<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(MARK ONE)
[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [FEE REQUIRED]
         FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995

OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
         FOR THE TRANSITION PERIOD FROM                   TO

                         COMMISSION FILE NUMBER 0-16852

                               KOMAG, INCORPORATED
             (Exact name of registrant as specified in its charter)

                     DELAWARE                                   94-2914864
         (STATE OR OTHER JURISDICTION OF                     (I.R.S. EMPLOYER
         INCORPORATION OR ORGANIZATION)                    IDENTIFICATION  NO.)

              275 SOUTH HILLVIEW DRIVE, MILPITAS, CALIFORNIA 95035
          (Address of Principal Executive Offices, including Zip Code)

         REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 946-2300

         Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
                                                         NAME OF EACH EXCHANGE
         TITLE OF EACH CLASS                              ON WHICH REGISTERED
         -------------------                              -------------------  
         <S>                                             <C>
                None                                              None
</TABLE>

         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. [ ]

                            [COVER PAGE 1 OF 2 PAGES]
<PAGE>   2
         The aggregate market value of voting stock held by non-affiliates of
the Registrant as of February 23, 1996 was approximately $1,447,185,000 (based
upon 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 February 23, 1996 approximately 50,832,767 shares of the
Registrant's Common Stock, $0.01 par value, were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Designated portions of the following document are incorporated by
reference into this Report on Form 10-K where indicated:

         Komag, Incorporated Proxy Statement for the Annual Meeting of
Stockholders to be held on May 14, 1996, Part III.



                                       2

<PAGE>   3
                                     PART I


ITEM 1.  BUSINESS

         Komag, Incorporated ("Komag" or the "Company") designs, manufactures
and markets thin-film media ("disks"), the primary storage medium for digital
data in computer hard disk drives. Komag believes it is recognized as the leader
in the thin-film media market. The Company's business strategy relies on the
combination of advanced technology and cost-effective, high-volume manufacturing
to advance its leadership position. The Company believes that the combination of
these two capabilities is a significant competitive advantage and enables the
Company to support its customers' technically advanced, high-volume product
programs. Komag's products address the high-capacity/high-performance segment of
the disk drive market and are used in products such as disk arrays, network file
servers, high-end personal computers and engineering workstations. The Company
manufactures the highest density disks commercially available for primarily 
5 1/4-inch and 3 1/2-inch form factor hard disk drives. The Company was 
organized in 1983 and is incorporated in the State of Delaware.

         The Company's business is subject to risks and uncertainties, a number
of which are discussed under "Risk Factors".

         Increasing demand for digital storage and low-cost, high-performance
hard disk drive products has resulted in strong unit demand for these products.
International Data Corporation ("IDC") forecasts that world-wide disk drive unit
shipments in 1996 will grow 30% over 1995 and that the annual rate of unit
growth will remain high, at about 20%, through 1999. Greater processing power,
more sophisticated operating systems and application software, high-resolution
graphics and larger data bases are among the developments that have required
ever higher performance from disk drives. 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 a storage density of less than ten
megabits (one million bits is a megabit; eight bits is one byte) per square
inch. Current high-performance 3 1/2-inch drives have capacities of four
gigabytes (one billion bytes is a gigabyte or "GB") with densities typically of
400 to 500 megabits per square inch. Advances in component technology have been
critical to improving the performance and storage capacity of disk drives and
lowering cost per bit stored.

         The Company has capitalized on its technological strength in thin-film
processes and its manufacturing capabilities to achieve the leading market
position in the thin-film media market. The Company's technological strength
stems from knowledge of materials science and an understanding of the interplay
between disks, heads and other drive components. Komag's manufacturing expertise
in thin-film media is evidenced by its history of delivering reliable products
in high volume. Current manufacturing operations are conducted by the Company in
the United States and Malaysia as well as through a joint venture in Japan.
Asahi Komag Co., Ltd. ("AKCL"), a joint venture with Asahi Glass Co., Ltd.
("Asahi Glass") and Vacuum Metallurgical Company, manufactures thin-film media
in Japan. The Company manufactures disk substrates in the U.S. for internal use
through its subsidiary, Komag Material Technologies, Inc. ("KMT"). A 20%
minority interest in KMT is held by Kobe Steel USA Holdings Inc. (together with
Kobe Steel, Ltd. and other affiliated companies, "Kobe").

         The Company has a direct voting interest (less than 20%) in Headway
Technologies, Inc. ("Headway"). Other Headway shareholders include
Hewlett-Packard Company, AKCL, and a U.S. subsidiary of Asahi Glass. Headway is
developing and manufacturing advanced magnetoresistive ("MR") heads for the data
storage industry.



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<PAGE>   4
TECHNOLOGY

         Komag manufactures and sells thin-film magnetic media on rigid disk
platters for use in hard disk drives. These drives are used in computer systems
to record, store and retrieve digital information. Inside a disk drive, the
media or disk rotates at speeds of up to 7,200 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 (now typically 400
to 500 million bits per square inch in high-performance drives) 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.

         The primary factors governing the density of storage achievable on a
disk's surface are (1) 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, defined as glide height (measured in
microinches or millionths of an inch), and (2) 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, defined as coercivity (measured in oersteds -- "Oe"). The
lower the glide height, the more accurately and reliably the bit can be
retrieved. The higher the coercivity of the media, the smaller the width of the
bit that can be stored. The Company's plating, polishing and texturing processes
result in a uniform surface with relatively few defects which permits the
read/write heads to pass over the disk surface at glide heights of 1.5
microinches. The platinum-cobalt based alloy deposited on the surfaces of
Komag's disks allows high coercivities, low noise and other desirable magnetic
characteristics. The combination of these factors results in more data stored in
a given area on the disk surface.



PRODUCTS, CUSTOMERS AND MARKETING

         Komag's thin-film disk products generally can be classified by size.
The diameter of the disk corresponds roughly with the width of the disk drive.
The Company sells primarily 95 mm and 130 mm disks for 3 1/2-inch and 5 1/4-inch
drives, respectively. Within each of these sizes, Komag offers a range of
coercivities, glide height capabilities, and other parameters to meet specific
customer requirements.

         Komag primarily sells its media products to independent OEM disk drive
manufacturers for incorporation into hard disk drives which are marketed under
the manufacturers' own labels. The Company also currently sells its disks to
computer system manufacturers. The Company works closely with customers as they
design new high-performance disk drives and generally customizes its products
according to customer specifications.

         Net sales to major customers in 1995 were as follows: Seagate
Technology, Inc. ("Seagate") -- 42%, Quantum Corporation ("Quantum") -- 23%,
Hewlett-Packard Company ("Hewlett-Packard") -- 15%, and Western Digital
Corporation ("Western Digital") -- 12%. 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 disk drive performance. Given
the relatively small number of high-performance disk drive manufacturers, the
Company expects that it will continue its dependence on a very limited number of
customers. Further there have been consolidations among the Company's disk drive
customers, including the recent merger of Seagate and Conner. In addition,
Quantum recently announced that it would cease disk drive production in
Milpitas, California and Penang, Malaysia and contract with its Japanese
manufacturing partner, Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE"),
to manufacture its disk drives. AKCL, the Company's Japanese joint venture, has
an established working relationship with MKE and MKE has remained AKCL's largest
customer for the past several years. The Company's Malaysian subsidiary recently
began shipments to MKE's new Singapore manufacturing facility. However, there
can be no 



                                       4
<PAGE>   5
assurance that MKE will purchase from either Komag or AKCL the unit quantities
of product which the Company previously supplied to Quantum in the U.S. and
Malaysia. See "Risk Factors".

         Sales are made directly to disk drive manufacturers worldwide (except
media sales into Japan) from the Company's U.S. and Malaysian operations. Media
sales to Japan are made solely through AKCL. Media sales to the Far East from
the Company's U.S. and Malaysian operations represented 62%, 54% and 45% of
Komag's net sales in 1995, 1994 and 1993, respectively. 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.

         The Company's sales are generally made pursuant to purchase orders
rather than long-term contracts. These purchase orders are generally subject to
change or cancellation without significant penalty. At December 31, 1995 the
Company's backlog of purchase orders scheduled for delivery within 90 days
totaled $156.0 million compared to $69.6 million at January 1, 1995. The Company
believes it is a common practice for disk drive manufacturers to place orders in
excess of actual requirements when there is an industry-wide shortage of media
supply (a condition that persisted throughout much of 1995), and 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.


MANUFACTURING

         Komag's manufacturing expertise in thin-film media is evidenced by its
history of delivering reliable products in high volume. Through the utilization
of proprietary processes and techniques, the Company has the capability to
cost-effectively produce advanced disk products that exhibit uniform performance
characteristics. Such uniform performance characteristics enhance the
reliability of the drive products manufactured by the Company's customers. In
addition, these characteristics raise production yields on the customers'
manufacturing lines, which is an important cost consideration in
high-performance disk drives with large component counts. Manufacturing costs
are highly dependent upon the Company's ability to effectively utilize its
installed physical capacity to produce large volumes of products at acceptable
yields. To improve yields and capacity utilization, Komag has adopted formal
continuous improvement programs at all of its worldwide operations. The
Company's media manufacturing facilities throughout the world have obtained ISO
Certification, an internationally recognized quality standard. The process
technologies employed by the Company require substantial capital investment. In
addition, long lead times to install new increments of physical capacity
complicate capacity planning. Historically, the Company has operated at or near
full capacity with favorable manufacturing yields and equipment utilization
rates.

         The manufacture of thin-film sputtered disks is a complex, multi-step
process that converts polished 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 end, the Company uses a vacuum deposition, or sputtering method,
similar to that used to coat semiconductor wafers. The basic process consists of
many interrelated steps which can be grouped into four major categories:

         1. Nickel Alloy Plating of the Substrate: Through a series of chemical
baths polished aluminum substrates are plated with a uniform nickel phosphorus
layer in order to provide support for the magnetic layer.

         2. Polishing, Texturing and Cleaning. During this relatively
labor-intensive process disks are smoothed and cleaned so that the read/write
heads of the disk drives can fly at low and constant levels over the disks.



                                       5
<PAGE>   6
         3. Sputtering and Lube: By a technically demanding vacuum deposition
process, the 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.

         4. Glide Test and Certification. In robotically controlled test cells,
disks are first tested for a specified glide height and then certified for
magnetic properties. Based on these test results, disks are graded according to
specific characteristics and sold to customers based upon their specific
performance requirements.

         Most of the critical process steps are conducted in Class 100 or better
clean rooms. From the final cleaning operation forward, disks are handled by
custom designed, and in many cases Company-built, automated equipment to reduce
contamination and enhance process precision. Minute impurities in materials
used, particulate contamination, or other production problems can reduce
production yields and, in extreme cases, result in the prolonged suspension of
production. Although no problems have required prolonged suspension of the
Company's production to date, other manufacturers of thin-film media have
experienced such suspensions, and no assurance can be given that the Company
will not experience manufacturing problems from contamination or other causes in
the future.


PRODUCTION CAPACITY

         The Company currently has 21 production lines installed at its
manufacturing plants in three countries: ten in the United States, six in
Malaysia, and five at its manufacturing joint venture in Japan. The Company
plans to add one additional line at its Penang, Malaysia facility in the second
quarter of 1996, thus utilizing all available space at that plant. The Company
is currently constructing and equipping a new front end manufacturing facility
in the east Malaysian state of Sarawak. This new facility will manufacture
plated, polished substrates that will be subsequently shipped to the Company's
back end manufacturing facilities in the United States and Penang, Malaysia for
completion. Production at this new facility is expected to begin in the first
half of 1996. In addition, due to strong market demand for the Company's disk
products, the Company has committed to further expand its physical production
capacity in the United States, Malaysia and Japan. The Company began
construction of a new 225,000 square-foot back end disk manufacturing plant in
San Jose, California in October 1995 and recently commenced construction of the
structural foundation for a new 275,000 square foot back end disk manufacturing
plant in Penang, Malaysia. These back end plants will utilize plated, polished
substrates to produce finished sputtered disk products. Production at the new
San Jose and Penang plants is expected to begin during the fourth quarter of
1996 and the first quarter of 1997, respectively. Each of these new facilities
is expected to house the equivalent of at least six current production lines.
AKCL began construction of a 225,000 square-foot facility in Thailand for front
end production of thin-film disks in 1995 and expects to begin production at
this site in late 1996.

         Supplementing this new physical capacity, the Company expects that
continued focus on process improvements will result in higher unit output from
both current and planned production lines during 1996, thus leading to increased
effective capacity.

         During the fourth quarter of 1994, the Company began a series of
process improvements designed to support production of future advanced disk
products. The Company believes that these improvements should enhance product
performance and should enable increased unit output through reduced process
cycle times. In order to utilize these process improvements on all of the
Company's sputtering lines, certain older machines are in the process of being
upgraded to a new design. Three U.S. machines were upgraded in 1995 and three
additional machines will be upgraded in 1996. Only one sputtering line has been
or will be out of production at any given time. As a result, one U.S. machine
will be out of 



                                       6
<PAGE>   7
production throughout 1996 as was the case in 1995. Certain older sputtering
lines at the Japanese joint venture have been or will also be upgraded during
1995 and 1996.

         The Company does not expect to sell appreciable quantities of
AKCL-produced media in 1996 due to strong demand for AKCL's products within the
Japanese media market. In the event demand within the Japanese media market
decreases, AKCL-produced media may become available for qualification and resale
by the Company to its customers.


RESEARCH, DEVELOPMENT AND ENGINEERING

         Since its founding, Komag has focused on the development of advanced
thin-film disk designs, as well as the process technologies necessary to produce
these designs. The Company utilizes a full scale sputtering line for pilot
production. In addition, the Board of Directors has recently approved the
construction of a new 178,000 square foot research and development facility
which the Company expects to occupy in the first half of 1997. The Company's
spending and capital investment for R&D are focused on the investigation,
design, development, and testing of more efficient that can be integrated into
manufacturing in a commercially viable manner.

         In 1996 thin-film media development efforts will focus on completing
the development of low-glide, full-surface textured inductive media for contact
recording and full-surface or mechanical zone-textured magnetoresistive ("MR")
media as well as the technical support for the production ramp of these
products. Additional efforts will be placed on the development of laser
zone-textured media for increased recording density in MR applications and on
the development of smooth glass media. Due to the interaction between heads and
disks in these advanced low-glide (less than 1.5 microinches) products, new
mechanical texturing processes are being developed as well as improved cleaning
processes, improved overcoats, and improved corrosion resistant metallic alloys
for the magnetic layers on the disks.

         The Company's expenditures (and percentage of sales) on research,
development and engineering, were $23.8 million (4.6%) in fiscal 1995, $21.3
million (5.4%) in fiscal 1994, and $29.6 million (7.7%) in fiscal year 1993.
Research, development and engineering expenses in 1995 and 1994 were lower than
in 1993 due to the cessation of operations at a former thin-film head
manufacturing joint venture, Dastek, Inc. ("Dastek"). Dastek's research,
development and engineering expenditures amounted to approximately $11.8 million
in 1993.


STRATEGIC ALLIANCES

         The Company has established joint ventures with Asahi Glass and Kobe.
Komag believes these alliances have enhanced the Company's competitive position
by providing research, development, engineering and manufacturing expertise that
reduce costs and technical risks and shorten product development cycles.

         Asahi Komag Co., Ltd. ("AKCL")

         In 1987 the Company formed a partnership (Komag Technology Partners)
with the U.S. subsidiaries of two Japanese companies, Asahi Glass and Vacuum
Metallurgical Company. The partners simultaneously formed a wholly-owned
subsidiary, AKCL, to manufacture and distribute thin-film disks in Japan. Under
the joint venture agreement, the Company contributed technology developed prior
to January 1987, and licensed technology developed after January 1987, to the
extent such technology relates to sputtered thin-film hard disk media, for a 50%
interest in the partnership. The Japanese partners contributed equity capital
aggregating 1.5 billion yen (approximately $11 million). AKCL began



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<PAGE>   8
commercial production with its first production line in 1988 and added three
more production lines between 1989 and 1991. A fifth production line was added
at its manufacturing facility in Yonezawa, Japan in September 1995. During the
fourth quarter of 1995 the first sputtering line was removed from production for
upgrading to a new design standard, thus offsetting the incremental unit output
from the newly-installed fifth sputtering line. Following the upgrading of its
second sputtering line, AKCL is expected to commence production on all five
lines late in the first half of 1996.

