounted for all of our unit
sales in the fourth quarter of 2001, compared to the fourth quarter of 2000
when over 80% of our unit sales were greater than 10 GB. Storage density has
roughly doubled in each of the last three years. We expect this trend to
continue in the foreseeable future. In addition to finished disks, at various
times we have sold material volumes of nickel plated and polished substrates.
By selling these unfinished products, we more fully utilize our factories and
reduce our overall cost.

In the last several years, certain media manufacturers have idled capacity
and restructured or ceased their operations, which coupled with increased disk
storage capacity, has resulted in reduced demand for our products. We believe
that the longer-term success of the thin-film media industry depends on growth
in demand for disks. We believe that improvements in enabling technologies,
such as increased bandwidth capability that will speed data transfers over the
Internet and promote use of other storage-intensive applications such as
multimedia, will increase demand for storage capacity.

We sell our media products primarily to independent OEM disk drive
manufacturers for incorporation into hard disk drives. Disk drives, in turn,
are sold to computer or consumer appliance manufacturers that incorporate the
disk drives into their systems, or are sold directly to consumers. We work
closely with our customers as they design new high-performance disk drives, and
generally customize our products according to their specifications.



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Three customers accounted for 93% of our net sales in 2001. Net sales to
major customers were as follows: Western Digital 59%, Maxtor 27%, and Seagate
Technology 7%. Sales are generally concentrated in a small number of customers
due to the high volume requirements of the dominant disk drive manufacturers
and their tendency to rely on a few suppliers because of the close
interrelationship between media and other disk drive components. Given the
relatively small number of high-performance disk drive manufacturers, we expect
that we will continue our dependence on a limited number of customers. In April
1999, we acquired the assets of Western Digitals media operation and also
entered into a volume purchase agreement (VPA) with Western Digital. In
October 2001, the term of the VPA subsequently was extended through April 2005.
As a result of the acquisition and related VPA, we expect Western Digital to
remain a significant customer.

Our 2001 sales were made directly to disk drive manufacturers worldwide
from our U.S. and Malaysian operations. Media sales to Asia from our U.S. and
Malaysian operations represented 95% of our net sales in 2001, 93% of our net
sales in 2000, and 95% of our net sales in 1999. Our customers assemble a
substantial portion of their disk drives in Asia, and subsequently sell these
products throughout the world. Therefore, our high concentration of Asian sales
does not accurately reflect the eventual point of consumption of the assembled
disk drives. All foreign sales are subject to certain risks common to all
export activities, such as government regulation and the risk of imposition of
tariffs or other trade barriers. Foreign sales must also be licensed by the
Office of Export Administration of the U.S. Department of Commerce.

We generally make sales pursuant to purchase orders rather than long-term
contracts. At December 30, 2001, our backlog of purchase orders scheduled for
delivery within 90 days totaled $42.0 million, compared to $38.2 million at
December 31, 2000. These purchase orders may be changed or canceled by
customers on short notice without significant penalty. Accordingly, the backlog
should not be relied upon as indicative of sales for any future period.

Competition

The competitive mix in the industry has changed substantially in the last
several years. Before 1997, the industry was divided roughly into thirds, with
U.S. independent disk manufacturers, Japanese independent manufacturers, and
captive operations of disk drive manufacturers, each holding equal shares. Due
to the combination of several factors, particularly the rapid improvement in
storage density outstripping the rate of growth in consumption of storage, and
the rapid increase in the industrys capacity to produce disks, disk
manufacturers operated by disk drive manufacturers have increased their share
of the market. We estimate that these captive disk manufacturers have shipped
more than half of the media consumed in each of the last three years. As a
result, competition among independent manufacturers has been heightened, prices
have fallen rapidly, and there has been considerable consolidation in the
industry. This significant pricing pressure during the last few years has
adversely affected the financial results of independent suppliers, including
ours. We believe that we are currently the largest independent manufacturer of
disks. Other independent manufacturers include several Japanese firms,
including Mitsubishi Chemical Corporation, Fuji Electric, Showa Denko and Hoya,
and Trace Storage in Taiwan.

Manufacturing

We believe our manufacturing expertise in thin-film media is evidenced by
our history of delivering reliable products in high volume. By using
proprietary processes and techniques, we have produced advanced disk products
that generally exhibit uniform performance characteristics. These uniform
performance characteristics enhance the reliability of the drive products
manufactured by our customers. In addition, these characteristics can raise
production yields on our customers manufacturing lines, which is an important
cost consideration. Manufacturing costs are highly dependent on our ability to
effectively use our installed physical capacity



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to produce large volumes of products at acceptable yields. To improve
yields and capacity utilization, we have adopted formal continuous improvement
programs at each of our worldwide manufacturing operations.

The manufacture of our thin-film sputtered disks is a complex, multi-step
process that converts aluminum substrates into finished data storage media
ready for use in a hard disk drive. The process requires the deposition of
extremely thin, uniform layers of metallic film onto a disk substrate. To
achieve this, we use a vacuum deposition, or sputtering, method similar to that
used to coat semiconductor wafers. The basic process consists of many
interrelated steps that can be grouped into five major categories:



| | 1. |  | Sizing and Grinding of the Substrate:A raw aluminum blank
substrate is sized by precisely cutting the inner and outer diameter
of the blank. A mechanical grinding process is then utilized to
provide a relatively flat surface on the substrate prior to nickel
alloy plating.                                     
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Nickel Alloy Plating and Polishing of the Substrate:Through a
series of chemical baths, aluminum substrates are plated with a
uniform nickel phosphorus layer in order to provide support for the
magnetic layer. Next, this layer is polished to achieve flatness and
smoothness at an atomic level.                
|
| | 3. |  | Texturing and Cleaning:During these process steps, a precisely
controlled, fine texture is applied to the polished disk surface to
allow the read/write heads of the disk drives to fly at low and
constant levels and then the disks are cleaned in preparation for the
sputtering process.                         
|
| | 4. |  | Sputtering and Lube:By a technically demanding vacuum
deposition process, magnetic layers are successively deposited on the
disk and a hard protective overcoat is applied. After sputtering, a
microscopic layer of lubrication is applied to the disks surfaces to
improve durability and reduce surface friction.
|
| | 5. |  | Glide Test and Certification:In robotically-controlled test
cells, disks are first tested for surface defects optically, then for
a specified glide height and finally certified for magnetic
properties. Based on these test results, disks are graded against
customers specific performance requirements.        

Most of the critical process steps are conducted in Class 100 or better
clean room environments. Throughout the process, disks are handled by highly
automated equipment to reduce contamination and enhance process precision.
Minute impurities in materials, particulate contamination or other production
problems can reduce production yields and, in extreme cases, cause production
to be suspended for prolonged periods.

Achieving low product cost is critical to our ability to achieve
profitability. The cost of our products is sensitive to many factors, including
production volume, yield, materials and operating supplies consumed, and
manufacturing location. Our processes have required substantial investment in
equipment and factory buildings. This investment leads to a high fixed cost
structure, making our costs sensitive to changes in production volume. Over the
last several years, we have improved our yields while advancing storage density
at a rate of 100% per year. At the same time, the cost of materials and
operating supplies has been reduced. We have chosen to consolidate our
manufacturing activities in Malaysia in order to reduce the cost of labor and
services. We believe that our future production volume, yield, and the low cost
of our Malaysian location will give us the benefit of one of the lowest cost
structures in the industry.



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Strategic Alliances

In 1987, we established a joint venture with Asahi Glass Co., Ltd. The
joint venture, which was known as Asahi Komag Co., Ltd. (AKCL), was located in
Japan. Because of difficult industry conditions, AKCL was dissolved in June
2001.

Another joint venture, which we established in 1989 with Kobe Steel, Ltd.,
is known as KMT. We own 80% of KMT. KMT, which is located in Santa Rosa,
California, ended manufacturing operations and became a substrate research and
development center in May 2001.

In November 2000, we formed Chahaya Optronics, Inc. (Chahaya) with two
venture capital firms, Storm Ventures and Summit Partners. We invested
equipment, provided most of Chahayas workforce, and have agreed to provide a
certain amount of facilities and facilities services to Chahaya through
December 2002. We currently own approximately 34% of Chahayas outstanding
stock. Chahaya plans to become a contract manufacturer for the photonics
industry, taking advantage of a technically trained workforce in both the U.S.
and Malaysia, material handling capabilities, and robust communication
capabilities to transfer technology in a timely manner worldwide.

Environmental Regulation

We are subject to a variety of environmental and other regulations in
connection with our operations and believe that we have obtained all necessary
permits for our operations. We use various industrial hazardous materials,
including metal-plating solutions, in our manufacturing processes. Wastes from
our manufacturing processes are either stored in areas with secondary
containment before removal to a disposal site, or processed on-site and
discharged to the industrial sewer system.

We have continuously upgraded our wastewater treatment facilities to
improve the performance and consistency of our wastewater processing.
Nonetheless, industrial wastewater discharges from our facilities may, in the
future, be subject to more stringent regulations. If we fail to comply with
present or future regulations, part or all of our operations would be suspended
or terminated. These regulations could restrict our ability to expand at our
present locations or could require us to acquire costly equipment or incur
other significant expenses.

Patents and Proprietary Information

We hold, and have applied for, U.S. and foreign patents and have entered
into cross-licenses with certain of our customers. While these patents could
present obstacles to the introduction of new products by competitors and
possibly result in royalty-bearing licenses from third parties, we believe that
our success does not generally depend on the ownership of intellectual property
rights but rather on our innovative skills, technical competence, manufacturing
execution, and marketing abilities. Accordingly, the patents that we hold or
apply for will not constitute any assurance of our future success.

We regard elements of our equipment designs and processes as proprietary
and confidential and rely upon employee and vendor nondisclosure agreements and
a system of internal safeguards for protection. In spite of these steps for
protecting proprietary and confidential information, there is a risk that
competitors may obtain and use such information. Further, the laws of certain
foreign countries in which we do business may provide a lesser degree of
protection to our proprietary and confidential information than that provided
by the laws of the U.S. Moreover, from time to time we receive proprietary and
confidential information from vendors, customers, and partners, the use and
disclosure of which are governed by nondisclosure agreements. Through internal
communication and the monitoring of use and disclosure of such information, we
comply with our obligations regarding use and nondisclosure.



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However, despite these efforts, there is a risk that we may use or
disclose this information in violation of our obligations of nondisclosure.

We have occasionally received, and may receive in the future,
communications from third parties asserting violation of intellectual rights
alleged to cover certain of our products or manufacturing processes or
equipment. In these cases, we evaluate whether it would be necessary to defend
against the claims or to seek licenses to the rights referred to in such
communications. If we must defend those claims, or if we are not able to
negotiate necessary licenses on reasonable terms, our business and financial
results would suffer.

Employees

As of December 30, 2001, on a worldwide basis, we had 3,789 employees. Of
the total: a) 3,749 were regular employees and 40 were employed on a temporary
basis; b) 3,437 were employed in manufacturing, 244 in research, development,
and engineering, and 108 in sales, administrative, and management positions;
and c) 456 were employed in the U.S., and 3,333 at offshore facilities. We
believe that our future success will depend in large part upon our ability to
continue to attract, retain, and motivate highly skilled and dedicated
employees. We have no employees who are represented by a labor union, and we
have never experienced a work stoppage.



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RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing Komag. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also impair our business
options. To the extent the following risks negatively impact our business, our
financial condition, results of operations and/or cash flows could be adversely
affected. In those cases, the trading price of our common stock could decline,
and you may lose all or part of your investment.

RISKS RELATED TO OUR FINANCIAL POSITION AND OUR COMMON STOCK

Our pending Chapter 11 bankruptcy has had, and will continue to have, a
negative impact on our business and operating results.

On August 24, 2001, our company, Komag, Incorporated (KUS), filed a
voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code. Chapter 11 permits us to remain in control of our business,
protected by a stay of all creditor action, while we attempt to negotiate and
confirm a Plan of Reorganization with our creditors. Due to our pending
Chapter 11 case and our financial condition, we believe our stakeholders
continue to be concerned about our bankruptcy proceedings and the prospect of
emergence from such proceedings. Some of our customers, suppliers and
employees have continued to express this apprehension, which may have an
adverse effect on our ability to continue to run our operations without
impairment.

In addition, although we are authorized to operate our businesses and
manage our properties as debtor-in-possession, we may not engage in
transactions outside of the ordinary course of business without complying with
applicable notice and hearing provisions of the Bankruptcy Code and obtaining
Bankruptcy Court approval. An official committee of unsecured creditors has
been formed by the United States Trustee. This committee and various other
parties-in-interest, including creditors holding claims, such as the
pre-petition senior bank lenders and bondholders, have the right to appear and
be heard on any of our applications relating to certain business transactions.
We are required to pay certain expenses of the committee, including legal fees,
to the extent allowed by the Bankruptcy Court.

Although we are currently continuing business operations as a
debtor-in-possession under the jurisdiction of the Court, the continuation of
our business as a going concern is contingent upon, among other things, our
ability to obtain confirmation of our Plan of Reorganization dated November 7,
2001, or to formulate an alternative Plan if necessary for confirmation by the
Court, and our ability to generate sufficient cash from operations and
financing sources to meet obligations as they become due.

A hearing regarding confirmation of our proposed Plan of Reorganization is
likely to occur in mid-2002. The Plan faces significant objections from
holders of our Subordinated Notes and other parties. We cannot assure you that
the Bankruptcy Court ultimately will overrule those objections and confirm the
Plan.

If we are unable to receive confirmation of the Plan of Reorganization or
an alternative Plan, we will not be able to operate our company as a viable
business, and may have to liquidate our assets. In addition, our operating
results and financial condition 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; and/or          
|
| |  |  | employee attrition could increase.                                         



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We may not be able to confirm our Plan of Reorganization. In that event,
unless we are able to confirm an alternative plan, our assets likely would be
liquidated or sold as a going concern.

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. We have incurred, and
will continue to incur, professional fees and other cash demands typically
incurred in bankruptcy. If we are unsuccessful in obtaining confirmation of the
Plan of Reorganization, creditors or equity security holders may seek other
alternatives for the company, which may include soliciting bids for the company
through an auction process or possible liquidation of our assets. In a
liquidation, all other creditors would be paid prior to our stockholders.

Existing holders of equity in our company will not receive any distributions
under our plan of reorganization.

Our proposed Plan of Reorganization contemplates a complete change of
equity ownership in our company as it exists today, with existing shares being
cancelled. Because the proposed Plan of Reorganization was not approved by our
current stockholders, our equity holders ultimately will have their shares
cancelled and will not receive any distributions under the Plan of
Reorganization with respect to those shares.

Upon consummation of the Plan of Reorganization, certain holders of claims may
receive a significant amount of shares of new common stock, which could put
them in a position to control the outcome of actions requiring stockholder
approval if they were to act together.

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

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

Our securities have been delisted from Nasdaq for failure to comply with
Nasdaqs minimum bid requirement, which has harmed the trading market and price
of our securities.

The trading of our common stock on the Nasdaq National Market depended on
our meeting certain asset, revenue, and stock price tests. We were out of
compliance with Nasdaqs minimum bid requirement because our stock had traded
below $1.00 per share for more than 30 consecutive trading days. Our stock was
delisted from Nasdaq on September 17, 2001 and is now trading on the OTC
Bulletin Board. The delisting, in addition to our Chapter 11 filing, has had a
material negative impact on the trading market and price of our stock.
Low-priced stocks are subject to additional risks, including certain state
regulatory requirements and the potential loss of effective trading markets.
Upon confirmation of our Plan of Reorganization, all existing shares of our
common stock will be cancelled.



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The market price of our common stock has been depressed.

Since our filing under Chapter 11 and the delisting of our common stock
from the Nasdaq, the trading price of our stock has been further depressed to a
minimal level. Recent prices of our common stock reflect that not all impaired
classes of creditors approved our Plan of Reorganization, meaning that our
stockholders will not receive any distribution at all. From the second quarter
of 1997 through March 22, 2002, the price of our stock fell to a low of $0.02
from a high of $35.13. Even prior to our filing under Chapter 11, the market
price of our common stock had been depressed in response to actual and
anticipated events, including our operational results, decreased demand for
computers and data storage, perceived weaknesses of the disk drive industry,
and variations in macroeconomic conditions.

The market price and valuation of new securities of the reorganized company
will be subject to uncertainties and contingencies, all of which are difficult
to predict.

If the Plan of Reorganization is approved, we will issue new common stock
upon our emergence from bankruptcy. At issuance, there will be no immediate
trading market for the new common stock and there can be no assurance that a
trading market will develop. We will attempt to list our new common stock for
trading on the Nasdaq National Market System. However, it is possible that we
will not be able to meet the Nasdaq listing requirements. Actual market prices
of such securities at issuance will depend upon, among other things, prevailing
interest rates, conditions in the financial markets, the anticipated initial
holdings of pre-petition creditors, some of which may prefer to liquidate their
investment rather than hold it on a long-term basis, and other factors which
generally influence the prices of securities.

Even if the new common stock is listed on the Nasdaq National Market
System, the market price for the stock will be affected by many factors,
including the following:



| |  |  | 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 volatility in our stock price to continue. In addition, any
shortfall or changes in our revenue, gross margins, earnings, or other
financial results could cause the price of our new common stock to fluctuate
significantly. Even if we emerge from bankruptcy, we cannot assure you that our
financial condition or results of operations will improve. Moreover, in recent
years, the stock market in general has experienced extreme price and volume
fluctuations, which have particularly affected the market price of many
technology companies, and which may be unrelated to the operating performance
of those companies. These broad market fluctuations may adversely affect the
market price of our common stock. Volatility in the price of stocks of
companies in the hard disk drive industry has been particularly high.



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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 in their audit report on the consolidated financial statements for
our fiscal year ended December 31, 2001. This 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 obtain
confirmation of our Plan of Reorganization and fund our business with cash
generated by operations or raise future capital, our auditors may not remove
the explanatory paragraph from their subsequent opinions, and any of the
following may occur:



| |  |  | our custom relations and order with our customers could deteriorate;
| | - |  | --------------------------------------------------------------------
|
| |  |  | suppliers could reduce their willingness to extend credit; or       
|
| |  |  | employee attrition could increase.                                  

Demand for disk drives is largely tied to demand for personal computers and
fluctuations in and reduced demand for personal computers may result in
cancellations or reductions in demand for our product.

Trend Focus estimates that 75% of the disks consumed during 2001 were
incorporated into disk drives for the desktop personal computer market. Because
of this concentration in a single market, 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 quarter of 2002,
personal computer manufacturers generally announced expectations of generally
flat sales for 2002. Due to the high fixed costs of our business, fluctuations
in demand resulting from this seasonality and cyclicality can lead to
disproportionate changes in the results of our operations. If cancellations or
reductions in demand for our products continue to occur in the future, our
business, financial condition, and results of operations could be seriously
harmed.

Delays and cancellations of our customer orders may cause us to underutilize
our production capacity, which could significantly reduce our gross margins and
result in significant losses.

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



| |  |  | equipment write-offs;          
| | - |  | -------------------------------
|
| |  |  | restructuring charges;         
|
| |  |  | reduced average selling prices;
|
| |  |  | increased unit costs; and      
|
| |  |  | employee layoffs.              

If we are not able to attract and retain key personnel, our operations could be
harmed.

Our future success depends on the continued service of our executive
officers, our highly-skilled research, development, and engineering team, our
manufacturing team, and our key administrative, sales, and marketing and
support personnel. Competition for skilled personnel is intense. In particular,
our bankruptcy filing and our financial performance have increased the
difficulty of attracting and retaining skilled engineers and other
knowledgeable workers. We may not be able to attract, assimilate, or retain
highly-



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

There is a high concentration of customers in the disk drive market, and we
receive a large percentage of our revenues from only a few customers, the loss
of any of which would adversely affect our sales.

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



| |  |  | the high-volume requirements of the dominant disk drive manufacturers;                                                                                                                                                                                                
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a tendency to rely on a few suppliers because of the close
interrelationship between media performance and disk drive
performance;                                                                                                                                    
|
| |  |  | the complexity of integrating components from a variety of
suppliers; and                                                                                                                                                                                             
|
| |  |  | the increases in storage densities which have led to decreases
in the platter count per drive. With lower platter counts, disk drive
manufacturers with captive disk manufacturing operations have excess
capacity and they rely less on independent sources of media.

During fiscal 2001, 59% of our sales were to Western Digital and 27% were
to Maxtor. In fiscal 2000, 50% of our sales were to Western Digital, 28% were
to Maxtor, and 17% were to Seagate Technology. If our customers reduce their
media requirements or develop capacity to produce thin-film disks for internal
use, our sales will be reduced. As a result, our business, financial condition
and operating results could suffer.

If we are unable to successfully compete in the highly competitive thin-film
media industry, we may not be able to gain additional market share or we may
lose our existing market share, and our operating results would be harmed. The
imbalance between demand and supply has further intensified competition in the
industry.

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

In 2001, as in 2000, 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 business combinations, failures, and joint venture
arrangements, may be required before media supply and demand are in balance.
However, structural changes would intensify the competition in the industry.

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

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



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revenue, and our gross margin will suffer. Failure by us to mitigate the
effect of these pressures through cost reduction of our products or changes in
our product mix could have a material adverse effect on our business, financial
condition and results of operations.

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

The disk media business has historically been capital-intensive, and we
believe that in order to remain competitive, we will likely have to make
continued investments over the next several years for capital expenditures,
working capital and research and development. If the Plan of Reorganization is
approved, we will issue new debt instruments to some of our pre-petition
creditors. If we do not meet our projections for expense and cost reduction we
may be unable to service the debt and if we cannot raise additional funds
required by our business, we may be forced to reduce or suspend operations.

Because our products require a lengthy sales cycle with no assurance of 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 6 to 12 months. During this time we may expend substantial
financial resources and management time and effort, while not being sure that a
sale will result, or that our share of the program ultimately will result in
high-volume production.

If our customers cancel orders, they may not be required to pay any penalties,
and our sales could suffer.

Our sales are generally made pursuant to purchase orders that are subject
to cancellation, modification, or rescheduling without significant penalties.
As a result, if a customer cancels, modifies, or reschedules an order, we may
make expenditures that are not recoverable, and our profitability will suffer.
Furthermore, 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 2001, IBM and Seagate Technology produced more than 90% of their
media requirements internally, and MMC Technology supplied approximately half
of Maxtors requirement for media. Recently, Maxtor purchased MMC Technology.
To date, the captive media operations of IBM, Maxtor and Seagate Technology
have sold minimal quantities of disks in the merchant market.

Disk drive manufacturers such as Seagate Technology and IBM have large
internal media manufacturing operations. We compete with these internal
operations directly, when we market our products to these disk drive companies,
and indirectly, when we sell our disks to customers who must compete with
vertically-integrated disk drive manufacturers. Vertically-integrated companies
have the ability to keep their disk-making operations fully utilized, thus
lowering their costs of production. This cost advantage contributes to the
pressure on us and other independent media manufacturers to sell disks at
prices so low that we have been



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unprofitable, and we cannot be sure when, if ever, we can achieve a low
enough cost structure to return to profitability. Vertically-integrated
companies are also able to achieve a large scale that supports the development
resources necessary to advance technology rapidly. We may not have sufficient
resources to be able to compete effectively with these companies. Therefore,
our business, financial condition, and operations could suffer.

Because we depend on a limited number of suppliers, if our suppliers experience
capacity constraints or production failures, our production and operating
results could be harmed.

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

Disk drive program life cycles are short, and disk drive programs are highly
customized. If we fail to respond to our customers demanding requirements, we
will not be able to compete effectively.

Our industry experiences rapid technological change, and 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, and as a result, supply chain
management, including just-in-time delivery, has become a standard industry
practice. In order to sustain customer relationships and achieve
profitability, we must be able to develop new products and technologies in a
timely fashion that can help customers reduce their time-to-market performance,
and continue to maintain operational excellence that supports high-volume
manufacturing ramps and tight inventory management throughout the supply chain.
If we cannot respond to this rapidly changing environment or fail to meet our
customers demanding product and qualification requirements, we will not be
able to compete effectively. As a result, we would not be able to maximize the
use of our production facilities and minimize our inventory losses.

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



19



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do not successfully implement those advanced technologies in our Malaysian
operations, or if technologies that we have chosen not to develop prove to be
viable competitive alternatives, we would not be able to compete effectively.
As a result, we would lose our market share and face increased price
competition from other manufacturers, and our operating results would suffer.

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

If we do not protect our patents and information rights, our revenues will
suffer.

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

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

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,
| | - |  | --------------------------------------------------



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| |  |  | changes in our product mix and average selling prices;                                                                                                                              
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | modified, adjusted or rescheduled shipments;                                                                                                                                        
|
| |  |  | availability of media versus demand for media;                                                                                                                                      
|
| |  |  | the cyclical nature of the hard disk drive industry;                                                                                                                                
|
| |  |  | our ability to develop and implement new manufacturing process technologies;                                                                                                        
|
| |  |  | increases in our production and engineering costs associated
with initial design and production of new product programs;                                                            
|
| |  |  | the extensibility of our process equipment to meet more
stringent future product requirements;                                                                                      
|
| |  |  | our ability to introduce new products that achieve
cost-effective high-volume production in a timely manner, timing of
product announcements, and market acceptance of new products;
|
| |  |  | the availability of our production capacity, and the extent to
which we can use that capacity;                                                                                      
|
| |  |  | changes in our manufacturing efficiencies, in particular
product yields and input costs for direct materials, operating
supplies and other running costs;                           
|
| |  |  | prolonged disruptions of operations at any of our facilities for any reason;                                                                                                        
|
| |  |  | changes in the cost of or limitations on availability of labor; and                                                                                                                 
|
| |  |  | structural changes within the disk media industry, including combinations, failures, and joint venture arrangements.                                                                

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

Our dependence on our Malaysian operations exposes us to unavoidable risks in
transmitting technology from U.S. facilities to Malaysian facilities, which
could adversely impact our results of operations.

During the third quarter of 1999, we announced that all media production
would be consolidated into our Malaysian factories. In the fourth quarter of
2000, we decided to end the manufacture of aluminum substrates in Santa Rosa,
California. Currently, all aluminum substrates are manufactured by our
Malaysian factory and a Malaysian vendor. In addition, we ended production of
polished disks in HMTs Eugene, Oregon, facility in the second quarter of 2001.
All polished disks are manufactured by our Malaysian factories. Further, in
the second quarter of 2001, we transferred the manufacturing capacity of HMTs
Fremont, California, facility to Malaysia, and closed all of our U.S. media
manufacturing operations, leaving us fully dependent on our Malaysian
manufacturing operations.

Technology developed at our U.S. research and development center must now
be first implemented at our Malaysian facilities without the benefit of being
implemented at a U.S. factory. Therefore, we rely heavily on electronic
communications between our U.S. facilities and Malaysia to transfer 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, including a failure in electronic communications with our U.S.
operations, the manufacture and shipment of our products would be delayed, and
our results of operations would suffer.



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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 accounted for substantially all of our sales in 2001. Accordingly, our operating results are subject to the risks inherent with
international operations, including, but not limited to:



| |  |  | compliance with changing legal and regulatory requirements of foreign jurisdictions;                                                                                                                                                                                                      
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | fluctuations in tariffs or other trade barriers;                                                                                                                                                                                                                                          
|
| |  |  | foreign currency exchange rate fluctuations since certain costs
of our foreign manufacturing and marketing operations are incurred in
foreign currency, including purchase of certain operating supplies
and production equipment from Japanese suppliers in yen-denominated
transactions;
|
| |  |  | difficulties in staffing and managing foreign operations;                                                                                                                                                                                                                                 
|
| |  |  | political, social and economic instability;                                                                                                                                                                                                                                               
|
| |  |  | exposure to taxes in multiple jurisdictions;                                                                                                                                                                                                                                              
|
| |  |  | local infrastructure problems or failures including but not limited to loss of power and water supply; and                                                                                                                                                                                
|
| |  |  | transportation delays and interruptions.                                                                                                                                                                                                                                                  

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

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

The nature of our operations makes us susceptible to material environmental
liabilities, which could result in significant clean-up expenses and adversely
affect our financial condition.

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



| |  |  | 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.                                                                                



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| |   |  | We are required to obtain necessary permits for expanding our facilities.
We must also comply with new regulations on our existing operations. Public
attention has increasingly been focused on the environmental impact of
manufacturing operations that use hazardous materials. If we fail to comply
with environmental regulations or fail to obtain the necessary permits:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we could be subject to significant penalties;                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | our ability to expand or operate in California or Malaysia could be restricted;                                                                                                                                                                                                                                                                                                 
|
| |  |  | our ability to establish additional operations in other locations could be restricted; or                                                                                                                                                                                                                                                                                       
|
| |  |  | we could be required to obtain costly equipment or incur significant
expenses to comply with environmental regulations.                                                                                                                                                                                                                                                         

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

Downturns in the disk drive manufacturing market and related markets may
decrease our revenues and margins.

The market for our products depends on economic conditions affecting the
disk drive manufacturing and related markets. Downturns in these markets may
cause disk drive manufacturers to delay or cancel projects, reduce their
production or reduce or cancel orders for our products. In the event of such a
downturn, customers may experience financial difficulty, cease operations or
fail to budget for the purchase of our products. This, in turn, may lead to
longer sales cycles, delays in payment and collection, and price pressures,
causing us to realize lower revenues and margins. In particular, many of our
customers and potential customers have experienced declines in their revenues
and operations. In addition, the terrorist acts of September 11, 2001 and
subsequent terrorist activities have created an uncertain economic environment
and we cannot predict the impact of these events, or of any related military
action, on our customers or business. We believe that, in light of these
events, some businesses may curtail or eliminate spending on technology related
to our products.

We rely on a continuous power supply to conduct our business, and an energy
crisis in California could disrupt our operations and increase our expenses.

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

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



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Earthquakes or other natural or man-made disasters could disrupt our
operations.

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

Additional asset impairments could adversely impact our financial condition and
results of operations.

As a result of recently issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets (SFAS 142), in 2002 we are
required to evaluate our existing intangible assets and goodwill that were
acquired in prior purchase business combinations, and make any necessary
adjustments in order to conform with the new criteria for classifications of
goodwill and other intangible assets. We are also required to reassess the
useful lives and residual values of all intangible assets acquired in purchase
business combinations. These changes are expected to have a material affect on
our accounting for goodwill and other intangible assets and will adversely
affect our results of operations as of the transition date.

At the beginning of fiscal 2002, the Company had unamortized goodwill and
other intangibles in the amount of $90.2 million, of which $83.5 million
pertains to goodwill. The Company is in the process of having an independent
appraisal performed as a basis for determining the value of goodwill and other
intangible assets. As a result of the new accounting rules and the appraisal,
the Company expects to record a transitional impairment loss in the range of
approximately $60 million to $84 million in the first half of 2002. However,
the other intangibles are expected to be amortized over remaining lives of
three to five years. Amortization expense related to goodwill was $22.8
million, $12.2 million and $16.1 million for the fiscal years ended 2001, 2000,
and 1999, respectively. After adoption of SFAS 142, any remaining goodwill
balance will not be amortized.

In addition, if we emerge from Chapter 11, we will be required to adopt
fresh start reporting in accordance with Statement of Position 90-7,
Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,
issued by the American Institute of Certified Public Accountants. Under fresh
start reporting, the reorganization value of the Company will be allocated to
the emerging entitys specific tangible and identifiable intangible assets
based on their fair values. Excess reorganization value, if any, will be
reported as reorganization value in excess of amounts allocable to
identifiable assets. This asset will be reviewed periodically for impairment
in accordance with newly issued financial accounting standards. As a result of
the adoption of such fresh start reporting, the Companys post emergence
(successor) financial statements will not be comparable with its
pre-emergence (predecessor) financial statements and could adversely affect
our financial condition and results of operations.



