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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K



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|                               |  |                                                                                                 
|------------------------------ |  | ------------------------------------------------------------------------------------------------
|(Mark One)                     |  |                                                                                                 
|þ                              |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|                               |  | For the fiscal year ended December 29,
    2002                                                 
|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(State or other jurisdiction of
    incorporation or organization) |  | 94-2914864(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


Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.    Yes þ         No o

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

Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Exchange Act
rule 12b-2).
Yes o         No þ

The aggregate market value of voting stock held
by non-affiliates of the Registrant as of February 23,
2003, was approximately $33,474,674 based on the closing sale
price for shares of the Registrants Common Stock as
reported by the Nasdaq National Market for the last trading date
prior to that date). On June 28, 2002, which was the last
business day of the Registrants most recently completed
second quarter, the aggregate market value of voting stock held
by non-affiliates of the Registrant was approximately $971,025
based on the closing sale price of $0.01 for shares of the
Registrants Common Stock as reported by the OTC Bulletin
Board for that date. The Registrant emerged from chapter 11
bankruptcy proceedings as of June 30, 2002, at which time
the capital structure changed completely. Therefore, the
aggregate market value of voting stock held by non-affiliates of
the Registrant as of June 28, 2002 is not comparable to
February 23, 2003. Shares of Common Stock held by each
officer, director and holder of 5% or more of the outstanding
Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.

On February 23, 2003, 23,519,736 shares of
the Registrants Common Stock, $0.01 par value, were
outstanding.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING

THE PRECEDING FIVE YEARS:


Indicate by check mark whether the Registrant has
filed all reports required to be filed by Section 12, 13,
or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a
court.    Yes þ         No o

Documents Incorporated by Reference

Designated portions of the following document are
incorporated by reference into this Report on Form 10-K
where indicated: Komag, Incorporated Proxy Statement for the
Annual Meeting of Stockholders to be held on May 20, 2003,
Part III.



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TABLE OF CONTENTS



|             |                                                                                               |  |  |  |  |  |  | 
|------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I      
|             | Item 1. Business                                                                             
|             | Item 2. Properties                                                                           
|             | Item 3. Legal Proceedings                                                                    
|             | Item 4. Submission of Matters to Vote of Security Holders                                    
|PART II     
|             | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|             | Item 6. Selected Consolidated Financial Data                                                 
|             | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|             | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|             | Item 8. Consolidated Financial Statements and Supplementary Data                             
|             | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III    
|PART IV     
|             | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES  
|EXHIBIT 4.9 
|EXHIBIT 4.10
|EXHIBIT 10.2
|EXHIBIT 21  
|EXHIBIT 23.1
|EXHIBIT 23.2
|EXHIBIT 99.1



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KOMAG, INCORPORATED

TABLE OF CONTENTS TO ANNUAL REPORT ON
FORM 10-K

|         |  |                                                                                           |  |      |    | 
|-------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                           |  | Page
|         |  |                                                                                           |  |     
|Item 1.  |  | Business                                                                                  |  |      | 2  | 
|Item 2.  |  | Properties                                                                                |  |      | 19 | 
|Item 3.  |  | Legal Proceedings                                                                         |  |      | 19 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |      | 19 | 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |  |      | 21 | 
|Item 6.  |  | Selected Consolidated Financial Data                                                      |  |      | 23 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 24 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures about
    Market Risk                            |  |      | 38 | 
|Item 8.  |  | Consolidated Financial Statements and
    Supplementary Data                              |  |      | 39 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |      | 71 | 
|Item 10. |  | Directors and Executive Officers                                                          |  |      | 71 | 
|Item 11. |  | Executive Compensation                                                                    |  |      | 71 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |      | 71 | 
|Item 13. |  | Certain Relationships and Related Transactions                                            |  |      | 71 | 
|Item 14. |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |  |      | 72 | 

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PART I

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






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

General

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

We file annual, quarterly, and current reports
and other information with the SEC. Our annual reports on
form 10-K, quarterly reports on form 10-Q, and current
reports on form 8-K, along with any amendments to those
reports, are available free of charge through our corporate
website at http://www.komag.com.

As discussed in Item 8, Notes 2 and 3,
Komag, Incorporated (KUS) filed a voluntary petition for
reorganization under chapter 11 of the United States Code
(the Bankruptcy Code) on August 24, 2001. The petition was
filed with the United States Bankruptcy Court for the Northern
District of California. The petition related only to the
Companys U.S. corporate parent, KUS, and did not
include any of its subsidiaries. Subsequent to our emergence
from bankruptcy on June 30, 2002, we shipped
12.3 million units in the third quarter of 2002 compared to
8.2 million units in the second quarter of 2002, a 51%
increase. Further, in the fourth quarter of 2002, we shipped a
record 17.7 million units, a 44% increase compared to the
third quarter of 2002. We believe that these substantial sales
increases are due to our technology leadership and low cost,
high quality volume manufacturing capability, which has resulted
in market share gains.

Industry Background

Increasing demand for digital data storage and
low-cost, high-performance hard disk drives has resulted in
growing demand for thin-film disks. Trend Focus estimates that
worldwide disk drive unit shipments in 2003 through 2006 will
grow at a 14.5% compounded annual growth rate. Greater
processing power, more sophisticated operating systems and
application software, high-resolution graphics, larger
databases, the Internet, and emerging demand for consumer
appliances are among the developments that have required and
benefited from ever higher disk drive performance at ever lower
cost. For example, the first 5  1/4-inch hard disk
drive, introduced in 1980, offered a capacity of five megabytes
(one million bytes is a megabyte or MB) with an areal density of
less than two megabits (one million bits is a megabit; eight
bits is one byte) per square inch. Current-generation
3  1/2-inch drives typically have capacities of 40 to
320 gigabytes (one billion bytes is a gigabyte or GB).
Todays areal densities per 3  1/2-inch disk
platter allow for approximately 40 to 80 GB of storage. By
the end of 2003, we expect that increases in areal densities
will allow for approximately 120 GB of storage per
3  1/2-inch disk. We believe that our technical
advances, along with those of other component

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suppliers, have improved the performance and
storage capacity of disk drives and dramatically lowered the
cost per bit stored.


From 1990 through approximately 1996, the disk
industry struggled to keep up with rapidly increasing demand. As
a result, most companies in our industry undertook aggressive
expansion plans beginning in 1995 and 1996. The lead-time to
expand disk capacity is generally one to two years, including
the time necessary to construct facilities and to purchase and
install equipment. Therefore, significant new capacity became
available to the industry in 1997.

Also in 1997, the disk drive industry widely
adopted magneto-resistive (MR) head technology. MR heads, and
subsequent product generations incorporating Giant MR (GMR)
technology, are more sensitive than prior technology, allowing
heads to read smaller bits of data packed more tightly together
on the surface of a disk. The result of widespread adoption of
MR heads was that the industry was able to advance the rate of
improvement in data storage density from 30% to 40% per year to
100% or more per year. The increased rate of improvement in
storage density allowed disk drive manufacturers to meet
consumer demand for higher capacity disk drives with drives
incorporating fewer heads and disks. Because of this lower
disk-per-drive ratio, demand for disks was relatively flat
during the period from 1997 through the third quarter of 2002,
resulting in substantial excess capacity for producing disks.
The impact of excess capacity fell disproportionately on the
independent disk manufacturers, because disk drive
manufacturers, such as Seagate Technology (Seagate), Maxtor
Corporation (Maxtor), and IBM, chose to fill their internal disk
production capacity before buying from independent disk
manufacturers. We estimate that these captive disk operations
have increased their market share from approximately one-third
of the market before 1997 to over 58% in each of the last three
years.

We believe that the imbalance between supply and
demand has been largely responsible for falling disk selling
prices. Current prices are sharply lower than industry pricing
in 1997. As a result of lower demand and lower prices, the
industry has undergone substantial consolidation. We estimate
that over 26% of the disk manufacturing capacity that was in
place at the end of 1997 is either no longer capable of
producing current generation disks or is no longer available.

Strategy

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

The key elements of our strategy are as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Establish and Maintain Leadership in High-End
    Product Technology.We focus our
    research and development resources principally on performance
    improvements for disks sold to the high-end, high-capacity
    segment of the disk drive industry. In order to improve product
    performance characteristics, including magnetics, glide height,
    durability and stiction, we continually enhance our proprietary
    technologies and processes.                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Commit to Advanced Technology.We have dedicated part of our research
    and development team to working on advanced technology. This
    group is responsible for investigating the elements of
    technology required more than two years into the future, as well
    as application of our technological skills to alternative
    businesses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Strengthen Collaborative Relationships with
    Leading Head and Disk Drive
    Manufacturers.We work closely with
    head manufacturers developing new technologies, including GMR,
    Proximity MR and pad slider head compatible disks.
    This collaboration enables the parties to develop compatible
    products that can be effectively incorporated together into
    high-performance disk drives. These efforts include
    demonstrations of advanced technology required sufficiently far
    into the future so that we can plan our development efforts to
    stay at the forefront of the industry. We also seek to establish
    strong relationships with our customers, enabling us to
    participate in establishing technological and design
    requirements for new products. We believe that close technical
    collaboration with our customers and

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | their other component suppliers during the design
    phase of the new disk drives, facilitates integration of our
    products into new disk drives, improves our ability to reach
    cost-effective high-volume manufacturing rapidly, and enhances
    the likelihood that we will remain a primary supplier of
    thin-film disks for high performance disk drive products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Improve Advanced Manufacturing Processes to
    Drive Volume Production.We develop
    our advanced processes on a full scale, production-capable,
    pilot line located in our research and development facility in
    San Jose, California. By performing our development activities
    in a production-like environment, we can quickly and efficiently
    transition to high-volume commercial production of new products
    in our Malaysian factories. Our ability to implement new
    processes quickly also helps us meet our customers
    increasingly rapid time-to-market demands, advancing our goal of
    having our products designed into our customers disk
    drives.                                                                                                                                                                
|
| |  | Improve Yields and Reduce Cost Through Quality
    and Process Improvement.We believe
    that strict attention to quality control is critical to our
    customer relationships. To this end, we have consistently
    maintained our ISO 9002 certification. Our objective is to
    be the supplier of choice in our customers factories.
    Attention to quality has the dual benefit of producing
    high-performance disks and lowering our cost of production
    through improved yield and more consistent output.                                                                                                                                                                                                                                                                                                                                   
|
| |  | Grow Our Business And Continue To Reduce Our
    Cost Structure By Fully Utilizing Our Malaysian Operations And
    Potential Other Low Cost Operations.We believe that demand for disk drives is elastic and that low
    disk drive prices are necessary to continue growth in demand. We
    contribute to our customers success by maintaining low
    prices. In order to attain a healthy business model in a low
    price environment, low manufacturing costs are necessary. We
    believe we can achieve lower costs than other disk manufacturers
    by fully utilizing our Malaysian factories. In addition, we may
    acquire other low cost operations and enter into long-term
    contracts with suppliers to reduce or stabilize our overall
    costs and grow our business. This cost reduction is a critical
    element in our strategy.

Technology

We have capitalized on our technological strength
in thin-film processes and our manufacturing capabilities to
achieve and maintain our position as a leading independent
supplier to the thin-film media market. Our technological
strength stems from the depth of our understanding of materials
science and the interplay between disks, heads, and other disk
drive components. Our manufacturing expertise in thin-film media
is evidenced by our long, uninterrupted history of delivering
reliable products in high volume. Because we manufacture
thin-film media primarily in Malaysia, we have a significant
cost advantage compared to our U.S. and Japan-based competitors.

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

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



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

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

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Our plating, polishing and texturing processes
produce a uniform disk surface that is smooth at an atomic
level. This smoothness permits the read/write heads to fly over
the disk surface at glide heights of 0.3 to 0.4 microinches
(millionths of an inch). Disks must be made in a clean
environment to limit surface defects. Even a handful of defects,
a fraction of a micron in diameter, could cause the disk to
fail. The magnetic alloys deposited on the surfaces of our disks
have high coercivity, low noise, and other desirable magnetic
characteristics.

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

Significant increases in areal densities
continued in 2002. We believe that the number of gigabits per
square inch on a typical disk increased by approximately 100%
during the year. In 2002, nearly all of our sales were based on
GMR technology. A GMR disk is optimized for use with GMR heads
that use separate read and write elements. The write element is
made from conventional inductive materials but the read element
is made of a material whose electrical resistance changes when
subjected to changes in a magnetic field. GMR heads are more
sensitive to magnetic fields than prior inductive technology.
This increased sensitivity enables GMR heads to read more
densely packed, smaller-sized bits.

Research, Development, and
Engineering

Historically, our research, development, and
engineering (R&D) efforts emphasized key technology
advancements in disk functionality, reliability and quality.
During the past three years, we also increased our focus on
improving yields and reducing costs, which we believe are
critical to improving our overall operating results. We have
also strengthened our efforts in advanced technology, which is
technology aimed at disk designs needed several years from now.

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

Our advanced technology efforts have in part
focused on partnering with other disk drive component makers in
key areas like magnetic recording heads and data channels. We
believe our most advanced longitudinal disks, that feature
synthetic anti-ferromagnetically (SAF) coupled layers to enhance
thermal stability, will support a recording density of up to
160GB per disk, which is approximately 100% higher than the most
advanced disk in production today. We are currently
transitioning to SAF media for certain 80GB per platter
applications. We expect these advancements will be achieved with
straightforward extensions of our current production equipment,
which suggests a limited need to replace equipment to keep pace
with technology improvement during the next few years. Further,
we are continuing our development of perpendicular media, which
will have storage capability of 240 to 300 GB when fully
developed.

Our expenditures (and percentage of net sales) on
research, development, and engineering activities (excluding
in-process research and development), were $37.2 million
(13%) in 2002, $39.5 million (14.0%) in fiscal 2001, and
$35.3 million (9.9%) in fiscal 2000.

Products, Customers, and Marketing

We sell primarily GMR media for
3  1/2-inch disk drives. Our products offer a range of
coercivities, glide height capabilities and other parameters to
meet specific customer requirements. Unit sales of
3  1/2-inch disks capable of storing at least
40 GB per platter accounted for 99% of our unit sales in
the fourth quarter of 2002, compared to the fourth quarter of
2001, when only 12% of our unit sales were greater than
40 GB. Storage density has roughly doubled in each of the
last three years. We expect this trend to continue in the
foreseeable future. In addition to finished disks, at various
times we have sold material volumes of nickel plated and

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polished (NPP) substrates. Further, in 2002, we
sold textured NPP substrates. By selling these unfinished
products, we more fully utilize our factories and reduce our
overall cost.


We believe that the long-term success of the
thin-film media industry depends on growth in demand for disks.
We believe that improvements in enabling technologies, such as
increased bandwidth capability that will speed data transfers
over the Internet and promote use of other storage-intensive
applications such as multimedia, and new consumer electronics
applications, will increase demand for storage capacity.

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

Three customers accounted for 96% of our sales in
2002. Net sales to major customers were as follows: Western
Digital 61%, Maxtor 30%, and IBM 5%. Sales are generally
concentrated in a small number of customers due to the high
volume requirements of the dominant disk drive manufacturers and
their tendency to rely on a few suppliers because of the close
interrelationship between media and other disk drive components.
Given the relatively small number of high-performance disk drive
manufacturers, we expect that we will continue our dependence on
a limited number of customers. In April 1999, we acquired the
assets of Western Digitals media operation and also
entered into a volume purchase agreement (VPA) with Western
Digital. In October 2001, the term of the VPA was extended
through April 2005. As a result of the acquisition and related
VPA, we expect Western Digital to remain a significant customer.

Our 2002 sales were made directly to disk drive
manufacturers worldwide primarily from our Malaysian operations.
Sales from our U.S. operations include samples and initial
shipments of new products. Net sales to Asia from our U.S. and
Malaysian operations represented 95% of our net sales in 2002,
95% of our net sales in 2001, and 93% of our net sales in 2000.
Our customers assemble a substantial portion of their disk
drives in Asia, and subsequently sell these products throughout
the world. Therefore, our high concentration of Asian sales does
not accurately reflect the eventual point of consumption of the
assembled disk drives. All foreign sales are subject to certain
risks common to all export activities, such as government
regulation and the risk of imposition of tariffs or other trade
barriers. Foreign sales must also be licensed by the Office of
Export Administration of the U.S. Department of Commerce.

We generally make sales pursuant to purchase
orders rather than long-term contracts. At December 29,
2002, our backlog of purchase orders scheduled for delivery
within 90 days totaled $102.6 million, compared to
$42.0 million at December 30, 2001. These purchase
orders may be changed or canceled by customers on short notice
without significant penalty. Accordingly, the backlog should not
be relied on as indicative of sales for any future period.

Competition

The competitive mix in the industry has changed
substantially in the last several years. Before 1997, the
industry was divided roughly into thirds, with
U.S. independent disk manufacturers, Japanese independent
manufacturers, and captive operations of disk drive
manufacturers each holding equal shares. Due to the combination
of several factors, particularly the rapid improvement in
storage density outstripping the rate of growth in consumption
of storage, and the rapid increase in the industrys
capacity to produce disks, disk manufacturers operated by disk
drive manufacturers have increased their share of the market. We
estimate that these captive disk manufacturers have shipped more
than half of the media consumed in each of the last three years.
As a result, competition among independent manufacturers has
been heightened, prices have fallen rapidly, and there has been
considerable consolidation in the industry. This significant
pricing pressure during the last few years has adversely
affected the financial results of independent suppliers,
including ours. We believe that we are currently the largest
independent manufacturer of disks. Other independent
manufacturers include several Japanese firms, including, Fuji
Electric, Showa Denko, and Hoya, and Trace Storage in Taiwan.
Showa Denko and Mitsubishi Chemical Corporation announced
consolidation plans in 2002.

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Manufacturing

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

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



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

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

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

Environmental Regulation

We are subject to a variety of environmental and
other regulations in connection with our operations and believe
that we have obtained all necessary permits for our operations.
We use various industrial hazardous

7



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##### Table of Contents



materials, including metal-plating solutions, in
our manufacturing processes. Wastes from our manufacturing
processes are either stored in areas with secondary containment
before removal to a disposal site, or processed on-site and
discharged to the industrial sewer system.


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

Patents and Proprietary Information

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

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

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

Employees

As of December 29, 2002, on a worldwide
basis, we had 4,353 employees. Of the total: a) 3,421 were
regular employees and 932 were employed on a temporary basis;
b) 3,990 were employed in manufacturing, 264 in research,
development, and engineering, and 99 in sales, administrative,
and management positions; and c) 369 were employed in the
U.S., and 3,984 at offshore facilities. We believe that our
future success will depend in large part upon our ability to
continue to attract, retain, and motivate highly-skilled and
dedicated employees. We have no employees who are represented by
a labor union, and we have never experienced a work stoppage.

8



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RISK FACTORS

Investing in our securities involves a high
degree of risk. You should carefully consider the risks and
uncertainties described below when considering whether or not to
invest in our company. These risks and uncertainties are not the
only ones facing our company. Additional risks and uncertainties
that we are unaware of or currently deem immaterial may also
become important factors that may harm our business. If any of
the following risks actually occur, our business, financial
condition or results of operations could be materially adversely
affected, the value of our stock could decline, and you may lose
part or all of your investment.

Risks Related to our Financial Position and
Our Common Stock

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

We sought protection under chapter 11 of the
Bankruptcy Code in August 2001. We incurred net losses of
approximately $68.1 million and $296.4 million during
the fiscal years ended December 31, 2000, and
December 30, 2001, respectively. For the nine-month period
ended September 29, 2002, we incurred a $50.9 million
loss before a gain of $396.4 million for extinguishment of
indebtedness and revaluation of assets and liabilities for
fresh-start reporting, and before a cumulative change in
accounting principle loss of $47.5 million. For the fourth
quarter ended December 29, 2002, we recorded a net loss of
$27.5 million after a $33.9 million non-cash goodwill
impairment charge and a $2.4 million stock compensation
charge. Our unit shipments and revenue grew over 100% from the
second quarter of 2002 to the fourth quarter of 2002. We shipped
a record 17.7 million units in the fourth quarter of 2002,
and without the aforementioned non-cash charges, we were
profitable. At slightly lower or similar shipment levels, we
expect to be profitable. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations. Our equity ownership changed in June 2002, and
a majority of our board of directors was replaced in connection
with our reorganization. We cannot assure you that we will
sustain current shipment levels, grow, or achieve profitability
in the near future, or at all.



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

Even after our emergence from bankruptcy, our new
long-term debt (including the short-term portion of such debt)
was approximately $140.2 million as of December 29,
2002. While we believe that our future operating cash flow,
together with our financing arrangements, will be sufficient to
finance our operating requirements, our indebtedness restricts
our ability to obtain additional financing in the future and,
because we may be more leveraged than some of our competitors,
may place us at a competitive disadvantage. Also, the Exit
Facility (a revolving credit facility of up to
$15.0 million), Senior Notes Indenture, and Junior Notes
Indenture that we entered into as part of our emergence from
bankruptcy contain covenants that impose operating and financial
restrictions on us. These covenants could adversely affect our
ability to finance future operations, potential acquisitions or
capital needs or to engage in other business activities that may
be in our interest. In addition, if we cannot achieve the
financial results necessary to maintain compliance with these
covenants, we could be declared in default and be required to
sell or liquidate our assets to repay outstanding debt.



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

As a result of our emergence from bankruptcy, we
are operating our business with a new capital structure. We were
also subject to the fresh-start reporting prescribed by
generally accepted accounting principles, and our balance sheet
as of December 29, 2002 reflects the application of these
rules. Accordingly, our financial condition and results of
operations are not comparable to the financial condition and
results of operations reflected in our historical financial
statements, making it difficult to assess our future prospects
based on historical performance.

9



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

We have several significant stockholders who in
the aggregate own approximately 74% of our common stock, and
together are able to significantly influence all matters
requiring approval by our stockholders, including new
financings, the election of directors and the approval of
mergers or other business combinations. To the extent that the
interests of these stockholders are different than those of
other stockholders, important company decisions may not reflect
the interests of all stockholders.



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

We have several significant stockholders who own
in the aggregate 74% of our common stock, and who are not
restricted as to the prices at which they may sell the stock.
Shares sold below the current level at which the shares of our
common stock are trading may adversely affect the market price
of our common stock. This large amount of stock, if sold all at
once or in blocks, could have a negative effect on the market
price of our common stock.



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

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



| |                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are currently listed on a national
    securities exchange, the Nasdaq National Market System, and if
    we are unable to continue to meet the listing requirements, we
    may have our stock delisted and our stock would be negatively
    effected.

We are currently traded on the Nasdaq National
Market System. We may not be able to continue to meet the
applicable listing requirements and, therefore, our stock may be
delisted. If our stock is not traded through a market system,
it, as well as our notes, may not be liquid, and we may be
unable to obtain future equity financing, or use our common
stock as consideration for mergers or other business
combinations.



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

We currently have no balance outstanding under
the Exit Facility, but we can choose to make a draw under the
Exit Facility at any time so long as the conditions precedent
are satisfied. The Senior Secured Notes are subordinated in
right of payment to the Exit Facility, and the Junior Secured
Note are in turn subordinated in right of payment to the Senior
Secured Notes. As a result of such subordination, in the event
of an acceleration declared because of (1) our liquidation
or insolvency, (2) a payment default, (3) a covenant
default or (4) the occurrence of other events of default,
our assets will be available to pay obligations on the Senior
Secured Notes only after the Exit Facility is paid in full and
on the Junior Secured Notes only after the Senior Secured Notes
have been paid in full. There may not be sufficient assets
remaining to pay amounts due on any or all of the Senior Secured
Notes or the Junior Secured Notes then outstanding. Holders of
equity securities would only receive a distribution in the event
of liquidation or insolvency after payment in full to each of
the Exit Facility, the Senior Secured Notes and the Junior
Secured Notes, and it is likely there would be nothing left to
distribute to equity holders at such time.



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

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

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

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

RISKS RELATED TO OUR BUSINESS



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

Trend Focus, a data-gathering and data-publishing
company, estimates that 75% of the disks consumed during 2002
were incorporated into disk drives for the desktop personal
computer market. Because of this concentration in a single
market, which we expect to continue, our business is tightly
linked to the success of the personal computer market.
Historically, demand for personal computers has been seasonal
and cyclical. Current external forecasts reflect a 5% growth in
PC demand in 2003. Due to the high fixed costs of our business,
fluctuations in demand resulting from this seasonality and
cyclicality can lead to disproportionate changes in the results
of our operations. If cancellations or reductions in demand for
our products occur in the future, our business, financial
condition, and results of operations could be seriously harmed.



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

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



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



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

Our future success depends on the continued
service of our executive officers, our highly-skilled research,
development and engineering team, our manufacturing team, and
our key administrative, sales and marketing and support
personnel. Acquiring talented personnel who possess the unique
skills we require has been difficult. Our bankruptcy filing and
our financial performance have increased the difficulty of
attracting and retaining skilled engineers and other
knowledgeable workers. We expect that it will continue to be
difficult to attract and retain key personnel, even though we
have emerged from bankruptcy. We may not be able to attract,
assimilate, or retain highly-qualified personnel to maintain the
capabilities that are necessary to compete effectively. If we
are unable to retain existing or hire key personnel, our
business, financial condition, and operating results could be
harmed.



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

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



| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | the high-volume requirements of the dominant disk
    drive manufacturers;                                                                
|
| |  | a tendency to rely on a few suppliers because of
    the close interrelationship between media performance and disk
    drive performance;

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

During 2002, 61% of our net sales were to Western
Digital and 30% were to Maxtor. During fiscal 2001, 59% of our
net sales were to Western Digital and 27% were to Maxtor. In
fiscal 2000, 50% of our net sales were to Western Digital, 28%
were to Maxtor, and 17% were to Seagate Technology. If our
customers reduce their media requirements or develop capacity to
produce thin-film disks for internal use, our sales will be
reduced. As a result, our business, financial condition and
operating results could suffer.



| |                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to perform successfully in
    the highly competitive thin-film media industry, we may not be
    able to gain additional market share or we may lose our existing
    market share, and our operating results would be
    harmed.

The market for our products is highly
competitive, and we expect competition to continue in the
future. Competitors in the thin-film disk industry fall mainly
into two groups: Asian-based manufacturers and captive
manufacturers. Our Asian-based competitors include Fuji
Electric, Trace Storage, Showa Denko, Mitsubishi Chemical
Corporation, and Hoya. Showa Denko and Mitsubishi Chemical
Corporation agreed to combine operations in 2002. The U.S.
captive manufacturers include the disk media operations of
Seagate Technology, IBM and Maxtor. In late 2002, IBM entered
into a joint venture with Hitachi. The joint venture, named
Hitachi Global Storage Technology, includes Hitachis and
IBMs disk drive operations and a portion of IBMs
disk media operations. Many of these competitors have greater
financial resources than we have, which could allow them to
adjust to fluctuating market conditions better than us. If we
are not able to compete successfully in the future, we would not
be able to gain additional market share for our products, or we
may lose our existing market share, and our operating results
could be harmed.

The imbalance between demand and supply has
further intensified competition in the industry. For most of
2002, as in 2001 and 2000, media supply exceeded media demand.
In the fourth quarter of 2002, media supply and demand began to
come into balance, and there were some shortages of disks, and
disk prices began to stabilize. As independent suppliers like
our company struggled to utilize their capacity, the excess
media supply caused average selling prices for disk products to
decline. Pricing pressure on component suppliers has also been
compounded by high consumer demand for inexpensive personal
computers and consumer devices. Further, structural changes in
the disk media industry, including business combinations,
failures, and joint venture arrangements, may be required before
media supply and demand are in balance. However, structural
changes could intensify the competition in the industry, which
will continue to put pressure on our profit margin.



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

We face fierce price competition in the disk
media industry. Continued high levels of competition have
continued to put downward pressure on prices per unit. We may be
forced to continue to lower our prices or add new products and
features at lower prices to remain competitive, and we may
otherwise be unable to introduce new products at higher prices.
We cannot assure you that we will be able to compete
successfully in this kind of price competitive environment.
Lower prices would reduce our ability to generate revenue, and
our gross margin would suffer. If we fail to mitigate the effect
of these pressures through reducing the cost of our products or
changing our product mix, our business, financial condition and
results of operations could be adversely affected.