         The terms of the joint venture agreement provide that AKCL may only
sell disks for incorporation into disk drives that are assembled in Japan, with
no limitation on the territory in which AKCL's customers can sell such assembled
disk drive products. The Company has, however, periodically granted AKCL a
limited right to sell its disks outside of Japan. During the term of the joint
venture agreement and for five years thereafter, the Japanese partners and their
affiliates have agreed not to develop, manufacture or sell sputtered media
anywhere in the world other than through the joint venture, and the Company and
its affiliates have agreed not to develop, manufacture or sell such media in
Japan except through the joint venture. Upon the occurrence of certain
terminating events and the subsequent acquisition of AKCL by one or more of the
joint venture partners, the restrictions related to activities of the acquiring
joint venture partner(s) within Japan may lapse.

         Disk sales to AKCL represented less than 1% of the Company's net sales
in 1995, 1994 and 1993. The Company purchased 1% of AKCL's unit output during
1995 compared to approximately 8% and 14% in 1994 and 1993, respectively.
Increased demand within the Japanese thin-film disk market continued to absorb
most of AKCL's production. The Company does not expect to sell appreciable
quantities of AKCL-produced products to U.S. customers in 1996 due to expected
strong demand within the Japanese media market. However, disk sales by the
Company to AKCL for distribution may increase in 1996.

         Komag Material Technology, Inc. ("KMT")

         In 1988 Komag formed a wholly-owned subsidiary, KMT, to secure an
additional stable supply of aluminum substrates of satisfactory quality for the
Company's products. In 1989 Kobe, a leading worldwide supplier of blank aluminum
substrates, purchased a 45% interest in KMT for $1.4 million. In December 1995,
the Company reacquired 25% of the outstanding common stock of KMT by purchasing
shares from Kobe for $6.75 million. The Company's recent purchase raised its
total ownership percentage of KMT to 80%. Under the recent stock purchase and
related agreements, Kobe retained one seat on KMT's Board of Directors.

         Under the new agreements, Kobe will continue to supply substrate blanks
to KMT while the Company will continue to purchase KMT's entire output of
finished substrates. Further, the Company has indicated its intention to
purchase a substantial proportion of its future substrate requirements from
Kobe, a continuation of a past procurement practice. In combination, KMT and
Kobe supply in excess of 85% of the Company's substrate requirements.

         Dastek, Inc. ("Dastek")

         The Company previously supplied thin-film recording heads for hard disk
drives through Dastek, a joint venture with a subsidiary of Asahi Glass. Due to
market changes during 1993 and significant continuing losses, Dastek ceased its
inductive thin-film head operations in mid 1994, sold its equipment at various
public auctions, settled its obligations with its creditors and was legally
dissolved in December 1994.

         Equity Positions Held by Asahi Glass and Kobe in Komag

         Asahi Glass and Kobe each purchased one million shares of newly issued
Common Stock from the Company for $20 million in January 1989 and March 1990,
respectively. In 1992 Asahi Glass transferred



                                       8
<PAGE>   9
ownership of its shares to a U.S. subsidiary of Asahi Glass. Under their
respective stock purchase agreements, Asahi Glass and Kobe each have the right
to purchase additional shares of the Company's Common Stock on the open market
to increase their respective equity interests in the Company to 20%, the right
to maintain their percentage interest in the Company by purchasing their pro
rata shares of any new equity issuance by the Company, and the right to require
the Company to register their shares for resale, either on a demand basis or
concurrent with an offering by the Company. Each stock purchase agreement
further provides that the Company shall use its best efforts to elect a
representative of each investor to the Company's Board of Directors and to
include such representatives on the Nominating Committee of the Board. During
1994 Asahi America and Kobe reduced their ownership positions in the Company by
3,691,568 and 2,573,112 shares, respectively. There were no purchases or sales
of the Company's stock by Asahi Glass or Kobe in 1995 and according to the
Company's stock records at February 23, 1996, Asahi America and Kobe held
2,000,000 and 2,000,002 shares of Common Stock, respectively. Sales of
significant amounts of the security holdings of Asahi Glass and/or Kobe in the
future could adversely affect the market price of the Company's Common Stock.
Any sales by either party, however, would require relinquishment of its
respective seat on the Company's Board of Directors.


COMPETITION

         Current thin-film disk competitors fall into three groups: U.S.
non-captive manufacturers, U.S. captive manufacturers, and Japan-based
manufacturers. Historically, each of these groups has supplied approximately
one-third of the worldwide thin-film disk unit output. Based upon research
conducted by an independent market research firm, the Company believes it is the
leading supplier of thin-film disks, with a market share greater than twice the
size of any of the U.S. non-captive manufacturers or Japan-based manufacturers.
The Company's U.S. non-captive thin-film disk competitors include Akashic
Memories Corporation (a subsidiary of Kubota, Inc.), HMT Technology Corporation
and StorMedia, Inc. Japan-based thin-film disk competitors include Fuji Electric
Company, Ltd., Mitsubishi Kasei Corp., Showa Denko K.K. and HOYA Corporation.
The U.S. captive manufacturers include IBM and OEM drive manufacturers, such as
Seagate and Conner (who have recently merged operations), and Western Digital,
which manufacture disks as a part of their vertical integration programs. To
date, IBM and these OEM drive manufacturers have sold nominal quantities of
disks in the open market. See "Risk Factors -- Competition".


ENVIRONMENTAL REGULATION

         The Company is subject to a variety of regulations in connection with
its operations, and believes that it has obtained all necessary permits for its
operations. The Company uses various industrial hazardous materials, including
metal plating solutions, in its manufacturing processes. Wastes from the
Company's 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. In addition, at one of its
facilities, the Company receives industrial waste water from Headway, which
subleases a portion of a building in Milpitas, California directly from the
Company. Under this arrangement, the Company processes this received waste water
together with its own industrial waste water.

         The Company has made investments in upgrading its waste water treatment
facilities to improve the performance and consistency of its waste water
processing. Nonetheless, industrial waste water discharges from the Company and
other businesses located at the southern end of the San Francisco Bay may, in
the future, be subject to more stringent regulations. Failure to comply with
present or future regulations could result in the suspension or cessation of
part or all of the Company's operations. Such regulations could restrict the
Company's ability to expand at its present locations or could require the
Company to acquire costly equipment or incur other significant expenses.



                                       9
<PAGE>   10
PATENTS AND PROPRIETARY INFORMATION

         Komag holds and has applied for United States and foreign patents
relating to its processes and equipment for manufacturing components and the
resulting components. While possession of patents could present obstacles to the
introduction of new products by competitors and possibly result in
royalty-bearing licenses from third parties, the Company believes that its
success does not depend on the ownership of intellectual property rights, but
rather on its innovative skills, technical competence and marketing abilities.
Accordingly, the patents held and applied for will not constitute any assurance
of the Company's future success.

         The Company regards elements of its equipment designs and processes as
proprietary and confidential and relies upon employee and vendor non-disclosure
agreements and a system of internal safeguards for protection. Despite these
steps for protecting proprietary and confidential information, there is a risk
that competitors may obtain and use such information. Furthermore, the laws of
certain foreign countries in which the Company does business may provide a
lesser degree of protection to the Company's proprietary and confidential
information than provided by the laws of the United States. In addition, the
Company from time to time receives proprietary and confidential information from
vendors, customers, and partners, the use and disclosure of which being governed
by non-disclosure agreements. Through internal communication and the monitoring
of use and disclosure of such information, the Company complies with its
obligations regarding use and non-disclosure. However, despite these efforts,
there is a risk that such information may be used or disclosed in violation of
the Company's obligations of non-disclosure.

         The Company has occasionally received, and may receive in the future,
communications from third parties asserting violation of intellectual rights
alleged to cover certain of the Company's products or manufacturing processes or
equipment. The Company evaluates whether to seek licenses to the rights referred
to in such communications. Although the Company believes that any such licenses
or other rights could be obtained by the Company on terms that would not have a
material adverse effect on the Company, there can be no assurance that this will
be the case.


EMPLOYEES

         As of December 31, 1995 the Company and its consolidated subsidiaries
had 2,915 employees (2,748 of which are regular employees and 167 of which were
employed on a temporary basis), including 2,587 in manufacturing, 202 in
research, development and engineering, and 126 in sales, administrative and
management positions. Of the total 1,091 are employed at offshore facilities.

         The Company believes that its future success will depend in large part
upon its ability to continue to attract, retain and motivate highly skilled and
dedicated employees. None of the Company's employees is represented by a labor
union and the Company has never experienced a work stoppage.


RISKS FACTORS

         The Company's business is subject to a number of risks and
uncertainties. As a result of those risks described below and other risks
presented elsewhere in this report, there can be no assurance that the Company
will continue to be successful or will maintain a leading market position. The
discussion contained in Item 1 -- "Business" and Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contain predictions, estimates and other forward-looking statements that involve
a number of risks and uncertainties. While this discussion represents the
Company's current judgment on the risks and future direction of the business,
such risks and uncertainties could cause actual results to differ materially
from any future performance suggested herein. Factors that could cause actual
results to differ include the following: product transitions to next-generation
products; effective utilization 



                                       10
<PAGE>   11
of existing manufacturing facilities; continuation of improved manufacturing
efficiencies; industry supply-demand relationships and related pricing for
high-end disk products; execution of planned capacity additions; and vertical
integration and company consolidation within a limited customer base. The
Company undertakes no obligation to publicly release the result of any revisions
to these forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

Rapid Technological Change

         The thin-film disk industry has been characterized by rapid
technological developments, increasingly shorter product life cycles, and price
erosion. The Company believes that its future success depends, in large measure,
on its ability to continually improve existing process technologies and to
develop and implement new process technologies in a timely manner. Such
technologies must support cost-effective, high-volume production of thin-film
disks that meet the ever-advancing customer requirements for enhanced magnetic
recording performance.

         Although the Company has a significant, ongoing research and
development effort to advance its process technologies and the resulting
products, there can be no assurance that the Company will be able to develop and
implement such technologies in a timely manner in order to compete effectively
against competitors' products and/or entirely new data storage technologies. The
Company's results of operations would be materially adversely affected if the
Company's efforts to advance its process technologies were not successful or if
the technologies that the Company had chosen not to develop were proven to be
viable competitive alternatives.

         In addition, protection of technology through patents and other forms
of intellectual property rights in technically sophisticated fields is
commonplace. There can be no assurance that others have not or will not perfect
such intellectual property rights and either enforce those rights to prevent the
Company from practicing certain technologies or demand royalty payments from the
Company in return for practicing those technologies, which may have a material
adverse affect on the Company's results of operations. The Company reviews, on a
routine basis, patent issuances in the U.S. and patent applications which are
published in Japan, and became aware of a Japanese patent application which, if
issued in identical form in Japan or, if there exists a corresponding
application in the U.S., if issued in the U.S., could give rise to a claim of
infringement against the Company. While the Company has not investigated this
Japanese patent application in detail, it believes it is unlikely that a valid
patent of sufficient breadth to materially adversely affect the Company's
business will be issued in either Japan or the U.S. However, there can be no
assurance that a broad patent will not issue from this application, which if
asserted against the Company and upheld may apply to a significant portion of
the Company's products and would have a material adverse effect on the Company's
business.

Capacity Expansion and Capital Intensity

         Inasmuch as the Company is operating its disk production lines at or
near full capacity, future sales and earnings growth will depend on the
successful expansion of the Company's manufacturing capacity. The Company plans
to expand capacity by increasing the disk output of its existing production
lines through process improvements and through the installation of new
production lines at existing and new manufacturing facilities. To improve disk
output from existing production lines, the Company strives to reduce process
cycle times, improve manufacturing yields, and increase equipment utilization
rates. Additionally, the Company is upgrading certain older existing production
lines to a new design standard that should enhance the production capabilities
of these older machines. Should the Company's efforts in these areas not produce
the desired results, the Company's rate of growth may be constrained or
curtailed. Furthermore, should the Company experience a deterioration in
manufacturing performance or a delay or unforeseen outcome arising from the
machine upgrade program, the Company's results of operations would be materially
adversely affected.



                                       11
<PAGE>   12
         The Company currently plans to add another production line at its
existing manufacturing plant in Penang, Malaysia during the second quarter of
1996 and additional lines at new back end manufacturing facilities currently
under construction in San Jose (first line during fourth quarter of 1996) and
Penang (first line during first quarter of 1997). Installations of new
production lines at both facilities are expected to occur in 4 to 6 month
intervals. In addition, a new front end manufacturing plant will begin operation
in the second quarter of 1996 in the east Malaysian state of Sarawak. There can
be no assurance that the Company's additional production lines will be installed
as scheduled or will experience the high levels of manufacturing efficiencies
attained by the Company's existing production lines. The Company must attract,
train, motivate and retain highly-trained and dedicated employees, particularly
at the Company's new operations in Sarawak. Manufacturing and other challenges
in connection with the commencement and subsequent expansion of operations in
any location and in particular Sarawak, a business location with limited
experience in advanced manufacturing, could have a material adverse affect on
the Company's results of operations.

         Based upon industry forecasts of continued high growth in demand for
magnetic media, the Company has developed plans to increase its production
capacity under a schedule that is substantially more aggressive than its past
expansion plans. Implementation of this plan entails parallel expansion at
multiple locations rather than serial expansion one location at a time, thus
requiring precise planning. Successful execution of this parallel expansion will
require timely identification and acquisition of appropriate sites, receipt of
requisite approvals, construction and equipping of facilities, recruitment and
retention of a high quality workforce, and achievement of satisfactory
manufacturing results on a scale greater than the Company's prior expansions.

         The Company's capital expenditures totaled $166 million in 1995 and
1996 capital expenditures are planned to increase to $350 million. Due to the
capital intensive nature of the Company's business, the construction and
equipping of new manufacturing facilities requires substantial capital
investment. Further, significant amounts of continuing investment in capital
equipment is required to improve, modify and change existing manufacturing
processes to support rapidly changing process technologies. There can be no
assurance that the Company will be able to properly plan and install capable
plant and equipment to support the manufacturing processes required for advanced
future products in a timely and cost-effective manner due to the long lead times
required to design, construct and install plant and equipment. Further, required
changes in manufacturing processes could obsolete or significantly shorten the
useful lives of substantial amounts of equipment.

         There can be no assurance that the Company will successfully achieve
planned process improvements or successfully manage its aggressive expansion
plan. In addition, should actual demand for the Company's products not meet the
Company's forecast, and not absorb existing or planned additional capacity, the
fixed costs and operating expenses related to unused capacity would have a
material adverse affect on the Company's results of operations.

Dependence on a Limited Number of Customers; Dependence on the Hard Disk Drive
 Industry

         The Company's sales are 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 performance and disk drive performance. Net sales to major
customers in 1995 were as follows: Seagate -- 42%, Quantum -- 23%,
Hewlett-Packard -- 15%, and Western Digital -- 12%. Given the relatively small
number of high-performance disk drive manufacturers, the Company expects that it
will continue its dependence on a very limited number of customers. Further
there have been consolidations among the Company's disk drive customers,
including the recent merger of Seagate and Conner. In addition, Quantum recently
announced that it would cease disk drive production in Milpitas, California and
Penang, Malaysia and contract with its Japanese manufacturing partner,
Matsushita-Kotobuki Electronics, Industries, Ltd. ("MKE") to manufacture its
disk drives. AKCL, the Company's Japanese joint venture, has an established
working relationship with MKE and MKE has remained AKCL's largest customer for
the past several years. The Company's



                                       12
<PAGE>   13
Malaysian subsidiary recently began shipments to MKE's new Singapore
manufacturing facility. However, there can be no assurance that MKE will
purchase from either Komag or AKCL the unit quantities of product which the
Company previously supplied to Quantum in the U.S. and Malaysia.

         Seagate produces a portion of its disk requirements internally and
Conner produces the majority of its own disk requirements. Prior to their
merger, both Seagate and Conner announced expansions of their disk production
facilities and Seagate has recently announced a long-term purchase commitment
with one of the Company's competitors. Other customers and potential customers
have, or could adopt, similar strategies. Depending on the overall growth in
market demand for disk products, such actions could result in the reduction or
cessation of purchases from the Company, thus materially adversely affecting the
Company's results of operations. Additionally, if one or more of the Company's
customers were to begin selling disks on the open market in direct competition
with the Company, the Company's results of operations could be further adversely
affected.

         The demand for the Company's high-performance thin-film disks depends
upon the demand for hard disk drives and the Company's ability to provide
technically superior products at competitive prices. The high-performance
segment of the hard disk drive market is characterized by short product life
cycles and rapid technological change. Failure by the Company to qualify new
products and/or successfully achieve volume manufacturing of new customer
products could adversely affect the Company's results of operations.
Furthermore, the Company's sales are generally made pursuant to purchase orders
which are subject to cancellation, modification or rescheduling without
significant penalties. There can be no assurance that the Company's current
customers will continue to place orders with the Company, that orders by
existing customers will continue at the levels of previous periods, or that the
Company will be able to obtain orders from new customers.

