UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)
[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [FEE REQUIRED]
         For the fiscal year ended December 29, 1996

OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
         For the transition period from                  to

                         Commission file number 0-16852

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

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

               1704 Automation Parkway, San Jose, California 95131
        (previously 275 South Hillview Drive, Milpitas, California 95035)
          (Address of Principal Executive Offices, including Zip Code)

       Registrant's telephone number, including area code: (408) 576-2000

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

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

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

                          Common Stock, $0.01 par value

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

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

                            [Cover page 1 of 2 pages]
<PAGE>

         The aggregate  market value of voting stock held by  non-affiliates  of
the Registrant as of February 21, 1997 was approximately  $1,093,933,984  (based
upon the  closing  sale price for  shares of the  Registrant's  Common  Stock as
reported by the Nasdaq  National  Market for the last trading date prior to that
date). Shares of Common Stock held by each officer, director and holder of 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be  deemed to be  affiliates.  This  determination  of  affiliate  status is not
necessarily a conclusive determination for other purposes.

         On  February   21,  1997   approximately   51,856,539   shares  of  the
Registrant's Common Stock, $0.01 par value, were outstanding.

                       Documents Incorporated by Reference

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

         Komag,   Incorporated   Proxy  Statement  for  the  Annual  Meeting  of
Stockholders to be held on May 14, 1997, Part III.


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                                     PART I


ITEM 1.  BUSINESS


     Komag,  Incorporated  ("Komag" or the "Company") designs,  manufactures and
markets  thin-film media ("disks"),  the primary storage medium for digital data
used in computer  hard disk  drives.  Komag  believes it is the world's  largest
independent  manufacturer  of  thin-film  media  and  is  well  positioned  as a
broad-based  strategic  supplier of choice for the industry's leading disk drive
manufacturers.  The Company's  business  strategy  relies on the  combination of
advanced technology and high-volume manufacturing.  Komag's products address the
high-capacity/high-performance  segment of the disk drive market and are used in
products such as disk arrays, network file servers,  high-end personal computers
and  engineering  workstations.   The  Company  manufactures  leading-edge  disk
products  primarily  for 5 1/4-inch and 3 1/2-inch form factor hard disk drives.
The Company was organized in 1983 and is incorporated in the State of Delaware.

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

     Increasing demand for digital storage and low-cost,  high-performance  hard
disk drives has resulted in strong unit demand for these products. International
Data Corporation  ("IDC")  forecasts that worldwide disk drive unit shipments in
1997  through  2000 will grow at a 20%  compound  annual  growth  rate.  Greater
processing power, more sophisticated operating systems and application software,
high-resolution  graphics and larger data bases are among the developments  that
have required ever higher performance from disk drives. For example, the first 5
1/4-inch  hard  disk  drive,  introduced  in 1980,  offered a  capacity  of five
megabytes  (one million  bytes is a megabyte or "MB") with a storage  density of
less than ten megabits  (one million bits is a megabit;  eight bits is one byte)
per square inch.  Current  high-performance 3 1/2-inch drives have capacities of
three to nine gigabytes (one billion bytes is a gigabyte or "GB") with densities
typically  of 650  to 850  megabits  per  square  inch.  Advances  in  component
technology have been critical to improving the performance and storage  capacity
of disk drives and lowering cost per bit stored.

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


Technology

     Komag  manufactures  and  sells  thin-film  magnetic  media on  rigid  disk
platters for use in hard disk drives.  These drives are used in computer systems
to record,  store and retrieve  digital  information.  Inside a disk drive,  the
media or disk  rotates at speeds of up to 10,000 RPM.  The head scans across the
disk as it spins,  magnetically  recording or reading  information.  The domains
where each bit of magnetic code is

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stored are  extremely  small (now  typically  650 to 850 million bits per square
inch in  high-performance  drives) and precisely  placed.  The tolerances of the
disks and recording heads are extremely  demanding and the  interaction  between
these  components is one of the most critical design aspects in an advanced disk
drive.

     The primary factors governing the density of storage achievable on a disk's
surface are (1) the minimum distance at which read/write heads can reliably pass
over the  surface  of the disk to  detect a change  in  magnetic  polarity  when
reading from the disk,  defined as glide  height  (measured  in  microinches  or
millionths of an inch),  and (2) the strength of the magnetic  field required to
change  the  polarity  of a bit of data on the  magnetic  layer  of a disk  when
writing, defined as coercivity (measured in oersteds--"Oe").  As glide height is
reduced,  smaller bits can be read. The higher the coercivity of the media,  the
smaller  the  width  of the bit  that  can be  stored.  The  Company's  plating,
polishing and texturing  processes  result in a uniform  surface with relatively
few defects which permits the  read/write  heads to fly over the disk surface at
glide heights of 1.2 microinches.  The platinum-cobalt  based alloy deposited on
the surfaces of Komag's disks has high coercivity, low noise and other desirable
magnetic characteristics.  The combination of these factors results in more data
stored in a given area on the disk surface.

     The Company currently  manufactures  inductive and magnetoresistive  ("MR")
media.  Designed for use with an MR head,  magnetic bits are reduced in size and
packed in  significantly  higher  densities on the surface of an MR disk than on
inductive  disks.  The MR head uses separate read and write elements.  The write
element is made from conventional inductive materials, but the read element is a
made of a material whose electrical resistance changes when subjected to changes
in a magnetic  field.  MR heads are more  sensitive  to  magnetic  fields  which
enables them to read the more densely-packed, smaller-sized bits contained on an
MR disk. The Company  believes that MR disks will become the  predominant  media
for disk  drives  over the next  several  years.  In  1996,  the  Company  began
production of MR media. The Company also currently manufactures proximity media,
an  advanced  version  of  inductive  media.  Proximity  media  interfaces  with
proximity  recording  heads and allows for higher  density  recording due to low
glide heights attainable with proximity media and heads.


Products, Customers and Marketing

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

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

      Net sales to major customers in 1996 were as follows:  Seagate Technology,
Inc. ("Seagate")--52%,  Western Digital Corporation ("Western Digital")--22% and
Quantum Corporation  ("Quantum") including its Japanese  manufacturing  partner,
Matsushita-Kotobuki   Electronics  Industries,  Ltd.  ("MKE")--18%.   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,  the Company  expects  that it will
continue its  dependence on a very limited  number of  customers.  Further there
were  consolidations  among the Company's disk drive customers in 1996.  Seagate
and Conner Peripherals, Inc. merged and Quantum ceased disk drive

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<PAGE>

production in Milpitas,  California and Penang, Malaysia and contracted with MKE
to  manufacture  all of its disk drives.  AKCL,  the  Company's  Japanese  joint
venture,  has a long  established  working  relationship  with  MKE  and MKE has
remained  AKCL's largest  customer for the past several  years.  During 1996 the
Company  sold  product  to MKE in  Japan  and to MKE's  Singapore  manufacturing
facility through AKCL.

     Sales are made directly to disk drive manufacturers worldwide (except media
sales into Japan) from the  Company's  U.S. and Malaysian  operations.  Sales of
media for assembly into disk drives  within Japan are made solely  through AKCL.
On a selective  basis the Company has used AKCL to  distribute  its  products to
Japanese drive  manufacturers for assembly outside of Japan.  Media sales to the
Far East from the Company's U.S. and Malaysian  operations  represented 88%, 62%
and 54% of Komag's net sales in 1996, 1995 and 1994,  respectively.  All foreign
sales are  subject to certain  risks  common to all export  activities,  such as
government  regulation  and the risk of  imposition  of tariffs  or other  trade
barriers.  Foreign  sales  must  also  be  licensed  by  the  Office  of  Export
Administration of the U.S. Department of Commerce.

     The Company's  sales are generally made pursuant to purchase  orders rather
than long-term contracts.  These purchase orders are generally subject to change
or cancellation  without significant penalty. At December 29, 1996 the Company's
backlog of purchase orders  scheduled for delivery within 90 days totaled $113.0
million compared to $156.0 million at December 31, 1995. The Company believes it
is a common practice for disk drive  manufacturers  to place orders in excess of
actual  requirements when there is an industry-wide  shortage of media supply (a
condition more prevalent in 1995 in comparison to 1996).  These purchase  orders
may be changed or canceled by  customers  on short  notice  without  significant
penalty.  Accordingly,  the backlog  should not be relied upon as  indicative of
sales for any future period.


Manufacturing

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

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

     1. 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.

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<PAGE>

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

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

     4.  Sputtering  and Lube:  By a  technically  demanding  vacuum  deposition
process,  the magnetic layers are successively  deposited on the disk and a hard
protective  overcoat  is  applied.  After  sputtering,  a  microscopic  layer of
lubrication is applied to the disk's  surfaces to improve  durability and reduce
surface friction.

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

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


Production Capacity

     The  Company   currently   has  23  production   lines   installed  at  its
manufacturing  plants in three  countries:  ten in the United  States,  eight in
Malaysia,  and five at its manufacturing joint venture in Japan. The addition of
the seventh line in the second quarter of 1996 in Penang,  Malaysia utilized all
available space in the Company's  first Penang  manufacturing  facility.  During
1996 the Company completed the construction of the second manufacturing facility
in Penang and  production  began on the first line in this  275,000  square foot
back end disk  manufacturing  facility in early January  1997.  The Company also
completed  construction  of a new back end facility in San Jose,  California and
production  commenced at this 225,000 square foot facility in the fourth quarter
of 1996.  The Company  constructed  and equipped a 275,000 square foot front end
manufacturing  facility  in the east  Malaysian  state of  Sarawak  which  began
production  in  the  first  half  of the  year.  This  new  front  end  facility
manufactures plated,  polished substrates that are shipped to the Company's back
end  manufacturing  facilities in the United States and Malaysia for completion.
The back end plants  utilize  plated,  polished  substrates to produce  finished
sputtered disk product. AKCL completed the construction of a 225,000 square foot
facility in  Thailand  for front end  production  of  thin-film  disks and began
production at this site in late 1996.

