##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended January 2, 2005                                                   
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from          to                                              

Commission file number 0-16852


Komag, Incorporated


(Exact name of registrant as specified in its charter)


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

1710 Automation Parkway, San Jose, California 95131


(Address of Principal Executive Offices, including Zip
Code)


Registrants telephone number, including area code:


(408) 576-2000


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


| |                     |  |                                           | 
| | ------------------- |  | ----------------------------------------- | 
| | Title of Each Class |  | Name of Each Exchange on Which Registered | 
| |                     |  |                                           | 
| | None                |  | None                                      | 

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


Common Stock, $0.01 par value


þ o


o


þ o






APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING


THE PRECEDING FIVE YEARS:


þ o


Documents Incorporated by Reference












---










KOMAG, INCORPORATED


TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K


|                 |  |                                                                                           |  |      |    | 
|---------------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|                 |  |                                                                                           |  | Page |   
|                 |  |                                                                                           |  |      |   
|Item 1.          |  | Business                                                                                  |  |      | 3  | 
|Item 2.          |  | Properties                                                                                |  |      | 21 | 
|Item 3.          |  | Legal Proceedings                                                                         |  |      | 21 | 
|Item 4.          |  | Submission of Matters to a Vote of Security
    Holders                                   |  |      | 21 | 
|Item 5.          |  | Market for Registrants Common Equity
    and Related Stockholder Matters                 |  |      | 23 | 
|Item 6.          |  | Selected Consolidated Financial Data                                                      |  |      | 24 | 
|Item 7.          |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations |  |      | 25 | 
|Item 7A.         |  | Quantitative and Qualitative Disclosures
    about Market Risk                            |  |      | 34 | 
|Item 8.          |  | Consolidated Financial Statements and
    Supplementary Data                              |  |      | 35 | 
|Item 9.          |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure  |  |      | 63 | 
|Item 9A.         |  | Controls and Procedures                                                                   |  |      | 63 | 
|Item 9B.         |  | Other Information                                                                         |  |      | 63 | 
|Item 10.         |  | Directors and Executive Officers                                                          |  |      | 64 | 
|Item 11.         |  | Executive Compensation                                                                    |  |      | 64 | 
|Item 12.         |  | Security Ownership of Certain Beneficial
    Owners and Management                        |  |      | 64 | 
|Item 13.         |  | Certain Relationships and Related
    Transactions                                        |  |      | 64 | 
|Item 14.         |  | Principal Accountant Fees and Services                                                    |  |      | 64 | 
|Item 15.         |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |  |      | 64 | 
|EXHIBIT 10.1.1.1
|EXHIBIT 10.7    
|EXHIBIT 10.8    
|EXHIBIT 10.8.1  
|EXHIBIT 10.9    
|EXHIBIT 10.9.1  
|EXHIBIT 10.10   
|EXHIBIT 10.11   
|EXHIBIT 21      
|EXHIBIT 23.1    
|EXHIBIT 31.1    
|EXHIBIT 31.2    
|EXHIBIT 32      



2



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##### Table of Contents



PART I


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS









|        |         
|------- | --------
|Item 1. | Business

General








Industry Background




| |                         
| | ------------------------
| | Disk Drive Market Growth



3



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| |   |                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increased demand for PCs with high storage capacities driven by
    consumer multi-media, broadband, and wireless applications,
    increased business usage, and an increased number of computers
    in developing economies;                                                           
|
| |  | increased demand for enterprise storage driven by a broader
    deployment of applications, which require significant storage
    capacity, such as enterprise software, data warehousing, data
    recovery, and data security operations;                                               
|
| |  | increased demand for new consumer electronic applications, which
    require significant digital data storage capability, including
    digital video and audio recorders, video game platforms,
    emerging high-definition television applications, and global
    positioning systems.



Disk Market


1 2 1 2








4



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##### Table of Contents



Competitive Strengths






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Leading Independent Disk Supplier. We have developed a
    deep understanding of market needs in the disk drive market and
    offer a broad portfolio of advanced solutions to address those
    needs. Additionally, we believe the scale of our manufacturing
    and our technology development programs provide us with
    competitive advantages in maintaining and growing our market
    share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Technology Leadership. We have been in the thin-film
    media business for over 20 years, during which time we have
    invested heavily in research and development. Our research,
    development, and engineering team has approximately 400
    employees in the United States and Malaysia, and is focused on
    developing next- generation products and efficient manufacturing
    processes. As a recent example of our success in technology
    innovation, 20% of our fourth quarter of 2004 shipments were 100
    GB and greater disks. Additionally, we believe we are currently
    a leader in developing next-generation technologies, such as
    PMR, to allow us to stay at the forefront of technology
    development in the disk industry. We believe our research and
    development strategy allows us to design and manufacture high
    volumes of advanced disks for our customers.                                                               
|
| |  | Strong Relationships With Top-Tier Disk Drive
    Manufacturers. We have developed strong relationships with
    many of the leading disk drive manufacturers, including HGST,
    Maxtor, Seagate, and Western Digital. Our San Jose,
    California headquarters and research and development operations
    are in close proximity to the design centers of many of the
    worlds largest disk drive manufacturers. Our ability to
    have our design teams work in such close proximity to our
    customers has, in part, facilitated the strong and collaborative
    customer relationships that we have established with these large
    disk drive manufacturers. We devote significant time working
    with our customers to produce disks that are highly specialized
    and customized for our customers particular technological
    requirements, and these close relationships provide added
    insight into our customers product and technology roadmaps.
|
| |  | Low-Cost Efficient Manufacturing Operations. We believe
    our manufacturing costs are among the lowest in our industry.
    Our manufacturing operations, all of which are located in
    Malaysia, are located in the same region as the manufacturing
    operations of many of the worlds largest disk drive
    manufacturers. We believe the location of our manufacturing
    operations, together with our experience in the industry and our
    economies of scale, provide us with timing and cost advantages
    in delivering consistently high-quality products to our
    customers in high volumes.                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Broad Range of Disk Products to Address Large and Emerging
    Markets. We provide a broad range of disk products that are
    incorporated into disk drives for desktop, enterprise and
    consumer electronics applications. Our primary market focus has
    been
    31/2-inch
    disks for the desktop and consumer electronic applications,
    which Dataquest estimates represented approximately 60% of the
    total disk drive market during the fourth quarter of 2004, and
    the majority of the highest volume business of our largest
    customers. As our customers pursue applications and products in
    other promising growth areas, such as the enterprise server,
    mobile and small form factor consumer electronics storage
    markets, we believe we are well positioned to meet their needs
    based on our ability to produce a wide range of products with
    varying areal densities and form factors.                                    

Strategy






| |   |                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maintain Technology Leadership. We intend to maintain and
    extend our technology leadership in the disk market by
    continuing to invest in leading-edge research and development.
    We intend to continue to focus our technology development
    efforts primarily on large and emerging market opportunities,

5



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | such as high-density storage for PCs, enterprise storage
    systems, communications infrastructure and consumer electronics
    appliances. We believe we have led the transition to SAF media
    for 80 GB and 100 GB per disk applications and are actively
    developing disks for our customers with up to 160 GB per disk.
    We will continue to develop PMR media, a next generation
    technology for improving areal density, and intend to continue
    to pursue new technologies such as PMR and discrete track
    recording (DTR) in an effort to achieve technological
    advantages over our competitors.                                                                                                                                                                                                                                     
|
| |  | Continue Improving Manufacturing Efficiency and Reducing
    Production Costs. We intend to continue improving the
    efficiency and quality of our manufacturing operations in
    Malaysia where we believe we can achieve lower costs than other
    disk manufacturers. We believe that our advanced manufacturing
    operations allow us to accelerate delivery of high volumes of
    reasonably priced disks, which enable our customers to rapidly
    introduce new products. As a leading independent disk supplier,
    we believe our highly experienced operations personnel can
    continue to drive yield improvements and reduce costs faster
    than our competitors. We believe our strategy of improving our
    manufacturing efficiency while reducing costs contributes to our
    customers success and will help grow our market share.
|
| |  | Leverage Collaborative Relationships with Disk Drive
    Manufacturers. We have established strong relationships with
    our customers, enabling us to participate in establishing
    technological and design requirements for new products. We
    believe that close technical collaboration with our customers
    and their other component suppliers during the design of our
    customers new disk drives facilitates integration of our
    disks, improves our ability to achieve cost-effective,
    high-volume manufacturing rapidly, and enhances the likelihood
    that we will remain a significant supplier of disks for
    high-performance disk drive products.                                                                                                                                                                             
|
| |  | Maintain a Diverse Customer Base. Our customers include
    HGST, Maxtor, Seagate, and Western Digital, which, according to
    Dataquest, together represented approximately 80% of all global
    disk drive sales during the fourth quarter of 2004. We continue
    to target additional high-volume disk drive manufacturers and
    believe that our combination of high-performance products and
    competitive pricing will enable us to further diversify our
    customer mix. In combination with offering a broad product mix
    to address multiple storage markets, we believe this strategy
    will reduce our dependence on the success of any one customer or
    market.                                                                                                                                                                       
|
| |  | Balance Capacity Growth with Customer Demand. Our
    strategy is to balance, in a cost-effective manner, our
    investments in new capacity with the expected growth in demand
    for our products. Our current production capacity is
    approximately 24 million disks a quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Technology










| |   |                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the minimum distance at which read/write heads can reliably pass
    over the surface of the disk to detect a change in magnetic
    polarity when reading from the disk, which is called flying
    height (measured in microinches, or millionths of an inch);

6



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| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the strength of the magnetic field required to change the
    polarity of a bit of data on the magnetic layer of a disk when
    writing, which is called coercivity; and
|
| |  | the ability of the head to discriminate a signal from background
    media noise, which is called the signal-to-noise ratio (SNR).                                       









Research, Development, and Engineering




1 2




Products and Customers




7



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1 2 1 2




1 2




Competition




Manufacturing










8



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



Environmental Regulation








9



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Patents and Proprietary Information








Employees






10



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##### Table of Contents



RISK FACTORS


These risks and uncertainties are not the only ones facing
our company. Additional risks and uncertainties that we are
unaware of or currently deem immaterial may also become
important factors that may harm our business. If any of the
following risks actually occur, or other unexpected events
occur, our business, financial condition, or results of
operations could be materially adversely affected, and the value
of our stock could decline. You should also refer to the other
information set forth in this report and incorporated herein by
reference, including our condensed consolidated financial
statements and the related notes. Further, this Form 10-K
contains forward-looking statements. Actual results may differ
significantly from the results contemplated by our
forward-looking statements.


Risks Related to Our Business




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





| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | If our production capacity is underutilized, our gross
    margin will be adversely affected and we could sustain
    significant losses.







| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If future demand for our products exceeds the production
    capability of our existing facilities, we may be required to
    invest significant capital expenditures to increase capacity or
    else risk losing market share.



11



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| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We receive a large percentage of our net sales from only a
    few disk drive manufacturing customers, the loss of any of which
    would adversely affect our sales.







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





| |                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We had a history of operating losses, and emerged from
    chapter 11 bankruptcy in 2002. Despite operating
    profitability during each of our eight most recent fiscal
    quarters, we cannot be assured that we will be able to maintain
    or improve our profitability in the future.



12



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| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Price competition may force us to lower our prices,
    causing our gross margin to suffer.





| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | Internal disk operations of disk drive manufacturers may
    adversely affect our ability to sell our disk products.





| |                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All of our manufacturing operations have been consolidated
    in Malaysia and our foreign operations and international sales
    subject us to additional risks inherent in doing business on an
    international level that make it more costly or difficult to
    conduct our business.





13



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| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | compliance with changing legal and regulatory requirements of
    foreign jurisdictions;                      
|
| |  | fluctuations in tariffs or other trade barriers;                                                              
|
| |  | foreign currency exchange rate fluctuations;                                                                  
|
| |  | difficulties in staffing and managing foreign operations;                                                     
|
| |  | political, social and economic instability;                                                                   
|
| |  | increased exposure to threats and acts of terrorism;                                                          
|
| |  | exposure to taxes in multiple jurisdictions;                                                                  
|
| |  | local infrastructure problems or failures including but not
    limited to loss of power and water supply; and
|
| |  | transportation delays and interruptions.                                                                      



| |                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to perform successfully in the highly
    competitive and increasingly concentrated disk industry, we may
    not be able to maintain or gain additional market share, and our
    operating results would be harmed.



14



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





| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our customers cancel orders, our sales could suffer and
    we are generally not entitled to receive cancellation penalties
    to offset the loss of sales revenue.





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



15



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| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not keep pace with the rapid technological change
    in the disk drive industry, we will not be able to compete
    effectively, and our operating results could suffer.

1 2




| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to improve the quality of, and control
    contamination in our manufacturing processes, we will lose our
    ability to remain competitive.





| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | An industry trend towards glass-based applications could
    negatively impact our ability to remain competitive.





| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | An industry trend towards glass-based applications could
    negatively impact our ability to remain competitive.



16



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





| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | If we do not protect our patents and other intellectual
    property rights, our revenues could suffer.





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





| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Historical quarterly results may not accurately predict
    our performance due to a number of uncertainties and market
    factors, and as a result it is difficult to predict our future
    results.





| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | timing of significant orders, or order cancellations;                           
|
| |  | changes in our product mix and average selling prices;                          
|
| |  | modified, adjusted or rescheduled shipments;                                    
|
| |  | availability of disks versus demand for disks;                                  
|
| |  | the cyclical nature of the disk drive industry;                                 
|
| |  | our ability to develop and implement new manufacturing process
    technologies;

17



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| |   |                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increases in our production and engineering costs associated
    with initial design and production of new product programs;                                                                                                                                                                                  
|
| |  | fluctuations in exchange rates, particularly between the
    U.S. dollar and the Malaysian ringgit;                                                                                                                                                                                                           
|
| |  | the ability of our process equipment to meet more stringent
    future product requirements;                                                                                                                                                                                                                  
|
| |  | our ability to introduce new products that achieve
    cost-effective high-volume production in a timely manner, timing
    of product announcements, and market acceptance of new products;                                                                                                                  
|
| |  | the availability of our production capacity, and the extent to
    which we can use that capacity;                                                                                                                                                                                                            
|
| |  | changes in our manufacturing efficiencies, in particular product
    yields and input costs for direct materials, operating supplies
    and other running costs;                                                                                                                                             
|
| |  | prolonged disruptions of operations at any of our facilities for
    any reason;                                                                                                                                                                                                                              
|
| |  | changes in the cost of or limitations on availability of labor;                                                                                                                                                                                                                                               
|
| |  | structural changes within the disk industry, including
    combinations, failures, and joint venture arrangements; and                                                                                                                                                                                        
|
| |  | changes in tax regulations in foreign jurisdictions that could
    potentially reduce our tax incentives in areas such as Malaysian
    capital allowances, tax holidays, and exemptions on withholding
    tax on royalty payments made by our Malaysian operations to our
    subsidiary in The Netherlands.





| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | If we make unprofitable acquisitions or are unable to
    successfully integrate future acquisitions, our business could
    suffer.





| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulties in integrating the operations, technologies,
    products and personnel of the acquired companies, especially
    given the specialized nature of our technology;
|
| |  | diversion of managements attention from normal daily
    operations of the business;                                                                                         
|
| |  | potential difficulties in completing projects associated with
    in-process research and development;                                                                        
|
| |  | initial dependence on unfamiliar supply chains or relatively
    small supply partners; and                                                                                   
|
| |  | the potential loss of key employees of the acquired companies.                                                                                                                





| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  | issue stock that would dilute our current stockholders
    percentage ownership;                                                                  
|
| |  | assume liabilities;                                                                                                                                
|
| |  | record goodwill and non-amortizable intangible assets that will
    be subject to impairment testing and potential periodic
    impairment charges;
|
| |  | incur amortization expenses related to certain intangible assets;                                                                                  
|
| |  | incur large and immediate write-offs; or                                                                                                           
|
| |  | become subject to litigation.                                                                                                                      



18



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





| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | the use, storage, discharge, and disposal of hazardous materials
    used during our manufacturing process;
|
| |  | the treatment of water used in our manufacturing
    process; and                                          
|
| |  | air quality management.                                                                                    





| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | we could be subject to significant penalties;                                                                              
|
| |  | our ability to expand or operate in California or Malaysia could
    be restricted;                                        
|
| |  | our ability to establish additional operations in other
    locations could be restricted; or                              
|
| |  | we could be required to obtain costly equipment or incur
    significant expenses to comply with environmental regulations.





| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | From time to time, we may have to defend lawsuits in
    connection with the operation of our business.