Capital Needs

         The Company believes that, in order to achieve its long-term expansion
objectives and maintain and enhance its competitive position, it will need
significant additional financial resources over the next several years for
capital expenditures, working capital and research and development. During 1996,
the Company expects to spend approximately $350 million on capital expenditures.
The Company believes that it will be able to fund these expenditures from a
combination of cash flow from operations, funds available from existing and
possibly new bank lines of credit, and existing cash balances. Property, plant
and equipment expenditures in 1997 are expected to be approximately $400 million
and will require significant new capital, thus necessitating additional debt,
equity or other financing. There can be no assurance that such additional funds
will be available to the Company or, if available, will be available on
favorable terms. In addition, the Company may require additional capital for
other purposes. If the Company is unable to obtain sufficient capital, it could
be required to reduce its capital equipment and research and development
expenditures, which could have a material adverse affect on the Company's
results of operations.

Fluctuations in Operating Results

         The Company believes that its future operating results will continue to
be subject to quarterly variations based upon a wide variety of factors,
including the cyclical nature of the hard disk drive industry, the ability to
develop and implement new manufacturing process technologies, the ability to
introduce new products and to achieve cost-effective, high-volume production in
a timely manner, changes in product mix and average selling prices, the
availability and the extent of utilization of the Company's production capacity,
manufacturing yields, prolonged disruptions of operations at any of the
Company's facilities for any reason, changes in the cost of or limitations on
availability of labor, and increases in production and engineering costs
associated with initial production of new product programs.

         Because the thin-film disk industry is capital intensive and requires a
high level of fixed costs, gross margins are also extremely sensitive to changes
in volume. Assuming fixed average selling prices, reductions in manufacturing
efficiency would cause declines in gross margins. Additionally, decreasing



                                       13
<PAGE>   14
demand for the Company's products generally results in reduced average selling
prices and/or low capacity utilization that, in turn, adversely affects gross
margins and operating results. The Company's ability to maintain average selling
prices and gross margins is dependent on its ability to produce, in volume,
products that are differentiated on the basis of technological superiority. In
the second, third and fourth quarters of 1995, the Company achieved high gross
margins as a result of increased manufacturing efficiencies, coupled with strong
market demand for and an industry shortage of 1800 Oe disks. The Company does
not believe that future gross margins are sustainable at the fourth quarter's
record level. The Company expects that the overall average selling price will
likely trend downward from the average selling price in the fourth quarter of
1995 due to a continuing high proportion of 1800 Oe product sales during the
first half of 1996. The transition to higher-priced 2000 Oe products is expected
to commence in the second quarter of 1996 and such products could account for
more than 50% of the Company's sales during the fourth quarter of 1996. In the
event that market supply meets or exceeds demand or the Company is unable to
introduce and ramp to volume production next-generation products in a timely
manner, the Company's operating results would likely be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

         Fluctuations in the financial results of AKCL, the Company's
unconsolidated Japanese disk manufacturing joint venture, could also impact the
Company's financial performance. Equity in net income of AKCL contributed 7% of
the Company's 1995 consolidated net income. AKCL is subject to many of the same
types of risks facing the Company. In addition, the equity income derived from
AKCL fluctuates over time due to its dependence on a more limited customer base
(MKE and Fujitsu Ltd. accounted for 72% and 26%, respectively, of AKCL's 1995
net sales), yen/dollar exchange rate fluctuations, and possible further
write-downs by AKCL of its investment in Headway Technologies, Inc.

Risk of Foreign Operations

         In 1995, sales to customers in the Far East, including foreign
subsidiaries of domestic companies, accounted for 62% of the Company's net sales
from its U.S. and Malaysian facilities, and the Company anticipates that
international sales will continue to represent the majority of its net sales.
All of the Company's sales are currently priced in U.S. dollars worldwide.
Certain costs at the Company's foreign manufacturing and marketing operations
are incurred in the local currency. The Company also purchases certain operating
supplies and production equipment from Japanese suppliers in yen denominated
transactions. Accordingly, the Company's operating results are subject to the
risks inherent with international operations, including but not limited to,
compliance with or changes in the law and regulatory requirements of foreign
jurisdictions, fluctuations in exchange rates, tariffs or other barriers,
difficulties in staffing and managing foreign operations, exposure to taxes in
multiple jurisdictions, and transportation delays and interruptions.

         The Company's existing Malaysian manufacturing facility accounted for
33% and 52% of the Company's 1995 consolidated net sales and operating income,
respectively. Prolonged disruption of operations at this facility for any reason
would cause delays in shipments of the Company's products, thus materially
adversely affect the Company's results of operations.

Competition

         The Company's thin-film disk products are used primarily in the
high-capacity segment of the 3 1/2-inch and 5 1/4-inch hard disk drive market,
where product performance, consistent quality and availability, taken together,
are of great competitive importance. To succeed in an industry characterized by
rapid incremental technological developments, the Company must continuously
advance its thin-film technology at a pace consistent with or faster than its
competitors. In addition, the Company must capture a market share position that
will insure a competitive cost structure. The Company believes that its
thin-film manufacturing facility in Penang, Malaysia provides a significant
competitive cost advantage relative to most other thin-film disk manufacturers
that currently operate exclusively in the U.S. and Japan. However, if the
technology involved in the manufacture of thin-film disks does not continue to
advance 



                                       14
<PAGE>   15
rapidly, or if the Company is not able to keep pace with such advances, the
Company may face increased price competition from other manufacturers. Such
competition could materially adversely affect its results of operations.

         Worldwide disk drive shipments grew 30% in 1995 over 1994 and are
projected to grow approximately 30% in 1996 over 1995 according to International
Data Corporation ("IDC"). IDC forecasts that the annual rate of unit growth will
remain high, at about 20%, through 1999. In response to the continuing rapid
growth of the disk drive market and resulting strong demand for thin-film disk
products, a majority of the Company's competitors (both independent disk
manufacturers and vertically-integrated disk drive customers) have announced
substantial plans to increase disk manufacturing capacity. These significant
investments in new disk production capacity, coupled with slower market growth
for data storage, could reduce the number of potential customers and increase
competition for the remaining market. Such conditions could have a material
adverse affect on the Company's results of operations.

Volatility of Stock Price

         The Company's Common Stock has experienced and can be expected to
experience substantial price volatility in response to actual or anticipated
quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, developments
related to patents or other intellectual property rights, developments in the
Company's relationships with its customers or suppliers, announcements of
alliances, mergers or other relationships by or between the Company's
competitors and/or customers, and other events or factors. In addition, any
shortfall or changes in revenue, gross margins, earnings, or other financial
results from analysts' expectations could cause the price of the Company's
Common Stock to fluctuate significantly. In recent years the stock market in
general has experienced extreme price and volume fluctuations which have
particularly affected the market price of many technology companies and which
have often been unrelated to the operating performance of those companies. These
broad market fluctuations may adversely affect the market price of the Company's
Common Stock. See "Price Range of Common Stock".

Other Risk Factors

         The Company relies on a limited number of suppliers, in some cases a
sole supplier, for certain materials used in its manufacturing processes. These
materials include aluminum substrates, nickel plating solutions, sputtering
target materials, and certain polishing and texturing supplies. These suppliers
work closely with the Company to optimize the Company's production processes.
Although this reliance on a limited number of suppliers, or 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 would be
adversely affected.

         The Company's California manufacturing facilities, its Japanese joint
venture (AKCL), its Japanese supplier of aluminum blanks for substrate
production, other Japanese suppliers of key manufacturing supplies, and its
Japanese supplier of sputtering machines are each located in areas with seismic
activity. The Company has incurred no significant disruptions to its business
due to seismic activity. However, there can be no assurance that seismic
activity or other natural disasters will not result in a prolonged disruption of
production in the future. Such disruptions could have a material adverse affect
on the Company's results of operations.



                                       15

<PAGE>   16
ITEM 2.  PROPERTIES.

         Worldwide (excluding AKCL), the Company currently occupies facilities
totaling approximately 813,000 square feet and has 775,000 square feet of
manufacturing facilities currently under construction. The Company owns a
340,000 square foot thin-film disk manufacturing facility in Penang, Malaysia on
a 13-acre site and the Company's headquarters, research and development,
manufacturing, and sales facilities are located in leased buildings in the
cities of Milpitas, San Jose, and Santa Rosa, California. These facilities are
leased for the following terms:

<TABLE>
<CAPTION>
                 FACILITY SIZE              CURRENT LEASE
                 (SQUARE FEET)              TERM EXPIRES                     EXTENSION OPTIONS
<S>              <C>                        <C>                              <C>
                    103,000                     July 1999                        10 years
                     97,000                 February 2001                        10 years
                     96,000                 February 2001                        10 years
                     44,000                    April 1999                        10 years
                     39,000                    March 1997                          --
                     51,000                    March 1997                          --
</TABLE>

         In addition to the facilities listed above, the Company leases other
smaller facilities in California and Singapore. The Company owns approximately 6
acres of undeveloped land adjacent to its Milpitas manufacturing complex.

         The Company is currently constructing and equipping a 275,000 square
foot front end manufacturing plant on a 77-acre site in Kuching, the capital
city of the east Malaysian state of Sarawak. Production from this facility is
scheduled to commence in the first half of 1996. The Company is also
constructing a new 225,000 square foot back end disk manufacturing plant in San
Jose, California under a build-to-suit lease arrangement on a 14-acre parcel and
recently commenced construction of a new 275,000 square foot back end disk
manufacturing plant in Penang, Malaysia on a 18-acre site. The new back end
plants in San Jose and Penang should begin operations in the fourth quarter of
1996 and first quarter of 1997, respectively.

         In January 1996, the Board of Directors approved the construction
(under build-to-suit lease arrangements) of a new 178,000 square foot research
and development building and a new 90,000 square foot administrative building in
San Jose, California. These new buildings will be located on an 18-acre parcel
adjacent to the new San Jose manufacturing plant and will be ready for occupancy
in the first half of 1997.


ITEM 3.  LEGAL PROCEEDINGS.

         There are no material legal proceedings to which the Company or its
subsidiaries is a party or to which any of its property is subject.



                                       16
<PAGE>   17
ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.

         A Special Annual Meeting of Stockholder's was held on December 20, 1995
for the following purpose:

         To approve an amendment to the Company's Restated Certificate of
Incorporation to increase the authorized shares of Common Stock from 35,000,000
shares to 85,000,000 shares.

         Shares of Common Stock voted (on a post-split basis) were as follows:

                  For -- 43,549,324

                  Against -- 747,814

                  Abstain -- 291,768

                  Broker non-votes -- 5,837,866

EXECUTIVE OFFICERS OF THE REGISTRANT

         As of January 31, 1996 the executive officers of the Company are as
follows:

<TABLE>
<CAPTION>
NAME                                            AGE           POSITION
----                                            ---           --------
<S>                                             <C>           <C>
Tu Chen...................................       60           Chairman of the Board of Directors
Stephen C. Johnson........................       53           President, Chief Executive Officer and Director
Willard Kauffman..........................       60           Senior Vice President-Chief Operating Officer
Venche Kao................................       59           Vice President Manufacturing-Milpitas Operations
Kathryn A. McGann.........................       50           Vice President-Human Resources
Steven J. Miura...........................       43           Vice President-Quality and Product Integration
T. Hunt Payne.............................       53           Senior Vice President-Marketing and Sales
William L. Potts, Jr......................       49           Senior Vice President, Chief Financial Officer and
                                                                     Secretary
Thian Hoo Tan.............................       47           Vice President Manufacturing-Malaysian Operations
Sonny Wey.................................       54           Vice President-Engineering and R&D
William V. Whitmer........................       53           Vice President Manufacturing-U.S. Operations
Tsutomu T. Yamashita......................       41           Vice President-Research
</TABLE>

         Dr. Chen is a founder of the Company and has served as Chairman of the
Board from its inception in June 1983. From 1971 to June 1983 he was a Member,
Research Staff and principal scientist at Xerox Corporation's Palo Alto Research
Center. From 1968 to 1971 Dr. Chen was employed as a research scientist for
Northrop Corp. Dr. Chen received his Ph.D. and M.S. in Metallurgical Engineering
from the University of Minnesota and holds a B.S. degree in Metallurgical
Engineering from Cheng Kung University in Taiwan.

         Mr. Johnson has served as President and Chief Executive Officer of the
Company since September 1983. From 1977 to 1983 Mr. Johnson was an officer of
Boschert Incorporated, a manufacturer of switching power supplies, initially as
Vice President, Marketing and subsequently as President and Chief Executive
Officer. Mr. Johnson holds a B.S. degree in Engineering from Princeton
University, a M.S. degree in Electrical Engineering from the University of New
Mexico and a M.B.A. degree from the Harvard Graduate School of Business. Mr.
Johnson is a director of 3COM Corporation and Uniphase Corporation.



                                       17
<PAGE>   18
         Mr. Kauffman was appointed Senior Vice President-Chief Operating
Officer in February 1990. For three years prior to joining the Company, Mr.
Kauffman was Executive Vice President and Chief Operating Officer of Vitelic
Corporation. Prior to that he was employed at Intel Corporation for 16 years in
a variety of positions, including Vice President of Component Production and
Vice President of Component Quality. Mr. Kauffman holds B.S. and M.S. degrees in
Engineering Physics from Lehigh University.

         Dr. Kao was promoted to Vice President for Milpitas Manufacturing in
October 1993. Dr. Kao joined Komag in November 1983 as a manager of Operations
and was promoted to Director of Manufacturing in April 1988. Previously, Dr. Kao
was a Plant Manager at Tau Laboratory, Inc. in New York. Dr. Kao holds a Ph.D.
degree from Iowa State University where he majored in Electrical Engineering and
minored in Physics.

         Ms. McGann joined the Company as Vice President-Human Resources in
September 1988. From 1978 to 1981 and from 1985 to 1988 she was employed by
Transamerica Corporation in various human resource management positions. From
1981 to 1985, Ms. McGann was an area personnel manager and later a personnel
programs manager at Digital Equipment Corporation. Ms. McGann holds a B.A.
degree in Anthropology from the University of California at Berkeley and a
Masters degree in Public Administration from the University of Southern
California.

         Mr. Miura joined the Company in 1984 and was Director of Test
Engineering prior to his promotion to Vice President-Quality and Product
Integration in November 1991. Before joining Komag, Mr. Miura held various
engineering positions at IBM. Mr. Miura holds both B.S. and M.S. degrees in
electrical engineering from the University of California, Davis.

         Mr. Payne joined the Company in June 1985 and was Vice
President-Marketing and Sales prior to his promotion to Senior Vice
President-Marketing and Sales in January 1992. From November 1983 to June 1985
he was a founder and Vice President of Marketing for Domain Technology,
Incorporated. From 1981 to 1983 he served as Vice President of Sales for
ITT/Qume Corporation and prior to that served in several sales management
positions for Control Data Corporation.

         Mr. Potts joined the Company in 1987 and served as Vice President --
Chief Financial Officer from January 1991 until his promotion to Senior Vice
President -- Chief Financial Officer in January 1996. In addition Mr. Potts
serves as Secretary. Prior to joining Komag, Mr. Potts held financial management
positions at several high technology manufacturing concerns. He has also served
on the consulting staff of Arthur Andersen & Co. Mr. Potts holds a B.S. degree
in Industrial Engineering from Lehigh University and a M.B.A. degree from the
Stanford Graduate School of Business.

         Mr. Tan was appointed Vice President Manufacturing of Komag,
Incorporated in September 1993 and has served as the Managing Director of Komag
USA (Malaysia) Sdn., since February 1992. Previously, Mr. Tan was in charge of
operations at Komag's San Jose, California manufacturing facility. Before
joining Komag in 1989, Mr. Tan was Vice President of Operations at HMT
Technology. Mr. Tan holds a M.S. degree in Physics from University of Malaya at
Kuala Lumpur.

         Dr. Wey has served as Vice President-Engineering since April 1988 and
assumed his current responsibilities in January 1996. Dr. Wey joined the
Company in November 1983 and has held director positions in both engineering
and manufacturing. For 10 years prior to joining the Company, Dr. Wey worked in
various engineering and engineering management positions at IBM. Dr. Wey
received his Ph.D. in Physical Chemistry from the Illinois Institute of
Technology and holds a B.S. degree in Chemical Engineering from National
Chen-Kung University in Taiwan.



                                       18
<PAGE>   19
         Mr. Whitmer joined the Company as Vice President-Manufacturing in
December 1987. From 1972 to 1987, he held various positions with Raychem
Corporation including the General Manager of the Materials Division. Mr. Whitmer
holds a B.S. degree in Chemical Engineering from Ohio State University.