     The  Company  currently  plans to add a second  production  line at the new
Penang plant in the second  quarter of 1997. In addition,  in the second quarter
at the new San Jose plant, the Company plans to commence production on the first
new design ("ND")  sputtering  machine which will have a rated capacity of twice
the output of the Company's existing machines.  In the third quarter the Company
will add a ND machine at its new Penang plant.  The addition of these production
lines in the second and third  quarters of 1997,  coupled with the first line in
the new Penang plant,  will translate into the equivalent of six more sputtering
lines by the end of the third quarter of 1997 than at the end of 1996.  Also, in
1997 the Company will  complete the equipping  and  production  expansion of the
front end manufacturing facility in Sarawak, Malaysia.

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<PAGE>

     Supplementing  this  new  physical  capacity,   the  Company  expects  that
continued focus on process  improvements  will result in higher unit output from
both current and planned production lines during 1997, thus leading to increased
effective capacity.

     During the fourth  quarter of 1994,  the Company  began a series of process
improvements  designed to support  production of future  advanced disk products.
The Company believes that these improvements  should enhance product performance
and should enable  increased unit output through reduced process cycle times. In
order to utilize these process  improvements on all of the Company's  sputtering
lines,  certain older machines were upgraded.  Three U.S. machines were upgraded
in 1995 and three machines were upgraded in 1996.  Only one sputtering  line was
out of  production  at any given time.  Certain  older  sputtering  lines at the
Japanese  joint  venture were also upgraded  during 1995 and 1996.  This upgrade
process  is now  complete,  however,  there  can  be no  assurance  that  future
modifications will not be required to meet new product needs.


Research, Development and Engineering

     Since its  founding,  Komag has  focused  on the  development  of  advanced
thin-film disk designs, as well as the process technologies necessary to produce
these designs.  The Company has utilized a full scale  sputtering line for pilot
production. The Company has recently completed the construction of a new 188,000
square foot research and development  facility which the Company occupied in the
first quarter of 1997. The new facility is being equipped with an additional new
full scale  sputter line which will be  dedicated  to research  and  development
activities  and available for use in the second  quarter of 1997.  The Company's
spending  and  capital  investment  for R&D are  focused  on the  investigation,
design,  development,  and testing of new products and  processes as well as the
development   of  more  efficient   processes   that  can  be  integrated   into
manufacturing in a commercially viable manner.

     In the second  half of 1996,  the Company  completed  the  development  and
quickly ramped to volume  production new proximity and  magnetoresistive  ("MR")
products.  The new  proximity  products  are  low-glide,  full-surface  textured
inductive media for use with proximity  heads. The new MR products are comprised
of  full-surface  and  mechanical  zone-textured  MR  media  as  well  as  laser
zone-textured media for use with MR recording heads.

     In 1997,  the Company  plans to increase its R&D spending to  approximately
$50  million.  The  Company's  R&D  team  will  focus  on  process  changes  and
improvements  to increase  yields on the proximity and MR products  currently in
volume  production.  New proximity and MR products will continue to be developed
and glass media  products will be developed for  production in late 1997.  These
advanced  products  require new and continuing  development  efforts and process
improvements  in the front end  manufacturing  processes from substrate  through
nickel polish, as well as improved cleaning processes,  improved overcoats,  and
improved  magnetic  recording  characteristics  for the  magnetic  layers on the
disks.

     The  Company's   expenditures   (and  percentage  of  sales)  on  research,
development  and  engineering,  were $29.4 million (5.1%) in fiscal 1996,  $23.8
million (4.6%) in fiscal 1995, and $21.3 million (5.4%) in fiscal 1994.


Strategic Alliances

     The Company has established joint ventures with Asahi Glass and Kobe. Komag
believes  these  alliances have enhanced the Company's  competitive  position by
providing research, development,

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engineering  and  manufacturing  expertise that reduce costs and technical risks
and shorten product development cycles.

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

     In 1987 the Company formed a partnership  (Komag Technology  Partners) with
the  U.S.  subsidiaries  of two  Japanese  companies,  Asahi  Glass  and  Vacuum
Metallurgical  Company.  The  partners  simultaneously  formed  a  wholly  owned
subsidiary,  AKCL, to manufacture and distribute thin-film disks in Japan. Under
the joint venture agreement,  the Company contributed technology developed prior
to January 1987, and licensed  technology  developed  after January 1987, to the
extent such technology relates to sputtered thin-film hard disk media, for a 50%
interest in the partnership.  The Japanese partners  contributed  equity capital
aggregating 1.5 billion yen (approximately  $11 million).  AKCL began commercial
production  with  its  first  production  line  in 1988  and  added  three  more
production lines between 1989 and 1991. A fifth production line was added at its
manufacturing  facility in Yonezawa,  Japan in September 1995. During the fourth
quarter  of 1995 the first  sputtering  line was  removed  from  production  for
upgrading,  thus offsetting the incremental unit output from the newly-installed
fifth sputtering line. The second  sputtering line was upgraded during the first
half of 1996 and all sputtering lines were in production  during the second half
of 1996.

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

     Disk  sales  to AKCL  represented  6% of the  Company's  net  sales in 1996
compared to less than 1% in 1995 and 1994. The increased  level of disk sales by
the Company to AKCL for  distribution  is  expected  to  continue  in 1997.  The
Company purchased 3% of AKCL's unit output during 1996 compared to approximately
1% and 8% in 1995 and 1994,  respectively.  Demand within the Japanese thin-film
disk  market  continued  to  absorb  most  of  AKCL's  production.  The  Company
anticipates that distribution sales of AKCL-produced  disks to U.S. customers in
1997 will remain a relatively small percentage of the Company's net sales.

     Komag Material Technology, Inc.  ("KMT")

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

     Under these  agreements,  Kobe will continue to supply  substrate blanks to
KMT while the Company will continue to purchase  KMT's entire output of finished
substrates.  Further,  the Company has  indicated  its  intention  to purchase a
substantial  proportion  of its  future  substrate  requirements  from  Kobe,  a
continuation of a past procurement practice. In combination, KMT and Kobe supply
in excess of 95% of the Company's substrate requirements.

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<PAGE>

     Equity Positions Held by Asahi Glass and Kobe in Komag

     Asahi  Glass and Kobe each  purchased  two million  shares of newly  issued
Common  Stock from the Company  for $20 million in January  1989 and March 1990,
respectively.  In 1992 Asahi Glass transferred ownership of its shares to a U.S.
subsidiary of Asahi Glass.  Under their  respective  stock purchase  agreements,
Asahi  Glass and Kobe each have the right to purchase  additional  shares of the
Company's  Common Stock on the open market to increase their  respective  equity
interests in the Company to 20%, the right to maintain their percentage interest
in the Company by purchasing their pro rata shares of any new equity issuance by
the Company,  and the right to require the Company to register  their shares for
resale,  either on a demand basis or concurrent with an offering by the Company.
Each stock purchase  agreement  further  provides that the Company shall use its
best efforts to elect a  representative  of each investor to the Company's Board
of Directors and to include such  representatives on the Nominating Committee of
the Board.  There were no  purchases  or sales of the  Company's  stock by Asahi
Glass or Kobe in 1996 and according to the  Company's  stock records at February
21, 1997,  Asahi America and Kobe held 2,000,000 and 2,000,002  shares of Common
Stock,  respectively.  Sales of significant  amounts of the security holdings of
Asahi Glass and/or Kobe in the future could adversely affect the market price of
the Company's  Common Stock. Any sales by either party,  however,  would require
relinquishment of its respective seat on the Company's Board of Directors.


Competition

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


Environmental Regulation

     The Company is subject to a variety of regulations  in connection  with its
operations,  and believes  that it has obtained  all  necessary  permits for its
operations.  The Company uses various industrial hazardous materials,  including
metal  plating  solutions,  in its  manufacturing  processes.  Wastes  from  the
Company's  manufacturing  processes  are either  stored in areas with  secondary
containment  before  removal  to a  disposal  site  or  processed  on  site  and
discharged  to  the  industrial  sewer  system.  In  addition,  at  one  of  its
facilities,   the  Company   receives   industrial   waste  water  from  Headway
Technologies,  Inc.,  ("Headway"),  which  subleases  a portion of a building in
Milpitas,  California  directly from the Company.  Under this  arrangement,  the
Company  processes  this received  waste water  together with its own industrial
waste water.

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

                                       9
<PAGE>

regulations  could  restrict  the  Company's  ability  to expand at its  present
locations  or could  require the Company to acquire  costly  equipment  or incur
other significant expenses.


Patents and Proprietary Information

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

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

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


Employees

     As of December 29, 1996 the Company and its  consolidated  subsidiaries had
4,101  employees  (4,027 of which are  regular  employees  and 74 of which  were
employed  on a  temporary  basis),  including  3,708  in  manufacturing,  222 in
research,  development and  engineering,  and 171 in sales,  administrative  and
management positions. Of the total, 2,035 are employed at offshore facilities.