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



19



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| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Anti-takeover provisions in our certificate of
    incorporation could discourage potential acquisition proposals
    or delay or prevent a change of control.



Risks Related to our Indebtedness




| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | We are leveraged, and our debt service requirements will
    continue to make us vulnerable to economic downturns.





| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Our holding company structure makes us dependent on cash
    flow from our subsidiaries to meet our obligations.





| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | The assets of our subsidiaries may not be available to
    make payments on our debt obligations.



20



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|        |           
|------- | ----------
|Item 2. | Properties



|                     |  |                                     |  |               |               |  |                 |  |                  |      |  |  |         | 
|-------------------- |  | ----------------------------------- |  | ------------- | ------------- |  | --------------- |  | ---------------- | ---- |  |  | ------- | 
|                     |  |                                     |  | Current Lease |               |  |                 |  | Square           |     
|Location             |  | Description                         |  | Term Expires  |               |  | Renewal Options |  |                  | Feet | 
|                     |  |                                     |  |               |               |  |                 |  |                  |      | 
|Leased Facilities    |  |                                     |  |               |               |  |                 |  |                  |      |  |  |         | 
|San Jose, California |  | Headquarters and R&D Center         |  |               | December 2014 |  |                 |  | 2 5-year options |      |  |  | 188,000 | 
|San Jose, California |  | Subleased to another company        |  |               | April 2007    |  |                 |  | 4 5-year options |      |  |  | 82,000  | 
|Owned Facilities     |  |                                     |  |               |               |  |                 |  |                  |      |  |  |         | 
|Eugene, Oregon       |  | Manufacturing; currently not in use |  |               |              |  |                 |  |                 |      |  |  | 106,000 | 
|Penang, Malaysia     |  | Manufacturing                       |  |               |              |  |                 |  |                 |      |  |  | 615,000 | 
|Sarawak, Malaysia    |  | Manufacturing                       |  |               |              |  |                 |  |                 |      |  |  | 275,000 | 
|Johor, Malaysia      |  | Manufacturing                       |  |               |              |  |                 |  |                 |      |  |  | 123,000 | 








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings








|        |                                                  
|------- | -------------------------------------------------
|Item 4. | Submission of Matters to Vote of Security Holders



Executive Officers of the Registrant




|                     |  |  |    |  |  |                                                                                   
|-------------------- |  |  | -- |  |  | ----------------------------------------------------------------------------------
|Thian Hoo Tan        |  |  | 56 |  |  | Chief Executive Officer                                                           
|Michael A. Russak    |  |  | 57 |  |  | President and Chief Technical Officer                                             
|Ray L. Martin        |  |  | 61 |  |  | Executive Vice President, Customer Sales and Service                              
|Peter S. Norris      |  |  | 53 |  |  | Executive Vice President, Strategic Business Development                          
|Kathleen A. Bayless  |  |  | 48 |  |  | Vice President, Chief Financial Officer and Secretary                             
|Ali Dabier           |  |  | 46 |  |  | Vice President, Chief Operating Officer                                           
|William G. Hammack*  |  |  | 55 |  |  | Vice President, Human Resources                                                   
|Kamran Honardoost    |  |  | 42 |  |  | Vice President, New Product Introduction and Design                               
|Kheng Huat Oung      |  |  | 45 |  |  | Vice President, Managing Director, Media Operations, Komag USA
    (Malaysia) Sdn.
|Tsutomu T. Yamashita |  |  | 50 |  |  | Vice President, Process Development                                               






|  |                                                                                 
|- | --------------------------------------------------------------------------------
|* | Mr. Hammack left the Company in January 2005 and returned
    on March  14, 2005

21



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##### Table of Contents



Mr. Thian Hoo Tan


Dr. Russak


Mr. Martin


Mr. Norris


Ms. Bayless


Mr. Dabier


Mr. Hammack


Mr. Honardoost


Mr. Oung


22



---



##### Table of Contents





Mr. Yamashita


PART II







|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and Related
    Stockholder Matters



|     |                                              |      |   |       |     |  |   |       | 
|---- | -------------------------------------------- | ---- | - | ----- | --- |  | - | ----- | 
|     |                                              | High |   |       | Low | 
|     |                                              |      |   |       |     | 
|2003 |                                              |      |   |       |     |  |   |      
|     | First Quarter (through February 24)          |      | $ | 5.90  |     |  | $ | 4.33  | 
|     | First Quarter (February 25 through March 30) |      |   | 7.50  |     |  |   | 6.09  | 
|     | Second Quarter                               |      |   | 11.99 |     |  |   | 7.15  | 
|     | Third Quarter                                |      |   | 18.00 |     |  |   | 11.49 | 
|     | Fourth Quarter                               |      |   | 20.93 |     |  |   | 13.52 | 
|2004 |                                              |      |   |       |     |  |   |      
|     | First Quarter                                |      |   | 24.00 |     |  |   | 14.61 | 
|     | Second Quarter                               |      |   | 19.48 |     |  |   | 12.68 | 
|     | Third Quarter                                |      |   | 14.08 |     |  |   | 9.75  | 
|     | Fourth Quarter                               |      |   | 19.21 |     |  |   | 13.96 | 



Dividend Policy




Recent Sales of Unregistered Securities




23



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##### Table of Contents








|        |                                     
|------- | ------------------------------------
|Item 6. | Selected Consolidated Financial Data



|                                                                             |  |                   |         |   |                   |                     |         |                   |  |                 |         |                  |              |  |                   |         |   |                   |   |          |   |  |   |         |  
|---------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | ------------------- | ------- | ----------------- |  | --------------- | ------- | ---------------- | ------------ |  | ----------------- | ------- | - | ----------------- | - | -------- | - |  | - | ------- | -
|                                                                             |  | Successor Company |         |   |                   | Predecessor Company |        
|                                                                             |  |                   |         |   |                   |                     |        
|Consolidated Statements of                                                   |  | Fiscal Year Ended |         |   | Fiscal Year Ended |                     |         | Six Months Ended  |  |                 |         | Six Months Ended |              |  | Fiscal Year Ended |         |   | Fiscal Year Ended |  
|Operations Data                                                              |  | January 2, 2005   |         |   | December 28, 2003 |                     |         | December 29, 2002 |  |                 |         | June 30, 2002    |              |  | December 30, 2001 |         |   | December 31, 2000 |  
|                                                                             |  |                   |         |   |                   |                     |         |                   |  |                 |         |                  |              |  |                   |         |   |                   |  
|                                                                             |  |                   |         |   |                   | (1)                 |         |                   |  | (2)(3)(4)(8)(9) |         |                  | (5)(6)(8)(9) |  |                   | (7)(9)  |  
|Net sales                                                                    |  | $                 | 458,377 |   |                   | $                   | 438,292 |                   |  | $               | 174,749 |                  |              |  | $                 | 111,955 |   |                   | $ | 282,613  |   |  | $ | 358,463 |  
|Gross profit (loss)                                                          |  |                   | 112,117 |   |                   |                     | 107,422 |                   |  |                 | 31,740  |                  |              |  |                   | 1,558   |   |                   |   | (6,740   | ) |  |   | 30,740  |  
|Restructuring/
    impairment charges                                        |  |                   |        |   |                   |                     |        |                   |  |                 | 34,763  |                  |              |  |                   | 4,318   |   |                   |   | 57,430   |   |  |   | 5,293   |  
|Operating income (loss)                                                      |  |                   | 54,382  |   |                   |                     | 49,419  |                   |  |                 | (36,380 | )                |              |  |                   | (27,674 | ) |                   |   | (145,927 | ) |  |   | (39,275 | )
|Interest expense                                                             |  |                   | 3,176   |   |                   |                     | 13,153  |                   |  |                 | 6,553   |                  |              |  |                   |        |   |                   |   | 155,192  |   |  |   | 45,428  |  
|Other income (expense), net                                                  |  |                   | (151    | ) |                   |                     | 250     |                   |  |                 | 2,150   |                  |              |  |                   | 397,009 |   |                   |   | 3,771    |   |  |   | 4,824   |  
|Reorganization costs, net                                                    |  |                   |        |   |                   |                     |        |                   |  |                 |        |                  |              |  |                   | 6,511   |   |                   |   | 6,066    |   |  |   |        |  
|Income (loss) before cumulative effect of change in accounting
    principle |  |                   | 51,355  |   |                   |                     | 36,040  |                   |  |                 | (41,919 | )                |              |  |                   | 359,924 |   |                   |   | (296,395 | ) |  |   | (68,058 | )
|Cumulative effect of change in accounting principle                          |  |                   |        |   |                   |                     |        |                   |  |                 |        |                  |              |  |                   | (47,509 | ) |                   |   |         |   |  |   |        |  
|Net income (loss)                                                            |  | $                 | 51,355  |   |                   | $                   | 36,040  |                   |  | $               | (41,919 | )                |              |  | $                 | 312,415 |   |                   | $ | (296,395 | ) |  | $ | (68,058 | )
|Basic net income (loss) per share                                            |  | $                 | 1.88    |   |                   | $                   | 1.53    |                   |  | $               | (1.84   | )                |              |  |                   |        |   |                   |   |         |   |  |   |        |  
|Diluted net income (loss) per share                                          |  | $                 | 1.71    |   |                   | $                   | 1.47    |                   |  | $               | (1.84   | )                |              |  |                   |        |   |                   |   |         |   |  |   |        |  

|                                                                              |  |                   |         |  |                   |   |         |                     |  |   |         |  |  |                   |  |  |                   |  |   |          |   |  |   |         | 
|----------------------------------------------------------------------------- |  | ----------------- | ------- |  | ----------------- | - | ------- | ------------------- |  | - | ------- |  |  | ----------------- |  |  | ----------------- |  | - | -------- | - |  | - | ------- | 
|                                                                              |  | Successor Company |         |  |                   |   |         | Predecessor Company | 
|                                                                              |  |                   |         |  |                   |   |         |                     | 
|Consolidated Balance Sheet                                                    |  | As of             |         |  | As of             |   |         | As of               |  |   |         |  |  | As of             |  |  | As of             | 
|Data                                                                          |  | January 2, 2005   |         |  | December 28, 2003 |   |         | December 29, 2002   |  |   |         |  |  | December 30, 2001 |  |  | December 31, 2000 | 
|                                                                              |  |                   |         |  |                   |   |         |                     |  |   |         |  |  |                   |  |  |                   | 
|Property, plant, and equipment, net, and land and buildings held
    for sale |  | $                 | 205,642 |  |                   | $ | 184,536 |                     |  | $ | 221,014 |  |  |                   |  |  |                   |  | $ | 256,856  |   |  | $ | 354,873 | 
|Total assets                                                                  |  |                   | 431,095 |  |                   |   | 347,807 |                     |  |   | 317,200 |  |  |                   |  |  |                   |  |   | 407,850  |   |  |   | 633,061 | 
|Current portion of long-term debt                                             |  |                   |        |  |                   |   | 20,247  |                     |  |   | 10,229  |  |  |                   |  |  |                   |  |   |         |   |  |   | 216,740 | 
|Long-term debt, less current portion                                          |  |                   | 80,500  |  |                   |   | 95,801  |                     |  |   | 129,923 |  |  |                   |  |  |                   |  |   |         |   |  |   | 137,545 | 
|Liabilities subject to compromise                                             |  |                   |        |  |                   |   |        |                     |  |   |        |  |  |                   |  |  |                   |  |   | 516,173  |   |  |   |        | 
|Stockholders equity (deficit)                                                |  | $                 | 287,626 |  |                   | $ | 166,588 |                     |  | $ | 127,960 |  |  |                   |  |  |                   |  | $ | (144,939 | ) |  | $ | 151,861 | 






|    |                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Results of operations for the six months ended December 29,
    2002 included a $33.9 million impairment charge related to
    the write- off of all remaining goodwill, in accordance with
    Statement of Financial Accounting Standards
    (SFAS) No. 142, Goodwill and Other Intangible Assets
    (SFAS No. 142).

24



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Results of operations for the six months ended June 30,
    2002 included other income of $379.0 million associated
    with the extinguishment of liabilities subject to compromise as
    of June 30, 2002, and other income of $17.3 million to
    revalue the Companys assets and liabilities at
    June 30, 2002 to fair value as prescribed by fresh-start
    reporting under Statement of Position 90-7 (SOP 90-7),
    Financial Reporting by Entities in Reorganization Under the
    Bankruptcy Code.
|   
|(3) | Results of operations for the six months ended June 30,
    2002, included a $4.3 million restructuring/impairment
    charge in connection with the shutdown of the Companys
    research and development facility in Santa Rosa, California.                                                                                                                                                                                                                                                                    
|   
|(4) | Results of operations for the six months ended June 30,
    2002, included a $47.5 million transitional impairment loss
    under SFAS No. 142. The loss was recognized as the
    cumulative effect of a change in accounting principle in the
    Companys consolidated statement of operations.                                                                                                                                                                                                                
|   
|(5) | Results of operations for 2001 included a $45.8 million
    impairment charge related to the write-down of land and
    buildings held for sale, a $4.4 million impairment charge
    related to manufacturing equipment no longer in service, and
    restructuring charges of $7.2 million primarily related to
    lease obligations on equipment no longer in service and
    additional facility closure costs.                                                                                               
|   
|(6) | Results of operations for 2001 included a $99.1 million
    interest expense charge related to accretion to bring the
    subordinated convertible notes up to their full face value of
    $230.0 million.                                                                                                                                                                                                                                                                                                        
|   
|(7) | Results of operations for 2000 included a net $5.3 million
    restructuring charge, including an $8 million charge in
    connection with the ceasing of the Companys Santa Rosa
    manufacturing operations, less a net $2.7 million reversal
    of charges previously accrued for the 1997, 1998, and 1999
    restructurings.                                                                                                                                                                               
|   
|(8) | In accordance with SOP 90-7, we did not record interest
    expense on our outstanding debt during the chapter 11
    proceedings from August 24, 2001, through June 30,
    2002.                                                                                                                                                                                                                                                                                                                                 
|   
|(9) | Earnings per share of the Predecessor Company are not presented,
    as the amounts are not meaningful.                                                                                                                                                                                                                                                                                                                                                                                                            