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have historically made and, in the
    future, expect to continue to make acquisitions, any
    acquisitions could disrupt our operations and harm our operating
    results.

The continuing growth of our business is
dependent upon, market growth, our ability to develop and
introduce new products to our customers on a timely basis and
our ability to continuously manufacture, in high volume, high
quality advanced products to meet our customers needs.
Additionally, achieving low product cost through careful
monitoring of yield, materials and operating supplies consumed,
and achieving high volume production in our low cost
manufacturing locations is critical to our ability to achieve
profitability. Through

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acquisitions of other companies and technologies,
we may be able to address the need to develop new products,
enhance our ability to achieve low product costs and facilitate
increased units sales and/or revenue growth. Acquisitions
involve numerous risks, including the following:




| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Difficulties in integrating the operations,
    technologies, products and personnel of the acquired companies;                                                      
|
| |  | Diversion of managements attention from
    normal daily operations of the business;                                                                                
|
| |  | Potential difficulties in completing projects
    associated with in-process research and development;                                                               
|
| |  | Difficulties in entering markets in which we have
    no or limited direct prior experience and where competitors in
    such markets have stronger market positions;
|
| |  | Initial dependence on unfamiliar supply chains or
    relatively small supply partners;                                                                              
|
| |  | Insufficient revenues to offset increased
    expenses associated with acquisitions; and                                                                             
|
| |  | The potential loss of key employees of the
    acquired companies.                                                                                                   

Acquisitions may also cause us to:



| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Issue common 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.                                                                                                                      

Mergers and acquisitions of high-technology
companies are inherently risky, and no assurance can be given
that our future acquisitions will be successful and will not
materially adversely affect our business, operating results, or
financial condition. Failure to manage and successfully
integrate acquisitions we make could harm our business and
operating results in a material way. Even if an acquired company
has already developed and marketed products, there can be no
assurance that product enhancements will be made in a timely
fashion or that all pre-acquisition due diligence will have
identified all possible issues that might arise with respect to
such products.



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

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



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

With short product life cycles and rapid
technological change, we must qualify new products frequently,
and we must also achieve high volume production and sales
rapidly. Hard disk drive programs have increasingly become
bimodal in that a few programs are high-volume and
the remaining programs are relatively small in terms of volume.
Supply and demand balance can change quickly from customer to
customer and from program to program. Further, qualifying
thin-film disks for incorporation into new disk drive products
requires us to work extensively with the customer and the
customers other suppliers to meet product specifications.
Therefore, customers often require a significant number of
product presentations and demonstrations, as well as substantial
interaction with our senior management, before making a
purchasing decision. Accordingly, our products typically have a
lengthy sales cycle, which can range from six to twelve months.
During this time we may expend substantial financial resources
and management time and effort,

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while not being sure that a sale will result, or
that our share of the program ultimately will result in
high-volume production. To the extent we expend significant
resources to qualify products without realizing sales, our
operations will suffer.




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

Our sales are generally made pursuant to purchase
orders that are subject to cancellation, modification, or
rescheduling without significant penalties. As a result, if a
customer cancels, modifies, or reschedules an order, we may have
already made expenditures that are not recoverable, and our
profitability will suffer. Furthermore, if our current customers
do not continue to place orders with us or if we are unable to
obtain orders from new customers, our sales and operating
results will suffer.



| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | Our customers internal disk
    operations may limit our ability to sell our
    product.

Disk drive manufacturers such as Seagate
Technology, Maxtor, and Hitachi Global Storage Technology have
large internal media manufacturing operations. In 2002, Seagate,
IBM, and Hitachi produced more than 89% of their media
requirements internally, and Maxtor produced approximately 45%
of their media requirements internally. We compete with these
internal operations directly, when we market our products to
these disk drive companies, and indirectly, when we sell our
disks to customers who must compete with vertically-integrated
disk drive manufacturers. Vertically-integrated companies have
the ability to keep their disk-making operations fully utilized,
thus lowering their costs of production. This cost advantage
contributes to the pressure on us and other independent media
manufacturers to sell disks at prices so low that we have been
unprofitable, and we cannot be sure when, if ever, we can
achieve a low enough cost structure to return to profitability.
Vertically-integrated companies are also able to achieve a large
scale that supports the development resources necessary to
advance technology rapidly. We may not have sufficient resources
to be able to compete effectively with these companies. Our
inability to absorb development costs through scale, and because
of continued downward price pressures, our business, financial
condition, and operations could suffer.



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

We rely on a limited number of suppliers for some
of the materials and equipment used in our manufacturing
processes, including aluminum substrates, nickel plating
solutions, polishing and texturing supplies, and sputtering
target materials. For instance, Kobe Steel, Ltd. is primarily
our sole supplier of aluminum substrates. Further, the supplier
base has been weakened by the poor financial condition of the
industry, and some suppliers have exited the business. Our
production capacity would be limited if one or more of these
materials were to become unavailable or available in reduced
quantities, or if we were unable to find alternative suppliers.
If our sources of materials and supplies were unavailable for a
significant period of time, our production and operating results
could be adversely affected. Due to the significant growth in
demand for our disk products in the fourth quarter of 2002, our
sales were actually somewhat constrained due to the need to
acquire substrates from sources other than our traditional
internal and external suppliers.



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

Our industry has experienced rapid technological
change, and if we are unable to timely anticipate and develop
products and production technologies, our competitive position
could be harmed. In general, the life cycles of recent disk
drive programs have been shortening. For example, since 1999,
the industry has doubled storage density annually compared to a
slower pace in prior years. Additionally, media must be more
customized to each disk drive program. Short program life cycles
and customization have increased the risk of product
obsolescence, and as a result, supply chain management,
including just-in-time delivery, has become a standard industry
practice. In order to sustain customer relationships and achieve
profitability, we must be able to develop new products and
technologies in a timely fashion that can help customers reduce
their time-to-market performance, and continue to maintain
operational excellence that supports high-volume manufacturing
ramps and tight inventory management throughout the supply
chain. If we cannot respond to this rapidly changing environment
or fail to meet our customers demanding product and
qualification require-

14



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##### Table of Contents



ments, we will not be able to compete
effectively. As a result, we would not be able to maximize the
use of our production facilities and minimize our inventory
losses, and our profitability would be negatively impacted.




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

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

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

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



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

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



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

We have occasionally received, and may receive in
the future, communications from third parties that assert
violation of intellectual rights alleged to cover certain of our
products or manufacturing processes or equipment. We evaluate
whether it would be necessary to defend against the claims or to
seek licenses to the rights referred to in such communications.
In those cases, we may not be able to negotiate necessary
licenses

15



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##### Table of Contents



on commercially reasonable terms, or at all.
Also, if we have to defend those claims, we could incur
significant expenses and our managements attention could
be diverted from our other business. Any litigation resulting
from such claims could have a material adverse effect on our
business and financial results.


We may not be able to anticipate claims by others
that we infringe their technology or successfully defend
ourselves against such claims. Similarly, we may not be able to
discover significant infringements of our technology or
successfully enforce our rights to our technology if we discover
infringing uses by others, and such infringements could have a
negative impact on our ability to compete effectively.



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | Historical quarterly results may not
    accurately predict our future performance, which is subject to
    fluctuation due to many uncertainties.

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



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

We cannot forecast with certainty the impact of
these and other factors on our revenues and operating results in
any future period. Our expense levels are based, in part, on
expectations as to future revenues. If our revenue levels are
below expectations, our operating results are likely to suffer.
Because thin-film disk manufacturing requires a high level of
fixed costs, our gross margins are extremely sensitive to
changes in volume. At constant average selling prices,
reductions in our manufacturing efficiency cause declines in our
gross margins. Additionally, decreasing market demand for our
products generally results in reduced average selling prices
and/or low capacity utilization that, in turn, adversely affect
our gross margins and operating results. Further, because we
were required to implement fresh-start reporting when we emerged
from chapter 11 proceedings, our historical information prior to
June 30, 2002 is significantly less meaningful as a
predictor of future performance.

16



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##### Table of Contents





| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we depend on our Malaysian
    operations, we are exposed to unavoidable risks in transmitting
    technology from U.S. facilities to Malaysian facilities.
    These risks could adversely impact our results of
    operations.

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

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



| |                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not receive an extension on our
    tax holiday for a plant site in Malaysia, we could become
    subject to significantly higher tax liabilities and tax expense
    than we have experienced in the past, and our operating results
    would suffer.

Our wholly-owned thin-film media operation, Komag
USA (Malaysia) SDN (KMS), has a ten-year initial tax holiday
that expires in June 2003, for its first plant site in Malaysia.
The Malaysian government is considering extending this tax
holiday but there can be no assurances that they will, and if we
do not receive an extension, we would become subject to income
tax expense for that location. Therefore, we may incur
significantly higher income tax liabilities and tax expense than
we have experienced in the past which would negatively effect
our operating results.



| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our foreign operations and international
    sales subject us to additional risks inherent in doing business
    on an international level that make it more costly or difficult
    to conduct our business.

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

We are subject to these risks to a greater extent
than most companies because, in addition to selling our products
outside the U.S., our Malaysian operations account for
substantially all of our sales. Accordingly, our operating
results are subject to the risks inherent with international
operations, including, but not limited to:



| |   |                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | compliance with changing legal and regulatory
    requirements of foreign jurisdictions;                                                                                                                                                                                                                   
|
| |  | fluctuations in tariffs or other trade barriers;                                                                                                                                                                                                                                                           
|
| |  | foreign currency exchange rate fluctuations,
    since certain costs of our foreign manufacturing and marketing
    operations are incurred in foreign currency, including purchase
    of certain operating supplies and production equipment from
    Japanese suppliers in yen-denominated transactions;
|
| |  | difficulties in staffing and managing foreign
    operations;                                                                                                                                                                                                                                              
|
| |  | political, social and economic instability;                                                                                                                                                                                                                                                                
|
| |  | exposure to taxes in multiple jurisdictions;                                                                                                                                                                                                                                                               

17



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| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | local infrastructure problems or failures
    including but not limited to loss of power and water supply; and
|
| |  | transportation delays and interruptions.                                                                      

In addition, our ability to transfer funds from
our Malaysian operations to the U.S. is subject to Malaysian
rules and regulations. In 1999, the Malaysian government
repealed a regulation that restricted the amount of dividends
that a Malaysian company may pay to its stockholders. If not
repealed, this regulation would have potentially limited our
ability to transfer funds to the U.S. from our Malaysian
operations. If similar regulations are enacted in the future, we
may not be able to finance our U.S.-based research and
development and/or repay our U.S. debt obligations.



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

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



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

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



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

Furthermore, our manufacturing processes rely on
the use of hazardous materials and any accidental hazardous
discharge could result in significant liability and clean-up
expenses, which could harm our business, financial condition,
and results of operations.



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

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



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

From time to time in the past, California has
experienced energy shortages. An energy crisis could disrupt our
research and development activities and increase our expenses.
In the event of an acute power shortage, which occurs when power
reserves for the State of California fall below 1.5%, California
has, on occasion,

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##### Table of Contents



implemented, and may in the future continue to
implement, rolling blackouts throughout the state. We currently
do not have back-up generators or alternate sources of power in
the event of a blackout, and our insurance does not provide
coverage for any damages we or our customers may suffer as a
result of any interruption in our power supply. If blackouts
interrupt our power supply, we would be temporarily unable to
continue operations at our California-based facilities. This
could damage our reputation, harm our ability to retain existing
customers and to obtain new customers, and could result in lost
revenue, any of which could substantially harm our business and
results of operations.


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



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

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




Item 2.     Properties

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

|                       |  |                              |  |               |            |                 |  |                  |  |  |         | 
|---------------------- |  | ---------------------------- |  | ------------- | ---------- | --------------- |  | ---------------- |  |  | ------- | 
|                       |  |                              |  | Current Lease |            |                 |  |                 
|Location               |  | Description                  |  | Term Expires  |            | Renewal Options |  | Square Feet     
|                       |  |                              |  |               |            |                 |  |                 
|Leased Facilities      |  |                              |  |               |            |                 |  |                  |  |  |         | 
|San Jose, California   |  | Headquarters and R&D Center  |  |               | Jan. 2007  |                 |  | 4 5-year options |  |  | 188,000 | 
|San Jose, California   |  | Subleased to another company |  |               | April 2007 |                 |  | 4 5-year options |  |  | 82,000  | 
|Santa Rosa, California |  | Idle; held for sublease      |  |               | April 2004 |                 |  | 2 5-year options |  |  | 44,000  | 
|Owned Facilities       |  |                              |  |               |            |                 |  |                  |  |  |         | 
|Fremont, California    |  | Manufacturing; held for sale |  |               |           |                 |  |                 |  |  | 182,000 | 
|Eugene, Oregon         |  | Manufacturing; held for sale |  |               |           |                 |  |                 |  |  | 106,000 | 
|Penang, Malaysia       |  | Manufacturing                |  |               |           |                 |  |                 |  |  | 615,000 | 
|Sarawak, Malaysia      |  | Manufacturing                |  |               |           |                 |  |                 |  |  | 275,000 | 




Item 3.     Legal
Proceedings

The Company filed a voluntary petition for
reorganization under chapter 11 of the United States Code
on August 24, 2001. The petition was filed with the United
States Bankruptcy Court for the Northern District of California.

The Company submitted a proposed a Plan of
Reorganization, which was later modified. On May 14, 2002,
the Bankruptcy Court entered an order confirming the modified
Plan of Reorganization. On June 30, 2002, the Plan of
Reorganization became effective, and the Company emerged from
bankruptcy on that date.




Item 4.     Submission
of Matters to Vote of Security Holders

A special meeting of the Companys
stockholders was held October 3, 2002. The purpose of the
meeting was to vote on proposals to: 1) approve the
Companys 2002 Qualified Stock Plan; 2) approve the
Companys 2002 Employee Stock Purchase Plan; and
3) ratify the appointment of KPMG LLP as the Companys
independent auditors for the fiscal year ending
December 29, 2002.

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All of the proposals were approved by the
stockholders. Shares of Common Stock voted on the proposals were
as follows:

|                                          |  |     |            |         |  |         |         |                 |  |  |        |  |  |  |           | 
|----------------------------------------- |  | --- | ---------- | ------- |  | ------- | ------- | --------------- |  |  | ------ |  |  |  | --------- | 
|                                          |  | For |            | Against |  | Abstain |         | Broker Non-Vote
|                                          |  |     |            |         |  |         |         |                
|Proposal No. 1                            |  |     |            |         |  |         |         |                 |  |  |        |  |  |  |           | 
|Approve 2002 Qualified Stock Plan         |  |     | 14,999,257 |         |  |         | 854,444 |                 |  |  | 56,482 |  |  |  | 6,511,612 | 
|Proposal No. 2                            |  |     |            |         |  |         |         |                 |  |  |        |  |  |  |           | 
|Approve 2002 Employee Stock Purchase Plan |  |     | 15,488,130 |         |  |         | 365,649 |                 |  |  | 56,404 |  |  |  | 6,511,612 | 
|Proposal No. 3                            |  |     |            |         |  |         |         |                 |  |  |        |  |  |  |           | 
|Ratify appointment of KPMG for 2002       |  |     | 22,414,015 |         |  |         | 6,997   |                 |  |  | 783    |  |  |  |          | 

Executive Officers of the Registrant

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

|                       |  |    |  |                                                                   
|---------------------- |  | -- |  | ------------------------------------------------------------------
|Thian Hoo Tan          |  | 54 |  | Chief Executive Officer and Director                              
|Michael A. Russak      |  | 56 |  | President and Chief Technical Officer                             
|Christopher H. Bajorek |  | 59 |  | Executive Vice President, Advanced Technology                     
|Ray Martin             |  | 59 |  | Executive Vice President, Sales and Customer
    Service          
|Peter S. Norris        |  | 51 |  | Executive Vice President, Strategic Business
    Development      
|Kathleen A. Bayless    |  | 46 |  | Vice President, Chief Financial Officer and
    Secretary         
|Ali Dabier             |  | 44 |  | Vice President, Managing Director of Komag USA
    (Malaysia) Sdn.
|William G. Hammack     |  | 53 |  | Vice President, Human Resources                                   
|Kamran Honardoost      |  | 40 |  | Vice President, New Product Introduction and
    Design           
|Tsutomu T. Yamashita   |  | 48 |  | Vice President, Process Development                               

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

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

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

20



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

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

Ms. Baylessjoined our company in 1994 as
Corporate Controller, became a Vice President in 2000, and
became our Chief Financial Officer in September 2002. Before
joining us, Ms. Bayless worked for the public accounting
firm of Ernst & Young, LLP. Ms. Bayless holds a
B.S. degree in Accounting from California State University
Fresno, and is a Certified Public Accountant.

Mr. Dabierjoined our company in October 2000, as
General Manager of Oregon manufacturing facilities, after the
merger with HMT. In June 2001, Mr. Dabier became the
Managing Director of Malaysian Operations. In January of 2003 he
was promoted to Vice President, Managing Director of Komag USA
(Malayisa) Sdn. He joined HMT in 1988 where he held various
manufacturing management positions. From 1983 to 1988
Mr. Dabier worked for Lin Data Corporation.

Mr. Hammackjoined our company in June, 2002, as
Vice President, Human Resources. Mr. Hammack is a veteran
manager with 30 years of experience in the human resources
field, primarily with technology companies. He has provided
service to companies from a few hundred employees, to over ten
thousand, with facilities throughout the world. His background
includes creating human resource departments and programs for
startup companies such as Zambeel Inc., a Kleiner/ Perkins and
NEA storage startup, QRS Corporation, a multinational leader in
electronic commerce solutions, and General Electric Medical
Systems/ Diasonics, a multinational provider of medical imaging
and diagnostic instruments. Mr. Hammack holds a B.A. degree
from San Diego State University.

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

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

21



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##### Table of Contents






PART II




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

Through September 17, 2001, we traded our
common stock under the symbol KMAG on the Nasdaq National Stock
Market. On September 17, 2001, we voluntarily delisted our
common stock from the Nasdaq National Stock Market. On
September 18, 2001, we began trading our common stock under
the symbol KMAGQ on the OTC Bulletin Board, where our stock
continued to trade through June 30, 2002.

During the period from July 1, 2002, through
July 9, 2002, our common stock was not traded. Beginning on
July 10, 2002, our stock symbol changed to KOMG, and our
stock resumed trading on the OTC Bulletin Board. On
February 19, 2003, we were approved to list our stock on
the Nasdaq National Stock Market. On February 25, 2003, our
stock ceased trading on the OTC Bulletin Board and began trading
on the Nasdaq National Stock Market under the symbol KOMG.

As of February 23, 2003, we had
73 holders of record of our Common Stock and
23,519,736 shares outstanding.

The following table sets forth the range of high
and low closing sales prices, as reported on the Nasdaq National
Market through September 17, 2001, and the OTC Bulletin
Board from September 18, 2001 through December 29,
2002.

|     |                                                       |                |   |      |  |  |   |      | 
|---- | ----------------------------------------------------- | -------------- | - | ---- |  |  | - | ---- | 
|     |                                                       |               
|     |                                                       | Price Range of
|     |                                                       | Common Stock  
|     |                                                       |               
|     |                                                       | High           |   | Low 
|     |                                                       |                |   |     
|2001 |                                                       |                |   |      |  |  |   |     
|     | First Quarter                                         |                | $ | 1.72 |  |  | $ | 0.56 | 
|     | Second Quarter                                        |                |   | 0.89 |  |  |   | 0.26 | 
|     | Third Quarter (through September 17)                  |                |   | 0.26 |  |  |   | 0.12 | 
|     | Third Quarter (September 18 through
    September 30) |                |   | 0.16 |  |  |   | 0.02 | 
|     | Fourth Quarter                                        |                |   | 0.08 |  |  |   | 0.03 | 
|2002 |                                                       |                |   |      |  |  |   |     
|     | First Quarter                                         |                |   | 0.05 |  |  |   | 0.01 | 
|     | Second Quarter                                        |                |   | 0.03 |  |  |   | 0.01 | 
|     | Third Quarter (beginning July 10)                     |                |   | 5.00 |  |  |   | 2.30 | 
|     | Fourth Quarter                                        |                |   | 4.62 |  |  |   | 2.50 | 

Dividend Policy

We have never declared cash dividends on our
common stock. We presently intend to retain all cash to repay
our debt and operate and expand our business, and do not
anticipate paying any cash dividends in the near future.
Further, our debt agreements preclude paying dividends.

22



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##### Table of Contents






Item 6.     Selected
Consolidated Financial Data

The following table sets forth selected
consolidated financial data and other operating information of
Komag, Incorporated. The financial data and operating
information is derived from the consolidated financial
statements of Komag, Incorporated, and should be read in
conjunction with the consolidated financial statements, related
notes, and other financial information included herein (in
thousands, except per share amounts and number of employees).
The Company declared no cash dividends during the five-year
period.

|                                                                                                     |  |              |         |               |             |                   |                     |      |  |      |          |      |  |   |         |   |  |   |          |   |  |   |          |   | 
|---------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ------------- | ----------- | ----------------- | ------------------- | ---- |  | ---- | -------- | ---- |  | - | ------- | - |  | - | -------- | - |  | - | -------- | - | 
|                                                                                                     |  |              |         |               |             |                  
|                                                                                                     |  | Successor    |         |               | Predecessor |                   | Predecessor Company
|                                                                                                     |  | Company      |         | Company       |             |                  
|                                                                                                     |  |              |         |               |             |                  
|                                                                                                     |  | Six Months   |         | Six Months    |             | Fiscal Year Ended
|                                                                                                     |  | Ended        |         | Ended         |             |                  
|Consolidated Statements of Operations Data                                                           |  | Dec 29, 2002 |         | June 30, 2002 |             | 2001              |                     | 2000 |  | 1999 |          | 1998
|                                                                                                     |  |              |         |               |             |                   |                     |      |  |      |          |     
|Net sales                                                                                            |  | $            | 174,749 |               |             | $                 | 111,955             |      |  | $    | 282,613  |      |  | $ | 358,463 |   |  | $ | 331,946  |   |  | $ | 328,883  |  
|Gross profit (loss)                                                                                  |  |              | 31,740  |               |             |                   | 5,167               |      |  |      | (2,456   | )    |  |   | 34,988  |   |  |   | (22,709  | ) |  |   | (62,752  | )
|Restructuring/impairment charges(1)(3)(5)(7)(8)(9)                                                   |  |              | 34,763  |               |             |                   | 4,318               |      |  |      | 57,430   |      |  |   | 5,293   |   |  |   | 187,965  |   |  |   | 187,768  |  
|Operating loss(1)(3)(5)(7)(8)(9)                                                                     |  |              | (37,690 | )             |             |                   | (29,812             | )    |  |      | (146,442 | )    |  |   | (38,295 | ) |  |   | (291,089 | ) |  |   | (331,919 | )
|Interest expense(6)(10)                                                                              |  |              | 6,553   |               |             |                   |                    |      |  |      | 155,192  |      |  |   | 45,428  |   |  |   | 23,319   |   |  |   | 19,212   |  
|Other income, net(2)                                                                                 |  |              | 3,460   |               |             |                   | 399,147             |      |  |      | 4,286    |      |  |   | 3,844   |   |  |   | 1,552    |   |  |   | 4,853    |  
|Reorganization costs, net                                                                            |  |              |        |               |             |                   | 6,511               |      |  |      | 6,066    |      |  |   |        |   |  |   |         |   |  |   |         |  
|Income (loss) before cumulative effect of change
    in accounting principle(1)(2)(3)(5)(6)(7)(8)(9) |  |              | (41,919 | )             |             |                   | 359,924             |      |  |      | (296,395 | )    |  |   | (68,058 | ) |  |   | (283,049 | ) |  |   | (366,336 | )
|Cumulative effect of change in accounting
    principle(4)                                           |  |              |        |               |             |                   | (47,509             | )    |  |      |         |      |  |   |        |   |  |   |         |   |  |   |         |  
|Net income (loss)(1)(2)(3)(4)(5)(6)(7)(8)(9)                                                         |  | $            | (41,919 | )             |             | $                 | 312,415             |      |  | $    | (296,395 | )    |  | $ | (68,058 | ) |  | $ | (283,049 | ) |  | $ | (366,336 | )
|Basic and diluted net loss per share(11)                                                             |  | $            | (1.84   | )             |             |                   |                     |      |  |      |          |      |  |   |         |   |  |   |          |   |  |   |          |  

|                                                                            |  |              |         |  |  |                             |  |      |  |      |          |      |  |   |         |  |  |   |         |  |  |   |         | 
|--------------------------------------------------------------------------- |  | ------------ | ------- |  |  | --------------------------- |  | ---- |  | ---- | -------- | ---- |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                                            |  |              |         |  |  |                            
|                                                                            |  |              |         |  |  | Predecessor Company        
|                                                                            |  | Successor    |         |  |  |                             | 
|                                                                            |  | Company      |         |  |  |                            
|                                                                            |  |              |         |  |  | As of the Fiscal Year Ended
|                                                                            |  | As of        |         |  |  |                            
|Consolidated Balance Sheet Data                                             |  | Dec 29, 2002 |         |  |  | 2001                        |  | 2000 |  | 1999 |          | 1998
|                                                                            |  |              |         |  |  |                             |  |      |  |      |          |     
|Net property, plant and equipment, and land and
    buildings held for sale |  | $            | 221,014 |  |  |                             |  |      |  | $    | 256,856  |      |  | $ | 354,873 |  |  | $ | 313,455 |  |  | $ | 470,017 | 
|Current portion of long-term debt                                           |  |              | 10,229  |  |  |                             |  |      |  |      |         |      |  |   | 216,740 |  |  |   | 260,000 |  |  |   | 260,000 | 
|Long-term debt (less current portion)                                       |  |              | 129,923 |  |  |                             |  |      |  |      |         |      |  |   | 137,545 |  |  |   | 22,891  |  |  |   |        | 
|Liabilities subject to compromise                                           |  |              |        |  |  |                             |  |      |  |      | 516,173  |      |  |   |        |  |  |   |        |  |  |   |        | 
|Stockholders equity (deficit)                                              |  |              | 127,960 |  |  |                             |  |      |  |      | (144,939 | )    |  |   | 151,861 |  |  |   | 78,713  |  |  |   | 323,807 | 
|Total assets                                                                |  | $            | 317,200 |  |  |                             |  |      |  | $    | 407,850  |      |  | $ | 633,061 |  |  | $ | 475,871 |  |  | $ | 694,095 | 
|Number of employees at end of period                                        |  |              | 4,353   |  |  |                             |  |      |  |      | 3,789    |      |  |   | 5,334   |  |  |   | 3,488   |  |  |   | 4,086   | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 FAS 142.                                                                                                                                                                                                                      
|   
|(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 SOP 90-7.                          
|   
|(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 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, plus a net
    $2.7 million reversal of charges previously accrued for the
    1997, 1998, and 1999 restructures.                                                                                           
|   
|(8) | Results of operations for 1999 included
    $143.7 million in restructuring charges and a
    $44.3 million impairment charge. The restructuring charges
    related primarily to the closing of the Companys U.S.
    manufacturing operations. The impairment charge related to the
    write-down of goodwill which originated from the acquisition of
    Western Digital Corporations media operation.                
|   
|(9) | Results of operations for 1998 included a
    $187.8 million restructuring charge that primarily related
    to an asset impairment charge of $175 million. Based on
    analysis of the Companys production capacity and its
    expectations of the media market over the remaining life of the
    Companys fixed assets, the Company concluded that it would
    not be able to recover the book value of those assets.



|     |                                                                                                                                                                                   
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | 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.
|    
|(11) | Earnings per share of the Predecessor Company are
    not presented as the amounts are not meaningful.                                                                            

23



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##### Table of Contents






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

The following discussion contains predictions,
estimates, and other forward-looking statements that involve a
number of risks and uncertainties about our business. These
statements may be identified by the use of words such as
expects, anticipates,
intends, plans, and similar expressions.
The Companys business is subject to a number of risks and
uncertainties. While this discussion represents our current
judgment on the future direction of our business, these risks
and uncertainties could cause actual results to differ
materially from any future performance suggested herein. Some of
the important factors that may influence possible differences
are continued competitive factors, pricing pressures, changes in
customer demand, and general economic conditions, as well as
those discussed below in Other Factors that May Affect
Future Operating Results.