         Mr. Yamashita joined the Company in 1984 and was Senior Director of
Research prior to his promotion to Vice President-Research in January 1995.
Prior to joining the Company, Mr. Yamashita was a graduate research assistant in
the Department of Material Science and Engineering at Stanford University. Mr.
Yamashita holds a B.S. in Chemistry and M.S. in Materials Science from Stanford
University.


PART II

ITEMS 5, 6, 7 AND 8.

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

         The Company's Common Stock is traded on the Nasdaq National Market
under the symbol KMAG. The following table sets forth the range of high and low
closing sales prices, as reported on the Nasdaq National Market. At February 23,
1996 the Company had approximately 449 holders of record of its Common Stock and
50,832,767 shares outstanding. The share prices have been adjusted to reflect
the Company's two-for-one stock split effective December 21, 1995.

                                 PRICE RANGE OF
                                  COMMON STOCK

<TABLE>
<CAPTION>
                                                         HIGH         LOW
                                                         ----         ---
          <S>                                          <C>           <C>
          1994
              First Quarter                            13 13/16       7 7/8
              Second Quarter                           12 5/8         8 7/8
              Third Quarter                            13 1/4         9 5/8
              Fourth Quarter                           14 5/16       12 1/16
          1995
              First Quarter                            16 23/32      11 9/16
              Second Quarter                           26 1/8        15 7/8
              Third Quarter                            37 1/16       25 5/8
              Fourth Quarter                           34 3/8        21 15/16
          1996
              First Quarter (through February 23,      31 7/8        23
                   1996)
</TABLE>
     DIVIDEND POLICY

         The Company has never paid cash dividends on its Common Stock. The
Company presently intends to retain all cash for use in the operation and
expansion of the Company's business and does not anticipate paying any cash
dividends in the near future. Certain of Komag's debt agreements limit the
amount of dividend payments without the lenders' consent.



                                       19

<PAGE>   20
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.

<TABLE>
<CAPTION>
                                                                         Fiscal Year Ended
                                                 ----------------------------------------------------------------
                                                   1995          1994        1993 (1)        1992          1991
                                                 --------      --------      --------      --------      --------
                                                 (in thousands, except per share amounts and number of employees)
<S>                                              <C>           <C>           <C>           <C>           <C>
CONSOLIDATED STATEMENTS OF
   OPERATIONS DATA:
Net Sales                                        $512,248      $392,391      $385,375      $326,801      $279,194
Gross Profit                                      197,486       125,386        91,439        67,765        68,185
Restructuring Charge                                   --            --        38,956            --            --
Income (Loss) Before
   Minority Interests and Equity
   in Joint Venture Income                        101,410        54,156       (33,738)        4,263        14,314
Minority Interests in Net Income
   (Loss) of Consolidated
   Subsidiaries                                     1,957         1,091       (18,977)       (9,458)        1,025
Equity in Net Income of
   Unconsolidated Joint Venture                     7,362         5,457         4,860         3,172         2,070
Net Income (Loss)                                $106,815       $58,522       $(9,901)      $16,893       $15,359

Net Income (Loss) Per Share (2)                     $2.14         $1.27        $(0.23)        $0.40         $0.38


CONSOLIDATED BALANCE SHEET DATA:
Working Capital                                  $252,218      $118,230       $97,265       $97,894       $97,808
Net Property, Plant & Equipment                   329,174       228,883       187,267       192,051       120,904
Long-term Debt & Capital
   Lease Obligations (less current portion)            --        16,250        29,482        27,613        16,516
Stockholders' Equity                              574,564       331,215       255,331       248,738       202,077
Total Assets                                     $686,315      $424,095      $382,297      $355,849      $276,979

Number of Employees at Year-end                     2,915         2,635         3,497         3,090         2,637
</TABLE>


(1)      The results of operations for 1993 included a $39.0 million
         restructuring charge for the winding down of Dastek's inductive
         thin-film head operation. The net effect of the restructuring charge,
         after related minority interest and tax adjustments, was $35.4 million
         ($0.83 loss per share) for 1993.

(2)      The earnings per share amounts have been restated to reflect the
         two-for-one stock split effective December 21, 1995.

(3)      The Company paid no cash dividends during the five-year period.



                                       20
<PAGE>   21
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

OVERVIEW

         The Company's business is both capital intensive and volume sensitive,
making capacity planning and efficient capacity use imperative. Physical
capacity, utilization of this physical capacity, yields and average unit sales
price constitute the key determinants of the Company's profitability. Of these
key determinants, price and utilization are the most sensitive to changes in
product demand. If capacity and product price are fixed at a given level and
demand is sufficient to support a higher level of output, then increased output
attained through improved utilization rates and higher manufacturing yields will
translate directly into increased sales and improved gross margins.
Alternatively, if demand for the Company's products decreases, falling average
selling prices and lower capacity utilization could adversely affect the results
of the Company's operations.

         The following discussion contains predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties.
While this discussion represents the Company's current judgment on the future
direction of the business, such risks and uncertainties could cause actual
results to differ materially from any future performance suggested herein.
Factors that could cause actual results to differ include the following: product
transitions to next-generation products; effective utilization of existing
manufacturing facilities; continuation of improved manufacturing efficiencies;
industry supply-demand relationships and related pricing for high-end disk
products; execution of planned capacity additions; and vertical integration and
consolidations within a limited customer base. See "Business - Risk Factors" for
more detailed discussions of the Company's risk factors. The Company undertakes
no obligation to publicly release the result of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.

1995 VS. 1994

Net Sales

         Net sales for 1995 rose to $512.2 million, a 31% increase over the
$392.4 million reported in 1994. The combination of unit sales volume growth and
an increase in the overall average selling price resulted in the substantially
higher net sales. Nearly three-quarters of the improvement in net sales was
attributable to higher unit sales volume in 1995 relative to 1994. The overall
average selling price typically strengthens only as the result of product mix
shifts to higher-priced, more technologically advanced product offerings. Price
reductions for individual product offerings are characteristic of the thin-film
media industry. The Company began a rapid transition to its leading-edge 1800 Oe
product offering in the fourth quarter of 1994. Unit sales of this product
increased to 91% of unit sales volume in the fourth quarter of 1995 from 14% of
unit sales in the fourth quarter of 1994. The higher sales mix of 1800 Oe
product and a favorable pricing environment arising from an industry shortage of
this product allowed the overall average selling price to increase 7% in 1995
relative to 1994. The overall average selling price will likely trend downward
from the average selling price in the fourth quarter of 1995 due to a continuing
high proportion of 1800 Oe product sales during the first half of 1996. The
transition to higher-priced 2000 Oe products is expected to commence in the
second quarter of 1996 and such products could account for more than 50% of the
Company's sales during the fourth quarter of 1996. Any delay in the introduction
of these products could adversely affect the Company's results of operations.



                                       21
<PAGE>   22
         In addition to sales of its internally produced disk products, the
Company resells products manufactured by Asahi Komag Co., Ltd. ("AKCL"), its
Japanese joint venture with Asahi Glass Company, Ltd. Distribution sales of
product manufactured by AKCL decreased to $0.9 million in 1995 from $9.4 million
in 1994. The Company purchased smaller quantities of product from AKCL in 1995
as demand within the Japanese thin-film media market absorbed the majority of
AKCL's capacity. The Company anticipates that distribution sales of
AKCL-produced product to U.S. customers in 1996 will be minimal.

         Increased production volume may occur due to increased physical
capacity (additional production lines) and/or improvements in manufacturing
efficiencies (improved unit output from higher yields, better equipment
utilization or shorter process cycle times). The increase in unit production
volume required to support the increase in unit sales volume for 1995 relative
to 1994 was primarily achieved through the addition of production lines and
improvement in cycle times. Production yields and equipment utilization rates
were relatively unchanged between the years. Shortened process cycle times
accounted for nearly one-half of the increase in unit output in 1995 relative
to 1994. Net physical capacity additions provided the remaining increase in
unit production volume. The Company added one new sputtering machine in each of
January 1994, August 1994, March 1995 and September 1995. As of the end of the
year, the Company had a total of fifteen production lines, ten in the U.S. and
five in Malaysia. In late 1994, the Company began a program to upgrade its
sputtering machines to enhance product capabilities and shorten process cycle
times. The Company expects one U.S. machine will be out of production on a
rotating basis through 1996. The addition of two production lines in the first
and second quarters of 1996 and full use of the two production lines installed
during 1995 throughout 1996, coupled with expected efficiency improvements,
should allow unit output between 1995 and 1996 to grow approximately 35%.

Gross Margin

         The gross margin percentage for 1995 rose to 38.6%, up markedly from
the 32.0% gross margin achieved for 1994. The combination of the rapid
transition to 1800 Oe product in 1995, strong industry demand for this product,
and solid manufacturing performance produced this historically high gross margin
for the Company. The 7% increase in the overall average selling price accounted
for over two-thirds of the gross margin percentage improvement. Additionally,
process cycle time improvements allowed the Company to lower its overall average
unit cost of production despite the inherently higher costs of producing more
technologically advanced 1800 Oe products. The gross margin percentage increased
sequentially in each quarter of 1995 from 31.2% in the first quarter to 42.6% in
the fourth quarter of 1995 as the sales mix of 1800 Oe product increased and
market conditions for advanced thin-film media remained strong. The gross margin
achieved in the fourth quarter of 1995 was well above the Company's targeted
range and the Company anticipates that its quarterly gross margin percentage
will decline toward its targeted range of 33%-38% as the 1996 fiscal year
progresses. Continued focus on process improvement programs designed to increase
production throughput and reduce the overall average unit production cost should
reduce, but not eliminate, the impact of a decreasing overall average selling
price on the Company's gross margin in 1996. In spite of expected sequential
increases in quarterly unit output, reductions in the gross margin percentage
from the level achieved in the fourth quarter of 1995 will likely restrict
sequential earnings growth during 1996. However, the Company believes that its
1996 annual financial performance will compare favorably to that achieved for
fiscal year 1995.

Operating Expenses

         Research and development expenses increased 12% ($2.5 million) in 1995
relative to 1994. The increase was primarily due to development of improved
sputtering processes and next-generation thin-film media products. Selling,
general and administrative ("SG&A") expenses increased $17.5 million in 1995
compared to 1994. The increase was primarily due to a $13.5 million increase in
the provisions for the Company's bonus and profit sharing programs resulting
from the substantially higher operating performance in 1995. Provisions for bad
debt increased $1.5 million between the years. Excluding provisions for bad debt
and the Company's bonus and profit sharing programs, SG&A expenses



                                       22
<PAGE>   23
increased approximately $2.5 million between the years. Increases in
administrative costs required to support the growth in the business accounted
for the majority of the increase.

Interest Income/Expense and Other Income

         Interest income increased $2.5 million (76%) in 1995 relative to 1994.
The increase was due to the combination of higher interest rates and higher
average investment balances in 1995. The Company exited 1995 with $213.7 million
in cash and short-term investments compared to $93.9 million at the end of 1994.
Proceeds from the Company's third public offering in September 1995 and
significant cash flow provided by operations in 1995 allowed the Company to
maintain its higher average investment balances for 1995. Interest expense
decreased $1.1 million (37%) in 1995 compared to 1994 due to a lower average
outstanding debt balance for 1995. The Company repaid all of its existing
outstanding debt in September 1995 and exited the year with no bank debt. Other
income increased $2.1 million in 1995 relative to 1994 primarily due to receipt
of an insurance recovery related to an electrical power disruption at the
Company's Malaysian manufacturing facility.

Income Taxes

         The effective income tax rate for 1995 of 25% was lower than the 1995
combined federal and state statutory rate of 41% and the effective income tax
rate of 30% in 1994 primarily as a result of a tax holiday granted to the
Company's wholly-owned thin-film media operation in Malaysia. Komag USA
(Malaysia) Sdn. ("KMS") has been granted a five-year tax holiday by the
Malaysian government. Assuming the Company fulfills certain commitments under
its license to operate within Malaysia, this tax holiday may be extended for an
additional five-year period by the Malaysian government. The impact of the tax
holiday was to increase net income by approximately $11.5 million ($0.23 per
share) and $6.4 million ($0.14 per share) in 1995 and 1994, respectively. Losses
incurred prior to the commencement of the tax holiday, approximately $6.2
million, are available for carryforward to years following the expiration of the
tax holiday. The Company anticipates that the effective income tax rate for 1996
will decrease as KMS installs one additional sputtering machine in each of the 
first and second quarters of 1996 and generates a larger percentage of the 
Company's consolidated profit than in 1995.

Minority Interest in Consolidated Subsidiary/Equity in Unconsolidated Joint
Venture

         The minority interest in the net income of consolidated subsidiary
during 1995 represented Kobe Steel USA Holdings Inc.'s ("Kobe USA") 45% share of
Komag Material Technology, Inc.'s ("KMT") net income. KMT recorded net income of
$4.3 million and $2.4 million in 1995 and 1994, respectively. On December 28,
1995 the Company increased its ownership interest in KMT from 55% to 80% through
the purchase of KMT shares directly from Kobe USA for $6.75 million. Kobe USA
retained a 20% minority interest investment in KMT.

         The Company records 50% of AKCL's net income as equity in net income of
unconsolidated joint venture. AKCL reported net income of $14.7 million for
1995, up from $11.0 million for 1994. Equity in net income of AKCL contributed
7% of the Company's 1995 consolidated net income. The Company anticipates that
AKCL's equity income will account for a similar percentage of 1996 consolidated
net income. The Company translates AKCL's yen-based income statements to U.S.
dollars at the average exchange rate in effect during the year. The Japanese yen
strengthened approximately 6% in 1995 relative to 1994. AKCL's net income would
have been approximately $13.5 million in 1995 had the yen-based income statement
been translated at the average rate in effect for 1994.

         AKCL's net income in 1996 will be affected by the start-up costs
associated with a new manufacturing facility and the financial performance of
Headway Technologies, Inc. ("Headway"). AKCL began construction of a 225,000
square foot facility in Thailand for front end production of thin-film disks in
1995 and expects to begin production at this site in late 1996. AKCL invested in
Headway in 1994 and has been recording partial writedowns of its investment
based upon net losses incurred at 



                                       23
<PAGE>   24
Headway. AKCL's net income reflected writedowns, net of tax, of $2.2 million and
$0.5 million in 1995 and 1994, respectively. To the extent that such losses
continue, AKCL will record a portion of those losses. Alternatively, AKCL will
record a portion of Headway's net income, if any, to the extent of previously
recognized losses.

Other

         The Company operates facilities in the U.S. and Malaysia and ships
products to both domestic and international locations. In order to minimize the
risks associated with foreign currency fluctuations, the Company denominates its
sales in U.S. dollars and periodically enters into foreign exchange contracts to
hedge firm purchase commitments. The Company had approximately $17.1 million of
foreign exchange contracts outstanding at December 31, 1995. No such foreign
exchange contracts were open as of January 1, 1995. Gains and losses created by
the remeasurement of the financial statements of the Company's Malaysian
operations into U.S. dollars from Malaysian ringgits have not had a significant
effect on the consolidated results of operations.

         In 1995, the Company adopted Statement of Financial Accounting Standard
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed" ("FAS 121"). The adoption of FAS 121 did not have a
material impact on the Company's financial position or results of operations.
Beginning January 1, 1996, the Company will be required to adopt Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("FAS 123"). The Company plans to adopt only the disclosure requirements of the
Statement and, as such, the adoption of FAS 123 will have no impact on the
Company's financial position or results of operations.


1994 VS. 1993

         The Company's consolidated results of operations for 1994 represent the
Company's thin-film media operations exclusively. In contrast, results of
operations for 1993 consolidate the operating results of the Company's thin-film
media operations and Dastek, Inc. ("Dastek"), the Company's thin-film head joint
venture with Asahi Glass America, Inc. ("Asahi America"). In the fourth quarter
of 1993, the Company recorded a $39.0 million restructuring charge related to
the cessation of Dastek's inductive thin-film head operations, which was
effected during 1994. Approximately one-half of the restructuring charge
provided for estimates of losses to be incurred during the 1994 wind down of
Dastek's operations. The remaining charge primarily represented reductions of
assets and liabilities to their estimated net realizable value. Actual operating
losses incurred in 1994 were approximately one-third higher than estimated in
the 1993 restructuring charge. However, net losses from the sale of Dastek's
assets and the settlement of its liabilities were lower by a comparable amount.