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations





25



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Results of Operations




| |         
| | --------
| | Overview









Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code






26



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##### Table of Contents













|                                                                       |                                                                   |            |         |         |              |   |         |              |  |   |          |         | 
|---------------------------------------------------------------------- | ----------------------------------------------------------------- | ---------- | ------- | ------- | ------------ | - | ------- | ------------ |  | - | -------- | ------- | 
|                                                                       |                                                                   | Year Ended |        
|                                                                       |                                                                   |            |        
|                                                                       |                                                                   | January 2, |         |         | December 28, |   |         | December 29, | 
|                                                                       |                                                                   | 2005       |         |         | 2003         |   |         | 2002         | 
|                                                                       |                                                                   |            |         |         |              |   |         |              | 
|Net sales                                                              |                                                                   | $          | 458,377 |         |              | $ | 438,292 |              |  | $ | 286,704  |        
|Cost of sales                                                          |                                                                   |            | 346,260 |         |              |   | 330,870 |              |  |   | 253,406  |        
|                                                                       |                                                                   |            |         |         |              |   |         |              | 
|                                                                       | Gross profit                                                      |            |         | 112,117 |              |   |         | 107,422      |  |   |          | 33,298  | 
|Research, development, and engineering expense                         |                                                                   |            | 40,783  |         |              |   | 42,085  |              |  |   | 37,196   |        
|Selling, general, and administrative expense                           |                                                                   |            | 17,980  |         |              |   | 18,939  |              |  |   | 17,739   |        
|Gain on disposal of assets                                             |                                                                   |            | (1,028  | )       |              |   | (3,021  | )            |  |   | (3,448   | )      
|Impairment charge related to goodwill                                  |                                                                   |            |        |         |              |   |        |              |  |   | 33,870   |        
|Restructuring charges                                                  |                                                                   |            |        |         |              |   |        |              |  |   | 5,211    |        
|In-process research and development                                    |                                                                   |            |        |         |              |   |        |              |  |   | 6,784    |        
|Interest income                                                        |                                                                   |            | (1,371  | )       |              |   | (524    | )            |  |   | (325     | )      
|Interest expense                                                       |                                                                   |            | 3,176   |         |              |   | 13,153  |              |  |   | 6,553    |        
|Other income (expense), net                                            |                                                                   |            | 151     |         |              |   | (250    | )            |  |   | (399,159 | )      
|Reorganization costs, net                                              |                                                                   |            |        |         |              |   |        |              |  |   | 6,511    |        
|Provision for income taxes                                             |                                                                   |            | 1,071   |         |              |   | 1,000   |              |  |   | 1,987    |        
|Minority interest/equity interest in net loss of related
    companies |                                                                   |            |        |         |              |   |        |              |  |   | 2,374    |        
|                                                                       |                                                                   |            |         |         |              |   |         |              | 
|                                                                       | Income before cumulative effect of change in accounting principle |            |         | 51,355  |              |   |         | 36,040       |  |   |          | 318,005 | 
|Cumulative effect of change in accounting principle                    |                                                                   |            |        |         |              |   |        |              |  |   | (47,509  | )      
|                                                                       |                                                                   |            |         |         |              |   |         |              | 
|                                                                       | Net income                                                        |            | $       | 51,355  |              |   | $       | 36,040       |  |   | $        | 270,496 | 
|                                                                       |                                                                   |            |         |         |              |   |         |              | 



| |                 
| | ----------------
| | 2004 versus 2003



| |          
| | ---------
| | Net Sales



27



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1 2














| |             
| | ------------
| | Gross Profit







| |                                                
| | -----------------------------------------------
| | Research, Development, and Engineering Expenses





| |                                              
| | ---------------------------------------------
| | Selling, General, and Administrative Expenses



28



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| |                           
| | --------------------------
| | Gain on Disposal of Assets





| |                 
| | ----------------
| | Interest Expense







| |             
| | ------------
| | Income Taxes













29



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| |                 
| | ----------------
| | 2003 versus 2002



| |          
| | ---------
| | Net Sales











| |             
| | ------------
| | Gross Profit





| |                   
| | ------------------
| | Operating Expenses









| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | Impairment Charge Related to Goodwill, Restructuring/
    Impairment Charges, and In-Process R&D





30



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| |                 
| | ----------------
| | Interest Expense





| |                                                 
| | ------------------------------------------------
| | Other Income, Net, and Reorganization Costs, Net







| |             
| | ------------
| | Income Taxes





| |                                                           
| | ----------------------------------------------------------
| | Minority/ Equity Interest in Net Loss of Related Companies







| |                                                    
| | ---------------------------------------------------
| | Cumulative Effect of Change in Accounting Principle





Critical Accounting Policies




31



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| |                            
| | ---------------------------
| | Allowance for Sales Returns









| |                                
| | -------------------------------
| | Impairment of Long-lived Assets







| |                       
| | ----------------------
| | Inventory Obsolescence





Liquidity and Capital Resources








| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | net income of $51.4 million, plus non-cash charges of
    $40.1 million;                                                                                                   
|
| |  | an accounts receivable increase of $18.6 million, which was
    primarily related to higher sales in the fourth quarter of 2004
    compared to the fourth quarter of 2003;
|
| |  | an inventory increase of $10.3 million, which was primarily
    related to the timing of production and sales of product to
    certain customers;                         

32



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| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | an accounts payable increase of $3.3 million, which was
    primarily related to the inventory increase; and                       
|
| |  | an accrued compensation and benefits decrease of
    $4.8 million, which reflected lower incentive compensation
    earned in 2004.















|                                      |                                    |      |        |        |      |   |       |       |  |   |       |       |  |      |       |       |            |   |       |       |  |   |        |         |  |   |        |         | 
|------------------------------------- | ---------------------------------- | ---- | ------ | ------ | ---- | - | ----- | ----- |  | - | ----- | ----- |  | ---- | ----- | ----- | ---------- | - | ----- | ----- |  | - | ------ | ------- |  | - | ------ | ------- | 
|                                      |                                    | 2005 |        |        | 2006 |   |       | 2007  |  |   | 2008  |       |  | 2009 |       |       | Thereafter |   |       | Total | 
|                                      |                                    |      |        |        |      |   |       |       |  |   |       |       |  |      |       |       |            |   |       |       | 
|Long-Term Debt Obligations            |                                    | $    |       |        |      | $ |      |       |  | $ |      |       |  | $    |      |       |            | $ |      |       |  | $ | 80,500 |         |  | $ | 80,500 |        
|Operating Lease Obligations(1)        |                                    |      | 1,454  |        |      |   | 3,092 |       |  |   | 2,258 |       |  |      | 2,039 |       |            |   | 3,141 |       |  |   | 16,382 |         |  |   | 28,366 |        
|Unconditional Purchase Obligations(2) |                                    |      | 15,988 |        |      |   | 1,266 |       |  |   | 1,129 |       |  |      | 1,129 |       |            |   | 1,129 |       |  |   | 3,387  |         |  |   | 24,028 |        
|                                      |                                    |      |        |        |      |   |       |       |  |   |       |       |  |      |       |       |            |   |       |       | 
|                                      | Total Contractual Cash Obligations |      | $      | 17,442 |      |   | $     | 4,358 |  |   | $     | 3,387 |  |      | $     | 3,168 |            |   | $     | 4,270 |  |   | $      | 100,269 |  |   | $      | 132,894 | 
|                                      |                                    |      |        |        |      |   |       |       |  |   |       |       |  |      |       |       |            |   |       |       | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These represent gross operating lease obligations, and are not
    reduced by sublease income.                                                                                                                                                                                                                                                                                                                    
|   
|(2) | Unconditional purchase obligations are defined as agreements to
    purchase goods or services that are enforceable and legally
    binding, and that specify all significant terms, including:
    fixed or minimum quantities to be purchased; fixed, minimum, or
    variable pricing provisions; and the approximate timing of the
    transactions. The amounts are based on our contractual
    commitments.

33



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##### Table of Contents







Off-Balance Sheet Arrangements




Other


Share-Based
Payment. Accounting for Stock-Based
Compensation







|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk









34



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##### Table of Contents








|        |                                                             
|------- | ------------------------------------------------------------
|Item 8. | Consolidated Financial Statements and Supplementary
    Data

KOMAG, INCORPORATED


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                                                                                                                                        |  |  |    | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Reports of Independent Registered Public
    Accounting Firm                                                                                                            |  |  | 36 | 
|Consolidated Statements of Operations,
    Fiscal Year 2004, Fiscal Year 2003, Six Months Ended
    December 29, 2002, and Six Months Ended June 30,
    2002           |  |  | 38 | 
|Consolidated Balance Sheets,
    January 2, 2005 and December 28, 2003                                                                                                  |  |  | 39 | 
|Consolidated Statements of Cash Flows,
    Fiscal Year 2004, Fiscal Year 2003, Six Months Ended
    December 29, 2002, and Six Months Ended June 30,
    2002           |  |  | 40 | 
|Consolidated Statements of
    Stockholders Equity, Fiscal Year 2004, Fiscal Year 2003,
    Six Months Ended December 29, 2002, and Six Months Ended
    June 30, 2002 |  |  | 41 | 
|Notes to Consolidated Financial
    Statements                                                                                                                          |  |  | 42 | 

35



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Report of Independent Registered Public Accounting Firm




















| |         
| | --------
| | KPMG LLP





36



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##### Table of Contents



Report of Independent Registered Public Accounting Firm






Managements Report on Internal Control
over Financial Reporting












37



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| |         
| | --------
| | KPMG LLP





38



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##### Table of Contents



KOMAG, INCORPORATED





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                       |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |         |   |   |         |         |         | 
|---------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------- | ------- | ------- | ------------ | - | ------- | ---------------- | ------ | - | ------- | ---------------- | ------- | - | - | ------- | ------- | ------- | 
|                                                                       |                                                                                                                                                                                                  | Successor                                |         |         | Successor    |   |         | Successor        |        |   |         | Predecessor      |        
|                                                                       |                                                                                                                                                                                                  | Company                                  |         |         | Company      |   |         | Company          |        |   |         | Company          |        
|                                                                       |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |        
|                                                                       |                                                                                                                                                                                                  | Year Ended                               |         |         | Year Ended   |   |         | Six Months Ended |        |   |         | Six Months Ended |        
|                                                                       |                                                                                                                                                                                                  | January 2,                               |         |         | December 28, |   |         | December 29,     |        |   |         | June 30,         |        
|                                                                       |                                                                                                                                                                                                  | 2005                                     |         |         | 2003         |   |         | 2002             |        |   |         | 2002             |        
|                                                                       |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |        
|                                                                       |                                                                                                                                                                                                  | (In thousands, except per share amounts) |         |         |              |  
|Net sales                                                              |                                                                                                                                                                                                  | $                                        | 458,377 |         |              | $ | 438,292 |                  |        | $ | 174,749 |                  |         |   | $ | 111,955 |        
|Cost of sales                                                          |                                                                                                                                                                                                  |                                          | 346,260 |         |              |   | 330,870 |                  |        |   | 143,009 |                  |         |   |   | 110,397 |        
|                                                                       |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |        
|                                                                       | Gross profit                                                                                                                                                                                     |                                          |         | 112,117 |              |   |         | 107,422          |        |   |         | 31,740           |         |   |   |         | 1,558   |        
|Operating expenses:                                                    |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |         |   |   |         |        
|                                                                       | Research, development, and engineering                                                                                                                                                           |                                          |         | 40,783  |              |   |         | 42,085           |        |   |         | 18,400           |         |   |   |         | 18,796  |        
|                                                                       | Selling, general, and administrative                                                                                                                                                             |                                          |         | 17,980  |              |   |         | 18,939           |        |   |         | 9,483            |         |   |   |         | 8,256   |        
|                                                                       | Gain on disposal of assets                                                                                                                                                                       |                                          |         | (1,028  | )            |   |         | (3,021           | )      |   |         | (1,310           | )       |   |   |         | (2,138  | )      
|                                                                       | Impairment charges related to goodwill                                                                                                                                                           |                                          |         |        |              |   |         |                 |        |   |         | 33,870           |         |   |   |         |        |        
|                                                                       | Restructuring/impairment charges                                                                                                                                                                 |                                          |         |        |              |   |         |                 |        |   |         | 893              |         |   |   |         | 4,318   |        
|                                                                       | In-process research and development                                                                                                                                                              |                                          |         |        |              |   |         |                 |        |   |         | 6,784            |         |   |   |         |        |        
|                                                                       |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |        
|                                                                       |                                                                                                                                                                                                  |                                          | 57,735  |         |              |   | 58,003  |                  |        |   | 68,120  |                  |         |   |   | 29,232  |        
|                                                                       |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |        
|                                                                       | Operating income (loss)                                                                                                                                                                          |                                          |         | 54,382  |              |   |         | 49,419           |        |   |         | (36,380          | )       |   |   |         | (27,674 | )      
|Other income (expense):                                                |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |         |   |   |         |        
|                                                                       | Interest income                                                                                                                                                                                  |                                          |         | 1,371   |              |   |         | 524              |        |   |         | 132              |         |   |   |         | 193     |        
|                                                                       | Interest expense                                                                                                                                                                                 |                                          |         | (3,176  | )            |   |         | (13,153          | )      |   |         | (6,553           | )       |   |   |         |        |        
|                                                                       | Other income (expense), net                                                                                                                                                                      |                                          |         | (151    | )            |   |         | 250              |        |   |         | 2,150            |         |   |   |         | 397,009 |        
|                                                                       |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |        
|                                                                       |                                                                                                                                                                                                  |                                          | (1,956  | )       |              |   | (12,379 | )                |        |   | (4,271  | )                |         |   |   | 397,202 |        
|                                                                       |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |        
|                                                                       | Income (loss) before reorganization costs, income taxes,
    minority interest/equity interest in net loss of related
    companies, and cumulative effect of change in accounting
    principle |                                          |         | 52,426  |              |   |         | 37,040           |        |   |         | (40,651          | )       |   |   |         | 369,528 |        
|Reorganization costs, net                                              |                                                                                                                                                                                                  |                                          |        |         |              |   |        |                  |        |   |        |                  |         |   |   | 6,511   |        
|Provision for income taxes                                             |                                                                                                                                                                                                  |                                          | 1,071   |         |              |   | 1,000   |                  |        |   | 1,268   |                  |         |   |   | 719     |        
|                                                                       |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |        
|                                                                       | Income (loss) before minority interest/equity interest in net
    loss of related companies, and cumulative effect of change in
    accounting principle                                         |                                          |         | 51,355  |              |   |         | 36,040           |        |   |         | (41,919          | )       |   |   |         | 362,298 |        
|Minority interest/equity interest in net loss of related
    companies |                                                                                                                                                                                                  |                                          |        |         |              |   |        |                  |        |   |        |                  |         |   |   | (2,374  | )      
|                                                                       |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |        
|                                                                       | Income (loss) before cumulative effect of change in accounting
    principle                                                                                                                     |                                          |         | 51,355  |              |   |         | 36,040           |        |   |         | (41,919          | )       |   |   |         | 359,924 |        
|Cumulative effect of change in accounting principle                    |                                                                                                                                                                                                  |                                          |        |         |              |   |        |                  |        |   |        |                  |         |   |   | (47,509 | )      
|                                                                       |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |        
|                                                                       |                                                                                                                                                                                                  | Net income (loss)                        |         | $       | 51,355       |   |         | $                | 36,040 |   |         | $                | (41,919 | ) |   |         | $       | 312,415 | 
|                                                                       |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |        
|Basic net income (loss) per share                                      |                                                                                                                                                                                                  | $                                        | 1.88    |         |              | $ | 1.53    |                  |        | $ | (1.84   | )                |         |   |   |         |        
|                                                                       |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |        
|Diluted net income (loss) per share                                    |                                                                                                                                                                                                  | $                                        | 1.71    |         |              | $ | 1.47    |                  |        | $ | (1.84   | )                |         |   |   |         |        
|                                                                       |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |        
|Number of shares used in basic per share computations                  |                                                                                                                                                                                                  |                                          | 27,384  |         |              |   | 23,504  |                  |        |   | 22,840  |                  |         |   |   |         |        
|                                                                       |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |        
|Number of shares used in diluted per share computations                |                                                                                                                                                                                                  |                                          | 31,017  |         |              |   | 24,518  |                  |        |   | 22,840  |                  |         |   |   |         |        
|                                                                       |                                                                                                                                                                                                  |                                          |         |         |              |   |         |                  |        |   |         |                  |        