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ITEM 2. PROPERTIES

The following table summarizes the size, location, and current status of
our facilities:

|                       |  |                              |  |               |  |                  |  |             | 
|---------------------- |  | ---------------------------- |  | ------------- |  | ---------------- |  | ----------- | 
|                       |  |                              |  | Current Lease |  | Renewal          |  |             | 
|Location               |  | Description                  |  | Term Expires  |  | Options          |  | Square Feet | 
|                       |  |                              |  |               |  |                  |  |             | 
|Leased Facilities      |  |                              |  |               |  |                  |  |             | 
|San Jose, California   |  | Headquarters and R&D Center  |  | Jan. 2007     |  | 20 Years         |  | 188,000     | 
|San Jose, California   |  | Subleased to another company |  | April 2007    |  | 20 Years         |  | 82,000      | 
|Hayward, California    |  | Warehouse                    |  | March 2004    |  |                 |  | 30,000      | 
|Santa Rosa, California |  | Manufacturing and R&D        |  | April 2004    |  | 2 5-year options |  | 44,000      | 
|Owned Facilities       |  |                              |  |               |  |                  |  |             | 
|Fremont, California    |  | Manufacturing; held for sale |  |              |  |                 |  | 182,000     | 
|Eugene, Oregon         |  | Manufacturing; held for sale |  |              |  |                 |  | 106,000     | 
|Penang, Malaysia       |  | Manufacturing                |  |              |  |                 |  | 615,000     | 
|Sarawak, Malaysia      |  | Manufacturing                |  |              |  |                 |  | 275,000     | 




ITEM 3. LEGAL PROCEEDINGS

We filed a voluntary petition for reorganization under Chapter 11 of the
United States Bankruptcy Code on August 24, 2001 (the Petition Date). The
petition was filed with the United States Bankruptcy Court for the Northern
District of California. The petition affects only our U.S. corporate parent,
KUS, and does not include any of our subsidiaries, including KMT and KMS. We
are operating our business as a debtor-in-possession, and as such, continue to
manage and operate our business pending confirmation of the Plan of
Reorganization, and subject to supervision and orders of the Bankruptcy court.
Any transactions not in the ordinary course of business must be engaged in
compliance with applicable notice and procedural provisions of the Bankruptcy
law and approval of the Bankruptcy court.

Asahi Glass Company, Ltd. (Asahi) asserted that a technology cooperation
agreement (the agreement) between us and Asahi gave Asahi exclusive rights,
even as to Komag, to certain low-cost glass substrate-related intellectual
property developed by us. In connection with the Chapter 11 Bankruptcy filing,
the Bankruptcy Court, on October 19, 2001, ordered that the agreement be
rejected, effective as of the petition date of August 24, 2001. We suspended
the development of our low-cost glass substrate program on October 17, 2001.
We entered into a settlement Stipulation with Asahi that resolves the dispute
regarding ownership of intellectual property and know-how developed by us
prior to June 29, 2001, the agreed date of termination of the agreement. As
part of that Stipulation, Asahi waived claims against us relating to the
agreement. The dispute has been resolved with no financial impact on our
consolidated results of operations.




ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

No matters were submitted to our stockholders during our fourth quarter of
2001.



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PART II




ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

On September 17, 2001, we voluntarily delisted our common stock from the
Nasdaq National Market. Our stock is currently trading on the OTC Bulletin
Board under the symbol KMAGQ. The following table sets forth the range of high
and low closing sales prices, as reported on the Nasdaq National Market through
September 17, 2001, and as reported on the OTC Bulletin Board from September
18, 2001, through December 30, 2001.

As of February 15, 2002, we had 571 holders of record of our Common Stock
and 111,924,983 shares outstanding.

|     |  |                                                   |  |   |      |                |  |     |      |  |  | 
|---- |  | ------------------------------------------------- |  | - | ---- | -------------- |  | --- | ---- |  |  | 
|     |  |                                                   |  |   |      | Price Range of
|     |  |                                                   |  |   |      | Common Stock  
|     |  |                                                   |  |   |      |               
|     |  |                                                   |  |   |      | High           |  | Low
|     |  |                                                   |  |   |      |                |  |    
|2000 |  |                                                   |  |   |      |                |  |     |      |  |  | 
|     |  | First Quarter                                     |  | $ | 4.81 |                |  | $   | 2.22 | 
|     |  | Second Quarter                                    |  |   | 4.00 |                |  |     | 1.75 | 
|     |  | Third Quarter                                     |  |   | 4.03 |                |  |     | 1.16 | 
|     |  | Fourth Quarter                                    |  |   | 3.38 |                |  |     | 0.63 | 
|2001 |  |                                                   |  |   |      |                |  |     |      |  |  | 
|     |  | First Quarter                                     |  |   | 1.72 |                |  |     | 0.56 | 
|     |  | Second Quarter                                    |  |   | 0.89 |                |  |     | 0.26 | 
|     |  | Third Quarter (through September 17)              |  |   | 0.26 |                |  |     | 0.12 | 
|     |  | Third Quarter (September 18 through September 30) |  |   | 0.16 |                |  |     | 0.02 | 
|     |  | Fourth Quarter                                    |  |   | 0.08 |                |  |     | 0.03 | 
|2002 |  |                                                   |  |   |      |                |  |     |      |  |  | 
|     |  | First Quarter (through March 22, 2002)            |  |   | 0.05 |                |  |     | 0.02 | 

Dividend Policy

We have never declared cash dividends on our common stock. We presently
intend to retain all cash for use in the operation and expansion of our
business and do not anticipate paying any cash dividends in the near future.
Our filing under Chapter 11 prohibits the payment of dividends.



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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data and
other operating information of Komag, Incorporated. The financial data and
operating information is derived from the consolidated financial statements of
Komag, Incorporated, and should be read in conjunction with the consolidated
financial statements, related notes, and other financial information included
herein.

|                                                           |  |                      |          |      |  |                                          |         |      |  |      |          |   |  |   |          |   |  |   |         |  
|---------------------------------------------------------- |  | -------------------- | -------- | ---- |  | ---------------------------------------- | ------- | ---- |  | ---- | -------- | - |  | - | -------- | - |  | - | ------- | -
|                                                           |  | Fiscal Year Ended(8)
|                                                           |  |                     
|                                                           |  | 2001                 |          | 2000 |  | 1999                                     |         | 1998 |  | 1997
|                                                           |  |                      |          |      |  |                                          |         |      |  |     
|                                                           |  |                      |          |      |  | (in thousands, except per share amounts)
|Consolidated Statements of Operations Data                 |  |                      |          |      |  |                                          |         |      |  |      |          |   |  |   |          |   |  |   |         |  
|Net sales                                                  |  | $                    | 282,613  |      |  | $                                        | 358,463 |      |  | $    | 331,946  |   |  | $ | 328,883  |   |  | $ | 631,082 |  
|Gross profit (loss)                                        |  |                      | (2,456   | )    |  |                                          | 34,988  |      |  |      | (22,709  | ) |  |   | (62,752  | ) |  |   | 93,546  |  
|Restructuring/impairment charges(1)(3)(5)(6)(7)            |  |                      | 57,430   |      |  |                                          | 5,293   |      |  |      | 187,965  |   |  |   | 187,768  |   |  |   | 52,157  |  
|Operating loss(1)(3)(5)(6)(7)                              |  |                      | (146,442 | )    |  |                                          | (38,295 | )    |  |      | (291,089 | ) |  |   | (331,919 | ) |  |   | (37,561 | )
|Interest expense(2)                                        |  |                      | 155,192  |      |  |                                          | 45,428  |      |  |      | 23,319   |   |  |   | 19,212   |   |  |   | 9,116   |  
|Reorganization costs                                       |  |                      | 6,066    |      |  |                                          |        |      |  |      |         |   |  |   |         |   |  |   |        |  
|Loss before extraordinary gain(1)(2)(3)(5)(6)(7)           |  |                      | (296,395 | )    |  |                                          | (71,830 | )    |  |      | (283,049 | ) |  |   | (366,336 | ) |  |   | (22,103 | )
|Extraordinary gain (4)                                     |  |                      |         |      |  |                                          | 3,772   |      |  |      |         |   |  |   |         |   |  |   |        |  
|Net loss(1)(2)(3)(4)(5)(6)(7)                              |  | $                    | (296,395 | )    |  | $                                        | (68,058 | )    |  | $    | (283,049 | ) |  | $ | (366,336 | ) |  | $ | (22,103 | )
|Basic and diluted loss per share before
extraordinary gain |  | $                    | (2.65    | )    |  | $                                        | (0.93   | )    |  | $    | (4.54    | ) |  | $ | (6.89    | ) |  | $ | (0.42   | )
|Basic and diluted extraordinary gain
per share             |  | $                    |         |      |  | $                                        | 0.05    |      |  | $    |         |   |  | $ |         |   |  | $ |        |  
|Basic and diluted loss per share                           |  | $                    | (2.65    | )    |  | $                                        | (0.88   | )    |  | $    | (4.54    | ) |  | $ | (6.89    | ) |  | $ | (0.42   | )

|                                                                        |  |                                |          |      |  |                                            |         |      |  |      |         |  |  |   |         |  |  |   |           | 
|----------------------------------------------------------------------- |  | ------------------------------ | -------- | ---- |  | ------------------------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | --------- | 
|                                                                        |  | As Of The Fiscal Year Ended(8)
|                                                                        |  |                               
|                                                                        |  | 2001                           |          | 2000 |  | 1999                                       |         | 1998 |  | 1997
|                                                                        |  |                                |          |      |  |                                            |         |      |  |     
|                                                                        |  |                                |          |      |  | (in thousands, except number of employees)
|Consolidated Balance Sheet Data                                         |  |                                |          |      |  |                                            |         |      |  |      |         |  |  |   |         |  |  |   |           | 
|Net property, plant and equipment,
and land and buildings held for sale |  | $                              | 256,856  |      |  | $                                          | 354,873 |      |  | $    | 313,455 |  |  | $ | 470,017 |  |  | $ | 678,596   | 
|Current portion of long-term debt                                       |  |                                |         |      |  |                                            | 216,740 |      |  |      | 260,000 |  |  |   | 260,000 |  |  |   |          | 
|Long-term debt (less current portion)                                   |  |                                |         |      |  |                                            | 137,545 |      |  |      | 22,891  |  |  |   |        |  |  |   | 245,000   | 
|Liabilities subject to compromise                                       |  |                                | 516,173  |      |  |                                            |        |      |  |      |        |  |  |   |        |  |  |   |          | 
|Stockholders equity (deficit)                                          |  |                                | (144,939 | )    |  |                                            | 151,861 |      |  |      | 78,713  |  |  |   | 323,807 |  |  |   | 686,184   | 
|Total assets                                                            |  | $                              | 407,850  |      |  | $                                          | 633,061 |      |  | $    | 475,871 |  |  | $ | 694,095 |  |  | $ | 1,084,664 | 
|Number of employees at year-end                                         |  |                                | 3,789    |      |  |                                            | 5,334   |      |  |      | 3,488   |  |  |   | 4,086   |  |  |   | 4,738     | 



---

|(1) |  | Results of operations for 2001 included a $45.8 million impairment charge
related to the write-down of land and buildings held for sale, a $4.4
million impairment charge related to manufacturing equipment no longer in
service, and restructuring charges of $7.2 million primarily related to
lease obligations on equipment no longer in service and additional
facility closure costs.         
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Results of operations for 2001 included a $99.1 million interest expense
charge related to accretion to bring the subordinated convertible notes up
to their full face value of $230.0 million.                                                                                                                                                                                                      
|   
|   
|   
|   
|(3) |  | Results of operations for 2000 included a net $5.3 million restructuring
charge, including an $8 million charge in connection with the ceasing of
the Companys Santa Rosa manufacturing operations, plus a net $2.7 million
reversal of charges previously accrued for the 1997, 1998, and 1999
restructures.                                                                                       
|   
|   
|   
|   
|(4) |  | Results of operations for 2000 included a $3.8 million extraordinary
gain, net of expenses, resulting from the restructuring of the Companys
term debt.                                                                                                                                                                                                                                             
|   
|   
|   
|   
|(5) |  | Results of operations for 1999 included $143.7 million in restructuring
charges and a $44.3 million impairment charge. The restructuring charges
related primarily to the closing of the Companys U.S. manufacturing
operations. The impairment charge related to the write-down of goodwill
was originally from the acquisition of Western Digital Corporations media
operation.                  
|   
|   
|   
|   
|(6) |  | Results of operations for 1998 included a $187.8 million restructuring
charge that primarily related to an asset impairment charge of $175
million. Based on analysis of the Companys production capacity and its
expectations of the media market over the remaining life of the Companys
fixed assets, the Company concluded that it would not be able to recover
the book value of those assets.
|   
|   
|   
|   
|(7) |  | Results of operations for 1997 included a $52.2 million restructuring
charge related to the consolidation of the Companys U.S. manufacturing
operations.                                                                                                                                                                                                                                            
|   
|   
|   
|   
|(8) |  | No cash dividends were declared by the Company during the five-year
period.                                                                                                                                                                                                                                                                                                                          



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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS

Results of Operations

Overview

Our business is characterized by capital intensity and high fixed costs,
making it imperative that we sell disks in high volume. Our contribution
margin per disk sold varies with changes in selling price, input material
costs, and production yield. As demand for our disks increases, our total
contribution margin increases proportionally, improving our financial results.
Currently, we are operating substantially below our estimated production
capacity due to poor market conditions. If the market improves, we should
achieve better financial performance, because we do not have to increase our
fixed cost structure in proportion to increases in demand and resultant
capacity utilization. Conversely, our financial results would deteriorate
rapidly if the disk market were to worsen. Furthermore, our ability to operate
as a going concern will depend on confirmation of our Plan of Reorganization
and emergence from Chapter 11 Bankruptcy proceedings, but even then, there can
be no assurance that there will be improvement in our financial condition.

Adverse conditions in the thin-film media market, which began in mid-1997,
continued to impact our business throughout 1999, 2000, and 2001. Demand for
disk drives grew rapidly during the mid-1990s, and industry forecasts were for
continued strong growth. Along with many of our competitors (both independent
disk manufacturers and captive disk manufacturers owned by vertically
integrated disk drive companies), in 1996 we committed to expansion programs
and substantially increased media manufacturing capacity in 1997. In 1997, the
rate of growth in demand for disk drives fell. Disk drive manufacturers
abruptly reduced orders for media from independent suppliers and relied more
heavily on internal capacity to supply a larger proportion of their media
requirements. The media industrys capacity expansion, coupled with the
decrease in the rate of demand growth, resulted in excess media production
capacity. Due to classic micro-economic forces, this excess industry capacity
caused sharp declines in average selling prices for disk products as
independent suppliers struggled to utilize their capacity.

In addition to adversities caused by excess capacity, by the end of 1998,
most disk drives were manufactured with advanced, magneto-resistive (MR) media
and recording heads. This transition to MR and subsequently to giant
magneto-resistive (GMR) components led to significant, unprecedented increases
in areal density and, therefore, the amount of data that can be stored on a
single disk platter. Increased storage capacity per disk allows drive
manufacturers to offer lower-priced disk drives by incorporating fewer
components into their disk drives. Because of this lower disk-per-drive ratio,
demand for disks was relatively flat during the period from 1997 through 2001,
resulting in substantial excess disk production capacity. The significant
amount of captive capacity employed by certain disk drive manufacturers also
continued to impair the market opportunities for independent disk suppliers
such as our company.

In April 1999, we purchased the assets of Western Digitals media
operation. At the time of the asset purchase, we also signed a volume purchase
agreement with Western Digital under which we agreed to supply a substantial
portion of Western Digitals media needs over the following three years. In
October 2001, this contract was extended for an additional three-year term,
through April 2005 at a minimum.

Due to weak unit demand, we closed the former Western Digital media
operation in Santa Clara, California at the end of June 1999, nearly fifteen
months ahead of our original transition plan.



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In July 1999, we announced that we would reduce the size of our U.S.
operations further in response to the poor industry conditions. In August 1999,
we announced that we would cease volume production of finished disks in the
U.S., close two manufacturing facilities in San Jose, California, and institute
staged work force reductions that would affect 980 employees by the end of
1999.

In October 2000, we merged with HMT. The merger was accounted for under
purchase accounting rules and accordingly, our financial statements include
the operating results of HMT beginning in the fourth quarter of 2000.

In December 2000, we implemented a restructuring plan to cease KMTs
manufacturing operations in Santa Rosa, California. These operations ended in
May 2001. A portion of the location has been retained as a research and
development center.

During fiscal 2001, we closed HMTs U.S. manufacturing facilities and
consolidated all of our manufacturing activities in Malaysia, where we can
achieve significantly lower costs. As a result, we lowered our fixed
manufacturing costs by approximately $27 million per quarter in the fourth
quarter of 2001 compared to the fourth quarter of 2000. Over the same period,
we combined technologies, lowered variable costs, and improved manufacturing
yields substantially, and ended the year with considerably stronger operating
performance.

Because of very weak industry market conditions and continuing excess
industry capacity during 2001, net sales decreased by 48% from $111.2 million
in the fourth quarter of 2000 to $58.0 million in the fourth quarter of 2001.
But as a result of the consolidation of our manufacturing operations and the
significant reduction of manufacturing costs discussed above, our gross margin,
operating loss, and operating loss without restructuring/impairment charges
improved in the fourth quarter of 2001 compared to the fourth quarter of 2000.

Now that the relocation of our manufacturing operations to our Malaysian
facilities has been completed, our California sites are solely focused on
activities related to research, process development, and product prototyping.
Our selling, general, and administrative functions also remain in California.
We believe that the shift of high-volume production to our cost-advantaged
Malaysian manufacturing plants has improved our overall cost structure,
resulted in lower unit production costs, and improved our ability to respond to
the continuing price pressures in the disk industry.

On August 24, 2001, we filed a voluntary petition for reorganization under
Chapter 11 of the United States Bankruptcy Code. The petition was filed with
the United States Bankruptcy Court for the Northern District of California
under case number 01-54143-JRG. The petition relates only to our U.S.
corporate parent, KUS, and does not include any of our subsidiaries, including
KMT and KMS. We are operating our business as a debtor-in-possession subject
to supervision and orders of the Bankruptcy Court.

2001 versus 2000

Net Sales

Net sales for 2001 were $282.6 million, a decrease of $75.9 million from
net sales of $358.5 million in 2000. The overall weak economy and related
personal computer market in 2001 negatively impacted our sales volume as well
as our average selling price. Unit shipments in 2001 declined by 14% in 2001,
to 43.2 million disks, versus 50.2 million in 2000. Our finished disk average
selling price per unit fell to $6.16 in 2001 from $6.58 in 2000. Another
factor contributing to the sales decline was a $15 million reduction in sales
of partially completed disks (disk substrates) for fiscal 2001 compared with
fiscal 2000. We expect relatively flat to slightly higher sales volume in the
first half of 2002, and continuing excess media industry capacity, which we
expect to lead to continuing pricing pressure with lower average selling
prices.



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In 2001, Western Digital accounted for approximately 59% of net sales.
Maxtor accounted for 27% of net sales, and Seagate Technology accounted for 7%
of net sales. In 2000, Western Digital accounted for approximately 50% of net
sales, Maxtor accounted for 28% of net sales, and Seagate Technology accounted
for 17% of net sales.

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

Gross Margin

Our overall 2001 gross loss percentage was negative 0.9% compared to a
gross profit percentage of 9.8% in 2000, a decline of 10.7 points. The sales
volume and average selling price declines, as discussed above, accounted for
6.1 points of the decline, and higher fixed manufacturing costs resulting from
the HMT merger accounted for 4.6 points of the decline. By the third quarter
of 2001, when the consolidation of our manufacturing operations was complete,
fixed manufacturing costs returned to approximately pre-merger levels in fiscal
2000. Variable costs per unit were flat year over year in 2000 and 2001.
However, variable costs per unit decreased in each successive quarter of 2001
due to lower input material costs and higher product yields. These quarter to
quarter improvements resulted from the consolidation of manufacturing
operations in Malaysia and continuous improvement of our manufacturing
processes while qualifying and ramping new advanced disk products. We expect
to maintain our variable cost per unit at levels similar to the second half of
2001 while continuing to advance our technology. With all of our manufacturing
now being performed in Malaysia, we expect our fixed cost per unit in 2002 to
vary based on changes in production volumes from the fourth quarter of 2001
levels.

Operating Expenses

Research, development, and engineering expenses were $39.5 million in
2001, a $4.2 million increase compared to $35.3 million in 2000. Increased R&D
personnel and operating expenses were required in 2001 to support the
additional engineering processes and equipment from the HMT merger, and to
support our expanded efforts in advanced technology. We expect R&D spending in
2002 to be similar to the 2001 level.

Selling, general, and administrative expenses were $19.9 million in 2001,
a $3.6 million increase over $16.3 million in 2000. The increase primarily
reflected higher payroll and payroll related expenses, and professional service
expenses associated with financial restructuring activities prior to the
bankruptcy filing, which was somewhat offset by lower retention bonuses. We
expect 2002 expenses to be similar to 2001 levels.

In both 2001 and 2000, we recorded $10.2 million of amortization of
intangibles associated with our acquisition of Western Digitals media
operation. See Note 15 for additional information. The remaining balance of
$2.6 million at December 30, 2001 will be fully amortized by the end of the
first quarter of fiscal 2002.

In 2001 we recorded $16.9 million compared to $6.2 million in 2000 of
amortization of intangibles associated with our merger with HMT. The increase
reflects four quarters of amortization of intangibles from the HMT merger,
compared to only one quarter of amortization in 2000. The value and
amortization period of goodwill and other intangibles will be reassessed in
accordance with SFAS 142, Goodwill and Other Identifiable Intangible Assets,
a recently issued new accounting pronouncement (see Item 7  Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Other for further discussion.)



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We recorded restructuring charges of $7.2 million in 2001 and $5.3 million
in 2000. The $7.2 million charge for 2001 reflected additional costs
associated with lease obligations on equipment no longer in service, and costs
for closing the former HMT facilities. The $5.3 million total for 2000
included an $8.0 million charge related to the cessation of manufacturing
operations at KMT, less a net $2.7 million reversal of charges previously
accrued for the 1997, 1998, and 1999 restructuring plans. See Note 12.

We recorded impairment charges of $50.2 million in 2001 and zero in 2000.
Impairment charges in 2001 included a $35.4 million write-down of the former
HMT land and buildings held for sale in Eugene, Oregon, and Fremont, California
in the second quarter, and an additional $10.4 million write-down on the same
properties in the fourth quarter. The impairment write-downs resulted from
currently-depressed market conditions for commercial real estate, and was based
on an independent valuation (net of estimated selling costs). We also recorded
$4.4 million of impairment charges for manufacturing equipment no longer in
service in 2001.

Interest Income/Expense

Interest income declined by $2.6 million, from $4.1 million in 2000 to
$1.5 million in 2001. The decrease was due to lower average cash and
investment balances during 2001.

Interest expense increased by $109.8 million in 2001, from $45.4 million
in 2000 to $155.2 million in 2001. The increase was primarily the result of
the accretion of the HMT debt over approximately eight months in 2001 versus
three months in 2000, and the accretion of $99.1 million in 2001 to record full
face value of the HMT debt upon our default on the debt agreements. No
interest expense was recorded after our Chapter 11 Bankruptcy filing on August
24, 2001.

Reorganization Costs

Reorganization costs of $6.1 million were recorded in 2001 in connection
with our Chapter 11 Bankruptcy filing. These costs primarily included a $2.3
million accretion of the remaining discount on the note payable to Western
Digital to its face value, $1.9 million in professional fees, and a $1.9
million adjustment to increase liabilities subject to compromise to the amount
of the Western Digital equipment lease claim. See Note 2.

Income Taxes

In 2001, we recorded an income tax benefit of $9.4 million, which was
primarily related to the expiration of the statutory periods to audit our
federal and state tax returns, net of foreign withholding taxes on royalty and
interest payments and foreign taxes of subsidiaries. In 2000, we recorded an
income tax benefit of $5.2 million, primarily related to the expiration of a
statutory period to audit our state tax returns, net of foreign withholding
taxes on royalty and interest payments and foreign taxes of subsidiaries.

The Companys wholly-owned thin-film media operation, KMS, received a
five-year extension of its initial tax holiday through June 2003 for its first
plant site in Malaysia. KMS has also been granted an additional eight-year and
ten-year tax holiday through December 2006 and 2008 for its second and third
plant sites in Malaysia, respectively. The tax holidays had no impact on the
Companys net losses in 2001. In 2000, the tax holiday reduced the Companys
net loss by approximately $8.8 million ($0.08 per share under the basic
method).



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Minority Interest in Consolidated Subsidiary

The minority interest in the net income of consolidated subsidiary during
2001 represented Kobe Steel USA Holdings Inc.s, (Kobe USA) share of
KMTs net income. KMT recorded net income of $0.1 million in 2001 and a $12.7
million net loss (including an $8.0 million restructuring charge) in 2000.

Equity in Unconsolidated Company

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

We recorded an investment in Chahaya for $12.0 million in the fourth
quarter of 2000. The investment included $4.0 million for expected 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 activity,
as well as additional changes in Chahayas equity structure, reduced our
ownership percentage to 34% at the end of our 2001 fiscal year. In 2001, we
recorded a $3.9 million loss as our equity share of Chahayas net loss.

2000 versus 1999

Net Sales

Net sales for 2000 increased to $358.5 million, up 8% from $331.9 million
in 1999. The increase was due to a combination of a 26% increase in unit sales
volume and a 18% decrease in the overall average selling price. Unit shipments
in 2000 were 50.2 million disks, versus 39.8 million in 1999. Shipments in 2000
included 3.3 million disks sold by HMT in the fourth quarter.

Distribution sales of product manufactured by Asahi Komag Co., Ltd. (AKCL)
were $5.6 million in 2000 compared to less than $0.1 million in 1999. Because
of difficult industry conditions, AKCL was dissolved in June 2001.

During 2000, sales to Western Digital accounted for approximately 50% of
consolidated net sales. Sales to Maxtor accounted for 28% of consolidated net
sales and sales to Seagate Technology accounted for 17% of consolidated net
sales. In 1999, sales to Western Digital accounted for approximately 71% of
consolidated net sales and sales to Maxtor accounted for 16% of consolidated
net sales. Net sales to each of our other customers were less than 10% during
2000 and 1999.

Gross Margin

The overall gross margin for 2000 was 9.8%, compared to a gross loss of
6.8% in 1999. The improvement in the gross margin in 2000 was mainly due to an
increase in unit production, a reduction in fixed costs due to a full year of
the effects of the 1999 restructuring activities, offset by a decline in
average selling prices and the addition of certain excess capacity costs due to
the HMT merger. The decline in the overall average selling price had a negative
impact of 20.4% on gross margin. However, unit production increased 22.9% in
2000 relative to 1999, and 5.9% of the increase was due to the HMT merger.



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Reductions in equipment and facilities related costs, including
depreciation, and payroll related costs had the most significant positive
impact on the 2000 gross margin compared to 1999. On a consolidated basis,
reductions in equipment and facilities related costs had a positive impact on
the gross margin in 2000 of 8.2%, net of a negative 1.7% impact from additional
HMT costs. Reductions in payroll-related costs had a positive impact on the
gross margin in 2000 of 5.2%, net of a negative 3.5% impact from additional HMT
costs.

Operating Expenses

Research, development and engineering expenses were $35.3 million in 2000,
down $9 million from $44.3 million in 1999. The decrease is primarily due to a
decrease of $6.8 million in payroll and related costs and lower facility and
equipment costs of $2.7 million, primarily due to having a full year of benefit
from the 1999 restructuring activities, somewhat offset by additional R&D costs
of $1.9 million related to the HMT merger.

Selling, general, and administrative expenses were $16.3 million in 2000,
down $2.6 million from $18.9 million in 1999. The decrease primarily reflected
lower marketing and administrative payroll and payroll-related expenses,
somewhat offset by higher discretionary bonus expenses and the addition of
expenses related to the HMT merger.

Amortization of intangible assets was $16.4 million in 2000, down $.9
million from $17.3 million in 1999. Fiscal year 2000 charges included $10.2
million of goodwill associated with the acquisition of assets from Western
Digital, and $6.2 million of goodwill amortization associated with the HMT
merger. See Notes 15 and 16 for additional information.

We recorded restructuring/impairment charges of $5.3 million in 2000, and
$188.0 million in 1999. Charges in 2000 included an $8 million charge in
connection with the ceasing of the Companys Santa Rosa manufacturing
operations, plus a net $2.7 million reversal of charges previously accrued for
the 1997, 1998, and 1999 restructures. Charges in 1999 included $143.7 million
in restructuring charges and a $44.3 million impairment charge. The
restructuring charges related primarily to the closing of the Companys U.S.
manufacturing operations. The impairment charge related to the write-down of
goodwill was originally from the acquisition of Western Digital Corporations
media operation. See Notes 12 and 13 for additional information.

Interest Income/Expense

Interest income declined by $1.1 million (21.3%) in 2000 compared to 1999,
primarily due to lower average investment balances during the first three
quarters of 2000.

Interest expense increased by $22.1 million in 2000 compared to 1999 due
to several factors. We recorded $10.6 million of accretion on the value of the
HMT debt in the fourth quarter of 2000. As part of the purchase price
allocation associated with the HMT merger, the HMT debt was valued at its fair
market value, which was $138.0 million lower than the face value of the debt.
The $138.0 million discount was being accreted over the remaining life of the
debt of thirteen quarters. The debt was accreted up to its face value upon
default of the debt in the third quarter of 2001. We also recorded $3.0
million in interest expense on the HMT debt in the fourth quarter of 2000.

In addition, our interest expense increased in 2000 compared to 1999 as a
result of an increase of $2.9 million in interest on our bank debt, $1.9
million in loan fee amortization, $1.5 million in warrant amortization and an
increase of $1.3 million on the Western Digital debt. The increase in interest
on the bank debt was the result of higher interest rates partially offset by
lower principal balances.



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Income Taxes

In 2000, we recorded an income tax benefit of $5.2 million, primarily
related to the expiration of a statutory period to audit our state tax returns,
net of foreign withholding taxes on royalty and interest payments and foreign
taxes of subsidiaries. In February 2000, we obtained favorable resolution of
various federal tax return audits which had been in process as of the fiscal
year ended January 2, 2000. These audits were resolved with no taxes owed by
us. As a result, the related income tax liability as of January 2, 2000, was
reduced by $27.0 million, and the provision for income taxes for the fourth
quarter of 2000 and the year ended 1999 reflect this adjustment. Our income tax
benefit of approximately $25.8 million for 1999 primarily represents the above
mentioned adjustment, net of foreign withholding taxes.

The Companys wholly-owned thin-film media operation, KMS, received a
five-year extension of its initial tax holiday through June 2003, for its first
plant site in Malaysia. KMS has also been granted an additional eight-year and
ten-year tax holiday through December 2006 and 2008 for its second and third
plant sites in Malaysia, respectively, based on achieving certain investment
criteria. In 2000, the tax holiday reduced the Companys net loss by
approximately $8.8 million ($0.08 per share under the basic method). The tax
holidays had no impact on the Companys net loss in 1999.

Minority Interest in Consolidated Subsidiary

The minority interest in the net loss of consolidated subsidiary during
2000 represented Kobe Steel USA Holdings Inc.s, (Kobe USA) share of
KMTs net loss. KMT recorded a net loss of $12.7 million (including an $8.0
million restructuring charge) in 2000 and $1.1 million in 1999.

Equity in Unconsolidated Joint Venture

We owned a 50% interest in AKCL and record our share of AKCLs net income
(loss) as equity in net income (loss) of unconsolidated joint venture. We
recorded a loss of $1.4 million as our equity in AKCLs loss in the first
quarter of 1999. This reduced our investment in AKCL to zero. During the
remainder of 1999 we did not record $2.6 million in losses, and in 2000 we did
not record $17.1 million in losses, as these amounts would have reduced the net
book value of the investment in AKCL below zero.

Critical Accounting Policies

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

Allowance for Sales Returns

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



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between our estimated and actual experience or changes in our estimate
would be reflected in our reported revenues in the period we determine that
difference.

Allowance for Doubtful Accounts

We record an allowance for doubtful accounts based on estimates of
potential uncollectability of our accounts receivables. We specifically
analyze our accounts receivable and analyze historical bad debts, customer
concentrations, customer credit-worthiness, current economic trends, and
changes in our customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. The majority of our sales and resulting
accounts receivable are concentrated among a few large customers. As a result
of this sales concentration, at December 30, 2001 86% of our accounts
receivable was with one customer for which no allowance was provided.
Historically, we have not experienced material differences between our
estimated allowance for doubtful accounts and actual results. However, if the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.

Restructuring Liabilities

Restructuring liabilities have been estimated and accrued based on
historical data on prior costs for such activities, coupled with assumptions on
expected timeframes for such activities and specific actions necessary to
complete such transitions. It is possible that future costs incurred to exit
related business activities could vary from historical costs, assumptions on
timeframes could change or different actions may be determined necessary than
assumed in our original estimates, which could result in significant changes in
costs to exit certain business activities. Any significant difference between
our estimated restructuring liabilities and actual experience or changes in our
estimate would be reflected in our reported operating expenses in the period we
determine that difference. In 2001, we increased our restructuring liabilities
associated with the HMT merger by $7.2 million. We accrued the remaining lease
obligations for equipment no longer in use and additional building exit costs
for the property held for sale due to an extension of the estimated period to
sell the property. In 2000, we reduced our restructuring liabilities by $2.7
million as actual costs associated with prior years restructuring activities
were less than original estimates.