                                       24
<PAGE>   25
         Excluding Dastek's results of operations and the related restructuring
charge, income statements for the Company were as follows for 1994 and 1993:

<TABLE>
<CAPTION>

(in thousands)                                Fiscal Year Ended
                                           ------------------------
                                             1994            1993
                                           --------        --------
<S>                                       <C>             <C>
Net sales                                  $392,391        $334,542
Cost of sales                               267,005         225,086
                                           --------        --------
    Gross profit                            125,386         109,456
Research, development and engineering        21,340          17,867
Selling, general and administrative          27,101          24,488
                                           --------        --------
    Operating income                         76,945          67,101
Interest income                               3,306           2,674
Interest expense                             (2,933)         (4,038)
Other income, net                                48             606
    Income before taxes, minority 
     interest and equity in joint          --------        --------
     venture income                          77,366          66,343
Provision for income taxes                   23,210          24,825
Minority interest in net income         
  of consolidated subsidiary                  1,091             499
Equity in income of
  unconsolidated joint venture                5,457           4,860
                                           --------        --------
    Net income                             $ 58,522        $ 45,879
                                           ========        ========
</TABLE>
 

         The following discussion compares the results of operations for 1994
vs. 1993, excluding the results of Dastek, as presented above.

Net Sales

         Unit sales of thin-film media increased nearly 40% in 1994 relative to
1993. The effect on thin-film media revenue from this substantial increase in
unit sales volume was reduced by a 16% decrease in the overall average unit
selling price between the years. In 1994, the Company began a transition to more
advanced 1800 Oe product offerings. The transition to this new disk product was
more challenging and required more time than previous product transitions. As a
result of the more lengthy product transition time, the effects of traditionally
declining prices for individual product offerings reduced the overall average
selling price between the years. Distribution sales of product manufactured by
AKCL decreased to $9.4 million in 1994 from $17.1 million in 1993. The Company
purchased smaller quantities of product from AKCL in 1994 as demand within the
Japanese thin-film media market absorbed more of AKCL's capacity.

         The increase in unit production volume required to support the increase
in unit sales volume for 1994 relative to 1993 was primarily achieved through a
combination of higher manufacturing throughput, increased physical capacity, and
improved production yields and utilization rates. Improvements in manufacturing
throughput, primarily due to shortened sputter cycle times, and physical
capacity additions each accounted for approximately 40% of the increased unit
production volume. Improvements in yields and utilization rates accounted for
the remaining increase in unit production volume.



                                       25
<PAGE>   26
Gross Margin

         The thin-film media gross margin percentage decreased to 32.0% for 1994
from 32.7% for 1993. Excluding distribution sales of product manufactured by
AKCL for resale to the Company's customers, the gross margin percentage
decreased to 32.7% from 34.1% between the years. The substantial decrease in the
overall average selling price outpaced solid improvements in the average unit
production cost and resulted in the lower gross margin percentage for 1994.
Manufacturing efficiencies, such as reduced cycle times and yield and
utilization improvements, were the primary drivers in reducing the average unit
production cost.

Operating Expenses

         Research, development and engineering expenses increased $3.5 million
in 1994 compared to 1993. The increase between the years was mainly due to
development costs for advanced thin-film media, including costs associated with
the Company's thin-film media pilot production line. Selling, general and
administrative expenses increased $2.6 million in 1994 relative to 1993,
primarily due to higher provisions for the Company's bonus and profit sharing
programs resulting from the higher operating profitability for the Company's
thin-film media operations.

Interest Income/Expense and Other Income

         Interest income increased $0.6 million in 1994 relative to 1993. The
increase was due to the combination of higher interest rates and higher average
investment balances in 1994. Interest expense decreased $1.1 million. In 1993,
the Company reversed previously capitalized interest related to the construction
of its thin-film media manufacturing facility in Malaysia, thus increasing 1993
interest expense. Excluding this reversal, interest expense decreased $0.2
million primarily due to a lower average outstanding debt balance for 1994.
Other income, net decreased $0.6 million in 1994 mainly due to higher losses on
disposal of equipment in 1994 relative to 1993.

Income Taxes

         The effective income tax rate for 1994 of 30% was lower than the
effective income tax rate of 37% in 1993 primarily as a result of a tax holiday
granted to the Company's wholly-owned thin-film media operation in Malaysia.
Komag USA (Malaysia) Sdn. has been granted a five-year tax holiday by the
Malaysian government. The impact of the tax holiday was to increase net income
by approximately $6.4 million ($0.14 per share) in 1994.

Minority Interest in Consolidated Subsidiary/Equity in Unconsolidated Joint
Venture

         The minority interest in the net income of consolidated subsidiary
represented Kobe USA's 45% share of KMT's net income. KMT recorded net income of
$2.4 million and $1.1 million in 1994 and 1993, respectively.

         The equity in net income of unconsolidated joint venture reflected the
Company's 50% interest in AKCL's net income. AKCL reported net sales and net
income of $131.3 million and $11.0 million for 1994, up from $119.4 million and
$9.8 million for 1993. AKCL's functional currency is the Japanese yen. The
Company translates AKCL's yen-based income statements to U.S. dollars at the
average exchange rate in effect for each quarterly period. The Japanese yen
strengthened approximately 8% in 1994 relative to 1993. AKCL's net income would
have been approximately $10.0 million in 1994 had the yen-based income statement
been translated at the average rate in effect for 1993.



                                       26
<PAGE>   27
LIQUIDITY AND CAPITAL RESOURCES

         Consolidated cash and short-term investments of $213.7 million at the
end of 1995 increased substantially from $93.9 million at the end of 1994.
Consolidated operating activities generated $188.8 million in cash during 1995
and more than funded the Company's $166.5 million of capital spending during the
year. Sales of Common Stock under the Company's stock option and stock purchase
programs during 1995 generated $10.8 million, while scheduled repayments of
long-term obligations used $9.7 million. In September 1995, the Company raised
$122.1 million (net of underwriting commissions and expenses) through a public
offering of 3.5 million shares of the Company's Common Stock. The Company used
$19.8 million of the proceeds from the stock offering to repay all of its
long-term debt.

         Total capital expenditures for 1996 are currently planned at
approximately $350 million. Construction and fit up of three new manufacturing
facilities are the major components of the capital plan. The Company is nearing
completion of a 275,000 square foot facility for the front end stages of its
manufacturing process in Sarawak, Malaysia and expects to begin production at
this site in the second quarter of 1996. Two back end factories are currently
under construction in San Jose, California and Penang, Malaysia. The San Jose
factory is approximately 225,000 square feet and the Penang factory is
approximately 275,000 square feet. The Company plans to begin production at the
new San Jose and Penang facilities in late 1996 and early 1997, respectively.
Additionally, the Company expects to begin construction of a 178,000 research
and development facility and a 90,000 square foot administration building in
1996 for occupancy in the first half of 1997. Current noncancellable commitments
total approximately $165.0 million.

         The Company believes that, in order to achieve its long-term expansion
objectives and maintain and enhance its competitive position, it will need
additional financing over the next several years for capital expenditures,
working capital, and research and development. During the two-year period of
1996 and 1997, the Company expects to spend approximately $750 million to
construct new facilities and add production equipment at its new and existing
facilities. Assuming a continued strong operating performance, the Company
expects to fund its 1996 capital expenditures through a combination of cash
flow from operations, its cash balances, and funds available from its
unutilized $140 million credit facilities. However, new debt or equity
financing will likely be required to fund a portion of capital expenditures in
1997. If the Company is unable to obtain sufficient capital it could be
required to reduce its capital equipment and research and development
expenditures which could have a material adverse effect on the Company's
results of operations.



                                       27
<PAGE>   28
ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS

                               KOMAG, INCORPORATED

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           Page
<S>                                                                     <C>
Report of Ernst & Young LLP, Independent Auditors                            29
Consolidated Statements of Operations
     1995, 1994 and 1993                                                     30
Consolidated Balance Sheets, 1995 and 1994                                31-32
Consolidated Statements of Cash Flows
     1995, 1994 and 1993                                                  33-34
Consolidated Statements of Stockholders' Equity,
     1995, 1994 and 1993                                                     35
Notes to Consolidated Financial Statements                                36-47

</TABLE>

                                       28
<PAGE>   29
                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


The Board of Directors and Stockholders
Komag, Incorporated

         We have audited the accompanying consolidated balance sheets of Komag,
Incorporated as of December 31, 1995 and January 1, 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. Our audits also
included the financial statement schedule 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 did not audit the financial
statements of Asahi Komag Co., Ltd. (a corporation in which the Company has a
50% interest) as of December 31, 1995 and January 1, 1995, and for each of the
three years in the period ended December 31, 1995. Those financial statements
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to data included for Asahi Komag Co., Ltd. as of
December 31, 1995 and January 1, 1995, and for each of the three years in the
period ended December 31, 1995, is based solely on the report of the other
auditors.

         We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of other auditors provide a reasonable
basis for our opinion.

         In our opinion, based on our audits and the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Komag, Incorporated at December
31, 1995 and January 1, 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.




                                                              ERNST & YOUNG LLP


San Jose, California
January 17, 1996



                                       29
<PAGE>   30
                               KOMAG, INCORPORATED
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                        Fiscal Year Ended
                                                               ---------------------------------
                                                                 1995         1994        1993
                                                               --------     --------    --------
<S>                                                            <C>          <C>         <C>
Net sales (see Note 13)                                        $512,248     $392,391    $385,375
Cost of sales (see Notes 12 and 13)                             314,762      267,005     293,936
                                                               --------     --------    --------
        Gross profit                                            197,486      125,386      91,439

Operating expenses:
   Research, development and engineering                         23,804       21,340      29,641
   Selling, general and administrative                           44,598       27,101      28,165
   Restructuring charge                                              --           --      38,956
                                                               --------     --------    --------
                                                                 68,402       48,441      96,762

                                                               --------     --------    --------
        Operating income (loss)                                 129,084       76,945      (5,323)

Other income (expense):
    Interest income                                               5,802        3,306       2,915
    Interest expense                                             (1,856)      (2,933)     (5,510)
    Other, net                                                    2,189           48         605
                                                               --------     --------    --------
                                                                  6,135          421      (1,990)

                                                               --------     --------    --------
        Income (loss) before income taxes, minority
          interests and equity in joint venture income          135,219       77,366      (7,313)

Provision for income taxes                                       33,809       23,210      26,425
                                                               --------     --------    --------
        Income (loss) before minority interests and equity
          in joint venture income                               101,410       54,156     (33,738)
Minority interests in net income (loss) of
   consolidated subsidiaries                                      1,957        1,091     (18,977)
Equity in net income of unconsolidated joint venture              7,362        5,457       4,860

                                                               --------     --------    --------
        Net income (loss)                                      $106,815      $58,522     $(9,901)
                                                               ========     ========    ========


Net income (loss) per share                                       $2.14        $1.27      $(0.23)
                                                               ========     ========    ========

Number of shares used in per share computation                   49,905       45,994      42,744
                                                               ========     ========    ========
</TABLE>


                 See notes to consolidated financial statements.



                                       30
<PAGE>   31
                               KOMAG, INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                      Fiscal Year End
                                                                 -------------------------
                                                                   1995             1994
                                                                 --------         --------
<S>                                                              <C>              <C>
ASSETS

Current Assets
   Cash and cash equivalents                                      $14,879          $22,664
   Short-term investments                                         198,799           71,284
   Accounts receivable, less allowances of $4,279 in 1995
      and $2,223 in 1994                                           61,660           44,564
   Accounts receivable from related parties                         5,034              214
   Inventories:
      Raw materials                                                20,213           15,030
      Work-in-process                                               7,431            5,652
      Finished goods                                                1,377            3,419
                                                                 --------         --------
         Total inventories                                         29,021           24,101
   Prepaid expenses and deposits                                    5,196            1,611
   Deferred income taxes                                            8,569            7,069
                                                                 --------         --------
          Total current assets                                    323,158          171,507


Investment in Unconsolidated Joint Venture                         30,143           22,653


Property, Plant and Equipment
   Land                                                             5,268            4,360
   Building                                                        38,357           33,322
   Leasehold improvements                                          51,088           45,633
   Furniture                                                        6,118            4,711
   Equipment                                                      443,011          294,626
                                                                 --------         --------
                                                                  543,842          382,652
    Less allowances for depreciation and amortization            (214,668)        (153,769)
                                                                 --------         --------
            Net property, plant and equipment                     329,174          228,883


Deposits and Other Assets                                           3,840            1,052



                                                                 --------         --------
                                                                 $686,315         $424,095
                                                                 ========         ========
</TABLE>



                                       31
<PAGE>   32
<TABLE>
<CAPTION>
                                                                 Fiscal Year End
                                                              ----------------------
                                                                1995          1994
                                                              --------      --------


<S>                                                           <C>           <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
    Trade accounts payable                                     $28,717       $17,842
    Accounts payable to related parties                          7,761         2,354
    Accrued compensation and benefits                           31,966        17,913
    Other liabilities                                            2,096         1,665
    Income taxes payable                                           400           271
    Current portion of long-term debt                               --        13,232
                                                              --------      --------
            Total current liabilities                           70,940        53,277

Long-term Debt, Less Current Portion                                --        16,250

Deferred Income Taxes                                           37,643        18,725

Other Long-term Liabilities                                        474           548

Minority Interest in Consolidated Subsidiary                     2,694         4,080

Commitments

Stockholders' Equity
   Preferred Stock, $0.01 par value per share:
       Authorized--1,000 shares in 1995
           and 1994
       No shares issued and outstanding                             --            --
   Common Stock, $0.01 par value per share:
       Authorized--85,000 shares in 1995
           and 35,000 in 1994
       Issued and outstanding--50,714 shares
           in 1995 and 45,803 shares in 1994                       507           458
   Additional paid-in capital                                  374,399       238,033
   Retained earnings                                           193,605        86,790
   Accumulated translation adjustment                            6,053         5,934
                                                              --------      --------
           Total stockholders' equity                          574,564       331,215

                                                              --------      --------
                                                              $686,315      $424,095
                                                              ========      ========
</TABLE>


                See notes to consolidated financial statements.



                                       32
<PAGE>   33
                               KOMAG, INCORPORATED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                          Fiscal Year Ended
                                                                                --------------------------------------
                                                                                  1995          1994            1993
                                                                                --------      --------        --------
<S>                                                                             <C>           <C>             <C>
OPERATING ACTIVITIES
Net cash provided by operating activities--
   see detail on following page                                                 $188,792       $97,517         $40,752

INVESTING ACTIVITIES
Acquisition of property, plant and equipment                                    (166,450)     (102,435)        (86,249)
Purchase of subsidiary shares from minority interest holder                       (6,750)           --              --
Purchases of short-term investments                                             (177,993)      (86,402)        (80,900)
Proceeds from short-term investments                                              50,478        90,518          86,200
Proceeds from disposal of equipment                                                  916        12,072             416
Deposits and other assets                                                            113           983             (72)
                                                                                --------      --------         -------
               Net cash used in investing activities                            (299,686)      (85,264)        (80,605)

FINANCING ACTIVITIES
Increase in notes payable                                                             --         1,500          19,000
Payments of notes payable                                                             --        (4,500)             --
Increase in long-term obligations                                                     --            --          20,000
Payments of long-term obligations                                                (29,482)      (14,505)         (9,488)
Sale of Common Stock, net of issuance costs                                      132,871        12,037           6,826
Minority interest investment in consolidated subsidiary                               --            --          11,031
Distribution to minority interest holder                                            (280)         (280)             --
                                                                                --------      --------         -------
               Net cash provided by (used in) financing activities               103,109        (5,748)         47,369

                                                                                --------      --------         -------
Increase (decrease) in cash and cash equivalents                                  (7,785)        6,505           7,516

Cash and cash equivalents at beginning of year                                    22,664        16,159           8,643

                                                                                --------      --------         -------
               Cash and cash equivalents at end of year                          $14,879       $22,664         $16,159
                                                                                --------      --------         -------
</TABLE>



                                       33
<PAGE>   34
<TABLE>
<CAPTION>
                                                                        Fiscal Year Ended
                                                               ---------------------------------
                                                                 1995         1994         1993
                                                               --------     --------     -------
<S>                                                            <C>          <C>          <C>
Net income (loss)                                              $106,815      $58,522     $(9,901)
Adjustments to reconcile net income (loss) to net cash
     provided by operating activities:
         Depreciation and amortization                           65,483       47,591      49,025
         Provision for losses on accounts receivable              1,519         (195)       (191)
         Undistributed earnings of unconsolidated
            joint venture                                        (7,362)      (5,457)     (4,860)
         Loss on disposal of equipment                              508        1,156         757
         Restructuring charge                                        --           --      38,956
         Deferred income taxes                                   17,418        8,709       2,030
         Deferred rent                                              (74)          (7)        (43)
         Minority interests in net income (loss) of
            consolidated subsidiaries                             1,957        1,091     (18,977)
         Changes in operating assets and liabilities:
             Accounts receivable                                (18,615)      (1,649)     (7,284)
             Accounts receivable from related parties            (4,820)          73        (175)
             Inventories                                         (4,920)       6,981     (10,885)
             Prepaid expenses and deposits                       (2,811)       1,419          (4)
             Trade accounts payable                              10,875       (4,923)      2,404
             Accounts payable to related parties                  5,407       (1,072)     (3,828)
             Accrued compensation and benefits                   14,053        1,344       1,959
             Other liabilities                                      431         (809)      1,817
             Income taxes payable                                 2,928          630         (48)
             Restructuring liability                                 --      (15,887)         --
                                                               ---------     -------     -------
               Net cash provided by operating activities       $188,792      $97,517     $40,752
                                                               ========      ========    =======


Supplemental disclosure of cash flow information
      Cash paid for interest                                     $2,204       $2,892      $3,865
      Cash paid for income taxes                                 13,463       12,937      24,310
      Income tax benefit from stock
           options exercised                                      3,582        2,851       1,703
</TABLE>


                See notes to consolidated financial statements.