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


Risks Factors

     The Company's  business is subject to a number of risks and  uncertainties.
As a result of those risks described  below and other risks presented  elsewhere
in this report,  there can be no assurance  that the Company will continue to be
successful or will maintain a leading market position.  The discussion contained
in Item  1--"Business"  and Item  7--"Management's  Discussion  and  Analysis of
Financial

                                       10
<PAGE>

Condition and Results of Operations"  contain  predictions,  estimates and other
forward-looking  statements  that  involve a number of risks and  uncertainties.
While this discussion represents the Company's current judgment on the risks and
future  direction  of the  business,  such risks and  uncertainties  could cause
actual  results  to differ  materially  from any  future  performance  suggested
herein. Factors that could cause actual results to differ include the following:
the  rate  of  improvement  in  manufacturing   efficiencies  on  new  products;
utilization of manufacturing  equipment and facilities;  product  transitions to
next-generation  products;  industry  supply-demand  relationships  and  related
pricing for high-end desktop and enterprise disk products;  execution of planned
capacity  additions;  availabilty of certain  sole-sourced raw material supplies
and vertical  integration and company  consolidation  within a limited  customer
base. The Company undertakes no obligation to publicly release the result of any
revisions  to these  forward-looking  statements  which  may be made to  reflect
events or  circumstances  after the date hereof or to reflect the  occurrence of
unanticipated events.

Rapid Technological Change

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

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

     In addition,  protection of technology  through  patents and other forms of
intellectual property rights in technically sophisticated fields is commonplace.
There  can be no  assurance  that  others  have  not or will  not  perfect  such
intellectual  property  rights and either  enforce  those  rights to prevent the
Company from practicing certain technologies or demand royalty payments from the
Company in return for practicing those  technologies,  which may have a material
adverse affect on the Company's results of operations. The Company reviews, on a
routine basis,  patent issuances in the U.S. and patent  applications  which are
published in Japan.  Through these  reviews,  the Company  occasionally  becomes
aware of a patent, or an application that may mature into a patent,  which could
give rise to a claim of  infringement.  When such  patents are  identified,  the
Company  investigates the validity and possibility of actual  infringement.  The
Company is  presently  involved  in such an  investigation  of several  recently
issued patents. However, the Company presently believes it is unlikely that such
patents will materially  adversely affect the Company's  business.  However,  if
such  patents are  asserted  against  the  Company  and upheld,  there can be no
assurance  that they would not apply to a  significant  portion of the Company's
products and would not have a material adverse effect on the Company's business.

Capacity Expansion and Capital Intensity

     Future sales and earnings  growth will depend,  in part, on the  successful
expansion of the Company's  manufacturing  capacity. The Company plans to expand
capacity by increasing the disk output of its existing  production lines through
process improvements and through the installation of new production lines at its
manufacturing facilities. In the second half of 1996, low yields on new products
and  high  usage  of  production  lines  for  product  and  process  development
activities constrained unit output. If planned improvements in yields, equipment
utilization  and process  cycle times are not achieved,  the  Company's  rate of
growth may be constrained or curtailed.

                                       11
<PAGE>

     The  Company  recently  completed  the  construction  of two new  back  end
production facilities,  one in San Jose, California and one in Penang, Malaysia.
The first  production  line at the new San Jose facility began  operation in the
fourth quarter of 1996.  The first  production  line at the new Penang  facility
began  operation at the beginning of 1997. The Company  currently plans to add a
second production line at the new Penang plant in the second quarter of 1997. In
addition,  in the second quarter at the new San Jose plant, the Company plans to
commence production on the first new design ("ND") sputtering machine which will
have a rated capacity of twice the output of the Company's existing machines. In
the third  quarter the Company will add a ND machine at the Penang  plant.  Also
the Company will complete the equipping  and  production  expansion at the front
end manufacturing plant in Sarawak, Malaysia. There can be no assurance that the
Company's  additional  production  lines,   especially  the  new  ND  sputtering
machines,  will be installed  as scheduled or will attain yield and  utilization
rates comparable to the Company's existing  production lines.  Manufacturing and
other challenges in connection with the commencement and subsequent expansion of
operations in any location could have a material adverse affect on the Company's
results of operations.

     Based  upon  industry  forecasts  of  continued  high  growth in demand for
magnetic media,  the Company has developed and is executing its plan to increase
its production  capacity under a schedule that is substantially  more aggressive
than its past  expansion  plans.  Implementation  of this plan entails  parallel
expansion at multiple  locations  rather than serial expansion one location at a
time, thus requiring  precise  planning.  Under this more  aggressive  plan, the
Company  successfully  completed the  construction  and brought into  production
three new  manufacturing  facilities on schedule  during the last twelve months.
Continued   successful  execution  of  this  expansion  plan  will  require  the
installation of the appropriate equipment to support current and advanced future
products,  continued recruitment and retention of high quality workforces at all
facilities worldwide, and achievement of satisfactory manufacturing results on a
scale greater than the Company's prior expansions.

     The Company's capital expenditures totaled $403 million in 1996 and capital
expenditures  for 1997 are planned at  approximately  $290  million.  Due to the
capital  intensive  nature  of the  Company's  business,  the  construction  and
equipping  of  new  manufacturing   facilities   requires   substantial  capital
investment.  Further,  significant  amounts of continuing  investment in capital
equipment  are  required to improve,  modify and change  existing  manufacturing
processes to support  rapidly  changing  process  technologies.  There can be no
assurance  that the Company  will be able to properly  plan and install  capable
plant and equipment to support the manufacturing processes required for advanced
future products in a timely and cost-effective manner due to the long lead times
required to design, construct and install plant and equipment. Further, required
changes in manufacturing  processes could obsolete or significantly  shorten the
useful lives of equipment currently in use.

     There  can be no  assurance  that the  Company  will  successfully  achieve
planned process  improvements or  successfully  manage its aggressive  expansion
plan.  Failure to improve  yields from the low levels  experienced in the fourth
quarter of 1996 would  continue to  materially  adversely  effect the  Company's
results of  operations.  In addition,  should  actual  demand for the  Company's
products not meet the  Company's  forecast,  and not absorb  existing or planned
additional  capacity,  the fixed costs and operating  expenses related to unused
capacity  would  have a  material  adverse  affect on the  Company's  results of
operations.

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

     The Company's sales are  concentrated in a small number of customers due to
the high-volume  requirements of the dominant disk drive manufacturers and their
tendency  to rely on a few  suppliers  because  of the  close  interrelationship
between  media  performance  and  disk  drive  performance.  Net  sales to major
customers  in 1996  were as  follows:  Seagate--52%,  Western  Digital--22%  and
Quantum,  including  its  Japanese  manufacturing  partner  MKE--18%.  Given the
relatively  small  number of  high-performance  disk  drive  manufacturers,  the
Company expects that it will continue its dependence on a very

                                       12
<PAGE>

limited  number  of  customers.  Further  there  were  consolidations  among the
Company's  disk drive  customers in 1996.  Seagate and Conner merged and Quantum
ceased disk drive  production in Milpitas,  California and Penang,  Malaysia and
contracted with MKE to manufacture  all of its disk drives.  AKCL, the Company's
Japanese joint venture, has a long established working relationship with MKE and
MKE has remained AKCL's largest customer for the past several years. During 1996
the Company  sold product to MKE in Japan and to MKE's  Singapore  manufacturing
facility through AKCL.

     Seagate currently produces over 50% of its disk requirements internally and
has  announced its  intentions to produce at least 70% of its internal  needs by
mid-1997.  In addition,  Seagate currently has a long-term  purchase  commitment
with one of the  Company's  competitors.  Western  Digital has stated its longer
term  intention to grow internal  media capacity from under 30% to at least 40%.
Other  customers  and  potential   customers  have,  or  could  adopt,   similar
strategies.  Depending on the overall growth in market demand for disk products,
such actions  could result in the  reduction or cessation of purchases  from the
Company,   thus  materially   adversely   affecting  the  Company's  results  of
operations.  Additionally,  if one or more of the  Company's  customers  were to
begin selling disks on the open market in direct  competition  with the Company,
the Company's results of operations could be further adversely affected.

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

Capital Needs

     The  Company  believes  that,  in order to  achieve  its  long-term  growth
objectives  and  maintain  and enhance its  competitive  position,  it will need
significant  additional  financial  resources  over the next  several  years for
capital expenditures, working capital and research and development. During 1996,
the Company spent  approximately  $403 million on property,  plant and equipment
and capital  expenditures in 1997 are expected to approximate $290 million.  The
Company  believes  that it will be able to fund  the  1997  expenditures  from a
combination  of cash flow from  operations,  funds  available from existing bank
lines of credit,  and existing cash  balances.  However,  the Company may obtain
additional  debt or equity  financing  in 1997 to ensure the  Company  maintains
adequate cash  reserves.  There can be no assurance that such  additional  funds
will be  available  to the  Company  or,  if  available,  will be  available  on
favorable  terms. In addition,  the Company may require  additional  capital for
other purposes.  If the Company is unable to obtain sufficient capital, it could
be  required  to reduce its  capital  equipment  and  research  and  development
expenditures,  which  could  have a  material  adverse  affect on the  Company's
results of operations.