Liabilities Subject to Compromise

We have recorded amounts for liabilities subject to compromise using
judgement on the estimated allowable amounts, as prescribed by Statement of
Position 90-7, Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code. The estimates for allowable amounts are based on our
accounting records, discussions with creditors and amounts as documented in the
Plan of Reorganization, as well as discussions with outside counsel. If we
obtain new information in the future, including court orders, our estimates for
allowable amounts could change. Any significant change would be reflected in
our reported reorganization costs in our statement of operations in the period
we determine such difference. In the fourth quarter of 2001, we increased our
liabilities subject to compromise by $1.9 million related to equipment lease
obligations under the Western Digital rejection claims.

Long-lived Assets and Certain Identifiable Intangible Assets

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



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estimated fair values utilizing discounted estimates of future cash flows.
Land and buildings held for sale are evaluated for impairment periodically when
there are significant changes in market conditions for commercial real estate
and valued based on independent valuation less estimated selling costs. Any
such identified writedowns are recorded as impairment charges and included in
operating expenses in the period the impairment is determined. We recorded
impairment charges of $50.2 million of impairment charges in 2001, including
$45.8 million on land and buildings held for sale, and $4.4 million for
writedowns of equipment no longer in use.

Liquidity and Capital Resources

Cash and cash equivalents and short-term investments were $17.8 million at
the end of 2001, a $62.9 million decline from $80.7 million at the end of 2000.
Based on current operating forecasts, we estimate that our cash balance is
adequate to support our continuing operations for at least the next twelve
months. Additionally, we have commitments from certain of our lenders to
provide debtor-in-possession financing, should we require it, and exit
financing on our emergence from Chapter 11 in the amount of $15.0 million. Our
forecasts and the exit financing agreement are contingent on our emergence from
our Chapter 11 case. If we are unsuccessful in obtaining confirmation of the
Plan of Reorganization, creditors or equity holders may seek other alternatives
for us, which may include soliciting bids for our company through an auction
process, or possible liquidation of our assets. In a liquidation, all
creditors would be paid prior to any distribution to shareholders.

Consolidated operating activities used $23.0 million in cash in 2001. The
primary components of this change include the following:



| |  |  | The 2001 net loss of $296.4 million (net of non-cash
depreciation and amortization of $96.0 million, non-cash accretion
and amortization of interest on debt of $130.9 million, non-cash
restructuring and impairment charges of $57.4 million, and other net
non-cash credits of $4.6 million) resulted in a $16.7 million net use
of cash.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Reorganization charges of $6.1 million included $2.3 million in
accretion of discount on the note payable to related party, $1.9
million in accrued professional fees, and a $1.9 million adjustment
to liabilities subject to compromise.                                                                                                  
|
| |  |  | The accounts receivable decrease of $15.6 million was a direct
result of the corresponding decline in 2001 net sales.                                                                                                                                                                                                                       
|
| |  |  | The inventory decrease of $9.7 million was due to the overall
slowdown in manufacturing operations resulting from the economic
downturn, and from continuing improvements in our inventory
management practices.                                                                                                                            
|
| |  |  | The accounts payables decrease of $10.8 million primarily
reflected lower raw materials purchases.                                                                                                                                                                                                                                          
|
| |  |  | Restructuring liabilities associated with the HMT merger used
$14.2 million, primarily for severance and notification pay, as well
as payments for building exit activities. Other restructuring
activity used $5.4 million for severance costs and building exit
activities.                                                               
|
| |  |  | Other liabilities used $2.0 million, primarily for facilities
and facility services paid in accordance with our agreement with
Chahaya                                                                                                                                                                                                      
|
| |  |  | Remaining operating assets and liabilities used $5.3 million in
cash, reflecting lower payroll-related accruals and lower interest
payable resulting from the Chapter 11 filing.                                                                                                                                                            



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Investing activities used $15.7 million in cash. Acquisitions of property,
plant, and equipment used $25.7 million, and net proceeds from short-term
investments provided $9.3 million. Other investing activities provided $0.7
million in cash.

Financing activities used $14.8 million in cash. The payment of debt in
2001 used $15.0 million and the sale of common stock provided $0.2 million.

Working capital increased by $199.7 million in 2001, primarily due to the
reclassification of our senior debt and other liabilities to liabilities
subject to compromise. Current assets (including the declines in cash,
receivables, and inventories discussed above) declined by $92.0 million.
However, current liabilities declined by $291.7 million during 2001. This
decline primarily reflected the reclassification of $206.9 million of senior
unsecured debt to liabilities subject to compromise, the decrease in accounts
payable discussed above, and the restructuring-related cash payments and
reclassification discussed above.

Current noncancellable capital purchase commitments total approximately
$3.1 million. Total capital expenditures for 2002 are currently planned at
approximately $20.0 million. The 2002 capital spending plan includes costs
primarily for projects designed to improve yield and productivity, as well as
costs to improve equipment capability for the manufacture of advanced products.
In addition, we plan to install additional manufacturing equipment in Malaysia
from the former HMT facilities if our sales volumes increase in the second half
of the year and the equipment is required.

We lease certain research and administrative facilities under operating
leases that expire at various dates between 2004 and 2007. Certain of these
leases include renewal options varying from five to twenty years. At December
30, 2001, the future minimum commitments for non-cancelable operating facility
leases and a sublease that we have not rejected or we do not intend to reject
pursuant to the Bankruptcy Code (see Note 2), are as follows (in thousands):

|           |  |          |        |          |  |   |       | 
|---------- |  | -------- | ------ | -------- |  | - | ----- | 
|           |  | Minimum  |        |          |  |  
|           |  | Lease    |        | Sublease
|           |  | Payments |        | Income  
|           |  |          |        |         
|2002       |  | $        | 3,507  |          |  | $ | 1,450 | 
|2003       |  |          | 3,509  |          |  |   | 1,494 | 
|2004       |  |          | 3,458  |          |  |   | 1,539 | 
|2005       |  |          | 3,308  |          |  |   | 1,585 | 
|2006       |  |          | 3,308  |          |  |   | 1,633 | 
|Thereafter |  |          | 636    |          |  |   | 414   | 
|           |  |          |        |          |  |   |       | 
|           |  | $        | 17,726 |          |  | $ | 8,115 | 
|           |  |          |        |          |  |   |       | 

In June 2000, we replaced our credit facilities with a senior unsecured loan
restructure agreement with our lenders, and a separate subordinated unsecured
convertible debt agreement with other creditors. As a result, we have $201.7
million in senior unsecured bank debt outstanding that matured on June 30,
2001, and $9.3 million of convertible debt that was originally scheduled to
mature in 2005. In addition, we have a note payable to Western Digital with a
principal balance of $30.1 million that was originally scheduled to mature in
April 2002. Also, we have outstanding $230.0 million of HMTs convertible debt
that was originally scheduled to mature in 2004. We did not pay interest on
the HMT subordinated notes when they became due on July 15, 2001, and our
failure to pay our senior bank debt when it became due caused a default under
the HMT subordinated notes as of July 30, 2001.



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As of August 24, 2001 (the petition date for reorganization under Chapter
11), the aforementioned debts remained outstanding, and were reclassified to
liabilities subject to compromise. The repayment of this indebtedness is
subject to the Plan of Reorganization. Through August 24, 2001, unpaid accrued
interest on the aforementioned debt was $17.3 million. Contractual interest
expense on the indebtedness from August 25, 2001 to December 30, 2001, was
$11.7 million. This expense was not recorded.

Other

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

At the beginning of fiscal 2002, the date of adoption of SFAS 142, we had
unamortized goodwill and other intangibles in the amount of $90.2 million
($83.5 million pertains to goodwill) which will be subject to the transition
provisions of SFAS 142. We are in the process of having an independent
appraisal performed as a basis for determining the value of goodwill and other
intangible assets. As a result, we expect to record a transitional impairment
loss in the range of $60 million to $84 million in the first half of 2002.
Amortization expense related to goodwill was $22.8 million, $12.2 million and
$16.1 million for the fiscal years ended 2001, 2000 and 1999, respectively.
After adoption of SFAS 142, any remaining goodwill balance will not be
amortized.

In June 2001, the FASB issued SFAS 143 Accounting for Asset Retirement
Obligations. SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This Statement applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development or normal use of the asset.
SFAS 143 is effective for fiscal years beginning after June 15, 2002. The
Company does not expect the adoption of SFAS 143 to have a material impact on
its financial position or results of operations.

In October 2001, the FASB issued SFAS 144 Accounting for the Impairment
or Disposal of Long-Lived Assets which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and also supersedes the
accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. SFAS 144 is
effective for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years. The Company does not expect the adoption of
SFAS 144 to have a material impact on its financial position or results of
operations.



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|                                                                   
|-------------------------------------------------------------------
|ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. We invest primarily in high-quality, short-term debt
instruments. A hypothetical 100 basis point increase in interest rates would
result in less than a $0.2 million decrease (less than 1%) in the fair value of
our available-for-sale securities.

A substantial majority of our revenue, expense, and capital purchasing
activities are transacted in U.S. dollars. However, a large portion of our
payroll, certain operating expenses and capital purchases are transacted in
other currencies, primarily Malaysian ringgit. Since late 1998, the ringgit has
been pegged at a conversion rate of 3.8 Malaysian ringgit to the U.S. dollar.
If the pegging is lifted in the future, we will evaluate whether or not we will
enter any hedging contracts for the Malaysian ringgit. Based on 2001 expenses
that were denominated in Malaysian ringgit, an adverse change in exchange rates
(defined as a 20% fluctuation in the Malaysian ringgit to U.S. dollar rate)
would result in an increased loss before taxes of approximately $8.1 million.

As of December 30, 2001, our debt is not subject to financial market risk
due to our Chapter 11 Bankruptcy filing in August, 2001. The debt is included
in liabilities subject to compromise on the balance sheet (see Note 2).



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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

|                                                                      |  |  |    | 
|--------------------------------------------------------------------- |  |  | -- | 
|Report of KPMG LLP, Independent Auditors                              |  |  | 41 | 
|Report of Ernst & Young LLP, Independent Auditors                     |  |  | 42 | 
|Consolidated Statements of Operations, 2001, 2000, and 1999           |  |  | 43 | 
|Consolidated Balance Sheets, 2001 and 2000                            |  |  | 44 | 
|Consolidated Statements of Cash Flows, 2001, 2000, and 1999           |  |  | 45 | 
|Consolidated Statements of Stockholders Equity, 2001, 2000, and 1999 |  |  | 46 | 
|Notes to Consolidated Financial Statements                            |  |  | 47 | 



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REPORT OF KPMG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Komag, Incorporated

We have audited the accompanying consolidated balance sheet of Komag,
Incorporated and subsidiaries (the Company) as of December 30, 2001, and the
related consolidated statements of operations, stockholders equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Komag,
Incorporated and subsidiaries as of December 30, 2001, and the results of their
operations and their cash flows for year then ended, in conformity with
accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Notes 1 and 2 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has a net capital deficiency. In
addition, Komag, Incorporated filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court on August 24, 2001. Although the Company is currently operating their
business as a debtor-in-possession under the jurisdiction of the Bankruptcy
Court, the continuation of their business as a going concern is contingent
upon, among other things, the Companys ability to gain confirmation of Komag,
Incorporateds Plan of Reorganization by the Bankruptcy Court and ultimately,
to achieve profitable operations and positive cash flow. These matters raise
substantial doubt about the Companys ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.

KPMG LLP

Mountain View, California
January 22, 2002



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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and
Stockholders
Komag, Incorporated

We have audited the accompanying consolidated balance sheet of Komag,
Incorporated as of December 31, 2000 and the related consolidated statements of
operations, stockholders equity, and cash flows for each of the two years in
the period ended December 31, 2000. Our audits also included the financial
statement schedule for each of the two years in the period ended December 31,
2000 listed in the Index at Item 14(a). These financial statements and schedule
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Komag, Incorporated at December 31, 2000, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule for each of the two years in the period ended
December 31, 2000, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

The accompanying financial statements have been prepared assuming that
Komag, Incorporated will continue as a going concern. As more fully described
in Note 1, the Company has incurred recent operating losses and has filed a
voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code. These conditions raise substantial doubt about the Companys
ability to continue as a going concern. Managements plans in regard to these
matters are also described in Note 1. 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 liabilities
that may result from the outcome of this uncertainty.

Ernst & Young LLP

San Jose, California
January 29, 2001



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

|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |         |         |         |         |         |          |  
|----------------------------------------------------------------- | -------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------- | ------ | ----------------- | -------- | ------- | ------ | ------- | ------- | ------- | ------- | ------- | -------- | -
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        | Fiscal Year Ended
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        |                  
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        | 2001              |          | 2000    |        | 1999   
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |        
|Net sales to unrelated parties                                    |                                        | $                                                                                                                        | 116,298                                                                                                                                 |        |                   | $        | 175,957 |        |         | $       | 148,299 |        
|Net sales to related parties                                      |                                        |                                                                                                                          | 166,315                                                                                                                                 |        |                   |          | 182,506 |        |         |         | 183,647 |        
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |         |         |         |        
|                                                                  |                                        |                                                                                                                          | Net sales                                                                                                                               |        |                   | 282,613  |         |        |         | 358,463 |         |         |         | 331,946  |  
|Cost of sales                                                     |                                        |                                                                                                                          | 285,069                                                                                                                                 |        |                   |          | 323,475 |        |         |         | 354,655 |        
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |         |         |         |        
|                                                                  |                                        |                                                                                                                          | Gross profit (loss)                                                                                                                     |        |                   | (2,456   | )       |        |         | 34,988  |         |         |         | (22,709  | )
|Operating expenses:                                               |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |         |         |         |        
|                                                                  | Research, development, and engineering |                                                                                                                          |                                                                                                                                         | 39,546 |                   |          |         | 35,309 |         |         |         | 44,254  |        
|                                                                  | Selling, general, and administrative   |                                                                                                                          |                                                                                                                                         | 19,929 |                   |          |         | 16,251 |         |         |         | 18,889  |        
|                                                                  | Amortization of intangible assets      |                                                                                                                          |                                                                                                                                         | 27,081 |                   |          |         | 16,430 |         |         |         | 17,272  |        
|                                                                  | Restructuring/impairment charges       |                                                                                                                          |                                                                                                                                         | 57,430 |                   |          |         | 5,293  |         |         |         | 187,965 |        
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |         |         |         |        
|                                                                  |                                        |                                                                                                                          | 143,986                                                                                                                                 |        |                   |          | 73,283  |        |         |         | 268,380 |        
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |         |         |         |        
|                                                                  |                                        |                                                                                                                          | Operating loss                                                                                                                          |        |                   | (146,442 | )       |        |         | (38,295 | )       |         |         | (291,089 | )
|Other income (expense):                                           |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |         |         |         |        
|                                                                  |                                        | Interest income                                                                                                          |                                                                                                                                         |        | 1,528             |          |         |        | 4,085   |         |         |         | 5,189   |         
|                                                                  |                                        | Interest expense (contractual interest expense was $166,859,
$45,428, and $23,319 in 2001, 2000, and 1999, respectively) |                                                                                                                                         |        | (155,192          | )        |         |        | (45,428 | )       |         |         | (23,319 | )       
|                                                                  |                                        | Other income, net                                                                                                        |                                                                                                                                         |        | 4,286             |          |         |        | 72      |         |         |         | 1,552   |         
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |         |         |         |        
|                                                                  |                                        |                                                                                                                          | (149,378                                                                                                                                | )      |                   |          | (41,271 | )      |         |         | (16,578 | )      
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |         |         |         |        
|                                                                  |                                        |                                                                                                                          | Loss before reorganization costs, income taxes,
minority interest, equity in net loss of unconsolidated
company, and extraordinary gain |        |                   | (295,820 | )       |        |         | (79,566 | )       |         |         | (307,667 | )
|Reorganization costs, net                                         |                                        |                                                                                                                          | 6,066                                                                                                                                   |        |                   |          |        |        |         |         |        |        
|Benefit from income taxes                                         |                                        |                                                                                                                          | (9,433                                                                                                                                  | )      |                   |          | (5,188  | )      |         |         | (25,808 | )      
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |         |         |         |        
|                                                                  |                                        |                                                                                                                          | Loss before minority interest, equity in net loss of
unconsolidated company, and extraordinary gain                                     |        |                   | (292,453 | )       |        |         | (74,378 | )       |         |         | (281,859 | )
|Minority interest in net income (loss) of
consolidated subsidiary |                                        |                                                                                                                          | 18                                                                                                                                      |        |                   |          | (2,548  | )      |         |         | (212    | )      
|Equity in net loss of unconsolidated company                      |                                        |                                                                                                                          | (3,924                                                                                                                                  | )      |                   |          |        |        |         |         | (1,402  | )      
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |         |         |         |        
|                                                                  |                                        |                                                                                                                          | Loss before extraordinary gain                                                                                                          |        |                   | (296,395 | )       |        |         | (71,830 | )       |         |         | (283,049 | )
|Extraordinary gain                                                |                                        |                                                                                                                          |                                                                                                                                        |        |                   |          | 3,772   |        |         |         |        |        
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |         |         |         |        
|                                                                  |                                        |                                                                                                                          | Net loss                                                                                                                                |        | $                 | (296,395 | )       |        | $       | (68,058 | )       |         | $       | (283,049 | )
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |         |         |         |        
|Basic and diluted loss per share before extraordinary gain        |                                        | $                                                                                                                        | (2.65                                                                                                                                   | )      |                   | $        | (0.93   | )      |         | $       | (4.54   | )      
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |         |         |         |        
|Basic and diluted extraordinary gain per share                    |                                        | $                                                                                                                        |                                                                                                                                        |        |                   | $        | 0.05    |        |         | $       |        |        
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |         |         |         |        
|Basic and diluted net loss per share                              |                                        | $                                                                                                                        | (2.65                                                                                                                                   | )      |                   | $        | (0.88   | )      |         | $       | (4.54   | )      
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |         |         |         |        
|Number of shares used in basic and diluted per share computations |                                        |                                                                                                                          | 111,882                                                                                                                                 |        |                   |          | 77,177  |        |         |         | 62,291  |        
|                                                                  |                                        |                                                                                                                          |                                                                                                                                         |        |                   |          |         |        |         |         |         |        

See notes to consolidated financial statements.

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

ASSETS

|                                               |                                                                                                                                                                             |                                             |                                                                                    |          |                 |          |         |          |   |         | 
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ---------------------------------------------------------------------------------- | -------- | --------------- | -------- | ------- | -------- | - | ------- | 
|                                               |                                                                                                                                                                             |                                             |                                                                                    |          | Fiscal Year End
|                                               |                                                                                                                                                                             |                                             |                                                                                    |          |                
|                                               |                                                                                                                                                                             |                                             |                                                                                    |          | 2001            |          | 2000   
|                                               |                                                                                                                                                                             |                                             |                                                                                    |          |                 |          |        
|Current assets                                 |                                                                                                                                                                            
|                                               | Cash and cash equivalents                                                                                                                                                   |                                             | $                                                                                  | 17,486   |                 |          | $       | 71,067   |  
|                                               | Short-term investments                                                                                                                                                      |                                             |                                                                                    | 335      |                 |          |         | 9,597    |  
|                                               | Accounts receivable (including $23,905 and $19,498 from related parties in 2001 and
2000, respectively) less allowances of $2,593 and $5,348 in 2001 and 2000, respectively |                                             |                                                                                    | 25,148   |                 |          |         | 40,243   |  
|                                               | Inventories                                                                                                                                                                 |                                             |                                                                                    | 11,766   |                 |          |         | 21,442   |  
|                                               | Prepaid expenses and deposits                                                                                                                                               |                                             |                                                                                    | 1,878    |                 |          |         | 6,299    |  
|                                               |                                                                                                                                                                             |                                             |                                                                                    |          |                 |          |         |         
|                                               |                                                                                                                                                                             |                                             | Total current assets                                                               |          |                 | 56,613   |         |          |   | 148,648 | 
|Investment in unconsolidated company           |                                                                                                                                                                             |                                             | 4,076                                                                              |          |                 |          | 12,000  |         
|Property, plant, and equipment, net            |                                                                                                                                                                             |                                             | 232,256                                                                            |          |                 |          | 284,518 |         
|Land and buildings held for sale               |                                                                                                                                                                             |                                             | 24,600                                                                             |          |                 |          | 70,355  |         
|Goodwill and other intangible assets, net      |                                                                                                                                                                             |                                             | 90,185                                                                             |          |                 |          | 117,359 |         
|Deposits and other assets                      |                                                                                                                                                                             |                                             | 120                                                                                |          |                 |          | 181     |         
|                                               |                                                                                                                                                                             |                                             |                                                                                    |          |                 |          |         |         
|                                               |                                                                                                                                                                             | $                                           | 407,850                                                                            |          |                 | $        | 633,061 |         
|                                               |                                                                                                                                                                             |                                             |                                                                                    |          |                 |          |         |         
|                                              
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
|                                              
|                                              
|                                              
|                                              
|Current liabilities                            |                                                                                                                                                                             |                                             |                                                                                    |          |                 |          |         |         
|                                               | Current portion of long-term debt                                                                                                                                           |                                             | $                                                                                  |         |                 |          | $       | 216,740  |  
|                                               | Trade accounts payable                                                                                                                                                      |                                             |                                                                                    | 13,376   |                 |          |         | 29,014   |  
|                                               | Accounts payable to related parties                                                                                                                                         |                                             |                                                                                    | 1,627    |                 |          |         | 2,487    |  
|                                               | Accrued compensation and benefits                                                                                                                                           |                                             |                                                                                    | 7,585    |                 |          |         | 13,866   |  
|                                               | Other liabilities                                                                                                                                                           |                                             |                                                                                    | 1,763    |                 |          |         | 18,710   |  
|                                               | Other liabilities due to related party                                                                                                                                      |                                             |                                                                                    | 6,583    |                 |          |         | 12,000   |  
|                                               | Restructuring liabilities associated with merger                                                                                                                            |                                             |                                                                                    | 1,363    |                 |          |         | 17,927   |  
|                                               | Other restructuring liabilities                                                                                                                                             |                                             |                                                                                    | 1,008    |                 |          |         | 14,277   |  
|                                               |                                                                                                                                                                             |                                             |                                                                                    |          |                 |          |         |         
|                                               |                                                                                                                                                                             |                                             | Total current liabilities                                                          |          |                 | 33,305   |         |          |   | 325,021 | 
|Long-term note payable to related party        |                                                                                                                                                                             |                                             |                                                                                   |          |                 |          | 25,649  |         
|Convertible subordinated debt                  |                                                                                                                                                                             |                                             |                                                                                   |          |                 |          | 111,896 |         
|Deferred income taxes                          |                                                                                                                                                                             |                                             | 1,003                                                                              |          |                 |          | 11,813  |         
|Other long-term liabilities                    |                                                                                                                                                                             |                                             | 910                                                                                |          |                 |          | 5,441   |         
|                                               |                                                                                                                                                                             |                                             |                                                                                    |          |                 |          |         |         
|                                               | Total liabilities not subject to compromise                                                                                                                                 |                                             |                                                                                    | 35,218   |                 |          |         | 479,820  |  
|Liabilities subject to compromise              |                                                                                                                                                                             |                                             | 516,173                                                                            |          |                 |          |        |         
|Minority interest in consolidated subsidiary   |                                                                                                                                                                             |                                             | 1,398                                                                              |          |                 |          | 1,380   |         
|Commitments                                    |                                                                                                                                                                            
|Stockholders
equity (deficit)                 |                                                                                                                                                                            
|                                               |                                                                                                                                                                             | Preferred stock, $0.01 par value per share: |                                                                                    |          |                 |          |         |          |   |        
|                                               |                                                                                                                                                                             |                                             | Authorized - 1,000 shares in 2001 and 2000, respectively                           |         
|                                               |                                                                                                                                                                             | Common stock, $0.01 par value per share:    |                                                                                    |          |                 |          |         |          |   |        
|                                               |                                                                                                                                                                             |                                             | Authorized - 250,000 shares in 2001 and 2000, respectively                         |         
|                                               |                                                                                                                                                                             |                                             | Issued and outstanding - 111,925 and 111,630 shares in 2001 and 2000, respectively |          |                 | 1,119    |         |          |   | 1,116   | 
|                                               | Additional paid-in capital                                                                                                                                                  |                                             |                                                                                    | 586,304  |                 |          |         | 586,133  |  
|                                               | Accumulated deficit                                                                                                                                                         |                                             |                                                                                    | (732,362 | )               |          |         | (435,967 | )
|                                               | Accumulated other comprehensive income                                                                                                                                      |                                             |                                                                                    |         |                 |          |         | 579      |  
|                                               |                                                                                                                                                                             |                                             |                                                                                    |          |                 |          |         |         
|                                               |                                                                                                                                                                             |                                             | Total stockholders equity (deficit)                                               |          |                 | (144,939 | )       |          |   | 151,861 | 
|                                               |                                                                                                                                                                             |                                             |                                                                                    |          |                 |          |         |         
|                                               |                                                                                                                                                                             | $                                           | 407,850                                                                            |          |                 | $        | 633,061 |         
|                                               |                                                                                                                                                                             |                                             |                                                                                    |          |                 |          |         |         

See notes to consolidated financial statements.



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

|                                                                                          |                                                                            |                                                     |          |                   |         |      |         |         |         |   |          |         |         |  
|----------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | --------------------------------------------------- | -------- | ----------------- | ------- | ---- | ------- | ------- | ------- | - | -------- | ------- | ------- | -
|                                                                                          |                                                                            |                                                     |          | Fiscal Year Ended
|                                                                                          |                                                                            |                                                     |          |                  
|                                                                                          |                                                                            |                                                     |          | 2001              |         | 2000 |         | 1999   
|                                                                                          |                                                                            |                                                     |          |                   |         |      |         |        
|Operating Activities                                                                      |                                                                            |                                                     |          |                   |         |      |         |         |         |   |          |        
|Net loss                                                                                  |                                                                            | $                                                   | (296,395 | )                 |         | $    | (68,058 | )       |         | $ | (283,049 | )      
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                                                            |                                                     |          |                   |         |      |         |         |         |   |          |        
|                                                                                          | Depreciation and amortization on property, plant, and equipment            |                                                     |          | 68,925            |         |      |         | 75,064  |         |   |          | 92,634  |        
|                                                                                          | Amortization of intangible assets                                          |                                                     |          | 27,081            |         |      |         | 16,430  |         |   |          | 17,272  |        
|                                                                                          | Extraordinary gain                                                         |                                                     |          |                  |         |      |         | (3,772  | )       |   |          |        |        
|                                                                                          | Provision for doubtful accounts receivable                                 |                                                     |          | (473              | )       |      |         | (236    | )       |   |          | (404    | )      
|                                                                                          | Interest accrual on long-term note payable to related party                |                                                     |          | 3,196             |         |      |         | 4,312   |         |   |          |        |        
|                                                                                          | Accretion and amortization of interest on debt                             |                                                     |          | 130,861           |         |      |         | 14,630  |         |   |          |        |        
|                                                                                          | Equity in net loss of unconsolidated company                               |                                                     |          | 3,924             |         |      |         |        |         |   |          | 1,402   |        
|                                                                                          | Realized gain on liquidation of subsidiary                                 |                                                     |          | (579              | )       |      |         |        |         |   |          |        |        
|                                                                                          | Loss on disposal of equipment, net                                         |                                                     |          | 146               |         |      |         | 3,615   |         |   |          | 424     |        
|                                                                                          | Impairment charge related to goodwill                                      |                                                     |          |                  |         |      |         |        |         |   |          | 44,348  |        
|                                                                                          | Restructuring/impairment charges related to property, plant, and equipment |                                                     |          | 57,430            |         |      |         |        |         |   |          | 98,548  |        
|                                                                                          | Deferred income taxes                                                      |                                                     |          | (10,810           | )       |      |         | (6,859  | )       |   |          | (28,403 | )      
|                                                                                          | Deferred rent                                                              |                                                     |          |                  |         |      |         | 147     |         |   |          | (1,890  | )      
|                                                                                          | Minority interest in net income (loss) of consolidated subsidiary          |                                                     |          | 18                |         |      |         | (2,548  | )       |   |          | (212    | )      
|Changes in operating assets and liabilities:                                              |                                                                            |                                                     |          |                   |         |      |         |         |         |   |          |        
|                                                                                          | Accounts receivable                                                        |                                                     |          | 19,975            |         |      |         | 3,126   |         |   |          | 32,803  |        
|                                                                                          | Accounts receivable from related parties                                   |                                                     |          | (4,407            | )       |      |         | 6,473   |         |   |          | (25,459 | )      
|                                                                                          | Inventories                                                                |                                                     |          | 9,676             |         |      |         | 15,103  |         |   |          | 12,771  |        
|                                                                                          | Prepaid expenses and deposits                                              |                                                     |          | 1,452             |         |      |         | (3,537  | )       |   |          | 1,091   |        
|                                                                                          | Trade accounts payable                                                     |                                                     |          | (9,984            | )       |      |         | (1,220  | )       |   |          | (5,800  | )      
|                                                                                          | Accounts payable to related parties                                        |                                                     |          | (860              | )       |      |         | 468     |         |   |          | 171     |        
|                                                                                          | Accrued compensation and benefits                                          |                                                     |          | (6,281            | )       |      |         | (2,830  | )       |   |          | (5,496  | )      
|                                                                                          | Other liabilities                                                          |                                                     |          | (788              | )       |      |         | (13,848 | )       |   |          | (4,067  | )      
|                                                                                          | Other liabilities due to related party                                     |                                                     |          | (1,244            | )       |      |         |        |         |   |          |        |        
|                                                                                          | Restructuring liabilities associated with merger                           |                                                     |          | (14,174           | )       |      |         |        |         |   |          |        |        
|                                                                                          | Other restructuring liabilities                                            |                                                     |          | (5,367            | )       |      |         | (13,013 | )       |   |          | 21,362  |        
|                                                                                          | Liabilities subject to compromise                                          |                                                     |          | (425              | )       |      |         |        |         |   |          |        |        
|                                                                                          |                                                                            |                                                     |          |                   |         |      |         |         |         |   |          |        
|                                                                                          |                                                                            |                                                     | (29,103  | )                 |         |      | 23,447  |         |         |   | (31,954  | )      
|Reorganization costs, net                                                                 |                                                                            |                                                     | 6,066    |                   |         |      |        |         |         |   |         |        
|                                                                                          |                                                                            |                                                     |          |                   |         |      |         |         |         |   |          |        
|                                                                                          |                                                                            | Net cash provided by (used in) operating activities |          |                   | (23,037 | )    |         |         | 23,447  |   |          |         | (31,954 | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Investing Activities                                                                      |                                                                            |                                                     |          |                   |         |      |         |         |         |   |          |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Acquisition of property, plant and equipment                                              |                                                                            |                                                     | (25,673  | )                 |         |      | (29,266 | )       |         |   | (32,017  | )      
|Purchases of short-term investments                                                       |                                                                            |                                                     | (5,777   | )                 |         |      | (8,104  | )       |         |   | (9,590   | )      
|Proceeds from short-term investments at maturity                                          |                                                                            |                                                     | 15,039   |                   |         |      | 20,201  |         |         |   | 5,180    |        
|Proceeds from disposal of property, plant and equipment                                   |                                                                            |                                                     | 539      |                   |         |      | 1,384   |         |         |   | 2,240    |        
|Deposits and other assets                                                                 |                                                                            |                                                     | 154      |                   |         |      | 1,596   |         |         |   | 58       |        
|Merger of business, net of cash                                                           |                                                                            |                                                     |         |                   |         |      | 23,282  |         |         |   |         |        
|                                                                                          |                                                                            |                                                     |          |                   |         |      |         |         |         |   |          |        
|                                                                                          |                                                                            | Net cash provided by (used in) investing activities |          |                   | (15,718 | )    |         |         | 9,093   |   |          |         | (34,129 | )
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Financing Activities                                                                      |                                                                            |                                                     |          |                   |         |      |         |         |         |   |          |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Payment of debt                                                                           |                                                                            |                                                     | (15,000  | )                 |         |      | (30,000 | )       |         |   |         |        
|Proceeds from sale of common stock, net of issuance costs                                 |                                                                            |                                                     | 174      |                   |         |      | 3,411   |         |         |   | 3,382    |        
|                                                                                          |                                                                            |                                                     |          |                   |         |      |         |         |         |   |          |        
|                                                                                          |                                                                            | Net cash provided by (used in) financing activities |          |                   | (14,826 | )    |         |         | (26,589 | ) |          |         | 3,382   |  
|                                                                                          |                                                                            |                                                     |          |                   |         |      |         |         |         |   |          |        
|Increase (decrease) in cash and cash equivalents                                          |                                                                            |                                                     | (53,581  | )                 |         |      | 5,951   |         |         |   | (62,701  | )      
|Cash and cash equivalents at beginning of year                                            |                                                                            |                                                     | 71,067   |                   |         |      | 65,116  |         |         |   | 127,817  |        
|                                                                                          |                                                                            |                                                     |          |                   |         |      |         |         |         |   |          |        
|                                                                                          | Cash and cash equivalents at end of year                                   |                                                     | $        | 17,486            |         |      | $       | 71,067  |         |   | $        | 65,116  |        
|                                                                                          |                                                                            |                                                     |          |                   |         |      |         |         |         |   |          |        
|Supplemental
disclosure of cash flow information                                          |                                                                           
|                                                                                          | Cash paid for interest                                                     |                                                     | $        | 14,703            |         |      | $       | 25,638  |         |   | $        | 20,159  |        
|                                                                                          | Cash paid (refunded) for income taxes                                      |                                                     | $        | 27                |         |      | $       | (726    | )       |   | $        | (39     | )      

See notes to consolidated financial
statements.