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KOMAG, INCORPORATED





CONSOLIDATED BALANCE SHEETS


|                                     |                                                                              |                                                                     |                            |         |              |         |         |         |     |         | 
|------------------------------------ | ---------------------------------------------------------------------------- | ------------------------------------------------------------------- | -------------------------- | ------- | ------------ | ------- | ------- | ------- | --- | ------- | 
|                                     |                                                                              | January 2,                                                          |                            |         | December 28, |        
|                                     |                                                                              | 2005                                                                |                            |         | 2003         |        
|                                     |                                                                              |                                                                     |                            |         |              |        
|                                     |                                                                              | (In thousands)                                                      |                           
|ASSETS                              
|Current assets                       |                                                                              |                                                                     |                            |         |              |         |         |        
|                                     | Cash and cash equivalents                                                    |                                                                     | $                          | 104,110 |              |         | $       | 70,058  |    
|                                     | Accounts receivable (less allowances of $1,075 and $1,064,
    respectively) |                                                                     |                            | 79,213  |              |         |         | 60,628  |    
|                                     | Inventories                                                                  |                                                                     |                            | 35,815  |              |         |         | 25,501  |    
|                                     | Prepaid expenses and deposits                                                |                                                                     |                            | 1,815   |              |         |         | 2,756   |    
|                                     |                                                                              |                                                                     |                            |         |              |        
|                                     |                                                                              |                                                                     | Total current assets       |         |              | 220,953 |         |         |     | 158,943 | 
|Property, plant, and equipment, net  |                                                                              |                                                                     | 205,642                    |         |              |         | 184,536 |        
|Intangible assets, net               |                                                                              |                                                                     | 1,523                      |         |              |         | 4,257   |        
|Other assets                         |                                                                              |                                                                     | 2,977                      |         |              |         | 71      |        
|                                     |                                                                              |                                                                     |                            |         |              |        
|                                     |                                                                              | $                                                                   | 431,095                    |         |              | $       | 347,807 |        
|                                     |                                                                              |                                                                     |                            |         |              |        
|LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities                  |                                                                              |                                                                     |                            |         |              |         |         |        
|                                     | Current portion of long-term debt                                            |                                                                     | $                          |        |              |         | $       | 20,247  |    
|                                     | Trade accounts payable                                                       |                                                                     |                            | 43,082  |              |         |         | 40,117  |    
|                                     | Accrued expenses and other liabilities                                       |                                                                     |                            | 19,887  |              |         |         | 25,054  |    
|                                     |                                                                              |                                                                     |                            |         |              |        
|                                     |                                                                              |                                                                     | Total current liabilities  |         |              | 62,969  |         |         |     | 85,418  | 
|Long-term debt                       |                                                                              |                                                                     | 80,500                     |         |              |         | 95,801  |        
|                                     |                                                                              |                                                                     |                            |         |              |        
|                                     |                                                                              |                                                                     | Total liabilities          |         |              | 143,469 |         |         |     | 181,219 | 
|Stockholders equity                 |                                                                              |                                                                     |                            |         |              |         |         |        
|                                     | Common stock, $0.01 par value per share:                                     |                                                                     |                            |         |              |         |         |         |    
|                                     |                                                                              | Authorized  50,000 shares                                          |                            |         |              |         |         |         |     |        
|                                     |                                                                              | Issued and outstanding  28,065 and
    23,753 shares, respectively |                            |         | 281          |         |         |         | 238 |        
|                                     | Additional paid-in capital                                                   |                                                                     |                            | 241,960 |              |         |         | 172,457 |    
|                                     | Deferred stock-based compensation                                            |                                                                     |                            | (91     | )            |         |         | (228    | )  
|                                     | Retained earnings (accumulated deficit)                                      |                                                                     |                            | 45,476  |              |         |         | (5,879  | )  
|                                     |                                                                              |                                                                     |                            |         |              |        
|                                     |                                                                              |                                                                     | Total stockholders equity |         |              | 287,626 |         |         |     | 166,588 | 
|                                     |                                                                              |                                                                     |                            |         |              |        
|                                     |                                                                              | $                                                                   | 431,095                    |         |              | $       | 347,807 |        
|                                     |                                                                              |                                                                     |                            |         |              |        



40



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KOMAG, INCORPORATED





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                             |                                                                                                                                                 |                                                     |          |         |              |   |         |                  |         |   |         |                  |        |   |   |         |          |        |  
|-------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | -------- | ------- | ------------ | - | ------- | ---------------- | ------- | - | ------- | ---------------- | ------ | - | - | ------- | -------- | ------ | -
|                                                                                             |                                                                                                                                                 | Successor                                           |          |         | Successor    |   |         | Successor        |         |   |         | Predecessor      |       
|                                                                                             |                                                                                                                                                 | Company                                             |          |         | Company      |   |         | Company          |         |   |         | Company          |       
|                                                                                             |                                                                                                                                                 |                                                     |          |         |              |   |         |                  |         |   |         |                  |       
|                                                                                             |                                                                                                                                                 | Year Ended                                          |          |         | Year Ended   |   |         | Six Months Ended |         |   |         | Six Months Ended |       
|                                                                                             |                                                                                                                                                 | January 2,                                          |          |         | December 28, |   |         | December 29,     |         |   |         | June 30,         |       
|                                                                                             |                                                                                                                                                 | 2005                                                |          |         | 2003         |   |         | 2002             |         |   |         | 2002             |       
|                                                                                             |                                                                                                                                                 |                                                     |          |         |              |   |         |                  |         |   |         |                  |       
|                                                                                             |                                                                                                                                                 | (In thousands)                                      |         
|Operating Activities                                                                         |                                                                                                                                                 |                                                     |          |         |              |   |         |                  |         |   |         |                  |        |   |   |         |         
|Net income (loss)                                                                            |                                                                                                                                                 | $                                                   | 51,355   |         |              | $ | 36,040  |                  |         | $ | (41,919 | )                |        |   | $ | 312,415 |         
|Adjustments to reconcile net income (loss) to net cash provided
    by operating activities: |                                                                                                                                                 |                                                     |          |         |              |   |         |                  |         |   |         |                  |        |   |   |         |         
|                                                                                             | Gain on extinguishment of liabilities subject to compromise and
    revaluation of assets and liabilities pursuant to fresh-start
    reporting |                                                     |          |        |              |   |         |                 |         |   |         |                 |        |   |   |         | (396,376 | )     
|                                                                                             | Cumulative effect of change in accounting principle                                                                                             |                                                     |          |        |              |   |         |                 |         |   |         |                 |        |   |   |         | 47,509   |       
|                                                                                             | Impairment charges related to property, plant, and equipment and
    goodwill                                                                   |                                                     |          |        |              |   |         |                 |         |   |         | 33,870           |        |   |   |         | 216      |       
|                                                                                             | Depreciation and amortization on property, plant, and equipment                                                                                 |                                                     |          | 37,086  |              |   |         | 38,625           |         |   |         | 24,114           |        |   |   |         | 25,998   |       
|                                                                                             | Amortization and adjustments of intangible assets                                                                                               |                                                     |          | 3,023   |              |   |         | 5,256            |         |   |         | 1,849            |        |   |   |         | 3,609    |       
|                                                                                             | Amortization of deferred stock-based compensation                                                                                               |                                                     |          | 555     |              |   |         | 1,980            |         |   |         | 2,403            |        |   |   |         |         |       
|                                                                                             | In-process research and development expense                                                                                                     |                                                     |          |        |              |   |         |                 |         |   |         | 6,784            |        |   |   |         |         |       
|                                                                                             | Non-cash interest charges                                                                                                                       |                                                     |          | 436     |              |   |         | 6,657            |         |   |         | 3,090            |        |   |   |         |         |       
|                                                                                             | Gain on disposal of assets                                                                                                                      |                                                     |          | (1,028  | )            |   |         | (3,021           | )       |   |         | (1,310           | )      |   |   |         | (2,138   | )     
|                                                                                             | Minority interest/equity interest in net loss of related
    companies                                                                          |                                                     |          |        |              |   |         |                 |         |   |         |                 |        |   |   |         | 2,374    |       
|Changes in operating assets and liabilities:                                                 |                                                                                                                                                 |                                                     |          |         |              |   |         |                  |         |   |         |                  |        |   |   |         |         
|                                                                                             | Accounts receivable, net                                                                                                                        |                                                     |          | (18,585 | )            |   |         | (14,387          | )       |   |         | (25,327          | )      |   |   |         | 4,234    |       
|                                                                                             | Inventories                                                                                                                                     |                                                     |          | (10,314 | )            |   |         | (10,576          | )       |   |         | (1,288           | )      |   |   |         | (2,069   | )     
|                                                                                             | Prepaid expenses and deposits                                                                                                                   |                                                     |          | 221     |              |   |         | (468             | )       |   |         | 1,070            |        |   |   |         | (1,480   | )     
|                                                                                             | Trade accounts payable                                                                                                                          |                                                     |          | 3,338   |              |   |         | 4,746            |         |   |         | 14,498           |        |   |   |         | 5,870    |       
|                                                                                             | Accrued expenses and other liabilities                                                                                                          |                                                     |          | (4,820  | )            |   |         | 11,337           |         |   |         | (10,416          | )      |   |   |         | 1,693    |       
|                                                                                             |                                                                                                                                                 |                                                     |          |         |              |   |         |                  |         |   |         |                  |       
|                                                                                             |                                                                                                                                                 |                                                     | 61,267   |         |              |   | 76,189  |                  |         |   | 7,418   |                  |        |   |   | 1,855   |         
|Reorganization costs, net                                                                    |                                                                                                                                                 |                                                     |         |         |              |   |        |                  |         |   |        |                  |        |   |   | 6,511   |         
|                                                                                             |                                                                                                                                                 |                                                     |          |         |              |   |         |                  |         |   |         |                  |       
|                                                                                             |                                                                                                                                                 | Net cash provided by operating activities           |          |         | 61,267       |   |         |                  | 76,189  |   |         |                  | 7,418  |   |   |         |          | 8,366  |  
|Investing Activities                                                                         |                                                                                                                                                 |                                                     |          |         |              |   |         |                  |         |   |         |                  |        |   |   |         |         
|Acquisition of property, plant, and equipment                                                |                                                                                                                                                 |                                                     | (59,202  | )       |              |   | (25,892 | )                |         |   | (7,038  | )                |        |   |   | (6,855  | )       
|Purchases of short-term investments                                                          |                                                                                                                                                 |                                                     |         |         |              |   |        |                  |         |   |        |                  |        |   |   | (338    | )       
|Proceeds from short-term investments at maturity                                             |                                                                                                                                                 |                                                     |         |         |              |   |        |                  |         |   | 338     |                  |        |   |   | 335     |         
|Proceeds from disposal of property, plant, and equipment                                     |                                                                                                                                                 |                                                     | 2,038    |         |              |   | 26,766  |                  |         |   | 1,421   |                  |        |   |   | 3,043   |         
|Other                                                                                        |                                                                                                                                                 |                                                     | (257     | )       |              |   | (372    | )                |         |   | (191    | )                |        |   |   | (41     | )       
|                                                                                             |                                                                                                                                                 |                                                     |          |         |              |   |         |                  |         |   |         |                  |       
|                                                                                             |                                                                                                                                                 | Net cash provided by (used in) investing activities |          |         | (57,421      | ) |         |                  | 502     |   |         |                  | (5,470 | ) |   |         |          | (3,856 | )
|Financing Activities                                                                         |                                                                                                                                                 |                                                     |          |         |              |   |         |                  |         |   |         |                  |        |   |   |         |         
|Payment of debt                                                                              |                                                                                                                                                 |                                                     | (116,341 | )       |              |   | (30,761 | )                |         |   | (424    | )                |        |   |   |         |         
|Proceeds from the issuance of long-term debt                                                 |                                                                                                                                                 |                                                     | 77,419   |         |              |   |        |                  |         |   |        |                  |        |   |   |        |         
|Proceeds from sale of common stock, net of issuance costs                                    |                                                                                                                                                 |                                                     | 69,128   |         |              |   | 608     |                  |         |   |        |                  |        |   |   |        |         
|                                                                                             |                                                                                                                                                 |                                                     |          |         |              |   |         |                  |         |   |         |                  |       
|                                                                                             |                                                                                                                                                 | Net cash provided by (used in) financing activities |          |         | 30,206       |   |         |                  | (30,153 | ) |         |                  | (424   | ) |   |         |          |       |  
|                                                                                             |                                                                                                                                                 |                                                     |          |         |              |   |         |                  |         |   |         |                  |       
|Increase in cash and cash equivalents                                                        |                                                                                                                                                 |                                                     | 34,052   |         |              |   | 46,538  |                  |         |   | 1,524   |                  |        |   |   | 4,510   |         
|Cash and cash equivalents at beginning of period                                             |                                                                                                                                                 |                                                     | 70,058   |         |              |   | 23,520  |                  |         |   | 21,996  |                  |        |   |   | 17,486  |         
|                                                                                             |                                                                                                                                                 |                                                     |          |         |              |   |         |                  |         |   |         |                  |       
|                                                                                             |                                                                                                                                                 | Cash and cash equivalents at end of period          |          | $       | 104,110      |   |         | $                | 70,058  |   |         | $                | 23,520 |   |   |         | $        | 21,996 |  
|                                                                                             |                                                                                                                                                 |                                                     |          |         |              |   |         |                  |         |   |         |                  |       
|Supplemental disclosure of cash flow information                                             |                                                                                                                                                 |                                                     |          |         |              |   |         |                  |         |   |         |                  |        |   |   |         |         
|                                                                                             |                                                                                                                                                 | Cash paid for interest                              |          | $       | 2,739        |   |         | $                | 6,549   |   |         | $                | 3,176  |   |   |         | $        |       |  
|                                                                                             |                                                                                                                                                 | Cash paid for income taxes                          |          | $       | 331          |   |         | $                | 25      |   |         | $                | 473    |   |   |         | $        | 561    |  
|Non-cash activities                                                                          |                                                                                                                                                 |                                                     |          |         |              |   |         |                  |         |   |         |                  |        |   |   |         |         
|                                                                                             |                                                                                                                                                 | Acquisition of minority interest                    |          | $       |             |   |         | $                |        |   |         | $                | 1,398  |   |   |         | $        |       |  



41



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##### Table of Contents



KOMAG, INCORPORATED





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


|                                                                      |  |                |          |   |            |   |        |             |  |   |              |   |  |          |        |   |       |   |          |   |  |   |          |  
|--------------------------------------------------------------------- |  | -------------- | -------- | - | ---------- | - | ------ | ----------- |  | - | ------------ | - |  | -------- | ------ | - | ----- | - | -------- | - |  | - | -------- | -
|                                                                      |  |                |          |   |            |   |        | Retained    |  |   |             
|                                                                      |  | Common Stock   |          |   | Additional |   |        | Deferred    |  |   | Earnings     |   |  |         
|                                                                      |  |                |          |   | Paid-in    |   |        | Stock-Based |  |   | (Accumulated |   |  |         
|                                                                      |  | Shares         |          |   | Amount     |   |        | Capital     |  |   | Compensation |   |  | Deficit) |        |   | Total |  
|                                                                      |  |                |          |   |            |   |        |             |  |   |              |   |  |          |        |   |       |  
|                                                                      |  | (In thousands) |         
|PREDECESSOR COMPANY                                                   |  |                |          |   |            |   |        |             |  |   |              |   |  |          |        |   |       |   |          |   |  |   |          |  
|Balance at December 30, 2001                                          |  |                | 111,925  |   |            | $ | 1,119  |             |  | $ | 586,304      |   |  | $        |       |   |       | $ | (732,362 | ) |  | $ | (144,939 | )
|Net income for the period from December 31, 2001 to
    June 30, 2002 |  |                |          |   |            |   |        |             |  |   |              |   |  |          |        |   |       |   | 312,415  |   |  |   | 312,415  |  
|Equity fresh-start adjustments on emergence from bankruptcy           |  |                | (111,925 | ) |            |   | (1,119 | )           |  |   | (586,304     | ) |  |          |        |   |       |   | 419,947  |   |  |   | (167,476 | )
|Issuance of new common stock                                          |  |                | 22,826   |   |            |   | 228    |             |  |   | 167,248      |   |  |          |        |   |       |   |          |   |  |   | 167,476  |  
|                                                                      |  |                |          |   |            |   |        |             |  |   |              |   |  |          |        |   |       |  
|Balance at June 30, 2002                                              |  |                | 22,826   |   |            |   | 228    |             |  |   | 167,248      |   |  |          |       |   |       |   |         |   |  |   | 167,476  |  
|SUCCESSOR COMPANY                                                     |  |                |          |   |            |   |        |             |  |   |              |   |  |          |        |   |       |   |          |   |  |   |          |  
|Net loss for the period from July 1, 2002 to
    December 29, 2002    |  |                |          |   |            |   |        |             |  |   |              |   |  |          |        |   |       |   | (41,919  | ) |  |   | (41,919  | )
|Deferred stock-based compensation                                     |  |                |          |   |            |   |        |             |  |   | 4,632        |   |  |          | (4,632 | ) |       |   |          |   |  |   |         |  
|Stock-based compensation                                              |  |                |          |   |            |   |        |             |  |   |              |   |  |          | 2,403  |   |       |   |          |   |  |   | 2,403    |  
|Common stock issued under stock plans                                 |  |                | 346      |   |            |   | 4      |             |  |   | (4           | ) |  |          |        |   |       |   |          |   |  |   |         |  
|                                                                      |  |                |          |   |            |   |        |             |  |   |              |   |  |          |        |   |       |  
|Balance at December 29, 2002                                          |  |                | 23,172   |   |            |   | 232    |             |  |   | 171,876      |   |  |          | (2,229 | ) |       |   | (41,919  | ) |  |   | 127,960  |  
|Net income                                                            |  |                |          |   |            |   |        |             |  |   |              |   |  |          |        |   |       |   | 36,040   |   |  |   | 36,040   |  
|Deferred stock-based compensation                                     |  |                |          |   |            |   |        |             |  |   | (21          | ) |  |          | 21     |   |       |   |          |   |  |   |         |  
|Stock-based compensation                                              |  |                |          |   |            |   |        |             |  |   |              |   |  |          | 1,980  |   |       |   |          |   |  |   | 1,980    |  
|Common stock issued under stock plans                                 |  |                | 581      |   |            |   | 6      |             |  |   | 602          |   |  |          |        |   |       |   |          |   |  |   | 608      |  
|                                                                      |  |                |          |   |            |   |        |             |  |   |              |   |  |          |        |   |       |  
|Balance at December 28, 2003                                          |  |                | 23,753   |   |            |   | 238    |             |  |   | 172,457      |   |  |          | (228   | ) |       |   | (5,879   | ) |  |   | 166,588  |  
|Net income                                                            |  |                |          |   |            |   |        |             |  |   |              |   |  |          |        |   |       |   | 51,355   |   |  |   | 51,355   |  
|Issuance of common stock, net of issuance costs                       |  |                | 3,525    |   |            |   | 35     |             |  |   | 66,356       |   |  |          |        |   |       |   |          |   |  |   | 66,391   |  
|Deferred stock-based compensation                                     |  |                |          |   |            |   |        |             |  |   | 252          |   |  |          | (252   | ) |       |   |          |   |  |   |         |  
|Stock-based compensation                                              |  |                |          |   |            |   |        |             |  |   | 166          |   |  |          | 389    |   |       |   |          |   |  |   | 555      |  
|Exercise of warrants                                                  |  |                | 90       |   |            |   | 1      |             |  |   | 1            |   |  |          |        |   |       |   |          |   |  |   | 2        |  
|Common stock issued under stock plans                                 |  |                | 697      |   |            |   | 7      |             |  |   | 2,728        |   |  |          |        |   |       |   |          |   |  |   | 2,735    |  
|                                                                      |  |                |          |   |            |   |        |             |  |   |              |   |  |          |        |   |       |  
|Balance at January 2, 2005                                            |  |                | 28,065   |   |            | $ | 281    |             |  | $ | 241,960      |   |  | $        | (91    | ) |       | $ | 45,476   |   |  | $ | 287,626  |  
|                                                                      |  |                |          |   |            |   |        |             |  |   |              |   |  |          |        |   |       |  