Fluctuations in Operating Results

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

                                       13
<PAGE>

     Because the  thin-film  disk  industry is capital  intensive and requires a
high level of fixed costs, gross margins are also extremely sensitive to changes
in volume.  Assuming fixed average selling prices,  reductions in  manufacturing
efficiency  cause declines in gross  margins.  Additionally,  decreasing  market
demand for the Company's  products  generally results in reduced average selling
prices and/or low capacity  utilization  that, in turn,  adversely affects gross
margins and operating results. The Company's ability to maintain average selling
prices and gross  margins is  dependent  on its ability to  produce,  in volume,
products that are differentiated on the basis of technological  superiority.  In
the first and second  quarters of 1996, the Company  achieved high gross margins
as a result of high  manufacturing  efficiencies,  coupled  with  strong  market
demand for its  inductive  disk  products.  In the third and fourth  quarters of
1996, the Company made a rapid transition to new proximity and MR disk products.
The lower yields on these new  products,  coupled with high usage of  production
equipment  for product  and process  development  activities,  constrained  unit
output in the second half of the year.  In light of the fixed cost nature of the
business,  constrained  unit  output  resulted  in high unit costs and low gross
margins in the second half of the year.  The Company  expects  gross  margins to
improve  sequentially  in the first two quarters of 1997 from the fourth quarter
1996 level and has  targeted a gross  margin range of 30-35% for the second half
of 1997.  In the event that market  supply meets or exceeds  demand or yields on
new  products do not improve at the rate  expected,  or the Company is unable to
introduce  and ramp to volume  production  next-generation  products in a timely
manner, the Company's operating results would likely be adversely affected.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations".

     Fluctuations in the financial results of AKCL, the Company's unconsolidated
Japanese disk manufacturing  joint venture,  also impact the Company's financial
performance.  Equity in net income of AKCL  contributed 9% of the Company's 1996
consolidated  net  income.  AKCL is  subject  to many of the same types of risks
facing the Company  including the risks associated with a similar  transition to
MR products which AKCL began in the second half of 1996. In addition, the equity
income  derived from AKCL  fluctuates  over time due to its dependence on a more
limited customer base (MKE, Fujitsu Ltd. and Toshiba  Corporation  accounted for
61%, 19% and 16% respectively, of AKCL's 1996 net sales) and yen/dollar exchange
rate fluctuations.  AKCL's financial results were also impacted in 1996 and 1995
by write-downs of its investment in Headway Technologies, Inc. ("Headway"). AKCL
sold its  interest  in Headway in the first  quarter of 1997 and will  include a
gain on sale of the investment in its first quarter 1997 operating results.

Risk of Foreign Operations

     In 1996 sales to customers in the Far East,  including foreign subsidiaries
of domestic  companies,  accounted  for 88% of the  Company's net sales from its
U.S. and Malaysian  facilities,  and the Company  anticipates that international
sales will  continue to  represent  the  majority  of its net sales.  All of the
Company's sales are currently priced in U.S. dollars worldwide. Certain costs at
the Company's foreign manufacturing and marketing operations are incurred in the
local  currency.  The Company  also  purchases  certain  operating  supplies and
production  equipment from Japanese  suppliers in yen denominated  transactions.
Accordingly,  the Company's  operating results are subject to the risks inherent
with international operations,  including but not limited to, compliance with or
changes  in the  law  and  regulatory  requirements  of  foreign  jurisdictions,
fluctuations  in exchange  rates,  tariffs or other  barriers,  difficulties  in
staffing  and  managing  foreign  operations,  exposure  to  taxes  in  multiple
jurisdictions, and transportation delays and interruptions.

     The Company's  Malaysian  operations in Penang and Sarawak  accounted for a
significant  portion of the Company's 1996  consolidated net sales and operating
income.  Prolonged  disruption  of  operations  in Penang and or Sarawak for any
reason  would  cause  delays  in  shipments  of  the  Company's  products,  thus
materially adversely affecting the Company's results of operations.

                                       14
<PAGE>

Competition

     The  Company's   thin-film   disk  products  are  used   primarily  in  the
high-capacity  segment of the 3 1/2-inch and 5 1/4-inch  hard disk drive market,
where product performance,  consistent quality and availability, taken together,
are of great competitive importance.  To succeed in an industry characterized by
rapid  incremental  technological  developments,  the Company must  continuously
advance its thin-film  technology at a pace  consistent  with or faster than its
competitors. However, if the technology involved in the manufacture of thin-film
disks does not  continue  to advance  rapidly,  or if the Company is not able to
keep pace with such advances,  the Company may face increased price  competition
from other manufacturers. Such competition could materially adversely affect its
results of operations.

     Worldwide disk drive shipments grew approximately 22% in 1996 over 1995 and
are projected to grow at a 20% compound  annual growth rate in 1997 through 2000
according  to  International  Data  Corporation  ("IDC").  In  response  to  the
continuing rapid growth of the disk drive market and resulting strong demand for
thin-film  disk  products,  the Company as well as a majority  of the  Company's
competitors (both independent disk manufacturers and vertically-integrated  disk
drive customers) are substantially increasing their disk manufacturing capacity.
The Company  believes that its  manufacturing  operations in Penang and Sarawak,
Malaysia  have  provided a  competitive  cost  advantage  relative to most other
thin-film  disk  manufacturers  that operate  exclusively in the U.S. and Japan.
However,  in order to remain cost competitive,  many of the U.S. and Japan based
competitors are currently expanding into lower cost regions in the world such as
Southeast Asia. These  significant  investments in new disk production  capacity
could result in an oversupply of disk media and increase  price  competition  in
the media market.  Further,  slower market growth for data storage, could reduce
the number of potential  customers  and increase  competition  for the remaining
market.  Such conditions  could have a material  adverse affect on the Company's
results of operations.

Volatility of Stock Price

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

Other Risk Factors

     The Company relies on a limited  number of suppliers,  in some cases a sole
supplier,  for  certain  materials  and  equipment  used  in  its  manufacturing
processes.   These  materials  include  aluminum   substrates,   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 sole  supplier,  entails some risk that the Company's  production
capacity  would  be  limited  if one or more of such  materials  were to  become
unavailable or available in reduced  quantities,  the Company  believes that the
advantages of working closely with these suppliers  outweigh such risks. If such
materials should be unavailable for a significant  period of time, the Company's
results of operations would be adversely affected.

                                       15
<PAGE>

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


ITEM 2.  PROPERTIES

     Worldwide  (excluding  AKCL),  the Company  currently  occupies  facilities
totaling  approximately  1,560,000  square  feet.  The  Company  owns three disk
manufacturing  facilities  in  Malaysia,  two in Penang and one in Sarawak.  The
square  footage of each of these  facilities  and  acreage of the  related  land
parcels are 340,000 square feet and 13 acres;  275,000 square feet and 18 acres;
and 275,000  square feet and 89 acres.  The  Company  leases five  manufacturing
facilities in Milpitas, San Jose, and Santa Rosa, California.  The Company's new
headquarters facility and new R&D facility in San Jose, California were occupied
in the first  quarter of 1997.  These  facilities  are leased for the  following
terms:


            Facility Size              Current Lease
            (square feet)              Term Expires           Extension Options
            -------------              -------------          -----------------
               225,000                 September 2006            20 years
               188,000                   January 2007            20 years
                82,000                  February 2007            20 years
               103,000                      July 1999            10 years
                97,000                  February 2001            10 years
                96,000                  February 2001            10 years
                44,000                     April 1999            10 years
                39,000                       May 1997               --
                51,000                     March 1997               --

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


ITEM 3.  LEGAL PROCEEDINGS

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

                                       16
<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

     No matters were  submitted to the  stockholders  of the Company  during the
Company's fourth quarter of 1996.

<TABLE>

Executive Officers of the Registrant

     As of  January  31,  1997 the  executive  officers  of the  Company  are as
follows:

<CAPTION>
Name                                            Age           Position
----                                            ---           --------
<S>                                              <C>          <C>
Tu Chen......................................    61           Chairman of the Board of Directors
Stephen C. Johnson...........................    54           President, Chief Executive Officer and Director
Christopher H. Bajorek.......................    53           Senior Vice President-Chief Technical Officer
Willard Kauffman.............................    61           Senior Vice President-Chief Operating Officer
William L. Potts, Jr. .......................    50           Senior Vice President-Chief Financial Officer and
                                                                  Secretary
Fred Wiele...................................    58           Senior Vice President-Marketing and Sales
Ronald Allen.................................    48           Vice President-Equipment Technology and
                                                                  Automation
Richard Austin...............................    41           Vice President-Manufacturing and Corporate
                                                                  Facilities
Venche Kao...................................    59           Vice President Manufacturing-Milpitas Operations
Elizabeth A. Lamb............................    45           Vice President-Human Resources
Steven J. Miura..............................    44           Vice President-Quality and Product Integration
Thian Hoo Tan................................    48           Vice President Manufacturing-Asia Operations
Sonny Wey....................................    56           Vice President-Product Research and Development
William V. Whitmer...........................    54           Vice President Manufacturing-U.S. Operations
Tsutomu T. Yamashita.........................    42           Vice President-Process Technology Research and
                                                                  Development
</TABLE>

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

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

                                       17
<PAGE>

     Dr.  Bajorek  joined  the  Company  and was  elected  to the newly  created
position  of Senior Vice  President-Chief  Technical  Officer in June 1996.  Dr.
Bajorek  was  most  recently  Vice   President,   Technology   Development   and
Manufacturing,  for the Storage Systems Division of IBM in San Jose, California.
During his 25 year  career with IBM,  Dr.  Bajorek  held  various  positions  in
research and management  related to magnetic  recording,  magnetic  bubble,  and
optical  storage  applications.  He holds a Ph.D. in Electrical  Engineering and
Business Economics from Caltech.