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KOMAG, INCORPORATED
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands)

|                                                                                 |  |              |         |            |  |             |       |               |  |        |         |       |  |   |          |   |  |             |      |   |  |   |          |  
|-------------------------------------------------------------------------------- |  | ------------ | ------- | ---------- |  | ----------- | ----- | ------------- |  | ------ | ------- | ----- |  | - | -------- | - |  | ----------- | ---- | - |  | - | -------- | -
|                                                                                 |  |              |         |            |  |             |       |               |  |        |         |       |  |   |          |   |  | Accumulated |      |   |  |  
|                                                                                 |  | Common Stock |         | Additional |  |             |       |               |  | Other  |         |       |  |  
|                                                                                 |  |              |         | Paid-in    |  | Accumulated |       | Comprehensive |  |        |         |      
|                                                                                 |  | Shares       |         | Amount     |  | Capital     |       | Deficit       |  | Income |         | Total
|                                                                                 |  |              |         |            |  |             |       |               |  |        |         |      
|Balance at January 3, 1999                                                       |  |              | 53,887  |            |  | $           | 539   |               |  | $      | 407,549 |       |  | $ | (84,860  | ) |  | $           | 579  |   |  | $ | 323,807  |  
|Net loss and comprehensive loss                                                  |  |              |         |            |  |             |       |               |  |        |         |       |  |   | (283,049 | ) |  |             |      |   |  |   | (283,049 | )
|Common stock issued under Asset
Purchase Agreement                               |  |              | 10,783  |            |  |             | 108   |               |  |        | 34,465  |       |  |   |          |   |  |             |      |   |  |   | 34,573   |  
|Common stock issued under stock
option and purchase plans                        |  |              | 1,205   |            |  |             | 12    |               |  |        | 3,370   |       |  |   |          |   |  |             |      |   |  |   | 3,382   
|                                                                                 |  |              |         |            |  |             |       |               |  |        |         |       |  |   |          |   |  |             |      |   |  |   |          |  
|Balance at January 2, 2000                                                       |  |              | 65,875  |            |  |             | 659   |               |  |        | 445,384 |       |  |   | (367,909 | ) |  |             | 579  |   |  |   | 78,713   |  
|Net loss and comprehensive loss                                                  |  |              |         |            |  |             |       |               |  |        |         |       |  |   | (68,058  | ) |  |             |      |   |  |   | (68,058  | )
|Common stock issued in connection
with merger                                    |  |              | 42,775  |            |  |             | 428   |               |  |        | 134,593 |       |  |   |          |   |  |             |      |   |  |   | 135,021  |  
|Issuance of warrants for debt restructure                                        |  |              |         |            |  |             |       |               |  |        | 2,774   |       |  |   |          |   |  |             |      |   |  |   | 2,774    |  
|Common stock issued under stock option
and purchase plans, and private placement |  |              | 2,980   |            |  |             | 29    |               |  |        | 3,382   |       |  |   |          |   |  |             |      |   |  |   | 3,411    |  
|                                                                                 |  |              |         |            |  |             |       |               |  |        |         |       |  |   |          |   |  |             |      |   |  |   |          |  
|Balance at December 31, 2000                                                     |  |              | 111,630 |            |  |             | 1,116 |               |  |        | 586,133 |       |  |   | (435,967 | ) |  |             | 579  |   |  |   | 151,861  |  
|Net loss and comprehensive loss                                                  |  |              |         |            |  |             |       |               |  |        |         |       |  |   | (296,395 | ) |  |             |      |   |  |   | (296,395 | )
|Realized gain on liquidation of subsidiary                                       |  |              |         |            |  |             |       |               |  |        |         |       |  |   |          |   |  |             | (579 | ) |  |   | (579     | )
|Common stock issued under stock
option and purchase plans                        |  |              | 295     |            |  |             | 3     |               |  |        | 171     |       |  |   |          |   |  |             |      |   |  |   | 174      |  
|                                                                                 |  |              |         |            |  |             |       |               |  |        |         |       |  |   |          |   |  |             |      |   |  |   |          |  
|Balance at December 30, 2001                                                     |  |              | 111,925 |            |  | $           | 1,119 |               |  | $      | 586,304 |       |  | $ | (732,362 | ) |  | $           |     |   |  | $ | (144,939 | )
|                                                                                 |  |              |         |            |  |             |       |               |  |        |         |       |  |   |          |   |  |             |      |   |  |   |          |  

See notes to consolidated financial statements.



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KOMAG, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Basis of Presentation:The consolidated financial statements include the
accounts of the Company, its wholly-owned and majority-owned subsidiaries (see
Note 14), and equity in an unconsolidated company (see Note 17). All
significant intercompany accounts and transactions have been eliminated in
consolidation.

As discussed in Note 2, Komag, Incorporated (KUS) filed a voluntary
petition for reorganization under Chapter 11 of the United States Bankruptcy
Code on August 24, 2001 (the Petition Date). The petition was filed with the
United States Bankruptcy Court for the Northern District of California. The
petition affects only the Companys U.S. corporate parent, KUS, and does not
include any of its subsidiaries, including Komag Material Technology (KMT), and
Komag USA (Malaysia) Sdn (KMS). KUS is operating its business as a
debtor-in-possession.

The consolidated financial statements have been prepared on a
going-concern basis, which contemplates continuity of operations, realization
of assets, and liquidation of liabilities and commitments in the normal course
of business. As a result of the Companys recurring losses from operations and
net capital deficiency, and the Chapter 11 Bankruptcy and related
circumstances, including the Companys substantial debt, realization of assets
and liquidation of liabilities are subject to significant uncertainty. These
matters, among others, raise substantial doubt about the Companys ability to
continue as a going concern. The Companys ability to continue as a going
concern depends on, among other things, its ability to: 1) gain approval of the
Plan of Reorganization by the Bankruptcy Court; and 2) maintain business and
financial operations consistent with those expected in the Companys Plan of
Reorganization (see Note 2).

While operating as a debtor-in-possession, the Company may sell or
otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the consolidated financial statements. Further,
the Plan or Reorganization could materially change the amounts and
classifications reported in the consolidated financial statements.

In connection with the Chapter 11 Bankruptcy, the Company is required to
prepare its consolidated financial statements as of December 30, 2001 in
accordance with Statement of Position 90-7 (SOP 90-7), Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code, issued by the American
Institute of Certified Public Accountants. In accordance with SOP 90-7, all of
the Companys pre-petition liabilities that are subject to compromise under the
proposed Plan of Reorganization (as defined in Note 2) are segregated in the
Companys consolidated balance sheet as liabilities subject to compromise.
These liabilities are recorded at the amounts expected to be allowed as claims
in the Chapter 11 case rather than at the estimated amounts for which those
allowed claims may be settled as a result of the approved Plan of
Reorganization.

As of the effective date of the Plan of Reorganization, the Company
expects to adopt fresh start reporting as defined in SOP 90-7. In accordance
with fresh start reporting, the reorganization value of the Company will be
allocated to the emerging entitys specific tangible and identified net
intangible assets based on their fair values. Excess reorganization value, if
any, will be reported as reorganization value in excess of amounts allocable
to identifiable assets. As a result of the adoption of such fresh start
reporting, the Companys post-emergence (successor) financial statements will
not be comparable with its pre-emergence (predecessor) financial statements
including the historical consolidated financial statements included in this
annual report.

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



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Fiscal Year:The Company uses a 52-53 week fiscal year ending on the
Sunday closest to December 31. The years ended December 30, 2001, December 31,
2000, and January 2, 2000, are referred to in the consolidated financial
statements as fiscal 2001, 2000, and 1999 respectively, and were each comprised
of 52 weeks.

Cash Equivalents:The Company considers as a cash equivalent any
highly-liquid investment that matures within three months of its purchase date.

Short-Term Investments:The Company invests its excess cash in
high-quality, short-term debt instruments. None of the Companys debt security
investments have maturities greater than one year. At December 30, 2001, all
short-term investments are designated as available for sale. Interest and
dividends on the investments are included in interest income.

The following is a summary of the Companys investments by major security
type at amortized cost, which approximates fair value:

|                                              |  |                   |        |      |  |   |        | 
|--------------------------------------------- |  | ----------------- | ------ | ---- |  | - | ------ | 
|                                              |  | Fiscal Year Ended
|                                              |  |                  
|                                              |  | 2001              |        | 2000
|                                              |  |                   |        |     
|                                              |  | (in thousands)   
|Municipal auction rate certificates           |  | $                 |       |      |  | $ | 28,500 | 
|Corporate debt securities                     |  |                   | 6,874  |      |  |   | 17,153 | 
|Mortgage-backed securities                    |  |                   |       |      |  |   | 13,991 | 
|Government-backed securities                  |  |                   | 5,350  |      |  |   | 8,045  | 
|                                              |  |                   |        |      |  |   |        | 
|                                              |  | $                 | 12,224 |      |  | $ | 67,689 | 
|                                              |  |                   |        |      |  |   |        | 
|Amounts included in cash and cash equivalents |  | $                 | 11,889 |      |  | $ | 58,092 | 
|Amounts included in short-term investments    |  |                   | 335    |      |  |   | 9,597  | 
|                                              |  |                   |        |      |  |   |        | 
|                                              |  | $                 | 12,224 |      |  | $ | 67,689 | 
|                                              |  |                   |        |      |  |   |        | 

There were no realized gains or losses on the Companys investments during
fiscal 2001, as all investments were held to maturity. The Company utilizes
zero-balance accounts and other cash management tools to invest all available
funds, including bank balances in excess of book balances.

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

|                |  |                   |        |      |  |   |        | 
|--------------- |  | ----------------- | ------ | ---- |  | - | ------ | 
|                |  | Fiscal Year Ended
|                |  |                  
|                |  | 2001              |        | 2000
|                |  |                   |        |     
|                |  | (in thousands)   
|Raw material    |  | $                 | 5,232  |      |  | $ | 8,883  | 
|Work in process |  |                   | 1,608  |      |  |   | 5,778  | 
|Finished goods  |  |                   | 4,926  |      |  |   | 6,781  | 
|                |  |                   |        |      |  |   |        | 
|                |  | $                 | 11,766 |      |  | $ | 21,442 | 
|                |  |                   |        |      |  |   |        | 

Property, Plant, and Equipment:Property, plant, and equipment are stated
at cost less accumulated depreciation and amortization. Depreciation is
computed by the straight-line method over the estimated useful lives of the
assets. The estimated useful life of the Companys buildings is thirty years.
Furniture and equipment are generally depreciated over three to five years, and
leasehold improvements are amortized over the shorter of the lease term or
their estimated useful life. Land and buildings acquired as



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part of the HMT merger which are available for sale, are valued at their
estimated fair value less estimated costs to sell of $24.6 million as of
December 30, 2001. The fair value was determined based on an independent
valuation.

Property, plant, and equipment consists of the following:

|                                                  |  |                   |          |      |  |   |          |  
|------------------------------------------------- |  | ----------------- | -------- | ---- |  | - | -------- | -
|                                                  |  | Fiscal Year Ended
|                                                  |  |                  
|                                                  |  | 2001              |          | 2000
|                                                  |  |                   |          |     
|                                                  |  | (in thousands)   
|Land                                              |  | $                 | 7,785    |      |  | $ | 7,785    |  
|Buildings                                         |  |                   | 163,333  |      |  |   | 136,149  |  
|Leasehold improvements                            |  |                   | 30,786   |      |  |   | 31,931   |  
|Furniture                                         |  |                   | 7,549    |      |  |   | 7,517    |  
|Equipment                                         |  |                   | 474,662  |      |  |   | 497,233  |  
|                                                  |  |                   |          |      |  |   |          |  
|                                                  |  |                   | 684,115  |      |  |   | 680,615  |  
|Less allowances for depreciation and amortization |  |                   | (451,859 | )    |  |   | (396,097 | )
|                                                  |  |                   |          |      |  |   |          |  
|                                                  |  | $                 | 232,256  |      |  | $ | 284,518  |  
|                                                  |  |                   |          |      |  |   |          |  

Long-lived assets and certain identifiable intangible assets:Long-lived
assets and certain identifiable intangible assets are generally evaluated for
impairment on an individual acquisition, market, or product basis whenever
events or changes in circumstances indicate that such assets may be impaired or
the estimated useful lives are no longer appropriate. The Company considers the
primary indicators of impairment to include significant decreases in unit
volumes, unit prices or significant increases in production costs.
Periodically, the Company reviews its long-lived assets and certain
identifiable intangible assets for impairment based on estimated future
undiscounted cash flows attributable to the assets. In the event that 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 estimates of future cash flows. The discount rate used is based on
the estimated incremental borrowing rate at the date of the event that triggers
the impairment. Land and buildings held for sale are evaluated for impairment
periodically when there are significant changes in market conditions for
commercial real estate, and carried at amounts based on independent valuation
less estimated selling costs.

Revenue Recognition:The Company records sales upon shipment, at which
point the title transfers, and provides an allowance for estimated returns of
defective products based on historical data as well as current knowledge of
product quality.

Shipping and Handling Costs:Shipping and handling costs associated with
manufactured product are charged to cost of sales as incurred.

Research and Development:Research and development costs are expensed as
incurred.

Stock-Based Compensation:The Company accounts for employee stock-based
compensation using the intrinsic-value method, in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Accordingly, compensation cost is recorded on the date of grant to the extent
that the fair value of the underlying share of common stock exceeds the
exercise price for a stock option or the purchase price for a share of common
stock. During the period from 1999 through 2001, the Company did not record
stock-based compensation expense for stock options issued to employees, as the
exercise prices of stock options granted were equal to the fair value of the
stock on the date of grant. Pursuant to SFAS No. 123, Accounting for
Stock-Based



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Compensation, the Company discloses the pro forma effect of using the fair
value method of accounting for employee stock-based compensation arrangements.

Income Taxes:The Company accounts for income taxes using the asset and
liability method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and for operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using the enacted tax laws
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax laws is recognized in the results of
operations in the period that includes the enactment date.

Loss Per Share:The Company determines loss per share in accordance with
Statement of Financial Accounting Standards No. 128 (SFAS No. 128), Earnings
per Share.

|                                                           |  |                                          |          |      |  |      |         |   |  |   |          |  
|---------------------------------------------------------- |  | ---------------------------------------- | -------- | ---- |  | ---- | ------- | - |  | - | -------- | -
|                                                           |  | Fiscal Year Ended                       
|                                                           |  |                                         
|                                                           |  | 2001                                     |          | 2000 |  | 1999
|                                                           |  |                                          |          |      |  |     
|                                                           |  | (in thousands, except per share amounts)
|Numerator: Loss before
extraordinary gain                  |  | $                                        | (296,395 | )    |  | $    | (71,830 | ) |  | $ | (283,049 | )
|                                                           |  |                                          |          |      |  |      |         |   |  |   |          |  
|Denominator: Basic and diluted
weighted-average shares     |  |                                          | 111,882  |      |  |      | 77,177  |   |  |   | 62,291   |  
|                                                           |  |                                          |          |      |  |      |         |   |  |   |          |  
|Basic and diluted loss per share
before extraordinary gain |  | $                                        | (2.65    | )    |  | $    | (0.93   | ) |  | $ | (4.54    | )
|                                                           |  |                                          |          |      |  |      |         |   |  |   |          |  

Potential incremental common shares attributable to the future exercise of
outstanding options (assuming proceeds would be used to purchase treasury
stock) of 264,000, 437,000, and 442,000, for 2001, 2000, and 1999,
respectively, were not included in the diluted net loss per share before
extraordinary gain computation because the effect would have been
anti-dilutive.

Potential incremental common shares attributable to the exercise of
outstanding warrants (assuming proceeds would be used to purchase treasury
stock) of zero for 2001 and 177,000 for 2000 were not included in the diluted
net loss per share before extraordinary gain computation because the effect
would have been anti-dilutive. There were no warrants outstanding during 1999.

Potential incremental common shares attributable to conversion of
convertible debt of 12,474,000 for 2001 and 4,358,000 for 2000 were not
included in the diluted net loss per share before extraordinary gain
computation because their effect would have been anti-dilutive. There was no
convertible debt outstanding during 1999.

Comprehensive Income (Loss):Comprehensive losses for all periods
presented reflect the adoption of SFAS No. 130, Reporting Comprehensive Income.
Accumulated other comprehensive income is comprised entirely of accumulated
translation adjustments.

Recent Accounting Pronouncements: In June 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 141, Business Combinations and SFAS No.
142 Goodwill and Other Intangible Assets. SFAS No. 141 is effective for any
business combinations initiated after June 30, 2001, and also includes the
criteria for the recognition of intangible assets separately from goodwill.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001,
and 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



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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. Under the adoption of SFAS No. 142, the Company will be
required to perform a transitional impairment analysis of its goodwill. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in the Companys statement of operations. At
the beginning of fiscal 2002, the date of adoption of SFAS No. 142, the Company
has unamortized goodwill and other intangibles in the amount of $90.2 million
which will be subject to the transition provisions of SFAS No. 142 ($83.5
million pertains to goodwill). The Company is in the process of having an
independent appraisal performed as a basis for determining the value of
goodwill and other intangible assets. As a result, the Company expects to
record a transitional impairment loss in the range of $60 million to $84
million in the first half of 2002. Amortization expense related to goodwill
was $22.8 million, $12.2 million and $16.1 million for the fiscal years ended
2001, 2000 and 1999, respectively. After adoption of SFAS No. 142, any
remaining goodwill balance will not be amortized.

In June 2001, the FASB issued SFAS No. 143 Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This Statement applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development or normal use of the assets.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The
Company does not expect the adoption of SFAS No. 143 to have a material impact
on its financial position or results of operations.

In October 2001, the FASB issued SFAS No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and also
supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. SFAS No.
144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The Company does not expect the
adoption of SFAS No. 144 to have a material impact on its financial position or
results of operations.

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

Note 2. Reorganization Under Chapter 11 of the United States Bankruptcy Code

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

The Company filed a proposed Plan of Reorganization (the Plan) on
September 21, 2001, which it amended on November 9, 2001, and by which it
intends to satisfy and discharge the claims underlying the liabilities
discussed below. As amended, the proposed Plan, which must be confirmed by the
Bankruptcy Court, currently has the support of creditors holding more than
one-half, or approximately $275 million, of the Companys estimated outstanding
debt. The Company has received affirmative votes from seven of the nine
classes voting on the Plan. The Plan was rejected by the Subordinated Notes
Claims and Stockholder classes. As a result of the vote by the Companys
stockholders, there will be no distribution to stockholders when the Company
emerges from bankruptcy.



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The Company continues to pursue diligently the steps necessary to emerge
from its Chapter 11 bankruptcy proceedings. Proceedings regarding Plan
confirmation are scheduled to take place over the next several months. The
proposed Plan may be modified materially before it is confirmed by the
Bankruptcy Court.

The accompanying consolidated statements of operations reflect certain
reorganization costs, including professional fees and accretion to full value
of the note payable to a related party. Interest expense on the Companys
senior bank debt, subordinated convertible notes, subordinated unsecured
convertible debt, and note payable has been recorded up to the petition date.
Such interest expense has not been recorded subsequent to that date because it
will not be paid, and will not be an allowed claim under the Plan. The
difference between recorded interest expense and stated contractual interest
expense was $11.7 million for the period from August 25 through December 30,
2001.

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

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



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Komag, Incorporated (KUS)

Debtor-In-Possession

Condensed Statement of Operations

(In Thousands)

|                                                             |          |                                                                                                                           |          |                   |          |  
|------------------------------------------------------------ | -------- | ------------------------------------------------------------------------------------------------------------------------- | -------- | ----------------- | -------- | -
|                                                             |          |                                                                                                                           |          | Fiscal Year Ended
|                                                             |          |                                                                                                                           |          | 2001             
|                                                             |          |                                                                                                                           |          |                  
|Net sales                                                    |          | $                                                                                                                         | 31,780   |                  
|Cost of sales                                                |          |                                                                                                                           | 71,281   |                  
|                                                             |          |                                                                                                                           |          |                  
|                                                             |          | Gross loss                                                                                                                |          |                   | (39,501  | )
|Operating Expenses:                                          |          |                                                                                                                           |          |                  
|Research, development, and engineering                       |          |                                                                                                                           | 27,767   |                  
|Selling, general, and administrative                         |          |                                                                                                                           | 15,738   |                  
|Amortization of intangible assets                            |          |                                                                                                                           | 16,860   |                  
|Restructuring/impairment charges                             |          |                                                                                                                           | 55,420   |                  
|                                                             |          |                                                                                                                           |          |                  
|                                                             |          | Operating loss                                                                                                            |          |                   | (155,286 | )
|Other income (expense):                                      |          |                                                                                                                           |          |                  
|Interest income                                              |          |                                                                                                                           | 1,199    |                  
|Interest expense (contractual interest expense was $166,859) |          |                                                                                                                           | (155,192 | )                
|Intercompany income from non-debtor subsidiaries, net        |          |                                                                                                                           | 94,864   |                  
|Other income, net                                            |          |                                                                                                                           | 3,541    |                  
|                                                             |          |                                                                                                                           |          |                  
|                                                             |          | Loss before reorganization costs, income taxes,
equity in net loss of unconsolidated company,
and non-debtor subsidiaries |          |                   | (210,874 | )
|Reorganization costs, net                                    |          |                                                                                                                           | 6,066    |                  
|Benefit from income taxes                                    |          |                                                                                                                           | (9,154   | )                
|                                                             |          |                                                                                                                           |          |                  
|                                                             |          | Loss before equity in net loss of unconsolidated company                                                                  |          |                   | (207,786 | )
|Equity in net loss of unconsolidated company                 |          |                                                                                                                           | (3,924   | )                
|Equity in net loss of non-debtor subsidiaries                |          |                                                                                                                           | (84,685  | )                
|                                                             |          |                                                                                                                           |          |                  
|                                                             | Net loss |                                                                                                                           | $        | (296,395          | )       
|                                                             |          |                                                                                                                           |          |                  



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Komag, Incorporated (KUS)

Debtor-In-Possession

Condensed Balance Sheet(In Thousands)

|                                                                |                                                            |   |                                             |                      |  |                 |        | 
|--------------------------------------------------------------- | ---------------------------------------------------------- | - | ------------------------------------------- | -------------------- |  | --------------- | ------ | 
|                                                                |                                                            |   |                                             |                      |  | Fiscal Year-End
|                                                                |                                                            |   |                                             |                      |  | 2001           
|                                                                |                                                            |   |                                             |                      |  |                
|ASSETS                                                          |                                                            |   |                                             |                     
|Current
assets                                                 
|                                                                | Cash and cash equivalents                                  |   | $                                           | 5,900                | 
|                                                                | Accounts receivable, net                                   |   |                                             | 1,280                | 
|                                                                | Intercompany receivables from non-debtor subsidiaries, net |   |                                             | 37,355               | 
|                                                                | Inventories                                                |   |                                             | 636                  | 
|                                                                | Prepaid expenses and deposits                              |   |                                             | 1,236                | 
|                                                                |                                                            |   |                                             |                     
|                                                                |                                                            |   |                                             | Total current assets |  |                 | 46,407 | 
|Investment in non-debtor subsidiaries                           |                                                            |   | 8,932                                       |                     
|Investment in unconsolidated company                            |                                                            |   | 4,076                                       |                     
|Long-term intercompany receivables from non-debtor subsidiaries |                                                            |   | 191,576                                     |                     
|Property, plant and equipment, net                              |                                                            |   | 26,172                                      |                     
|Land and buildings held for sale                                |                                                            |   | 24,600                                      |                     
|Goodwill and other intangible assets, net                       |                                                            |   | 87,630                                      |                     
|Deposits and other assets                                       |                                                            |   | 48                                          |                     
|                                                                |                                                            |   |                                             |                     
|                                                                |                                                            | $ | 389,441                                     |                     
|                                                                |                                                            |   |                                             |                     
|LIABILITIES AND STOCKHOLDERS DEFICIT                           |                                                            |   |                                             |                     
|Current liabilities                                            
|                                                                | Trade accounts payable                                     |   | $                                           | 1,903                | 
|                                                                | Accrued compensation and benefits                          |   |                                             | 5,075                | 
|                                                                | Other liabilities                                          |   |                                             | 1,370                | 
|                                                                | Other liabilities due to related party                     |   |                                             | 6,583                | 
|                                                                | Restructuring liabilities associated with merger           |   |                                             | 1,363                | 
|                                                                |                                                            |   |                                             |                     
|                                                                |                                                            |   | Total current liabilities                   |                      |  | 16,294          |       
|Deferred income taxes                                           |                                                            |   | 1,003                                       |                     
|Other long-term liabilities                                     |                                                            |   | 910                                         |                     
|                                                                |                                                            |   |                                             |                     
|                                                                |                                                            |   | Total liabilities not subject to compromise |                      |  | 18,207          |       
|Liabilities subject to compromise                               |                                                            |   | 516,173                                     |                     
|Stockholders deficit                                           |                                                            |   | (144,939                                    | )                   
|                                                                |                                                            |   |                                             |                     
|                                                                |                                                            | $ | 389,441                                     |                     
|                                                                |                                                            |   |                                             |                     



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Komag, Incorporated (KUS)

Debtor-In-Possession

Condensed Statement of Cash Flows

(In Thousands)

|                                                                                    |                                                                            |                                           |          |                   |         |  
|----------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------------------------- | -------- | ----------------- | ------- | -
|                                                                                    |                                                                            |                                           |          | Fiscal Year Ended
|                                                                                    |                                                                            |                                           |          | 2001             
|                                                                                    |                                                                            |                                           |          |                  
|Operating Activities                                                                |                                                                            |                                           |          |                  
|Net loss                                                                            |                                                                            | $                                         | (296,395 | )                
|Adjustments to reconcile net loss to net cash used in operating activities:         |                                                                            |                                           |          |                  
|                                                                                    | Depreciation and amortization on property, plant, and equipment            |                                           |          | 9,489             |        
|                                                                                    | Amortization of intangible assets                                          |                                           |          | 16,860            |        
|                                                                                    | Provision for doubtful accounts receivable                                 |                                           |          | (933              | )      
|                                                                                    | Interest accrual on long-term note payable to related party                |                                           |          | 3,196             |        
|                                                                                    | Accretion and amortization of interest on debt                             |                                           |          | 130,861           |        
|                                                                                    | Equity in net loss of unconsolidated company                               |                                           |          | 3,924             |        
|                                                                                    | Equity in net loss of non-debtor subsidiaries                              |                                           |          | 84,685            |        
|                                                                                    | Gain on disposal of equipment                                              |                                           |          | (14               | )      
|                                                                                    | Gain on transfer of equipment to non-debtor subsidiaries                   |                                           |          | (266              | )      
|                                                                                    | Restructuring/impairment charges related to property, plant, and equipment |                                           |          | 55,420            |        
|                                                                                    | Deferred income taxes                                                      |                                           |          | (10,425           | )      
|Changes in operating assets and liabilities:                                        |                                                                            |                                           |          |                  
|                                                                                    | Accounts receivable                                                        |                                           |          | 12,626            |        
|                                                                                    | Accounts receivable from related parties                                   |                                           |          | (150              | )      
|                                                                                    | Inventories                                                                |                                           |          | 5,458             |        
|                                                                                    | Prepaid expenses and deposits                                              |                                           |          | 1,350             |        
|                                                                                    | Trade accounts payable                                                     |                                           |          | 1,630             |        
|                                                                                    | Intercompany balances with non-debtor subsidiaries, net                    |                                           |          | (52,166           | )      
|                                                                                    | Accrued compensation and benefits                                          |                                           |          | (5,173            | )      
|                                                                                    | Other liabilities                                                          |                                           |          | (13               | )      
|                                                                                    | Other liabilities due to related party                                     |                                           |          | (1,244            | )      
|                                                                                    | Restructuring liabilities associated with merger                           |                                           |          | (14,174           | )      
|                                                                                    | Other restructuring liabilities                                            |                                           |          | (1,445            | )      
|                                                                                    | Liabilities subject to compromise                                          |                                           |          | (425              | )      
|                                                                                    |                                                                            |                                           |          |                  
|                                                                                    |                                                                            |                                           | (57,324  | )                
|Reorganization costs, net                                                           |                                                                            |                                           | 6,066    |                  
|                                                                                    |                                                                            |                                           |          |                  
|                                                                                    |                                                                            | Net cash used in operating activities     |          |                   | (51,258 | )
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Investing Activities                                                                |                                                                            |                                           |          |                  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Acquisition of property, plant and equipment                                        |                                                                            |                                           | (1,193   | )                
|Purchases of short-term investments                                                 |                                                                            |                                           | (3,209   | )                
|Proceeds from short-term investments at maturity                                    |                                                                            |                                           | 11,534   |                  
|Proceeds from disposal of property, plant and equipment                             |                                                                            |                                           | 516      |                  
|Proceeds from transfer of property, plant, and equipment to non-debtor subsidiaries |                                                                            |                                           | 1,608    |                  
|Deposits and other assets                                                           |                                                                            |                                           | 156      |                  
|                                                                                    |                                                                            |                                           |          |                  
|                                                                                    |                                                                            | Net cash provided by investing activities |          |                   | 9,412   |  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Financing Activities                                                                |                                                                            |                                           |          |                  
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Payment of debt                                                                     |                                                                            |                                           | (15,000  | )                
|Sale of common stock, net of issuance costs                                         |                                                                            |                                           | 174      |                  
|                                                                                    |                                                                            |                                           |          |                  
|                                                                                    |                                                                            | Net cash used in financing activities     |          |                   | (14,826 | )
|                                                                                    |                                                                            |                                           |          |                  
|Decrease in cash and cash equivalents                                               |                                                                            |                                           | (56,672  | )                
|Cash and cash equivalents at beginning of year                                      |                                                                            |                                           | 62,572   |                  
|                                                                                    |                                                                            |                                           |          |                  
|                                                                                    |                                                                            | Cash and cash equivalents at end of year  |          | $                 | 5,900   |  
|                                                                                    |                                                                            |                                           |          |                  



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As part of the Bankruptcy Filing, the Company has rejected certain leases
and contracts, and intends to reject additional leases and contracts as allowed
by the Bankruptcy Code. Certain of the leases that the Company already has
rejected or intends to reject have previously been accounted for as part of
restructuring plans in accordance with Emerging Issues Task Force (EITF) Issue
No. 95-3, Recognition of Liabilities in Connection with Purchase Business
Combinations, and EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring). Consequently, the Company has
reclassified the merger and restructuring related accruals for these leases to
liabilities subject to compromise. In addition, in the fourth quarter of
2001 the Company increased its liability to Western Digital related to
equipment lease obligations by $1.9 million to the estimated amount of the
claim.