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KOMAG, INCORPORATED





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|        |                                                          
|------- | ---------------------------------------------------------
|Note 1. | Basis of Presentation and Significant Accounting Policies





Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code




Fiscal Year:


Use of Estimates:


Cash Equivalents:


Inventories:


|                |  |            |        |  |              |   |        | 
|--------------- |  | ---------- | ------ |  | ------------ | - | ------ | 
|                |  | January 2, |        |  | December 28, |  
|                |  | 2005       |        |  | 2003         |  
|                |  |            |        |  |              |  
|Raw materials   |  | $          | 20,647 |  |              | $ | 13,525 | 
|Work in process |  |            | 7,785  |  |              |   | 6,134  | 
|Finished goods  |  |            | 7,383  |  |              |   | 5,842  | 
|                |  |            |        |  |              |  
|                |  | $          | 35,815 |  |              | $ | 25,501 | 
|                |  |            |        |  |              |  

Property, Plant, and Equipment:


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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)








|                                               |  |            |         |   |              |   |         |  
|---------------------------------------------- |  | ---------- | ------- | - | ------------ | - | ------- | -
|                                               |  | January 2, |         |   | December 28, |  
|                                               |  | 2005       |         |   | 2003         |  
|                                               |  |            |         |   |              |  
|Land                                           |  | $          | 8,206   |   |              | $ | 6,709   |  
|Buildings                                      |  |            | 127,348 |   |              |   | 116,197 |  
|Leasehold improvements                         |  |            | 2,987   |   |              |   | 2,974   |  
|Furniture                                      |  |            | 1,580   |   |              |   | 1,376   |  
|Equipment                                      |  |            | 164,586 |   |              |   | 119,940 |  
|                                               |  |            |         |   |              |  
|                                               |  |            | 304,707 |   |              |   | 247,196 |  
|Less accumulated depreciation and amortization |  |            | (99,065 | ) |              |   | (62,660 | )
|                                               |  |            |         |   |              |  
|                                               |  | $          | 205,642 |   |              | $ | 184,536 |  
|                                               |  |            |         |   |              |  

Impairment of Long-lived Assets:


Goodwill: Goodwill and
Other Intangible


Revenue Recognition: Revenue
Recognition.








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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


Cost of Sales:


Research and Development:


Stock-Based Compensation: Accounting for Stock Issued to
Employees.


Accounting for
Stock-Based Compensation Accounting for Stock-Based
Compensation  Transition and Disclosure 
an Amendment of SFAS No. 123






|                                                                                                   |                       |            |        |      |              |   |        |                  |  |   |         |                  |   |  |   |         |   | 
|-------------------------------------------------------------------------------------------------- | --------------------- | ---------- | ------ | ---- | ------------ | - | ------ | ---------------- |  | - | ------- | ---------------- | - |  | - | ------- | - | 
|                                                                                                   |                       | Successor  |        |      | Successor    |   |        | Successor        |  |   |         | Predecessor      |  
|                                                                                                   |                       | Company    |        |      | Company      |   |        | Company          |  |   |         | Company          |  
|                                                                                                   |                       |            |        |      |              |   |        |                  |  |   |         |                  |  
|                                                                                                   |                       | Year Ended |        |      | Year Ended   |   |        | Six Months Ended |  |   |         | Six Months Ended |  
|                                                                                                   |                       | January 2, |        |      | December 28, |   |        | December 29,     |  |   |         | June 30,         |  
|                                                                                                   |                       | 2005       |        |      | 2003         |   |        | 2002             |  |   |         | 2002             |  
|                                                                                                   |                       |            |        |      |              |   |        |                  |  |   |         |                  |  
|Net income (loss), as reported                                                                     |                       | $          | 51,355 |      |              | $ | 36,040 |                  |  | $ | (41,919 | )                |   |  | $ | 312,415 |  
|Add: Stock-based employee compensation expense included in
    reported net income (loss)          |                       |            | 555    |      |              |   | 1,980  |                  |  |   | 2,404   |                  |   |  |   |        |  
|Deduct: Stock-based compensation expense determined under the
    fair value method for all awards |                       |            | (3,571 | )    |              |   | (4,265 | )                |  |   | (2,404  | )                |   |  |   | (4,895  | )
|                                                                                                   |                       |            |        |      |              |   |        |                  |  |   |         |                  |  
|Pro forma net income (loss)                                                                        |                       | $          | 48,339 |      |              | $ | 33,755 |                  |  | $ | (41,919 | )                |   |  | $ | 307,520 |  
|                                                                                                   |                       |            |        |      |              |   |        |                  |  |   |         |                  |  
|Net income (loss) per share:                                                                       |                       |            |        |      |              |   |        |                  |  |   |         |                  |   |  |   |         |  
|                                                                                                   | Basic  as reported   |            | $      | 1.88 |              |   | $      | 1.53             |  |   | $       | (1.84            | ) |  |   |         |   | 
|                                                                                                   |                       |            |        |      |              |   |        |                  |  |   |         |                  |  
|                                                                                                   | Diluted  as reported |            | $      | 1.71 |              |   | $      | 1.47             |  |   | $       | (1.84            | ) |  |   |         |   | 
|                                                                                                   |                       |            |        |      |              |   |        |                  |  |   |         |                  |  
|                                                                                                   | Basic  pro forma     |            | $      | 1.77 |              |   | $      | 1.44             |  |   | $       | (1.84            | ) |  |   |         |   | 
|                                                                                                   |                       |            |        |      |              |   |        |                  |  |   |         |                  |  
|                                                                                                   | Diluted  pro forma   |            | $      | 1.61 |              |   | $      | 1.38             |  |   | $       | (1.84            | ) |  |   |         |   | 
|                                                                                                   |                       |            |        |      |              |   |        |                  |  |   |         |                  |  





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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)








Share-Based Payment


Income Taxes:


Net Income (Loss) Per Share: Earnings per Share.






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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                                                   |                                                             |                                                        |        |        |              |   |        |                  |     |   |         |         |   | 
|-------------------------------------------------- | ----------------------------------------------------------- | ------------------------------------------------------ | ------ | ------ | ------------ | - | ------ | ---------------- | --- | - | ------- | ------- | - | 
|                                                   |                                                             | Year Ended                                             |        |        | Year Ended   |   |        | Six Months Ended |    
|                                                   |                                                             | January 2,                                             |        |        | December 28, |   |        | December 29,     |    
|                                                   |                                                             | 2005                                                   |        |        | 2003         |   |        | 2002             |    
|                                                   |                                                             |                                                        |        |        |              |   |        |                  |    
|Numerator for basic net income (loss) per share:   |                                                             |                                                        |        |        |              |   |        |                  |     |   |         |        
|                                                   | Net income (loss) as reported                               |                                                        | $      | 51,355 |              |   | $      | 36,040           |     |   | $       | (41,919 | )
|                                                   |                                                             |                                                        |        |        |              |   |        |                  |    
|Numerator for diluted net income (loss) per share: |                                                             |                                                        |        |        |              |   |        |                  |     |   |         |        
|                                                   | Net income (loss) as reported                               |                                                        | $      | 51,355 |              |   | $      | 36,040           |     |   | $       | (41,919 | )
|                                                   | Interest adjustment related to contigently convertible debt |                                                        |        | 1,642  |              |   |        |                 |     |   |         |        |  
|                                                   |                                                             |                                                        |        |        |              |   |        |                  |    
|                                                   |                                                             | $                                                      | 52,997 |        |              | $ | 36,040 |                  |     | $ | (41,919 | )      
|                                                   |                                                             |                                                        |        |        |              |   |        |                  |    
|Denominator for basic income (loss) per share:     |                                                             |                                                        |        |        |              |   |        |                  |     |   |         |        
|                                                   | Weighted average shares                                     |                                                        |        | 27,384 |              |   |        | 23,504           |     |   |         | 22,840  |  
|                                                   |                                                             |                                                        |        |        |              |   |        |                  |    
|Denominator for diluted income (loss) per share:   |                                                             |                                                        |        |        |              |   |        |                  |     |   |         |        
|                                                   | Weighted average shares                                     |                                                        |        | 27,384 |              |   |        | 23,504           |     |   |         | 22,840  |  
|                                                   | Effect of dilutive securities:                              |                                                        |        |        |              |   |        |                  |     |   |         |         |  
|                                                   |                                                             | Contingently convertible shares under convertible debt |        |        | 2,803        |   |        |                  |    |   |         |         |  | 
|                                                   |                                                             | Stock options                                          |        |        | 468          |   |        |                  | 337 |   |         |         |  | 
|                                                   |                                                             | Warrants                                               |        |        | 362          |   |        |                  | 221 |   |         |         |  | 
|                                                   |                                                             | Stock purchase rights                                  |        |        |             |   |        |                  | 456 |   |         |         |  | 
|                                                   |                                                             |                                                        |        |        |              |   |        |                  |    
|                                                   |                                                             |                                                        | 31,017 |        |              |   | 24,518 |                  |     |   | 22,840  |        
|                                                   |                                                             |                                                        |        |        |              |   |        |                  |    
|Basic net income (loss) per share                  |                                                             | $                                                      | 1.88   |        |              | $ | 1.53   |                  |     | $ | (1.84   | )      
|                                                   |                                                             |                                                        |        |        |              |   |        |                  |    
|Diluted net income (loss) per share                |                                                             | $                                                      | 1.71   |        |              | $ | 1.47   |                  |     | $ | (1.84   | )      
|                                                   |                                                             |                                                        |        |        |              |   |        |                  |    







Accounting Issues Related to Certain
Features of Contingently Convertible Debt and the Effect on
Diluted Earnings per Share.


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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




Comprehensive Income (Loss):


Recent Accounting Pronouncements: Consolidation of Variable Interest Entities Consolidation of Variable
Interest Entities


Inventory Costs.




|        |                                                     
|------- | ----------------------------------------------------
|Note 2. | Emergence from Chapter 11 and Plan of Reorganization







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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)










|        |                      
|------- | ---------------------
|Note 3. | Fresh-Start Reporting











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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                                                                                    |  |            |      |   |              |   |     |                  |  |   |       |                  |  |  |   |         | 
|----------------------------------------------------------------------------------- |  | ---------- | ---- | - | ------------ | - | --- | ---------------- |  | - | ----- | ---------------- |  |  | - | ------- | 
|                                                                                    |  | Successor  |      |   | Successor    |   |     | Successor        |  |   |       | Predecessor      | 
|                                                                                    |  | Company    |      |   | Company      |   |     | Company          |  |   |       | Company          | 
|                                                                                    |  |            |      |   |              |   |     |                  |  |   |       |                  | 
|                                                                                    |  | Year Ended |      |   | Year Ended   |   |     | Six Months Ended |  |   |       | Six Months Ended | 
|                                                                                    |  | January 2, |      |   | December 28, |   |     | December 29,     |  |   |       | June 30,         | 
|                                                                                    |  | 2005       |      |   | 2003         |   |     | 2002             |  |   |       | 2002             | 
|                                                                                    |  |            |      |   |              |   |     |                  |  |   |       |                  | 
|Gain on extinguishment of liabilities subject to compromise                         |  | $          |     |   |              | $ |    |                  |  | $ |      |                  |  |  | $ | 379,027 | 
|Gain on revaluation of assets and liabilities pursuant to
    fresh-start reporting |  |            |     |   |              |   |    |                  |  |   |      |                  |  |  |   | 17,349  | 
|Other income (expense), net                                                         |  |            | (151 | ) |              |   | 250 |                  |  |   | 2,150 |                  |  |  |   | 633     | 
|                                                                                    |  |            |      |   |              |   |     |                  |  |   |       |                  | 
|                                                                                    |  | $          | (151 | ) |              | $ | 250 |                  |  | $ | 2,150 |                  |  |  | $ | 397,009 | 
|                                                                                    |  |            |      |   |              |   |     |                  |  |   |       |                  | 





|        |                                   
|------- | ----------------------------------
|Note 4. | Segment and Geographic Information