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

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

     Mr. Wiele joined the Company as Senior Vice  President-Marketing  and Sales
in June  1996.  Most  recently,  he was  General  Manager,  Worldwide  Sales and
Marketing,  for the Storage  Systems  Division  of IBM in San Jose,  California.
During  his 31 years  with IBM,  Mr.  Wiele  held  various  marketing  and sales
positions within the domestic and overseas  operations of IBM. He headed product
management  for  AS/400  hardware  and  software  for IBM's U.S.  Marketing  and
Services  Division.  He also directed  marketing and product  management for IBM
Europe, Middle East, and Africa. He holds a B.S. in Mechanical  Engineering from
Villanova University.

     Mr.  Allen  was  promoted  to  Vice   President-Equipment   Technology  and
Automation in January 1997. Mr. Allen joined the Company in October 1983 when he
established the Company's automation manufacturing program which he has directed
since that time.  Prior to joining  Komag,  Mr. Allen was employed  with Xerox's
Palo Alto Research Center as a member of the research  staff.  Mr. Allen holds a
B.S. degree in Physics and a minor in Chemistry from Dillard University.

     Mr.  Austin was  promoted  to Vice  President-Manufacturing  and  Corporate
Facilities  in January  1997.  Mr.  Austin joined the Company in October 1988 as
Facilities  and  Equipment  Maintenance  Manager  and most  recently  was Senior
Director of Corporate  Facilities.  Prior to joining  Komag,  Mr.  Austin was an
Equipment  Maintenance and Facilities Manager at VLSI Technology Inc. Mr. Austin
also worked at National  Semiconductor and Rockwell  International  between 1975
and 1983.

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

     Ms. Lamb joined the Company as Vice  President-Human  Resources  in October
1996.  From 1995 to 1996 she was  Director of  Worldwide  Staffing  and Employee
Relations  at Adaptec.  Prior to that,  Ms. Lamb was  Director of  Compensation,
Benefits  and  Executive  programs at Tandem.  Ms.  Lamb holds a B.A.  degree in
Communications from San Jose State University.

                                       18
<PAGE>

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

     Mr. Tan was appointed Vice President of  Manufacturing  in September  1993.
Mr. Tan currently serves as Vice President Manufacturing-Asia  Operations and is
in charge of the  Company's  operations  in Penang  and  Sarawak,  Malaysia.  He
previously  served as the Managing  Director of the Company's  Penang,  Malaysia
operation and prior to that was in charge of  operations at the Company's  first
San Jose, California  manufacturing facility.  Before joining Komag in 1989, Mr.
Tan was Vice  President of  Operations at HMT  Technology.  Mr. Tan holds a M.S.
degree in Physics from the University of Malaya at Kuala Lumpur.

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

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

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

                                       19
<PAGE>


PART II

ITEMS 5, 6, 7 and 8.

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

     The Company's  Common Stock is traded on the Nasdaq  National  Market under
the  symbol  KMAG.  The  following  table  sets  forth the range of high and low
closing sales prices, as reported on the Nasdaq National Market. At February 21,
1997 the Company had approximately 483 holders of record of its Common Stock and
51,856,539  shares  outstanding.  The share prices have been adjusted to reflect
the Company's two-for-one stock split effective December 21, 1995.

                                 Price Range of
                                  Common Stock
                                 --------------               High        Low
                                                              ----        ---
          1995
              First Quarter                                 16 7/32    11 9/16
              Second Quarter                                25 3/4     15 7/8
              Third Quarter                                 37 1/16    25 5/8
              Fourth Quarter                                34 3/8     21 15/16
          1996
              First Quarter                                 33 1/4     23
              Second Quarter                                36 9/16    24
              Third Quarter                                 27         19 3/8
              Fourth Quarter                                36         21

          1997
              First  Quarter (through February 21, 1997)    32 5/8     26 3/8

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

                                       20

<PAGE>

Item 6.  SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>

         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.

<CAPTION>
                                                                                        Fiscal Year Ended
                                                                 -------------------------------------------------------------------
                                                                   1996          1995          1994        1993 (1)       1992 (1)
                                                                 ---------     ---------     ---------     ---------      ---------
                                                                   (in thousands, except per share amounts and number of employees)
<S>                                                              <C>           <C>           <C>           <C>            <C>
Consolidated Statements of
   Operations Data:
Net Sales                                                        $ 577,791     $ 512,248     $ 392,391     $ 385,375      $ 326,801
Gross Profit                                                       175,567       197,486       125,386        91,439         67,765
Restructuring Charge                                                    --            --            --        38,956             --
Income (Loss) Before
          Minority Interests and Equity
          in Joint Venture Income                                  100,553       101,410        54,156       (33,738)         4,263
Minority Interests in Net Income
          (Loss) of Consolidated
          Subsidiaries                                                 695         1,957         1,091       (18,977)        (9,458)
Equity in Net Income of
          Unconsolidated Joint Venture                              10,116         7,362         5,457         4,860          3,172
Net Income (Loss)                                                $ 109,974     $ 106,815     $  58,522     $  (9,901)     $  16,893

Net Income (Loss) Per Share (2)                                  $    2.07     $    2.14     $    1.27     $   (0.23)     $    0.40


Consolidated Balance Sheet Data:
Working Capital                                                  $ 142,142     $ 252,218     $ 118,230     $  97,265      $  97,894
Net Property, Plant & Equipment                                    643,706       329,174       228,883       187,267        192,051
Long-term Debt & Capital
          Lease Obligations (less current portion)                  70,000            --        16,250        29,482         27,613
Stockholders' Equity                                               697,940       574,564       331,215       255,331        248,738
Total Assets                                                     $ 938,357     $ 686,315     $ 424,095     $ 382,297      $ 355,849

Number of Employees at Year-end                                      4,101         2,915         2,635         3,497          3,090

<FN>
(1)  The results of operations  for 1993 and 1992 included the operations of the
     Company's  thin-film  head  operation.  The results of operations  for 1993
     included a $39.0 million  restructuring  charge for the winding down of the
     thin-film head operation. The net effect of the restructuring charge, after
     related  minority  interest and tax  adjustments,  was $35.4 million ($0.83
     loss per share) for 1993.

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

(3)  The Company paid no cash dividends during the five-year period.
</FN>
</TABLE>
                                       21
<PAGE>

Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

Results of Operations

Overview

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

         The  following  discussion  contains  predictions,  estimates and other
forward-looking  statements  that  involve a number of risks and  uncertainties.
While this discussion  represents the Company's  current  judgment on the future
direction  of the  business,  such risks and  uncertainties  could cause  actual
results to differ  materially  from any  future  performance  suggested  herein.
Factors that could cause actual  results to differ  include the  following:  the
rate of improvement in manufacturing  efficiencies on new products;  utilization
of manufacturing  facilities;  product transitions to next-generation  products;
industry supply-demand relationship and related pricing for high-end desktop and
enterprise  disk products;  availability  of certain  sole-sourced  raw material
supplies;  vertical  integration and consolidation  within the Company's limited
customer base; and execution of planned capacity additions.  See "Business--Risk
Factors" for more detailed discussions of the Company's risk factors.

1996 vs. 1995

         Product  transitions were significant factors in both the 1995 and 1996
fiscal years. In 1995, the Company transitioned to its then-current leading-edge
inductive  disk product  family.  Quarterly  sales and gross  margins  increased
sequentially  during 1995 from $105.1  million and 31.2%,  respectively,  in the
first quarter of 1995 to $153.5 million and 42.6%,  respectively,  in the fourth
quarter of 1995. The Company entered 1996 with continuing  strong demand for its
inductive  media  products.  Quarterly sales in excess of $150 million and gross
margins  exceeding  40% in both the first and  second  quarters  of 1996 were at
near-record  levels for the  Company.  During the third and fourth  quarters  of
1996,  the  Company  began a rapid  transition  to two  distinctly  new  product
families--proximity   media  (an  advanced   version  of  inductive  media)  and
magnetoresistive ("MR") media. Sales and gross margins decreased during the last
half of 1996 as low manufacturing yields on these new products and high usage of
production  equipment for product and process development  activities  prevented
the Company  from  fulfilling  customer  demand for the  products.  In the third
quarter of 1996,  net sales and gross  profit  decreased  to $131.5  million and
24.0%.  Net sales and gross profit were $141.2  million and 11.7% for the fourth
quarter of 1996.  During the fourth quarter of 1996, the Company achieved volume
production of MR disk  products and also  increased  the  production  volume for
proximity  products.  These two new products accounted for 54% of unit shipments
during the fourth quarter.

Net Sales

         Net sales for 1996  increased  to $577.8  million,  up 13% from  $512.2
million in 1995.  Net sales during 1996 included $6.5 million of substrate  disk
sales; no such substrate sales occurred in 1995. The

                                       22
<PAGE>

Company  may  periodically  sell  substrate  products  but  does  not  currently
anticipate  that such sales will become a  significant  portion of its  revenue.
Excluding the substrate disk sales,  net sales  increased 12% between the years.
The higher  sales  resulted  from the net effect of a 21% increase in unit sales
volume and an 8% decrease  in the overall  average  selling  price.  The overall
average  selling  price  typically  strengthens  only as the  result of  product
transitions to higher-priced,  more technologically  advanced product offerings.
Price  reductions for individual  product  offerings are  characteristic  of the
thin-film  media industry.  The Company  rapidly  transitioned to higher oersted
inductive products  throughout 1995. Unit sales of these products increased from
41% of net sales in the first  quarter of 1995 to 91% of net sales in the fourth
quarter of 1995.  Unit sales of these products  continued to exceed 90% of sales
during the first half of 1996. During the third and fourth quarters of 1996, the
Company began a transition to two new product  families--proximity  media and MR
media. The effects of price reductions on maturing  inductive disk products were
only  partially  offset  by  the  product  mix  shift  to  these  higher-priced,
next-generation products.