Results of Operations

Overview

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

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

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

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

With the relocation of our manufacturing
operations to our Malaysian facilities, our San Jose, California
site is focused solely on activities related to research,
process development, and product prototyping. Our selling,
general, and administrative functions also remain in California.
The shift of high-volume production to our cost-advantaged
Malaysian manufacturing plants has improved our overall cost
structure, resulting in lower unit production costs, and has
improved our ability to respond to the continuing price
pressures in the disk industry. We expect to maintain low costs
by fully utilizing our Malaysian operations. In addition, we may
acquire other low cost operations and enter into long-term
contracts with suppliers to reduce or stabilize costs and grow
our business.

24



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##### Table of Contents



2002 versus
2001

As discussed in Note 1 to the financial
statements, we emerged from chapter 11 bankruptcy on
June 30, 2002. In accordance with SOP 90-7, Financial
Reporting by entities in Reorganization Under the Bankruptcy
Code, we adopted fresh-start reporting and reflected the effects
of the adoption in the consolidated financial statements for the
six months ended June 30, 2002. As a result of the adoption
of fresh-start reporting, the statements of operations for
periods ended after June 30, 2002 are prepared on a
different basis of accounting. Therefore, these financial
statements are not comparable to the financial statements for
prior periods.

The following discussion compares the results of
operations for the fiscal year ended December 29, 2002, to
the fiscal year ended December 30, 2001. To facilitate an
understanding of this discussion, we have provided the table
below. The table shows our results of operations for the 2002
and 2001 fiscal years. Results of operations for 2002 include
the combined income statement activity of the successor company
and the predecessor company.

The information in this table is not intended to
replace our statements of operations prepared in accordance with
accounting principles generally accepted in the United States of
America. The table (in thousands) is as follows:

|                                                                       |                                                                              |              |          |              |  |   |         |          |  
|---------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------ | -------- | ------------ |  | - | ------- | -------- | -
|                                                                       |                                                                              | Year Ended   |          | Year Ended  
|                                                                       |                                                                              | Dec 29, 2002 |          | Dec 30, 2001
|                                                                       |                                                                              |              |          |             
|Net sales                                                              |                                                                              | $            | 286,704  |              |  | $ | 282,613 |         
|Cost of sales                                                          |                                                                              |              | 249,797  |              |  |   | 285,069 |         
|                                                                       |                                                                              |              |          |              |  |   |         |         
|                                                                       | Gross profit (loss)                                                          |              |          | 36,907       |  |   |         | (2,456   | )
|Research, development, and engineering expense                         |                                                                              |              | 37,196   |              |  |   | 39,546  |         
|Selling, general, and administrative expense                           |                                                                              |              | 17,739   |              |  |   | 19,929  |         
|Amortization of intangible assets                                      |                                                                              |              | 3,609    |              |  |   | 27,081  |         
|Impairment charges related to goodwill                                 |                                                                              |              | 33,870   |              |  |   |        |         
|Restructuring/impairment charges                                       |                                                                              |              | 5,211    |              |  |   | 57,430  |         
|In-process research and development                                    |                                                                              |              | 6,784    |              |  |   |        |         
|Interest income                                                        |                                                                              |              | (325     | )            |  |   | (1,528  | )       
|Interest expense                                                       |                                                                              |              | 6,553    |              |  |   | 155,192 |         
|Other income, net                                                      |                                                                              |              | (402,607 | )            |  |   | (4,286  | )       
|Reorganization costs, net                                              |                                                                              |              | 6,511    |              |  |   | 6,066   |         
|Provision for (benefit from) income taxes                              |                                                                              |              | 1,987    |              |  |   | (9,433  | )       
|Minority interest/equity interest in net loss of
    related companies |                                                                              |              | (2,374   | )            |  |   | (3,942  | )       
|                                                                       |                                                                              |              |          |              |  |   |         |         
|                                                                       | Income (loss) before cumulative effect of
    change in accounting principle |              |          | 318,005      |  |   |         | (296,395 | )
|Cumulative effect of change in accounting
    principle                |                                                                              |              | (47,509  | )            |  |   |        |         
|                                                                       |                                                                              |              |          |              |  |   |         |         
|                                                                       | Net income (loss)                                                            |              | $        | 270,496      |  |   | $       | (296,395 | )
|                                                                       |                                                                              |              |          |              |  |   |         |         



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

Net sales for 2002 were $286.7 million, an
increase of $4.1 million from net sales of
$282.6 million in 2001. Units shipped in 2002 increased to
47.7 million units, a 4.5 million unit increase
compared to 43.2 million units in 2001. The overall
shipment and revenue increases were primarily the result of
market share gains which began in the third quarter of 2002, in
addition to seasonally strong overall market conditions in the
fourth quarter of 2002. Disk media unit shipment volume and
total revenue increased over 100% in the fourth quarter of 2002
compared to the second quarter of 2002. Fourth quarter unit
sales were somewhat constrained due to shortages of substrates
from external suppliers.

Our average selling price declined to $5.61 in
2002 compared to $6.16 in 2001. The decrease was primarily
related to our efforts to increase market share, as well as
continued general pricing pressure from customers due to excess
capacity for the majority of 2002. With the strength of the
fourth quarter 2002

25



---



##### Table of Contents



shipments and customer demand, and migration of
sales to new advanced products, our average selling price in the
fourth quarter of 2002 increased slightly from the third quarter
of 2002.


Sales of partially completed disks (disk
substrates) for fiscal 2002 were $19.3 million compared to
$16.7 million in 2001. The increase reflects higher demand
from customers in fiscal 2002. Disk substrate sales vary from
period to period based on customer requirements.

Based on traditional seasonal market trends, we
expect lower unit shipments and revenue in the first quarter of
2003 compared to the fourth quarter of 2002. However, due to the
strong start in the first quarter of 2003 and current demand
from our customers, we expect that unit shipments may decrease
less than 10% from the fourth quarter of 2002.

In 2002, Western Digital accounted for
approximately 61% of net sales, Maxtor accounted for 30% of net
sales, and sales to other customers were less than 10% of net
sales. In 2001, Western Digital accounted for approximately 59%
of net sales and Maxtor accounted for 27% of net sales, and
sales to other customers were less than 10% of net sales.

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



| |             
| | ------------
| | Gross Margin

Our overall gross margin percentage of 12.9% in
2002 was 13.8 points higher than our overall 2001 gross loss
percentage of 0.9% in 2001. The economies of scale associated
with higher sales and production in the second half of 2002
significantly lowered our cost per disk, and accounted for 23.7%
of the increase. However, the higher sales volume was offset by
the lower average selling price, and accounted for a 9.9%
decline in gross margin.

We expect similar variable cost per unit in 2003
compared to 2002 while continuing to advance our technology. We
expect our fixed cost per unit in 2003 to vary based on changes
in production volumes from the level achieved in the fourth
quarter of 2002.



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

Research, development, and engineering (R&D)
expenses were $37.2 million in 2002, a $2.3 million
decrease compared to $39.5 million in 2001. The decrease in
costs reflected lower costs associated with the KMT plant
shutdown and higher costs in the first half of 2001, reflecting
additional costs incurred in Malaysia to qualify customer
programs on the initial equipment relocated from the U.S. We
expect R&D spending in 2003 to be similar to 2001 and 2002
levels.



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

Selling, general, and administrative expenses
were $17.7 million in 2002, a $2.2 million decrease
over $19.9 million in 2001. The decrease is primarily
related to lower headcount and payroll-related costs which were
partially offset by stock compensation expense which was not
applicable in 2001. We expect selling, general, and
administrative expenses in 2003 to be similar to 2001 and 2002
levels.



| |                                  
| | ---------------------------------
| | Amortization of Intangible Assets

Amortization of intangible assets was
$3.6 million in 2002, compared to $27.1 million in
2001. The decrease of $23.5 million was primarily due to
the cessation of amortization of goodwill beginning in January
2002, in accordance with SFAS 142. Amortization of
intangible assets of $1.8 million was included in cost of
sales for the second half of 2002, as it represents amortization
of developed technology and amortization of the Western Digital
volume purchase agreement.

26



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##### Table of Contents





| |                                  
| | ---------------------------------
| | Restructuring/ Impairment Charges

We recorded restructuring charges of
$5.2 million in 2002 and $7.2 million in 2001. The
$5.2 million charge for 2002 included $4.3 million
related to the closure of the KMT research and development
facility in the second quarter of 2002, $0.9 million
related to professional fees associated with the chapter
11 bankruptcy case and Exit Facility fees. The
$7.2 million charge for 2001 reflected additional costs
associated with lease obligations on equipment no longer in
service, and costs for closing the former HMT facilities.

Impairment charges in 2002 were
$33.9 million. Upon the adoption of fresh-start reporting
as of June 30, 2002, we had a goodwill balance of
$33.9 million, which equaled the reorganization value in
excess of amounts allocable to identifiable net assets recorded
in accordance with SOP 90-7. In the fourth quarter of 2002,
in accordance with FAS 142 requirements, we performed our first
annual goodwill impairment test. As a result of that test, we
wrote off the entire $33.9 million goodwill balance.

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



| |                                    
| | -----------------------------------
| | In-Process Research and Development

Upon adoption of fresh-start reporting, in June
2002, the Company recorded certain intangible assets including
in-process research and development of $6.8 million, which
was expensed in the third quarter of 2002.



| |                                     
| | ------------------------------------
| | Interest Income and Interest Expense

Interest income was $0.3 million in 2002,
compared to $1.5 million in 2001. The decrease primarily
reflected lower investment interest rates during 2002 and lower
average cash balances in 2002.

Interest expense decreased by $148.6 million
in 2002, from $155.2 million in 2001 to $6.6 million
in 2002. Interest expense in 2002 included interest on our new
debt in the second half of 2002 subsequent to emergence from
chapter 11 bankruptcy. Interest expense in 2001 primarily
reflected interest, including accretion, on all old debt through
our chapter 11 bankruptcy filing on August 24, 2001, and an
additional $99.1 million of accretion to record the full
face value of the HMT debt (which was assumed upon the
acquisition of HMT) upon our default on our debt agreements.



| |                  
| | -----------------
| | Other Income, Net

Other income in 2002 was $402.6 million, an
increase of $398.3 million over $4.3 million in 2001.
The increase included a net gain of $396.4 million
associated with the chapter 11 cancellation of liabilities
subject to compromise and fresh-start reporting and a net
$2.2 million property tax refund.

Other income of $4.3 million in 2001
primarily included $2.0 million in refunds for
manufacturing work not completed by vendors, $0.7 million
in cash received on a note receivable that had been written off,
and $0.6 million in realized gain on cumulative translation
adjustments. The remaining $1.0 million primarily represented
other miscellaneous income.



| |                          
| | -------------------------
| | Reorganization Costs, Net

Reorganization costs of $6.5 million in 2002
primarily included a $5.0 million charge associated with the
Magnetic Media Development LLC (MMD) bankruptcy claim and
professional fees related to the bankruptcy filing.

Reorganization costs of $6.1 million in 2001
primarily included $2.3 million in accretion to bring the note
payable to Western Digital to its face value, $1.9 million
in professional fees, and a $1.9 million adjustment to
increase liabilities subject to compromise to the amount of the
Western Digital equipment lease claim.

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Reorganization costs, net relate solely to the
bankruptcy filing. Accordingly, no further costs may be recorded
on this line on the consolidated statement of operations
subsequent to emergence on June 30, 2002.



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

Income tax expense of $2.0 million in 2002
represents foreign withholding taxes on royalty and interest
payments. In 2001, we recorded an income tax benefit of
$9.4 million, which was primarily related to the reversal
of income tax payable due to the expiration of the statutory
periods to audit our federal and state tax returns, net of
$1.3 million of foreign withholding taxes on royalty and
interest payments and foreign taxes of subsidiaries.

Our wholly-owned thin-film media operation, KMS,
has a ten-year initial tax holiday through June 2003 for its
first plant site in Malaysia. KMS has also been granted an
additional eight-year and ten-year tax holiday through December
2006 and 2008 for its second and third plant sites in Malaysia,
respectively. We are currently applying for an extension of the
tax holiday expiring in June 2003. We may or may not receive an
extension. In 2002 the tax holidays increased our net income by
$8.2 million. The tax holidays had no impact on our net
losses in 2001.



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

In April 2002, we purchased Kobe Steel USA
Holdings, Inc.s (Kobe USA) 20% share of KMT in
exchange for certain idle assets. The purchase increased our
ownership percentage of KMT to 100%. In the third quarter of
2002, we closed the KMT operation. The minority interest for
Kobe USAs 20% share of KMTs net income in 2001 was
less than $0.1 million.

In the second quarter of 2002, in accordance with
fresh-start reporting requirements, our remaining investment in
Chahaya of $1.7 million was written down to its estimated
fair value of zero. Accordingly, no further equity in the net
losses of Chahaya was recorded in the last half of 2002.
Further, Chahaya ceased operations in the fourth quarter of
2002. In 2002 and 2001, we recorded our equity share of
Chahayas net loss of $2.4 million and $3.9 million,
respectively.



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

As discussed in Note 3, we adopted SFAS
No. 142 and recorded the effects of adoption in June 2002
on a cumulative effect basis as of the first day of the 2002
fiscal year.

Under SFAS No. 142, we were required to
perform a transitional impairment analysis on our goodwill. The
transitional impairment loss of $47.5 million was
recognized as the cumulative effect of a change in accounting
principle in our consolidated statement of operations.



| |                 
| | ----------------
| | 2001 versus 2000



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

Net sales for 2001 were $282.6 million, a
decrease of $75.9 million from net sales of
$358.5 million in 2000. The overall weak economy and
related personal computer market in 2001 negatively impacted our
sales volume as well as our average selling price. Unit
shipments in 2001 declined by 14% in 2001, to 43.2 million
disks, versus 50.2 million in 2000. Our finished disk
average selling price per unit fell to $6.16 in 2001 from $6.58
in 2000. Another factor contributing to the sales decline was a
$15 million reduction in sales of partially completed disks
(disk substrates) for fiscal 2001 compared with fiscal 2000.

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

Gross Profit
(Loss)

Our overall 2001 gross loss percentage was
negative 0.9% compared to a gross profit percentage of 9.8% in
2000, a decline of 10.7 points. The sales volume and
average selling price declines, as discussed above, accounted
for 6.1 points of the decline, and higher fixed manufacturing
costs resulting from the HMT merger

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accounted for 4.6 points of the decline. By
the third quarter of 2001, when the consolidation of our
manufacturing operations was complete, fixed manufacturing costs
returned to approximately pre-merger levels in fiscal 2000.
Variable costs per unit were flat year over year in 2000 and
2001. However, variable costs per unit decreased in each
successive quarter of 2001 due to lower input material costs and
higher product yields. These quarter to quarter improvements
resulted from the consolidation of manufacturing operations in
Malaysia and continuous improvement of our manufacturing
processes while qualifying and ramping new advanced disk
products.


Operating
Expenses

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

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

In both 2001 and 2000, we recorded
$10.2 million of amortization of intangibles associated
with our acquisition of Western Digitals media operation.

In 2001 we recorded $16.9 million compared
to $6.2 million in 2000 of amortization of intangibles
associated with our merger with HMT. The increase reflects four
quarters of amortization of intangibles from the HMT merger,
compared to only one quarter of amortization in 2000. The value
and amortization period of goodwill and other intangibles was
reassessed in 2002 in accordance with SFAS 142,
Goodwill and Other Identifiable Intangible Assets.

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

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

Interest
Income/ Expense

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

Interest expense increased by $109.8 million
in 2001, from $45.4 million in 2000 to $155.2 million
in 2001. The increase was primarily the result of the accretion
of the HMT debt over approximately eight months in 2001 versus
three months in 2000, and the accretion of $99.1 million in
2001 to record full face value of the HMT debt upon our default
on the debt agreements. No interest expense was recorded after
our chapter 11 Bankruptcy filing on August 24, 2001
until our emergence from chapter 11 Bankruptcy on
June 30, 2002.

Reorganization
Costs

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

29



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Income
Taxes

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

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

Minority/
Equity Interest in Net Loss of Related Companies

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

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

We recorded an investment in Chahaya for
$12.0 million in the fourth quarter of 2000. The investment
included $4.0 million for expected future cash payments and
$8.0 million for facilities, facility services, and
equipment. In June 2001, our investment was reduced by
$4.0 million due to cancellation of the shares related to
the future $4 million cash contribution. This activity, as
well as additional changes in Chahayas equity structure,
reduced our ownership percentage to 34% at the end of our 2001
fiscal year. In 2001, we recorded a $3.9 million loss as
our equity share of Chahayas net loss. Chahaya ceased
operations in the fourth quarter of 2002.

Critical Accounting Policies

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

Fresh-Start
Reporting

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

The enterprise valuation of $310.0 million
(the value of the restructured debt and equity) was based on the
consideration of many factors and various valuation methods,
including the income approach and application of the discounted
cash flow method based on projected five and one-quarter year
financial information, selected publicly traded company market
multiples of certain companies operating businesses viewed to be
similar to that of our company, and other applicable ratios and
valuation techniques that we and our financial advisors believed
to be representative of our business and industry. However, the
valuation was

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


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

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

Allowance for
Sales Returns

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

From December 30, 2001, to December 29,
2002, our allowance for sales returns decreased by
$0.3 million. The decrease in the allowance reflects a
decrease in the number of specific items that may possibly be
returned.

Allowance
for Doubtful Accounts

We record an allowance for doubtful accounts
based on estimates of collection risk associated with our
accounts receivable. We specifically analyze our accounts
receivable and analyze historical bad debts, customer
concentrations, customer credit-worthiness, current economic
trends, and changes in our customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts.
The majority of our sales and resulting accounts receivable are
concentrated among a few large customers. As a result of this
sales concentration, at December 29, 2002, 62% of our
accounts receivable was with one customer for which no allowance
was provided. Historically, we have not experienced material
differences between our estimated allowance for doubtful
accounts and actual results. However, if the financial condition
of our customers were to deteriorate, resulting in an impairment
of their ability to make payments, our results would suffer and
additional allowances may be required.

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

Restructuring
Liabilities

We have estimated and accrued restructuring
liabilities based on historical data on prior costs for these
activities, coupled with assumptions on expected timeframes for
these activities and specific actions necessary to complete such
transitions. It is possible that future costs incurred to exit
related business activities could vary from historical costs,
assumptions on timeframes could change or different actions may
be determined necessary than were assumed in our original
estimates, which could result in significant changes in costs to
exit certain business activities. Any significant difference
between our estimated restructuring liabilities and actual
experience or changes in our estimate would be reflected in our
reported operating expenses in the period in which that
difference is determined.

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Long-lived
Assets

Long-lived assets are generally evaluated for
impairment on an individual acquisition, market, or product
basis whenever events or changes in circumstances indicate that
these assets may be impaired or the estimated useful lives are
no longer appropriate. We consider the primary indicators of
impairment to include significant decreases in unit volumes,
unit prices or significant increases in production costs.
Periodically, we review our long-lived assets for impairment
based on estimated future undiscounted cash flows attributable
to the assets. In the event that these cash flows are not
expected to be sufficient to recover the recorded value of the
assets, the assets are written down to their estimated fair
values utilizing discounted estimates of future cash flows. The
discount rate used is based on the estimated incremental
borrowing rate at the date of the event that triggers the
impairment. Land and buildings held for sale are evaluated for
impairment periodically when there are significant changes in
market conditions for commercial real estate, and carried at
amounts based on independent valuation less estimated selling
costs.

Goodwill
and Other Intangible Assets

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

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

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

Upon the adoption of fresh-start reporting as of
June 30, 2002, we had a goodwill balance of
$33.9 million, which equaled the reorganization value in
excess of amounts allocable to identifiable net assets recorded
in accordance with SOP 90-7. We also had other intangible
assets in the amount of $17.6 million, which consisted of:
1) developed technology of $3.1 million, which will be
amortized on a straight-line basis over its estimated useful
life of four years; 2) a volume purchase agreement of
$7.7 million, which will be amortized on a straight-line
basis over its remaining useful life of three and one-quarter
years; and 3) in-process research and development of
$6.8 million (which was expensed in the third quarter of
2002). In the fourth quarter of 2002, the $33.9 million of
goodwill was written off based on the results of our annual
impairment test, in accordance with FAS 142.

Liquidity and Capital Resources

The following liquidity discussion is intended to
identify significant sources and uses of cash and cash
equivalents for the 2002 fiscal year. To facilitate an
understanding of this discussion, we have provided the table
below. The table combines cash flow activity for the six months
ended June 30, 2002 (predecessor company) and the six
months ended December 29, 2002 (successor company) .

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The information in this table is not intended to
replace our statements of cash flows prepared in accordance with
GAAP. The table (in thousands) is as follows:

|                                                                                      |                                                                               |                                           |         |          |         |  
|------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ----------------------------------------- | ------- | -------- | ------- | -
|                                                                                      |                                                                               | Year                                     
|                                                                                      |                                                                               | Ended                                    
|                                                                                      |                                                                               | Dec 29, 2002                             
|                                                                                      |                                                                               |                                          
|Net income                                                                            |                                                                               | $                                         | 270,496 |         
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                               |                                           |         |         
|                                                                                      | Gain on debt and revaluation of assets and
    liabilities                    |                                           |         | (396,376 | )      
|                                                                                      | Cumulative effect of change in accounting
    principle                       |                                           |         | 47,509   |        
|                                                                                      | Impairment charges related to property, plant,
    and equipment and goodwill |                                           |         | 34,086   |        
|                                                                                      | Depreciation and amortization on property, plant,
    and equipment           |                                           |         | 50,112   |        
|                                                                                      | Amortization of intangible assets                                             |                                           |         | 5,458    |        
|                                                                                      | In-process research and development                                           |                                           |         | 6,784    |        
|                                                                                      | Amortization of deferred stock compensation                                   |                                           |         | 2,403    |        
|                                                                                      | Non-cash interest charges                                                     |                                           |         | 3,090    |        
|                                                                                      | Gain on disposal of property, plant, and equipment                            |                                           |         | (2,296   | )      
|                                                                                      | Equity in net loss of unconsolidated company                                  |                                           |         | 2,374    |        
|                                                                                      | Restructuring charges                                                         |                                           |         | 4,995    |        
|                                                                                      | Reorganization costs, net                                                     |                                           |         | 6,511    |        
|                                                                                      | Accounts receivable                                                           |                                           |         | (21,093  | )      
|                                                                                      | Inventories                                                                   |                                           |         | (3,357   | )      
|                                                                                      | Prepaid expenses and deposits                                                 |                                           |         | (410     | )      
|                                                                                      | Accounts payable                                                              |                                           |         | 20,368   |        
|                                                                                      | Accrued expenses and other liabilities                                        |                                           |         | (13,718  | )      
|                                                                                      |                                                                               |                                           |         |         
|                                                                                      |                                                                               | Net cash provided by operating activities |         |          | 16,936  |  
|Acquisition of property, plant, and equipment                                         |                                                                               |                                           | (13,893 | )       
|Proceeds from disposal of property, plant, and
    equipment                          |                                                                               |                                           | 3,312   |         
|Other investing activities                                                            |                                                                               |                                           | 103     |         
|                                                                                      |                                                                               |                                           |         |         
|                                                                                      |                                                                               | Net cash used in investing activities     |         |          | (10,478 | )
|Payment of debt                                                                       |                                                                               |                                           | (424    | )       
|                                                                                      |                                                                               |                                           |         |         
|Increase in cash and cash equivalents                                                 |                                                                               |                                           | 6,034   |         
|Cash and cash equivalents at December 30,
    2001                                    |                                                                               |                                           | 17,486  |         
|                                                                                      |                                                                               |                                           |         |         
|Cash and cash equivalents at December 29,
    2002                                    |                                                                               | $                                         | 23,520  |         
|                                                                                      |                                                                               |                                           |         |         

Cash and cash equivalents of $23.5 million
at the end of the 2002 fiscal year increased by
$6.0 million from the end of the 2001 fiscal year. The
increase primarily reflected a $16.9 million increase
resulting from consolidated operating activities, offset by
$13.9 million of spending on property, plant, and
equipment, plus $3.3 million in proceeds from the sale of
idle manufacturing equipment.

Consolidated operating activities generated
$16.9 million in cash in 2002. The primary components of
this change include the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $270.5 million of net income;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | non-cash adjustments totaling a reduction of
    $235.4 million, which primarily included a
    $396.4 million adjustment to net income for the non-cash
    net gain on extinguishment of liabilities subject to compromise
    and revaluation of assets for fresh-start reporting related to
    the emergence from chapter 11, a $47.5 million
    non-cash loss reflecting the cumulative effect of change in
    accounting principle on adoption of FAS 142,
    $50.1 million of depreciation and amortization, a
    $33.9 million charge related to the write-off of remaining
    goodwill, and a $6.8 million write-off of in-process
    research and development;

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| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an accounts receivable increase of
    $21.1 million due to increased sales in the fourth quarter
    of 2002;                                                                                                
|
| |  | an inventory increase of $3.4 million due to
    increased manufacturing activity in the fourth quarter of 2002;                                                                                              
|
| |  | an accounts payable increase of
    $20.4 million due to increased spending to support higher
    production volumes in the fourth quarter of 2002; and                                                       
|
| |  | an accrued expenses and other liabilities
    decrease of $13.7 million, which primarily reflected
    payments of previously accrued expenses related to
    restructurings, and chapter 11-related expenses.

Based on current operating forecasts, we estimate
that the cash balance and cash from operations will be adequate
to support our continuing operations, capital spending plan, and
interest and debt payments for at least the next twelve months.
Additionally, we can borrow under the Exit Facility, which is
described below. We currently have no borrowings under the Exit
Facility.

The Exit Facility is a revolving credit facility
providing for advances having a principal amount of up to
$15.0 million at any time outstanding, with a
$3.0 million letter of credit sub-facility. The Exit
Facility expires June 30, 2005. As of December 29,
2002, there were no borrowings under the Exit Facility. The
Companys total outstanding borrowings under the Exit
Facility at any one time may not exceed the lesser of
$15.0 million or 70% of the fair market value of certain of
the Companys assets less a reserve, and less additional
reserves that may be created by the Administrative Agent from
time to time, as set forth in the Exit Facility agreement. The
Exit Facility is secured by a first-priority security interest
in substantially all of the Companys assets, including
tangible and intangible assets (except in the case of the
Companys ownership interest in its foreign subsidiaries,
which is limited to a pledge of 65% of such equity interests).
Interest is payable monthly in arrears at a rate of 12% per
annum on the outstanding principal amount. A commitment fee of
$0.3 million was paid in order to obtain the Exit Facility,
and there will be ongoing unused commitment fees due on a
monthly basis at an annual rate of 0.5% on the average unused
portion of the $15.0 million facility during the preceding
month.

The Exit Facility contains affirmative, negative
and financial covenants binding on the Company and its
subsidiaries. The negative covenants include restrictions on the
ability of the Company and its subsidiaries to incur
indebtedness and make guarantees, grant liens, sell assets,
declare dividends, make investments and make capital
expenditures, and financial covenants include the maintenance of
minimum adjusted tangible net worth, minimum adjusted working
capital, and a total cash debt service coverage ratio.

In 2002, total restructuring payments were
$4.1 million and total chapter 11 cash distributions
were $4.6 million. We anticipate that the remaining
chapter 11 distributions of $0.4 million will be paid
upon settlement of the remaining claims. Remaining claims are
expected to be settled in early 2003. Substantially all of the
chapter 11-related expenses have been paid.