The amounts for Chapter 11 related reorganization costs included in the
consolidated and condensed debtor-in-possession statements of operations
consist of the following for the year ended December 30, 2001 (in thousands):

|                                                                                       |  |   |       |  
|-------------------------------------------------------------------------------------- |  | - | ----- | -
|Accretion of discount on note payable to related party                                 |  | $ | 2,270 |  
|Adjustment to liabilities subject to compromise
related to equipment lease obligations |  |   | 1,929 |  
|Professional fees                                                                      |  |   | 1,876 |  
|U.S. Trustee fees                                                                      |  |   | 10    |  
|Other                                                                                  |  |   | (19   | )
|                                                                                       |  |   |       |  
|                                                                                       |  | $ | 6,066 |  
|                                                                                       |  |   |       |  

Liabilities included in the condensed and consolidated
debtor-in-possession balance sheet at December 30, 2001, which are subject to
compromise under the terms of the Plan of Reorganization, are summarized as
follows (in thousands):

|                                        |  |   |         | 
|--------------------------------------- |  | - | ------- | 
|Priority tax claims                     |  | $ | 1,729   | 
|Loan restructure agreement claims       |  |   | 206,880 | 
|Western Digital note claim              |  |   | 33,675  | 
|Western Digital rejection claims        |  |   | 11,262  | 
|Convertible notes claims                |  |   | 10,193  | 
|Subordinated notes claims               |  |   | 238,195 | 
|General unsecured claims                |  |   | 14,239  | 
|                                        |  |   |         | 
|Total liabilities subject to compromise |  | $ | 516,173 | 
|                                        |  |   |         | 

The above balance sheet amounts represent the Companys estimate of known
or potential pre-petition claims. Pursuant to the Bankruptcy Code, schedules
have been filed by KUS with the Bankruptcy Court setting forth its assets and
liabilities. Differences between amounts recorded by KUS and claims filed by
creditors are being investigated and resolved as part of the Chapter 11
bankruptcy proceedings. Such claims remain subject to future adjustment. Any
such adjustments would increase or decrease the liabilities subject to
compromise and reorganization costs in the period in which they become known.
Adjustments may result from negotiations, actions of the Bankruptcy Court,
further developments with respect to disputed claims, and rejection of
executory contracts, unexpired leases and proofs of claim. Payment terms for
these amounts will be established in connection with the Chapter 11 bankruptcy
proceedings.



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Liabilities subject to compromise are explained as follows:



| |  |  | Priority tax claims reflect the liability for property,
sales, and income taxes that were unpaid as of August 24, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Loan restructure agreement claims reflect the outstanding
$201.7 million principal balance of the senior unsecured bank debt.
In June 2000, the Company entered into a senior unsecured loan
restructure agreement with its senior lenders. Under the loan
restructure agreement, the bank debt became due and payable on June
30, 2001. This debt bore interest at the prime interest rate plus
1.25%, and required principal payments of $7.5 million a quarter.
The amount also includes accrued interest of $4.4 million through
August 24, 2001, and $0.8 million for reimbursement of professional
advisory expenses.
|
| |  |  | Western Digital note claim reflects a note to Western Digital
in the principal amount of $30.1 million in connection with the
purchase of the assets of Western Digitals media operation in April
1999. The note bears interest at 4.9% and was originally due in
April 2002 and was subordinated to the Companys senior bank debt.
The amount includes $3.6 million in accrued interest through August
24, 2001.                                                                                                                                                                                                        
|
| |  |  | Western Digital rejection claims reflect the liability for
all unused equipment leases in connection with the closure of the
media operation acquired from Western Digital in April 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | Convertible notes claims reflect the outstanding $9.3
million of subordinated unsecured convertible debt that was scheduled
to mature in 2005. This convertible debt was issued in June 2000 as
part of the restructuring of the senior bank debt. The convertible
notes originally bore interest of 8%, payable on the maturity date of
the convertible notes. The claim amount includes $0.9 million in
accrued interest through August 24, 2001.                                                                                                                                                                        
|
| |  |  | Subordinated notes claims reflect the outstanding $230.0
million in subordinated convertible notes assumed in the merger with
HMT Technology Corporation. The HMT notes originally bore interest
at 53/4% payable semiannually on January 15 and July 15, were
convertible into shares of common stock of the Company at a
conversion price of $26.12, and were scheduled to mature in January
2004. The Company has not paid the interest on the HMT notes that
was due on July 15, 2001. This amount includes $8.3 million in
accrued interest through August 24, 2001.                                                  
|
| |  |  | General unsecured claims reflect the liability for: 1) all
materials and services that were received by KUS but unpaid as of
August 24, 2001; 2) remaining lease payments for unused equipment
leased by HMT; and 3) unpaid severance costs as of August 24, 2001.                                                                                                                                                                                                                                                                                                                                                         

The Company has received approval from the Bankruptcy Court to pay or
otherwise honor certain of its pre-petition obligations, including employee
wages, salaries, benefits and other employee obligations, and certain other
pre-petition claims. The pre-petition liabilities that have been approved for
payment by the Bankruptcy Court are excluded from liabilities subject to
compromise.

Note 3. Segment and Geographic Information

The Company operates in one business segment, which is the development,
production, and marketing of high-performance thin-film media for use in hard
disk drives. The Company primarily sells to original equipment manufacturers in
the rigid disk drive market.



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The Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information on January 3, 1999. SFAS 131 establishes
annual and interim reporting standards for an enterprises operating segments
and related disclosures about its products, services, geographic areas and
major customers. Under SFAS No. 131, the Companys operations are treated as
one operating segment as it only reports profit and loss information on an
aggregate basis to chief operating decision-makers of the Company.

Summary information for the Companys operations by geographic location is
as follows:

|                   |                                        |  |                   |          |      |  |         |          |   |  |         |          |  
|------------------ | -------------------------------------- |  | ----------------- | -------- | ---- |  | ------- | -------- | - |  | ------- | -------- | -
|                   |                                        |  | Fiscal Year Ended
|                   |                                        |  |                  
|                   |                                        |  | 2001              |          | 2000 |  | 1999   
|                   |                                        |  |                   |          |      |  |        
|                   |                                        |  | (in thousands)   
|Net sales:         |                                        |  |                   |          |      |  |         |          |   |  |         |         
|                   | To customers from US operations        |  | $                 | 22,141   |      |  | $       | 37,708   |   |  | $       | 115,554  |  
|                   | To customers from Malaysian operations |  |                   | 260,472  |      |  |         | 320,755  |   |  |         | 216,392  |  
|                   | Intercompany from Malaysian operations |  |                   | 72,084   |      |  |         | 77,559   |   |  |         | 73,201   |  
|                   | Intercompany from US operations        |  |                   | 18,956   |      |  |         | 36,191   |   |  |         | 31,945   |  
|                   |                                        |  |                   |          |      |  |         |          |   |  |         |         
|                   |                                        |  | 373,653           |          |      |  | 472,213 |          |   |  | 437,092 |         
|                   | Intercompany eliminations              |  |                   | (91,040  | )    |  |         | (113,750 | ) |  |         | (105,146 | )
|                   |                                        |  |                   |          |      |  |         |          |   |  |         |         
|                   | Total net sales                        |  | $                 | 282,613  |      |  | $       | 358,463  |   |  | $       | 331,946  |  
|                   |                                        |  |                   |          |      |  |         |          |   |  |         |         
|Operating loss:    |                                        |  |                   |          |      |  |         |          |   |  |         |         
|                   | US operations                          |  | $                 | (67,569  | )    |  | $       | (42,309  | ) |  | $       | (204,172 | )
|                   | Malaysian operations                   |  |                   | (78,873  | )    |  |         | 4,014    |   |  |         | (86,917  | )
|                   |                                        |  |                   |          |      |  |         |          |   |  |         |         
|                   | Total operating loss                   |  | $                 | (146,442 | )    |  | $       | (38,295  | ) |  | $       | (291,089 | )
|                   |                                        |  |                   |          |      |  |         |          |   |  |         |         
|Long-lived assets: |                                        |  |                   |          |      |  |         |          |   |  |         |         
|                   | US operations                          |  | $                 | 139,595  |      |  | $       | 214,678  |   |  | $       | 55,690   |  
|                   | Malaysian operations                   |  |                   | 207,566  |      |  |         | 257,735  |   |  |         | 283,307  |  
|                   |                                        |  |                   |          |      |  |         |          |   |  |         |         
|                   | Total long-lived assets                |  | $                 | 347,161  |      |  | $       | 472,413  |   |  | $       | 338,997  |  
|                   |                                        |  |                   |          |      |  |         |          |   |  |         |         

External sales by geographic location, which is determined by the
customers sold-to address, are as follows:

|                          |                 |   |                   |         |      |   |         |         |  |   |         |         | 
|------------------------- | --------------- | - | ----------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                          |                 |   | Fiscal Year Ended
|                          |                 |   |                  
|                          |                 |   | 2001              |         | 2000 |   | 1999   
|                          |                 |   |                   |         |      |   |        
|                          |                 |   | (in thousands)   
|Malaysia                  |                 | $ | 168,384           |         |      | $ | 190,168 |         |  | $ | 162,635 |        
|Singapore                 |                 |   | 94,138            |         |      |   | 137,392 |         |  |   | 149,344 |        
|US                        |                 |   | 13,732            |         |      |   | 25,168  |         |  |   | 16,570  |        
|All Other Asian Countries |                 |   | 6,308             |         |      |   | 5,735   |         |  |   | 2,426   |        
|Europe                    |                 |   | 51                |         |      |   |        |         |  |   | 971     |        
|                          |                 |   |                   |         |      |   |         |         |  |   |         |        
|                          | Total net sales |   | $                 | 282,613 |      |   | $       | 358,463 |  |   | $       | 331,946 | 
|                          |                 |   |                   |         |      |   |         |         |  |   |         |        



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Note 4. Concentration of Customer and Supplier Risk

The majority of the Companys sales are derived from a relatively small
number of customers, resulting in a concentration of credit risk with respect
to trade receivables. The Company performs ongoing credit evaluations of its
customers, and generally requires no collateral. Based on managements
evaluation of potential credit losses, the Company believes its allowance for
doubtful accounts is adequate. The Company had one customer that accounted for
$ 23.8 million of its accounts receivable as of December 30, 2001, or 59% of
its net sales for the year then ended. A second customer accounted for $3.2
million of the Companys accounts receivable as of December 30, 2001, or 27% of
sales for the year ended.

The Companys customers are concentrated in the disk drive industry.
Accordingly, the Companys future success depends on the buying patterns of
these customers and the continued demand by these customers for the Companys
products. Additionally, the disk drive market is characterized by rapidly
changing technology, evolving industry standards, changes in end user
requirements, and frequent new product introductions and enhancements. The
Companys continued success will depend upon its ability to enhance existing
products and to develop and introduce, on a timely basis, new products and
features that keep pace with technological developments and emerging industry
standards. Furthermore, as a result of its international sales, the Companys
operations are subject to risks of doing business abroad, including but not
limited to, fluctuations in the value of currency, longer payment cycles, and
greater difficulty in collecting accounts receivable.

Due to the Companys small customer base, the loss of any one significant
customer would have a material impact on the Companys business operations.
Significant customers accounted for the following percentages of net sales in
2001, 2000, and 1999:

|                            |  |                   |    |      |  |      |    |   |  |  |    |  
|--------------------------- |  | ----------------- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                            |  | Fiscal Year Ended
|                            |  |                  
|                            |  | 2001              |    | 2000 |  | 1999
|                            |  |                   |    |      |  |     
|Western Digital Corporation |  |                   | 59 | %    |  |      | 50 | % |  |  | 71 | %
|Maxtor Corporation          |  |                   | 27 | %    |  |      | 28 | % |  |  | 16 | %
|Seagate Technology          |  |                   | 7  | %    |  |      | 17 | % |  |  | 8  | %

In April 1999, the Company purchased Western Digitals media operation. As
part of the purchase, the Company and Western Digital entered into a volume
purchase agreement whereby Western Digital is obligated, over the three years
following the acquisition date, to purchase a significant majority of its media
requirements from the Company. In October 2001, Western Digital and the
Company approved a three-year extension, extending the agreement through April
2005.

Kobe Steel, Ltd. (Kobe), through certain subsidiaries, supplies aluminum
substrate blanks and ground aluminum substrates to the Company. The Company
also relies on a limited number of other suppliers, in some cases a sole
supplier, for certain other materials used in its manufacturing processes.
These materials include nickel plating solutions, certain polishing and
texturing supplies and sputtering target materials. These suppliers work
closely with the Company to optimize the Companys production processes.
Although this reliance on a limited number of suppliers, or a sole supplier,
entails some risk that the Companys production capacity would be limited if
one or more of such materials were to become unavailable or available in
reduced quantities, the Company believes that the advantages of working closely
with these suppliers outweigh such risks. If such materials should be
unavailable for a significant period of time, the Companys results of
operations could be adversely affected.



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Note 5. Stockholders Equity

In September 2000, the Companys stockholders approved a proposal to
increase the amount of Common Stock the Company is authorized to issue from
150,000,000 to 250,000,000 shares.

At December 30, 2001, shares of Common Stock reserved for future issuance
are as follows (in thousands):

|                 |  |  |        | 
|---------------- |  |  | ------ | 
|Stock options    |  |  | 26,133 | 
|Warrants         |  |  | 2,392  | 
|Convertible debt |  |  | 12,474 | 
|                 |  |  |        | 
|                 |  |  | 40,999 | 
|                 |  |  |        | 

Note 6. Stock Option Plans and Stock Purchase Plan

At December 30, 2001, the Company had stock-based compensation plans,
which are described below. The Company has elected to follow APB No. 25, in
accounting for its plans. Accordingly, no compensation cost has been recorded
in the consolidated financial statements for its stock option and stock
purchase plans.

If compensation cost for the stock-based compensation plans had been
determined consistent SFAS No. 123, Accounting for Stock-Based Compensation,
the Companys net loss and loss per share would have been increased to the pro
forma amounts indicated below:

|                       |             |  |   |          |                                          |  |      |         |      |  |   |          |   |  | 
|---------------------- | ----------- |  | - | -------- | ---------------------------------------- |  | ---- | ------- | ---- |  | - | -------- | - |  | 
|                       |             |  |   |          | Fiscal Year Ended                       
|                       |             |  |   |          |                                         
|                       |             |  |   |          | 2001                                     |  | 2000 |         | 1999
|                       |             |  |   |          |                                          |  |      |         |     
|                       |             |  |   |          | (in thousands, except per share amounts)
|Net loss:              |             |  |   |          |                                          |  |      |         |      |  |   |         
|                       | As reported |  | $ | (296,395 | )                                        |  | $    | (68,058 | )    |  | $ | (283,049 | )
|                       | Pro forma   |  |   | (306,185 | )                                        |  |      | (93,379 | )    |  |   | (303,793 | )
|Basic and diluted EPS: |             |  |   |          |                                          |  |      |         |      |  |   |         
|                       | As reported |  | $ | (2.65    | )                                        |  | $    | (0.88   | )    |  | $ | (4.54    | )
|                       | Pro forma   |  |   | (2.74    | )                                        |  |      | (1.21   | )    |  |   | (4.88    | )

For purposes of the pro forma disclosure, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions used for grants in 2001, 2000, and 1999,
respectively: risk-free interest rates of 4.6%, 6.2%, and 5.8%; volatility
factors of the expected market price of the Companys Common Stock of 266.0%,
235.6%, and 90.4%; and a weighted-average expected life of the options of 1.3,
4.3, and 4.3 years. There was no dividend yield included in the calculation, as
the Company does not pay dividends. The weighted-average fair value of options
granted during 2001, 2000, and 1999 was $0.76, $2.11, and $2.72, respectively

Under the Companys stock option plans (Plans), the Company may grant
options to purchase up to 30,826,104 shares of Common Stock. Options may be
granted to employees, directors, independent contractors and consultants. The
Restated 1987 Stock Option Plan provides for issuing both incentive stock
options and nonqualified stock options, both of which must be granted at fair
market value at the date of grant. The 1997 Supplemental Stock Option Plan and
the Komag Material Technology, Inc. Stock Option



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Plan provide for the issuance of nonqualified stock options, which must be
granted at fair market value at the date of grant. Outstanding options vest
over various periods ranging from immediate vesting to four years, and expire
no later than ten years from the date of grant. Options may be exercised in
exchange for cash or outstanding shares of the Companys Common Stock.

In connection with the merger with HMT, the Company assumed outstanding
options of approximately 3,064,000 under the HMT 1995 Stock Option Plan and the
HMT 1996 Equity Incentive Plan. In accordance with the merger agreement, these
options were converted into approximately 2,786,000 options to purchase the
Companys shares of Common Stock.

At December 30, 2001, approximately 9,553,000 shares of Common Stock were
reserved for future option grants and 16,580,000 shares of Common Stock were
reserved for the exercise of outstanding options under the Companys Plans.
Approximately 12,838,000, 9,379,000, and 4,486,000 of the outstanding options
were exercisable at December 30, 2001, December 31, 2000, and January 2, 2000,
respectively.

A summary of stock option transactions is as follows:

|                                 |                           |  |                                          |        |                |   |           |      |  |   |        |         |  
|-------------------------------- | ------------------------- |  | ---------------------------------------- | ------ | -------------- | - | --------- | ---- |  | - | ------ | ------- | -
|                                 |                           |  |                                          |        |                |   | Weighted- |      |  |   |       
|                                 |                           |  |                                          |        |                |   | average   |      |  |   |       
|                                 |                           |  | Shares                                   |        | Exercise Price |   | Total    
|                                 |                           |  |                                          |        |                |   |          
|                                 |                           |  | (in thousands, except per share amounts)
|Outstanding at January 3, 1999   |                           |  | 8,816                                    |        |                | $ | 6.50      |      |  | $ | 57,285 |        
|                                 | Granted                   |  |                                          | 9,934  |                |   |           | 3.92 |  |   |        | 38,815  |  
|                                 | Exercised                 |  |                                          | (34    | )              |   |           | 9.33 |  |   |        | (317    | )
|                                 | Cancelled                 |  |                                          | (3,367 | )              |   |           | 6.28 |  |   |        | (21,205 | )
|                                 |                           |  |                                          |        |                |   |           |      |  |   |        |        
|Outstanding at January 2, 2000   |                           |  | 15,349                                   |        |                |   | 4.86      |      |  |   | 74,578 |        
|                                
|                                
|                                
|                                
|                                 | Granted                   |  |                                          | 5,959  |                |   |           | 2.05 |  |   |        | 12,224  |  
|                                 | Options assumed in merger |  |                                          | 2,786  |                |   |           | 7.62 |  |   |        | 21,245  |  
|                                 | Exercised                 |  |                                          | (60    | )              |   |           | 2.85 |  |   |        | (170    | )
|                                 | Cancelled                 |  |                                          | (4,978 | )              |   |           | 5.47 |  |   |        | (27,225 | )
|                                 |                           |  |                                          |        |                |   |           |      |  |   |        |        
|Outstanding at December 31, 2000 |                           |  | 19,056                                   |        |                |   | 4.23      |      |  |   | 80,652 |        
|                                
|                                
|                                
|                                
|                                 | Granted                   |  |                                          | 3,035  |                |   |           | 0.87 |  |   |        | 2,637   |  
|                                 | Exercised                 |  |                                          | (71    | )              |   |           | 0.04 |  |   |        | (3      | )
|                                 | Cancelled                 |  |                                          | (5,440 | )              |   |           | 4.51 |  |   |        | (24,522 | )
|                                 |                           |  |                                          |        |                |   |           |      |  |   |        |        
|Outstanding at December 30, 2001 |                           |  | 16,580                                   |        |                | $ | 3.54      |      |  | $ | 58,764 |        
|                                 |                           |  |                                          |        |                |   |           |      |  |   |        |        



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The following table summarizes information concerning outstanding and
exercisable options at December 30, 2001 (option shares in thousands):

|                 |  |             |                     |             |                     |          |           |             |  |          |       |  |  |  |        |  |  |   |       |  | 
|---------------- |  | ----------- | ------------------- | ----------- | ------------------- | -------- | --------- | ----------- |  | -------- | ----- |  |  |  | ------ |  |  | - | ----- |  | 
|                 |  |             | Options Outstanding |             | Options Exercisable
|                 |  |             |                     |             |                    
|                 |  |             |                     |             |                     |          | Remaining
|Range of         |  | Number      |                     | Contractual |                     | Exercise |           | Number      |  | Exercise
|Exercise Prices  |  | Outstanding |                     | Life (yrs)* |                     | Price*   |           | Exercisable |  | Price*  
|                 |  |             |                     |             |                     |          |           |             |  |         
|$  0.04 -$  1.25 |  |             | 2,626               |             |                     |          | 4.5       |             |  | $        | 0.67  |  |  |  | 2,268  |  |  | $ | 0.67  | 
|1.38-    2.25    |  |             | 4,453               |             |                     |          | 8.6       |             |  |          | 1.70  |  |  |  | 3,604  |  |  |   | 1.72  | 
|2.31-    5.35    |  |             | 8,040               |             |                     |          | 6.9       |             |  |          | 4.11  |  |  |  | 5,829  |  |  |   | 4.34  | 
|5.41-  16.13     |  |             | 1,374               |             |                     |          | 5.9       |             |  |          | 10.17 |  |  |  | 1,049  |  |  |   | 10.33 | 
|16.36-  34.13    |  |             | 87                  |             |                     |          | 4.3       |             |  |          | 27.10 |  |  |  | 88     |  |  |   | 27.10 | 
|                 |  |             |                     |             |                     |          |           |             |  |          |       |  |  |  |        |  |  |   |       | 
|                 |  |             | 16,580              |             |                     |          |           |             |  |          |       |  |  |  | 12,838 |  |  |   |       | 
|                 |  |             |                     |             |                     |          |           |             |  |          |       |  |  |  |        |  |  |   |       | 



---

|* |  | weighted average
|- |  | ----------------

In May 1999, the Shareholders approved a 2,550,000 share increase in the
total number of shares that may be issued under the Komag ESPP Plan. In January
2001, the Board of Directors, by unanimous written consent, approved an
additional 2,100,000 shares to cover future issuances. In June 2001, the Plan
was terminated. In May 2001, the Shareholders approved a new 2001 ESPP Plan,
which became effective in July 2001. The 2001 ESPP Plan was terminated due to
the Companys bankruptcy filing.

Shares issued under the ESPP Plan approximated zero, 2,257,000, and
1,170,000, in 2001, 2000, and 1999, respectively. At December 30, 2001, no
shares of Common Stock were reserved for future issuance under the ESPP Plan.

For purposes of the pro forma disclosure, the fair value of the employees
purchase rights under the ESPP Plan has been estimated using the Black-Scholes
model assuming risk-free interest rates of 6.2% and 5.8%, for 2000 and 1999,
respectively. Volatility factors of the expected market price were 235.6% and
90.4% for 2000 and 1999, respectively. The weighted-average expected life of
the purchase rights was six months for 2000 and 1999. The weighted-average fair
value of those purchase rights granted in 2000 and 1999 was $0.85 and $2.90,
respectively.

In connection with the HMT merger, the Company assumed ownership of the
HMT Employee Stock Purchase Plan (HMT ESPP Plan). As of October 2, 2000, the
merger date, there were 3,637,600 shares available for issuance under the HMT
ESPP Plan. As part of the semi-annual October 31, 2000 offering, 492,462 shares
were issued to employees under the HMT ESPP Plan. As of December 31, 2000,
3,147,638 shares were available for future issuance. On April 30, 2001, the
final employee stock purchase under the HMT ESPP Plan was made, and 224,000
shares were issued. Subsequently, the HMT ESPP Plan was terminated. For
purposes of the pro forma disclosure in 2000, the fair value of the employees
purchase rights under the HMT ESPP Plan has been estimated using the
Black-Scholes model assuming a risk-free interest rate of 6.2%, a volatility
factor of the expected market price of 235.6%, and a weighted-average expected
life of the purchase rights of six months as of December 31, 2000. The
weighted-average fair value of those purchase rights granted in 2000 was $0.85.



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Note 7. Bonus and Employee Savings Plans

The Companys bonus plans include provisions for discretionary bonuses.
The Company expensed $4.6 million, $5.2 million, and $1.5 million under the
discretionary bonus provisions as retention bonuses in 2001, 2000, and 1999,
respectively.

The Company and its subsidiaries maintain savings and deferred profit
sharing plans. Employees who meet certain criteria are eligible to participate.
In addition to voluntary employee contributions to these plans, the Company
matches a portion of each employees contributions to the plans, up to a
maximum amount. The Company contributed $0.7 million, $0.4 million, and $0.6
million to the plans in 2001, 2000, and 1999, respectively. Expenses for the
Companys bonus and employee savings plans are included in selling, general,
and administrative expenses.

Note 8. Income Taxes

The benefit for income taxes consists of the following:

|         |          |          |         |                   |         |      |        |                |      |   |         |        |         |  
|-------- | -------- | -------- | ------- | ----------------- | ------- | ---- | ------ | -------------- | ---- | - | ------- | ------ | ------- | -
|         |          |          |         | Fiscal Year Ended
|         |          |          |         |                  
|         |          |          |         | 2001              |         | 2000 |        | 1999          
|         |          |          |         |                   |         |      |        |               
|         |          |          |         |                   |         |      |        | (in thousands) |      |   |         |       
|Federal: |          |          |         |                   |         |      |        |                |      |   |         |       
|         |          | Current  |         | $                 | 18      |      |        | $              |     |   |         | $      | 1,369   |  
|         |          | Deferred |         |                   | (11,069 | )    |        |                | (722 | ) |         |        | (20,555 | )
|         |          |          |         |                   |         |      |        |                |      |   |         |       
|         |          |          | (11,051 | )                 |         |      | (722   | )              |      |   | (19,186 | )     
|State:   |          |          |         |                   |         |      |        |                |      |   |         |       
|         | Current  |          |         | 13                |         |      |        | 87             |      |   |         | 2      |        
|         | Deferred |          |         | 259               |         |      |        | (6,138         | )    |   |         | (7,848 | )      
|         |          |          |         |                   |         |      |        |                |      |   |         |       
|         |          |          | 272     |                   |         |      | (6,051 | )              |      |   | (7,846  | )     
|Foreign: |          |          |         |                   |         |      |        |                |      |   |         |       
|         | Current  |          |         | 1,346             |         |      |        | 1,585          |      |   |         | 1,224  |        
|         |          |          |         |                   |         |      |        |                |      |   |         |       
|         |          | $        | (9,433  | )                 |         | $    | (5,188 | )              |      | $ | (25,808 | )     
|         |          |          |         |                   |         |      |        |                |      |   |         |       

Foreign income taxes consist of withholding taxes on royalty and interest
payments, and foreign taxes of subsidiaries.

Deferred tax assets (liabilities) are comprised of the following:

|                                                |  |                   |          |      |  |   |          |  
|----------------------------------------------- |  | ----------------- | -------- | ---- |  | - | -------- | -
|                                                |  | Fiscal Year Ended
|                                                |  |                  
|                                                |  | 2001              |          | 2000
|                                                |  |                   |          |     
|                                                |  | (in thousands)   
|Deferred income                                 |  | $                 |         |      |  | $ | (9,872   | )
|Other                                           |  |                   | (1,003   | )    |  |   | (1,941   | )
|                                                |  |                   |          |      |  |   |          |  
|Gross deferred tax liabilities                  |  |                   | (1,003   | )    |  |   | (11,813  | )
|                                                |  |                   |          |      |  |   |          |  
|Capital loss carryover                          |  |                   | 2,029    |      |  |   |         |  
|Depreciation and amortization                   |  |                   | 28,563   |      |  |   |         |  
|Accrued compensation and benefits               |  |                   | 1,781    |      |  |   |         |  
|Other                                           |  |                   | 9,758    |      |  |   |         |  
|Tax benefit of net operating loss carryforwards |  |                   | 255,437  |      |  |   | 158,282  |  
|Tax benefit of credit carryforwards             |  |                   | 52,683   |      |  |   | 14,363   |  
|                                                |  |                   |          |      |  |   |          |  
|Gross deferred tax assets                       |  |                   | 350,251  |      |  |   | 172,645  |  
|Valuation allowance                             |  |                   | (350,251 | )    |  |   | (172,645 | )
|                                                |  |                   |          |      |  |   |          |  
|Net deferred tax assets                         |  |                   |         |      |  |   |         |  
|                                                |  |                   |          |      |  |   |          |  
|                                                |  | $                 | (1,003   | )    |  | $ | (11,813  | )
|                                                |  |                   |          |      |  |   |          |  



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As of December 30, 2001, the Company has federal and state tax net operating
loss carryforwards of approximately $693.7 million and $220.0 million,
respectively. The Company also has federal and state tax credit carryforwards
of approximately $24.8 million and $42.8 million, respectively. The Companys
federal net operating loss carryforwards expire beginning in 2008 through 2021,
and the state net operating loss carryforwards expire beginning in 2002 through
2011. The Companys federal R&D and AMT tax credits can be carried forward for
twenty years and indefinitely, respectively, and the state R&D credit can be
carried forward indefinitely.

The utilization of the Companys net operating loss and tax credit
carryforwards is subject to a substantial annual limitation due to the change
in ownership provisions of the Internal Revenue Code of 1986, as amended, and
similar State provisions. The annual limitation may result in the expiration
of net operating loss carryforwards and tax credit carryforwards before
utilization. Due to the uncertainty of the timing and amount of future income,
the Company has provided a full valuation allowance against its deferred tax
assets.

The deferred tax asset valuation allowance increased by $177.6 million in
2001, decreased by $39.1 million in 2000, and increased $80.8 million in 1999.

A reconciliation of the income tax provision at the 35% federal statutory
rate to the income tax provision at the effective tax rate is as follows:

|                                                   |  |                   |          |      |  |      |         |   |  |   |          |  
|-------------------------------------------------- |  | ----------------- | -------- | ---- |  | ---- | ------- | - |  | - | -------- | -
|                                                   |  | Fiscal Year Ended
|                                                   |  |                  
|                                                   |  | 2001              |          | 2000 |  | 1999
|                                                   |  |                   |          |      |  |     
|                                                   |  | (in thousands)   
|Income tax benefit at federal statutory rate       |  | $                 | (107,039 | )    |  | $    | (28,198 | ) |  | $ | (107,683 | )
|State income taxes, net of federal benefit         |  |                   | 272      |      |  |      | (2,829  | ) |  |   | (6,622   | )
|Foreign withholding taxes                          |  |                   | 1,345    |      |  |      |        |   |  |   |         |  
|Non-deductible interest expense                    |  |                   | 46,920   |      |  |      |        |   |  |   |         |  
|Nondeductible goodwill amortization                |  |                   | 5,901    |      |  |      |        |   |  |   |         |  
|Permanently reinvested foreign losses              |  |                   |         |      |  |      | 1,976   |   |  |   | 15,052   |  
|Changes in estimate for tax contingencies          |  |                   | 10,995   |      |  |      |        |   |  |   |         |  
|Losses for which no current year benefit available |  |                   | 30,671   |      |  |      | 26,257  |   |  |   | 72,095   |  
|Other                                              |  |                   | 1,502    |      |  |      | (2,394  | ) |  |   | 1,350    |  
|                                                   |  |                   |          |      |  |      |         |   |  |   |          |  
|                                                   |  | $                 | (9,433   | )    |  | $    | (5,188  | ) |  | $ | (25,808  | )
|                                                   |  |                   |          |      |  |      |         |   |  |   |          |  

Foreign pre-tax loss was $83.7 million, $5.6 million, and $101.4 million
in 2001, 2000, and 1999, respectively.

The Companys wholly-owned thin-film media operation, KMS, received a
five-year extension of its initial tax holiday through June 2003, for its first
plant site in Malaysia. KMS has also been granted an additional eight-year and
ten-year tax holiday through December 2006 and 2008 for its second and third
plant sites in Malaysia, respectively. The tax holidays had no impact on either
the Companys 2001 or 1999 net loss. In 2000, the tax holiday reduced the
Companys net loss by approximately $8.8 million ($0.08 per basic and diluted
share).



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Note 9. Term Debt and Convertible Subordinated Debt

Prior to June 2000, the Company borrowed $260.0 million under its term
debt and line of credit facilities. In June 2000, the Company entered into a
senior unsecured loan restructure agreement with its lenders and a separate
subordinated unsecured convertible debt agreement with other creditors. As part
of this transaction, $13.3 million of senior unsecured debt was converted to
$9.3 million of subordinated unsecured convertible debt. The conversion
resulted in an extraordinary gain of $3.8 million, net of expenses.

As a consequence of this agreement, at December 30, 2001, the Company has:
a) $201.7 million in senior unsecured bank debt which bears interest at the
prime interest rate plus 1.25% and a 2% penalty for defaulting on the loan, and
which matured on June 30, 2001; and b) $9.3 million of convertible debt which
bears interest at 8% and which was originally scheduled to mature in February
2005. In connection with this convertible debt, the Company issued warrants to
purchase up to 3 1/2% of its common stock.