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                         |                                        |            |         |         |              |  |         |                  |   |  |         |                  |   |  |  |         |         |  
|------------------------ | -------------------------------------- | ---------- | ------- | ------- | ------------ |  | ------- | ---------------- | - |  | ------- | ---------------- | - |  |  | ------- | ------- | -
|                         |                                        | Successor  |         |         | Successor    |  |         | Successor        |   |  |         | Predecessor      |  
|                         |                                        | Company    |         |         | Company      |  |         | Company          |   |  |         | Company          |  
|                         |                                        |            |         |         |              |  |         |                  |   |  |         |                  |  
|                         |                                        | Year Ended |         |         | Year Ended   |  |         | Six Months Ended |   |  |         | Six Months Ended |  
|                         |                                        | January 2, |         |         | December 28, |  |         | December 29,     |   |  |         | June 30,         |  
|                         |                                        | 2005       |         |         | 2003         |  |         | 2002             |   |  |         | 2002             |  
|                         |                                        |            |         |         |              |  |         |                  |   |  |         |                  |  
|Net sales:               |                                        |            |         |         |              |  |         |                  |   |  |         |                  |   |  |  |         |        
|                         | To customers from U.S. parent          |            | $       | 21,520  |              |  | $       | 1,141            |   |  | $       | 815              |   |  |  | $       | 1,343   |  
|                         | To customers from Malaysian subsidiary |            |         | 436,857 |              |  |         | 437,151          |   |  |         | 173,934          |   |  |  |         | 110,612 |  
|                         | Intercompany from Malaysian subsidiary |            |         | 20,868  |              |  |         | 1,495            |   |  |         | 926              |   |  |  |         | 928     |  
|                         | Intercompany from U.S. parent          |            |         | 170     |              |  |         | 369              |   |  |         | 320              |   |  |  |         | 913     |  
|                         |                                        |            |         |         |              |  |         |                  |   |  |         |                  |  
|                         |                                        |            | 479,415 |         |              |  | 440,156 |                  |   |  | 175,995 |                  |   |  |  | 113,796 |        
|                         | Intercompany eliminations              |            |         | (21,038 | )            |  |         | (1,864           | ) |  |         | (1,246           | ) |  |  |         | (1,841  | )
|                         |                                        |            |         |         |              |  |         |                  |   |  |         |                  |  
|                         | Total net sales                        |            | $       | 458,377 |              |  | $       | 438,292          |   |  | $       | 174,749          |   |  |  | $       | 111,955 |  
|                         |                                        |            |         |         |              |  |         |                  |   |  |         |                  |  
|Operating income (loss): |                                        |            |         |         |              |  |         |                  |   |  |         |                  |   |  |  |         |        
|                         | U.S. parent                            |            | $       | (5,823  | )            |  | $       | (2,679           | ) |  | $       | (38,811          | ) |  |  | $       | (10,686 | )
|                         | Malaysian subsidiary                   |            |         | 60,205  |              |  |         | 52,098           |   |  |         | 2,431            |   |  |  |         | (16,988 | )
|                         |                                        |            |         |         |              |  |         |                  |   |  |         |                  |  
|                         | Total operating income (loss)          |            | $       | 54,382  |              |  | $       | 49,419           |   |  | $       | (36,380          | ) |  |  | $       | (27,674 | )
|                         |                                        |            |         |         |              |  |         |                  |   |  |         |                  |  
|Long-lived assets:       |                                        |            |         |         |              |  |         |                  |   |  |         |                  |   |  |  |         |        
|                         | U.S. parent                            |            | $       | 20,094  |              |  | $       | 16,314           |   |  | $       | 43,579           |   |  |  |         |         |  
|                         | Malaysian subsidiary                   |            |         | 190,048 |              |  |         | 172,550          |   |  |         | 186,647          |   |  |  |         |         |  
|                         |                                        |            |         |         |              |  |         |                  |   |  |         |                  |  
|                         | Total long-lived assets                |            | $       | 210,142 |              |  | $       | 188,864          |   |  | $       | 230,226          |   |  |  |         |         |  
|                         |                                        |            |         |         |              |  |         |                  |   |  |         |                  |  



|              |                 |            |         |         |              |   |         |                  |  |   |        |                  |  |  |   |        |         | 
|------------- | --------------- | ---------- | ------- | ------- | ------------ | - | ------- | ---------------- |  | - | ------ | ---------------- |  |  | - | ------ | ------- | 
|              |                 | Successor  |         |         | Successor    |   |         | Successor        |  |   |        | Predecessor      | 
|              |                 | Company    |         |         | Company      |   |         | Company          |  |   |        | Company          | 
|              |                 |            |         |         |              |   |         |                  |  |   |        |                  | 
|              |                 | Year Ended |         |         | Year Ended   |   |         | Six Months Ended |  |   |        | Six Months Ended | 
|              |                 | January 2, |         |         | December 28, |   |         | December 29,     |  |   |        | June 30,         | 
|              |                 | 2005       |         |         | 2003         |   |         | 2002             |  |   |        | 2002             | 
|              |                 |            |         |         |              |   |         |                  |  |   |        |                  | 
|Singapore     |                 | $          | 201,686 |         |              | $ | 138,584 |                  |  | $ | 56,077 |                  |  |  | $ | 36,611 |        
|Thailand      |                 |            | 111,904 |         |              |   | 68,855  |                  |  |   | 21,332 |                  |  |  |   | 4,063  |        
|United States |                 |            | 53,535  |         |              |   | 36,347  |                  |  |   | 3,118  |                  |  |  |   | 3,604  |        
|Malaysia      |                 |            | 42,704  |         |              |   | 137,977 |                  |  |   | 84,390 |                  |  |  |   | 65,288 |        
|Taiwan        |                 |            | 25,940  |         |              |   | 8,719   |                  |  |   |       |                  |  |  |   |       |        
|Japan         |                 |            | 20,779  |         |              |   | 26,107  |                  |  |   | 1,362  |                  |  |  |   | 1,856  |        
|China         |                 |            | 1,792   |         |              |   | 737     |                  |  |   | 462    |                  |  |  |   | 194    |        
|Europe        |                 |            | 37      |         |              |   | 20,966  |                  |  |   | 8,008  |                  |  |  |   | 339    |        
|              |                 |            |         |         |              |   |         |                  |  |   |        |                  | 
|              | Total net sales |            | $       | 458,377 |              |   | $       | 438,292          |  |   | $      | 174,749          |  |  |   | $      | 111,955 | 
|              |                 |            |         |         |              |   |         |                  |  |   |        |                  | 



|        |                                            
|------- | -------------------------------------------
|Note 5. | Concentration of Customer and Supplier Risk



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)












|                                       |  |            |    |              |  |                  |    |   |                  |  |    |   |  |  |  |    |  
|-------------------------------------- |  | ---------- | -- | ------------ |  | ---------------- | -- | - | ---------------- |  | -- | - |  |  |  | -- | -
|                                       |  | Successor  |    | Successor    |  | Successor        |    |   | Predecessor     
|                                       |  | Company    |    | Company      |  | Company          |    |   | Company         
|                                       |  |            |    |              |  |                  |    |   |                 
|                                       |  | Year Ended |    | Year Ended   |  | Six Months Ended |    |   | Six Months Ended
|                                       |  | January 2, |    | December 28, |  | December 29,     |    |   | June 30,        
|                                       |  | 2005       |    | 2003         |  | 2002             |    |   | 2002            
|                                       |  |            |    |              |  |                  |    |   |                 
|Maxtor Corporation                     |  |            | 47 | %            |  |                  | 37 | % |                  |  | 31 | % |  |  |  | 30 | %
|Hitachi Global Storage Technologies(1) |  |            | 29 | %            |  |                  | 17 | % |                  |  |   |   |  |  |  |   |  
|Western Digital Corporation            |  |            | 14 | %            |  |                  | 38 | % |                  |  | 60 | % |  |  |  | 62 | %






|    |                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Hitachi Global Storage Technologies was founded in 2003, and was
    formed as a result of the combination of Hitachis and
    IBMs storage technology business.





|        |                                                  
|------- | -------------------------------------------------
|Note 6. | Employee Savings and Deferred Profit Sharing Plan



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






|        |                  
|------- | -----------------
|Note 7. | Impairment Charge





|        |             
|------- | ------------
|Note 8. | Income Taxes



|         |          |            |       |       |              |   |       |                  |  |   |       |                  |   |  |   |     |     | 
|-------- | -------- | ---------- | ----- | ----- | ------------ | - | ----- | ---------------- |  | - | ----- | ---------------- | - |  | - | --- | --- | 
|         |          | Successor  |       |       | Successor    |   |       | Successor        |  |   |       | Predecessor      |  
|         |          | Company    |       |       | Company      |   |       | Company          |  |   |       | Company          |  
|         |          |            |       |       |              |   |       |                  |  |   |       |                  |  
|         |          | Year Ended |       |       | Year Ended   |   |       | Six Months Ended |  |   |       | Six Months Ended |  
|         |          | January 2, |       |       | December 28, |   |       | December 29,     |  |   |       | June 30,         |  
|         |          | 2005       |       |       | 2003         |   |       | 2002             |  |   |       | 2002             |  
|         |          |            |       |       |              |   |       |                  |  |   |       |                  |  
|Federal: |          |            |       |       |              |   |       |                  |  |   |       |                  |   |  |   |     |    
|         | Current  |            | $     |      |              |   | $     |                 |  |   | $     | (65              | ) |  |   | $   |    | 
|         | Deferred |            |       |      |              |   |       |                 |  |   |       |                 |   |  |   |     |    | 
|         |          |            |       |       |              |   |       |                  |  |   |       |                  |  
|         |          |            |      |       |              |   |      |                  |  |   | (65   | )                |   |  |   |    |    
|State:   |          |            |       |       |              |   |       |                  |  |   |       |                  |   |  |   |     |    
|         | Current  |            |       | 1     |              |   |       | 2                |  |   |       |                 |   |  |   |     | 2   | 
|         | Deferred |            |       |      |              |   |       |                 |  |   |       |                 |   |  |   |     |    | 
|         |          |            |       |       |              |   |       |                  |  |   |       |                  |  
|         |          |            | 1     |       |              |   | 2     |                  |  |   |      |                  |   |  |   | 2   |    
|Foreign: |          |            |       |       |              |   |       |                  |  |   |       |                  |   |  |   |     |    
|         | Current  |            |       | 1,070 |              |   |       | 998              |  |   |       | 1,333            |   |  |   |     | 717 | 
|         |          |            |       |       |              |   |       |                  |  |   |       |                  |  
|         |          | $          | 1,071 |       |              | $ | 1,000 |                  |  | $ | 1,268 |                  |   |  | $ | 719 |    
|         |          |            |       |       |              |   |       |                  |  |   |       |                  |  



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                         |                                                 |                           |                               |          |              |   |      |              |         |   |      |          |         |   | 
|------------------------ | ----------------------------------------------- | ------------------------- | ----------------------------- | -------- | ------------ | - | ---- | ------------ | ------- | - | ---- | -------- | ------- | - | 
|                         |                                                 | January 2,                |                               |          | December 28, |   |      | December 29, |        
|                         |                                                 | 2005                      |                               |          | 2003         |   |      | 2002         |        
|                         |                                                 |                           |                               |          |              |   |      |              |        
|Deferred tax assets      |                                                 |                           |                               |          |              |   |      |              |         |   |      |         
|                         | Depreciation and amortization                   |                           | $                             | 22,037   |              |   | $    | 23,739       |         |   | $    | 25,999   |        
|                         | Accrued compensation and benefits               |                           |                               | 1,456    |              |   |      | 1,262        |         |   |      | 1,637    |        
|                         | Other                                           |                           |                               | 2,207    |              |   |      | 5,344        |         |   |      | 1,815    |        
|                         | Tax benefit of net operating loss carryforwards |                           |                               | 68,480   |              |   |      | 62,729       |         |   |      | 58,465   |        
|                         | Tax benefit of credit carryforwards             |                           |                               | 32,887   |              |   |      | 31,409       |         |   |      | 27,082   |        
|                         |                                                 |                           |                               |          |              |   |      |              |        
|                         |                                                 | Gross deferred tax assets |                               |          | 127,067      |   |      |              | 124,483 |   |      |          | 114,998 |  
|Deferred tax liabilities |                                                 |                           |                              |          |              |   | (800 | )            |         |   | (800 | )       
|                         |                                                 |                           |                               |          |              |   |      |              |        
|                         |                                                 | Net deferred tax assets   |                               |          | 127,067      |   |      |              | 123,683 |   |      |          | 114,198 |  
|                         | Valuation allowance                             |                           |                               | (127,067 | )            |   |      | (123,683     | )       |   |      | (114,198 | )      
|                         |                                                 |                           |                               |          |              |   |      |              |        
|                         |                                                 |                           | Total net deferred tax assets |          | $            |  |      |              | $       |  |      |          | $       |  | 
|                         |                                                 |                           |                               |          |              |   |      |              |        







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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                                                                                |  |            |         |   |              |   |         |                  |  |   |         |                  |  |  |   |          |  
|------------------------------------------------------------------------------- |  | ---------- | ------- | - | ------------ | - | ------- | ---------------- |  | - | ------- | ---------------- |  |  | - | -------- | -
|                                                                                |  | Successor  |         |   | Successor    |   |         | Successor        |  |   |         | Predecessor      | 
|                                                                                |  | Company    |         |   | Company      |   |         | Company          |  |   |         | Company          | 
|                                                                                |  |            |         |   |              |   |         |                  |  |   |         |                  | 
|                                                                                |  | Year Ended |         |   | Year Ended   |   |         | Six Months Ended |  |   |         | Six Months Ended | 
|                                                                                |  | January 2, |         |   | December 28, |   |         | December 29,     |  |   |         | June 30,         | 
|                                                                                |  | 2005       |         |   | 2003         |   |         | 2002             |  |   |         | 2002             | 
|                                                                                |  |            |         |   |              |   |         |                  |  |   |         |                  | 
|Income tax expense (benefit) at federal statutory rate                          |  | $          | 18,349  |   |              | $ | 12,964  |                  |  | $ | (14,228 | )                |  |  | $ | 127,056  |  
|State income taxes, net of federal benefit                                      |  |            | 1       |   |              |   | 1       |                  |  |   |        |                  |  |  |   | 2        |  
|Foreign withholding taxes                                                       |  |            | (182    | ) |              |   | (834    | )                |  |   | 1,333   |                  |  |  |   | 717      |  
|Non-deductible interest expense                                                 |  |            |        |   |              |   |        |                  |  |   | 586     |                  |  |  |   | 496      |  
|Non-deductible goodwill amortization and impairment                             |  |            |        |   |              |   |        |                  |  |   | 11,865  |                  |  |  |   |         |  
|Non-taxable gain on the extinguishment of liabilities subject to
    compromise |  |            |        |   |              |   |        |                  |  |   |        |                  |  |  |   | (132,650 | )
|Foreign rate differential                                                       |  |            | (18,489 | ) |              |   | (14,948 | )                |  |   | (2,415  | )                |  |  |   | 9,870    |  
|Losses for which no current year benefit available                              |  |            | 1,392   |   |              |   | 3,820   |                  |  |   |        |                  |  |  |   |         |  
|In-process research and development                                             |  |            |        |   |              |   |        |                  |  |   | 2,374   |                  |  |  |   |         |  
|Other                                                                           |  |            |        |   |              |   | (3      | )                |  |   | 1,753   |                  |  |  |   | (4,772   | )
|                                                                                |  |            |         |   |              |   |         |                  |  |   |         |                  | 
|                                                                                |  | $          | 1,071   |   |              | $ | 1,000   |                  |  | $ | 1,268   |                  |  |  | $ | 719      |  
|                                                                                |  |            |         |   |              |   |         |                  |  |   |         |                  | 









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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)








|        |                                    
|------- | -----------------------------------
|Note 9. | Fair Value of Financial Instruments







|         |                                     
|-------- | ------------------------------------
|Note 10. | Goodwill and Other Intangible Assets











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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|         |                                       
|-------- | --------------------------------------
|Note 11. | Accrued Expenses and Other Liabilities



|                                  |  |            |        |  |              |   |        | 
|--------------------------------- |  | ---------- | ------ |  | ------------ | - | ------ | 
|                                  |  | January 2, |        |  | December 28, |  
|                                  |  | 2005       |        |  | 2003         |  
|                                  |  |            |        |  |              |  
|Accrued compensation and benefits |  | $          | 15,777 |  |              | $ | 20,608 | 
|Restructuring liabilities         |  |            |       |  |              |   | 515    | 
|Other liabilities                 |  |            | 4,110  |  |              |   | 3,931  | 
|                                  |  |            |        |  |              |  
|                                  |  | $          | 19,887 |  |              | $ | 25,054 | 
|                                  |  |            |        |  |              |  









|         |                        
|-------- | -----------------------
|Note 12. | Debt and Bank Guarantee











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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)












|         |                     
|-------- | --------------------
|Note 13. | Stockholders Equity



| |             
| | ------------
| | Common Stock



|                                  |  |  |       | 
|--------------------------------- |  |  | ----- | 
|2002 Qualified Stock Plan         |  |  | 2,502 | 
|2002 Employee Stock Purchase Plan |  |  | 400   | 
|Warrants                          |  |  | 828   | 
|                                  |  |  |      
|                                  |  |  | 3,730 | 
|                                  |  |  |      





| |                                               
| | ----------------------------------------------
| | Amended and Restated 2002 Qualified Stock Plan