In 2002, we received $3.3 million in cash
proceeds from the sale of idle equipment, and we spent
$13.9 million on fixed asset acquisitions. We repaid
$0.4 million of debt in fiscal 2002.

Current non-cancelable capital commitments as of
December 29, 2002 totaled $2.4 million. Capital
expenditures were $13.9 million in 2002. For 2003, we plan
to spend approximately $20.0 million on property, plant and
equipment for projects designed to improve yield and
productivity, as well as costs to improve equipment capability
for the manufacture of advanced products.

We lease certain research and administrative
facilities under operating leases that expire at various dates
between 2004 and 2007. Certain of these leases include renewal
options varying from five to twenty years. At

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December 29, 2002, the future minimum
commitments for non-cancelable operating facility leases,
equipment leases, and a facility sublease are as follows (in
thousands):


|     |  |          |        |          |  |   |       | 
|---- |  | -------- | ------ | -------- |  | - | ----- | 
|     |  | Minimum  |        |         
|     |  | Lease    |        | Sublease
|     |  | Payments |        | Payments
|     |  |          |        |         
|2003 |  | $        | 3,939  |          |  | $ | 1,494 | 
|2004 |  |          | 3,633  |          |  |   | 1,539 | 
|2005 |  |          | 3,425  |          |  |   | 1,585 | 
|2006 |  |          | 3,308  |          |  |   | 1,633 | 
|2007 |  |          | 446    |          |  |   | 414   | 
|     |  |          |        |          |  |   |       | 
|     |  | $        | 14,751 |          |  | $ | 6,665 | 
|     |  |          |        |          |  |   |       | 

In accordance with our confirmed Plan of
Reorganization (see Note 2), we entered into a
$15.0 million Exit Facility (discussed above).
Additionally, we issued $85.3 million of cash pay notes and
$43.5 million of paid-in-kind (PIK) notes (Senior Secured
Notes), $7.0 million of subordinated PIK notes (Junior
Secured Notes), and $1.7 million of secured and unsecured
promissory notes.

Under the Senior Secured Notes Indenture, a total
of $128.8 million of Senior Secured Notes were issued. The
Senior Secured Notes have a cash-pay portion of
$85.3 million and a PIK portion of $43.5 million. The
cash-pay portion of the Senior Secured Notes: a) is due on
June 30, 2007; b) is payable in quarterly installments
over a four-year period on a straight-line basis beginning on
July 15, 2003; and c) pays interest monthly in arrears
in cash, and bears interest at the greater of 8% per annum and a
rate per annum equal to the prime rate of interest (which was
4.25% at December 29, 2002) plus three hundred basis
points. The PIK portion of the Senior Secured Notes: a) is due
on June 30, 2007; and b) pays interest in-kind (i.e., by
increasing the principal amount of the Senior Secured Notes)
monthly in arrears, and bears interest at a rate of 12% per
annum. The Senior Secured Notes are secured by a second priority
security interest in substantially all of the Companys
assets (except in the case of its ownership interest in its
foreign subsidiaries, which is limited to a pledge of 65% of
such equity interests). The Senior Secured Notes, including
accrued and unpaid interest, are due and payable in cash on
June 30, 2007.

Under the Senior Secured Notes Indenture, the
Company has an obligation to make certain payments with the net
proceeds of the issuance of certain debt or equity securities
and the sale of certain assets permitted to be sold under the
indenture. All net proceeds from the issuance of such securities
or the sale of these assets must first be used to pay down the
outstanding balance, if any, under the Exit Facility and certain
indebtedness secured by a lien on the assets sold in the case of
an asset sale, and to permanently reduce the loan commitment
under the Exit Facility. In the case of proceeds from the
issuance of debt or equity securities, the Company is required
to use 50% of any remaining proceeds to redeem the Senior
Secured Notes, subject to the limitations set forth in the
indenture. The Company is required to use 50% of any remaining
proceeds from such asset sales to place up to $20.0 million
into an escrow account and, to the extent not so deposited, to
redeem the principal amount of the Senior Secured Notes under
the indenture based on specific criteria.

The indenture governing the Senior Secured Notes
contains affirmative, negative and financial covenants binding
on the Company and its subsidiaries. The negative covenants
include restrictions on ability of the Company and its
subsidiaries to pay dividends, incur indebtedness, make
investments, create liens, sell assets, and make capital
expenditures. The financial covenants include requirements with
respect to minimum adjusted tangible net worth, minimum adjusted
networking capital and a total cash debt service coverage ratio.
The Senior Secured Notes Indenture has cross-default provisions
to the Exit Facility and the Junior Secured Notes.

Under the Junior Secured Notes Indenture,
$7.0 million of Junior Secured Notes were issued. The
Junior Secured Notes: a) have a maturity date of
December 31, 2007; b) pay interest entirely in-kind
(i.e., by increasing the principal amount of the Junior Secured
Notes) monthly in arrears, and bear interest at a rate of 12%
per annum; c) are fully subordinated to the Exit Facility
and Senior Secured Notes Indenture; d) are secured by a
third priority interest in the collateral pledged to secure the
Exit Facility and Senior Secured

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Notes, which security interest is fully
subordinated to the security interest granted in respect of the
Exit Facility and Senior Secured Notes; and e) have
cross-default provisions to the Exit Facility and Senior Secured
Notes. The Junior Secured Notes, including accrued and unpaid
interest, are due and payable in cash on December 31, 2007.


Under the Junior Secured Notes Indenture, to the
extent that any proceeds remain, after prepayment of the Exit
Facility and the Senior Secured Notes, from the sales of equity
or debt securities and assets sales that trigger prepayment
under the Senior Secured Notes Indenture, the Company is
required to use such proceeds to redeem the Junior Secured
Notes, subject to the limitations set forth in the indenture.

The indenture governing the Junior Secured Notes
contains affirmative, negative and financial covenants binding
on the Company and its subsidiaries. The negative covenants
include restrictions as on ability of the Company and its
subsidiaries to pay dividends, incur indebtedness, make
investments, create liens, sell assets and make capital
expenditures. The financial covenants include requirements with
respect to minimum adjusted tangible net worth, minimum adjusted
networking capital and a total cash debt service coverage ratio.

As of December 29, 2002, the future minimum
principal payments due under these debt agreements are as
follows (in thousands):

|           |  |           |         | 
|---------- |  | --------- | ------- | 
|           |  | Minimum  
|           |  | Principal
|           |  | Payments 
|           |  |          
|2003       |  | $         | 10,229  | 
|2004       |  |           | 20,283  | 
|2005       |  |           | 20,298  | 
|2006       |  |           | 20,314  | 
|2007       |  |           | 68,894  | 
|Thereafter |  |           | 134     | 
|           |  |           |         | 
|           |  | $         | 140,152 | 
|           |  |           |         | 

Other

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires a
guarantor to (i) include disclosure of certain obligations
and (ii) if applicable, at the inception of the guarantee,
recognize a liability for the fair value of other certain
obligations undertaken in issuing a guarantee. The disclosure
provisions of the Interpretation are effective for financial
statements of interim or annual reports that end after
December 15, 2002. The adoption of the disclosure
requirements of FIN 45 had no impact on the Companys
disclosures as of December 29, 2002. The recognition and
measurement provisions of FIN 45 are effective for
guarantees issued or modified after December 29, 2002. The
Company is currently assessing the impact of adopting the
initial recognition and initial measurement requirements of FIN
45 on its consolidated financial statements and will adopt them
in the first quarter of fiscal 2003.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities
(FIN 46). This interpretation of Accounting Research
Bulletin No. 51, Consolidated Financial Statements,
addresses consolidation by business enterprises of variable
interest entities. Under current practice, two enterprises
generally have been included in consolidated financial
statements because one enterprise controls the other through
voting interests. FIN 46 defines the concept of
variable interests and requires existing
unconsolidated variable interest entities to be consolidated by
their primary beneficiaries if the entities do not effectively
disperse risks among the parties involved. This interpretation
applies immediately to variable interest entities created after
January 31, 2003. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. If it is
reasonably possible that an enterprise will consolidate or
disclose information about a variable interest entity when
FIN 46 becomes effective, the enterprise shall disclose
information about those entities in all financial statements
issued after January 31, 2003. The interpretation may be
applied prospectively with a cumulative-effect adjustment as of
the date on which it is first applied or by restating

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##### Table of Contents



previously issued financial statements for one or
more years with a cumulative-effect adjustment as of the
beginning of the first year restated. The Company does not
expect the adoption of FIN 46 to have a material impact on
its consolidated financial statements.







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

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

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

A substantial majority of our revenue, expense,
and capital purchasing activities are transacted in
U.S. dollars. However, a large portion of our payroll,
certain operating expenses and capital purchases are transacted
in other currencies, primarily Malaysian ringgit. Since late
1998, the ringgit has been pegged at a conversion rate of 3.8
Malaysian ringgit to the U.S. dollar. If the pegging is
lifted in the future, we will evaluate whether or not we will
enter any hedging contracts for the Malaysian ringgit. Expenses
recorded in Malaysian ringgit in fiscal 2002 amounted to
approximately $39.9 million.

We have $85.3 million in senior secured cash
pay notes outstanding which bear interest at the prime rate plus
3% (such rate not to be less than 8% per annum) and mature in
June 2007. A hypothetical 100 basis point increase in interest
rates over the 8% minimum would result in approximately
$0.9 million of additional interest expense each year.

Controls and Procedures

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

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

37



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##### Table of Contents








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

KOMAG, INCORPORATED

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                                                                    |  |  |    | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Report of Independent Auditors                                                                                                                                      |  |  | 40 | 
|Report of Ernst & Young LLP, Independent
    Auditors                                                                                                               |  |  | 41 | 
|Consolidated Statements of Operations, Six Months
    Ended December 29, 2002, Six Months Ended June 30,
    2002, Fiscal Year 2001, and Fiscal Year 2000           |  |  | 42 | 
|Consolidated Balance Sheets, 2002 and 2001                                                                                                                          |  |  | 43 | 
|Consolidated Statements of Cash Flows, Six Months
    Ended December 29, 2002, Six Months Ended June 30,
    2002, Fiscal Year 2001, and Fiscal Year 2000           |  |  | 44 | 
|Consolidated Statements of Stockholders
    Equity, Six Months Ended December 29, 2002, Six Months
    Ended June 30, 2002, Fiscal Year 2001, and Fiscal Year 2000 |  |  | 45 | 
|Notes to Consolidated Financial Statements                                                                                                                          |  |  | 46 | 

38



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REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Komag, Incorporated


We have audited the accompanying consolidated
balance sheets of Komag, Incorporated and subsidiaries (the
Company) as of December 29, 2002 and December 30,
2001, and the related consolidated statements of operations,
stockholders equity, and cash flows for the six-month
periods ended December 29, 2002 and June 30, 2002, and
for the year ended December 30, 2001. These consolidated
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Komag, Incorporated and
subsidiaries as of December 29, 2002 and December 30,
2001, and the results of their operations and their cash flows
for the six-month periods ended December 29, 2002 and
June 30, 2002, and for the year ended December 30,
2001, in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Notes 1 and 11 to the
consolidated financial statements, effective as of the beginning
of the 2002 fiscal year, the Company adopted the provisions of
Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets.

As discussed in Notes 1, 2, and 3 to the
consolidated financial statements, the Companys plan of
reorganization under Chapter 11 of the United States
Bankruptcy Code became effective on June 30, 2002. As a
result of the adoption of fresh-start reporting in
accordance with Statement of Position 90-7, Financial
Reporting by Entities in Reorganization under the Bankruptcy
Code, the consolidated financial statements as of and for
the six-month period ended December 29, 2002 are presented
on a different reporting basis than the periods before the
emergence from bankruptcy, and are therefore not comparable.



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

Mountain View, California

January 16, 2003, except as to Note 17,


which is as of February 25, 2003


39



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##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

The Board of Directors and Stockholders

Komag, Incorporated


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

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

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

As discussed in Note 1 to the financial
statements, the Companys recurring losses from operations
and significant short-term debt raise substantial doubt about
its ability to continue as a going concern. The 2000 financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.



| |                  
| | -----------------
| | ERNST & YOUNG LLP

San Jose, California

January 29, 2001


40



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##### Table of Contents



KOMAG, INCORPORATED

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


|                                                                       |                                                                                                                                                                                                  |                   |         |               |             |              |             |              |             |   |          |          |          |   |         |         |         |   | 
|---------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------- | ------- | ------------- | ----------- | ------------ | ----------- | ------------ | ----------- | - | -------- | -------- | -------- | - | ------- | ------- | ------- | - | 
|                                                                       |                                                                                                                                                                                                  | Successor         |         |               | Predecessor |              | Predecessor |              | Predecessor
|                                                                       |                                                                                                                                                                                                  | Company           |         | Company       |             | Company      |             | Company     
|                                                                       |                                                                                                                                                                                                  |                   |         |               |             |              |             |             
|                                                                       |                                                                                                                                                                                                  | Six Months        |         | Six Months    |             | Year         |             | Year        
|                                                                       |                                                                                                                                                                                                  | Ended             |         | Ended         |             | Ended        |             | Ended       
|                                                                       |                                                                                                                                                                                                  | Dec 29, 2002      |         | June 30, 2002 |             | Dec 30, 2001 |             | Dec 31, 2000
|                                                                       |                                                                                                                                                                                                  |                   |         |               |             |              |             |             
|Net sales                                                              |                                                                                                                                                                                                  | $                 | 174,749 |               |             | $            | 111,955     |              |             | $ | 282,613  |          |          | $ | 358,463 |        
|Cost of sales                                                          |                                                                                                                                                                                                  |                   | 143,009 |               |             |              | 106,788     |              |             |   | 285,069  |          |          |   | 323,475 |        
|                                                                       |                                                                                                                                                                                                  |                   |         |               |             |              |             |              |             |   |          |          |          |   |         |        
|                                                                       | Gross profit (loss)                                                                                                                                                                              |                   |         | 31,740        |             |              |             | 5,167        |             |   |          | (2,456   | )        |   |         | 34,988  |        
|Operating expenses:                                                    |                                                                                                                                                                                                  |                   |         |               |             |              |             |              |             |   |          |          |          |   |         |        
|                                                                       | Research, development, and engineering                                                                                                                                                           |                   |         | 18,400        |             |              |             | 18,796       |             |   |          | 39,546   |          |   |         | 35,309  |        
|                                                                       | Selling, general, and administrative                                                                                                                                                             |                   |         | 9,483         |             |              |             | 8,256        |             |   |          | 19,929   |          |   |         | 16,251  |        
|                                                                       | Amortization of intangible assets                                                                                                                                                                |                   |         |              |             |              |             | 3,609        |             |   |          | 27,081   |          |   |         | 16,430  |        
|                                                                       | Impairment charges related to goodwill                                                                                                                                                           |                   |         | 33,870        |             |              |             |             |             |   |          |         |          |   |         |        |        
|                                                                       | Restructuring/impairment charges                                                                                                                                                                 |                   |         | 893           |             |              |             | 4,318        |             |   |          | 57,430   |          |   |         | 5,293   |        
|                                                                       | In-process research and development                                                                                                                                                              |                   |         | 6,784         |             |              |             |             |             |   |          |         |          |   |         |        |        
|                                                                       |                                                                                                                                                                                                  |                   |         |               |             |              |             |              |             |   |          |          |          |   |         |        
|                                                                       |                                                                                                                                                                                                  |                   | 69,430  |               |             |              | 34,979      |              |             |   | 143,986  |          |          |   | 73,283  |        
|                                                                       |                                                                                                                                                                                                  |                   |         |               |             |              |             |              |             |   |          |          |          |   |         |        
|                                                                       | Operating loss                                                                                                                                                                                   |                   |         | (37,690       | )           |              |             | (29,812      | )           |   |          | (146,442 | )        |   |         | (38,295 | )      
|Other income (expense):                                                |                                                                                                                                                                                                  |                   |         |               |             |              |             |              |             |   |          |          |          |   |         |        
|                                                                       | Interest income                                                                                                                                                                                  |                   |         | 132           |             |              |             | 193          |             |   |          | 1,528    |          |   |         | 4,085   |        
|                                                                       | Interest expense                                                                                                                                                                                 |                   |         | (6,553        | )           |              |             |             |             |   |          | (155,192 | )        |   |         | (45,428 | )      
|                                                                       | Other income, net                                                                                                                                                                                |                   |         | 3,460         |             |              |             | 399,147      |             |   |          | 4,286    |          |   |         | 3,844   |        
|                                                                       |                                                                                                                                                                                                  |                   |         |               |             |              |             |              |             |   |          |          |          |   |         |        
|                                                                       |                                                                                                                                                                                                  |                   | (2,961  | )             |             |              | 399,340     |              |             |   | (149,378 | )        |          |   | (37,499 | )      
|                                                                       |                                                                                                                                                                                                  |                   |         |               |             |              |             |              |             |   |          |          |          |   |         |        
|                                                                       | 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 |                   |         | (40,651       | )           |              |             | 369,528      |             |   |          | (295,820 | )        |   |         | (75,794 | )      
|Reorganization costs, net                                              |                                                                                                                                                                                                  |                   |        |               |             |              | 6,511       |              |             |   | 6,066    |          |          |   |        |        
|Provision for (benefit from) income taxes                              |                                                                                                                                                                                                  |                   | 1,268   |               |             |              | 719         |              |             |   | (9,433   | )        |          |   | (5,188  | )      
|                                                                       |                                                                                                                                                                                                  |                   |         |               |             |              |             |              |             |   |          |          |          |   |         |        
|                                                                       | Income (loss) before minority
    interest/equity interest in net loss of related companies, and
    cumulative effect of change in accounting principle                                         |                   |         | (41,919       | )           |              |             | 362,298      |             |   |          | (292,453 | )        |   |         | (70,606 | )      
|Minority interest/equity interest in net loss of
    related companies |                                                                                                                                                                                                  |                   |        |               |             |              | (2,374      | )            |             |   | (3,942   | )        |          |   | 2,548   |        
|                                                                       |                                                                                                                                                                                                  |                   |         |               |             |              |             |              |             |   |          |          |          |   |         |        
|                                                                       | Income (loss) before cumulative effect of
    change in accounting principle                                                                                                                     |                   |         | (41,919       | )           |              |             | 359,924      |             |   |          | (296,395 | )        |   |         | (68,058 | )      
|Cumulative effect of change in accounting
    principle                |                                                                                                                                                                                                  |                   |        |               |             |              | (47,509     | )            |             |   |         |          |          |   |        |        
|                                                                       |                                                                                                                                                                                                  |                   |         |               |             |              |             |              |             |   |          |          |          |   |         |        
|                                                                       |                                                                                                                                                                                                  | Net income (loss) |         | $             | (41,919     | )            |             | $            | 312,415     |   |          | $        | (296,395 | ) |         | $       | (68,058 | )
|                                                                       |                                                                                                                                                                                                  |                   |         |               |             |              |             |              |             |   |          |          |          |   |         |        
|Basic and diluted net loss per share                                   |                                                                                                                                                                                                  | $                 | (1.84   | )             |             |              |             |              |             |   |          |          |          |   |         |        
|                                                                       |                                                                                                                                                                                                  |                   |         |               |             |              |             |              |             |   |          |          |          |   |         |        
|Number of shares used in basic and diluted per
    share computations  |                                                                                                                                                                                                  |                   | 22,840  |               |             |              |             |              |             |   |          |          |          |   |         |        
|                                                                       |                                                                                                                                                                                                  |                   |         |               |             |              |             |              |             |   |          |          |          |   |         |        

See notes to consolidated financial statements.

41



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##### Table of Contents



KOMAG, INCORPORATED

CONSOLIDATED BALANCE SHEETS

(In thousands)


|                                                   |                                                                                |                                                                               |         |              |             |   |         |          |          |   | 
|-------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------------------------------------------------------- | ------- | ------------ | ----------- | - | ------- | -------- | -------- | - | 
|                                                   |                                                                                | Successor                                                                     |         |              | Predecessor
|                                                   |                                                                                | Company                                                                       |         | Company     
|                                                   |                                                                                |                                                                               |         |             
|                                                   |                                                                                | Dec 29, 2002                                                                  |         | Dec 30, 2001
|                                                   |                                                                                |                                                                               |         |             
|ASSETS                                             |                                                                                |                                                                               |         |              |             |   |         |         
|Current assets                                     |                                                                                |                                                                               |         |              |             |   |         |         
|                                                   | Cash and cash equivalents                                                      |                                                                               | $       | 23,520       |             |   | $       | 17,486   |         
|                                                   | Short-term investments                                                         |                                                                               |         |             |             |   |         | 335      |         
|                                                   | Accounts receivable (less allowances of $1,101 in
    2002 and $2,593 in 2001) |                                                                               |         | 46,241       |             |   |         | 25,148   |         
|                                                   | Inventories                                                                    |                                                                               |         | 14,925       |             |   |         | 11,766   |         
|                                                   | Prepaid expenses and deposits                                                  |                                                                               |         | 2,288        |             |   |         | 1,878    |         
|                                                   |                                                                                |                                                                               |         |              |             |   |         |         
|                                                   |                                                                                | Total current assets                                                          |         |              | 86,974      |   |         |          | 56,613   |  
|Investment in unconsolidated company               |                                                                                |                                                                               |        |              |             |   | 4,076   |         
|Property, plant, and equipment, net                |                                                                                |                                                                               | 196,414 |              |             |   | 232,256 |         
|Land and buildings held for sale                   |                                                                                |                                                                               | 24,600  |              |             |   | 24,600  |         
|Goodwill                                           |                                                                                |                                                                               |        |              |             |   | 81,379  |         
|Other intangible assets, net                       |                                                                                |                                                                               | 9,142   |              |             |   | 8,806   |         
|Other assets                                       |                                                                                |                                                                               | 70      |              |             |   | 120     |         
|                                                   |                                                                                |                                                                               |         |              |             |   |         |         
|                                                   |                                                                                | $                                                                             | 317,200 |              |             | $ | 407,850 |         
|                                                   |                                                                                |                                                                               |         |              |             |   |         |         
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT)
|Current liabilities                                |                                                                                |                                                                               |         |              |             |   |         |         
|                                                   | Current portion of long-term debt                                              |                                                                               | $       | 10,229       |             |   | $       |         |         
|                                                   | Trade accounts payable                                                         |                                                                               |         | 35,371       |             |   |         | 15,003   |         
|                                                   | Accrued expenses and other liabilities                                         |                                                                               |         | 13,717       |             |   |         | 18,302   |         
|                                                   |                                                                                |                                                                               |         |              |             |   |         |         
|                                                   |                                                                                | Total current liabilities                                                     |         |              | 59,317      |   |         |          | 33,305   |  
|Long-term debt                                     |                                                                                |                                                                               | 129,923 |              |             |   |        |         
|Other long-term liabilities                        |                                                                                |                                                                               |        |              |             |   | 1,913   |         
|Liabilities subject to compromise                  |                                                                                |                                                                               |        |              |             |   | 516,173 |         
|Minority interest in consolidated subsidiary       |                                                                                |                                                                               |        |              |             |   | 1,398   |         
|                                                   |                                                                                |                                                                               |         |              |             |   |         |         
|                                                   |                                                                                | Total liabilities                                                             |         |              | 189,240     |   |         |          | 552,789  |  
|Commitments                                        |                                                                                |                                                                               |         |              |             |   |         |         
|Stockholders equity (deficit)                     |                                                                                |                                                                               |         |              |             |   |         |         
|                                                   | Common stock, $0.01 par value per share:                                       |                                                                               |         |              |             |   |         |          |         
|                                                   |                                                                                | Authorized  50,000 shares in 2002 and
    250,000 shares in 2001             |         |              |             |   |         |          |          |  
|                                                   |                                                                                | Issued and outstanding  23,172 shares
    in 2002 and 111,925 shares in 2001 |         |              | 232         |   |         |          | 1,119    |  
|                                                   | Additional paid-in capital                                                     |                                                                               |         | 171,876      |             |   |         | 586,304  |         
|                                                   | Deferred stock-based compensation                                              |                                                                               |         | (2,229       | )           |   |         |         |         
|                                                   | Accumulated deficit                                                            |                                                                               |         | (41,919      | )           |   |         | (732,362 | )       
|                                                   |                                                                                |                                                                               |         |              |             |   |         |         
|                                                   |                                                                                | Total stockholders equity (deficit)                                          |         |              | 127,960     |   |         |          | (144,939 | )
|                                                   |                                                                                |                                                                               |         |              |             |   |         |         
|                                                   |                                                                                | $                                                                             | 317,200 |              |             | $ | 407,850 |         
|                                                   |                                                                                |                                                                               |         |              |             |   |         |         

See notes to consolidated financial statements.