The Company also has a note payable to Western Digital with a principal
balance of $30.1 million at December 30, 2001, which bears interest at 4.9%
compounded quarterly, and which was originally scheduled to mature in April
2002.

Additionally, on completion of the HMT merger in 2000, the Company
assumed, and has at December 30, 2001, $230.0 million of HMTs convertible
notes, which bear interest at 5 3/4% and which were originally scheduled to
mature in January 2004.

In accordance with the terms of the loan restructure agreement for the
senior bank debt and the subordination provisions for the HMT convertible
notes, the Company did not pay the interest on the HMT subordinated notes when
it became due on July 15, 2001. In addition, the Companys failure to pay its
senior bank debt when it became due on June 30, 2001 caused a default under the
HMT subordinated notes as of July 30, 2001. Upon default of the HMT
subordinated notes, the notes became immediately due and payable. As a result,
the Company accreted the unamortized discount on the notes of $99.1 million to
interest expense.

On August 24, 2001, Komag, Incorporated filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code, and filed
a proposed Plan of Reorganization (the Plan). Accordingly, these liabilities
have been reclassified in 2001 to liabilities subject to compromise (see Note
2). The repayment or discharge of the aforementioned indebtedness, plus unpaid
accrued interest of $17.3 million through August 24, 2001, is subject to the
provisions of the Plan, which may be modified materially before being confirmed
by the Bankruptcy Court.

Contractual interest expense on the indebtedness from August 25, 2001, to
December 30, 2001, was $11.7 million.

Note 10. Fair Value of Financial Instruments

The carrying values of cash and short-term investments, accounts
receivable and certain other current assets and liabilities approximate their
fair values at December 30, 2001, and December 31, 2000, due to the relatively
short period to maturity of these instruments.

As a result of the Companys Chapter 11 bankruptcy petition on August 24,
2001, the Companys debt has been reclassified to liabilities subject to
compromise on the balance sheet (see Note 2) at the value the Company
estimates will be allowed by the Bankruptcy Court. The current status of the
debt is discussed in Note 9.



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Note 11. Leases and Commitments

The Company leases certain research and administrative facilities under
operating leases that expire at various dates between 2004 and 2007. Certain of
these leases include renewal options varying from five to twenty years. At
December 30, 2001, the future minimum commitments for non-cancellable operating
facility leases and a sublease that the Company has not rejected or does not
intend to reject pursuant to the Bankruptcy Code (see Note 2), are as follows
(in thousands):

|           |  |          |        |          |  |   |       | 
|---------- |  | -------- | ------ | -------- |  | - | ----- | 
|           |  | Minimum  |        |          |  |  
|           |  | Lease    |        | Sublease
|           |  | Payments |        | Income  
|           |  |          |        |         
|2002       |  | $        | 3,507  |          |  | $ | 1,450 | 
|2003       |  |          | 3,509  |          |  |   | 1,494 | 
|2004       |  |          | 3,458  |          |  |   | 1,539 | 
|2005       |  |          | 3,308  |          |  |   | 1,585 | 
|2006       |  |          | 3,308  |          |  |   | 1,633 | 
|Thereafter |  |          | 636    |          |  |   | 414   | 
|           |  |          |        |          |  |   |       | 
|           |  | $        | 17,726 |          |  | $ | 8,115 | 
|           |  |          |        |          |  |   |       | 

As part of the Bankruptcy Filing, the Company has rejected certain leases
and intends to reject other leases as allowed by the Bankruptcy Code (see Note
2). At December 30, 2001, commitments for these operating facility and
equipment leases, including amounts that were not paid in fiscal 2001, are $6.4
million, net of $0.4 million in future sublease income related to these leases.

Rental expense for all operating leases amounted to $5.3 million, $4.5
million and $8.0 million in 2001, 2000 and 1999, respectively. Sublease rental
income amounted to $1.4 million, $1.8 million, and $1.4 million in 2001, 2000,
and 1999, respectively.

The Company has current non-cancellable capital purchase commitments of
approximately $3.1 million at December 30, 2001.

Note 12. Restructuring Charges

The Company has recorded liabilities related to costs to exit certain
business activities. Such liabilities have been estimated using historical
data on prior costs for such activities, coupled with assumptions on time
frames for exiting such activities and specific actions necessary to complete
such transactions.

The Company recorded restructuring charges of $7.2 million, $5.3 million,
and $143.6 million in 2001, 2000, and 1999, respectively. The $7.2 million
total for 2001 reflected additional costs associated with operating lease
obligations on equipment no longer in service, and costs for closing the former
HMT facilities. The $5.3 million total for 2000 included an $8.0 million charge
related to KMT, less a net $2.7 million reversal of charges previously accrued
for the 1997, 1998, and 1999 restructuring plans.



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1999 Restructuring Plan

In the second quarter of 1999, the Company recorded restructuring charges
of $4.3 million. This restructuring charge related primarily to severance pay
associated with 400 terminated U.S. manufacturing employees, and was paid in
the second and third quarters of 1999.

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
this 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, which 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.

In 2000, the writedown of net book value of equipment and leasehold
improvements was increased by $2.4 million for additional equipment that was
determined unusable due to the restructure. The facility closure liability was
decreased by $3.7 million in 2000 due to successfully terminating the leases
on manufacturing facilities and subleasing the administrative facility earlier
than originally expected. The severance costs liability was decreased by $0.7
million to reflect lower than expected payments.

In 2001, 2000, and 1999, the Company made cash payments totaling $39.2
million relating to restructuring activities under the 1999 restructuring plan.
The remaining reserve balance of $3.9 million associated with certain Western
Digital unused equipment leases was reclassified to liabilities subject to
compromise (see Note 2).

The following table summarizes the activities in the 1999 restructuring
plans:

|                             |  |                    |       |                   |  |          |      |           |  |       |      |   |  |   |       |   |  |   |        |  
|---------------------------- |  | ------------------ | ----- | ----------------- |  | -------- | ---- | --------- |  | ----- | ---- | - |  | - | ----- | - |  | - | ------ | -
|                             |  | Writedown Net Book |       | Liabilities Under |  |          |      |           |  |       |      |   |  |   |       |  
|                             |  | Value of Equipment |       | Non-Cancelable    |  | Facility |      |           |  |       |      |   |  |  
|                             |  | and Leasehold      |       | Equipment         |  | Closure  |      | Severance |  |       |      |  
|(in millions)                |  | Improvements       |       | Leases            |  | Costs    |      | Costs     |  | Total
|                             |  |                    |       |                   |  |          |      |           |  |      
|Expensed in 1999             |  | $                  | 98.5  |                   |  | $        | 17.7 |           |  | $     | 7.5  |   |  | $ | 19.9  |   |  | $ | 143.6  |  
|Charged to Reserve           |  |                    | (98.5 | )                 |  |          | (3.9 | )         |  |       | (3.0 | ) |  |   | (15.1 | ) |  |   | (120.5 | )
|                             |  |                    |       |                   |  |          |      |           |  |       |      |   |  |   |       |   |  |   |        |  
|Balance at January 2, 2000   |  |                    |      |                   |  |          | 13.8 |           |  |       | 4.5  |   |  |   | 4.8   |   |  |   | 23.1   |  
|Adjustment to Reserve        |  |                    | 2.4   |                   |  |          |     |           |  |       | (3.7 | ) |  |   | (0.7  | ) |  |   | (2.0   | )
|Charged to Reserve           |  |                    | (2.4  | )                 |  |          | (7.5 | )         |  |       | (0.8 | ) |  |   | (4.1  | ) |  |   | (14.8  | )
|                             |  |                    |       |                   |  |          |      |           |  |       |      |   |  |   |       |   |  |   |        |  
|Balance at December 31, 2000 |  |                    |      |                   |  |          | 6.3  |           |  |       |     |   |  |   |      |   |  |   | 6.3    |  
|Charged to Reserve           |  |                    |      |                   |  |          | (2.4 | )         |  |       |     |   |  |   |      |   |  |   | (2.4   | )
|Reclassifications            |  |                    |      |                   |  |          | (3.9 | )         |  |       |     |   |  |   |      |   |  |   | (3.9   | )
|                             |  |                    |       |                   |  |          |      |           |  |       |      |   |  |   |       |   |  |   |        |  
|Balance at December 30, 2001 |  | $                  |      |                   |  | $        |     |           |  | $     |     |   |  | $ |      |   |  | $ |       |  
|                             |  |                    |       |                   |  |          |      |           |  |       |      |   |  |   |       |   |  |   |        |  

2000 Restructuring Plan

In December 2000, the Company implemented a restructuring plan to cease
KMTs U.S. manufacturing operations in May 2001. This restructuring action
resulted in a charge of $8.0 million, and included $2.5 million of severance
pay associated with eliminating approximately 160 positions, primarily in
manufacturing, $4.6 million associated with the write-down of equipment and
leasehold improvements, and $0.9 million associated with related facility
closing costs in 2000. In 2001, the reserve was decreased by $4.6 million to
reflect the write-down of net book value of equipment and leasehold
improvements.



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Cash payments of $2.4 million were made in 2001 under the 2000
restructuring plan. The remaining liabilities are expected to be paid through
2004, the remaining facility lease term.

The following table summarizes the activities in the 2000 restructuring
plan:

|                                                                     |  |                    |      |          |  |           |      |       |  |   |      |   |  |   |      |  
|-------------------------------------------------------------------- |  | ------------------ | ---- | -------- |  | --------- | ---- | ----- |  | - | ---- | - |  | - | ---- | -
|                                                                     |  | Writedown Net Book |      |          |  |           |      |       |  |   |      |   |  |  
|                                                                     |  | Value of Equipment |      | Facility |  |           |      |       |  |   |      |  
|                                                                     |  | and Leasehold      |      | Closure  |  | Severance |      |       |  |  
|(in millions)                                                        |  | Improvements       |      | Costs    |  | Costs     |      | Total
|                                                                     |  |                    |      |          |  |           |      |      
|Expensed in 2000, and
balance at December 31, 2000                   |  | $                  | 4.6  |          |  | $         | 0.9  |       |  | $ | 2.5  |   |  | $ | 8.0  |  
|Write-down of net book value of
equipment and leasehold improvements |  |                    | (4.6 | )        |  |           |     |       |  |   |     |   |  |   | (4.6 | )
|Charged to reserve                                                   |  |                    |     |          |  |           | (0.3 | )     |  |   | (2.1 | ) |  |   | (2.4 | )
|Reclassifications                                                    |  |                    |      |          |  |           | 0.4  |       |  |   | (0.4 | ) |  |   |     |  
|                                                                     |  |                    |      |          |  |           |      |       |  |   |      |   |  |   |      |  
|Balance at December 30, 2001                                         |  | $                  |     |          |  | $         | 1.0  |       |  | $ |     |   |  | $ | 1.0  |  
|                                                                     |  |                    |      |          |  |           |      |       |  |   |      |   |  |   |      |  

Other Restructuring Expenses

In 2000, restructuring expense was credited for $0.7 million to close-out
the 1997 and 1998 restructuring plans. In 2001, restructuring expense was
charged $7.2 million to reflect the recognition of operating lease obligations
for equipment no longer in service, and additional building exit costs related
to the former HMT facilities.

Note 13. Impairment Charges

The Company recorded impairment charges of $50.2 million, zero, and $44.3
million in 2001, 2000, and 1999, respectively. Impairment charges in 1999
related to the goodwill associated with the purchase of the assets of Western
Digitals media operation (see Note 15). Impairment charges in 2001 included a
$45.8 million write-down of the former HMT land and buildings held for sale in
Eugene, Oregon, and Fremont, California, which reflected currently depressed
market conditions for commercial real estate, and which was based on an
independent valuation less estimated selling costs, and a $4.4 million
impairment charge pertaining to manufacturing equipment no longer in service.

Note 14. Komag Material Technology, Inc.

The Companys consolidated financial statements include the consolidation
of the financial results of Komag Material Technology, Inc. (KMT), which
manufactured and sold aluminum disk substrate products for high-performance
magnetic storage media prior to 2001. KMT conducts engineering, research, and
development activities for disk substrates. KMT is owned 80% by the Company
and 20% by Kobe Steel USA Holdings Inc., a US subsidiary of Kobe Steel, Ltd.
(Kobe).



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Other transactions between Kobe or its distributors and the Company were
as follows:

|                                             |                   |           |             |       |                   |       |      |       |         |       |   |       |         |       | 
|-------------------------------------------- | ----------------- | --------- | ----------- | ----- | ----------------- | ----- | ---- | ----- | ------- | ----- | - | ----- | ------- | ----- | 
|                                             |                   |           |             |       | Fiscal Year Ended
|                                             |                   |           |             |       |                  
|                                             |                   |           |             |       | 2001              |       | 2000 |       | 1999   
|                                             |                   |           |             |       |                   |       |      |       |        
|                                             |                   |           |             |       | (in thousands)   
|Accounts payable to Kobe or its distributors |                   |           |             |       |                   |       |      |       |         |       |   |      
|                                             | Beginning of year |           | $           | 1,827 |                   |       | $    | 2,007 |         |       | $ | 1,799 |        
|                                             |                   | Purchases |             |       | 25,848            |       |      |       | 25,605  |       |   |       | 15,031  |      
|                                             |                   | Payments  |             |       | (26,080           | )     |      |       | (25,785 | )     |   |       | (14,823 | )    
|                                             |                   |           |             |       |                   |       |      |       |         |       |   |      
|                                             |                   |           | End of year |       | $                 | 1,595 |      |       | $       | 1,827 |   |       | $       | 2,007 | 
|                                             |                   |           |             |       |                   |       |      |       |         |       |   |      

Note 15. Purchase of Western Digital Corporations Media Operation

In April 1999, the Company purchased the assets of Western Digitals media
operation through the issuance of approximately 10.8 million shares of the
Companys common stock and a note in the principal amount of $30.1 million. The
shares issued in the transaction, which represented 16.7% of the Companys
outstanding shares on a post-issuance basis, were originally unregistered and
subject to trading restrictions. Western Digital may resell these shares in
specified increments over a three and one-half year period under registration
rights granted by the Company or under SEC rules after expiration of the
required holding periods. The Company registered 30% of the shares in January,
2000, pursuant to the agreement. Principal and interest accrued on the note are
due in three years and the note is subordinated to the Companys senior credit
facilities. The Company discounted the principal amount of the subordinated
note payable to $21.2 million based on the Companys estimated incremental
borrowing rate at the time of the acquisition of 18% for this class of
financial instrument. Through the Companys Chapter 11 bankruptcy petition
date of August 24, 2001 (see Note 2), this amount had been accreted up to $27.8
million. In accordance with SOP 90-7 the Company recorded a $2.3 million
charge to reorganization expense to accrete the note to its face value of $30.1
million. At December 30, 2001, this amount, plus $3.6 million in accrued
interest through August 24, 2001, has been reclassified to liabilities subject
to compromise (see Note 2).

Additionally, in April 1999, the Company and Western Digital signed a
volume purchase agreement under which the Company agreed to supply a
substantial portion of Western Digitals media needs over the next three years.
Under the volume purchase agreement, Western Digital began to purchase most of
its media requirements from the Company after the closing date. In October
2001, Western Digital and the Company approved a three-year extension of the
volume purchase agreement, extending the agreement through April 2005.

Due to weak unit demand driven by a substantial decrease in the number of
disks per drive, the Company closed the former Western Digital media operation
located in Santa Clara, California at the end of June, 1999, nearly fifteen
months ahead of the Companys original transition plan.



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The Companys acquisition of Western Digitals media operation was
recorded as a business combination using the purchase method of accounting.
Under this method, the Company recorded the following (in millions):

|                     |                                                                |   |      |       |  
|-------------------- | -------------------------------------------------------------- | - | ---- | ----- | -
|Purchase Price Paid: |                                                                |   |      |      
|                     | Common Stock                                                   |   | $    | 34.6  |  
|                     | Note Payable                                                   |   |      | 21.2  |  
|                     |                                                                |   |      |      
|Total Costs          |                                                                | $ | 55.8 |      
|                     |                                                                |   |      |       |  
|Assets Acquired:     |                                                                |   |      |      
|                     | Goodwill                                                       |   | $    | 79.2  |  
|                     | Volume Purchase Agreement                                      |   |      | 4.7   |  
|                     | Equipment                                                      |   |      | 5.3   |  
|                     | Inventory                                                      |   |      | 2.1   |  
|Liabilities Assumed: |                                                                |   |      |      
|                     | Remaining Lease Obligations
for Equipment Removed
from Service |   |      | (26.5 | )
|                     | Facility Closure Costs                                         |   |      | (5.6  | )
|                     | Purchase Order Cancellation
Liabilities                        |   |      | (2.6  | )
|                     | Other Liabilities                                              |   |      | (0.8  | )
|                     |                                                                |   |      |      
|Net Assets Acquired  |                                                                | $ | 55.8 |      
|                     |                                                                |   |      |       |  

The Company recognized goodwill and other intangible assets in connection
with the acquisition of the Western Digital media operation in the amount of
$83.9 million. Goodwill reflects the difference between the fair value of the
identifiable net assets acquired and consideration paid. Under purchase
accounting rules, the Company also recorded liabilities that increased the
amount of goodwill recognized. These liabilities included estimated costs for
the closure of the former Western Digital media operation as well as costs
related to the remaining lease obligations for equipment taken out of service
due to the closure.

Of the original liabilities assumed, $29.3 million has been paid through
December 30, 2001, including equipment lease obligations ($20.3 million),
facility closure costs ($5.6 million), and other liabilities ($3.4 million). In
accordance with SOP 90-7, the remaining liability, which pertains to equipment
lease obligations, has been reclassified to liabilities subject to compromise
(see Note 2).

Based on reduced cash flow expectations influenced by continuing difficult
market conditions through the end of the third quarter of 1999, the company
recorded an impairment charge of approximately $44.3 million against this
goodwill balance which was recorded on the Statement of Operations on the line
captioned Restructuring/impairment charges. The fair value of the goodwill as
of the end of the third quarter of 1999 was determined based on the discounted
cash flows resulting from expected sales volumes to Western Digital through the
remaining period of the volume purchase agreement. This charge, combined with
the goodwill amortization through December 30, 2001, reduced the goodwill
balance to $2.6 million at December 30, 2001.



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Related party transactions between Western Digital and the Company
subsequent to April 8, 1999, were as follows:

|                                         |                   |               |             |        |                   |        |      |        |          |        |   |   |          |        | 
|---------------------------------------- | ----------------- | ------------- | ----------- | ------ | ----------------- | ------ | ---- | ------ | -------- | ------ | - | - | -------- | ------ | 
|                                         |                   |               |             |        | Fiscal Year Ended
|                                         |                   |               |             |        |                  
|                                         |                   |               |             |        | 2001              |        | 2000 |        | 1999    
|                                         |                   |               |             |        |                   |        |      |        |         
|                                         |                   |               |             |        | (in thousands)   
|Accounts receivable from Western Digital |                   |               |             |        |                   |        |      |        |          |        |   |  
|                                         | Beginning of year |               | $           | 19,428 |                   |        | $    | 25,313 |          |        | $ |  |         
|                                         |                   | Sales         |             |        | 166,315           |        |      |        | 180,195  |        |   |   | 183,511  |       
|                                         |                   | Cash receipts |             |        | (161,897          | )      |      |        | (186,080 | )      |   |   | (158,198 | )     
|                                         |                   |               |             |        |                   |        |      |        |          |        |   |  
|                                         |                   |               | End of year |        | $                 | 23,846 |      |        | $        | 19,428 |   |   | $        | 25,313 | 
|                                         |                   |               |             |        |                   |        |      |        |          |        |   |  

Note 16. Merger With HMT

On October 2, 2000, the Company merged with HMT Technology Corporation
(HMT). HMT was headquartered in Fremont, California, and designed, developed,
manufactured, and marketed high-performance thin-film disks. In connection with the merger, in the fourth quarter of 2000, the Company
implemented a 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.

In accordance with the merger agreement, each issued and outstanding share
of HMT stock was converted into 0.9094 shares of the Companys common stock for
a total of 42.8 million shares. In addition, the Company assumed options to
purchase HMT common stock and reserved 4.4 million shares of the Companys
common stock for issuance upon the exercise of the assumed options. The merger
was accounted for in the fourth quarter of fiscal 2000 as a business
combination using the purchase method of accounting. The Companys consolidated
financial statements include the operating results of HMT subsequent to October
2, 2000.

The total purchase cost was as follows (in millions):

|                               |  |   |       | 
|------------------------------ |  | - | ----- | 
|Value of common shares issued  |  | $ | 128.2 | 
|Assumption of HMT options      |  |   | 6.8   | 
|Transaction costs and expenses |  |   | 9.0   | 
|                               |  |   |       | 
|Total costs                    |  | $ | 144.0 | 
|                               |  |   |       | 

The purchase price allocation recorded by the Company was (in millions):

|                                          |  |   |       |  
|----------------------------------------- |  | - | ----- | -
|Tangible net assets acquired              |  | $ | 52.3  |  
|Goodwill                                  |  |   | 99.1  |  
|Intangible assets                         |  |   | 10.5  |  
|Costs to exit certain business activities |  |   | (17.9 | )
|                                          |  |   |       |  
|Net purchase price allocation             |  | $ | 144.0 |  
|                                          |  |   |       |  

The Company recognized goodwill and other intangibles in connection with
the merger in the amount of $109.6 million. Goodwill reflects the difference
between the fair value of the identifiable net assets acquired and
consideration paid. The Company is amortizing goodwill over seven years and the
other intangibles generally over four to five years on a straight-line basis.
Other intangible assets include primarily patents, current technology and an
in-place workforce. As of December 30, 2001, accumulated



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amortization on goodwill and other intangible assets was $23.1 million,
reducing the goodwill and other intangible assets balance to $86.5 million at
December 30, 2001.

Goodwill and other 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. Periodically, the Company reviews its goodwill
and other 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. No such
charges have been recorded in 2000 or 2001 related to the HMT merger. As discussed in Note 1, the Company will adopt SFAS No. 141 and SFAS No. 142 at
the beginning of its 2002 fiscal year. Accordingly, the accounting for this
goodwill and other intangible assets will be affected.

Property, plant, and equipment were valued under purchase accounting rules
at fair value. Land and buildings currently held for sale are valued at a fair
value (less estimated costs to sell) of $24.6 million at December 30, 2001 (see
Note 13).

Under purchase accounting rules, the Company also recorded liabilities
that include $12.2 million for estimated severance pay associated with
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. In 2000 and 2001, $15.5 million of payments were made against these
liabilities. In 2001, an additional $0.6 million was accrued to these
liabilities for additional estimated closure costs related to the former HMT
facilities. In accordance with SOP 90-7, $1.7 million of the remaining
severance liability has been reclassified to liabilities subject to
compromise (see Note 2).

Note 17. Investment 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 related to the future $4.0 million cash
contribution. This activity, as well as additional changes in Chahayas
equity structure, reduced the Companys ownership percentage to 34% at December
30, 2001. In 2001, the Company recorded a $3.9 million loss for its equity
share of Chahayas net loss. As of December 30, 2001, the Companys remaining
liability for facilities and facility services was $6.6 million.

Note 18. Nasdaq Delistings

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

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



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Note 19. Legal Proceedings

As discussed in Note 2, KUS filed a voluntary petition for reorganization
under Chapter 11 of the United States Bankruptcy Code on August 24, 2001 (the
Petition Date). The petition was filed with the United States Bankruptcy
Court for the Northern District of California. The petition affects only the
Companys U.S. corporate parent, KUS, and does not include any of its
subsidiaries, including KMT and KMS. The Company is operating its business as
a debtor-in-possession. See Note 2 for additional information.

Asahi Glass Company, Ltd. (Asahi) asserted that a technology cooperation
agreement (the agreement) between the Company and Asahi gave Asahi exclusive
rights, even as to Komag, to certain low-cost glass substrate-related
intellectual property developed by the Company. In connection with the Chapter
11 Bankruptcy filing, the Bankruptcy Court, on October 19, 2001, ordered that
the agreement be rejected, effective as of the petition date of August 24,
2001. The Company suspended the development of its low-cost glass substrate
program on October 17, 2001. The Company entered into a settlement Stipulation
with Asahi that resolves the dispute regarding ownership of intellectual
property and know-how developed by the Company prior to June 29, 2001, the
agreed date of termination of the agreement. As part of that Stipulation,
Asahi waived claims against the Company relating to the agreement. The dispute
has been resolved with no financial impact on the Companys consolidated
results of operations.



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Note 20. Quarterly Financial Data (Unaudited)

|                                                                  |  |             |         |                |  |                |         |                |  |   |          |   |  |   |         |  
|----------------------------------------------------------------- |  | ----------- | ------- | -------------- |  | -------------- | ------- | -------------- |  | - | -------- | - |  | - | ------- | -
|                                                                  |  | 2001       
|                                                                  |  |            
|                                                                  |  | 1st Quarter |         | 2nd Quarter(1) |  | 3rd Quarter(2) |         | 4th Quarter(3)
|                                                                  |  |             |         |                |  |                |         |               
|Net sales                                                         |  | $           | 87,856  |                |  | $              | 77,351  |                |  | $ | 59,391   |   |  | $ | 58,015  |  
|Gross profit (loss)                                               |  |             | (5,574  | )              |  |                | (1,900  | )              |  |   | 1,145    |   |  |   | 3,873   |  
|Operating loss                                                    |  |             | (29,519 | )              |  |                | (67,611 | )              |  |   | (19,754  | ) |  |   | (29,558 | )
|Net loss                                                          |  |             | (51,014 | )              |  |                | (88,963 | )              |  |   | (122,292 | ) |  |   | (34,126 | )
|Basic and diluted loss per share                                  |  |             | ($0.46  | )              |  |                | ($0.80  | )              |  |   | ($1.09   | ) |  |   | ($0.30  | )
|Number of shares used in basic
and diluted per share computations |  |             | 111,645 |                |  |                | 111,828 |                |  |   | 111,925  |   |  |   | 111,925 |  

|                                                                  |  |             |        |                |  |                |         |                |  |   |         |   |  |   |         |  
|----------------------------------------------------------------- |  | ----------- | ------ | -------------- |  | -------------- | ------- | -------------- |  | - | ------- | - |  | - | ------- | -
|                                                                  |  | 2000       
|                                                                  |  |            
|                                                                  |  | 1st Quarter |        | 2nd Quarter(1) |  | 3rd Quarter(2) |         | 4th Quarter(3)
|                                                                  |  |             |        |                |  |                |         |               
|Net sales                                                         |  | $           | 79,633 |                |  | $              | 83,468  |                |  | $ | 84,169  |   |  | $ | 111,193 |  
|Gross profit                                                      |  |             | 12,838 |                |  |                | 9,934   |                |  |   | 9,773   |   |  |   | 2,443   |  
|Operating income (loss)                                           |  |             | 39     |                |  |                | (4,022  | )              |  |   | (4,043  | ) |  |   | (30,269 | )
|Loss before extraordinary gain                                    |  |             | (5,294 | )              |  |                | (10,246 | )              |  |   | (12,575 | ) |  |   | (43,715 | )
|Extraordinary gain                                                |  |             |       |                |  |                | 3,772   |                |  |   |        |   |  |   |        |  
|Net loss                                                          |  |             | (5,294 | )              |  |                | (6,474  | )              |  |   | (12,575 | ) |  |   | (43,715 | )
|Basic and diluted loss per share
before extraordinary gain        |  |             | ($0.08 | )              |  |                | ($0.16  | )              |  |   | ($0.19  | ) |  |   | ($0.40  | )
|Basic and diluted extraordinary
gain per share                    |  | $           |       |                |  | $              | 0.06    |                |  | $ |        |   |  | $ |        |  
|Basic and diluted loss per share                                  |  |             | ($0.08 | )              |  |                | ($0.10  | )              |  |   | ($0.19  | ) |  |   | ($0.40  | )
|Number of shares used in basic
and diluted per share computations |  |             | 65,902 |                |  |                | 66,039  |                |  |   | 66,792  |   |  |   | 109,984 |  



---

|(1) |  | Results for the second quarter of 2001 included $36.4 million of
impairment charge related to the write-down of land and buildings held for
sale and other equipment no longer in service, and a $6.6 million
restructuring charge pertaining to lease obligations on equipment no
longer in service.                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Results for the third quarter of 2001 included a $99.1 million charge to
interest expense related to accretion to increase the value of the
subordinated convertible notes to their full face value of $230.0 million.                                                                                                       
|   
|   
|   
|   
|(3) |  | Results for the fourth quarter of 2001 included a $10.4 million
impairment charge related to the write-down of land and buildings held for
sale, a $3.4 million impairment charge related to manufacturing equipment
no longer in service, and a $0.6 million restructuring charge related to
additional facility exit costs.
|   
|   
|   
|   
|(4) |  | Results for the second quarter of 2000 included a $3.8 million
extraordinary gain, net of expenses, resulting from the restructuring of
the Companys term debt.                                                                                                                                                             
|   
|   
|   
|   
|(5) |  | Results for the fourth quarter of 2000 included an $8.0 million
restructuring charge related to the cessation of KMTs U.S. manufacturing
operations in May 2001. Results for the fourth quarter of 2000 also
included HMTs results, reflecting the completion of the merger on October
2, 2000.                            



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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

We issued a press release on November 19, 2001, announcing that our
auditors, Ernst & Young LLP (Ernst & Young), resigned after a fourteen-year
period of engagement. As described in the press release, Ernst & Young
resigned due to a conflict between the requirement that the Bankruptcy Court
approve our auditors, and certain terms required by Ernst & Young in its
engagement agreement for debtors, such as us, in Chapter 11 proceedings. Our
Board of Directors approved the decision to change independent accountants.

Ernst & Youngs reports on our financial statements for the years ended
2000 and 1999 did not contain an adverse opinion or a disclaimer of opinion,
nor were the opinions qualified or modified as to uncertainty, audit scope, or
accounting principles. However, Ernst & Young did report uncertainty as to our
ability to continue as a going concern. During our 2000 and 1999 fiscal years
and the subsequent interim period preceding Ernst & Youngs resignation, there
were no disagreements with Ernst & Young on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which, if not resolved to the satisfaction of Ernst & Young, would have caused
it to make reference to the subject matter of the disagreement in connection
with its reports on the financial statements for such years.

During our 2000 and 1999 fiscal years and the subsequent interim period
preceding Ernst & Youngs resignation, there were no reportable events as
that term is defined in Regulation S-K Item 304(a)(1)(v). We requested that
Ernst & Young furnish us with a letter addressed to the Securities and Exchange
Commission stating whether or not it agrees with the above statements. A copy
of that letter, which is dated November 26, 2001, is filed as Exhibit 16 to
this Form 10-K.

We engaged KPMG LLP (KPMG) as our principal accountants effective as of
November 19, 2001. During the Companys 2000 and 1999 fiscal years and the
subsequent interim period prior to engaging KPMG, neither Komag nor anyone on
its behalf consulted with KPMG regarding either (i) the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Companys financial
statements, and neither a written report nor oral advice was provided to us by
KPMG that was an important factor considered by us in reaching a decision as to
any accounting, auditing or financial reporting issue; or (ii) any matter that
was either the subject of a disagreement, as that term is defined in Item
304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of
Regulation S-K, or a reportable event, as that term is defined in Item
304(a)(1)(v) of Regulation S-K.



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PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the name, age, and other information
regarding the Companys directors and executive officers. No family
relationship exists between any of the directors or executive officers of the
Company.

|                       |  |  |    |  |  |                                                         
|---------------------- |  |  | -- |  |  | --------------------------------------------------------
|Thian Hoo Tan          |  |  | 53 |  |  | Chief Executive Officer and Director                    
|Michael A. Russak      |  |  | 55 |  |  | President and Chief Technical Officer                   
|Christopher H. Bajorek |  |  | 58 |  |  | Executive Vice President, Advanced Technology           
|Ray Martin             |  |  | 58 |  |  | Executive Vice President, Sales and Customer Service    
|Peter S. Norris        |  |  | 50 |  |  | Executive Vice President, Strategic Business Development
|Kathleen A. Bayless    |  |  | 45 |  |  | Vice President, Corporate Controller                    
|Kamran Honardoost      |  |  | 39 |  |  | Vice President, New Product Introduction and Design     
|Edward H. Siegler      |  |  | 51 |  |  | Vice President, Chief Financial Officer and Secretary   
|Tsutomu T. Yamashita   |  |  | 47 |  |  | Vice President, Process Development                     
|Donald P. Beadle       |  |  | 66 |  |  | Director                                                
|Chris A. Eyre          |  |  | 55 |  |  | Director                                                
|George A. Neil         |  |  | 64 |  |  | Director                                                
|Ronald L. Schauer      |  |  | 57 |  |  | Director                                                
|Anthony Sun            |  |  | 49 |  |  | Director                                                
|Harry G. Van Wickle    |  |  | 55 |  |  | Director                                                

Mr. Thian Hoo Tanjoined our company in 1989, and started our first San
Jose, California, manufacturing facility in 1989, our Penang operations in
1993, and our Sarawak operations in 1996. Mr. Tan returned to the U.S. and
assumed the position of Senior Vice President, Worldwide Operations, from 1996
through his appointment to his present position of Chief Executive Officer in
1999. Before joining, Mr. Tan was Vice President of Operations at HMT. Mr.
Tan holds B.S. and M.S. degrees in Physics from the University of Malaya in
Kuala Lumpur.