                                       34
<PAGE>   35
                               KOMAG, INCORPORATED
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                 Common Stock        Additional                                       Accumulated
                                                ---------------        Paid-in           Note          Retained       Translation
                                                Shares   Amount        Capital        Receivable       Earnings       Adjustment
                                                ------   ------      ----------       ----------       --------       -----------
<S>                                             <C>      <C>         <C>              <C>              <C>            <C>
BALANCE AT JANUARY 3, 1993                      42,162    $422        $219,175         $(11,031)        $38,169         $2,003

Collection of note receivable                                           (4,412)          11,031
Common Stock issued under stock
   option and purchase plans, including
   related tax benefits                          1,370      14           8,404
Net loss                                                                                                 (9,901)
Accumulated translation adjustment                                                                                       1,457
                                                ------    ----        --------         --------        --------         ------
BALANCE AT JANUARY 2, 1994                      43,532     436         223,167               --          28,268          3,460

Common Stock issued under stock
   option and purchase plans, including
   related tax benefits                          2,268      22          14,865
Common Stock issued upon exercise
   of stock warrants                                 3                       1
Net income                                                                                               58,522
Accumulated translation adjustment                                                                                       2,474
                                                ------    ----        --------         --------        --------         ------

BALANCE AT JANUARY 1, 1995                      45,803     458         238,033               --          86,790          5,934

Common Stock issued under stock
   option and purchase plans, including
   related tax benefits                          1,411      14          14,298
Sale of Common Stock, net of
   issuance costs                                3,500      35         122,068
Net income                                                                                              106,815
Accumulated translation adjustment                                                                                         119
                                                ------    ----        --------         --------        --------         ------

BALANCE AT DECEMBER 31, 1995                    50,714    $507        $374,399         $     --        $193,605         $6,053
                                                ======    ====        ========         ========        ========         ======
</TABLE>


                 See notes to consolidated financial statements.



                                       35


<PAGE>   36
                                                            

                               KOMAG, INCORPORATED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation: The consolidated financial statements include the
accounts of the Company, its wholly-owned and majority-owned subsidiaries (see
Notes 11 and 12) and equity in its unconsolidated joint venture (see Note 13).
All significant intercompany accounts and transactions have been eliminated in
consolidation.

Foreign Currency Translation: The functional currency of the Company's
unconsolidated joint venture is the Japanese yen. Translation adjustments
relating to the translation of these statements are included as a separate
component of stockholders' equity and not included in net income. The functional
currency for the Company's Malaysian operation is the U.S. dollar. Remeasurement
gains and losses, resulting from the process of remeasuring these foreign
currency financial statements into U.S. dollars, are included in operations.

Foreign Exchange Gains and Losses: The Company enters into foreign currency
forward exchange contracts to reduce the impact of currency fluctuations on firm
purchase order commitments for equipment and construction-in-process. Gains and
losses related to these contracts are included in the cost of the assets
acquired. The Company had approximately $17,125,000 in foreign exchange
contracts outstanding at December 31, 1995. The fair market value of these
foreign exchange contracts was not materially different from the contract value
at December 31, 1995. There were no foreign exchange contracts outstanding at
January 1, 1995. The Company had approximately $358,000 and $9,000,000 of
unhedged Japanese yen based firm purchase commitments at December 31, 1995 and
January 1, 1995, respectively.

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. Short-term investments consist primarily of
AAA-rated, municipal auction rate preferred stock. None of the Company's debt
security investments have maturities greater than one year. At December 31, 1995
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:

<TABLE>
<CAPTION>
                                                             DEC 31        Jan 1
(in thousands)                                                 1995         1995
                                                           --------     --------
<S>                                                        <C>          <C>     
Municipal auction rate preferred stock                     $198,636     $ 70,765
Corporate debt securities                                     3,062        2,417
Mortgage-backed securities                                   19,462       10,677
                                                           --------     --------
                                                           $221,160     $ 83,859
                                                           ========     ========

Amounts included in cash and cash equivalents              $ 22,361     $ 12,575
Amounts included in short term investments                  198,799       71,284
                                                           --------     --------
                                                           $221,160     $ 83,859
                                                           ========     ========
</TABLE>


                                       36
<PAGE>   37
There were no realized gains or losses on the Company's investments during 1995
as all investments were held to maturity during the year. 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.

Property, Plant and Equipment: Property, plant and equipment, except
construction-in-process, 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 30 years. Furniture and equipment are generally depreciated over 3
to 5 years and leasehold improvements are amortized over the shorter of the
lease term or the useful life.

Revenue Recognition: The Company records sales upon shipment and provides an
allowance for estimated returns of defective products.

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

Income Taxes: The provision for income taxes is based on pretax financial
accounting income. Deferred tax assets and liabilities are recognized for the
expected tax consequences of temporary differences between the tax and book
basis of assets and liabilities.

Income (Loss) Per Share: Income per share has been computed using the weighted
average number of shares of Common Stock and dilutive common stock equivalents
outstanding during the period. Common stock equivalents include shares issuable
upon the assumed exercise of options reflected under the treasury stock method.
Loss per share has been computed using the weighted average number of shares of
Common Stock outstanding during the period.

Reclassifications: Certain reclassifications have been made to the 1994
Consolidated Balance Sheet, the 1994 and 1993 Statements of Cash Flows, and the
related notes to conform to the current year's presentation.

Fiscal Year: The Company uses a 52-53 week fiscal year ending on the Sunday
closest to December 31. The years ended December 31, 1995, January 1, 1995 and
January 2, 1994 were each comprised of 52 weeks.

Stock Split: The Company effected a two-for-one stock split of its outstanding
Common Stock effective December 21, 1995. Earnings per share and share amounts
for all periods in the consolidated financial statements have been restated to
reflect the split.

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


NOTE 2.  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 sells to original equipment manufacturers in the rigid
disk drive market and computer system manufacturers that produce their own disk
drives.



                                       37
<PAGE>   38
Summary information for the Company's operations by geographic location is as
follows:

<TABLE>
<CAPTION>
                                               1995        1994         1993
                                            ---------    ---------    ---------
                                                       (in thousands)
<S>                                         <C>          <C>          <C>      
Net sales
    To customers from U.S. operations       $ 344,218    $ 315,540    $ 369,683
    To customers from Far East operations     168,030       76,851       15,692
    Intercompany from Far East operations      25,123       16,881       25,806
    Intercompany from U.S. operations           6,683           --           --
                                            ---------    ---------    ---------
                                              544,054      409,272      411,181
    Eliminations                              (31,806)     (16,881)     (25,806)
                                            ---------    ---------    ---------
    Total net sales                         $ 512,248    $ 392,391    $ 385,375
                                            =========    =========    =========
Operating income (loss)
    U.S. operations                         $  55,696    $  48,265    $   7,460
    Far East operations                        67,559       25,080      (13,458)
                                            ---------    ---------    ---------
                                              123,255       73,345       (5,998)
    Eliminations                                5,829        3,600          675
                                            ---------    ---------    ---------
    Total operating income (loss)           $ 129,084    $  76,945    $  (5,323)
                                            =========    =========    =========
Identifiable assets
    U.S. operations                         $ 573,006    $ 387,907    $ 342,192
    Far East operations                       201,915      124,048       89,354
                                            ---------    ---------    ---------
                                              774,921      511,955      431,546
    Eliminations                              (88,606)     (87,860)     (49,249)
                                            ---------    ---------    ---------
    Total identifiable assets               $ 686,315    $ 424,095    $ 382,297
                                            =========    =========    =========
</TABLE>

Export sales by domestic operations included the following:

<TABLE>
<CAPTION>
                                                     Fiscal Year Ended
                                            -----------------------------------
                                               1995        1994         1993
                                            ---------    ---------    ---------
                                                       (in thousands)
<S>                                         <C>          <C>          <C>      
Far East (see Note 13)                      $ 151,000    $ 133,574    $ 180,844
Europe                                             --        1,258       20,950
</TABLE>



                                       38
<PAGE>   39
NOTE 3.  CONCENTRATION OF CUSTOMER AND SUPPLIER RISK

The Company performs ongoing credit evaluations of its customers' financial
conditions and generally requires no collateral. Significant customers accounted
for the following percentages of net sales in 1995, 1994 and 1993:

<TABLE>
<CAPTION>
                                               Fiscal Year Ended
                                   -------------------------------------------
                                       1995           1994            1993
                                   ------------   ------------    ------------
<S>                                <C>            <C>             <C>
Seagate Technology, Inc.                     42%            40%             24%
Quantum Corporation                          23%            23%             15%
Hewlett-Packard Company                      15%            21%             21%
Western Digital Corporation                  12%            12%   less than 10%
Conner Peripherals, Inc.           less than 10%  less than 10%             11%
</TABLE>

In February 1996, Seagate and Conner merged. Net sales to Seagate and Conner on
a combined basis were 44%, 40% and 35% in 1995, 1994 and 1993, respectively. In
addition, Quantum recently announced that it would cease disk drive production
in Milpitas, California and Penang, Malaysia and contract with its Japanese
manufacturing partner, Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE")
to manufacture its drives. Asahi Komag Co. Ltd. ("AKCL"), the Company's Japanese
joint venture, has an established working relationship with MKE and MKE has
remained AKCL's largest customer for the past several years. The Company's
Malaysian subsidiary recently began shipments to MKE's new Singapore
manufacturing facility. However, there can be no assurance that MKE will
purchase from either the Company or AKCL the unit quantities of product which
the Company previously supplied to Quantum in the U.S. and Malaysia.

Kobe Steel, Ltd. ("Kobe") supplies aluminum substrate blanks to Komag Material
Technology, Inc. ("KMT"), and the Company in turn purchases KMT's entire output
of finished substrates. The Company also purchases substantial quantities of
finished substrates from Kobe in addition to the substrates purchased from KMT.
In combination, KMT and Kobe supply in excess of 85% of the Company's substrate
requirements. 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,
sputtering target materials and certain polishing and texturing supplies. These
suppliers work closely with the Company to optimize the Company's production
processes. Although this reliance on a limited number of suppliers, or 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 would be adversely affected.


NOTE 4.  STOCKHOLDERS' EQUITY

In 1995, the Company raised $122,100,000 from the sale of 3,500,000 shares of
Common Stock in a follow-on public stock offering. In December 1995, the
stockholders approved an increase in the number of shares of Common Stock
authorized for issuance to 85,000,000.


                                       39
<PAGE>   40
NOTE 5.  STOCK OPTION PLANS AND STOCK PURCHASE PLAN

Under the Company's stock option plans ("Plans"), options to purchase up to
12,760,000 shares of Common Stock may be granted to key employees and directors.
The Plans provide for issuing both incentive stock options, which must be
granted at fair market value at the date of grant, and non-qualified stock
options, which may be granted at not less than 85% of fair market value at the
date of grant. Outstanding options generally vest over 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.
Approximately 17,000 and 11,000 shares of the Company's Common Stock were
received in exchange for option exercises in 1995 and 1994, respectively. No
such exchange occurred in 1993. At December 31, 1995 approximately 543,000
options were available for grant and 5,571,000 shares of Common Stock were
reserved for future issuance under these Plans. At December 31, 1995 and January
1, 1995 approximately 1,487,000 and 1,283,000, respectively, of the outstanding
options were exercisable.

Under an option plan for employees of Dastek, Inc. ("Dastek"), a former joint
venture of the Company (see Note 11), options to purchase 2,000,000 shares of
the Company's Common Stock were authorized and reserved for issuance. At
December 31, 1995, 560,000 options had been exercised and no options were
exercisable or outstanding under the Dastek plan. No additional options will be
granted under the Dastek plan due to the cessation of Dastek's operations.

A summary of stock option transactions is as follows:

<TABLE>
<CAPTION>
                                          Shares    Exercise Price       Total
                                          ------    ---------------    --------
                                                 (in thousands, except
                                                   per share amounts)
<S>                                      <C>        <C>                <C>   
Outstanding at January 3, 1993             5,671    $ 0.49 - $10.88    $ 35,770
    Granted                                1,883      7.75 -  12.00      18,701
    Exercised                               (842)     0.49 -   9.25      (3,787)
    Cancelled                               (330)     0.49 -  10.88      (2,490)
                                          ------    ---------------    --------

Outstanding at January 2, 1994             6,382      0.49 -  12.00      48,194
    Granted                                1,382      7.88 -  13.38      12,551
    Exercised                             (1,811)     0.49 -  12.00      (9,850)
    Cancelled                             (1,254)     2.17 -  12.00     (10,728)
                                          ------    ---------------    --------

Outstanding at January 1, 1995             4,699      2.90 -  13.38      40,167
    Granted                                1,479     11.63 -  35.94      24,528
    Exercised                               (997)     2.90 -  12.94      (7,174)
    Cancelled                               (153)     2.90 -  25.63      (1,567)
                                          ------    ---------------    --------
Outstanding at December 31, 1995           5,028    $3.13 - $ 35.94    $ 55,954
                                          ======    ===============    ========
</TABLE>

In January 1996 the Company's Board of Directors approved an increase of
3,000,000 in the total number of shares of Common Stock that may be issued under
the Komag Stock Option Plan. The increase is subject to stockholder approval.

Under the terms of the Employee Stock Purchase Plan, employees may elect to
contribute up to 10% of their compensation toward the purchase of shares of the
Company's Common Stock. The purchase price 


                                       40
<PAGE>   41
per share will be the lesser of 85% of the fair market value of the stock on the
first day of enrollment in a twenty-four month offering period or the last day
of each semi-annual period within the twenty-four month offering period. The
total number of shares of stock that may be issued under the Plan cannot exceed
2,800,000 shares. Shares issued under this plan approximated 431,000, 469,000
and 528,000 in 1995, 1994 and 1993, respectively. At December 31, 1995
approximately 398,000 shares of Common Stock were reserved for future issuance
under this Plan.

Beginning January 1, 1996, the Company will be required to adopt Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("FAS 123"). The Company plans to adopt only the disclosure requirements of the
Statement and, as such, the adoption of FAS 123 will have no impact on the
Company's financial position or results of operations.


NOTE 6.  BONUS AND PROFIT SHARING PLANS

The Company and its subsidiaries maintain various cash profit sharing plans.
Under the terms of the cash profit sharing plans, a percentage of semi-annual
operating profit, as defined in the plans, is allocated among all employees who
meet certain criteria. Under the terms of the Company's bonus plans, various
percentages of an operating unit's annual operating profit, as defined in the
respective bonus plans, is paid to eligible employees. The Company expensed
$19,990,000, $9,083,000 and $8,084,000 under these bonus and cash profit sharing
plans in 1995, 1994 and 1993, 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
contributes four percent of semi-annual consolidated operating profit, as
defined in the plans. These contributions are allocated to all eligible
employees. Furthermore, the Company matches a portion of the employee's
contributions to the plans up to a maximum amount. The Company contributed
$6,653,000, $4,081,000 and $2,207,000 to the plans in 1995, 1994 and 1993,
respectively.

Expenses for the Company's bonus and profit sharing plans are included in
selling, general and administrative expenses.



                                       41
<PAGE>   42
NOTE 7.  INCOME TAXES

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                   Fiscal Year Ended
                                      -----------------------------------------
                                        1995             1994            1993
                                      --------         --------        --------
                                                    (in thousands)
<S>                                   <C>              <C>             <C>     
Federal:
       Current                        $ 16,496         $ 13,482        $ 22,863
       Deferred                         14,830            4,437          (4,515)
                                      --------         --------        --------
                                        31,326           17,919          18,348
State:
       Current                          (1,284)             264           1,339
       Deferred                          2,588            4,272           6,580
                                      --------         --------        --------
                                         1,304            4,536           7,919
Foreign:
       Current                           1,179              755             158
                                      --------         --------        --------

                                      $ 33,809         $ 23,210        $ 26,425
                                      ========         ========        ========
</TABLE>

The foreign provision above consists of withholding taxes on royalty and
interest payments and foreign taxes of subsidiaries.