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KOMAG, INCORPORATED

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                           |                                                                                                                                                 |                                                         |         |               |             |               |             |               |             |   |          |         |         |   |         |         |         |   | 
|---------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------------- | ----------- | ------------- | ----------- | ------------- | ----------- | - | -------- | ------- | ------- | - | ------- | ------- | ------- | - | 
|                                                                                                           |                                                                                                                                                 | Successor                                               |         |               | Predecessor |               | Predecessor |               | Predecessor
|                                                                                                           |                                                                                                                                                 | Company                                                 |         | Company       |             | Company       |             | Company      
|                                                                                                           |                                                                                                                                                 |                                                         |         |               |             |               |             |              
|                                                                                                           |                                                                                                                                                 | Six Months                                              |         | Six Months    |             | Year          |             | Year         
|                                                                                                           |                                                                                                                                                 | Ended                                                   |         | Ended         |             | Ended         |             | Ended        
|                                                                                                           |                                                                                                                                                 | Dec. 29, 2002                                           |         | June 30, 2002 |             | Dec. 30, 2001 |             | Dec. 31, 2000
|                                                                                                           |                                                                                                                                                 |                                                         |         |               |             |               |             |              
|                                                                                                           |                                                                                                                                                 |                                                        
|                                                                                                           |                                                                                                                                                 | (In thousands)                                         
|Operating Activities                                                                                       |                                                                                                                                                 |                                                         |         |               |             |               |             |               |             |   |          |         |         |   |         |        
|Net income (loss)                                                                                          |                                                                                                                                                 | $                                                       | (41,919 | )             |             | $             | 312,415     |               |             | $ | (296,395 | )       |         | $ | (68,058 | )      
|Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities: |                                                                                                                                                 |                                                         |         |               |             |               |             |               |             |   |          |         |         |   |         |        
|                                                                                                           | Gain on extinguishment of liabilities subject to
    compromise and revaluation of assets and liabilities pursuant to
    fresh-start reporting |                                                         |         |              |             |               |             | (396,376      | )           |   |          |        |         |   |         |        |        
|                                                                                                           | Gain on restructuring of debt                                                                                                                   |                                                         |         |              |             |               |             |              |             |   |          |        |         |   |         | (3,772  | )      
|                                                                                                           | Cumulative effect of change in accounting
    principle                                                                                         |                                                         |         |              |             |               |             | 47,509        |             |   |          |        |         |   |         |        |        
|                                                                                                           | Impairment charges related to property, plant,
    and equipment and goodwill                                                                   |                                                         |         | 33,870        |             |               |             | 216           |             |   |          | 50,235  |         |   |         |        |        
|                                                                                                           | Depreciation and amortization on property, plant,
    and equipment                                                                             |                                                         |         | 24,114        |             |               |             | 25,998        |             |   |          | 68,925  |         |   |         | 75,064  |        
|                                                                                                           | Amortization of intangible assets                                                                                                               |                                                         |         | 1,849         |             |               |             | 3,609         |             |   |          | 27,081  |         |   |         | 16,430  |        
|                                                                                                           | In-process research and development                                                                                                             |                                                         |         | 6,784         |             |               |             |              |             |   |          |        |         |   |         |        |        
|                                                                                                           | Amortization of deferred stock compensation                                                                                                     |                                                         |         | 2,403         |             |               |             |              |             |   |          |        |         |   |         |        |        
|                                                                                                           | Non-cash interest charges                                                                                                                       |                                                         |         | 3,090         |             |               |             |              |             |   |          | 134,057 |         |   |         | 18,942  |        
|                                                                                                           | Gain on liquidation of subsidiary                                                                                                               |                                                         |         |              |             |               |             |              |             |   |          | (579    | )       |   |         |        |        
|                                                                                                           | Loss (gain) on disposal of property, plant,
    and equipment, net                                                                              |                                                         |         | (513          | )           |               |             | (1,783        | )           |   |          | 146     |         |   |         | 3,615   |        
|                                                                                                           | Deferred income taxes                                                                                                                           |                                                         |         |              |             |               |             |              |             |   |          | (10,810 | )       |   |         | (6,859  | )      
|                                                                                                           | Minority interest/equity interest in net loss of
    related companies                                                                          |                                                         |         |              |             |               |             | 2,374         |             |   |          | 3,942   |         |   |         | (2,548  | )      
|Changes in operating assets and liabilities:                                                               |                                                                                                                                                 |                                                         |         |               |             |               |             |               |             |   |          |         |         |   |         |        
|                                                                                                           | Accounts receivable                                                                                                                             |                                                         |         | (25,327       | )           |               |             | 4,234         |             |   |          | 15,095  |         |   |         | 9,363   |        
|                                                                                                           | Inventories                                                                                                                                     |                                                         |         | (1,288        | )           |               |             | (2,069        | )           |   |          | 9,676   |         |   |         | 15,103  |        
|                                                                                                           | Prepaid expenses and deposits                                                                                                                   |                                                         |         | 1,070         |             |               |             | (1,480        | )           |   |          | 1,452   |         |   |         | (3,537  | )      
|                                                                                                           | Trade accounts payable                                                                                                                          |                                                         |         | 14,498        |             |               |             | 5,870         |             |   |          | (10,844 | )       |   |         | (752    | )      
|                                                                                                           | Accrued expenses and other liabilities                                                                                                          |                                                         |         | (10,416       | )           |               |             | 1,693         |             |   |          | (21,084 | )       |   |         | (29,544 | )      
|                                                                                                           |                                                                                                                                                 |                                                         |         |               |             |               |             |               |             |   |          |         |         |   |         |        
|                                                                                                           |                                                                                                                                                 |                                                         | 8,215   |               |             |               | 2,210       |               |             |   | (29,103  | )       |         |   | 23,447  |        
|Reorganization costs, net                                                                                  |                                                                                                                                                 |                                                         |        |               |             |               | 6,511       |               |             |   | 6,066    |         |         |   |        |        
|                                                                                                           |                                                                                                                                                 |                                                         |         |               |             |               |             |               |             |   |          |         |         |   |         |        
|                                                                                                           |                                                                                                                                                 | Net cash provided by (used in) operating
    activities |         |               | 8,215       |               |             |               | 8,721       |   |          |         | (23,037 | ) |         |         | 23,447  |  
|Investing Activities                                                                                       |                                                                                                                                                 |                                                         |         |               |             |               |             |               |             |   |          |         |         |   |         |        
|Acquisition of property, plant and equipment                                                               |                                                                                                                                                 |                                                         | (7,038  | )             |             |               | (6,855      | )             |             |   | (25,673  | )       |         |   | (29,266 | )      
|Purchases of short-term investments                                                                        |                                                                                                                                                 |                                                         |        |               |             |               | (338        | )             |             |   | (5,777   | )       |         |   | (8,104  | )      
|Proceeds from short-term investments at maturity                                                           |                                                                                                                                                 |                                                         | 338     |               |             |               | 335         |               |             |   | 15,039   |         |         |   | 20,201  |        
|Proceeds from disposal of property, plant and
    equipment                                                |                                                                                                                                                 |                                                         | 624     |               |             |               | 2,688       |               |             |   | 539      |         |         |   | 1,384   |        
|Changes in deposits and other assets                                                                       |                                                                                                                                                 |                                                         | (191    | )             |             |               | (41         | )             |             |   | 154      |         |         |   | 1,596   |        
|Merger of business, net of cash                                                                            |                                                                                                                                                 |                                                         |        |               |             |               |            |               |             |   |         |         |         |   | 23,282  |        
|                                                                                                           |                                                                                                                                                 |                                                         |         |               |             |               |             |               |             |   |          |         |         |   |         |        
|                                                                                                           |                                                                                                                                                 | Net cash provided by (used in) investing
    activities |         |               | (6,267      | )             |             |               | (4,211      | ) |          |         | (15,718 | ) |         |         | 9,093   |  
|Financing Activities                                                                                       |                                                                                                                                                 |                                                         |         |               |             |               |             |               |             |   |          |         |         |   |         |        
|Payment of debt                                                                                            |                                                                                                                                                 |                                                         | (424    | )             |             |               |            |               |             |   | (15,000  | )       |         |   | (30,000 | )      
|Proceeds from sale of common stock, net of
    issuance costs                                              |                                                                                                                                                 |                                                         |        |               |             |               |            |               |             |   | 174      |         |         |   | 3,411   |        
|                                                                                                           |                                                                                                                                                 |                                                         |         |               |             |               |             |               |             |   |          |         |         |   |         |        
|                                                                                                           |                                                                                                                                                 | Net cash used in financing activities                   |         |               | (424        | )             |             |               |            |   |          |         | (14,826 | ) |         |         | (26,589 | )
|                                                                                                           |                                                                                                                                                 |                                                         |         |               |             |               |             |               |             |   |          |         |         |   |         |        
|Increase (decrease) in cash and cash
    equivalents                                                       |                                                                                                                                                 |                                                         | 1,524   |               |             |               | 4,510       |               |             |   | (53,581  | )       |         |   | 5,951   |        
|Cash and cash equivalents at beginning of period                                                           |                                                                                                                                                 |                                                         | 21,996  |               |             |               | 17,486      |               |             |   | 71,067   |         |         |   | 65,116  |        
|                                                                                                           |                                                                                                                                                 |                                                         |         |               |             |               |             |               |             |   |          |         |         |   |         |        
|                                                                                                           |                                                                                                                                                 | Cash and cash equivalents at end of period              |         | $             | 23,520      |               |             | $             | 21,996      |   |          | $       | 17,486  |   |         | $       | 71,067  |  
|                                                                                                           |                                                                                                                                                 |                                                         |         |               |             |               |             |               |             |   |          |         |         |   |         |        
|Supplemental disclosure of cash flow information                                                           |                                                                                                                                                 |                                                         |         |               |             |               |             |               |             |   |          |         |         |   |         |        
|                                                                                                           |                                                                                                                                                 | Cash paid for interest                                  |         | $             | 3,176       |               |             | $             |            |   |          | $       | 14,703  |   |         | $       | 25,638  |  
|                                                                                                           |                                                                                                                                                 | Cash paid (refunded) for income taxes                   |         | $             | 473         |               |             | $             | 561         |   |          | $       | 27      |   |         | $       | (726    | )
|Non-cash activities                                                                                        |                                                                                                                                                 |                                                         |         |               |             |               |             |               |             |   |          |         |         |   |         |        
|                                                                                                           |                                                                                                                                                 | Acquisition of minority interest                        |         | $             | 1,398       |               |             | $             |            |   |          | $       |        |   |         | $       |        |  

See notes to consolidated financial statements.

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KOMAG, INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                                     |                          |                |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          |          |  
|------------------------------------------------------------------------------------ | ------------------------ | -------------- | -------- | ---------- |  | ----------- | ------ | ------------ |  | ------------- | -------- | ------ |  | ----- | ------ | - |  | - | -------- | - |  | - | ---- | - |  | - | -------- | -------- | -
|                                                                                     |                          |                |          |            |  |             |        |              |  | Accumulated   |          |       
|                                                                                     |                          | Common Stock   |          | Additional |  | Deferred    |        |              |  | Other         |          |       
|                                                                                     |                          |                |          | Paid-in    |  | Stock-Based |        | Accumulated  |  | Comprehensive |          |       
|                                                                                     |                          | Shares         |          | Amount     |  | Capital     |        | Compensation |  | Deficit       |          | Income |  | Total
|                                                                                     |                          |                |          |            |  |             |        |              |  |               |          |        |  |      
|                                                                                     |                          |               
|                                                                                     |                          | (In thousands)
|PREDECESSOR COMPANY                                                                  |                          |                |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          |         
|Balance at January 2, 2000                                                           |                          |                | 65,875   |            |  | $           | 659    |              |  | $             | 445,384  |        |  | $     |       |   |  | $ | (367,909 | ) |  | $ | 579  |   |  | $ | 78,713   |         
|Net loss and comprehensive loss                                                      |                          |                |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   | (68,058  | ) |  |   |      |   |  |   | (68,058  | )       
|Common stock issued in connection with merger                                        |                          |                | 42,775   |            |  |             | 428    |              |  |               | 134,593  |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   | 135,021  |         
|Issuance of warrants for debt restructure                                            |                          |                |          |            |  |             |        |              |  |               | 2,774    |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   | 2,774    |         
|Common stock issued under stock option and
    purchase plans, and private placement |                          |                | 2,980    |            |  |             | 29     |              |  |               | 3,382    |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   | 3,411    |         
|                                                                                     |                          |                |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          |         
|Balance at December 31, 2000                                                         |                          |                | 111,630  |            |  |             | 1,116  |              |  |               | 586,133  |        |  |       |       |   |  |   | (435,967 | ) |  |   | 579  |   |  |   | 151,861  |         
|Net loss                                                                             |                          |                |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   | (296,395 | ) |  |   |      |   |  |   | (296,395 | )       
|Realized gain on liquidation of subsidiary                                           |                          |                |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   | (579 | ) |  |   | (579     | )       
|                                                                                     |                          |                |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          |         
|                                                                                     | Total comprehensive loss |                |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          | (296,974 | )
|Common stock issued under stock option and
    purchase plans                        |                          |                | 295      |            |  |             | 3      |              |  |               | 171      |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   | 174      |         
|                                                                                     |                          |                |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          |         
|Balance at December 30, 2001                                                         |                          |                | 111,925  |            |  |             | 1,119  |              |  |               | 586,304  |        |  |       |       |   |  |   | (732,362 | ) |  |   |     |   |  |   | (144,939 | )       
|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 | ) |  |   |          |   |  |   |      |   |  |   |         |         
|Amortization of deferred stock-based compensation                                    |                          |                |          |            |  |             |        |              |  |               |          |        |  |       | 2,403  |   |  |   |          |   |  |   |      |   |  |   | 2,403    |         
|Common stock issued under stock plan                                                 |                          |                | 346      |            |  |             | 4      |              |  |               | (4       | )      |  |       |        |   |  |   |          |   |  |   |      |   |  |   |         |         
|                                                                                     |                          |                |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          |         
|Balance at December 29, 2002                                                         |                          |                | 23,172   |            |  | $           | 232    |              |  | $             | 171,876  |        |  | $     | (2,229 | ) |  | $ | (41,919  | ) |  | $ |     |   |  | $ | 127,960  |         
|                                                                                     |                          |                |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          |         

See notes to consolidated financial statements.

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KOMAG, INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1.     Basis of
Presentation

The consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiaries, and
equity in an unconsolidated company. In addition, the
Companys consolidated financial statements include the
accounts of Komag Material Technology, Inc. (KMT), which was an
80%-owned subsidiary through April 2002, and 100%-owned
thereafter. The Company liquidated the subsidiary in September
2002. All significant intercompany accounts and transactions
have been eliminated in consolidation.

The December 31, 2000 financial statements
were prepared on a going concern basis. The Company had incurred
recent recurring losses ($68.1 million in 2000) and had
$216.7 million in senior debt outstanding that was
scheduled to mature in 2001.

As discussed in Note 2, Komag, Incorporated
(KUS) filed a voluntary petition for reorganization under
chapter 11 of the United States Code (the Bankruptcy Code) on
August 24, 2001 (the Petition Date). The petition was filed
with the United States Bankruptcy Court for the Northern
District of California. The petition related only to the
Companys U.S. corporate parent, KUS, and did not include
any of its subsidiaries.

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

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

Fiscal Year:The
Company uses a 52-53 week fiscal year ending on the Sunday
closest to December 31. The 2001 and 2000 fiscal years were
both 52-week years. The six months ended December 29, 2002,
and June 30, 2002, both consisted of a 26-week period.

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

Short-Term Investments:The Company invests its excess cash in
high-quality, short-term debt instruments which do not have
maturities greater than one year. Interest on the investments
are included in interest income.

45



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##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                              |  |              |       |              |             |   |        |  | 
|--------------------------------------------- |  | ------------ | ----- | ------------ | ----------- | - | ------ |  | 
|                                              |  | Successor    |       |              | Predecessor
|                                              |  | Company      |       | Company     
|                                              |  |              |       |             
|                                              |  | Dec 29, 2002 |       | Dec 30, 2001
|                                              |  |              |       |             
|Corporate debt securities                     |  | $            | 7,902 |              |             | $ | 6,874  | 
|Government-backed securities                  |  |              |      |              |             |   | 5,350  | 
|                                              |  |              |       |              |             |   |        | 
|                                              |  | $            | 7,902 |              |             | $ | 12,224 | 
|                                              |  |              |       |              |             |   |        | 
|Amounts included in cash and cash equivalents |  | $            | 7,902 |              |             | $ | 11,889 | 
|Amounts included in short-term investments    |  |              |      |              |             |   | 335    | 
|                                              |  |              |       |              |             |   |        | 
|                                              |  | $            | 7,902 |              |             | $ | 12,224 | 
|                                              |  |              |       |              |             |   |        | 

There were no realized or unrealized gains or
losses recorded on the Companys investments for the six
months ended December 29, 2002 and June 30, 2002, and
for the fiscal years 2001 and 2000, as all investments were held
to maturity.

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

|                |  |              |        |              |             |   |        |  | 
|--------------- |  | ------------ | ------ | ------------ | ----------- | - | ------ |  | 
|                |  | Successor    |        |              | Predecessor
|                |  | Company      |        | Company     
|                |  |              |        |             
|                |  | Dec 29, 2002 |        | Dec 30, 2001
|                |  |              |        |             
|Raw material    |  | $            | 9,281  |              |             | $ | 5,232  | 
|Work in process |  |              | 2,350  |              |             |   | 1,608  | 
|Finished goods  |  |              | 3,294  |              |             |   | 4,926  | 
|                |  |              |        |              |             |   |        | 
|                |  | $            | 14,925 |              |             | $ | 11,766 | 
|                |  |              |        |              |             |   |        | 

Pursuant to the adoption of fresh-start reporting
on June 30, 2002, management determined that the historical
cost of inventories approximated their fair value. See
Note 3.

Property, Plant, and Equipment:Property, plant, and equipment are
stated at cost less accumulated depreciation and amortization.
Depreciation is computed by the straight-line method over the
estimated useful lives of the assets. The estimated useful life
of the Companys buildings is thirty years. Furniture and
equipment are generally depreciated over three to five years,
and leasehold improvements are amortized over the shorter of the
lease term or their estimated useful life. Land and buildings
acquired as part of the HMT merger which are available for sale,
are valued at their estimated fair value less estimated costs to
sell of $24.6 million as of December 29, 2002, and
December 30, 2001.

Pursuant to the adoption of fresh-start reporting
on June 30, 2002, the Company adjusted the historical cost
of property, plant, and equipment to its fair value, and reset
the accumulated depreciation and amortization balance to zero on
that date. See Note 3.

46



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##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Property, plant, and equipment consists of the
following (in thousands):

|                                               |  |              |         |              |             |   |          |   | 
|---------------------------------------------- |  | ------------ | ------- | ------------ | ----------- | - | -------- | - | 
|                                               |  | Successor    |         |              | Predecessor
|                                               |  | Company      |         | Company     
|                                               |  |              |         |             
|                                               |  | Dec 29, 2002 |         | Dec 30, 2001
|                                               |  |              |         |             
|Land                                           |  | $            | 6,709   |              |             | $ | 7,785    |  
|Buildings                                      |  |              | 114,559 |              |             |   | 163,333  |  
|Leasehold improvements                         |  |              | 2,990   |              |             |   | 30,786   |  
|Furniture                                      |  |              | 1,287   |              |             |   | 7,549    |  
|Equipment                                      |  |              | 94,983  |              |             |   | 474,662  |  
|                                               |  |              |         |              |             |   |          |  
|                                               |  |              | 220,528 |              |             |   | 684,115  |  
|Less accumulated depreciation and amortization |  |              | (24,114 | )            |             |   | (451,859 | )
|                                               |  |              |         |              |             |   |          |  
|                                               |  | $            | 196,414 |              |             | $ | 232,256  |  
|                                               |  |              |         |              |             |   |          |  

Impairment of Long-lived Assets:Long-lived assets, including
identifiable intangible assets, are evaluated as one group for
impairment whenever events or changes in circumstances indicate
that such assets may be impaired or the estimated useful lives
are no longer appropriate. The Company reviews its long-lived
assets for impairment based on estimated future undiscounted
cash flows attributable to the assets. In the event that such
cash flows are not expected to be sufficient to recover the
recorded value of the assets, the assets are written down to
their estimated fair values utilizing discounted estimates of
future cash flows. Land and buildings held for sale are stated
at the lower of cost or fair value, less estimated selling cost,
and are evaluated for impairment on a quarterly basis.

Goodwill:In June
2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets.
SFAS No. 142 requires that goodwill not be amortized, but
rather be subject to an impairment test at least annually. The
Company adopted SFAS No. 142 as of the beginning of fiscal
2002. See Note 11.

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

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

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

Stock-Based Compensation:The Company accounts for employee
stock-based compensation using the intrinsic-value method, in
accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Accordingly,
compensation cost is recorded on the date of grant to the extent
that the fair value of the underlying share of common stock
exceeds the exercise price for a stock option or the purchase
price for a share of common stock. As discussed below under
Recent Accounting Pronouncements, the Company adopted the
disclosure provisions of SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure 
an Amendment of FASB Statement No. 123, in 2002. The following
table illustrates the effect on net income and earnings per
share if the fair value based method had been applied to

47



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##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

all outstanding and unvested awards in each
period. Earnings per share of the Predecessor Company are not
presented as the amounts are not meaningful.

|                                                                                                                                                    |                                 |            |         |            |                     |              |         |              |  |   |          |   |  |   |         |   |  | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ---------- | ------- | ---------- | ------------------- | ------------ | ------- | ------------ |  | - | -------- | - |  | - | ------- | - |  | 
|                                                                                                                                                    |                                 |            |         |           
|                                                                                                                                                    |                                 | Successor  |         |            | Predecessor Company
|                                                                                                                                                    |                                 | Company    |         |           
|                                                                                                                                                    |                                 | Six Months |         | Six Months |                     |             
|                                                                                                                                                    |                                 | Ended Dec  |         | Ended June |                     | Year Ended   |         | Year Ended  
|                                                                                                                                                    |                                 | 29, 2002   |         | 30, 2002   |                     | Dec 30, 2001 |         | Dec 31, 2000
|                                                                                                                                                    |                                 |            |         |            |                     |              |         |             
|Net income (loss), as reported                                                                                                                      |                                 | $          | (41,919 | )          |                     | $            | 312,415 |              |  | $ | (296,395 | ) |  | $ | (68,058 | )
|Add: Stock-based employee compensation expense
    included in reported net income, net of related tax effects                                      |                                 |            | 2,404   |            |                     |              |        |              |  |   |         |   |  |   |        |  
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                                 |            | (2,404  | )          |                     |              | (4,895  | )            |  |   | (9,790   | ) |  |   | (25,321 | )
|                                                                                                                                                    |                                 |            |         |            |                     |              |         |              |  |   |          |   |  |   |         |  
|Pro forma net income (loss)                                                                                                                         |                                 | $          | (41,919 | )          |                     | $            | 307,520 |              |  | $ | (306,185 | ) |  | $ | (93,379 | )
|                                                                                                                                                    |                                 |            |         |            |                     |              |         |              |  |   |          |   |  |   |         |  
|Loss per share:                                                                                                                                     |                                 |            |         |            |                     |              |         |              |  |   |          |   |  |   |         |  
|                                                                                                                                                    | Basic and diluted  as reported |            | $       | (1.84      | )                   |              |         |              |  |   |          |   |  |   |         |   | 
|                                                                                                                                                    |                                 |            |         |            |                     |              |         |              |  |   |          |   |  |   |         |  
|                                                                                                                                                    | Basic and diluted  pro forma   |            | $       | (1.84      | )                   |              |         |              |  |   |          |   |  |   |         |   | 
|                                                                                                                                                    |                                 |            |         |            |                     |              |         |              |  |   |          |   |  |   |         |  

For purposes of the pro forma disclosure, the
fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model. The
following assumptions were used for grants in the second six
months of 2002 (there were no grants in the first six months of
2002), 2001 and 2000, respectively: risk-free interest rates of
1.3%, 4.6% and 6.2%, volatility factors of the expected market
price of the Companys Common Stock of 88.3%, 266.0% and
235.6%, and a weighted-average expected life of the options of
0.5, 4.3 and 4.3,. There was no dividend yield included in the
calculation, as the Company does not pay dividends. The
weighted-average fair value of options granted during in the
second six months of 2002, 2001 and 2000 was $3.01, $0.76 and
$2.11, respectively.

For purposes of the pro forma disclosure, the
fair value of the employees purchase rights under the old
ESPP Plan has been estimated using the Black-Scholes model
assuming a risk-free interest rate of 6.2% for 2000. The
volatility factor of the expected market price was 235.6% for
2000. The weighted-average expected life of the purchase rights
was six months for 2000. The weighted-average fair value of
those purchase rights granted in 2000 was $0.85.

For purposes of the pro forma disclosure in 2000,
the fair value of the employees purchase rights under the
HMT ESPP Plan has been estimated using the Black-Scholes model
assuming a risk-free interest rate of 6.2%, a volatility factor
of the expected market price of 235.6%, and a weighted-average
expected life of the purchase rights of six months as of
December 31, 2000. The weighted-average fair value of those
purchase rights granted in 2000 was $0.85.

Income Taxes:The
Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and for operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using the enacted tax
laws expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax laws is recognized in the results of operations in
the period that includes the enactment date. A valuation
allowance is recorded to reduce the carrying amounts of deferred
tax assets if it is more likely than not that such assets will
not be realized.

Net Income (Loss) Per Share:The Company determines net income
(loss) per share in accordance with SFAS No. 128,
Earnings per Share.

48



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##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Basic earnings (loss) per common share is
computed by dividing income (loss) available to common
stockholders by the weighted-average number of shares of common
stock outstanding during the period. Diluted earnings (loss) per
share is computed by dividing income (loss) available to
common stockholders by the weighted-average number of shares and
dilutive potential shares of common stock outstanding during the
period. The dilutive effect of outstanding options, rights, and
warrants is reflected in diluted earnings per share by
application of the treasury stock method. Dilutive potential
shares of common stock related to stock options, warrants and
convertible debt were excluded from the calculation of diluted
income (loss) per common share for all periods presented in
the consolidated statement of operations because their effect
would have been antidilutive. Upon emergence from
chapter 11 on June 30, 2002, the Company had a
significant change in the structure of stockholders
equity. See Notes 2 and 14. As such, earnings per share of
the Predecessor Company are not presented as the amounts are not
meaningful.

Incremental common shares attributable to
outstanding common stock options (assuming proceeds would be
used to purchase treasury stock) of 75,000 for the second six
months of 2002 were not included in the diluted net income
(loss) per share computation because the effect would have been
anti-dilutive.

Comprehensive Income (Loss):Comprehensive income (loss) for
all periods presented reflect the adoption of SFAS No. 130,
Reporting Comprehensive Income. For the year ended
December 30, 2001, accumulated other comprehensive income
was reduced by $579,000, which related to a realized gain on
translation adjustments from the liquidation of a subsidiary.
Comprehensive income (loss) equaled the Companys net
income (loss) for all other periods presented.

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

Recent Accounting
Pronouncements:In June 2001, the FASB
issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement applies to legal
obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development or
normal use of the assets. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The Company
early-adopted SFAS No. 143 effective June 30,
2002 as required by SOP 90-7. The adoption of SFAS 143
had no impact on the Companys consolidated financial
statements.

In October 2001, the FASB issued
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supersedes
SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
and also supersedes the accounting and reporting provisions of
APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a
business. SFAS No. 144 was effective for fiscal years
beginning after December 15, 2001, and interim periods
within those fiscal years. The Company adopted
SFAS No. 144 at the beginning of the 2002 fiscal year.
The adoption of SFAS No. 144 had no impact on the
Companys consolidated financial statements.

In April 2002, the FASB issued
SFAS No. 145, Rescission of FASB Statement
Nos. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. SFAS No. 145
rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, as amended by SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking Fund
Requirements. The Company early-adopted SFAS No. 145
effective June 30, 2002 as required by SOP 90-7. Upon
adoption, the Company reclassified $3.8 million from
extraordinary gain to other income, net for the fiscal year
ending December 31, 2000.

49



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##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 addresses
financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring).
The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31,
2002. The Company early-adopted SFAS No. 146 effective
June 30, 2002. The adoption of SFAS No. 146 had
no impact on the Companys consolidated financial
statements.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires a
guarantor to (i) include disclosure of certain obligations
and (ii) if applicable, at the inception of the guarantee,
recognize a liability for the fair value of other certain
obligations undertaken in issuing a guarantee. The disclosure
provisions of FIN 45 are effective for financial statements
of interim or annual reports that end after December 15,
2002. The adoption of the disclosure requirements of FIN 45
had no impact on the Companys disclosures as of
December 29, 2002. The recognition and measurement
provisions of FIN 45 are effective for guarantees issued or
modified after December 29, 2002. The Company is currently
assessing the impact of adopting the initial recognition and
initial measurement requirements of FIN 45 on its
consolidated financial statements and will adopt them in the
first quarter of fiscal 2003.

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an Amendment of FASB Statement No. 123.
SFAS No. 148 amends SFAS No. 123, Accounting
for Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the
fair-value-based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of
SFAS No. 123 to require prominent disclosure about the
effects on reported net income and earnings per share and the
entitys accounting policy decisions with respect to
stock-based employee compensation. Certain of the disclosure
requirements are required for all companies, regardless of
whether the fair value method or intrinsic value method is used
to account for stock-based employee compensation arrangements.
The Company continues to account for its employee incentive
stock option plans using the intrinsic value method in
accordance with the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. The amendments to
SFAS No. 123 will be effective for financial
statements for fiscal years ended after December 15, 2002
and for interim periods beginning after December 15, 2002.
The Company has adopted the disclosure provisions of this
statement in fiscal 2002.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities
(FIN 46). This interpretation of Accounting Research
Bulletin No. 51, Consolidated Financial Statements,
addresses consolidation by business enterprises of variable
interest entities. Under current practice, two enterprises
generally have been included in consolidated financial
statements because one enterprise controls the other through
voting interests. FIN 46 defines the concept of
variable interests and requires existing
unconsolidated variable interest entities to be consolidated by
their primary beneficiaries if the entities do not effectively
disperse risks among the parties involved. This interpretation
applies immediately to variable interest entities created after
January 31, 2003. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. If it is
reasonably possible that an enterprise will consolidate or
disclose information about a variable interest entity when
FIN 46 becomes effective, the enterprise shall disclose
information about those entities in all financial statements
issued after January 31, 2003. The interpretation may be
applied prospectively with a cumulative-effect adjustment as of
the date on which it is first applied or by restating previously
issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first
year restated. The Company does not expect the adoption of
FIN 46 to have a material impact on its consolidated
financial statements.

50



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##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

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

Under the Plan, all of the Companys old
common stock, as well as outstanding warrants and common stock
options, were canceled. All of the Companys pre-bankruptcy
debt and certain other liabilities (totaling
$521.6 million) were discharged and satisfied through
several means, including: 1) cash distributions of
$5.0 million; 2) the issuance of shares of new common
stock; 3) the issuance of warrants to purchase shares of
new common stock; 4) the issuance of $128.8 million of
new cash pay notes and new paid-in-kind (PIK) notes (Senior
Secured Notes), and $7.0 million of new subordinated PIK
notes (Junior Secured Notes); and 5) the issuance of
$1.7 million of secured and unsecured promissory notes.