Dr. Russakjoined in October, 2000, as Chief Technical Officer and
Executive Vice President of Research and Development after our merger with HMT.
He was appointed President and Chief Technical Officer of Komag in January
2001. Previously, Dr. Russak was with HMT, which he joined in 1993 as Vice
President  Research and Development. He subsequently became Chief Technical
Officer in 1998 and Executive Vice President  Research & Development and Chief
Technical Officer in 1999. From 1985 to 1993, Dr. Russak held several staff and
management positions with IBM. Dr. Russak holds a B.S. in Ceramic Engineering
and a Ph.D. in Materials Science from Rutgers University.

Dr. Bajorekjoined our company in 1996 as Senior Vice President  Chief
Technical Officer. He became our Executive Vice President  Chief Technical
Officer in January 2000, and then was appointed Executive Vice President,
Advanced Technology, in October 2000. Before joining our company, Dr. Bajorek
was Vice President, Technology Development and Manufacturing, for IBM. He holds
a Ph.D. degree in Electrical Engineering and Business Economics from the
California Institute of Technology. Dr. Bajorek is one of ten scientists
awarded the Millennium award by the Magnetics Society of the IEEE in 2000. He
also received the 2002 Reynold B. Johnson IEEE Information Storage Award for
leadership in the development and manufacturing of magnetoresistive recording
heads for data storage devices.



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Mr. Martinjoined our company in 1997 as Vice President  Product
Assurance and Product Test, and became our Senior Vice President  Customer
Sales and Service in 1998. In 2001, Mr. Martin became our Executive Vice
President, Sales and Customer Service. From 1990 to 1997, he was Director of
Process and Technology at Quantum Corporation. Prior to working at Quantum, Mr.
Martin held a number of management and engineering positions at several leading
disk drive manufacturers, including Western Digital, Seagate Technology, and
IBM. Mr. Martin holds a B.S. degree in Mechanical Engineering from Kansas State
University.

Mr. Norrisjoined our company in October, 2000, as Executive Vice
President, Strategic Business Development, after the merger with HMT. He joined
HMT in 1995 as Vice President, Finance, Chief Financial Officer and Treasurer
and became its Executive Vice President, Finance, Chief Financial Officer and
Treasurer in 1999. From 1975 to 1995, Mr. Norris worked for General Instrument
Corporation. Mr. Norris holds a B.A. degree in Economics from Upsala College.

Ms. Baylessjoined our company in 1994 as Corporate Controller and became
a Vice President in 2000. Before joining us, Ms. Bayless worked for the public
accounting firm of Ernst & Young, LLP. Ms. Bayless holds a B.S. degree in
Accounting from California State University Fresno and is a Certified Public
Accountant.

Mr. Honardoostjoined our company in October, 2000, as Vice President, New
Product Introduction and Design, after the merger with HMT. He joined HMT in
1991, and became its Vice President, New Product Development in 1998. He
previously held the title of Executive Director, New Product Development for
HMT. Prior to HMT, he worked for Nashua Corporation (previously Lin Data
Corporation) from 1984 to 1991. Mr. Honardoost holds a B.S. degree in
Mechanical Engineering from Fresno State University and an M.S. degree in
Thermo/Air Dynamics from San Jose State University.

Mr. Sieglerjoined our company in 1987 as Manager of Financial Planning
and Analysis. Before becoming our Vice President  Chief Financial Officer in
2000, he was Treasurer and Senior Director of Corporate Development. He also
serves as Secretary. Before joining our company, Mr. Siegler held management
positions at several high-technology concerns. Mr. Siegler holds a B.A. degree
from Stanford University and an M.B.A. degree from Santa Clara University.

Mr. Yamashitajoined our company in 1984 as an engineer, and became Vice
President  Research and Development in 1995. Mr. Yamashita currently serves
as Vice President, Process Development. Mr. Yamashita holds a B.S. degree in
Chemistry and a M.S. degree in Materials Science from Stanford University.

Mr. Beadlehas served as a member of our Board of Directors since October
2000 when we merged with HMT Technology Corporation. Mr. Beadle served as a
director of HMT from May 1998 to October 2000. Mr. Beadle spent 34 years at
National Semiconductor Corp., or NSC, a semiconductor manufacturing company.
Since that time, he has been a consultant to various companies, including
having spent three months as the acting Vice President, Sales, Marketing and
Sales Support for Interwave Communications, a wireless communications device
manufacturer. From 1991 to 1994, Mr. Beadle was the Senior Vice
President/Managing Director, Far East, of NSC, reporting to the Chief Executive
Officer of NSC. Mr. Beadles previous positions with NSC include Senior Vice
President, Worldwide Sales and Marketing of NSC and Managing Director, Europe.

Mr. Eyrehas served as a member of our Board of Directors since September
1983. Mr. Eyre was named Chairman of the Board in October 2000. He has been
the managing Director of Legacy Venture, a philanthropic venture capital fund
since March, 2001. Mr. Eyre has been a private investor for many years and from
1976 to 1987 served as a general partner of Merrill, Pickard, Anderson & Eyre,
and a Vice President of its predecessor, BankAmerica Capital, entities which
managed a series of venture capital partnerships. Mr. Eyre holds a B.S. degree
from Utah State University and an M.B.A. from Harvard.



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Mr. Neilhas served as a member of our Board of Directors since 1994. Mr.
Neil served as Consultant to Asahi Glass Co., Ltd. from 1990 to 2000 and Senior
Vice President of Asahi Glass America from 1990 through 1996. From August 1986
Mr. Neil held executive positions at two specialty ceramic companies. From
August 1988 to July 1990 Mr. Neil was consultant to and President of
Thunderbird Technologies. Mr. Neil served in various management positions with
Corning, Incorporated, including Executive Vice President of Iwaki Glass and
President of Corning Japan.

Mr. Schauerhas served as a member of our Board of Directors since October
2000 when we merged with HMT. Mr. Schauer had served as Chief Executive
Officer and Chairman of the Board of Directors of HMT after joining HMT in
February 1994. From June 1993 to February 1994, he was owner, President and
Chief Executive Officer of Paws, Inc., a plastic manufacturing company. From
June 1991 to June 1993, he was President and Chief Operating Officer of
Magnetic Data, Inc., a contract manufacturer of disk drives and computers.
From June 1983 to May 1991, he was Corporate Vice President and General Manager
of the Memory Products Division of Stolle Corporation, a wholly owned
subsidiary of Alcoa, a diversified aluminum manufacturing company. From 1972
to May 1983, Mr. Schauer held various technical and general management
positions in the Recording Products Division at 3M Company, a diversified
manufacturing company. Mr. Schauer holds a B.S. degree in Electrical
Engineering from South Dakota State University.

Mr. Sunhas served as a member of our Board of Directors since September
1983. Since 1979, he has been associated with Venrock Associates, a venture
capital partnership, and has been a general partner since 1980. Mr. Sun is a
director of Cognex Corporation, Phoenix Technologies Ltd., and several
privately held companies.

Mr. Van Wicklehas served as a member of our Board of Directors since
October 2000 when we merged with HMT. Mr. Van Wickle served as a member of
HMTs Board of Directors from May 1998 to October 2000. Mr. Van Wickle has
been President and Chief Executive Officer of Intarsia Corporation, an
integrated electronic component design and manufacturing company. Mr. Van
Wickle is a 30-year veteran in semiconductor and disk drive manufacturing.
From 1974 to 1992, Mr. Van Wickle held management positions at Texas
Instruments, Fairchild Semiconductor, AT&T and Micropolis Corporation. From
1992 and prior to joining Intarsia, he was a Vice President in Operations of
Dastek, a subsidiary of Komag, Vice President of Manufacturing at Cypress
Semiconductor and President of Alphatec Electronics Corporation. Mr. Van
Wickle holds a B.A. degree from Hobart College.

Section 16(a) Beneficial Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and executive officers, and persons who own more than 10% of a
registered class of our equity securities, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of our common stock and other equity securities. Officers, directors
and greater than 10% stockholders are required by the Securities and Exchange
Commission regulations to furnish us with copies of all Section 16(a) forms
they file.

To our knowledge, based solely upon written review of reports furnished to
us and written representations that no other reports were required, during the
fiscal year ended December 30, 2001, all Section 16(a) filing requirements
applicable to our officers, directors and greater than 10% stockholders were
met in a timely manner except that one Form 4 to be filed by each of Donald
Beadle, Kamran Honardoost, George Neil were filed late, and one Form 3 to be
filed by Michael Russak was filed late. In each instance, there was one
transaction involved per individual.



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ITEM 11. EXECUTIVE COMPENSATION

Director Compensation

Non-employee members of our Board of Directors receive $4,500 per fiscal
quarter and a $1,000 meeting fee for each Board meeting or Board committee
meeting attended, including telephonic meetings. Non-employee Board members
also receive periodic option grants under the Automatic Option Grant Program in
effect for them under the option plans. Each individual who first becomes a
non-employee Board member, whether through election by the stockholders or
appointment by the Board, will receive, at the time of such initial election or
appointment, a stock option grant to purchase 30,000 shares of our common
stock. On the date of each annual stockholders meeting, each individual who is
re-elected as a non-employee Board member will receive an option to purchase
12,000 shares of our common stock, provided that the individual has served on
the Board for at least six months. Each option grant will have an exercise
price equal to the fair market value of the option shares on the grant date and
will have a maximum term of 10 years, subject to earlier termination upon the
optionees cessation of Board service.

Each non-employee member of our Board of Directors re-elected at the 2001
annual meeting (Messrs. Beadle, Neil, Schauer, Sun and Van Wickle) received at
that time an option to purchase 12,000 shares with an exercise price of $0.80
per share. Each option will become exercisable for all the option shares upon
the optionees completion of one year of non-employee director service measured
from the grant date. However, the option will become immediately exercisable
for all of the option shares upon an acquisition of Komag by merger,
consolidation or asset sale or upon certain other changes in control or
ownership of Komag. Upon the successful completion of a hostile tender offer
for more than 50% of our outstanding common stock, each of these options will
automatically be canceled, and each optionee will in return receive a cash
distribution from us in an amount per canceled option share equal to the excess
of the highest reported price per share of common stock paid in the tender
offer over the option exercise price payable per share.



79



---



##### Table of Contents



Executive Officer Compensation

The following table sets forth the compensation earned by our Chief
Executive Officer, and each of our four most highly compensated executive
officers whose base salary and bonus for the 2001 fiscal year was in excess of
$100,000 and one additional executive officer who earned in excess of $100,000,
for services rendered in all capacities to us and our subsidiaries for the
2001, 2000, and 1999 fiscal years.

|                            |                                 |      |                     |        |               |       |           |         |        |              |               |        |     |  |              |         |  |  |       |           |       
|--------------------------- | ------------------------------- | ---- | ------------------- | ------ | ------------- | ----- | --------- | ------- | ------ | ------------ | ------------- | ------ | --- |  | ------------ | ------- |  |  | ----- | --------- | ------
|                            |                                 |      |                     |        |               |       |           |         |        |              |               |        |     |  | Long-Term    |         |  |  |      
|                            |                                 |      |                     |        |               |       |           |         |        |              |               |        |     |  | Compensation |         |  |  |      
|                            |                                 |      | Annual Compensation |        |               |       |           |         |       
|                            |                                 |      |                     |        | Stock Options |       | All Other
|Name and Principal Position |                                 | Year |                     | Salary |               | Bonus |           | Granted |        | Compensation
|                            |                                 |      |                     |        |               |       |           |         |        |             
|                            |                                 |      |                     |        |               |       | ($)(1)    |         | ($)(2) |              | (# of Shares) |        | ($)
|                           
|                           
|                           
|                           
|Thian Hoo Tan               |                                 |      | 2001                |        |               |       | 423,077   |         |        |              | 43,269        |        |     |  | 500,000      |         |  |  | 2,539 | (3)      
|                            | Chief Executive Officer         |      |                     | 2000   |               |       |           | 400,001 |        |              |               | 11,269 |     |  |              | 104,795 |  |  |       | 625       | (3)   
|                            |                                 |      | 1999                |        |               |       | 331,399   |         |        |              |              |        |     |  | 1,714,595    |         |  |  | 625   | (3)      
|Michael A. Russak(6)        |                                 |      | 2001                |        |               |       | 334,231   |         |        |              | 200,000       |        |     |  | 200,000      |         |  |  | 4,260 | (3)      
|                            | President and Chief             |      |                     | 2000   |               |       |           | 63,779  |        |              |               |       |     |  |              | 83,230  |  |  |       |          |       
|                            | Technical Officer               |      |                     | 1999   |               |       |           |        |        |              |               |       |     |  |              |        |  |  |       |          |       
|Christopher H. Bajorek      |                                 |      | 2001                |        |               |       | 374,999   |         |        |              | 36,058        |        |     |  | 106,000      |         |  |  | 1,969 | (3)      
|                            | Executive Vice President       |      |                     | 2000   |               |       |           | 374,999 |        |              |               | 8,941  |     |  |              | 83,230  |  |  |       | 1,070,631 | (3)(4)
|                            | Advanced Technology             |      |                     | 1999   |               |       |           | 372,922 |        |              |               |       |     |  |              | 466,460 |  |  |       | 723       | (3)   
|Ray L. Martin               |                                 |      | 2001                |        |               |       | 287,500   |         |        |              | 28,846        |        |     |  |             |         |  |  | 4,387 | (3)(5)   
|                            | Executive Vice President       |      |                     | 2000   |               |       |           | 275,001 |        |              |               | 8,941  |     |  |              | 61,960  |  |  |       | 2,821     | (3)(5)
|                            | Sales and Customer Service      |      |                     | 1999   |               |       |           | 275,464 |        |              |               |       |     |  |              | 201,530 |  |  |       | 3,512     | (3)(5)
|Peter Norris(7)             |                                 |      | 2001                |        |               |       | 237,507   |         |        |              | 24,038        |        |     |  |             |         |  |  | 3,689 | (3)      
|                            | Executive Vice President,       |      |                     | 2000   |               |       |           | 32,021  |        |              |               |       |     |  |              | 83,230  |  |  |       |          |       
|                            | Strategic Business Development  |      |                     | 1999   |               |       |           |        |        |              |               |       |     |  |              |        |  |  |       |          |       
|Edward H. Siegler(8)        |                                 |      | 2001                |        |               |       | 215,000   |         |        |              | 22,115        |        |     |  |             |         |  |  | 2,769 | (3)      
|                            | Vice President, Chief           |      |                     | 2000   |               |       |           | 198,077 |        |              |               | 12,153 |     |  |              | 104,510 |  |  |       | 625       | (3)   
|                            | Financial Officer and Secretary |      |                     | 1999   |               |       |           |        |        |              |               |       |     |  |              |        |  |  |       |          |       



---

|(1) |  | Includes salary deferred under the Komag Savings and Deferred Profit
Sharing Plan.                                                                  
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Includes amounts earned for the indicated year as retention bonuses under
the Discretionary Bonus Plan.                                             
|   
|   
|   
|   
|(3) |  | Includes the matching contributions made by us on behalf of each named
executive officer to the Section 401(k) Savings Program.                     
|   
|   
|   
|   
|(4) |  | Includes $1,070,006 paid by us on behalf of Mr. Bajorek in connection
with settlement of a lawsuit and associated payments.                         
|   
|   
|   
|   
|(5) |  | Includes $2,389 paid by us on behalf of Mr. Martin in connection with his
personal use of an automobile in 2001, $2,196 in 2000, and $2,887 in 1999.
|   
|   
|   
|   
|(6) |  | Dr. Russak joined our company in October 2000 and became President in
February 2001.                                                                
|   
|   
|   
|   
|(7) |  | Mr. Norris joined our company in October 2000.                                                                                                      
|   
|   
|   
|   
|(8) |  | Mr. Siegler became Vice President  Chief Financial Officer and Secretary
in February 2000.                                                         



80



---



##### Table of Contents



Stock Options

The following table provides information with respect to the stock option
grants made for the 2001 fiscal year under our 1987 Restated Stock Option Plan
to the executive officers named in the Summary Compensation Table. Except for
the limited stock appreciation right described below, which formed part of the
option grant made to each of those executive officers, no stock appreciation
rights were granted to such individuals during the 2001 fiscal year. Potential
Realizable Values noted below reflect hypothetical appreciation based on the
stock price at grant date.

|                       |  |         |          |         |  |                   |         |            |  |          |       |            |  |          |      |           |  |                              |      |                                       |  |  |          |  |  |   |         |  |  |   |           | 
|---------------------- |  | ------- | -------- | ------- |  | ----------------- | ------- | ---------- |  | -------- | ----- | ---------- |  | -------- | ---- | --------- |  | ---------------------------- | ---- | ------------------------------------- |  |  | -------- |  |  | - | ------- |  |  | - | --------- | 
|                       |  |         |          |         |  | Individual Grants |         |            |  |          |       |            |  |          |      |           |  |                              |      |                                      
|                       |  |         |          |         |  |                   |         |            |  |          |       |            |  |          |      |           |  |                              |      |                                      
|                       |  |         |          |         |  | Number of         |         | % of Total |  | Exercise |       |            |  |          |      |           |  |                              |      | Potential Realizable Value at Assumed
|                       |  |         |          |         |  | Securities        |         | Options    |  | or Base  |       | Option     |  |          |      |           |  | Annual Rates Stock Price    
|                       |  |         |          |         |  | Underlying        |         | Granted to |  | Price    |       | Date       |  |          |      |           |  | Appreciation
For Option Term
|                       |  | Date of |          | Options |  | Employees in      |         | ($/Share)  |  | Market   |       | Expiration |  |         
|Name                   |  | Grant   |          | Granted |  | Fiscal Year       |         | (1)        |  | Value    |       | Date       |  | 5%($)(2) |      | 10%($)(2)
|                       |  |         |          |         |  |                   |         |            |  |          |       |            |  |          |      |          
|Thian Hoo Tan          |  |         | 02/09/01 |         |  |                   | 500,000 |            |  |          | 17.03 |            |  | $        | 1.56 |           |  | $                            | 1.56 |                                       |  |  | 02/09/11 |  |  | $ | 491,323 |  |  | $ | 1,245,111 | 
|Michael A. Russak      |  |         | 01/23/01 |         |  |                   | 100,000 |            |  |          | 3.41  |            |  | $        | 1.41 |           |  | $                            | 1.41 |                                       |  |  | 01/23/11 |  |  | $ | 88,435  |  |  | $ | 224,112   | 
|                       |  |         | 02/09/01 |         |  |                   | 100,000 |            |  |          | 3.41  |            |  |          | 1.56 |           |  |                              | 1.56 |                                       |  |  | 02/09/11 |  |  | $ | 98,264  |  |  | $ | 249,022   | 
|Christopher H. Bajorek |  |         | 02/13/01 |         |  |                   | 100,000 |            |  |          | 3.41  |            |  | $        | 1.44 |           |  | $                            | 1.44 |                                       |  |  | 02/13/11 |  |  | $ | 90,403  |  |  | $ | 229,100   | 
|                       |  |         | 06/15/01 |         |  |                   | 6,000   |            |  |          | 0.20  |            |  | $        | 0.39 |           |  | $                            | 0.39 |                                       |  |  | 06/15/02 |  |  | $ | 243     |  |  | $ | 366       | 

Each new option has a maximum term of 10 years, subject to earlier
termination upon the optionees cessation of service. Each option will become
immediately exercisable for all the option shares in the event we are acquired
by a merger or asset sale (unless the option is assumed or replaced by the
acquiring entity) or in the event the optionees employment terminates by
reason of death or permanent disability. Each option includes a limited stock
appreciation right which would result in the cancellation of that option upon a
take-over of our company effected through a hostile tender offer for more than
50% of our outstanding common stock. In return, the optionee will be entitled
to a cash distribution from us per canceled option share equal to the highest
reported price paid per share of common stock in such tender offer less the
option exercise price per share.



---

|(1) |  | The exercise price may be paid in cash, in shares of our common stock
valued at fair market value on the exercise date, or through a cashless
exercise procedure involving a same-day sale of the purchased shares.                                                                                                                                                                                                                 
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | There is no assurance provided to any executive officer, or any other
holder of our securities, that the actual stock price appreciation from
the grant date and over the 10 year option term will be at the assumed 5%
and 10% levels or at any other defined level. Unless the market price of
the common stock appreciates over the option term, no value will be
realized from the option grants made to the executive officers.



81



---



##### Table of Contents



Option Exercises and Holdings

The table below sets forth information concerning the exercise of options
during the 2001 fiscal year and unexercised options held as of the end of such
year by the executive officers named in the Summary Compensation Table. No
stock appreciation rights were exercised during such fiscal year, and except
for the limited stock appreciation rights described immediately following the
Option Grant Table above which form part of each stock option grant, no stock
appreciation rights were outstanding at the end of such fiscal year.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Value:

|                       |  |             |   |             |  |                   |   |                    |  |                       |             |                   |  |          |     | 
|---------------------- |  | ----------- | - | ----------- |  | ----------------- | - | ------------------ |  | --------------------- | ----------- | ----------------- |  | -------- | --- | 
|                       |  |             |   |             |  |                   |   |                    |  |                       |             |                   |  | Value of
|                       |  |             |   |             |  |                   |   |                    |  | Number of             |             | Unexercised      
|                       |  |             |   |             |  |                   |   |                    |  | Securities Underlying |             | In-The-Money     
|                       |  |             |   |             |  |                   |   |                    |  | Unexercised Options   |             | Options at Fiscal
|                       |  | Shares      |   |             |  |                   |   | At Fiscal Year-End |  | Year-End ($) (2)     
|                       |  | Acquired    |   | Value       |  | Exercisable (E)/  |   | Exercisable (E)/  
|Name                   |  | on Exercise |   | Realized(1) |  | Unexercisable (U) |   | Unexercisable (U) 
|                       |  |             |   |             |  |                   |   |                   
|Thian Hoo Tan          |  |             |  |             |  | $                 |  |                    |  |                       | 1,378,146 E |                   |  | $        |  E | 
|                       |  |             |   |             |  |                   |   |                    |  |                       | 1,111,817 U |                   |  | $        |  U | 
|Michael A. Russak      |  |             |  |             |  | $                 |  |                    |  |                       | 347,682 E   |                   |  | $        |  E | 
|                       |  |             |   |             |  |                   |   |                    |  |                       | 108,333 U   |                   |  | $        |  U | 
|Christopher H. Bajorek |  |             |  |             |  | $                 |  |                    |  |                       | 833,736 E   |                   |  | $        |  E | 
|                       |  |             |   |             |  |                   |   |                    |  |                       | 144,094 U   |                   |  | $        |  U | 
|Ray L. Martin          |  |             |  |             |  | $                 |  |                    |  |                       | 323,043 E   |                   |  | $        |  E | 
|                       |  |             |   |             |  |                   |   |                    |  |                       | 90,447 U    |                   |  | $        |  U | 
|Peter Norris           |  |             |  |             |  | $                 |  |                    |  |                       | 246,921 E   |                   |  | $        |  E | 
|                       |  |             |   |             |  |                   |   |                    |  |                       |  U         |                   |  | $        |  U | 
|Edward H. Siegler      |  |             |  |             |  | $                 |  |                    |  |                       | 263,620 E   |                   |  | $        |  E | 
|                       |  |             |   |             |  |                   |   |                    |  |                       | 13,122 U    |                   |  | $        |  U | 



---

|(1) |  | Value Realized equals the market price value of the shares at the time of
exercise less the exercise price of the shares.                                                                                                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Excess of the closing price per share of our common stock at the end of
the fiscal year ($0.036) over the option exercise price. If the closing
price is less than the exercise price, then the value of unexercised
options equals zero.



82



---



##### Table of Contents






ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Stock Ownership of Certain Beneficial Owners

The table below indicates the number of shares of our common stock owned
by certain beneficial owners as of December 30, 2001:

|               |  |                                                                                              |  |                      |  |            |      |  
|-------------- |  | -------------------------------------------------------------------------------------------- |  | -------------------- |  | ---------- | ---- | -
|               |  |                                                                                              |  | Amount and Nature of |  | Percentage
|Title of Class |  | Name and Address of Beneficial Owner                                                         |  | Beneficial Ownership |  | of Class  
|               |  |                                                                                              |  |                      |  |           
|Common Stock   |  | Western Digital Corporation
8105 Irvine Center Drive
Irvine, California 92618                |  | 5,930,722 shares     |  |            | 5.30 | %
|              
|Common Stock   |  | Dimensional Fund Advisors, Inc.
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401 |  | 6,074,036 shares     |  |            | 5.43 | %

The above table is based on information supplied from Schedules 13G filed
with the Securities and Exchange Commission. We believe that the shareholders
named in the table have sole voting and investment power with respect to the
shares indicated as beneficially owned. Applicable percentages are based on
111,924,983 shares outstanding on December 30, 2001.



83



---



##### Table of Contents



Stock Ownership by Directors, Nominees, and Executive Officers

The table below indicates the number of shares of our common stock
beneficially owned as of December 30, 2001 by



| |  |  | our directors;                                                                            
| | - |  | ------------------------------------------------------------------------------------------
|
| |  |  | each of the current executive officers listed in the Summary Compensation Table below; and
|
| |  |  | all current directors and executive officers as a group.                                  

Except as otherwise noted, each person has sole investment and voting
powers with respect to the shares shown as beneficially owned. Ownership
information is based upon information furnished by these individuals.

|                                                                     |  |                              |           |            |  |  |      |  
|-------------------------------------------------------------------- |  | ---------------------------- | --------- | ---------- |  |  | ---- | -
|                                                                     |  | Shares Beneficially Owned(1)
|                                                                     |  |                             
|Name                                                                 |  | Number                       |           | Percentage
|                                                                     |  |                              |           |           
|Thian Hoo Tan(2)                                                     |  |                              | 1,519,455 |            |  |  | 1.36 | %
|Michael A. Russak(3)                                                 |  |                              | 750,602   |            |  |  | *    |  
|Christopher H. Bajorek(4)                                            |  |                              | 897,399   |            |  |  | *    |  
|Ray L. Martin(5)                                                     |  |                              | 330,265   |            |  |  | *    |  
|Peter Norris(6)                                                      |  |                              | 665,944   |            |  |  | *    |  
|Edward H. Siegler(7)                                                 |  |                              | 282,818   |            |  |  | *    |  
|Donald Beadle(8)                                                     |  |                              | 18,109    |            |  |  | *    |  
|Chris A. Eyre(9)                                                     |  |                              | 424,560   |            |  |  | *    |  
|George A. Neil(10)                                                   |  |                              | 79,500    |            |  |  | *    |  
|Ronald L. Schauer(11)                                                |  |                              | 1,972,711 |            |  |  | 1.76 | %
|Anthony Sun(12)                                                      |  |                              | 144,310   |            |  |  | *    |  
|Harry Van Wickle(13)                                                 |  |                              | 18,109    |            |  |  | *    |  
|Current executive officers and directors as
a group (15 persons)(14) |  |                              | 7,985,725 |            |  |  | 7.13 | %



---

|*   |  | Less than 1%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(1) |  | Some of the individuals may share voting power with regard to the shares
listed herein with their spouses. The number of shares outstanding and
percent of ownership is based on 111,924,983 shares of our common stock
outstanding as of December 30, 2001. The shares of common stock issuable
pursuant to convertible notes, options and warrants that are currently
exercisable or exercisable within 60 days of December 30, 2001 are deemed
to be outstanding and to be beneficially owned by the person holding those
options for the purpose of computing the percentage ownership of such
person, but are not deemed to be outstanding and to be beneficially owned
for the purpose of computing the percentage of any other person.
|   
|   
|   
|   
|(2) |  | Includes 1,484,013 shares subject to options currently exercisable or
which will become exercisable within 60 days after December 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|   
|   
|   
|(3) |  | Includes 356,015 shares subject to options currently exercisable or which
will become exercisable within 60 days after December 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    



84



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##### Table of Contents



|(4)  |  | Includes 852,986 shares subject to options currently exercisable or which
will become exercisable within 60 days after December 30, 2001.                                           
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(5)  |  | Includes 327,870 shares subject to options currently exercisable or which
will become exercisable within 60 days after December 30, 2001.                                           
|    
|    
|    
|    
|(6)  |  | Includes 246,921 shares subject to options currently exercisable or which
will become exercisable within 60 days after December 30, 2001.                                           
|    
|    
|    
|    
|(7)  |  | Includes 265,688 shares subject to options currently exercisable or which
will become exercisable within 60 days after December 30, 2001.                                           
|    
|    
|    
|    
|(8)  |  | Includes 18,109 shares subject to options currently exercisable or which
will become exercisable within 60 days after December 30, 2001.                                            
|    
|    
|    
|    
|(9)  |  | Includes 423,560 shares subject to options currently exercisable or which
will become exercisable within 60 days after December 30, 2001.                                           
|    
|    
|    
|    
|(10) |  | Includes 63,500 shares subject to options currently exercisable or which
will become exercisable within 60 days after December 30, 2001.                                            
|    
|    
|    
|    
|(11) |  | Includes 166,644 shares subject to options currently exercisable or which
will become exercisable within 60 days after December 30, 2001.                                           
|    
|    
|    
|    
|(12) |  | Includes 70,500 shares subject to options currently exercisable or which
will become exercisable within 60 days after December 30, 2001.                                            
|    
|    
|    
|    
|(13) |  | Includes 18,109 shares subject to options currently exercisable or which
will become exercisable within 60 days after December 30, 2001.                                            
|    
|    
|    
|    
|(14) |  | Includes 5,167,985 shares of current executive officers, subject to
options which are currently exercisable or which will become exercisable
within 60 days after December 30, 2001.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain Relationships and Related Transactions

We advanced a total of $233,684 to Mr. Thian Hoo Tan during the 1998
fiscal year as a personal loan. The advances bore interest at the market rate
required under the federal tax laws. The highest amount outstanding under
these advances during the 2001 fiscal year was $56,563. As of December 30,
2001, the outstanding balance had been paid in full.