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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)










|                                 |           |                           |           |           |                |   |       |       | 
|-------------------------------- | --------- | ------------------------- | --------- | --------- | -------------- | - | ----- | ----- | 
|                                 |           |                           |           | Weighted- |               
|                                 |           |                           |           | Average   |               
|                                 |           | Shares                    |           |           | Exercise Price |  
|                                 |           |                           |           |           |                |  
|                                 |           | (In thousands, except per |          
|                                 |           | share amounts)            |          
|Outstanding at June 30, 2002     |           |                           |          |           |                | $ |      |      
|                                 | Granted   |                           |           | 403,896   |                |   |       |      | 
|                                 | Exercised |                           |           |          |                |   |       |      | 
|                                 | Cancelled |                           |           | (405      | )              |   |       |      | 
|                                 |           |                           |           |           |                |  
|Outstanding at December 29, 2002 |           |                           | 403,491   |           |                |   |      |      
|                                 | Granted   |                           |           | 1,205,672 |                |   |       | 9.09  | 
|                                 | Exercised |                           |           | (367,675  | )              |   |       | 0.67  | 
|                                 | Cancelled |                           |           | (21,403   | )              |   |       | 5.87  | 
|                                 |           |                           |           |           |                |  
|Outstanding at December 28, 2003 |           |                           | 1,220,085 |           |                |   | 8.68  |      
|                                 | Granted   |                           |           | 422,880   |                |   |       | 17.19 | 
|                                 | Exercised |                           |           | (237,912  | )              |   |       | 5.78  | 
|                                 | Cancelled |                           |           | (37,669   | )              |   |       | 12.50 | 
|                                 |           |                           |           |           |                |  
|Outstanding at January 2, 2005   |           |                           | 1,367,384 |           |                | $ | 11.72 |      
|                                 |           |                           |           |           |                |  

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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                         |  |                     |           |                     |  |          |     |             |  |          |       |  |  |  |         |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | -------- | --- | ----------- |  | -------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                         |  | Options Outstanding |           |                    
|                         |  |                     |           | Options Exercisable
|                         |  |                     |           | Remaining           |  |          |     |            
|                         |  | Number              |           | Contractual         |  | Exercise |     | Number      |  | Exercise
|Range of Exercise Prices |  | Outstanding         |           | Life (yrs)*         |  | Price*   |     | Exercisable |  | Price*  
|                         |  |                     |           |                     |  |          |     |             |  |         
|$    - $ 6.48           |  |                     | 562,143   |                     |  |          | 8.0 |             |  | $        | 6.43  |  |  |  | 240,551 |  |  | $ | 6.48  | 
|10.30 -  12.68           |  |                     | 67,010    |                     |  |          | 9.5 |             |  |          | 11.28 |  |  |  |        |  |  |   |      | 
|13.16 -  18.78           |  |                     | 449,027   |                     |  |          | 8.4 |             |  |          | 13.75 |  |  |  | 176,512 |  |  |   | 13.33 | 
|18.85 -  22.03           |  |                     | 289,204   |                     |  |          | 8.8 |             |  |          | 18.93 |  |  |  | 824     |  |  |   | 18.86 | 
|                         |  |                     |           |                     |  |          |     |             |  |          |       |  |  |  |         |  |  |   |       | 
|                         |  |                     | 1,367,384 |                     |  |          |     |             |  |          |       |  |  |  | 417,887 |  |  |   |       | 
|                         |  |                     |           |                     |  |          |     |             |  |          |       |  |  |  |         |  |  |   |       | 






|  |                 
|- | ----------------
|* | Weighted-average





| |                           
| | --------------------------
| | Deferred Compensation Plan



Deferred Stock-Based Compensation




| |                                  
| | ---------------------------------
| | 2002 Employee Stock Purchase Plan





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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




| |         
| | --------
| | Warrants





| |                                  
| | ---------------------------------
| | Deferred Stock-Based Compensation









|         |                       
|-------- | ----------------------
|Note 14. | Leases and Commitments





|           |  |          |        |  |          |   |       | 
|---------- |  | -------- | ------ |  | -------- | - | ----- | 
|           |  | Minimum  |        |  |         
|           |  | Lease    |        |  | Sublease |  
|           |  | Payments |        |  | Income   |  
|           |  |          |        |  |          |  
|2005       |  | $        | 1,454  |  |          | $ | 1,585 | 
|2006       |  |          | 3,092  |  |          |   | 1,633 | 
|2007       |  |          | 2,258  |  |          |   | 414   | 
|2008       |  |          | 2,039  |  |          |   |      | 
|2009       |  |          | 3,141  |  |          |   |      | 
|Thereafter |  |          | 16,382 |  |          |   |      | 
|           |  |          |        |  |          |  
|           |  | $        | 28,366 |  |          | $ | 3,632 | 
|           |  |          |        |  |          |  



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|         |                                     
|-------- | ------------------------------------
|Note 15. | Quarterly Financial Data (Unaudited)

|                                                           |  |             |         |  |             |   |         |             |  |   |             |  |  |   |         | 
|---------------------------------------------------------- |  | ----------- | ------- |  | ----------- | - | ------- | ----------- |  | - | ----------- |  |  | - | ------- | 
|                                                           |  | 2004        |        
|                                                           |  |             |        
|                                                           |  | 1st Quarter |         |  | 2nd Quarter |   |         | 3rd Quarter |  |   | 4th Quarter | 
|                                                           |  |             |         |  |             |   |         |             |  |   |             | 
|Net sales                                                  |  | $           | 123,585 |  |             | $ | 101,139 |             |  | $ | 102,424     |  |  | $ | 131,229 | 
|Gross profit                                               |  |             | 36,929  |  |             |   | 21,629  |             |  |   | 23,168      |  |  |   | 30,391  | 
|Operating income                                           |  |             | 20,143  |  |             |   | 8,888   |             |  |   | 9,755       |  |  |   | 15,596  | 
|Net income                                                 |  | $           | 17,973  |  |             | $ | 8,368   |             |  | $ | 9,264       |  |  | $ | 15,750  | 
|Basic net income per share                                 |  | $           | 0.68    |  |             | $ | 0.30    |             |  | $ | 0.33        |  |  | $ | 0.56    | 
|Diluted net income per share(1)                            |  | $           | 0.61    |  |             | $ | 0.28    |             |  | $ | 0.31        |  |  | $ | 0.51    | 
|Number of shares used in basic per share computations      |  |             | 26,307  |  |             |   | 27,526  |             |  |   | 27,792      |  |  |   | 27,975  | 
|Number of shares used in diluted per share computations(1) |  |             | 29,778  |  |             |   | 31,553  |             |  |   | 31,334      |  |  |   | 31,875  | 

|                                                        |  |             |         |  |             |   |         |                |  |   |             |  |  |   |         | 
|------------------------------------------------------- |  | ----------- | ------- |  | ----------- | - | ------- | -------------- |  | - | ----------- |  |  | - | ------- | 
|                                                        |  | 2003        |        
|                                                        |  |             |        
|                                                        |  | 1st Quarter |         |  | 2nd Quarter |   |         | 3rd Quarter(2) |  |   | 4th Quarter | 
|                                                        |  |             |         |  |             |   |         |                |  |   |             | 
|Net sales                                               |  | $           | 105,515 |  |             | $ | 105,347 |                |  | $ | 109,199     |  |  | $ | 118,231 | 
|Gross profit                                            |  |             | 22,776  |  |             |   | 22,836  |                |  |   | 25,359      |  |  |   | 36,451  | 
|Operating income                                        |  |             | 9,166   |  |             |   | 8,613   |                |  |   | 10,656      |  |  |   | 20,984  | 
|Net income                                              |  | $           | 5,054   |  |             | $ | 4,600   |                |  | $ | 9,943       |  |  | $ | 16,443  | 
|Basic net income per share                              |  | $           | 0.22    |  |             | $ | 0.20    |                |  | $ | 0.42        |  |  | $ | 0.70    | 
|Diluted net income per share                            |  | $           | 0.21    |  |             | $ | 0.19    |                |  | $ | 0.40        |  |  | $ | 0.65    | 
|Number of shares used in basic per share computations   |  |             | 23,297  |  |             |   | 23,344  |                |  |   | 23,558      |  |  |   | 23,643  | 
|Number of shares used in diluted per share computations |  |             | 23,934  |  |             |   | 24,304  |                |  |   | 24,860      |  |  |   | 25,150  | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In January 2004, the Company issued $80.5 million of
    2.0% Convertible Subordinated Notes (the Notes). The Notes
    are convertible, under certain circumstances, into shares of the
    Companys common stock at an initial conversion price of
    $26.40, or approximately 3,049,000 shares. In October 2004,
    the EITF reached a consensus on Issue No. 04-08,
    Accounting Issues Related to Certain Features of Contingently
    Convertible Debt and the Effect on Diluted Earnings per
    Share. This consensus, which became effective during the
    fourth quarter of 2004, requires the Company to include an
    additional 3.0 million shares in the calculation of diluted
    earnings per share, beginning in the period in which the debt
    issued, which was the first quarter of 2004. Therefore, diluted
    earnings per share have been adjusted from $0.65, $0.29, and
    $0.33 for the first, second, and third quarters of 2004,
    respectively.
|   
|(2) | Results for the third quarter of 2003 included an income tax
    benefit of $2.5 million related to withholding taxes
    previously accrued which are no longer payable as a result of a
    tax exemption.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



|         |                  
|-------- | -----------------
|Note 16. | Subsequent Events



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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of Disclosure Controls and Procedures




Internal Control over Financial Reporting






| |   |                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pertain to the maintenance of records that, in reasonable
    detail, accurately and fairly reflect the transactions and
    dispositions of the assets of the company;                                                                                                                                                                                        
|
| |  | provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles, and
    that receipts and expenditures of the company are being made
    only in accordance with authorizations of management and
    directors of the company; and
|
| |  | provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of the
    companys assets that could have a material effect on the
    financial statements.                                                                                                                                       



Managements Report on Internal Control Over Financial
Reporting






Changes in Internal Control Over Financial Reporting









|         |                  
|-------- | -----------------
|Item 9B. | Other Information



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PART III





Item(s) 10, 11, 12, 13, and 14.




|          |  |                                                                |  |                                                                                         
|--------- |  | -------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|10-K Item |  | Description                                                    |  | Caption in 2005 Proxy Statement                                                         
|          |  |                                                                |  |                                                                                         
|10        |  | Directors and Executive Officers                               |  | Election of Directors and Section 16(a)
    Beneficial Ownership Reporting Compliance
|11        |  | Executive Compensation                                         |  | Executive Compensation and Related Information                                        
|12        |  | Security Ownership of Certain Beneficial Owners and Management |  | Stock Ownership Table                                                                 
|13        |  | Certain Relationships and Related Transactions                 |  | Certain Relationships and Related Transactions                                        
|14        |  | Principal Accountant Fees and Services                         |  | Principal Accountant Fees and Services                                                





PART IV







|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and Reports on
    Form 8-K

List of Documents filed as part of this Report




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



|                                                                                                                                                                     |  |  |  | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Consolidated Statements of Operations  Fiscal Year
    2004, Fiscal Year 2003, Six Months Ended December 29, 2002,
    and Six Months Ended June 30, 2002           |  |  |  | 
|Consolidated Balance Sheets  January 2, 2005 and
    December 28, 2003                                                                                              |  |  |  | 
|Consolidated Statements of Cash Flows  Fiscal Year
    2004, Fiscal Year 2003, Six Months Ended December 29, 2002,
    and Six Months Ended June 30, 2002           |  |  |  | 
|Consolidated Statements of Stockholders Equity 
    Fiscal Year 2004, Fiscal Year 2003, Six Months Ended
    December 29, 2002, and Six Months Ended June 30, 2002 |  |  |  | 
|Notes to Consolidated Financial Statements                                                                                                                           |  |  |  | 

64



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##### Table of Contents





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









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

|         |  |                                                                                                                                                                                                                                                                                                                            
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                                                                                                                                                            
|Number   |  | Description                                                                                                                                                                                                                                                                                                                
|         |  |                                                                                                                                                                                                                                                                                                                            
|2.1      |  | Komag Incorporateds Further Modified First Amended Plan of
    Reorganization, dated May 7, 2002 (incorporated by
    reference from Exhibit 2.1 filed with the Companys
    Form 8-K filed on July 11, 2002).                                                                                                           
|        
|2.2      |  | Findings of Fact, Conclusions of Law and Order, dated
    May 9, 2002, Confirming Further Modified First Amended Plan
    of Reorganization of Komag, Incorporated, dated May 7, 2002
    (incorporated by reference from Exhibit 2.2 filed with the
    Companys Form 8-K filed on July 11, 2002).                       
|        
|3.1      |  | Amended and Restated Certificate of Incorporation of Komag,
    Incorporated (incorporated by reference from Exhibit 3.1
    filed with the Companys Form 10-Q filed on
    August 13, 2002).                                                                                                                             
|        
|3.2      |  | Bylaws of Komag, Incorporated (incorporated by reference from
    Exhibit 3.2 filed with the Companys Form 10-Q filed
    on August 13, 2002).                                                                                                                                                                            
|        
|4.1      |  | Form of Stock Certificate for Common Stock (incorporated by
    reference from Exhibit 4.1 filed with the Companys
    Form 10-Q filed on August 13, 2002).                                                                                                                                                               
|        
|4.2      |  | Registration Rights Agreement between Komag, Incorporated and
    certain holders of common stock and Senior Secured Notes due
    2007, (incorporated by reference from Exhibit 4.2 filed
    with the Companys Form 10-Q filed on August 13,
    2002), as amended by Amendment No. 1 thereto dated
    October 1, 2002.
|        
|4.3      |  | Form of Warrant (incorporated by reference from Exhibit 4.3
    filed with the Companys Form 10-Q filed on August 13,
    2002).                                                                                                                                                                                          
|        
|4.4      |  | Form of Indenture by and between Komag, Incorporated and
    U.S. Bank National Association (incorporated by reference
    from Exhibit 4.8 filed with the Companys
    Form S-3/A filed on January 15, 2004).                                                                                                            
|        
|4.5      |  | Form of Convertible Note (included in Exhibit 4.3)                                                                                                                                                                                                                                                                         
|        
|10.1.1   |  | Lease Agreement (B10) dated May 24, 1996 between Sobrato
    Development Companies #871 and Komag, Incorporated
    (incorporated by reference from Exhibit 10.1.11 filed with
    the Companys report on Form 10-K for the year ended
    December 29, 1996).                                                            
|        
|10.1.1.1 |  | Second Amendment to Lease (B10) dated December 17, 2004,
    between DIVCO West Properties and Komag, Incorporated.                                                                                                                                                                                                        
|        
|10.1.2   |  | Lease Agreement (B11) dated May 24, 1996 between Sobrato
    Development Companies #871 and Komag, Incorporated
    (incorporated by reference from Exhibit 10.1.12 filed with
    the Companys report on Form 10-K for the year ended
    December 29, 1996).                                                            
|        
|10.1.3   |  | Sublease Agreement (B11) dated January 10, 2000, between
    Komag, Incorporated and 2Wire, Inc. (incorporated by reference
    from Exhibit 10.1.15 filed with the Companys report
    on Form 10-K for the year ended January 2, 2000).                                                                                 
|        
|10.2     |  | Form of Indemnification Agreement (incorporated by reference
    from Exhibit 10.2 filed with the Companys report on
    Form S-1 on August 27, 2002).                                                                                                                                                                    
|        
|10.3     |  | Form of Komag, Incorporated Amended and Restated 2002 Employee
    Stock Purchase Plan (incorporated by reference from
    Exhibit 4.2 filed with the Companys report on
    Form S-8 on July 23, 2002).                                                                                                                  