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

<TABLE>
<CAPTION>
                                                            Fiscal Year End
                                                       ------------------------
                                                         1995            1994
                                                       --------        --------
                                                             (in thousands)
<S>                                                    <C>             <C>      
Depreciation                                           $ (7,284)       $ (8,384)
State income taxes                                       (7,295)         (5,016)
Deferred income                                         (13,588)         (1,323)
Other                                                    (9,476)         (4,002)
                                                       --------        --------
Gross deferred tax liabilities                          (37,643)        (18,725)
                                                       --------        --------

Inventory valuation adjustments                           1,578           1,675
Accrued compensation and benefits                         2,270           2,466
State income taxes                                          901           1,636
Other                                                     3,820           1,292
Tax benefit of net operating losses                      34,789          33,600
                                                       --------        --------
Gross deferred tax assets                                43,358          40,669
                                                       --------        --------

Deferred tax asset valuation allowance                  (34,789)        (33,600)
                                                       --------        --------

                                                       $(29,074)       $(11,656)
                                                       ========        ========
</TABLE>

As of December 31, 1995 a 60%-owned subsidiary of the Company, Dastek Holding
Company, has a federal tax net operating loss carryforward of approximately
$99,000,000. The Company has fully reserved for the potential future federal tax
benefit of this net operating loss in the deferred tax asset 



                                       42
<PAGE>   43
valuation allowance due to the fact that its utilization is limited to the
subsidiary's separately computed future taxable income and that the subsidiary
has no history of operating profits. The deferred tax asset valuation allowance
increased $1,189,000, $7,308,000 and $11,719,000 in fiscal years 1995, 1994 and
1993, respectively. The $99,000,000 net loss expires at various dates through
2010.

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:

<TABLE>
<CAPTION>
                                                             Fiscal Year Ended
                                                     --------------------------------
                                                       1995        1994        1993
                                                     --------    --------    --------
                                                              (in thousands)
<S>                                                  <C>         <C>         <C>      
Income taxes computed at federal statutory rate      $ 47,327    $ 27,078    $ (2,560)
State and foreign income taxes, net of federal tax
    benefit                                               868       2,961       5,290
Tax-exempt interest income                             (1,434)       (827)       (723)
Permanently reinvested foreign earnings               (12,634)     (6,473)         --
Domestic losses unavailable for offset in
    consolidated return or carryback                       --          --      21,141
Certain foreign losses not currently utilized              --          --       5,429
Write-off of investments in subsidiaries                   --          --      (2,295)
Other                                                    (318)        471         143
                                                     --------    --------    --------
                                                     $ 33,809    $ 23,210    $ 26,425
                                                     ========    ========    ========
</TABLE>

Foreign pretax income (loss) was $65,903,000, $23,882,000 and ($15,511,000) in
1995, 1994 and 1993, respectively.

Komag USA (Malaysia) Sdn., the Company's wholly-owned thin-film media operation
in Malaysia, has been granted a tax holiday for a period of five years
commencing in July 1993. Assuming the Company fulfills certain commitments under
its license to operate within Malaysia, this tax holiday may be extended for an
additional five-year period by the Malaysian government. The impact of this tax
holiday was to increase net income by approximately $11,500,000 ($0.23 per
share) and $6,400,000 ($0.14 per share) in 1995 and 1994, respectively. Losses
incurred prior to the commencement of the tax holiday, approximately $6,237,000,
are available for carryforward to years following the expiration of the tax
holiday.

The Company has generated $76,800,000 of earnings for which no U.S. tax has been
provided. These earnings are considered to be permanently invested outside the
United States.


NOTE 8.  TERM DEBT AND LINE OF CREDIT

The Company had no long-term debt outstanding at December 31, 1995. Notes
payable, primarily to banks, totaled approximately $29,482,000 at January 1,
1995. The notes bore interest at various LIBOR and Eurodollar rates plus 1.375%.
The Company used $19,800,000 of the proceeds from its September 1995 public
offering to repay its remaining notes payable.

The Company's credit facilities total $140,000,000 and are comprised of three
four-year term line of credit agreements. These agreements each expire in
December 1999 but may be extended, subject to bank approvals, annually for an
additional year, thus perpetuating their four-year terms. The entire
$140,000,000 under these unsecured credit facilities remains available.



                                       43
<PAGE>   44
The Company's credit facilities require maintenance of certain financial ratios
and compliance with covenants that limit the amount of dividend payments without
the lenders' consents.


NOTE 9.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash and short-term investments, accounts receivable and
certain other liabilities on the Consolidated Balance Sheets approximate fair
value at December 31, 1995 and January 1, 1995 due to the relatively short
period to maturity of the instruments.


NOTE 10.  LEASES AND COMMITMENTS

The Company leases most of its production facilities under operating leases that
expire at various dates between 1996 and 2006. Certain of these leases include
renewal options varying from five to ten years.

At December 31, 1995 the future minimum commitments for all non-cancellable
operating leases are as follows (in thousands):

<TABLE>
<S>                                                        <C>    
          1996                                             $ 4,809
          1997                                               5,495
          1998                                               5,378
          1999                                               4,564
          2000                                               3,692
          Thereafter                                        12,241
                                                           -------
          Total minimum lease payments                     $36,179
                                                           =======
</TABLE>

Rental expense for all operating leases amounted to $4,212,000, $4,319,000 and
$5,471,000 in 1995, 1994 and 1993, respectively.

The Company has current non-cancellable capital commitments of approximately
$165,037,000.


NOTE 11.  DASTEK HOLDING COMPANY

In December 1991 the Company completed a merger with Dastek, Inc. ("Dastek"), a
manufacturer of thin-film magnetic recording heads for use in hard disk drives.
In February 1992 the Company formed a joint venture to produce and market
thin-film magnetic recording heads with Asahi Glass America, Inc. ("Asahi
America"), a U.S. subsidiary of Asahi Glass Co., Ltd. of Japan. Under the joint
venture agreement, the Company contributed to the joint venture both the stock
of Dastek and the assets of its existing thin-film head development program.
Asahi America in turn contributed to the joint venture nearly $60,000,000 in
cash and notes. The notes were paid to the joint venture in 1992 and 1993. Based
on these contributions, the Company and Asahi America obtained interests in the
joint venture of 60% and 40%, respectively. During 1993 the Company and a
subsidiary of Asahi America loaned the Dastek joint venture an additional
$24,000,000 and $16,000,000, respectively.

These loans were revalued to their estimated settlement amounts in late 1993 as
a result of the restructuring of the thin-film head operations. In December 1993
the Company recorded a one-time charge of $38,956,000 as a result of Dastek's
decision to exit the inductive thin-film head business. The net impact of the
restructuring charge, after related minority interest and income tax
adjustments, was $35,389,000 


                                       44
<PAGE>   45
($0.83 loss per share for the year ended January 2, 1994). Approximately
one-half of the restructuring charge related to the reduction of assets and
liabilities to net realizable value. The remaining portion provided for
estimated operating losses to be incurred during the completion of existing
customer orders and the wind down of Dastek's operations. Dastek ceased its
inductive thin-film head operations, sold its equipment at various public
auctions, settled with its creditors and was legally dissolved prior to the end
of 1994. Based upon the results of these actual shutdown activities, no
significant adjustment was required to the aggregate restructuring charge
recorded in 1993. Actual operating losses incurred in 1994 were approximately
one-third higher than estimated in the 1993 restructuring charge. However, net
losses from the sale of Dastek's assets and the settlement of its liabilities
were lower by a comparable amount.


NOTE 12.  KOMAG MATERIAL TECHNOLOGY, INC.

The Company's financial statements include the consolidation of the financial
results of Komag Material Technology, Inc. ("KMT"), which manufactures and sells
aluminum disk substrate products for high-performance magnetic storage media.
KMT was owned 55% by the Company and 45% by Kobe Steel USA Holdings Inc. ("Kobe
USA"), a U.S. subsidiary of Kobe Steel, Ltd. ("Kobe") from November 1988 to
December 1995. On December 28, 1995 the Company increased its ownership of KMT
to 80% through the purchase of KMT Common Stock directly from Kobe USA for
$6,750,000. Kobe USA retained a 20% minority interest investment in KMT.

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

<TABLE>
<CAPTION>
                                                       Fiscal Year Ended
                                                --------------------------------
                                                  1995        1994        1993
                                                --------    --------    --------
                                                         (in thousands)
<S>                                             <C>         <C>         <C>     
Accounts payable to Kobe or its distributors:
    Balance at beginning of year                $  2,234    $  2,728    $  2,636
        Purchases                                 34,478      34,657      33,098
        Payments                                 (33,410)    (35,151)    (33,006)
                                                --------    --------    --------
           Balance at end of year               $  3,302    $  2,234    $  2,728
                                                ========    ========    ========
</TABLE>

 
NOTE 13.  UNCONSOLIDATED JOINT VENTURE

In 1987 the Company formed a partnership, Komag Technology Partners
("Partnership"), with the U.S. subsidiaries of two Japanese companies and
simultaneously formed a subsidiary, Asahi Komag Co., Ltd. ("AKCL"). The Company
contributed technology in exchange for a 50% interest in the Partnership, and
the subsidiaries of the Japanese companies contributed approximately 1.5 billion
yen (approximately $11 million) in exchange for a 50% interest in the
Partnership. The Partnership then contributed all the cash and licensed the
technology to AKCL in exchange for all of its stock and a limited royalty of 5%
of product produced and sold by AKCL. The Partnership and its subsidiary (joint
venture) established a facility in Japan to manufacture and sell the Company's
thin-film media products in Japan. AKCL also sells its products to the Company
for resale outside of Japan.

The Company's share of the joint venture's net income was $7,362,000, $5,457,000
and $4,860,000 in 1995, 1994 and 1993, respectively. Royalty income ceased in
1992 upon reaching its contractual limit.



                                       45
<PAGE>   46
Other transactions between the joint venture and the Company were as follows:

<TABLE>
<CAPTION>
                                                           Fiscal Year Ended
                                                  ----------------------------------
                                                    1995         1994         1993
                                                  --------     --------     --------
                                                            (in thousands)
<S>                                               <C>          <C>          <C>     
     Accounts receivable from joint venture:
         Balance at beginning of year             $     96     $    227     $     92
             Sales                                  21,224        1,375          990
             Cash receipts                         (16,414)      (1,506)        (855)
                                                  --------     --------     --------
                Balance at end of year            $  4,906     $     96     $    227
                                                  --------     --------     --------

     Accounts payable to joint venture:
         Balance at beginning of year             $     46     $    592     $  4,572
             Purchases                               5,460        9,752       16,259
             Payments                               (5,151)     (10,298)     (20,239)
                                                  --------     --------     --------
                Balance at end of year            $    355     $     46     $    592
                                                  ========     ========     ========
</TABLE>

Equipment purchases by the Company from its joint venture partners were
$18,195,000, $11,571,000 and $4,998,000 in 1995, 1994 and 1993, respectively.

Summary combined financial information for the Partnership and AKCL for the
years ended December 31, 1995, 1994 and 1993, and as of December 31, 1995 and
1994 is as follows. The subsidiary's total assets, liabilities, revenues, costs
and expenses approximate 100% of the combined totals.

<TABLE>
<CAPTION>
                                                           Fiscal Year Ended
                                                 ------------------------------------
                                                   1995          1994          1993
                                                 --------      --------      --------
                                                            (in thousands)
<S>                                              <C>           <C>           <C>     
     Summarized Income Statements:
     Net sales                                   $173,177      $131,335      $119,447
     Costs and expenses                           143,766       109,674        99,596
     Provision for income taxes                    14,687        10,626        10,094
                                                 --------      --------      --------
                        Net Income               $ 14,724      $ 11,035      $  9,757
                                                 ========      ========      ========
</TABLE>

<TABLE>
<CAPTION>
                                                                   Fiscal Year End
                                                               ----------------------
                                                                 1995          1994
                                                               --------      --------
                                                                   (in thousands)
<S>                                                            <C>           <C>     
     Summarized Balance Sheets:   
     Current assets                                            $ 52,302      $ 32,328
     Noncurrent assets                                           99,765        76,124
                                                               --------      --------
        Total Assets                                           $152,067      $108,452
                                                               ========      ========

     Current liabilities                                       $ 71,811      $ 39,677
     Long-term obligations                                       10,412        14,079
     Partners' capital                                           69,844        54,696
                                                               --------      --------
        Total Liabilities and Partners' Capital                $152,067      $108,452
                                                               ========      ========
</TABLE>


                                       46
<PAGE>   47
NOTE 14.  PARTICIPATION IN HEADWAY TECHNOLOGIES, INC.

The Company has a voting interest in Headway Technologies, Inc. ("Headway").
Headway was formed in 1994 to research, develop and manufacture advanced
magnetoresistive ("MR") heads for the data storage industry. Hewlett-Packard
Company ("HP") and AKCL (see Note 13) provided the initial cash funding to
Headway in exchange for equity interests. The Company and Asahi America licensed
to Headway MR technology developed by Dastek and contributed certain research
and production equipment in exchange for equity. As a result of these
transactions the Company holds a direct voting interest in Headway of less than
20%. The Company has no cost basis in its investment in Headway. Consequently,
operating results at Headway do not directly affect the Company's earnings. The
Company has not guaranteed any obligation of Headway and is not otherwise
committed to provide financial support to Headway.

AKCL invested in Headway in 1994 and has been recording partial writedowns of
its investment based upon net losses incurred at Headway. AKCL's net income
reflected writedowns, net of tax, of $2,200,000 and $500,000 in 1995 and 1994,
respectively. To the extent that such losses continue, AKCL will record a
portion of those losses. Alternatively, AKCL will record a portion of Headway's
net income, if any, to the extent of previously recognized losses.


NOTE 15.  QUARTERLY SUMMARIES
(in thousands except per share amounts, unaudited)

<TABLE>
<CAPTION>
                                                  1995
                        --------------------------------------------------------
                        1st Quarter    2nd Quarter    3rd Quarter    4th Quarter
                        -----------    -----------    -----------    -----------
<S>                      <C>            <C>            <C>            <C>     
Net sales                $105,063       $120,807       $132,835       $153,543
Gross profit               32,767         46,020         53,322         65,377
Net income                 14,880         23,361         30,399         38,175
                                                                    
Net income per share     $   0.31       $   0.48       $   0.61       $   0.72
</TABLE>
                                                                    

<TABLE>
<CAPTION>
                                                 1994
                        --------------------------------------------------------
                        1st Quarter    2nd Quarter   3rd Quarter     4th Quarter
                        -----------    -----------   -----------     -----------
<S>                       <C>            <C>            <C>            <C>    
Net sales                 $97,701        $97,774        $98,172        $98,744
Gross profit               32,888         29,897         31,570         31,031
Net income                 15,444         13,954         15,015         14,109
                                                                   
Net income per share      $  0.34        $  0.31        $  0.33        $  0.30
</TABLE>
                                                                   


                                       47
<PAGE>   48
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE.

         Not Applicable.

                                    PART III

ITEMS 10, 11, 12 AND 13.

         Items 10 through 13 of Part III will be contained in the Komag,
Incorporated Proxy Statement For the Annual Meeting of Stockholders to be held
May 14, 1996 (the "1996 Proxy Statement") which will be filed with the
Securities and Exchange Commission no later than April 29, 1996. The cross
reference table below sets forth the captions under which the responses to these
items are found:

<TABLE>
<CAPTION>
10-K Item        Description                                 Caption in 1996 Proxy Statement
---------        -----------                                 -------------------------------
<S>              <C>                                         <C>                      
10               Directors and Executive Officers            "Item No. 1--Election of Directors:
                                                                 Nominees; Business
                                                                 Experience of Directors and 
                                                                 Nominees" and "Additional
                                                                 Information: Certain
                                                                 Relationships and Related
                                                                 Transactions; Other Matters"

11               Executive Compensation                      "Additional Information: Executive
                                                                 Compensation and Related             
                                                                 Information"

12               Security Ownership of Certain Beneficial    "Additional Information: Principal
                     Owners and Management                       Stockholders"

13               Certain Relationships and Related           "Additional Information: Certain
                     Transactions                                Relationships and Related
                                                                 Transactions"
</TABLE>

         The information set forth under the captions listed above, contained in
the 1996 Proxy Statement, are hereby incorporated herein by reference in
response to Items 10 through 13 of this Report on Form 10-K.



                                       48
<PAGE>   49
                                     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 1995, 1994 and 1993
Consolidated Balance Sheets--December 31, 1995 and January 1, 1995 
Consolidated Statements of Cash Flows--Fiscal Years 1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity--Fiscal Years 1995, 1994 and
1993 
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

Report of Other Auditor
     --Report of Chuo Audit Corporation on Asahi Komag Co., Ltd.