Related party transactions between Western Digital and us subsequent to April
8, 1999 (when they became a related party) were as follows:

|                                         |                   |               |             |        |                   |        |      |        |          |        |   |   |          |        | 
|---------------------------------------- | ----------------- | ------------- | ----------- | ------ | ----------------- | ------ | ---- | ------ | -------- | ------ | - | - | -------- | ------ | 
|                                         |                   |               |             |        | Fiscal Year Ended
|                                         |                   |               |             |        |                  
|                                         |                   |               |             |        | 2001              |        | 2000 |        | 1999    
|                                         |                   |               |             |        |                   |        |      |        |         
|                                         |                   |               |             |        | (in thousands)   
|Accounts receivable from Western Digital |                   |               |             |        |                   |        |      |        |          |        |   |  
|                                         | Beginning of year |               | $           | 19,428 |                   |        | $    | 25,313 |          |        | $ |  |         
|                                         |                   | Sales         |             |        | 166,315           |        |      |        | 180,195  |        |   |   | 183,511  |       
|                                         |                   | Cash receipts |             |        | (161,897          | )      |      |        | (186,080 | )      |   |   | (158,198 | )     
|                                         |                   |               |             |        |                   |        |      |        |          |        |   |  
|                                         |                   |               | End of year |        | $                 | 23,846 |      |        | $        | 19,428 |   |   | $        | 25,313 | 
|                                         |                   |               |             |        |                   |        |      |        |          |        |   |  



85



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##### Table of Contents



PART IV




ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



| | (a) List of Documents filed as part of this Report.
| | ---------------------------------------------------



| | 1. Financial Statements.
| | ------------------------



| | The following consolidated financial statements of Komag, Incorporated are
filed in Part II, Item 8 of this Report on Form 10-K:
| | --------------------------------------------------------------------------------------------------------------------------------



| | Consolidated Statements of Operations  Fiscal Years 2001, 2000, and 1999
| | -------------------------------------------------------------------------



| | Consolidated Balance Sheets  December 30, 2001 and December 31, 2000
| | ---------------------------------------------------------------------



| | Consolidated Statements of Cash Flows  Fiscal Years 2001, 2000, and 1999
| | -------------------------------------------------------------------------



| | Consolidated Statements of Stockholders Equity  Fiscal Years 2001, 2000, and 1999
| | -----------------------------------------------------------------------------------



| | Notes to Consolidated Financial Statements
| | ------------------------------------------



| | 2. Financial Statement Schedules.
| | ---------------------------------



| | The following financial statement schedule of Komag, Incorporated is filed
in Part IV, Item 14(d) of this report on Form 10-K:
| | ------------------------------------------------------------------------------------------------------------------------------



| | Schedule II  Valuation and Qualifying Accounts
| | -----------------------------------------------



| | All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. Exhibits.
| | ------------

|        |  |                                                                                                                                                                                                                                         |  |  |  | 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |  |                                                                                                                                                                                                                                         |  |  |  | 
|Number  |  | Description                                                                                                                                                                                                                             |  |  |  | 
|        |  |                                                                                                                                                                                                                                         |  |  |  | 
|2.1     |  | Not used.                                                                                                                                                                                                                              
|3.1     |  | Amended and Restated Certificate of Incorporation of Komag,
Incorporated (incorporated by reference from Exhibit 3.1 filed
with the Companys report on Form 10-K for the year ended
December 31, 2000).                               
|3.2     |  | Bylaws (incorporated by reference from Exhibit 3.3 filed with the
Companys report on Form 10-K for the year ended December 30, 1990)                                                                                                  
|4.1     |  | Not used.                                                                                                                                                                                                                              
|4.2     |  | Specimen Stock Certificate (incorporated by reference from Exhibit 4.2
filed with Amendment No. 1 to the Registration Statement)                                                                                                       
|4.3     |  | Loan Restructure Agreement by and among Komag and the Restructure Lenders
named therein, dated as of June 1, 2000 (incorporated by reference from
Exhibit 4.1 filed with the Companys report on Form 8-K filed June 2,
2000)          
|4.4     |  | Warrant Agreement by and between Komag and the Banks named therein, dated
as of June 1, 2000, with attached form of Warrant (incorporated by
reference from Exhibit 4.2 filed with the Companys report on Form 8-K
filed June 2, 2000)



86



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|        |  |                                                                                                                                                                                                                                                                                                            |  |  |  | 
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |  |                                                                                                                                                                                                                                                                                                            |  |  |  | 
|Number  |  | Description                                                                                                                                                                                                                                                                                                |  |  |  | 
|        |  |                                                                                                                                                                                                                                                                                                            |  |  |  | 
|4.5     |  | Not used.                                                                                                                                                                                                                                                                                                 
|4.6     |  | Not used.                                                                                                                                                                                                                                                                                                 
|4.7     |  | Registration Rights Agreement by and among Komag and certain buyers listed
therein, dated June 1, 2000 (incorporated by reference from Exhibit 4.2
filed with the Companys report on Form 8-K filed June 2, 2000)                                                                                        
|4.8     |  | Form of Convertible Note issued by Komag to buyer named therein dated June
2, 2000 (incorporated by reference from Exhibit 4.3 filed with the
Companys report on Form 8-K filed June 2, 2000)                                                                                                            
|4.9     |  | Form of Restricted Global Convertible Subordinated Note due 2004
(incorporated by reference from the HMT Technology Corporation Form 8-K,
dated January 21, 1997)                                                                                                                                         
|4.10    |  | Form of Unrestricted Global Convertible Subordinated Note due 2004
(incorporated by reference from the HMT Technology Corporation Form 8-K,
dated January 21, 1997)                                                                                                                                       
|4.11    |  | Form of Certificated Convertible Subordinated Note due 2004 (incorporated
by reference from the HMT Technology Corporation Form 8-K, dated January
21, 1997)                                                                                                                                              
|4.12    |  | Indenture, dated as of January 15, 1997, between the Company and State
Street Bank and Trust Company of California, N.A., as Trustee
(incorporated by reference from the HMT Technology Corporation Form 8-K,
dated January 21, 1997)                                                                     
|10.1.1  |  | Lease Agreement dated May 2, 1989 by and between Stony Point Associates I
and Komag Material Technology, Inc. (incorporated by reference from
Exhibit 10.1.6 filed with the Companys report on Form 10-K for the year
ended December 31, 1989)                                                           
|10.1.2  |  | Lease Agreement (B10) dated May 24, 1996 between Sobrato Development
Companies #871 and Komag, Incorporated (incorporated by reference from
Exhibit 10.1.11 filed with the Companys report on Form 10-K for the year
ended December 29, 1996)                                                            
|10.1.3  |  | Lease Agreement (B11) dated May 24, 1996 between Sobrato Development
Companies #871 and Komag, Incorporated (incorporated by reference from
Exhibit 10.1.12 filed with the Companys report on Form 10-K for the year
ended December 29, 1996)                                                            
|10.1.4  |  | Sublease Agreement (B11) dated January 10, 2000, between Komag,
Incorporated and 2Wire, Inc. (incorporated by reference from Exhibit
10.1.15 filed with the Companys report on Form 10-K for the year ended
January 2, 2000)                                                                             
|10.1.5  |  | Second Amendment to Lease dated March 16, 1999 by and between Northern
Trust Bank of California N.A. and Komag Material Technology, Inc.
(incorporated by reference from Exhibit 10.1.16 filed with the Companys
report on Form 10-K for the year ended January 2, 2000)                                 
|10.1.6  |  | Not used.                                                                                                                                                                                                                                                                                                 
|10.1.7  |  | Not used.                                                                                                                                                                                                                                                                                                 
|10.2    |  | Form of Directors Indemnification Agreement (incorporated by
reference from Exhibit 10.2 filed
with the Companys report on Form 10-K for the year ended
December 31, 2000.)                                                                                                                             
|10.3    |  | Asset Purchase Agreement between the Company and Western Digital
Corporation dated April 8, 1999 (incorporated by reference from Exhibit
10.1.13 filed with the Companys report of Form 10-Q for the quarter ended
July 4, 1999) (Confidential treatment requested as to certain portions.)              
|10.3.1  |  | Volume Purchase Agreement dated as of April 8, 1999 by and between the
Company and Western Digital Corporation (incorporated by reference from
Exhibit 10.1.14 filed with the Companys report of Form 10-Q for the
quarter ended July 4, 1999) (Confidential treatment requested as to
certain portions.)



87



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|        |  |                                                                                                                                                                                                                                                                                                                                                    |  |  |  | 
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                    |  |  |  | 
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                        |  |  |  | 
|        |  |                                                                                                                                                                                                                                                                                                                                                    |  |  |  | 
|10.3.2  |  | Not used.                                                                                                                                                                                                                                                                                                                                         
|10.3.3  |  | Not used.                                                                                                                                                                                                                                                                                                                                         
|10.3.4  |  | Not used.                                                                                                                                                                                                                                                                                                                                         
|10.3.5  |  | Not used.                                                                                                                                                                                                                                                                                                                                         
|10.3.6  |  | Not used.                                                                                                                                                                                                                                                                                                                                         
|10.3.7  |  | Not used.                                                                                                                                                                                                                                                                                                                                         
|10.3.8  |  | Not used.                                                                                                                                                                                                                                                                                                                                         
|10.3.9  |  | Joint Development and Cross-License Agreement dated March 10, 1989 by and
between Komag, Incorporated; Kobe Steel, Ltd.; and Komag Material
Technology, Inc. (incorporated by reference from Exhibit 10.10.7 filed
with the Companys report on Form 10-K for the year ended December 31,
1989)                                                   
|10.3.10 |  | Blank Sales Agreement dated March 10, 1989 by and between Komag,
Incorporated; Kobe Steel, Ltd.; and Komag Material Technology, Inc.
(incorporated by reference from Exhibit 10.3.10 filed with the Companys
report on Form 10-K for the year ended December 31, 1989)                                                                           
|10.3.11 |  | Finished Substrate Agreement dated March 10, 1989 by and between Komag,
Incorporated; Kobe Steel, Ltd.; and Komag Material Technology, Inc.
(incorporated by reference from Exhibit 10.10.9 filed with the Companys
report on Form 10-K for the year ended December 31, 1989) (confidential
treatment obtained as to certain portions)           
|10.3.12 |  | Stock Purchase Agreement between Komag, Incorporated and Kobe Steel USA
Holdings Inc. dated November 17, 1995 (incorporated by reference from
Exhibit 10.3.12 filed with the Companys report on Form 10-K for the year
ended December 31, 1995)                                                                                                  
|10.3.13 |  | Substrate Agreement by and between Kobe Steel, Ltd. and Komag,
Incorporated dated November 17, 1995 (incorporated by reference from
Exhibit 10.3.13 filed with the Companys report on Form 10-K for the year
ended December 31, 1995) (confidential treatment obtained as to certain
portions)                                                   
|10.3.14 |  | License Amendment Agreement among Komag, Incorporated; Komag Material
Technology, Inc.; and Kobe Steel, Ltd. Dated November 17, 1995
(incorporated by reference from Exhibit 10.3.14 filed with the Companys
report on Form 10-K for the year ended December 31, 1995)                                                                           
|10.3.15 |  | Substrate Sales Amendment Agreement among Komag, Incorporated; Komag
Material Technology, Inc.; and Kobe Steel, Ltd. dated November 17, 1995
(incorporated by reference from Exhibit 10.3.15 filed with the Companys
report on Form 10-K for the year ended December 31, 1995)                                                                   
|10.3.16 |  | Joint Venture Amendment Agreement among Komag, Incorporated; Komag
Material Technology, Inc.; and Kobe Steel USA Holdings Inc. dated November
17, 1995 (incorporated by reference from Exhibit 10.3.16 filed with the
Companys report on Form 10-K for the year ended December 31, 1995)
(confidential treatment obtained as to certain portions)
|10.3.17 |  | Stock Purchase and Contribution Agreement By and Among Chahaya Optronics,
Inc., The Investors Named Herein and Komag, Incorporated
(Incorporated by reference from Exhibit 10.3.17 filed with the
Companys report on Form 10-K for the year ended
December 31, 2000)                                                                             
|10.3.18 |  | Amendment Number 1 to Volume Purchase Agreement with Western Digital
Corporation dated October 5, 2001 (incorporated by reference from Exhibit
10.1 filed with the companys report on Form 10-Q for the quarter ended
September 30, 2001)                                                                                                        



88



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|        |  |                                                                                                                                                                                                                                                                                                                                        |  |  |  | 
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                        |  |  |  | 
|Number  |  | Description                                                                                                                                                                                                                                                                                                                            |  |  |  | 
|        |  |                                                                                                                                                                                                                                                                                                                                        |  |  |  | 
|10.4.1  |  | Restated 1987 Stock Option Plan, effective January 31, 1996 and forms of
agreement thereunder (incorporated by reference from Exhibit 10.4.1 filed
with the Companys report on Form 10-Q for the quarter ended June 30,
1996)                                                                                                        
|10.4.2  |  | Komag, Incorporated Management Bonus Plan As Amended and Restated January
22, 1997 (incorporated by reference from Exhibit 10.4.2 filed with the
Companys report on Form 10-K for the year ended January 3, 1999)                                                                                                                    
|10.4.3  |  | Not used.                                                                                                                                                                                                                                                                                                                             
|10.4.4  |  | Komag, Incorporated Discretionary Bonus Plan (incorporated by reference
from Exhibit 10.4.4 filed with the Companys report on Form 10-K for the
year ended December 29, 1996)                                                                                                                                                        
|10.4.5  |  | Komag, Incorporated 1997 Supplemental Stock Option Plan Amended June 12,
1998 (incorporated by reference from Exhibit 10.4.5 filed with the
Companys report on Form 10-K for the year ended January 3, 1999)                                                                                                                         
|10.4.6  |  | Komag Material Technology, Inc. 1995 Stock Option Plan (incorporated by
reference from Exhibit 10.11.12 filed with the Companys report on Form
10-Q for the Quarter ended October 1, 1995)                                                                                                                                           
|10.4.7  |  | Registrants 1995 Stock Option Plan (the 1995 Plan) (incorporated by
reference from the HMT Technology Corporation Form S-1 No. 333-450 and
amendments thereto)                                                                                                                                                                     
|10.4.8  |  | Registrants 1996 Equity Incentive Plan (the Incentive Plan)
(incorporated by reference from the HMT Technology Corporation Form S-1
No. 333-450 and amendments thereto)                                                                                                                                                            
|10.5    |  | Letter dated February 10, 1992 from the Malaysian Industrial Development
Authority addressed to Komag, Incorporated approving the Pioneer Status
of the Companys thin-film media venture in Malaysia (incorporated by
reference from Exhibit 10.28 filed with the Companys report on Form 10-K
for the year ended January 3, 1993)
|10.6    |  | Not Used.                                                                                                                                                                                                                                                                                                                             
|16      |  | Letter regarding change in certifying accountants from Ernst & Young LLP
dated November 26, 2001 (incorporated by reference from Exhibit 16 filed
with the Companys report on Form 8-K filed on November 26, 2001.)                                                                                                                  
|21      |  | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                 
|23      |  | Consent of KPMG LLP, independent auditors.                                                                                                                                                                                                                                                                                            
|23.1    |  | Consent of Ernst & Young LLP, independent auditors.                                                                                                                                                                                                                                                                                   
|24      |  | Power of Attorney. Reference is made to the signature pages of this Report.                                                                                                                                                                                                                                                           

The Company agrees to furnish to the Commission upon request a copy of any
instrument with respect to long-term debt where the total amount of securities
authorized thereunder does not exceed 10% of the total assets of the Company.

(b)  Reports on Form 8-K.

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

On November 26, 2001, the Company filed Form 8-K, which referenced a
November 19, 2001 press release announcing the resignation of its auditors,
Ernst & Young LLP, and the engagement of KPMG LLP as the Companys principal
accountants as of November 19, 2001.



89



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in San Jose,
California on this 27th day of March, 2002.

| |                     |                                     
| | ------------------- | ------------------------------------
| | Komag, Incorporated
|
| | By                  | /s/  Thian Hoo Tan                  
| |                     |                                     
| |                     | Thian Hoo TanChief Executive Officer



90



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POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears herein constitutes and appoints Thian Hoo Tan and Edward H. Siegler,
and each of them, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and re-substitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
Report on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated:

|                                             |  |                                                                                     |  |               
|-------------------------------------------- |  | ----------------------------------------------------------------------------------- |  | --------------
|Signature                                    |  | Title                                                                               |  | Date          
|                                             |  |                                                                                     |  |               
|                                            
|/s/ Thian Hoo Tan(Thian Hoo Tan)             |  | Chief Executive Officer and Director
(Principal Executive Officer)                  |  | March 27, 2002
|                                            
|/s/ Edward H. Siegler(Edward H. Siegler)     |  | Vice President, Chief Financial
Officer and Secretary
(Principal Financial Officer) |  | March 27, 2002
|                                            
|/s/ Kathleen A. Bayless(Kathleen A. Bayless) |  | Vice President, Corporate Controller
(Principal Accounting Officer)                 |  | March 27, 2002
|                                            
|/s/ Donald P. Beadle(Donald P. Beadle)       |  | Director                                                                            |  | March 27, 2002
|                                            
|/s/ CHRIS A. EYRE(Chris A. Eyre)             |  | Director                                                                            |  | March 27, 2002
|                                            
|/s/ George A. Neil(George A. Neil)           |  | Director                                                                            |  | March 27, 2002
|                                            
|/s/ Ronald L. Schauer(Ronald L. Schauer)     |  | Director                                                                            |  | March 27, 2002
|                                            
|/s/ Anthony Sun(Anthony Sun)                 |  | Director                                                                            |  | March 27, 2002
|                                            
|/s/ Harry G. Van Wickle(Harry G. Van Wickle) |  | Director                                                                            |  | March 27, 2002



|*By /s/ Edward H. Siegler             | 
|------------------------------------- | 
|(Edward H. Siegler,
Attorney-in-Fact)



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ITEM 14(D) FINANCIAL STATEMENT SCHEDULE

KOMAG, INCORPORATED
Schedule II VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

|                             |                                 |           |            |          |            |           |       |            |     |           |       |       |     |   |         |       |     |   |       |       | 
|---------------------------- | ------------------------------- | --------- | ---------- | -------- | ---------- | --------- | ----- | ---------- | --- | --------- | ----- | ----- | --- | - | ------- | ----- | --- | - | ----- | ----- | 
|Column A                     |                                 | Column B  |            | Column C |            | Column D  |       | Column E   |     | Column F 
|                             |                                 |           |            |          |            |           |       |            |     |          
|                             |                                 |           |            |          |            | Additions |       |            |     |           |       |       |     |   |         |      
|                             |                                 |           | Balance at |          | Charged to |           |       |            |     |           |       |       |     |   | Balance
|                             |                                 |           | Beginning  |          | Costs and  |           |       |            |     |           |       |       |     |   | at End 
|Description                  |                                 | of Period |            | Expenses |            | Other     |       | Deductions |     | of Period
|                             |                                 |           |            |          |            |           |       |            |     |          
|Year ended January 2, 2000   |                                 |           |            |          |            |           |       |            |     |           |       |       |     |   |         |       |     |   |       |      
|                             | Allowance for doubtful accounts |           | $          | 2,165    |            |           | $     | (404       | )   |           | $     |      |     |   | $       |      |     |   | $     | 1,761 | 
|                             | Allowance for sales returns     |           |            | 682      |            |           |       | 3,105      | (1) |           |       |      |     |   |         | 3,368 | (2) |   |       | 419   | 
|                             |                                 |           |            |          |            |           |       |            |     |           |       |       |     |   |         |       |     |   |       |      
|                             |                                 | $         | 2,847      |          |            | $         | 2,701 |            |     | $         |      |       |     | $ | 3,368   |       |     | $ | 2,180 |      
|                             |                                 |           |            |          |            |           |       |            |     |           |       |       |     |   |         |       |     |   |       |      
|Year ended December 31, 2000 |                                 |           |            |          |            |           |       |            |     |           |       |       |     |   |         |       |     |   |       |      
|                             | Allowance for doubtful accounts |           | $          | 1,761    |            |           | $     | 55         |     |           | $     | 2,123 | (3) |   | $       |      |     |   | $     | 3,939 | 
|                             | Allowance for sales returns     |           |            | 419      |            |           |       | 5,741      | (1) |           |       | 485   | (3) |   |         | 5,236 | (2) |   |       | 1,409 | 
|                             |                                 |           |            |          |            |           |       |            |     |           |       |       |     |   |         |       |     |   |       |      
|                             |                                 | $         | 2,180      |          |            | $         | 5,796 |            |     | $         | 2,608 |       |     | $ | 5,236   |       |     | $ | 5,348 |      
|                             |                                 |           |            |          |            |           |       |            |     |           |       |       |     |   |         |       |     |   |       |      
|Year ended December 30, 2001 |                                 |           |            |          |            |           |       |            |     |           |       |       |     |   |         |       |     |   |       |      
|                             | Allowance for doubtful accounts |           | $          | 3,939    |            |           | $     | (473       | )   |           | $     |      |     |   | $       | 1,829 |     |   | $     | 1,637 | 
|                             | Allowance for sales returns     |           |            | 1,409    |            |           |       | 3,039      | (1) |           |       |      |     |   |         | 3,492 | (2) |   |       | 956   | 
|                             |                                 |           |            |          |            |           |       |            |     |           |       |       |     |   |         |       |     |   |       |      
|                             |                                 | $         | 5,348      |          |            | $         | 2,566 |            |     | $         |      |       |     | $ | 5,321   |       |     | $ | 2,593 |      
|                             |                                 |           |            |          |            |           |       |            |     |           |       |       |     |   |         |       |     |   |       |      



---

|(1) |  | Additions to the allowance for sales returns are netted against sales.                                                                                                                                                                       
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Actual sales returns of subsequently scrapped product were charged
against the allowance for sales returns. Actual sales returns of product
that were subsequently tested and shipped to another customer were netted
directly against sales.
|   
|   
|   
|   
|(3) |  | Adjustment to reflect addition of HMT balance related to merger.                                                                                                                                                                             



92



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EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                          |  |  |  | 
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |  |                                                                                                                                                                                                                                          |  |  |  | 
|Number  |  | Description                                                                                                                                                                                                                              |  |  |  | 
|        |  |                                                                                                                                                                                                                                          |  |  |  | 
|2.1     |  | Not used.                                                                                                                                                                                                                               
|3.1     |  | Amended and Restated Certificate of Incorporation of Komag,
Incorporated (incorporated by reference from Exhibit 3.1 filed
with the Companys report on Form 10-K for the year ended
December 31, 2000).                                
|3.2     |  | Bylaws (incorporated by reference from Exhibit 3.3 filed with the
Companys report on Form 10-K for the year ended
December 30, 1990).                                                                                                  
|4.1     |  | Not used.                                                                                                                                                                                                                               
|4.2     |  | Specimen Stock Certificate (incorporated by reference from Exhibit 4.2
filed with Amendment No. 1 to the Registration Statement).                                                                                                       
|4.3     |  | Loan Restructure Agreement by and among Komag and the Restructure Lenders
named therein, dated as of June 1, 2000 (incorporated by reference from
Exhibit 4.1 filed with the Companys report on Form 8-K filed June 2,
2000).          
|4.4     |  | Warrant Agreement by and between Komag and the Banks named therein, dated
as of June 1, 2000, with attached form of Warrant (incorporated by
reference from Exhibit 4.2 filed with the Companys report on Form 8-K
filed June 2, 2000).



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                            |  |  |  | 
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |  |                                                                                                                                                                                                                                                                                                            |  |  |  | 
|Number  |  | Description                                                                                                                                                                                                                                                                                                |  |  |  | 
|        |  |                                                                                                                                                                                                                                                                                                            |  |  |  | 
|4.5     |  | Not used.                                                                                                                                                                                                                                                                                                 
|4.6     |  | Not used.                                                                                                                                                                                                                                                                                                 
|4.7     |  | Registration Rights Agreement by and among Komag and certain buyers listed
therein, dated June 1, 2000 (incorporated by reference from Exhibit 4.2
filed with the Companys report on Form 8-K filed June 2, 2000)                                                                                        
|4.8     |  | Form of Convertible Note issued by Komag to buyer named therein dated June
2, 2000 (incorporated by reference from Exhibit 4.3 filed with the
Companys report on Form 8-K filed June 2, 2000)                                                                                                            
|4.9     |  | Form of Restricted Global Convertible Subordinated Note due 2004
(incorporated by reference from the HMT Technology Corporation Form 8-K,
dated January 21, 1997).                                                                                                                                        
|4.10    |  | Form of Unrestricted Global Convertible Subordinated Note due 2004
(incorporated by reference from the HMT Technology Corporation Form 8-K,
dated January 21, 1997).                                                                                                                                      
|4.11    |  | Form of Certificated Convertible Subordinated Note due 2004 (incorporated
by reference from the HMT Technology Corporation Form 8-K, dated January
21, 1997).                                                                                                                                             
|4.12    |  | Indenture, dated as of January 15, 1997, between the Company and State
Street Bank and Trust Company of California, N.A., as Trustee
(incorporated by reference from the HMT Technology Corporation Form 8-K,
dated January 21, 1997).                                                                    
|10.1.1  |  | Lease Agreement dated May 2, 1989 by and between Stony Point Associates I
and Komag Material Technology, Inc. (incorporated by reference from
Exhibit 10.1.6 filed with the Companys report on Form 10-K for the year
ended December 31, 1989).                                                          
|10.1.2  |  | Lease Agreement (B10) dated May 24, 1996 between Sobrato Development
Companies #871 and Komag, Incorporated (incorporated by reference from
Exhibit 10.1.11 filed with the Companys report on Form 10-K for the year
ended December 29, 1996).                                                           
|10.1.3  |  | Lease Agreement (B11) dated May 24, 1996 between Sobrato Development
Companies #871 and Komag, Incorporated (incorporated by reference from
Exhibit 10.1.12 filed with the Companys report on Form 10-K for the year
ended December 29, 1996).                                                           
|10.1.4  |  | Sublease Agreement (B11) dated January 10, 2000, between Komag,
Incorporated and 2Wire, Inc. (incorporated by reference from Exhibit
10.1.15 filed with the Companys report on Form 10-K for the year ended
January 2, 2000).                                                                            
|10.1.5  |  | Second Amendment to Lease dated March 16, 1999 by and between Northern
Trust Bank of California N.A. and Komag Material Technology, Inc.
(incorporated by reference from Exhibit 10.1.16 filed with the Companys
report on Form 10-K for the year ended January 2, 2000).                                
|10.1.6  |  | Not used.                                                                                                                                                                                                                                                                                                 
|10.1.7  |  | Not used.                                                                                                                                                                                                                                                                                                 
|10.2    |  | Form of Directors Indemnification Agreement (incorporated by
reference from Exhibit 10.2 filed
with the Companys report on Form 10-K for the year ended
December 31, 2000).                                                                                                                             
|10.3    |  | Asset Purchase Agreement between the Company and Western Digital
Corporation dated April 8, 1999 (incorporated by reference from Exhibit
10.1.13 filed with the Companys report of Form 10-Q for the quarter ended
July 4, 1999) (Confidential treatment requested as to certain portions.)              
|10.3.1  |  | Volume Purchase Agreement dated as of April 8, 1999 by and between the
Company and Western Digital Corporation (incorporated by reference from
Exhibit 10.1.14 filed with the Companys report of Form 10-Q for the
quarter ended July 4, 1999) (Confidential treatment requested as to
certain portions.)



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|        |  |                                                                                                                                                                                                                                                                                                                                                     |  |  |  | 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                     |  |  |  | 
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                         |  |  |  | 
|        |  |                                                                                                                                                                                                                                                                                                                                                     |  |  |  | 
|10.3.2  |  | Not used.                                                                                                                                                                                                                                                                                                                                          
|10.3.3  |  | Not used.                                                                                                                                                                                                                                                                                                                                          
|10.3.4  |  | Not used.                                                                                                                                                                                                                                                                                                                                          
|10.3.5  |  | Not used.                                                                                                                                                                                                                                                                                                                                          
|10.3.6  |  | Not used.                                                                                                                                                                                                                                                                                                                                          
|10.3.7  |  | Not used.                                                                                                                                                                                                                                                                                                                                          
|10.3.8  |  | Not used.                                                                                                                                                                                                                                                                                                                                          
|10.3.9  |  | Joint Development and Cross-License Agreement dated March 10, 1989 by and
between Komag, Incorporated; Kobe Steel, Ltd.; and Komag Material
Technology, Inc. (incorporated by reference from Exhibit 10.10.7 filed
with the Companys report on Form 10-K for the year ended December 31,
1989).                                                   
|10.3.10 |  | Blank Sales Agreement dated March 10, 1989 by and between Komag,
Incorporated; Kobe Steel, Ltd.; and Komag Material Technology, Inc.
(incorporated by reference from Exhibit 10.3.10 filed with the Companys
report on Form 10-K for the year ended December 31, 1989).                                                                           
|10.3.11 |  | Finished Substrate Agreement dated March 10, 1989 by and between Komag,
Incorporated; Kobe Steel, Ltd.; and Komag Material Technology, Inc.
(incorporated by reference from Exhibit 10.10.9 filed with the Companys
report on Form 10-K for the year ended December 31, 1989) (confidential
treatment obtained as to certain portions).           
|10.3.12 |  | Stock Purchase Agreement between Komag, Incorporated and Kobe Steel USA
Holdings Inc. dated November 17, 1995 (incorporated by reference from
Exhibit 10.3.12 filed with the Companys report on Form 10-K for the year
ended December 31, 1995).                                                                                                  
|10.3.13 |  | Substrate Agreement by and between Kobe Steel, Ltd. and Komag,
Incorporated dated November 17, 1995 (incorporated by reference from
Exhibit 10.3.13 filed with the Companys report on Form 10-K for the year
ended December 31, 1995) (confidential treatment obtained as to certain
portions).                                                   
|10.3.14 |  | License Amendment Agreement among Komag, Incorporated; Komag Material
Technology, Inc.; and Kobe Steel, Ltd. Dated November 17, 1995
(incorporated by reference from Exhibit 10.3.14 filed with the Companys
report on Form 10-K for the year ended December 31, 1995).                                                                           
|10.3.15 |  | Substrate Sales Amendment Agreement among Komag, Incorporated; Komag
Material Technology, Inc.; and Kobe Steel, Ltd. dated November 17, 1995
(incorporated by reference from Exhibit 10.3.15 filed with the Companys
report on Form 10-K for the year ended December 31, 1995).                                                                   
|10.3.16 |  | Joint Venture Amendment Agreement among Komag, Incorporated; Komag
Material Technology, Inc.; and Kobe Steel USA Holdings Inc. dated November
17, 1995 (incorporated by reference from Exhibit 10.3.16 filed with the
Companys report on Form 10-K for the year ended December 31, 1995)
(confidential treatment obtained as to certain portions).
|10.3.17 |  | Stock Purchase and Contribution Agreement By and Among Chahaya Optronics,
Inc., The Investors Named Herein and Komag, Incorporated
(incorporated by reference from Exhibit 10.3.17 filed with the
Companys report on Form 10-K for the year ended
December 31, 2000).                                                                             
|10.3.18 |  | Amendment Number 1 to Volume Purchase Agreement with Western Digital
Corporation dated October 5, 2001 (incorporated by reference from Exhibit
10.1 filed with the companys report on Form 10-Q for the quarter ended
September 30, 2001).                                                                                                        



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                         |  |  |  | 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                         |  |  |  | 
|Number  |  | Description                                                                                                                                                                                                                                                                                                                             |  |  |  | 
|        |  |                                                                                                                                                                                                                                                                                                                                         |  |  |  | 
|10.4.1  |  | Restated 1987 Stock Option Plan, effective January 31, 1996 and forms of
agreement thereunder (incorporated by reference from Exhibit 10.4.1 filed
with the Companys report on Form 10-Q for the quarter ended June 30,
1996).                                                                                                        
|10.4.2  |  | Komag, Incorporated Management Bonus Plan As Amended and Restated January
22, 1997 (incorporated by reference from Exhibit 10.4.2 filed with the
Companys report on Form 10-K for the year ended
January 3, 1999).                                                                                                                    
|10.4.3  |  | Not used.                                                                                                                                                                                                                                                                                                                              
|10.4.4  |  | Komag, Incorporated Discretionary Bonus Plan (incorporated by reference
from Exhibit 10.4.4 filed with the Companys report on Form 10-K for the
year ended December 29, 1996).                                                                                                                                                        
|10.4.5  |  | Komag, Incorporated 1997 Supplemental Stock Option Plan Amended June 12,
1998 (incorporated by reference from Exhibit 10.4.5 filed with the
Companys report on Form 10-K for the year ended
January 3, 1999).                                                                                                                         
|10.4.6  |  | Komag Material Technology, Inc. 1995 Stock Option Plan (incorporated by
reference from Exhibit 10.11.12 filed with the Companys report on Form
10-Q for the Quarter ended October 1, 1995).                                                                                                                                           
|10.4.7  |  | Registrants 1995 Stock Option Plan (the 1995 Plan) (incorporated by
reference from the HMT Technology Corporation Form S-1 No. 333-450 and
amendments thereto).                                                                                                                                                                     
|10.4.8  |  | Registrants 1996 Equity Incentive Plan (the Incentive Plan)
(incorporated by reference from the HMT Technology Corporation Form S-1
No. 333-450 and amendments thereto).                                                                                                                                                            
|10.5    |  | Letter dated February 10, 1992 from the Malaysian Industrial Development
Authority addressed to Komag, Incorporated approving the Pioneer Status
of the Companys thin-film media venture in Malaysia (incorporated by
reference from Exhibit 10.28 filed with the Companys report on Form 10-K
for the year ended January 3, 1993).
|10.6    |  | Not Used.                                                                                                                                                                                                                                                                                                                              
|16      |  | Letter regarding change in certifying accountants from Ernst & Young LLP
dated November 26, 2001 (incorporated by reference from Exhibit 16 filed
with the Companys report on Form 8-K filed on November 26, 2001.)                                                                                                                   
|21      |  | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                  
|23      |  | Consent of KPMG LLP, independent auditors.                                                                                                                                                                                                                                                                                             
|23.1    |  | Consent of Ernst & Young LLP, independent auditors.                                                                                                                                                                                                                                                                                    
|24      |  | Power of Attorney. Reference is made to the signature pages of this Report.