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

|                      |                |                   |         |               |  |   |         |        | 
|--------------------- | -------------- | ----------------- | ------- | ------------- |  | - | ------- | ------ | 
|                      |                |                  
|                      |                | Successor Company
|                      |                |                  
|                      |                | Dec 29, 2002      |         | June 30, 2002
|                      |                |                   |         |              
|Senior Secured Notes: |                |                   |         |               |  |   |         |       
|                      | Cash pay notes |                   | $       | 85,332        |  |   | $       | 85,332 | 
|                      | PIK notes      |                   |         | 46,162        |  |   |         | 43,500 | 
|                      |                |                   |         |               |  |   |         |       
|                      |                |                   | 131,494 |               |  |   | 128,832 |       
|Junior Secured Notes  |                |                   | 7,428   |               |  |   | 7,000   |       
|Promissory Notes      |                |                   | 1,230   |               |  |   | 1,654   |       
|                      |                |                   |         |               |  |   |         |       
|                      |                |                   | 140,152 |               |  |   | 137,486 |       
|Less current portion  |                |                   | (10,229 | )             |  |   | (518    | )     
|                      |                |                   |         |               |  |   |         |       
|Long-term debt        |                | $                 | 129,923 |               |  | $ | 136,968 |       
|                      |                |                   |         |               |  |   |         |       

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Class 1  Holders of Allowed
    Priority Claims, Class 2  Holders of Allowed
    Secured Claims, and Holders of Cure Claimsreceived an aggregate amount of
    $1.2 million in cash, and promissory notes in the aggregate
    amount of $1.7 million. The promissory notes provide for
    deferred cash payments and a lien satisfying the requirements of
    the Bankruptcy Code.
|
| |  | Class 3  Holders of Allowed
    Loan Restructure Agreement Claimsreceived $82.5 million of new cash pay Senior Secured Notes
    and $32.5 million of new PIK Senior Secured Notes, and
    12.5 million shares of new common stock. Additionally, the
    Company made a payment of $1.5 million in administrative
    expenses.                                                     
|
| |  | Class 4-A  Holders of Western
    Digital Note Claimsreceived
    $11.0 million of new PIK Senior Secured Notes and
    3.0 million shares of new common stock.                                                                                                                                                                                                                       
|
| |  | Class 4-B  Holders of Western
    Digital Rejection Claimsreceived
    0.9 million shares of new common stock.                                                                                                                                                                                                                                                                        
|
| |  | Class 5  Holders of
    Convertible Notes Claimsreceived
    1.2 million shares of new common stock.                                                                                                                                                                                                                                                                                  
|
| |  | Class 6  Holders of
    Subordinated Notes Claimsreceived
    4.5 million shares of new common stock, $7.0 million
    of new PIK Junior Secured Notes, and new warrants to purchase
    1.0 million shares of new common stock. Additionally, the
    Company made a payment of $0.5 million in administrative
    expenses related to these claims.                                 

51



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##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Class 7  Holders of General
    Unsecured Claimsreceived their pro
    rata share of $1.0 million in cash, $2.5 million of
    new cash pay Senior Secured Notes, and 0.6 million shares
    of new common stock. The majority of the Class 7
    distribution has been made. As of December 29, 2002, a few
    claims within this class were in the process of being settled. A
    final distribution of the allocated amounts for this creditor
    class will be made upon final settlement of all allowed claims.
|
| |  | Class 8  Holders of
    Convenience Claimsreceived their pro
    rata share of $0.7 million in cash.                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Class 9  Holders of Equity
    Interestsvoted to reject the Plan and
    therefore received no distributions and retained no interests in
    the reorganized Company under the Plan.                                                                                                                                                                                                                                                                                                                                  
|
| |  | Class 10  Holders of MMD
    Claimsreceived $0.1 million in
    cash, $0.3 million of new cash pay Senior Secured Notes,
    and 0.1 million shares of new common stock.                                                                                                                                                                                                                                                                                                                                               

In accordance with the Plan, current employees
were to receive up to 1.625 million shares of new common
stock pursuant to the Companys 2002 Qualified Stock Plan.
This distribution was approved by the Companys board of
directors in July 2002, and approved by stockholders at the
October 3, 2002 meeting. The distribution process to
employees commenced after October 3, 2002. As of
December 29, 2002, 1.138 million stock purchase rights
were offered and accepted, and options for 0.403 million
shares of stock were granted under the 2002 Qualified Stock
Plan. As of December 29, 2002, 0.3 million shares of
common stock had been issued related to the stock purchase
rights and zero for stock options. As of December 29, 2002,
the Company had available to offer and grant up to
0.084 million shares out of the original 1.625 million
approved.

As of the Effective Date, the Company was
authorized to issue 50.0 million shares of new common stock
with a par value of $0.01. As of December 29, 2002, the
Company had a total of 23.2 million shares of new common
stock issued, including 0.1 million shares that are subject
to a distribution process whereby the remaining shares will be
distributed to class 7 claim-holders upon settlement of all
allowed claims within the class. Additionally, as of
December 29, 2002, the Company had outstanding warrants to
purchase up to 1.0 million shares of new common stock at
$9.00 a share. The warrants are exercisable until June 2005.

Under the Plan, the Company entered into a
Registration Rights Agreement (the Agreement) with four of the
holders of Class 3 and Class 4 claims, under which the
shares of new common stock issued to them, as well as the Senior
Secured Notes, were registered under federal securities laws.
This registration statement was filed, and became effective in
October 2002.

In accordance with the Plan, a new
$15.0 million Secured Loan Facility (the Exit Facility) was
entered into as of the Effective Date. The Exit Facility is a
revolving credit facility of up to $15.0 million, expiring
in June 2005. See Note 13 for terms of the Exit Facility
and new debt.

On September 17, 2001, the Company withdrew
its appeal to the Nasdaq Listing Qualifications Panel, and
voluntarily delisted its common stock from the Nasdaq National
Market.



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

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

The enterprise valuation of $310.0 million
was based on the consideration of many factors and various
valuation methods, including the income approach and application
of the discounted cash flow method based on projected five and
one-quarter year financial information, selected publicly traded
company market multiples for certain companies operating
businesses viewed to be similar to that of the Company, and
other applicable ratios and valuation techniques believed by the
Company to be representative of the Companys

52



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

business and industry. The valuation was approved
by the creditors and ratified by the Plan. The discount rate
applied to the five and one-quarter year cash flow was 20%, the
income tax rate utilized ranged from zero to approximately 30%,
and the residual value approximated $500 million based on
the last years projected operating income plus
depreciation times a market multiple of 6. The predecessor
Companys stockholders deficit was eliminated as of
June 30, 2002, on adoption of fresh-start reporting.

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

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

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

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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

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



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

54



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##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following amounts show the detail of Other
income, net for the six-month periods ended December 29,
2002 and June 30, 2002, and the fiscal years ended
December 30, 2001 and December 31, 2000 (in thousands):

|                                                                                    |  |              |       |               |             |              |             |              |             |   |       |  |  |   |       |  | 
|----------------------------------------------------------------------------------- |  | ------------ | ----- | ------------- | ----------- | ------------ | ----------- | ------------ | ----------- | - | ----- |  |  | - | ----- |  | 
|                                                                                    |  | Successor    |       |               | Predecessor |              | Predecessor |              | Predecessor
|                                                                                    |  | Company      |       | Company       |             | Company      |             | Company     
|                                                                                    |  |              |       |               |             |              |             |             
|                                                                                    |  | Six Months   |       | Six Months    |             | Year         |             | Year        
|                                                                                    |  | Ended        |       | Ended         |             | Ended        |             | Ended       
|                                                                                    |  | Dec 29, 2002 |       | June 30, 2002 |             | Dec 30, 2001 |             | Dec 31, 2000
|                                                                                    |  |              |       |               |             |              |             |             
|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, net                                                                   |  |              | 3,460 |               |             |              | 2,771       |              |             |   | 4,286 |  |  |   | 3,844 | 
|                                                                                    |  |              |       |               |             |              |             |              |             |   |       |  |  |   |       | 
|                                                                                    |  | $            | 3,460 |               |             | $            | 399,147     |              |             | $ | 4,286 |  |  | $ | 3,844 | 
|                                                                                    |  |              |       |               |             |              |             |              |             |   |       |  |  |   |       | 

Included in other income, net in the six-month
period ended December 29, 2002, was a net $2.2 million
property tax refund in connection with the former HMT facilities
in Fremont, California, and a $1.1 million gain on
equipment sales. Included in other income, net in the six-month
period ended June 30, 2002, was a $2.4 million gain on
the sale of unused equipment at the former HMT facilities in
Eugene, Oregon.

Other income, net in the year ended
December 30, 2001, included $2.0 million in refunds
related to certain manufacturing equipment work which was not
completed by vendors, $0.7 million in payments on a
receivable that had been previously written off, and a
$0.6 million realized gain on the liquidation of a
subsidiary.

Included in other income, net in the year ended
December 31, 2000, was a $3.8 million gain in
connection with the restructuring of the Companys debt in
the second quarter of 2000.

Note 4.     Related
Parties

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

Related party transactions between the Company
and Western Digital were as follows (in thousands):

|                                         |                     |                                                         |   |                   |         |              |   |        |          |   |   |        |          |  
|---------------------------------------- | ------------------- | ------------------------------------------------------- | - | ----------------- | ------- | ------------ | - | ------ | -------- | - | - | ------ | -------- | -
|                                         |                     |                                                        
|                                         |                     | Predecessor Company                                    
|                                         |                     |                                                        
|                                         |                     | Six Months                                              |   |                  
|                                         |                     | Ended                                                   |   | Fiscal Year Ended
|                                         |                     |                                                         |   |                  
|                                         |                     | June 30, 2002                                           |   | Dec 30, 2001      |         | Dec 31, 2000
|                                         |                     |                                                         |   |                   |         |             
|Accounts receivable from Western Digital |                     |                                                         |   |                   |         |              |   |        |          |   |   |       
|                                         | Beginning of period |                                                         | $ | 23,846            |         |              | $ | 19,428 |          |   | $ | 25,313 |         
|                                         |                     | Sales                                                   |   |                   | 69,322  |              |   |        | 166,315  |   |   |        | 180,195  |  
|                                         |                     | Cash receipts                                           |   |                   | (79,339 | )            |   |        | (161,897 | ) |   |        | (186,080 | )
|                                         |                     | Reclassification to third-party accounts
    receivable |   |                   | (13,829 | )            |   |        |         |   |   |        |         |  
|                                         |                     |                                                         |   |                   |         |              |   |        |          |   |   |       
|                                         | End of period       |                                                         | $ |                  |         |              | $ | 23,846 |          |   | $ | 19,428 |         
|                                         |                     |                                                         |   |                   |         |              |   |        |          |   |   |       

The Companys consolidated financial
statements include the consolidation of the financial results of
KMT, which manufactured and sold aluminum disk substrate
products for high-performance magnetic storage media prior to
2001. In 2001 KMT began to focus solely on engineering,
research, and development activities. In April 2002, the Company
purchased Kobe USAs 20% share of KMT in exchange for
certain idle

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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

assets. As a result, the Company owned 100% of
KMT by the end of April 2002. In June 2002, the Company
announced it would be closing KMT, resulting in a loss of
$4.3 million, which was included in
restructuring/impairment charges for the six months ended
June 30, 2002. See Note 8 and 12. In September 2002,
KMTs operations were closed, and KMT was liquidated.

Other transactions between the Company and Kobe
USA or its distributors were as follows (in thousands):

|                                                 |                     |                                                  |   |                   |        |              |   |       |         |   |   |       |         |  
|------------------------------------------------ | ------------------- | ------------------------------------------------ | - | ----------------- | ------ | ------------ | - | ----- | ------- | - | - | ----- | ------- | -
|                                                 |                     |                                                 
|                                                 |                     | Predecessor Company                             
|                                                 |                     |                                                 
|                                                 |                     | Six Months                                       |   |                  
|                                                 |                     | Ended                                            |   | Fiscal Year Ended
|                                                 |                     |                                                  |   |                  
|                                                 |                     | June 30, 2002                                    |   | Dec 30, 2001      |        | Dec 31, 2000
|                                                 |                     |                                                  |   |                   |        |             
|Accounts payable to Kobe USA or its distributors |                     |                                                  |   |                   |        |              |   |       |         |   |   |      
|                                                 | Beginning of period |                                                  | $ | 1,595             |        |              | $ | 1,827 |         |   | $ | 2,007 |        
|                                                 |                     | Purchases                                        |   |                   | 8,167  |              |   |       | 25,848  |   |   |       | 25,605  |  
|                                                 |                     | Payments                                         |   |                   | (7,884 | )            |   |       | (26,080 | ) |   |       | (25,785 | )
|                                                 |                     | Reclassification to third-party accounts payable |   |                   | (1,878 | )            |   |       |        |   |   |       |        |  
|                                                 |                     |                                                  |   |                   |        |              |   |       |         |   |   |      
|                                                 | End of period       |                                                  | $ |                  |        |              | $ | 1,595 |         |   | $ | 1,827 |        
|                                                 |                     |                                                  |   |                   |        |              |   |       |         |   |   |      

The Company previously held a 50% ownership in a
joint venture named Asahi Komag Co., Ltd (AKCL). The Company had
related party sales to AKCL of zero in fiscal 2001 and
$2.3 million in fiscal 2000, and a related accounts
receivable balance from AKCL of zero and less than
$0.1 million at December 30, 2001 and
December 31, 2000, respectively. In addition, the Company
had related party payable balances to AKCL of less than
$0.1 million at December 30, 2001 and
$0.7 million at December 31, 2000. AKCL ceased
operations in the first quarter of 2001.

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

The Company recorded an investment in Chahaya for
$12.0 million in the fourth quarter of 2000. The investment
included $4.0 million for future cash payments and
$8.0 million for facilities, facility services, and
equipment. In June 2001, The Companys investment was
reduced by $4.0 million due to Chahayas cancellation
of shares related to the $4.0 million future cash
contribution. The Companys liability for Chahayas
facilities, facility services and equipment obligations was zero
at December 29, 2002 and $6.6 million at
December 30, 2001.

During 2001 and 2002 the Company recorded its
equity share of Chahayas net loss. In accordance with the
adoption of fresh-start reporting discussed in Note 3, the
Companys remaining investment balance was written down to
its estimated fair value of zero in the second quarter of 2002.
In the fourth quarter of 2002, Chahaya ceased operations and as
of December 29, 2002, the Company had no remaining
obligations related to Chahaya.

Note 5.     Segment
and Geographic Information

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

The Company adopted SFAS No. 131,
Disclosures About Segments of an Enterprise and Related
Information, on January 3, 1999. SFAS No. 131
establishes annual and interim reporting standards for an
enterprises operating segments and related disclosures
about its products, services, geographic areas and

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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

major customers. Under SFAS No. 131, the
Companys operations are treated as one operating segment
as it reports profit and loss information on an aggregate basis
to chief operating decision-makers of the Company.

Summary information for the Companys
operations by geographic location is as follows (in thousands):

|                         |                                        |              |         |               |             |              |             |              |             |  |         |          |   |  |         |          |   | 
|------------------------ | -------------------------------------- | ------------ | ------- | ------------- | ----------- | ------------ | ----------- | ------------ | ----------- |  | ------- | -------- | - |  | ------- | -------- | - | 
|                         |                                        | Successor    |         |               | Predecessor |              | Predecessor |              | Predecessor
|                         |                                        | Company      |         | Company       |             | Company      |             | Company     
|                         |                                        |              |         |               |             |              |             |             
|                         |                                        | Six Months   |         | Six Months    |             | Year         |             | Year        
|                         |                                        | Ended        |         | Ended         |             | Ended        |             | Ended       
|                         |                                        | Dec 29, 2002 |         | June 30, 2002 |             | Dec 30, 2001 |             | Dec 31, 2000
|                         |                                        |              |         |               |             |              |             |             
|Net sales:               |                                        |              |         |               |             |              |             |              |             |  |         |          |   |  |         |         
|                         | To customers from US operations        |              | $       | 815           |             |              | $           | 1,343        |             |  | $       | 22,141   |   |  | $       | 37,708   |  
|                         | To customers from Malaysian operations |              |         | 173,934       |             |              |             | 110,612      |             |  |         | 260,472  |   |  |         | 320,755  |  
|                         | Intercompany from Malaysian operations |              |         | 43,532        |             |              |             | 34,642       |             |  |         | 72,084   |   |  |         | 77,559   |  
|                         | Intercompany from US operations        |              |         | 320           |             |              |             | 913          |             |  |         | 18,956   |   |  |         | 36,191   |  
|                         |                                        |              |         |               |             |              |             |              |             |  |         |          |   |  |         |         
|                         |                                        |              | 218,601 |               |             |              | 147,510     |              |             |  | 373,653 |          |   |  | 472,213 |         
|                         | Intercompany eliminations              |              |         | (43,852       | )           |              |             | (35,555      | )           |  |         | (91,040  | ) |  |         | (113,750 | )
|                         |                                        |              |         |               |             |              |             |              |             |  |         |          |   |  |         |         
|                         | Total net sales                        |              | $       | 174,749       |             |              | $           | 111,955      |             |  | $       | 282,613  |   |  | $       | 358,463  |  
|                         |                                        |              |         |               |             |              |             |              |             |  |         |          |   |  |         |         
|Operating income (loss): |                                        |              |         |               |             |              |             |              |             |  |         |          |   |  |         |         
|                         | US operations                          |              | $       | (39,501       | )           |              | $           | (13,474      | )           |  | $       | (67,569  | ) |  | $       | (42,309  | )
|                         | Malaysian operations                   |              |         | 1,811         |             |              |             | (16,338      | )           |  |         | (78,873  | ) |  |         | 4,014    |  
|                         |                                        |              |         |               |             |              |             |              |             |  |         |          |   |  |         |         
|                         | Total operating loss                   |              | $       | (37,690       | )           |              | $           | (29,812      | )           |  | $       | (146,442 | ) |  | $       | (38,295  | )
|                         |                                        |              |         |               |             |              |             |              |             |  |         |          |   |  |         |         
|Long-lived assets:       |                                        |              |         |               |             |              |             |              |             |  |         |          |   |  |         |         
|                         | US operations                          |              | $       | 43,579        |             |              |             |              |             |  | $       | 139,595  |   |  |         |          |  
|                         | Malaysian operations                   |              |         | 186,647       |             |              |             |              |             |  |         | 207,566  |   |  |         |          |  
|                         |                                        |              |         |               |             |              |             |              |             |  |         |          |   |  |         |         
|                         | Total long-lived assets                |              | $       | 230,226       |             |              |             |              |             |  | $       | 347,161  |   |  |         |          |  
|                         |                                        |              |         |               |             |              |             |              |             |  |         |          |   |  |         |         

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

|                          |                 |              |        |               |             |              |             |              |             |   |         |         |  |   |         |         |  | 
|------------------------- | --------------- | ------------ | ------ | ------------- | ----------- | ------------ | ----------- | ------------ | ----------- | - | ------- | ------- |  | - | ------- | ------- |  | 
|                          |                 | Successor    |        |               | Predecessor |              | Predecessor |              | Predecessor
|                          |                 | Company      |        | Company       |             | Company      |             | Company     
|                          |                 |              |        |               |             |              |             |             
|                          |                 | Six Months   |        | Six Months    |             | Year         |             | Year        
|                          |                 | Ended        |        | Ended         |             | Ended        |             | Ended       
|                          |                 | Dec 29, 2002 |        | June 30, 2002 |             | Dec 30, 2001 |             | Dec 31, 2000
|                          |                 |              |        |               |             |              |             |             
|Malaysia                  |                 | $            | 84,390 |               |             | $            | 65,288      |              |             | $ | 168,384 |         |  | $ | 190,168 |        
|Singapore                 |                 |              | 56,077 |               |             |              | 36,611      |              |             |   | 94,138  |         |  |   | 137,392 |        
|Thailand                  |                 |              | 21,332 |               |             |              | 4,063       |              |             |   | 298     |         |  |   | 153     |        
|All Other Asian Countries |                 |              | 1,824  |               |             |              | 2,050       |              |             |   | 6,010   |         |  |   | 5,582   |        
|US                        |                 |              | 3,118  |               |             |              | 3,604       |              |             |   | 13,732  |         |  |   | 25,168  |        
|Europe                    |                 |              | 8,008  |               |             |              | 339         |              |             |   | 51      |         |  |   |        |        
|                          |                 |              |        |               |             |              |             |              |             |   |         |         |  |   |         |        
|                          | Total net sales |              | $      | 174,749       |             |              | $           | 111,955      |             |   | $       | 282,613 |  |   | $       | 358,463 | 
|                          |                 |              |        |               |             |              |             |              |             |   |         |         |  |   |         |        

Note 6.     Concentration
of Customer and Supplier Risk

The majority of the Companys sales are
derived from a relatively small number of customers, resulting
in a concentration of credit risk with respect to trade
receivables. The Company performs ongoing credit evaluations of
its customers, and generally requires no collateral for sales to
these customers. Based on managements evaluation of
potential credit losses, the Company believes its allowance for
doubtful accounts is adequate. The Company had one customer that
accounted for $28.6 million of its accounts receivable at

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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

December 29, 2002, and 62% of its net sales
for the six months ended June 30, 2002, and 60% for the six
months ended December 29, 2002. A second customer accounted
for $8.9 million of the Companys accounts receivable
at December 29, 2002, and 30% of its net sales for the six
months ended June 30, 2002, and 31% for the six months
ended December 29, 2002. A third customer accounted for
$7.0 million of the Companys accounts receivable at
December 29, 2002, and 1% of its net sales for the six
months ended June 30, 2002, and 7% for the six months ended
December 29, 2002.

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

Due to the Companys small customer base,
the loss of any one significant customer would have a material
impact on the Companys business operations. Significant
customers accounted for the following percentages of net sales
in 2002, 2001, and 2000:

|                            |  |              |    |               |             |              |             |              |             |  |    |   |  |  |    |   | 
|--------------------------- |  | ------------ | -- | ------------- | ----------- | ------------ | ----------- | ------------ | ----------- |  | -- | - |  |  | -- | - | 
|                            |  | Successor    |    |               | Predecessor |              | Predecessor |              | Predecessor
|                            |  | Company      |    | Company       |             | Company      |             | Company     
|                            |  |              |    |               |             |              |             |             
|                            |  | Six Months   |    | Six Months    |             | Year         |             | Year        
|                            |  | Ended        |    | Ended         |             | Ended        |             | Ended       
|                            |  | Dec 29, 2002 |    | June 30, 2002 |             | Dec 30, 2001 |             | Dec 31, 2000
|                            |  |              |    |               |             |              |             |             
|Western Digital Corporation |  |              | 60 | %             |             |              | 62          | %            |             |  | 59 | % |  |  | 50 | %
|Maxtor Corporation          |  |              | 31 | %             |             |              | 30          | %            |             |  | 27 | % |  |  | 28 | %
|IBM                         |  |              | 7  | %             |             |              | 1           | %            |             |  |   |   |  |  |   |  
|Seagate Technology          |  |              | 1  | %             |             |              | 6           | %            |             |  | 7  | % |  |  | 17 | %

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

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

Note 7.     Employee
Savings and Deferred Profit Sharing Plan

The Company maintains a savings and deferred
profit sharing plan. Employees who meet certain criteria are
eligible to participate. In addition to voluntary employee
contributions to the plan, the Company matches a portion of each
employees contributions to the plan, up to a maximum
amount. The Company contributed a

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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

total of $0.3 million to the plan in the
second six months of 2002, $0.4 million in the first six
months of 2002, $0.7 million in 2001, and $0.4 million
in 2000. Plan expenses are included in selling, general, and
administrative expenses.

Note 8.     Impairment
Charges

The Company recorded impairment charges related
to goodwill of $33.9 million as a separate line item in the
consolidated statement of operations for the six months ended
December 29, 2002. The Company also recorded a goodwill
impairment charge of $47.5 million during the six months
ended June 30, 2002 upon adoption of SFAS No. 142 as a
cumulative effect of a change in accounting principle. See Note
11. The Company recorded a $0.2 million impairment charge
on assets during the six months ended June 30, 2002,
related to the closure of KMTs operations. See Note 4.
Impairment charges in 2001 included a $45.8 million
write-down of land and buildings held for sale in Eugene,
Oregon, and Fremont, California, and a $4.4 million
impairment charge pertaining to manufacturing equipment no
longer in service. The land and buildings write-down reflected
depressed market conditions for commercial real estate and was
based on an independent valuation less estimated selling costs.
These charges are included in restructuring/impairment charges
in the consolidated statement of operations for the year ended
December 30, 2001.

Note 9.     Income
Taxes

The provision (benefit) for income taxes consists
of the following (in thousands):

|         |          |              |       |               |             |              |             |              |             |   |         |         |   |   |        |        |   | 
|-------- | -------- | ------------ | ----- | ------------- | ----------- | ------------ | ----------- | ------------ | ----------- | - | ------- | ------- | - | - | ------ | ------ | - | 
|         |          | Successor    |       |               | Predecessor |              | Predecessor |              | Predecessor
|         |          | Company      |       | Company       |             | Company      |             | Company     
|         |          |              |       |               |             |              |             |             
|         |          | Six Months   |       | Six Months    |             | Year         |             | Year        
|         |          | Ended        |       | Ended         |             | Ended        |             | Ended       
|         |          | Dec 29, 2002 |       | June 30, 2002 |             | Dec 30, 2001 |             | Dec 31, 2000
|         |          |              |       |               |             |              |             |             
|Federal: |          |              |       |               |             |              |             |              |             |   |         |         |   |   |        |       
|         | Current  |              | $     | (65           | )           |              | $           |             |             |   | $       | 18      |   |   | $      |       |  
|         | Deferred |              |       |              |             |              |             |             |             |   |         | (11,069 | ) |   |        | (722   | )
|         |          |              |       |               |             |              |             |              |             |   |         |         |   |   |        |       
|         |          |              | (65   | )             |             |              |            |              |             |   | (11,051 | )       |   |   | (722   | )     
|State:   |          |              |       |               |             |              |             |              |             |   |         |         |   |   |        |       
|         | Current  |              |       |              |             |              |             | 2            |             |   |         | 13      |   |   |        | 87     |  
|         | Deferred |              |       |              |             |              |             |             |             |   |         | 259     |   |   |        | (6,138 | )
|         |          |              |       |               |             |              |             |              |             |   |         |         |   |   |        |       
|         |          |              |      |               |             |              | 2           |              |             |   | 272     |         |   |   | (6,051 | )     
|Foreign: |          |              |       |               |             |              |             |              |             |   |         |         |   |   |        |       
|         | Current  |              |       | 1,333         |             |              |             | 717          |             |   |         | 1,346   |   |   |        | 1,585  |  
|         |          |              |       |               |             |              |             |              |             |   |         |         |   |   |        |       
|         |          | $            | 1,268 |               |             | $            | 719         |              |             | $ | (9,433  | )       |   | $ | (5,188 | )     
|         |          |              |       |               |             |              |             |              |             |   |         |         |   |   |        |       

The foreign provision above consists of
withholding taxes on royalty and interest payments and foreign
taxes of the Companys subsidiaries.