         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.



                                       49
<PAGE>   50
         3.  EXHIBITS.

3.1               Amended and Restated Certificate of Incorporation.

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).

4.2               Specimen Stock Certificate (incorporated by reference from a 
                  similarly numbered exhibit filed with Amendment No. 1 to the
                  Registration Statement).

10.1.1            Lease Agreement dated May 24, 1991 between Milpitas-Hillview 
                  and Komag, Incorporated (incorporated by reference from
                  Exhibit 10.1.2 filed with the Company's report on Form 10-K
                  for the year ended December 29, 1991).

10.1.2            Lease Agreement dated May 24, 1991, between Milpitas-Hillview 
                  II and Komag, Incorporated (incorporated by reference from
                  Exhibit 10.1.3 filed with the Company's report on Form 10-K
                  for the year ended December 29, 1991).

10.1.3            Lease Agreement dated July 29, 1988 by and between Brokaw 
                  Interests and Komag Corporation (incorporated by reference
                  from Exhibit 10.1.6 filed with the Company's Report on Form
                  10-K for the year ended January 1, 1989).

10.1.4            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).

10.1.5            Amendment to Lease Agreement dated December 28, 1990 by and 
                  between Milpitas-Hillview II 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 30,
                  1990).

10.1.6            Second Amendment to Lease dated December 28, 1990 by and 
                  between Milpitas-Hillview 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 30,
                  1990).

10.1.7            First Amendment to Lease dated November 1, 1993 by and between
                  Wells Fargo Bank et al and Komag Material Technology, Inc.
                  (incorporated by reference from Exhibit 10.1.14 filed with the
                  Company's Report on Form 10-K for the year ended January 2,
                  1994).

10.1.8            Lease Agreement dated May 27, 1994 by and between Hillview I 
                  Partners and Komag, Incorporated (incorporated by reference
                  from Exhibit 10.1.16 filed with the Company's Report on Form
                  10-Q for the quarter ended July 3, 1994).

10.1.9            Lease Agreement dated August 4, 1995 by and between Great Oaks
                  Interests and Komag, Incorporated (incorporated by reference
                  from Exhibit 10.11.12 filed with Form 10-Q for the Quarter
                  ended October 1, 1995).

10.2              Form of Directors' Indemnification Agreement (incorporated by 
                  reference from Exhibit 10.9 filed with the Company's Report on
                  Form 10-K for the year ended December 30, 1990).

10.3.1            Joint Venture Agreement by and among Komag, Inc., Asahi Glass 
                  Co., Ltd., and Vacuum Metallurgical Company dated November 9,
                  1986, as amended January 7, 1987 and January 27, 1987
                  (incorporated by reference from Exhibit 10.10.1 filed with the


                                       50
<PAGE>   51
                  Registration Statement on Form S-1--File No. 33-13663)
                  (confidential treatment obtained as to certain portions).

10.3.2            General Partnership Agreement for Komag Technology Partners 
                  dated January 7, 1987 (incorporated by reference from Exhibit
                  10.10.2 filed with the Registration Statement on Form
                  S-1--File No. 33-13663).

10.3.3            Technology Contribution Agreement dated January 7, 1987 by and
                  between Komag, Incorporated and Komag Technology Partners
                  (incorporated by reference from Exhibit 10.10.3 filed with the
                  Registration Statement on Form S-1--File No. 33-13663)
                  (confidential treatment obtained as to certain portions).

10.3.4            Technical Cooperation Agreement dated January 7, 1986 by and 
                  between Asahi Glass Company, Ltd. and Komag, Incorporated
                  (incorporated by reference from Exhibit 10.10.4 filed with the
                  Registration Statement on Form S-1--File No. 33-13663).

10.3.5            Third Amendment to Joint Venture Agreement by and among Komag,
                  Inc., Asahi Glass Co., Ltd., Vacuum Metallurgical Company, et
                  al dated March 21, 1990 (incorporated by reference from
                  Exhibit 10.10.5 filed with the Company's Report on Form 10-K
                  for the year ended December 31, 1989).

10.3.6            Fourth Amendment to Joint Venture Agreement by and among 
                  Komag, Inc., Asahi Glass Co., Ltd., Vacuum Metallurgical
                  Company, et al dated May 24, 1990 (incorporated by reference
                  from Exhibit 10.10.11 filed with the Company's Report on Form
                  10-K for the year ended January 1, 1995).

10.3.7            Fifth Amendment to Joint Venture Agreement by and among Komag,
                  Inc., Asahi Glass Co., Ltd., Vacuum Metallurgical Company, et
                  al dated November 4, 1994 (incorporated by reference from
                  Exhibit 10.10.12 filed with the Company's Report on Form 10-K
                  for the year ended January 1, 1995).

10.3.8            Joint Venture Agreement dated March 6, 1989 by and between 
                  Komag, Incorporated, Komag Material Technology, Inc. and Kobe
                  Steel USA Holdings Inc. (incorporated by reference from
                  Exhibit 10.10.6 filed with the Company's Report on Form 10-K
                  for the year ended December 31, 1989) (confidential treatment
                  obtained as to certain portions).

10.3.9            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 a similarly
                  numbered exhibit 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.



                                       51
<PAGE>   52
10.3.13           Substrate Agreement by and between Kobe Steel, Ltd. and Komag,
                  Incorporated dated November 17, 1995 (filed on March 4, 1996
                  requesting confidential treatment as to certain portions;
                  incorporated herein by reference).

10.3.14           License Amendment Agreement among Komag, Incorporated, Komag 
                  Material Technology, Inc. and Kobe Steel, Ltd. dated November
                  17, 1995.

10.3.15           Substrate Sales Amendment Agreement among Komag, Incorporated,
                  Komag Material Technology, Inc. and Kobe Steel, Ltd. dated
                  November 17, 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 (filed on March 4, 1996
                  requesting confidential treatment as to certain portions;
                  incorporated herein by reference).

10.4.1            Restated 1987 Stock Option Plan, effective January 23, 1992 
                  and forms of agreement thereunder (incorporated by reference
                  from a similarly numbered exhibit filed with the Company's
                  report on Form 10-K for the year ended December 29, 1991).

10.4.2            Komag, Incorporated 1995 Management Bonus Plan (incorporated 
                  by reference from a similarly numbered exhibit filed with the
                  Company's Report on Form 10-K for the year ended January 1,
                  1995).

10.4.3            1988 Employee Stock Purchase Plan Joinder Agreement dated July
                  1, 1993 between Komag, Incorporated and Komag USA (Malaysia)
                  Sdn. (incorporated by reference from Exhibit 10.11.11 filed
                  with the Company's Report on Form 10-K for the year ended
                  January 2, 1994).

10.5.1            Komag, Incorporated Deferred Compensation Plan (incorporated 
                  by reference from a similarly numbered exhibit filed with the
                  Company's Report on Form 10-K for the year ended January 1,
                  1995).

10.5.2            Komag Material Technology, Inc. 1995 Stock Option Plan 
                  (incorporated by reference from Exhibit 10.11.12 filed with
                  Form 10-Q for the Quarter ended October 1, 1995).

10.6              Common Stock Purchase Agreement dated December 9, 1988 by and 
                  between Komag, Incorporated and Asahi Glass Co., Ltd.
                  (incorporated by reference from Exhibit 1 filed with the
                  Company's Report on Form 8-K filed with the Securities and
                  Exchange Commission on December 20, 1988).

10.7              Common Stock Purchase Agreement dated February 6, 1990 by and 
                  between Komag, Incorporated and Kobe Steel USA Holdings Inc.
                  (incorporated by reference from Exhibit 10.17 filed with the
                  Company's Report on Form 10-K for the year ended December 31,
                  1989).

10.8              Registration Rights Agreement dated March 21, 1990 by and 
                  between Komag, Incorporated and Kobe Steel USA Holdings Inc.
                  (incorporated by reference from Exhibit 10.18 filed with the
                  Company's Report on Form 10-K for the year ended December 31,
                  1989).

10.9              Amendment No. 1 to Common Stock Purchase Agreement dated March
                  21, 1990 by and between Komag, Incorporated and Asahi Glass
                  Co., Ltd. (incorporated by reference from Exhibit 10.19 filed
                  with Amendment No. 1 to the Registration Statement filed with
                  the Securities and Exchange Commission on May 26, 1987).



                                       52
<PAGE>   53
10.10             Amended and Restated Registration Rights Agreement dated March
                  21, 1990 by and between Komag, Incorporated and Asahi Glass
                  Co., Ltd. (incorporated by reference from Exhibit 10.20 filed
                  with Amendment No. 1 to the Registration Statement filed with
                  the Securities and Exchange Commission on May 26, 1987).

10.11             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).

10.12             Credit Agreement between Komag, Incorporated and First 
                  Interstate Bank of California-- Three Year Facility--dated
                  December 15, 1994 (incorporated by reference from Exhibit
                  10.24 filed with the Company's report on Form 10-K for the
                  year ended January 1, 1995).

10.13             Credit Agreement between Komag, Incorporated and First 
                  Interstate Bank of California-- One Year Facility--dated
                  December 15, 1994 (incorporated by reference from Exhibit
                  10.25 filed with the Company's report on Form 10-K for the
                  year ended January 1, 1995).

10.14             First Amendment to Credit Agreement--Three Year Facility--by 
                  and between Komag, Incorporated and First Interstate Bank of
                  California dated March 29, 1995.

10.15             Second Amendment to Credit Agreement--Three Year Facility--by 
                  and between Komag, Incorporated and First Interstate Bank of
                  California dated December 15, 1995.

10.16             Credit Agreement between Komag, Incorporated and The 
                  Industrial Bank of Japan, Limited, San Francisco Agency dated
                  December 15, 1995.

11.1              Computation of Income (Loss) per Share.

21                List of Subsidiaries.

23.1              Consent of Ernst & Young LLP.

23.2              Consent of Chuo Audit Corporation.

24                Power of Attorney. Reference is made to the signature pages of
                  this Report.

27                Financial Data Schedule.

-----------------
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.

         Not Applicable

UNDERTAKING

         For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the undersigned registrant hereby undertakes as follows:



                                       53
<PAGE>   54
         Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered on the Form S-8 identified
below, the registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.

         The preceding undertaking shall be incorporated by reference into
registrant's Registration Statements on Form S-8 Nos. 33-16625 (filed August 19,
1987), 33-19851 (filed January 28, 1988), 33-25230 (filed October 28, 1988),
33-41945 (filed July 29, 1991), 33-45469 (filed February 3, 1992), 33-53432
(filed October 16, 1992), 33-80594 (filed June 22, 1994), and 33-62543 (filed
September 12, 1995).



                                       54
<PAGE>   55
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 MILPITAS, CALIFORNIA ON
THIS 6TH DAY OF MARCH, 1996.

                                     Komag, Incorporated

                                          By    Stephen C. Johnson
                                            -------------------------
                                                   Stephen C. Johnson
                                          President and Chief Executive Officer









                                POWER OF ATTORNEY

         KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears herein constitutes and appoints Stephen C. Johnson and William L. Potts,
Jr., and each of them, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, 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.




                                       55
<PAGE>   56
         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:

<TABLE>
<CAPTION>
           Name                                  Title                                Date
<S>                                 <C>                                         <C>
  TU CHEN                           Chairman of the Board                       March 6, 1996
----------------------------          and Director
  (Tu Chen)


  STEPHEN C. JOHNSON                President, Chief Executive Officer          March 6, 1996
----------------------------
(Stephen C. Johnson)

 WILLIAM L. POTTS, JR.              Senior Vice President-Chief                 March 6, 1996
----------------------------          Financial Officer and Secretary
(William L. Potts, Jr.)               (Principal Financial and
                                      Accounting Officer)

  CRAIG R. BARRETT                  Director                                    February 23, 1996
----------------------------
  (Craig R. Barrett)

  CHRIS A. EYRE                     Director                                    March 6, 1996
----------------------------
  (Chris A. Eyre)

  IRWIN FEDERMAN                    Director                                    March 6, 1996
----------------------------
  (Irwin Federman)

  GEORGE A. NEIL                    Director                                    February 26, 1996
----------------------------
  (George A. Neil)

  MAX PALEVSKY                      Director                                    March 6, 1996
----------------------------
  (Max Palevsky)

  ANTHONY SUN                       Director                                    March 6, 1996
----------------------------
  (Anthony Sun)

  MASAYOSHI TAKEBAYASHI             Director                                    February 24, 1996
---------------------------
  (Masayoshi Takebayashi)

*By WILLIAM L. POTTS, JR.
   ------------------------
    (William L. Potts, Jr.,
      Attorney-in-Fact)
</TABLE>



                                       56
<PAGE>   57
ITEM 14(D) FINANCIAL STATEMENT SCHEDULES

                               KOMAG, INCORPORATED

                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
COL. A                                        COL. B        COL. C         COL. D           COL. E
------                                        ------        ------         ------           ------
                                                            ADDITIONS
                                              BALANCE AT    CHARGED TO                      BALANCE
                                              BEGINNING     COSTS AND                       AT END
DESCRIPTION                                   OF PERIOD     EXPENSES       DEDUCTIONS       OF PERIOD
-----------                                   ---------     --------       ----------       ---------
<S>                                           <C>           <C>            <C>              <C>
Year ended January 2, 1994
        Allowance for doubtful accounts       $ 1,917       $  (191)        $     44         $ 1,682
        Allowance for sales returns             1,344         3,163 (1)        2,632 (2)       1,875
                                              -------       -------         --------         -------
           Sub total                            3,261         2,972            2,676           3,557
        Restructuring liability (3)                --        38,956           23,069 (4)      15,887
                                              -------       -------         --------         -------
                                              $ 3,261       $41,928         $ 25,745         $19,444
                                              =======       =======         ========         =======

Year ended January 1, 1995
        Allowance for doubtful accounts       $ 1,682       $  (195)        $     --         $ 1,487
        Allowance for sales returns             1,875         2,146 (1)        3,285 (2)         736
                                              -------       -------         --------         -------
           Sub total                            3,557         1,951            3,285           2,223
        Restructuring liability (3)            15,887            --           15,887 (5)          --
                                              -------       -------         --------         -------
                                              $19,444       $ 1,951         $ 19,172         $ 2,223
                                              =======       =======         ========         =======

Year ended December 31, 1995
        Allowance for doubtful accounts       $ 1,487       $ 1,519         $     --         $ 3,006
        Allowance for sales returns               736         2,351 (1)        1,814 (2)       1,273
                                              -------       -------         --------         -------
                                              $ 2,223       $ 3,870         $  1,814         $ 4,279
                                              =======       =======         ========         =======
</TABLE>

     (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 was subsequently tested and shipped to another customer
         were netted directly against sales.
     (3) Relates to the restructuring of Dastek, Inc., the Company's thin-film 
         head joint venture. See Note 10 to the Consolidated Financial
         Statements.
     (4) Primarily represents reductions of assets and liabilities to their 
         estimated net realizable values.
     (5) Primarily represents operating losses incurred during the shutdown of 
         Dastek, Inc.




                                       57
<PAGE>   58
                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
Asahi Komag Co., Ltd.

     We have audited the accompanying consolidated balance sheet of Asahi Komag
Co., Ltd. and subsidiary as of December 31, 1995, and the related consolidated
statements of income, cash flows, and stockholder's equity for the year then
ended. We have also audited the accompanying balance sheet of Asahi Komag Co.,
Ltd. as of December 31, 1994, and the related statements of income, cash flows,
and stockholder's equity for each of the years in the two year period ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Headway Technologies, Inc., a company investment accounted for
using the equity method, which represents six percent of the Company's total
assets as of December 31, 1995. Those statements were audited by other auditors
whose report has been provided to us and our opinion, insofar as it relates to
the amounts included for Headway Technologies, Inc., is based solely on the
report of the other auditors.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. These 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 audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects
the consolidated financial position of Asahi Komag Co., Ltd. and subsidiary as
of December 31, 1995, and the consolidated results of its operations and its
cash flows for the year ended December 31, 1995, and the financial position of
Asahi Komag Co., Ltd. as of December 31, 1994 and the results of its operations
and its cash flows for each of the years in the two year period ended December
31, 1994 in conformity with generally accepted accounting principles applicable
in the United States of America.

     As discussed in Note 2b of the notes to the financial statements, the
Company reporting entity changed in 1995 as a result of the establishment of a
wholly owned subsidiary.

     The consolidated financial statements as of and for the year ended December
31, 1995 have been translated into United States Dollars solely for the
convenience of the reader. Our audit included the translation, and in our
opinion such translation has been made in accordance with the basis stated in
note 2g to the financial statements.

                             CHUO AUDIT CORPORATION

Tokyo, Japan
January 27, 1996




                                       58