         In addition to sales of internally produced disk products,  the Company
resells products  manufactured by Asahi Komag Co., Ltd.  ("AKCL"),  its Japanese
joint  venture  with Asahi Glass  Company,  Ltd.  Distribution  sales of product
manufactured  by AKCL  increased  to $5.7  million in 1996 from $0.9  million in
1995. The Company  anticipates that distribution sales of AKCL-produced goods to
U.S.  customers  in 1997  will  remain  a  relatively  small  percentage  of the
Company's net sales.

         Increased  production  volume  may  occur  due  to  increased  physical
capacity  (additional  production  lines) and/or  improvements in  manufacturing
efficiencies   (improved  production   throughput  from  higher  yields,  better
equipment  utilization  or shorter  process cycle  times).  The increase in unit
production  required  to support  the  increase  in unit  sales  volume for 1996
relative  to 1995 was  primarily  achieved  through the  addition of  production
lines.  The  Company  added one new  sputtering  machine in each of March  1995,
September  1995,  January 1996,  May 1996 and November 1996. At the end of 1996,
the Company had ten and seven  production  lines in  operation  in the U.S.  and
Malaysia,  respectively.  Improvements  in process  cycle  times  only  slightly
outpaced decreases in manufacturing yields and equipment utilization between the
years and  resulted in a marginal  improvement  in  manufacturing  efficiencies.
Manufacturing  yields and  equipment  utilization  decreased  between  the years
mainly due to substantially  lower yield and utilization  rates in the last half
of 1996 on the new MR and proximity product families. Development time for these
new  products,  incurred  on  manufacturing  lines,  lowered  the  manufacturing
equipment utilization rate in the last half of 1996.

         The Company  plans to increase  production  capacity  for the first and
second quarters of 1997 through the addition of three new production  lines. One
of these lines,  the first new design  ("ND")  sputtering  machine,  will have a
rated  capacity  equal to twice the output of the Company's  existing  machines.
During the second half of 1997,  the Company  expects to add one  additional  ND
machine.


Gross Margin

         The gross margin  percentage for 1996 decreased to 30.4% from 38.6% for
1995. The  combination of an 8% decrease in the overall  average  selling price,
lower yield and equipment  utilization rates in the last half of 1996 and higher
costs associated with the production of the new MR and advanced  proximity disks
resulted in the lower gross margin percentage.  The Company anticipates that its
overall  average  selling price will likely  increase  through the first half of
1997 as it continues  to  transition  its sales mix toward these  higher-priced,
more  technologically  advanced  products.  While the Company expects  continued
yield  improvement in 1997,  the rate of yield  improvement on new products will
likely  continue to constrain  financial  results during the first half of 1997.
The Company believes gross margins will show sequential  improvement  during the
first two  quarters of 1997 and is  targeting a gross margin range of 30-35% for
the second half of the year.

                                       23
<PAGE>

Operating Expenses

         Research and development  ("R&D") expenses increased 24% ($5.6 million)
in 1996 relative to 1995.  The increase was primarily due to  development  costs
associated with  next-generation  proximity and MR media  products.  The Company
plans to increase its R&D  spending to  approximately  $50 million in 1997.  The
increase is  primarily  due to the  installation  of a  sputtering  line devoted
exclusively  to R&D  efforts,  completion  of an R&D  facility,  and  additional
staffing.  The  Company  expects  to fully test and  develop  new  products  and
processes  on  the  R&D  sputtering  line  prior  to  their   introduction  into
manufacturing.  Use of the dedicated R&D sputtering line for  large-scale  pilot
production runs will limit the use of existing  manufacturing  production  lines
for  this  purpose.   Selling,  general  and  administrative  ("SG&A")  expenses
decreased $10.9 million in 1996 compared to 1995. The decrease was primarily due
to a $12.0 million reduction in the provision for the Company's bonus and profit
sharing  programs.  Lower provisions in 1996 were primarily due to the Company's
1996  operating  profit  performance  relative to the Company's  1996  operating
profit plan.  Provisions for bad debt also  decreased  $2.5 million  between the
years.  Excluding  provisions  for bad debt and the  Company's  bonus and profit
sharing programs, SG&A expenses increased approximately $3.6 million.  Increases
in administrative costs required to support the growth in operations in both the
U.S. and Malaysia accounted for the increase.


Interest Income/Expense and Other Income

         Interest  income  increased $0.6 million (11%) in 1996 relative to 1995
primarily due to a higher average investment  balance in 1996.  Interest expense
decreased  $1.2 million in 1996 compared to 1995.  The Company repaid all of its
existing  outstanding  debt in  September  1995 and  remained  debt  free  until
November  1996. The Company  borrowed $70.0 million under its credit  facilities
during November and December 1996.  Other income  increased $0.7 million in 1996
relative to 1995 mainly due to the commencement of a royalty from AKCL for sales
AKCL made  outside of Japan.  The  royalty  began in the second half of 1996 and
amounted to $1.3 million for the year.


Income Taxes

         The  effective  income tax rate for 1996 of 17% was lower than the 1996
combined  federal and state  statutory rate of 41% and the effective  income tax
rate of 25% in 1995  primarily as a result of an initial  five-year  tax holiday
granted to the  Company's  wholly owned  thin-film  media  operation,  Komag USA
(Malaysia)  Sdn.  ("KMS"),  which  commenced in July 1993.  Assuming the Company
fulfills certain commitments under its license to operate within Malaysia,  this
initial tax holiday may be extended for an  additional  five-year  period by the
Malaysian government. The effective tax rate for 1996 was lower than the rate in
effect for 1995 primarily due to growth in the percentage of consolidated income
derived from the Company's  Malaysian  operations in 1996. The impact of the tax
holiday was to increase net income by  approximately  $21.8  million  ($0.41 per
share)  and $11.5  million  ($0.23  per  share) in 1996 and 1995,  respectively.
Losses  incurred  prior  to  the  commencement  of  this  initial  tax  holiday,
approximately  $6.2 million,  are available for  carryforward to years following
the  expiration  of this tax  holiday.  The  Company  has also been  granted  an
additional  ten-year tax holiday for new  operations  in Malaysia.  This new tax
holiday has not yet commenced at December 29, 1996.


Minority  Interest in Consolidated  Subsidiary/Equity  in  Unconsolidated  Joint
Venture

         The  minority  interest  in the net income of  consolidated  subsidiary
during 1996  represented  Kobe Steel USA Holdings  Inc.'s  ("Kobe USA") share of
Komag Material  Technology,  Inc.'s ("KMT") net income. KMT was owned 55% by the
Company and 45% by Kobe USA from November 1988 to December 1995. On December 28,
1995, the Company increased its ownership of KMT to 80% through

                                       24
<PAGE>

the purchase of KMT Common Stock  directly  from Kobe USA.  Kobe  retained a 20%
minority interest investment in KMT. KMT recorded net income of $3.5 million and
$4.3 million in 1996 and 1995, respectively.

         The Company records 50% of AKCL's net income as equity in net income of
unconsolidated  joint  venture.  AKCL  reported net income of $20.2  million for
1996, up from $14.7 million for 1995. AKCL's results included  writedowns of its
investment in Headway  Technologies,  Inc.  ("Headway") of $4.5 million and $2.2
million (net of tax) in 1996 and 1995, respectively. AKCL invested in Headway in
1994 and recorded partial  writedowns of its investment  through 1995 based upon
net losses  incurred by  Headway.  During the third  quarter of 1996,  Headway's
major customer, Hewlett-Packard Company ("HP") announced the closure of its disk
drive manufacturing  operations.  Based upon anticipated future operating losses
at Headway arising from the loss of HP's business,  AKCL wrote-off its remaining
Headway  investment  at the end of the  third  quarter  of 1996.  Subsequent  to
year-end,  AKCL sold its entire interest in Headway for $10.8 million to a group
of new investors as part of a recapitalization.  AKCL recorded the proceeds from
this sale as a gain ($5.3 million, net of tax) in the first quarter of 1997. The
Company  will  reflect  its 50% share of this net gain in the first  quarter  of
1997.

         Excluding losses related to Headway,  AKCL recorded net income of $24.7
million  in 1996,  up from  $16.9  million in 1995.  AKCL's  improved  operating
performance  in 1996 was primarily due to the  combination of an increase in the
overall  average  selling  price of its  products and a reduction in the overall
average  unit  production  cost on a  substantially  higher  unit sales  volume.
Despite the improved year-to-year results, AKCL's quarterly net income decreased
substantially  from $6.1  million in the third  quarter of 1996  (excluding  the
Headway  write-off) to $0.8 million in the fourth  quarter of 1996. The decrease
was primarily due to new product  transition issues similar to those experienced
by the Company.  Manufacturing  yield and utilization issues associated with the
product  transition  lowered AKCL's production  quantity to 2.6 million units in
the fourth quarter of 1996,  down from 4.3 million units in the third quarter of
1996.

         The Company  translates  AKCL's  yen-based  income  statements  to U.S.
dollars at the average  exchange rate in effect for each quarterly  period.  The
Japanese yen weakened  approximately  13% in 1996  relative to 1995.  AKCL's net
income would have been  approximately  $23.9  million in 1996 had the  yen-based
income statement been translated at the average rate in effect for 1995.