65



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                                      
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                      
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                      
|       
|10.3.1  |  | Amended and Restated 2002 Qualified Stock Option Plan
    (incorporated by reference from Exhibit 4.1 filed with the
    Companys report on Form S-8 on July 23, 2002).                                                                                                                                                                                             
|       
|10.3.2  |  | Komag, Incorporated 2002 Deferred Compensation Plan
    (incorporated by reference from Exhibit 10.4.2 filed with
    the Companys report on Form S-1 on August 27,
    2002).                                                                                                                                                                                      
|       
|10.4.1  |  | Letter dated August 6, 2003 from the Malaysian Industrial
    Development Authority addressed to Komag USA (Malaysia) Sdn.
    extending the Pioneer Status of the Companys
    thin-film media venture in Malaysia (incorporated by reference
    from Exhibit 10.5.2 filed with the Companys report on
    Form 10-Q for the quarter ended September 28, 2003).
|       
|10.5.1  |  | Form of Executive Retention Agreement (incorporated by reference
    from Exhibit 10.6.1 filed with the Companys report on
    Form S-1 on August 27, 2002).                                                                                                                                                                                                        
|       
|10.6    |  | Business Agreement by and between the Company and Maxtor
    Corporation dated October 6, 2003 (incorporated by
    reference from Exhibit 10.7 filed with the Companys
    Form S-3/A filed on December 9, 2003).                                                                                                                                                  
|       
|10.7    |  | Discretionary Bonus Plan.                                                                                                                                                                                                                                                                                                                                            
|       
|10.8    |  | 2005 Bonus Plan.                                                                                                                                                                                                                                                                                                                                                     
|       
|10.8.1  |  | 2005 Target Incentive Plan.                                                                                                                                                                                                                                                                                                                                          
|       
|10.9    |  | Form of Notice of Grant of Stock Purchase Right 
    Employees.                                                                                                                                                                                                                                                                                                     
|       
|10.9.1  |  | Form of Notice of Grant of Stock Purchase Right 
    Officers.                                                                                                                                                                                                                                                                                                      
|       
|10.10   |  | Form of Stock Option Agreement.                                                                                                                                                                                                                                                                                                                                      
|       
|10.11   |  | Consulting Services Agreement with Mr. Hammack.                                                                                                                                                                                                                                                                                                                      
|       
|21      |  | Subsidiaries of Komag, Incorporated.                                                                                                                                                                                                                                                                                                                                 
|       
|23.1    |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                 
|       
|24      |  | Power of Attorney. Reference is made to the signature pages of
    this report.                                                                                                                                                                                                                                                                                      
|       
|31.1    |  | Rule 13a-14(a) Certification of Chief Executive Officer.                                                                                                                                                                                                                                                                                                             
|       
|31.2    |  | Rule 13a-14(a) Certification of Chief Financial Officer.                                                                                                                                                                                                                                                                                                             
|       
|32      |  | Section 1350 Certifications of Chief Executive Officer and
    Chief Financial Officer.                                                                                                                                                                                                                                                                              



66



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##### Table of Contents






SIGNATURES






| |                    
| | -------------------
| | KOMAG, INCORPORATED



| |    |                  
| | -- | -----------------
| | By | /s/ THIAN HOO TAN

| |                        
| | -----------------------
| |                        
| | Thian Hoo Tan          
| | Chief Executive Officer

67



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##### Table of Contents



POWER OF ATTORNEY






|                                                 |  |                                                                                         |  |                |  | 
|------------------------------------------------ |  | --------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                        |  | Title                                                                                   |  | Date          
|                                                 |  |                                                                                         |  |               
|                                                
|/s/ THIAN HOO TAN(Thian
    Hoo Tan)             |  | Chief Executive Officer and Director
    (Principal Executive Officer)                  |  | March 16, 2005
|                                                
|/s/ KATHLEEN A. BAYLESS(Kathleen
    A. Bayless) |  | Vice President, Chief Financial Officer and Secretary (Principal
    Financial Officer) |  | March 16, 2005
|                                                
|/s/ PAUL G. JUDY(Paul
    G. Judy)               |  | Corporate Controller
    (Principal Accounting Officer)                                 |  | March 16, 2005
|                                                
|/s/ PAUL A. BRAHE(Paul
    A. Brahe)             |  | Director                                                                                |  | March 16, 2005
|                                                
|/s/ CHRIS A. EYRE(Chris
    A. Eyre)             |  | Director                                                                                |  | March 16, 2005
|                                                
|/s/ RICHARD A. KASHNOW(Richard
    A. Kashnow)   |  | Director                                                                                |  | March 16, 2005
|                                                
|/s/ NEIL S. SUBIN(Neil
    S. Subin)             |  | Director                                                                                |  | March 16, 2005
|                                                
|/s/ KENNETH R. SWIMM(Kenneth
    R. Swimm)       |  | Director                                                                                |  | March 16, 2005
|                                                
|/s/ DAVID G. TAKATA(David
    G. Takata)         |  | Director                                                                                |  | March 16, 2005
|                                                
|/s/ HARRY G. VAN WICKLE(Harry
    G. Van Wickle) |  | Director                                                                                |  | March 16, 2005
|                                                
|/s/ DENNIS P. WOLF(Dennis
    P. Wolf)           |  | Director                                                                                |  | March 16, 2005
|                                                
|/s/ MICHAEL LEE WORKMAN(Michael
    Lee Workman) |  | Director                                                                                |  | March 16, 2005

68



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##### Table of Contents





|           |                             
|---------- | ----------------------------
|Item 14(d) | Financial Statement Schedule

KOMAG, INCORPORATED


Schedule II  VALUATION AND QUALIFYING
ACCOUNTS


|                                   |                                 |                |       |           |            |   |       |            |     |           |          |       |     |   |       |       | 
|---------------------------------- | ------------------------------- | -------------- | ----- | --------- | ---------- | - | ----- | ---------- | --- | --------- | -------- | ----- | --- | - | ----- | ----- | 
|Column A                           |                                 | Column B       |       |           | Column C   |   |       | Column D   |     |           | Column E |      
|                                   |                                 |                |       |           |            |   |       |            |     |           |          |      
|                                   |                                 |                |       | Additions |            |   |       |            |    
|                                   |                                 | Balance at     |       |           | Charged to |   |       |            |     | Balance   |         
|                                   |                                 | Beginning      |       |           | Costs and  |   |       |            |     | at End of |         
|Description                        |                                 | of Period      |       |           | Expenses   |   |       | Deductions |     |           | Period   |      
|                                   |                                 |                |       |           |            |   |       |            |     |           |          |      
|                                   |                                 | (In thousands) |      
|PREDECESSOR COMPANY                |                                 |                |       |           |            |   |       |            |     |           |          |       |     |   |       |      
|Six months ended June 30, 2002     |                                 |                |       |           |            |   |       |            |     |           |          |       |     |   |       |      
|                                   | Allowance for doubtful accounts |                | $     | 1,637     |            |   | $     | (295       | )   |           | $        | 935   |     |   | $     | 407   | 
|                                   | Allowance for sales returns     |                |       | 956       |            |   |       | 751        | (1) |           |          | 1,266 | (2) |   |       | 441   | 
|                                   |                                 |                |       |           |            |   |       |            |     |           |          |      
|                                   |                                 | $              | 2,593 |           |            | $ | 456   |            |     | $         | 2,201    |       |     | $ | 848   |      
|                                   |                                 |                |       |           |            |   |       |            |     |           |          |      
|SUCCESSOR COMPANY                  |                                 |                |       |           |            |   |       |            |     |           |          |       |     |   |       |      
|Six months ended December 29, 2002 |                                 |                |       |           |            |   |       |            |     |           |          |       |     |   |       |      
|                                   | Allowance for doubtful accounts |                | $     | 407       |            |   | $     | 10         |     |           | $        | 16    |     |   | $     | 401   | 
|                                   | Allowance for sales returns     |                |       | 441       |            |   |       | 1,146      | (1) |           |          | 887   | (2) |   |       | 700   | 
|                                   |                                 |                |       |           |            |   |       |            |     |           |          |      
|                                   |                                 | $              | 848   |           |            | $ | 1,156 |            |     | $         | 903      |       |     | $ | 1,101 |      
|                                   |                                 |                |       |           |            |   |       |            |     |           |          |      
|Year ended December 28, 2003       |                                 |                |       |           |            |   |       |            |     |           |          |       |     |   |       |      
|                                   | Allowance for doubtful accounts |                | $     | 401       |            |   | $     | (3         | )   |           | $        |      |     |   | $     | 398   | 
|                                   | Allowance for sales returns     |                |       | 700       |            |   |       | 3,217      | (1) |           |          | 3,251 | (2) |   |       | 666   | 
|                                   |                                 |                |       |           |            |   |       |            |     |           |          |      
|                                   |                                 | $              | 1,101 |           |            | $ | 3,214 |            |     | $         | 3,251    |       |     | $ | 1,064 |      
|                                   |                                 |                |       |           |            |   |       |            |     |           |          |      
|Year ended January 2, 2005         |                                 |                |       |           |            |   |       |            |     |           |          |       |     |   |       |      
|                                   | Allowance for doubtful accounts |                | $     | 398       |            |   | $     | (398       | )   |           | $        |      |     |   | $     |      | 
|                                   | Allowance for sales returns     |                |       | 666       |            |   |       | 5,232      | (1) |           |          | 4,823 | (2) |   |       | 1,075 | 
|                                   |                                 |                |       |           |            |   |       |            |     |           |          |      
|                                   |                                 | $              | 1,064 |           |            | $ | 4,834 |            |     | $         | 4,823    |       |     | $ | 1,075 |      
|                                   |                                 |                |       |           |            |   |       |            |     |           |          |      






|    |                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------
|(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.

69



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##### Table of Contents






EXHIBIT INDEX


|         |  |                                                                                                                                                                                                                                                                                                                                                                      
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                                                                                                                                                                                                      
|Number   |  | Description                                                                                                                                                                                                                                                                                                                                                          
|         |  |                                                                                                                                                                                                                                                                                                                                                                      
|2.1      |  | Komag Incorporateds Further Modified First Amended Plan of
    Reorganization, dated May 7, 2002 (incorporated by
    reference from Exhibit 2.1 filed with the Companys
    Form 8-K filed on July 11, 2002).                                                                                                                                                     
|        
|2.2      |  | Findings of Fact, Conclusions of Law and Order, dated
    May 9, 2002, Confirming Further Modified First Amended Plan
    of Reorganization of Komag, Incorporated, dated May 7, 2002
    (incorporated by reference from Exhibit 2.2 filed with the
    Companys Form 8-K filed on July 11, 2002).                                                                 
|        
|3.1      |  | Amended and Restated Certificate of Incorporation of Komag,
    Incorporated (incorporated by reference from Exhibit 3.1
    filed with the Companys Form 10-Q filed on
    August 13, 2002).                                                                                                                                                                       
|        
|3.2      |  | Bylaws of Komag, Incorporated (incorporated by reference from
    Exhibit 3.2 filed with the Companys Form 10-Q filed
    on August 13, 2002).                                                                                                                                                                                                                      
|        
|4.1      |  | Form of Stock Certificate for Common Stock (incorporated by
    reference from Exhibit 4.1 filed with the Companys
    Form 10-Q filed on August 13, 2002).                                                                                                                                                                                                         
|        
|4.2      |  | Registration Rights Agreement between Komag, Incorporated and
    certain holders of common stock and Senior Secured Notes due
    2007, (incorporated by reference from Exhibit 4.2 filed
    with the Companys Form 10-Q filed on August 13,
    2002), as amended by Amendment No. 1 thereto dated
    October 1, 2002.                                          
|        
|4.3      |  | Form of Warrant (incorporated by reference from Exhibit 4.3
    filed with the Companys Form 10-Q filed on August 13,
    2002).                                                                                                                                                                                                                                    
|        
|4.4      |  | Form of Indenture by and between Komag, Incorporated and
    U.S. Bank National Association (incorporated by reference
    from Exhibit 4.8 filed with the Companys
    Form S-3/A filed on January 15, 2004).                                                                                                                                                      
|        
|4.5      |  | Form of Convertible Note (included in Exhibit 4.3)                                                                                                                                                                                                                                                                                                                   
|        
|10.1.1   |  | Lease Agreement (B10) dated May 24, 1996 between Sobrato
    Development Companies #871 and Komag, Incorporated
    (incorporated by reference from Exhibit 10.1.11 filed with
    the Companys report on Form 10-K for the year ended
    December 29, 1996).                                                                                                      
|        
|10.1.1.1 |  | Second Amendment to Lease (B10) dated December 17, 2004,
    between DIVCO West Properties and Komag, Incorporated.                                                                                                                                                                                                                                                  
|        
|10.1.2   |  | Lease Agreement (B11) dated May 24, 1996 between Sobrato
    Development Companies #871 and Komag, Incorporated
    (incorporated by reference from Exhibit 10.1.12 filed with
    the Companys report on Form 10-K for the year ended
    December 29, 1996).                                                                                                      
|        
|10.1.3   |  | Sublease Agreement (B11) dated January 10, 2000, between
    Komag, Incorporated and 2Wire, Inc. (incorporated by reference
    from Exhibit 10.1.15 filed with the Companys report
    on Form 10-K for the year ended January 2, 2000).                                                                                                                           
|        
|10.2     |  | Form of Indemnification Agreement (incorporated by reference
    from Exhibit 10.2 filed with the Companys report on
    Form S-1 on August 27, 2002).                                                                                                                                                                                                              
|        
|10.3     |  | Form of Komag, Incorporated Amended and Restated 2002 Employee
    Stock Purchase Plan (incorporated by reference from
    Exhibit 4.2 filed with the Companys report on
    Form S-8 on July 23, 2002).                                                                                                                                                            
|        
|10.3.1   |  | Amended and Restated 2002 Qualified Stock Option Plan
    (incorporated by reference from Exhibit 4.1 filed with the
    Companys report on Form S-8 on July 23, 2002).                                                                                                                                                                                             
|        
|10.3.2   |  | Komag, Incorporated 2002 Deferred Compensation Plan
    (incorporated by reference from Exhibit 10.4.2 filed with
    the Companys report on Form S-1 on August 27,
    2002).                                                                                                                                                                                      
|        
|10.4.1   |  | Letter dated August 6, 2003 from the Malaysian Industrial
    Development Authority addressed to Komag USA (Malaysia) Sdn.
    extending the Pioneer Status of the Companys
    thin-film media venture in Malaysia (incorporated by reference
    from Exhibit 10.5.2 filed with the Companys report on
    Form 10-Q for the quarter ended September 28, 2003).
|        
|10.5.1   |  | Form of Executive Retention Agreement (incorporated by reference
    from Exhibit 10.6.1 filed with the Companys report on
    Form S-1 on August 27, 2002).                                                                                                                                                                                                        



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                    
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                    
|Number  |  | Description                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                    
|       
|10.6    |  | Business Agreement by and between the Company and Maxtor
    Corporation dated October 6, 2003 (incorporated by
    reference from Exhibit 10.7 filed with the Companys
    Form S-3/A filed on December 9, 2003).
|       
|10.7    |  | Discretionary Bonus Plan.                                                                                                                                                                                          
|       
|10.8    |  | 2005 Bonus Plan.                                                                                                                                                                                                   
|       
|10.8.1  |  | 2005 Target Incentive Plan.                                                                                                                                                                                        
|       
|10.9    |  | Form of Notice of Grant of Stock Purchase Right 
    Employees.                                                                                                                                                   
|       
|10.9.1  |  | Form of Notice of Grant of Stock Purchase Right 
    Officers.                                                                                                                                                    
|       
|10.10   |  | Form of Stock Option Agreement.                                                                                                                                                                                    
|       
|10.11   |  | Consulting Services Agreement with Mr. Hammack.                                                                                                                                                                    
|       
|21      |  | Subsidiaries of Komag, Incorporated.                                                                                                                                                                               
|       
|23.1    |  | Consent of KPMG LLP.                                                                                                                                                                                               
|       
|24      |  | Power of Attorney. Reference is made to the signature pages of
    this report.                                                                                                                                    
|       
|31.1    |  | Rule 13a-14(a) Certification of Chief Executive Officer.                                                                                                                                                           
|       
|31.2    |  | Rule 13a-14(a) Certification of Chief Financial Officer.                                                                                                                                                           
|       
|32      |  | Section 1350 Certifications of Chief Executive Officer and
    Chief Financial Officer.