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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                         |                                                 |                           |                               |              |             |   |   |          |         |   |  | 
|------------------------ | ----------------------------------------------- | ------------------------- | ----------------------------- | ------------ | ----------- | - | - | -------- | ------- | - |  | 
|                         |                                                 | Successor                 |                               |              | Predecessor
|                         |                                                 | Company                   |                               | Company     
|                         |                                                 |                           |                               |             
|                         |                                                 | Dec 29, 2002              |                               | Dec 30, 2001
|                         |                                                 |                           |                               |             
|Deferred tax assets      |                                                 |                           |                               |              |             |   |   |         
|                         | Capital loss carryover                          |                           | $                             |             |             |   | $ | 2,029    |        
|                         | Depreciation and amortization                   |                           |                               | 25,999       |             |   |   | 28,563   |        
|                         | Accrued compensation and benefits               |                           |                               | 1,637        |             |   |   | 1,781    |        
|                         | Other                                           |                           |                               | 1,815        |             |   |   | 9,758    |        
|                         | Tax benefit of net operating loss carryforwards |                           |                               | 58,465       |             |   |   | 255,437  |        
|                         | Tax benefit of credit carryforwards             |                           |                               | 27,082       |             |   |   | 52,683   |        
|                         |                                                 |                           |                               |              |             |   |   |         
|                         |                                                 | Gross deferred tax assets |                               |              | 114,998     |   |   |          | 350,251 |  
|Deferred tax liabilities |                                                 |                           | (800                          | )            |             |   |  |         
|                         |                                                 |                           |                               |              |             |   |   |         
|                         |                                                 | Net deferred tax assets   |                               |              | 114,198     |   |   |          | 350,251 |  
|                         | Valuation allowance                             |                           |                               | (114,198     | )           |   |   | (350,251 | )      
|                         |                                                 |                           |                               |              |             |   |   |         
|                         |                                                 |                           | Total net deferred tax assets |              | $           |  |   |          | $       |  | 
|                         |                                                 |                           |                               |              |             |   |   |         

As of December 29, 2002, the Company has
federal net operating loss carryforwards of approximately
$163.6 million. The Company also has net federal and state
tax credit carryforwards of approximately $8.4 million and
$18.7  million, respectively. The Companys federal
net operating losses expire beginning in 2019 through 2021. The
Companys federal R&D and AMT tax credit can be carried
forward for twenty years and indefinitely, respectively, and the
state R&D credit can be carried forward indefinitely. As a
result of the Companys chapter 11 bankruptcy
proceedings, the Companys federal and state net operating
loss carryforwards were reduced by $358.1 million and
$230.4 million, respectively, and state tax credit
carryforwards were also reduced by $7.8 million

The utilization of the Companys net
operating losses and tax credit carryforwards is subject to a
substantial annual limitation due to the change in
ownership provisions of the Internal Revenue Code of 1986,
as amended, and similar State provisions. The ownership change
will result in an annual limitation of $8.4 million.
Consequently, some of the Companys tax attributes
carryforwards will expire before they can be fully utilized. The
Company, therefore, has reduced its federal net operating loss
carryforwards by $156.6 million, and has also reduced its
federal and state tax credits carryforwards by
$18.9 million and $8.5 million, respectively. The
Company has also provided a full valuation allowance against its
remaining net deferred tax assets due to the uncertainty of the
timing and amount of future income. The use of the
Companys net operating losses and tax credits
carryforwards generated by the Predecessor Company, will be
accounted for as a credit to additional paid in capital when
utilized.

The deferred tax asset valuation allowance
decreased by $236.1 million in 2002, increased by
$177.6 million in 2001, and decreased by $39.1 million
in 2000.

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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A reconciliation of the income tax provision
(benefit) at the 35% federal statutory rate to the income tax
provision at the effective tax rate is as follows (in thousands):

|                                                                                |  |              |         |               |             |              |             |              |             |   |          |   |  |   |         |   | 
|------------------------------------------------------------------------------- |  | ------------ | ------- | ------------- | ----------- | ------------ | ----------- | ------------ | ----------- | - | -------- | - |  | - | ------- | - | 
|                                                                                |  | Successor    |         |               | Predecessor |              | Predecessor |              | Predecessor
|                                                                                |  | Company      |         | Company       |             | Company      |             | Company     
|                                                                                |  |              |         |               |             |              |             |             
|                                                                                |  | Six Months   |         | Six Months    |             | Year         |             | Year        
|                                                                                |  | Ended        |         | Ended         |             | Ended        |             | Ended       
|                                                                                |  | Dec 29, 2002 |         | June 30, 2002 |             | Dec 30, 2001 |             | Dec 31, 2000
|                                                                                |  |              |         |               |             |              |             |             
|Income tax expense (benefit) at federal statutory
    rate                      |  | $            | (14,228 | )             |             | $            | 127,056     |              |             | $ | (107,039 | ) |  | $ | (28,198 | )
|State income taxes, net of federal benefit                                      |  |              |        |               |             |              | 2           |              |             |   | 272      |   |  |   | (4,353  | )
|Foreign withholding taxes                                                       |  |              | 1,333   |               |             |              | 717         |              |             |   | 1,346    |   |  |   | 1,524   |  
|Non-deductible interest expense                                                 |  |              | 586     |               |             |              | 496         |              |             |   | 46,920   |   |  |   |        |  
|Non-deductible goodwill amortization and
    impairment                         |  |              | 11,865  |               |             |              |            |              |             |   | 5,901    |   |  |   | 1,404   |  
|Non-taxable gain on the extinguishment of
    liabilities subject to compromise |  |              |        |               |             |              | (132,650    | )            |             |   |         |   |  |   |        |  
|Changes in estimate for tax contingencies                                       |  |              |        |               |             |              |            |              |             |   | 10,995   |   |  |   | 258     |  
|Foreign rate differential                                                       |  |              | (2,415  | )             |             |              | 9,870       |              |             |   | 29,298   |   |  |   | 1,976   |  
|Losses for which no current year benefit available                              |  |              |        |               |             |              |            |              |             |   | 1,373    |   |  |   | 24,175  |  
|In-process research and development                                             |  |              | 2,374   |               |             |              |            |              |             |   |          |   |  |   | 420     |  
|Other                                                                           |  |              | 1,753   |               |             |              | (4,772      | )            |             |   | 1,501    |   |  |   | (2,394  | )
|                                                                                |  |              |         |               |             |              |             |              |             |   |          |   |  |   |         |  
|                                                                                |  | $            | 1,268   |               |             | $            | 719         |              |             | $ | (9,433   | ) |  | $ | (5,188  | )
|                                                                                |  |              |         |               |             |              |             |              |             |   |          |   |  |   |         |  

Foreign pretax income (loss) was
$6.9 million, ($28.2) million, ($83.7) million,
and ($5.6) million in the second six months of 2002, the
first six months of 2002, 2001, and 2000, respectively.

The Companys wholly-owned thin-film media
operation, Komag USA (Malaysia) SDN (KMS), has a ten-year
initial tax holiday through June 2003, for its first plant site
in Malaysia. KMS has also been granted an additional eight-year
and ten-year tax holiday through December 2006 and 2008 for its
second and third plant sites in Malaysia, respectively, based on
achieving certain investment criteria. In 2002, the tax holiday
decreased the Companys net loss by approximately
$7.1 million ($0.31 per basic and diluted share) for the
second six months of 2002, and increased net income by
approximately $1.1 million for the first six months of
2002. The tax holidays had no impact on the Companys 2001
net loss. In 2000, the tax holiday reduced the Companys
net loss by approximately $8.8 million.

Note 10.     Fair
Value of Financial Instruments

The carrying values of cash and cash equivalents,
short-term investments, accounts receivable and certain other
current assets and liabilities approximate their fair values at
December 29, 2002, and December 30, 2001, due to the
relatively short period to maturity of these instruments.

As of December 29, 2002, the fair value of
the Companys long-term debt approximated its carrying
values. The fair value of long-term debt is estimated based on
discounted cash flow analyses using interest rates for the same
or similar debt having the same or similar maturities and
collateral requirements.

Note 11.     Goodwill
and Other Intangible Assets

In June 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets, which requires that
goodwill should not be amortized, but should be subject to an
impairment test at least annually.

The Company completed a transitional impairment
analysis of its goodwill during the six months ended
June 30, 2002 and recorded a transitional impairment loss
of $47.5 million as of the first day of fiscal 2002. The
transitional impairment loss of $47.5 million was
recognized as the cumulative effect of a change in

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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

accounting principle in the Companys
consolidated statement of operations. Upon the adoption of
fresh-start reporting as of June 30, 2002, the Company
recorded goodwill of $33.9 million, which equals the
reorganization value in excess of amounts allocable to
identifiable net assets recorded in accordance with
SOP 90-7. In the fourth quarter of 2002, the Company
performed its first annual goodwill impairment analysis under
SFAS No. 142, utilizing the market capitalization method
required for single-business-unit companies. Because the
Companys market capitalization was significantly less than
net book value at December 29, 2002, the Company wrote off
the entire $33.9 million goodwill balance in the fourth
quarter of 2002.

Upon the adoption of fresh-start reporting as of
June 30, 2002, the Company recorded other intangible assets
in the amount of $17.6 million. As of December 29,
2002, other intangible assets included developed technology of
$3.1 million (less accumulated depreciation of
$0.4 million), which is being amortized on a straight-line
basis over its estimated useful life of four years and a volume
purchase agreement of $7.7 million (less accumulated
depreciation of $1.4 million), which is being amortized on
a straight-line basis over its remaining useful life of three
and one-quarter years. The other intangible assets previously
included in-process research and development of
$6.8 million, which was expensed in the third quarter of
2002. Amortization of intangible assets in the second half of
2002 was $1.8 million, which was included in cost of sales.
Amortization of intangible assets in the first half of 2002 was
$3.6 million. Amortization of intangible assets is
estimated to be $3.7 million in 2003 and 2004, and
$1.6 million in 2005, at which point the intangibles will
be fully amortized.

The following table shows the effect on the
six-month period ended December 29, 2002, the six-month
period ended June 30, 2002, the fiscal year ended
December 30, 2001, and the fiscal year ended
December 31, 2000, of applying the change in accounting
principle retroactively (in thousands). Earnings per share of
the Predecessor Company are not presented as the amounts are not
meaningful.

|                                                                                          |  |              |         |               |             |              |             |              |             |   |          |   |  |   |         |   | 
|----------------------------------------------------------------------------------------- |  | ------------ | ------- | ------------- | ----------- | ------------ | ----------- | ------------ | ----------- | - | -------- | - |  | - | ------- | - | 
|                                                                                          |  | Successor    |         |               | Predecessor |              | Predecessor |              | Predecessor
|                                                                                          |  | Company      |         | Company       |             | Company      |             | Company     
|                                                                                          |  |              |         |               |             |              |             |             
|                                                                                          |  | Six Months   |         | Six Months    |             | Year         |             | Year        
|                                                                                          |  | Ended        |         | Ended         |             | Ended        |             | Ended       
|                                                                                          |  | Dec 29, 2002 |         | June 30, 2002 |             | Dec 30, 2001 |             | Dec 31, 2000
|                                                                                          |  |              |         |               |             |              |             |             
|Reported net income (loss) before cumulative
    effect of change in accounting principle |  | $            | (41,919 | )             |             | $            | 359,924     |              |             | $ | (296,395 | ) |  | $ | (68,058 | )
|Add: goodwill amortization                                                                |  |              |        |               |             |              |            |              |             |   | 22,799   |   |  |   | 12,182  |  
|                                                                                          |  |              |         |               |             |              |             |              |             |   |          |   |  |   |         |  
|Adjusted net income (loss) before cumulative
    effect of change in accounting principle |  |              | (41,919 | )             |             |              | 359,924     |              |             |   | (273,596 | ) |  |   | (55,876 | )
|Cumulative effect of change in accounting
    principle                                   |  |              |        |               |             |              | (47,509     | )            |             |   |         |   |  |   |        |  
|                                                                                          |  |              |         |               |             |              |             |              |             |   |          |   |  |   |         |  
|Adjusted net income (loss)                                                                |  | $            | (41,919 | )             |             | $            | 312,415     |              |             | $ | (273,596 | ) |  | $ | (55,876 | )
|                                                                                          |  |              |         |               |             |              |             |              |             |   |          |   |  |   |         |  

Note 12.     Accrued
Expenses and Other Liabilities

The following table summarizes accrued expenses
and other liabilities balances for fiscal 2002 and fiscal 2001
(in thousands):

|                                  |  |              |        |              |             |   |        |  | 
|--------------------------------- |  | ------------ | ------ | ------------ | ----------- | - | ------ |  | 
|                                  |  | Successor    |        |              | Predecessor
|                                  |  | Company      |        | Company     
|                                  |  |              |        |             
|                                  |  | Dec 29, 2002 |        | Dec 30, 2001
|                                  |  |              |        |             
|Accrued Compensation and Benefits |  | $            | 7,732  |              |             | $ | 7,585  | 
|Restructuring Liabilities         |  |              | 2,356  |              |             | $ | 2,371  | 
|Other Liabilities                 |  |              | 3,629  |              |             | $ | 8,346  | 
|                                  |  |              |        |              |             |   |        | 
|                                  |  | $            | 13,717 |              |             | $ | 18,302 | 
|                                  |  |              |        |              |             |   |        | 

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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

The Company recorded restructuring charges of
$0.9 million in the second six months of 2002,
$4.1 million in the first six months of 2002,
$7.2 million in 2001 and $5.3 million in 2000. The
$0.9 million charge in the second six months of 2002
related to professional fees related to the chapter 11
bankruptcy and Exit Facility fees. The $4.1 million charge
in the first six months of 2002 related to the closure of the
KMT research and development facility in the first six months of
2002. The $7.2 million charge for 2001 reflected additional
costs associated with lease obligations on equipment no longer
in service and costs for closing the former HMT facilities. The
$5.3 million total for 2000 included an $8.0 million
charge related to KMT, less a net $2.7 million reversal of
charges previously accrued for restructuring plans recorded
prior to 2000.

Cash payments under the restructuring plans
totaled $4.0 million in the second six months of 2002,
$1.0 million in the first six months of 2002,
$21.0 million in 2001 and $14.1 million in 2000.

Non-cash charges against the restructuring
liabilities were $4.6 million in 2001 and $2.4 million
in 2000. In 2001, $11.4 million was reclassified from
restructuring liabilities into liabilities subject to
compromise. In 2000, upon merging with HMT, under purchase
accounting rules, the Company recorded liabilities of
$17.9 million for estimated severance pay and facility
closure costs for certain U.S. manufacturing operations.

Note 13.     Exit
Facility and Debt

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

The Exit Facility is a revolving credit facility
providing for advances having a principal amount of up to
$15.0 million at any time outstanding, with a
$3.0 million letter of credit sub-facility. The Exit
Facility expires June 30, 2005. As of December 29,
2002, there were no borrowings under the Exit Facility. The
Companys total outstanding borrowings under the Exit
Facility at any one time may not exceed the lesser of
$15.0 million or 70% of the fair market value of certain of
the Companys assets less a reserve, and less additional
reserves that may be created by the Administrative Agent from
time to time, as set forth in the Exit Facility agreement. The
Exit Facility is secured by a first-priority security interest
in substantially all of the Companys assets, including
tangible and intangible assets (except in the case of the
Companys ownership interest in its foreign subsidiaries,
which is limited to a pledge of 65% of such equity interests).
Interest is payable monthly in arrears at a rate of 12% per
annum on the outstanding principal amount. A commitment fee of
$0.3 million was paid in order to obtain the Exit Facility,
and there will be ongoing unused commitment fees due on a
monthly basis at an annual rate of 0.5% on the average unused
portion of the $15.0 million facility during the preceding
month.

The Exit Facility contains affirmative, negative
and financial covenants binding on the Company and its
subsidiaries. The negative covenants include restrictions on the
ability of the Company and its subsidiaries to incur
indebtedness and make guarantees, grant liens, sell assets,
declare dividends, make investments and make capital
expenditures, and financial covenants include the maintenance of
minimum adjusted tangible net worth, minimum adjusted working
capital, and a total cash debt service coverage ratio.

Under the Senior Secured Notes Indenture, a total
of $128.8 million of Senior Secured Notes were issued. The
Senior Secured Notes have a cash-pay portion of
$85.3 million and a paid-in-kind (PIK) portion of
$43.5 million. The cash-pay portion of the Senior Secured
Notes: a) is due on June 30, 2007; b) is payable
in quarterly installments over a four-year period on a
straight-line basis beginning on July 15, 2003; and
c) pays interest monthly in arrears in cash, and bears
interest at the greater of 8% per annum and a rate per annum
equal to the prime rate of interest (which was 4.25% at
December 29, 2002) plus three hundred basis

63



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

points. The PIK portion of the Senior Secured
Notes: a) is due on June 30, 2007; and b) pays
interest in-kind (i.e., by increasing the principal amount of
the Senior Secured Notes) monthly in arrears, and bears interest
at a rate of 12% per annum. The Senior Secured Notes are secured
by a second priority security interest in substantially all of
the Companys assets (except in the case of its ownership
interest in its foreign subsidiaries, which is limited to a
pledge of 65% of such equity interests). The Senior Secured
Notes, including accrued and unpaid interest, are due and
payable in cash on June 30, 2007.

Under the Senior Secured Notes Indenture, the
Company has an obligation to make certain payments with the net
proceeds of the issuance of certain debt or equity securities
and the sale of certain assets permitted to be sold under the
indenture. All net proceeds from the issuance of such securities
or the sale of these assets must first be used to pay down the
outstanding balance, if any, under the Exit Facility and certain
indebtedness secured by a lien on the assets sold in the case of
an asset sale, and to permanently reduce the loan commitment
under the Exit Facility. In the case of proceeds from the
issuance of debt or equity securities, the Company is required
to use 50% of any remaining proceeds to redeem the Senior
Secured Notes, subject to the limitations set forth in the
indenture. The Company is required to use 50% of any remaining
proceeds from such asset sales to place up to $20.0 million
into an escrow account and, to the extent not so deposited, to
redeem the principal amount of the Senior Secured Notes under
the indenture based on specific criteria.

The Senior Secured Notes indenture contains
affirmative, negative and financial covenants binding on the
Company and its subsidiaries. The negative covenants include
restrictions on ability of the Company and its subsidiaries to
pay dividends, incur indebtedness, make investments, create
liens, sell assets, and make capital expenditures. The financial
covenants include requirements with respect to minimum adjusted
tangible net worth, minimum adjusted networking capital and a
total cash debt service coverage ratio. The Senior Secured Notes
Indenture has cross-default provisions to the Exit Facility and
the Junior Secured Notes.

Under the Junior Secured Notes Indenture,
$7.0 million of Junior Secured Notes were issued. The
Junior Secured Notes: a) have a maturity date of
December 31, 2007; b) pay interest entirely in-kind
(i.e., by increasing the principal amount of the Junior Secured
Notes) monthly in arrears, and bear interest at a rate of 12%
per annum; c) are fully subordinated to the Exit Facility
and Senior Secured Notes Indenture; d) are secured by a
third priority interest in the collateral pledged to secure the
Exit Facility and Senior Secured Notes, which security interest
is fully subordinated to the security interest granted in
respect of the Exit Facility and Senior Secured Notes; and
e) have cross-default provisions to the Exit Facility and
Senior Secured Notes. The Junior Secured Notes, including
accrued and unpaid interest, are due and payable in cash on
December 31, 2007.

Under the Junior Secured Notes Indenture, to the
extent that any proceeds remain, after prepayment of the Exit
Facility and the Senior Secured Notes, from the sales of equity
or debt securities and assets sales that trigger prepayment
under the Senior Secured Notes Indenture, the Company is
required to use such proceeds to redeem the Junior Secured
Notes, subject to the limitations set forth in the indenture.

The Junior Secured Notes Indenture contains
affirmative, negative and financial covenants binding on the
Company and its subsidiaries. The negative covenants include
restrictions as on ability of the Company and its subsidiaries
to pay dividends, incur indebtedness, make investments, create
liens, sell assets and make capital expenditures. The financial
covenants include requirements with respect to minimum adjusted
tangible net worth, minimum adjusted networking capital and a
total cash debt service coverage ratio.

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

64



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|           |  |           |         | 
|---------- |  | --------- | ------- | 
|           |  | Minimum  
|           |  | Principal
|           |  | Payments 
|           |  |          
|2003       |  | $         | 10,229  | 
|2004       |  |           | 20,283  | 
|2005       |  |           | 20,298  | 
|2006       |  |           | 20,314  | 
|2007       |  |           | 68,894  | 
|Thereafter |  |           | 134     | 
|           |  |           |         | 
|           |  | $         | 140,152 | 
|           |  |           |         | 

Note 14.     Stockholders
Equity

In accordance with the Plan of Reorganization
effective June 30, 2002, all of the Companys old
common stock, as well as outstanding warrants and common stock
options, were cancelled, and new stock was issued. See
Note 2.

New Plans Effective as of June 30, 2002
Upon Emergence from Bankruptcy



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

As of December 29, 2002, the Company is
authorized to issue 50.0 million shares of common stock and
the following shares of common stock are reserved for future
issuance (in thousands):

|                                  |  |  |       | 
|--------------------------------- |  |  | ----- | 
|2002 Qualified Stock Plan         |  |  | 2,480 | 
|2002 Employee Stock Purchase Plan |  |  | 300   | 
|Warrants                          |  |  | 1,000 | 
|                                  |  |  |       | 
|                                  |  |  | 3,780 | 
|                                  |  |  |       | 

The Companys debt agreements preclude it
from paying any dividends.

2002
Qualified Stock Plan

In October 2002, the Companys stockholders
approved the 2002 Qualified Stock Plan (the 2002 Stock Plan).
The 2002 Stock Plan provides for the grant of incentive stock
options to the Companys employees, and for the grant of
non-statutory stock options and stock purchase rights to the
Companys employees, directors, and consultants. The term
for stock options granted may not exceed 10 years.

A total of 2,825,000 shares of the
Companys common stock was reserved for issuance under the
2002 Stock Plan. The number of shares available for issuance
under the 2002 Stock Plan will be increased on January 1,
2005, by 750,000 shares. Of the total shares currently
reserved for issuance under the Stock Plan, 750,000 shares will
have a per share exercise price equal to the greater of (i)
$4.00 or (ii) the fair market value on March 17, 2003,
and 450,000 shares will have a per share exercise price
equal to the fair market value on March 15, 2004. The
additional shares issued in 2005 will have a per share exercise
price equal to the fair market value on March 15, 2005. Up
to 1,625,000 of the available shares under the 2002 Stock Plan
were to be issued to employees in accordance with the Plan of
Reorganization (see Stock Compensationdiscussion below
for details).

Stock purchase rights, which represent the right
to purchase the Companys common stock, may be issued under
the 2002 Stock Plan. The administrator determines the purchase
price of stock purchase rights granted under the 2002 Stock
Plan. Unless the administrator determines otherwise, the Company
may exercise a repurchase option upon the voluntary or
involuntary termination of the purchasers service with the

65



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company for any reason. The purchase price for
shares the Company repurchases will generally be the original
price paid by the purchaser and may be paid by cancellation of
any indebtedness of the purchaser.

At December 29, 2002, approximately
1,283,774 shares of common stock were reserved for future
option grants and 403,491 shares of common stock were
reserved for the exercise of outstanding options under the
Companys 2002 Stock Plan. None of the outstanding options
were exercisable at December 29, 2002.

Under the 2002 Stock Plan, there were options
granted to employees to purchase 403,896 shares of common
stock at an exercise price of zero and 405 options
canceled, leaving a balance outstanding of 403,491 as of
December 29, 2002. All of the outstanding options had a
weighted average remaining contractual life of three months.
There were no shares exercised as of December 29, 2002.

Under the 2002 Stock Plan, as of
December 29, 2002, 1,137,735 stock purchase rights were
offered and accepted (no stock purchase rights were
exercisable). Of this total, 345,735 were issued and
outstanding, 736,000 were deferred under the Deferred
Compensation Plan (discussed below), and 56,000 were unissued.

Deferred
Compensation Plan

Employees at the director level and above are
eligible to participate in the Companys Deferred
Compensation Plan, which provides for the deferral of stock
purchase rights. Eligible employees may elect to defer any stock
purchase rights they are eligible to receive during any calendar
year the plan remains in effect. All deferrals must equal 100%
of the shares to be awarded at the fair market value, calculated
on the date of grant, of the stock purchase rights that would
have otherwise been received. Distributions shall be paid in the
form of shares of the Companys common stock at such time
as may be elected by each participant. The Deferred Compensation
Plan, which is unfunded, is administered by a committee
appointed by the Companys board of directors. As of
December 29, 2002, 736,000 shares were deferred under
this Deferred Compensation Plan as discussed under Stock
Compensationbelow.

2002 Employee
Stock Purchase Plan

The Companys stockholders approved its 2002
Employee Stock Purchase Plan (ESPP) in October of 2002. The
Company has reserved a total of 300,000 shares of its
common stock for issuance under the ESPP. The board has
appointed the Companys Compensation Committee as
administrator of the ESPP. The ESPP is implemented by offering
periods lasting approximately six months in duration with a new
offering period commencing on the first trading day on or
following the first day of the fiscal month of March and
September of each year. The first offering period will commence
on February 24, 2003, and will end on the last trading day
of the fiscal month of August, 2003.

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

Warrants

In accordance with the Plan of Reorganization,
the Company issued warrants to purchase 1,000,000 shares of
the Companys common stock. The warrants are exercisable
until June 2005 and have an exercise price of $9.00.

Stock
Compensation

During the second six months of fiscal 2002, the
Company recorded deferred stock-based compensation of
$4.6 million, representing the difference between the
exercise price of stock options granted (which was zero) or the
purchase price of a share of common stock (which was zero), and
the fair value of the Companys stock as of the date of
grant (which ranged from $3.00 to $3.70). These amounts are
being amortized ratably as charges to operations over the
vesting periods of the individual stock options and stock
purchase rights. The

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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

vesting periods range from three to
21 months. During the second six months of fiscal 2002, the
Company recorded $2.4 million of stock-based compensation
expense in the consolidated statement of operations.

Old Plans Cancelled as of June 30, 2002
Upon Emergence from Bankruptcy

Common
Stock

Prior to June 30, 2002, the Company was
authorized to issue 250,000,000 shares of common stock.
Upon the Companys emergence from bankruptcy, all
outstanding shares totaling 111,925,000 were cancelled.

Stock Option
Plans

Prior to June 30, 2002, the Company had
several stock-based compensation plans, which are described
further below.

Under the Companys old stock option plans,
the Company was authorized to grant options to purchase up to
30,826,104 shares of common stock. Options could be granted
to employees, directors, independent contractors and
consultants. The option plans provided for issuing both
incentive stock options and nonqualified stock options, both of
which had to be granted at fair market value at the date of
grant. Outstanding options vested over various periods ranging
from immediate vesting to four years, and expired no later than
ten years from the date of grant. Options were allowed to be
exercised in exchange for cash or outstanding shares of the
Companys common stock.

Prior to June 30, 2002, approximately
16,731,000 shares of common stock were reserved for future
option grants and 13,960,000 shares of Common Stock were
reserved for the exercise of outstanding options under the
Companys plans. Approximately zero, 12,838,000, and
9,379,000 of the outstanding options were exercisable at
June 30, 2002, December 30, 2001, and
December 31, 2000, respectively.

A summary of stock option transactions is as
follows:

|                                 |                           |                     |        |                |   |   |      |      | 
|-------------------------------- | ------------------------- | ------------------- | ------ | -------------- | - | - | ---- | ---- | 
|                                 |                           |                    
|                                 |                           | Predecessor Company
|                                 |                           |                    
|                                 |                           |                     |        | Weighted-     
|                                 |                           |                     |        | Average       
|                                 |                           | Shares              |        | Exercise Price
|                                 |                           |                     |        |               
|Outstanding at January 2, 2000   |                           |                     | 15,349 |                |   | $ | 4.86 |     
|                                 | Granted                   |                     |        | 5,959          |   |   |      | 2.05 | 
|                                 | Options assumed in merger |                     |        | 2,786          |   |   |      | 7.62 | 
|                                 | Exercised                 |                     |        | (60            | ) |   |      | 2.85 | 
|                                 | Cancelled                 |                     |        | (4,978         | ) |   |      | 5.47 | 
|                                 |                           |                     |        |                |   |   |      |     
|Outstanding at December 31, 2000 |                           |                     | 19,056 |                |   |   | 4.23 |     
|                                 | Granted                   |                     |        | 3,035          |   |   |      | 0.87 | 
|                                 | Exercised                 |                     |        | (71            | ) |   |      | 0.04 | 
|                                 | Cancelled                 |                     |        | (5,440         | ) |   |      | 4.51 | 
|                                 |                           |                     |        |                |   |   |      |     
|Outstanding at December 30, 2001 |                           |                     | 16,580 |                |   |   | 3.54 |     
|                                 | Cancelled                 |                     |        | (16,580        | ) |   |      | 3.54 | 
|                                 |                           |                     |        |                |   |   |      |     
|Outstanding at June 30, 2002     |                           |                     |       |                |   | $ |     |     
|                                 |                           |                     |        |                |   |   |      |     

Employee
Stock Purchase Plan

In June 2001, the old Employee Stock Purchase
Plan was terminated. In May 2001, the Shareholders approved a
new 2001 ESPP Plan, which became effective in July 2001. The
2001 ESPP Plan was terminated due to the Companys
bankruptcy filing.