1995 vs. 1994

Net Sales

         Net  sales for 1995 rose to $512.2  million,  a 31%  increase  over the
$392.4 million reported in 1994. The combination of unit sales volume growth and
an increase in the overall average  selling price resulted in the  substantially
higher net sales. The Company began a rapid transition to high oersted inductive
product  offerings  in the fourth  quarter of 1994.  Unit sales of this  product
increased to 91% of unit sales volume in the fourth  quarter of 1995 from 14% of
unit sales in the fourth  quarter of 1994.  The higher sales mix of high oersted
inductive products and a favorable pricing  environment arising from an industry
shortage of this product  allowed the overall  average selling price to increase
7% in 1995 relative to 1994.  Distribution sales of product manufactured by AKCL
decreased to $0.9 million in 1995 from $9.4 million in 1994.

         The increase in unit production volume required to support the increase
in unit sales volume for 1995  relative to 1994 was primarily  achieved  through
the addition of  production  lines and  improvement  in cycle times.  Production
yields and equipment  utilization  rates were relatively  unchanged  between the
years.  Shortened  process  cycle  times  accounted  for nearly  one-half of the
increase  in unit  output  in 1995  relative  to  1994.  Net  physical  capacity
additions provided the remaining increase in unit production volume.

                                       25
<PAGE>

Gross Margin

         The gross margin  percentage  for 1995 rose to 38.6%,  up markedly from
the  32.0%  gross  margin  achieved  for  1994.  The  combination  of the  rapid
transition to high oersted  inductive  products in 1995,  strong industry demand
for this product,  and solid manufacturing  performance resulted in the improved
gross margin percentage.  The higher overall average selling price accounted for
over two-thirds of the gross margin percentage increase.  Additionally,  process
cycle time  improvements  allowed the Company to lower its overall  average unit
cost of  production  despite  the  inherently  higher  costs of  producing  more
technologically advanced inductive products.

Operating Expenses

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

Interest Income/Expense and Other Income

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

Income Taxes

         The  effective  income  tax  rate for  1995 of 25% was  lower  than the
effective  income tax rate of 30% in 1994 primarily as a result of a tax holiday
granted to the Company's  wholly owned  thin-film  media  operation in Malaysia.
Komag USA  (Malaysia)  Sdn.  has been  granted a  five-year  tax  holiday by the
Malaysian  government.  The impact of the tax holiday was to increase net income
by  approximately  $11.5 million  ($0.23 per share) and $6.4 million  ($0.14 per
share) in 1995 and 1994, respectively.

Minority  Interest in Consolidated  Subsidiary/Equity  in  Unconsolidated  Joint
Venture

         The  minority  interest  in the net income of  consolidated  subsidiary
during 1995 represented  Kobe USA's 45% share of KMT's net income.  KMT recorded
net income of $4.3 million and $2.4 million in 1995 and 1994, respectively.

         The Company records 50% of AKCL's net income as equity in net income of
unconsolidated  joint  venture.  AKCL  reported net income of $14.7  million for
1995, up from $11.0 million for 1994.  AKCL's net income  reflected  writedowns,
net of tax, of its  investment  in Headway of $2.2  million and $0.5  million in
1995 and 1994,  respectively.  The Company  translates  AKCL's  yen-based income
statements  to U.S.  dollars at the average  exchange  rate in effect during the
year. The Japanese yen  strengthened  approximately 6% in 1995 relative to 1994.
AKCL's net income would have been  approximately  $13.5  million in 1995 had the
yen-based  income  statement  been  translated at the average rate in effect for
1994.

                                       26
<PAGE>

Liquidity and Capital Resources

         Consolidated  cash and  short-term  investments of $93.2 million at the
end of 1996  decreased  substantially  from  $213.7  million at the end of 1995.
Operating  activities generated $200.9 million in cash during 1996 and partially
funded the Company's  $403.1  million of capital  spending  during the year. The
Company  borrowed  $70.0  million under its credit  facilities.  Sales of Common
Stock under the Company's  stock option and stock purchase  programs  during the
year generated $10.8 million. Working capital decreased to $142.1 million at the
end of 1996 from $252.2  million at the end of 1995.  The decrease was primarily
due to the lower cash and short-term investment balances. Trade accounts payable
and accounts  payable to related parties  increased $46.9 million as a result of
the higher  level of capital  spending in 1996.  Inventory  balances,  including
inventory  intransit  between  the  Company's  U.S.  and  Malaysian  facilities,
increased $32.9 million primarily due to the addition of offshore  manufacturing
capacity.

         Total  capital   expenditures   for  1997  are  currently   planned  at
approximately  $290 million.  The 1997 capital  spending plan includes  costs to
equip the Company's two recently completed back end manufacturing  facilities in
Penang,  Malaysia and San Jose, California.  Additionally,  the Company plans to
complete and equip a 188,000 square foot research and development facility and a
82,000 square foot administration building in San Jose, California for occupancy
in the first quarter of 1997.

         Current  noncancellable  capital commitments total approximately $104.0
million.  The Company believes that in order to achieve its long-term  expansion
objectives  and  maintain  and enhance its  competitive  position,  it will need
additional financing for capital expenditures, working capital, and research and
development.  The  Company  believes  that it will  be  able  to fund  its  1997
expenditures  through a combination  of cash generated  from  operations,  funds
available  from  existing  bank lines of credit,  and  existing  cash  balances.
However,  the Company may obtain  additional debt or equity financing in 1997 to
maintain  adequate cash reserves.  If the Company is unable to obtain sufficient
capital it could be required to reduce its capital  equipment  and  research and
development  expenditures  which  could  have a material  adverse  effect on the
Company's results of operations.

                                       27
<PAGE>






                      [This page intentionally left blank]










                                       28
<PAGE>

Item 8.  CONSOLIDATED FINANCIAL STATEMENTS

                               KOMAG, INCORPORATED

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                           Page


Report of Ernst & Young LLP, Independent Auditors                            30
Consolidated Statements of Income
     1996, 1995 and 1994                                                     31
Consolidated Balance Sheets, 1996 and 1995                                32-33
Consolidated Statements of Cash Flows,
     1996, 1995 and 1994                                                  34-35
Consolidated Statements of Stockholders' Equity,
     1996, 1995 and 1994                                                     36
Notes to Consolidated Financial Statements                                37-49





                                       29
<PAGE>


                Report of Ernst & Young LLP, Independent Auditors


The Board of Directors and Stockholders
Komag, Incorporated

     We have  audited the  accompanying  consolidated  balance  sheets of Komag,
Incorporated  as of December 29, 1996 and  December  31,  1995,  and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three  years in the period  ended  December  29,  1996.  Our audits  also
included the  financial  statement  schedule  listed in the Index at Item 14(a).
These financial  statements and schedule are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements  and  schedule  based on our audits.  We did not audit the  financial
statements  of Asahi Komag Co., Ltd. (a  corporation  in which the Company has a
50% interest) as of December 29, 1996 and December 31, 1995, and for each of the
three years in the period ended December 29, 1996.  Those  financial  statements
were audited by other  auditors whose reports have been furnished to us, and our
opinion,  insofar as it relates to data included for Asahi Komag Co., Ltd. as of
December 29, 1996 and December 31, 1995,  and for each of the three years in the
period  ended  December  29,  1996,  is based  solely on the report of the other
auditors.

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

     In our opinion,  based on our audits and the report of other auditors,  the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Komag,  Incorporated at December 29, 1996
and December 31, 1995, and the  consolidated  results of its income and its cash
flows for each of the three years in the period  ended  December  29,  1996,  in
conformity with generally accepted accounting principles.  Also, in our opinion,
the related  financial  statement  schedule,  when considered in relation to the
basic  financial  statements  taken as a whole,  presents fairly in all material
respects the information set forth therein.




                                                         ERNST & YOUNG LLP


San Jose, California
January 16, 1997

                                       30
<PAGE>
<TABLE>

                                                  KOMAG, INCORPORATED
                                           CONSOLIDATED STATEMENTS OF INCOME
                                        (In thousands, except per share amounts)
<CAPTION>

                                                                                             Fiscal Year Ended
                                                                                   -----------------------------------
                                                                                     1996          1995         1994
                                                                                   ---------    ---------    ---------

<S>                                                                                <C>          <C>          <C>      
Net sales (see Note 12)                                                            $ 577,791    $ 512,248    $ 392,391
Cost of sales (see Notes 11 and 12)                                                  402,224      314,762      267,005
                                                                                   ---------    ---------    ---------
             Gross profit                                                            175,567      197,486      125,386

Operating expenses:
   Research, development and engineering                                              29,409       23,804       21,340
   Selling, general and administrative                                                33,665       44,598       27,101
                                                                                   ---------    ---------    ---------
                                                                                      63,074       68,402       48,441
                                                                                   ---------    ---------    ---------
             Operating income                                                        112,493      129,084       76,945

Other income (expense):
    Interest income                                                                    6,437        5,802        3,306
    Interest expense                                                                    (625)      (1,856)      (2,933)
    Other, net                                                                         2,843        2,189           48
                                                                                   ---------    ---------    ---------
                                                                                       8,655        6,135          421
                                                                                   ---------    ---------    ---------
             Income before income taxes, minority
               interest and equity in joint venture income                           121,148      135,219       77,366

Provision for income taxes                                                            20,595       33,809       23,210
                                                                                   ---------    ---------    ---------
             Income before minority interest and equity
               in joint venture income                                               100,553      101,410       54,156
Minority interest in net income of
   consolidated subsidiary                                                               695        1,957        1,091
Equity in net income of unconsolidated joint venture                                  10,116        7,362        5,457
                                                                                   ---------    ---------    ---------
             Net income                                                            $ 109,974    $ 106,815    $  58,522
                                                                                   =========    =========    =========