Shares issued under the old ESPP Plan
approximated zero and 2,257,000, in fiscal 2001 and fiscal 2000,
respectively.

67



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In connection with the HMT merger in fiscal 2000,
the Company assumed ownership of the HMT Employee Stock Purchase
Plan (HMT ESPP Plan). As of October 2, 2000, the merger
date, there were 3,637,600 shares available for issuance
under the HMT ESPP Plan. As part of the semi-annual
October 31, 2000 offering, 492,462 shares were issued to
employees under the HMT ESPP Plan. As of December 31, 2000,
3,147,638 shares were available for future issuance. On
April 30, 2001, the final employee stock purchase under the
HMT ESPP Plan was made, and 224,000 shares were issued. The
HMT ESPP Plan was terminated in fiscal 2001.

Note 15.     Leases
and Commitments

The Company leases certain research and
administrative facilities under operating leases that expire at
various dates between 2003 and 2007. Certain of these leases
include renewal options varying from one to twenty years. At
December 29, 2002, the future minimum commitments for
non-cancelable operating facility leases, equipment leases, and
a facility sublease are as follows (in thousands):

|     |  |          |        |          |  |   |       | 
|---- |  | -------- | ------ | -------- |  | - | ----- | 
|     |  | Minimum  |        |         
|     |  | Lease    |        | Sublease
|     |  | Payments |        | Income  
|     |  |          |        |         
|2003 |  | $        | 3,939  |          |  | $ | 1,494 | 
|2004 |  |          | 3,633  |          |  |   | 1,539 | 
|2005 |  |          | 3,425  |          |  |   | 1,585 | 
|2006 |  |          | 3,308  |          |  |   | 1,633 | 
|2007 |  |          | 446    |          |  |   | 414   | 
|     |  |          |        |          |  |   |       | 
|     |  | $        | 14,751 |          |  | $ | 6,665 | 
|     |  |          |        |          |  |   |       | 

Rental expense for all operating leases amounted
to $1.5 million in the second six months of 2002,
$1.6 million in the first six months of 2002,
$5.3 million in 2001, and $4.5 million in 2000.
Sublease rental income amounted to $0.7 million in the
second six months of 2002, $0.8 million in the first six
months of 2002, $1.4 million in 2001, and $1.8 million
in 2000.

68



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 16.     Quarterly
Financial Data (Unaudited)

|                                                                             |  |                |         |                |  |                |           |                |           |   |         |   |  |   |         |   | 
|---------------------------------------------------------------------------- |  | -------------- | ------- | -------------- |  | -------------- | --------- | -------------- | --------- | - | ------- | - |  | - | ------- | - | 
|                                                                             |  |               
|                                                                             |  | 2002          
|                                                                             |  |               
|                                                                             |  | Predecessor    |         | Predecessor    |  |                | Successor |                | Successor
|                                                                             |  | Company        |         | Company        |  | Company        |           | Company       
|                                                                             |  |                |         |                |  |                |           |               
|                                                                             |  | 1st Quarter(1) |         | 2nd Quarter(2) |  | 3rd Quarter(3) |           | 4th Quarter(4)
|                                                                             |  |                |         |                |  |                |           |               
|Net sales                                                                    |  | $              | 61,365  |                |  | $              | 50,590    |                |           | $ | 70,241  |   |  | $ | 104,508 |  
|Gross profit (loss)                                                          |  |                | 6,197   |                |  |                | (1,030    | )              |           |   | 7,388   |   |  |   | 24,352  |  
|Operating loss                                                               |  |                | (10,434 | )              |  |                | (19,378   | )              |           |   | (13,079 | ) |  |   | (24,611 | )
|Income (loss) before cumulative effect of
    change in accounting principle |  |                | (10,182 | )              |  |                | 370,106   |                |           |   | (14,405 | ) |  |   | (27,514 | )
|Cumulative effect of change in accounting
    principle                      |  |                | (47,509 | )              |  |                |          |                |           |   |        |   |  |   |        |  
|Net income (loss)                                                            |  | $              | (57,691 | )              |  | $              | 370,106   |                |           | $ | (14,405 | ) |  | $ | (27,514 | )
|Basic and diluted net loss per share(8)                                      |  |                |         |                |  |                |           |                |           | $ | (0.63   | ) |  | $ | (1.20   | )
|Number of shares used in basic and diluted per
    share computations(8)     |  |                |         |                |  |                |           |                |           |   | 22,826  |   |  |   | 22,853  |  

|                    |  |                        |         |                |  |                |         |                |  |   |          |   |  |   |         |  
|------------------- |  | ---------------------- | ------- | -------------- |  | -------------- | ------- | -------------- |  | - | -------- | - |  | - | ------- | -
|                    |  |                       
|                    |  | 2001                  
|                    |  |                       
|                    |  |                       
|                    |  | Predecessor Company(8)
|                    |  |                       
|                    |  | 1st Quarter            |         | 2nd Quarter(5) |  | 3rd Quarter(6) |         | 4th Quarter(7)
|                    |  |                        |         |                |  |                |         |               
|Net sales           |  | $                      | 87,856  |                |  | $              | 77,351  |                |  | $ | 59,391   |   |  | $ | 58,015  |  
|Gross profit (loss) |  |                        | (5,574  | )              |  |                | (1,900  | )              |  |   | 1,145    |   |  |   | 3,873   |  
|Operating loss      |  |                        | (29,519 | )              |  |                | (67,611 | )              |  |   | (19,754  | ) |  |   | (29,558 | )
|Net loss            |  |                        | (51,014 | )              |  |                | (88,963 | )              |  |   | (122,292 | ) |  |   | (34,126 | )



---



|    |                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Results for the first quarter of 2002 included a
    $47.5 million impairment charge related to goodwill, which
    was recognized as the cumulative effect of a change in
    accounting principle as of January 1, 2002.                                                                                                                       
|   
|(2) | Results for the second quarter of 2002 included
    $379.0 million in other income, net associated with the
    extinguishment of liabilities subject to compromise, and
    $17.3 million in other income, net to adjust certain
    balance sheet items to their fair value in accordance with
    fresh-start reporting.                      
|   
|(3) | Results for the third quarter of 2002 included a
    $6.8 million charge associated with in-process research and
    development costs.                                                                                                                                                                                                          
|   
|(4) | Results for the fourth quarter of 2002 included a
    $33.9 million impairment charge related to the write-off of
    all remaining goodwill, and a $2.4 million stock
    compensation charge.                                                                                                                                                  
|   
|(5) | Results for the second quarter of 2001 included
    $36.4 million of impairment charge related to the
    write-down of land and buildings held for sale and other
    equipment no longer in service, and a $6.6 million
    restructuring charge pertaining to lease obligations on
    equipment no longer in service.                        
|   
|(6) | Results for the third quarter of 2001 included a
    $99.1 million charge to interest expense related to
    accretion to increase the value of the subordinated convertible
    notes to their full face value of $230.0 million.                                                                                                               
|   
|(7) | Results for the fourth quarter of 2001 included a
    $10.4 million impairment charge related to the write down
    of land and buildings held for sale, a $3.4 million
    impairment charge related to manufacturing equipment no longer
    in service, and a $0.6 million restructuring charge related
    to additional facility exit costs.
|   
|(8) | Earnings per share of the Predecessor Company are
    not presented as the amounts are not meaningful.                                                                                                                                                                                                                                           

69



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 17.     Subsequent
Event

On February 19, 2003, we were approved to
list our stock on the Nasdaq National Stock Market. On
February 25, 2003, our stock ceased trading on the OTC
Bulletin Board and began trading on the Nasdaq National Stock
Market under the symbol KOMG.

70



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








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

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

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

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

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




PART III

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

Items 10 through 13 of Part III
will be contained in the Komag, Incorporated Proxy Statement for
the Annual Meeting of Stockholders to be held on May 20,
2003 (the 2003 Proxy Statement), which will be filed
with the Securities and Exchange Commission no later than
April 21, 2003. The cross-reference table below sets forth
the captions under which the responses to these items are found:

|          |    |             |  |                                                                    |  |                                                                                                                
|--------- | -- | ----------- |  | ------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------
|10-K Item |    | Description |  | Caption in 2003 Proxy Statement                                   
|          |    |             |  |                                                                   
|          | 10 |             |  | Directors and Executive Officers                                   |  | Item No. 1  Election
    of Directors and Compliance with Section 16(a)
    Beneficial Ownership Reporting
|          | 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                                                           

The information set forth under the captions
listed above, contained in the 2003 Proxy Statement, are hereby
incorporated herein by reference in response to Items 10
through 13 of this Report on Form 10-K.

71



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PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 14. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) List of Documents filed as part of
this Financial Statements.

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



| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consolidated Statements of Operations  Six
    Months Ended December 29, 2002, Six Months Ended
    June 30, 2002, Fiscal Year 2001, and Fiscal Year 2000              
|
| | Consolidated Balance Sheets 
    December 29, 2002 and December 30, 2001                                                                                               
|
| | Consolidated Statements of Cash Flows  Six
    Months Ended December 29, 2002, Six Months Ended
    June 30, 2002, Fiscal Year 2001, and Fiscal Year 2000              
|
| | Consolidated Statements of Stockholders
    Equity  Six Months Ended December 29, 2002, Six
    Months Ended June 30, 2002, Fiscal Year 2001, and Fiscal
    Year 2000
|
| | Notes to Consolidated Financial Statements                                                                                                                              

2.     Financial
Statement Schedules.

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

Schedule II  Valuation and
Qualifying Accounts



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

3.     Exhibits.

|        |     |             |  |                                                                                                                                                                                                                                                                                                                               
|------- | --- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|        | 2.1 |             |  | 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, 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).                                                                     
|        | 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 |             |  | Loan and Security Agreement between Komag,
    Incorporated, the lenders named therein, Foothill Capital
    Corporation as arranger and administrative agent and Ableco
    Finance LLC as collateral agent (incorporated by reference from
    Exhibit 4.4 filed with the Companys Form 10-Q
    filed on August 13, 2002).
|        | 4.5 |             |  | Indenture, dated June 30, 2002, governing
    the Senior Secured Notes due 2007 (incorporated by reference
    from Exhibit 4.5 filed with the Companys
    Form 10-Q filed on August 13, 2002).                                                                                                                             
|        | 4.6 |             |  | Form of Senior Secured Notes due 2007
    (incorporated by reference from Exhibit 4.6 filed with the
    Companys Form 10-Q filed on August 13, 2002).                                                                                                                                                                       

72



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|        |        |             |  |                                                                                                                                                                                                                                                                                                                               
|------- | ------ | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 4.7    |             |  | Indenture, dated June 30, 2002, governing
    the Junior Secured Notes due 2007 (incorporated by reference
    from Exhibit 4.7 filed with the Companys
    Form 10-Q filed on August 13, 2002).                                                                                                                             
|        | 4.8    |             |  | Form of Junior Secured Notes due 2007
    (incorporated by reference from Exhibit 4.8 filed with the
    Companys Form 10-Q filed on August 13, 2002).                                                                                                                                                                       
|        | 4.9    |             |  | Intercreditor Agreement dated June 30, 2002,
    between Komag, Incorporated, Ableco Finance LLC, The Bank of New
    York, and Bank One Trust Company, NA.                                                                                                                                                                   
|        | 4.10   |             |  | Intercreditor Agreement dated June 30, 2002,
    between Komag, Incorporated, The Bank of New York, and Bank One
    Trust Company, NA.                                                                                                                                                                                       
|        | 10.1.1 |             |  | Lease Agreement dated May 2, 1989 by and
    between Stony Point Associates I and Komag Material
    Technology, Inc. (incorporated by reference from
    Exhibit 10.1.6 filed with the Companys report on
    Form 10-K for the year ended December 31, 1989).                                                              
|        | 10.1.2 |             |  | Lease Agreement (B10) dated May 24, 1996
    between Sobrato Development Companies #871 and Komag,
    Incorporated (incorporated by reference from
    Exhibit 10.1.11 filed with the Companys report on
    Form 10-K for the year ended December 29, 1996).                                                               
|        | 10.1.3 |             |  | Lease Agreement (B11) dated May 24, 1996
    between Sobrato Development Companies #871 and Komag,
    Incorporated (incorporated by reference from
    Exhibit 10.1.12 filed with the Companys report on
    Form 10-K for the year ended December 29, 1996).                                                               
|        | 10.1.4 |             |  | Sublease Agreement (B11) dated January 10,
    2000, between Komag, Incorporated and 2Wire, Inc. (incorporated
    by reference from Exhibit 10.1.15 filed with the
    Companys report on Form 10-K for the year ended
    January 2, 2000).                                                                                
|        | 10.1.5 |             |  | Second Amendment to Lease dated March 16,
    1999 by and between Northern Trust Bank of California N.A. and
    Komag Material Technology, Inc. (incorporated by reference from
    Exhibit 10.1.16 filed with the Companys report on
    Form 10-K for the year ended January 2, 2000).                                    
|        | 10.2   |             |  | Form of Indemnification Agreement                                                                                                                                                                                                                                                                                             
|        | 10.3   |             |  | Asset Purchase Agreement between the Company and
    Western Digital Corporation dated April 8, 1999
    (incorporated by reference from Exhibit 10.1.13 filed with
    the Companys report of Form 10-Q for the quarter
    ended July 4, 1999) (Confidential treatment requested as to
    certain portions.)              
|        | 10.3.1 |             |  | Volume Purchase Agreement dated as of
    April 8, 1999 by and between the Company and Western
    Digital Corporation (incorporated by reference from
    Exhibit 10.1.14 filed with the Companys report of
    Form 10-Q for the quarter ended July 4, 1999)
    (Confidential treatment requested as to certain portions).
|        | 10.3.2 |             |  | Amendment Number 1 to Volume Purchase
    Agreement with Western Digital Corporation dated October 5,
    2001 (incorporated by reference from Exhibit 10.1 filed
    with the Companys report on Form 10-Q for the quarter
    ended September 30, 2001).                                                                   
|        | 10.4.1 |             |  | 2002 Qualified Stock Option Plan and forms of
    agreement thereunder (incorporated by reference from
    Exhibit 10.4.1 filed with the Companys
    S-1 Registration Statement filed on August 27, 2002).                                                                                                                  
|        | 10.4.2 |             |  | Komag, Incorporated 2002 Deferred Compensation
    Plan (incorporated by reference from Exhibit 10.4.2 filed
    with the Companys S-1 Registration Statement filed on
    August 27, 2002).                                                                                                                                 
|        | 10.4.3 |             |  | Komag, Incorporated Retention Bonus Plan
    (incorporated by reference from Exhibit 10.4.3 filed with
    the Companys S-1 Registration Statement filed on
    August 27, 2002).                                                                                                                                            
|        | 10.4.4 |             |  | Form of Komag, Incorporated 2002 Employee Stock
    Purchase Plan (incorporated by reference from Exhibit 99.2
    filed with the Companys S-1 Registration Statement
    filed on August 27, 2002).                                                                                                                         
|        | 10.5   |             |  | Form of Executive Retention Agreement between
    Komag, Incorporated and certain executive officers (incorporated
    by reference from Exhibit 10.6.1 filed with the
    Companys S-1 Registration Statement filed on
    August 27, 2002).                                                                                
|        | 16.    |             |  | Letter dated November 26, 2001 regarding
    change in certifying accountants from Ernst & Young LLP
    (incorporated by reference from Exhibit 16 filed with the
    companys report on Form 8-K filed on
    November 26, 2001).                                                                                          
|        | 21     |             |  | Subsidiaries of Komag, Incorporated.                                                                                                                                                                                                                                                                                          
|        | 23.1   |             |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                          
|        | 23.2   |             |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                                                                 

73



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|        |      |             |  |                                                                                
|------- | ---- | ----------- |  | -------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 24   |             |  | Power of Attorney. Reference is made to the
    signature pages of this Report.
|        | 99.1 |             |  | Certification of Chief Executive Officer and
    Chief Financial Officer.      

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

(b) Reports on Form 8-K.

Not Applicable

74



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in San Jose, California
on this 13th day of March, 2003.



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



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

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

75



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##### Table of Contents



POWER OF ATTORNEY

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

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

|                                                                   |  |                                                                                         |  |                |  | 
|------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                                                   |  |                                                                                         |  |               
|Signature                                                          |  | Title                                                                                   |  | Date          
|                                                                   |  |                                                                                         |  |               
|                                                                  
|/s/ THIAN HOO TAN(Thian Hoo Tan)                                   |  | Chief Executive Officer and Director (Principal
    Executive Officer)                  |  | March 13, 2003
|                                                                  
|/s/ KATHLEEN A. BAYLESS(Kathleen A. Bayless)                       |  | Vice President, Chief Financial Officer and
    Secretary (Principal Financial Officer) |  | March 13, 2003
|                                                                  
|/s/ PAUL BRAHE(Paul Brahe)                                         |  | Director                                                                                |  | March 13, 2003
|                                                                  
|/s/ CHRIS A. EYRE(Chris A. Eyre)                                   |  | Director                                                                                |  | March 13, 2003
|                                                                  
|/s/ NEIL S. SUBIN(Neil S. Subin)                                   |  | Director                                                                                |  | March 13, 2003
|                                                                  
|/s/ KENNETH R. SWIMM(Kenneth R. Swimm)                             |  | Director                                                                                |  | March 13, 2003
|                                                                  
|/s/ DAVID G. TAKATA(David G. Takata)                               |  | Director                                                                                |  | March 13, 2003
|                                                                  
|/s/ HARRY G. VAN WICKLE(Harry G. Van Wickle)                       |  | Director                                                                                |  | March 13, 2003
|                                                                  
|/s/ RAYMOND H. WECHSLER(Raymond H. Wechsler)                       |  | Director                                                                                |  | March 13, 2003
|                                                                  
|/s/ MICHAEL LEE WORKMAN(Michael Lee Workman)                       |  | Director                                                                                |  | March 13, 2003
|                                                                  
|*By /s/ KATHLEEN A. BAYLESS(Kathleen A. Bayless, Attorney-in-Fact) |  |                                                                                         |  |               

76



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##### Table of Contents



CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002


I, Thian Hoo Tan, certify that:



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



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



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



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



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



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

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

DATE:     March 13,
2003

77



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##### Table of Contents



CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002


I, Kathleen A. Bayless, certify that:



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



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



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



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



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



| |     |                        
| | --- | -----------------------
| | BY: | /s/ KATHLEEN A. BAYLESS

| |                                            
| | -------------------------------------------
| | Kathleen A. Bayless                        
| | Vice President, Chief Financial
    Officer

DATE:     March 13,
2003

78



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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   |     | Column F 
|                                   |                                 |                |       |                   |  |          |       |            |     |          
|                                   |                                 | Balance at     |       | Additions Charged |  |          |       |            |     | Balance  
|                                   |                                 | Beginning      |       | to Costs          |  |          |       |            |     | at End   
|Description                        |                                 | of Period      |       | and Expenses      |  | Other    |       | Deductions |     | of Period
|                                   |                                 |                |       |                   |  |          |       |            |     |          
|                                   |                                 |               
|                                   |                                 | (In thousands)
|PREDECESSOR COMPANY                |                                 |                |       |                   |  |          |       |            |     |           |       |       |     |   |       |       |     |   |       |      
|Year ended December 31, 2000       |                                 |                |       |                   |  |          |       |            |     |           |       |       |     |   |       |       |     |   |       |      
|                                   | Allowance for doubtful accounts |                | $     | 1,761             |  |          | $     | 55         |     |           | $     | 2,123 | (3) |   | $     |      |     |   | $     | 3,939 | 
|                                   | Allowance for sales returns     |                |       | 419               |  |          |       | 5,741      | (1) |           |       | 485   | (3) |   |       | 5,236 | (2) |   |       | 1,409 | 
|                                   |                                 |                |       |                   |  |          |       |            |     |           |       |       |     |   |       |       |     |   |       |      
|                                   |                                 | $              | 2,180 |                   |  | $        | 5,796 |            |     | $         | 2,608 |       |     | $ | 5,236 |       |     | $ | 5,348 |      
|                                   |                                 |                |       |                   |  |          |       |            |     |           |       |       |     |   |       |       |     |   |       |      
|Year ended December 30, 2001       |                                 |                |       |                   |  |          |       |            |     |           |       |       |     |   |       |       |     |   |       |      
|                                   | Allowance for doubtful accounts |                | $     | 3,939             |  |          | $     | (473       | )   |           | $     |      |     |   | $     | 1,829 |     |   | $     | 1,637 | 
|                                   | Allowance for sales returns     |                |       | 1,409             |  |          |       | 3,039      | (1) |           |       |      |     |   |       | 3,492 | (2) |   |       | 956   | 
|                                   |                                 |                |       |                   |  |          |       |            |     |           |       |       |     |   |       |       |     |   |       |      
|                                   |                                 | $              | 5,348 |                   |  | $        | 2,566 |            |     | $         |      |       |     | $ | 5,321 |       |     | $ | 2,593 |      
|                                   |                                 |                |       |                   |  |          |       |            |     |           |       |       |     |   |       |       |     |   |       |      
|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 |      
|                                   |                                 |                |       |                   |  |          |       |            |     |           |       |       |     |   |       |       |     |   |       |      



---



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

79



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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, 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).                                                                     
|        | 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   |             |  | Loan and Security Agreement between Komag,
    Incorporated, the lenders named therein, Foothill Capital
    Corporation as arranger and administrative agent and Ableco
    Finance LLC as collateral agent (incorporated by reference from
    Exhibit 4.4 filed with the Companys Form 10-Q
    filed on August 13, 2002).
|        | 4.5   |             |  | Indenture, dated June 30, 2002, governing
    the Senior Secured Notes due 2007 (incorporated by reference
    from Exhibit 4.5 filed with the Companys
    Form 10-Q filed on August 13, 2002).                                                                                                                             
|        | 4.6   |             |  | Form of Senior Secured Notes due 2007
    (incorporated by reference from Exhibit 4.6 filed with the
    Companys Form 10-Q filed on August 13, 2002).                                                                                                                                                                       
|        | 4.7   |             |  | Indenture, dated June 30, 2002, governing
    the Junior Secured Notes due 2007 (incorporated by reference
    from Exhibit 4.7 filed with the Companys
    Form 10-Q filed on August 13, 2002).                                                                                                                             
|        | 4.8   |             |  | Form of Junior Secured Notes due 2007
    (incorporated by reference from Exhibit 4.8 filed with the
    Companys Form 10-Q filed on August 13, 2002).                                                                                                                                                                       
|        | 4.9   |             |  | Intercreditor Agreement dated June 30, 2002,
    between Komag, Incorporated, Ableco Finance LLC, The Bank of New
    York, and Bank One Trust Company, NA..                                                                                                                                                                  
|        | 4.10  |             |  | Intercreditor Agreement dated June 30, 2002,
    between Komag, Incorporated, The Bank of New York, and Bank One
    Trust Company, NA.                                                                                                                                                                                       
|        | 10.1. | 1           |  | Lease Agreement dated May 2, 1989 by and
    between Stony Point Associates I and Komag Material
    Technology, Inc. (incorporated by reference from
    Exhibit 10.1.6 filed with the Companys report on
    Form 10-K for the year ended December 31, 1989).                                                              
|        | 10.1. | 2           |  | Lease Agreement (B10) dated May 24, 1996
    between Sobrato Development Companies #871 and Komag,
    Incorporated (incorporated by reference from
    Exhibit 10.1.11 filed with the Companys report on
    Form 10-K for the year ended December 29, 1996).                                                               
|        | 10.1. | 3           |  | Lease Agreement (B11) dated May 24, 1996
    between Sobrato Development Companies #871 and Komag,
    Incorporated (incorporated by reference from
    Exhibit 10.1.12 filed with the Companys report on
    Form 10-K for the year ended December 29, 1996).                                                               
|        | 10.1. | 4           |  | Sublease Agreement (B11) dated January 10,
    2000, between Komag, Incorporated and 2Wire, Inc. (incorporated
    by reference from Exhibit 10.1.15 filed with the
    Companys report on Form 10-K for the year ended
    January 2, 2000).                                                                                
|        | 10.1. | 5           |  | Second Amendment to Lease dated March 16,
    1999 by and between Northern Trust Bank of California N.A. and
    Komag Material Technology, Inc. (incorporated by reference from
    Exhibit 10.1.16 filed with the Companys report on
    Form 10-K for the year ended January 2, 2000).                                    
|        | 10.2  |             |  | Form of Indemnification Agreement.                                                                                                                                                                                                                                                                                            
|        | 10.3  |             |  | Asset Purchase Agreement between the Company and
    Western Digital Corporation dated April 8, 1999
    (incorporated by reference from Exhibit 10.1.13 filed with
    the Companys report of Form 10-Q for the quarter
    ended July 4, 1999) (Confidential treatment requested as to
    certain portions.)              



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                                               
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.3. | 1           |  | Volume Purchase Agreement dated as of
    April 8, 1999 by and between the Company and Western
    Digital Corporation (incorporated by reference from
    Exhibit 10.1.14 filed with the Companys report of
    Form 10-Q for the quarter ended July 4, 1999)
    (Confidential treatment requested as to certain portions).
|        | 10.3. | 2           |  | Amendment Number 1 to Volume Purchase
    Agreement with Western Digital Corporation dated October 5,
    2001 (incorporated by reference from Exhibit 10.1 filed
    with the Companys report on Form 10-Q for the quarter
    ended September 30, 2001).                                                                   
|        | 10.4. | 1           |  | 2002 Qualified Stock Option Plan and forms of
    agreement thereunder (incorporated by reference from
    Exhibit 10.4.1 filed with the Companys
    S-1 Registration Statement filed on August 27, 2002).                                                                                                                  
|        | 10.4. | 2           |  | Komag, Incorporated 2002 Deferred Compensation
    Plan (incorporated by reference from Exhibit 10.4.2 filed
    with the Companys S-1 Registration Statement filed on
    August 27, 2002).                                                                                                                                 
|        | 10.4. | 3           |  | Komag, Incorporated Retention Bonus Plan
    (incorporated by reference from Exhibit 10.4.3 filed with
    the Companys S-1 Registration Statement filed on
    August 27, 2002).                                                                                                                                            
|        | 10.4. | 4           |  | Form of Komag, Incorporated 2002 Employee Stock
    Purchase Plan (incorporated by reference from Exhibit 99.2
    filed with the Companys S-1 Registration Statement
    filed on August 27, 2002).                                                                                                                         
|        | 10.5  |             |  | Form of Executive Retention Agreement between
    Komag, Incorporated and certain executive officers (incorporated
    by reference from Exhibit 10.6.1 filed with the
    Companys S-1 Registration Statement filed on
    August 27, 2002).                                                                                
|        | 16.   |             |  | Letter dated November 26, 2001 regarding
    change in certifying accountants from Ernst & Young LLP
    (incorporated by reference from Exhibit 16 filed with the
    companys report on Form 8-K filed on
    November 26, 2001).                                                                                          
|        | 21    |             |  | Subsidiaries of Komag, Incorporated.                                                                                                                                                                                                                                                                                          
|        | 23.1  |             |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                          
|        | 23.2  |             |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                                                                 
|        | 24    |             |  | Power of Attorney. Reference is made to the
    signature pages of this Report.                                                                                                                                                                                                                                               
|        | 99.1  |             |  | Certification of Chief Executive Officer and
    Chief Financial Officer.