Net income per share                                                               $    2.07    $    2.14    $    1.27
                                                                                   =========    =========    =========

Number of shares used in per share computation                                        53,132       49,905       45,994
                                                                                   =========    =========    =========
<FN>

                                    See notes to consolidated financial statements.
</FN>
</TABLE>

                                       31
<PAGE>
<TABLE>

                               KOMAG, INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                    (In thousands, except per share amounts)

<CAPTION>

                                                                   Fiscal Year End     
                                                              -------------------------
                                                                 1996          1995
                                                              ----------   ------------
<S>                                                            <C>          <C>
Assets                                                        
                                                              
Current Assets                                                
   Cash and cash equivalents                                   $  90,741    $  14,879
   Short-term investments                                          2,500      198,799
   Accounts receivable, less allowances of $3,087 in 1996     
      and $4,279 in 1995                                          55,676       61,660
   Accounts receivable from related parties                        8,449        5,034
   Inventories:                                               
      Raw materials                                               33,734       20,213
      Work-in-process                                             21,774        7,431
      Finished goods                                               6,452        1,377
                                                               ---------    ---------
         Total inventories                                        61,960       29,021
   Prepaid expenses and deposits                                  16,192        5,196
   Deferred income taxes                                          15,579        8,569
                                                               ---------    ---------
          Total current assets                                   251,097      323,158
                                                              
                                                              
Investment in Unconsolidated Joint Venture                        39,754       30,143
                                                              
                                                              
Property, Plant and Equipment:                                
   Land                                                            9,367        5,268
   Building                                                      110,991       38,357
   Leasehold improvements                                        131,737       51,088
   Furniture                                                       7,754        6,118
   Equipment                                                     673,210      443,011
                                                               ---------    ---------
                                                                 933,059      543,842
    Less allowances for depreciation and amortization           (289,353)    (214,668)
                                                               ---------    ---------
            Net property, plant and equipment                    643,706      329,174
                                                              
Deposits and Other Assets                                          3,800        3,840
                                                              
                                                               ---------    ---------
                                                               $ 938,357    $ 686,315
                                                               =========    =========
</TABLE>
                                                              
                                       32
<PAGE>
<TABLE>
<CAPTION>

                                                         Fiscal Year End
                                                    ---------------------------
                                                      1996               1995
                                                    ---------         ----------

<S>                                                  <C>               <C>
Liabilities and Stockholders' Equity

Current Liabilities
    Trade accounts payable                           $ 80,089          $ 28,717 
    Accounts payable to related parties                 3,294             7,761
    Accrued compensation and benefits                  21,835            31,966
    Other liabilities                                   1,913             2,096
    Income taxes payable                                1,824               400
                                                     --------          --------
            Total current liabilities                 108,955            70,940
                                                                     
Long-term Debt                                         70,000              --
                                                                     
Deferred Income Taxes                                  57,806            37,643
                                                                     
Other Long-term Liabilities                               497               474
                                                                     
Minority Interest in Consolidated Subsidiary            3,159             2,694
                                                                     
Commitments                                                          
                                                                     
Stockholders' Equity                                                 
   Preferred Stock, $0.01 par value per share:                       
       Authorized--1,000 shares                                      
       No shares issued and outstanding                  --                --   
   Common Stock,  $0.01 par value per share:                         
       Authorized--85,000 shares                                     
       Issued and outstanding--51,696 shares                         
           in 1996 and 50,714 shares in 1995              517               507
   Additional paid-in capital                         388,305           374,399
   Retained earnings                                  303,579           193,605
   Accumulated translation adjustment                   5,539             6,053
                                                     --------          --------
           Total stockholders' equity                 697,940           574,564
                                                                     
                                                     --------          --------
                                                     $938,357          $686,315
                                                     ========          ========
<FN>
                 See notes to consolidated financial statements.
</FN>
</TABLE>
                                       33
<PAGE>
<TABLE>

                                          KOMAG, INCORPORATED
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                                             (In thousands)
<CAPTION>

                                                                           Fiscal Year Ended
                                                                  ------------------------------------
                                                                     1996         1995         1994
                                                                  ---------    ---------    ----------
<S>                                                               <C>          <C>          <C>   
Operating Activities
Net cash provided by operating activities--
   see detail on following page                                   $ 200,892    $ 188,792    $  97,517

Investing Activities
Acquisition of property, plant and equipment                       (403,062)    (166,450)    (102,435)
Purchase of subsidiary shares from minority interest holder            --         (6,750)        --
Purchases of short-term investments                                    (163)    (177,993)     (86,402)
Proceeds from short-term investments                                196,462       50,478       90,518
Proceeds from disposal of equipment                                   1,883          916       12,072
Deposits and other assets                                              (649)         113          983
                                                                  ---------    ---------    ---------
            Net cash used in investing activities                  (205,529)    (299,686)     (85,264)

Financing Activities
Increase in notes payable                                              --           --          1,500
Payments of notes payable                                              --           --         (4,500)
Proceeds from long-term obligations                                  70,000         --           --
Payments of long-term obligations                                      --        (29,482)     (14,505)
Sale of Common Stock, net of issuance costs                          10,778      132,871       12,037
Distribution to minority interest holder                               (279)        (280)        (280)
                                                                  ---------    ---------    ---------
            Net cash provided by (used in) financing activities      80,499      103,109       (5,748)

                                                                  ---------    ---------    ---------
Increase (decrease) in cash and cash equivalents                     75,862       (7,785)       6,505

Cash and cash equivalents at beginning of year                       14,879       22,664       16,159

                                                                  ---------    ---------    ---------
               Cash and cash equivalents at end of year           $  90,741    $  14,879    $  22,664
                                                                  =========    =========    =========
</TABLE>
                                       34
<PAGE>

<TABLE>
<CAPTION>  
                                                                         Fiscal Year Ended
                                                                -----------------------------------
                                                                  1996         1995         1994
                                                                ---------    ----------   ---------

<S>                                                             <C>          <C>          <C>      
Net income                                                      $ 109,974    $ 106,815    $  58,522
Adjustments to reconcile net income to net cash
     provided by operating activities:
         Depreciation and amortization                             86,928       65,483       47,591
         Provision for losses on accounts receivable               (1,011)       1,519         (195)
         Undistributed earnings of unconsolidated
            joint venture                                         (10,117)      (7,362)      (5,457)
         Loss on disposal of equipment                                445          508        1,156
         Deferred income taxes                                     13,153       17,418        8,709
         Deferred rent                                                 23          (74)          (7)
         Minority interest in net income of
            consolidated subsidiary                                   695        1,957        1,091
         Changes in operating assets and liabilities:
             Accounts receivable                                    6,995      (18,615)      (1,649)
             Accounts receivable from related parties              (3,415)      (4,820)          73
             Inventories                                          (32,939)      (4,920)       6,981
             Prepaid expenses and deposits                            974       (2,811)       1,419
             Trade accounts payable                                51,372       10,875       (4,923)
             Accounts payable to related parties                   (4,467)       5,407       (1,072)
             Accrued compensation and benefits                    (10,131)      14,053        1,344
             Other liabilities                                       (183)         431         (809)
             Income taxes payable (refundable)                     (7,404)       2,928          630
             Restructuring liability                                 --           --        (15,887)
                                                                ---------    ---------    ---------
                    Net cash provided by operating activities   $ 200,892    $ 188,792    $  97,517
                                                                =========    =========    =========


Supplemental disclosure of cash flow information
      Cash paid for interest                                    $     340    $   2,204    $   2,892
      Cash paid for income taxes                                   13,655       13,463       12,937
      Income tax benefit from stock
           options exercised                                        3,138        3,582        2,851

<FN>

                 See notes to consolidated financial statements.
</FN>
</TABLE>
                                       35
<PAGE>
<TABLE>

                                                   KOMAG, INCORPORATED
                                     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                     (In thousands)
<CAPTION>
                                                                          
                                                   Common Stock           Additional                     Accumulated 
                                             --------------------------     Paid-in        Retained      Translation 
                                                Shares       Amount         Capital        Earnings       Adjustment
                                             ------------- ------------ ---------------- -------------- ---------------

<S>                                             <C>          <C>           <C>            <C>              <C>      
Balance at January 2, 1994                      43,532       $    436      $223,167       $ 28,268         $  3,460 
                                                                                                          
Common Stock issued under stock                                                                           
   option and purchase plans, including                                                                   
   related tax benefits                          2,268             22        14,865                       
Common Stock issued upon exercise                                                                         
   of stock warrants                                 3                            1                       
Net income                                                                                  58,522        
Accumulated translation adjustment                                                                            2,474
                                              --------       --------      --------       --------         --------
                                                                                                          
Balance at January 1, 1995                      45,803            458       238,033         86,790            5,934
                                                                                                          
Common Stock issued under stock                                                                           
   option and purchase plans, including                                                                   
   related tax benefits                          1,411             14        14,298                       
Sale of Common Stock, net of                                                                              
   issuance costs                                3,500             35       122,068                       
Net income                                                                                 106,815        
Accumulated translation adjustment                                                                              119
                                              --------       --------      --------       --------         --------
                                                                                                          
Balance at December 31, 1995                    50,714            507       374,399        193,605            6,053
                                                                                                          
Common Stock issued under stock                                                                           
   option and purchase plans, including                                                                   
   related tax benefits                            982             10        13,906                       
Net income                                                                                 109,974        
Accumulated translation adjustment                                                                             (514)
                                              --------       --------      --------       --------         --------
                                                                                                          
Balance at December 29, 1996                    51,696       $    517      $388,305       $303,579         $  5,539
                                              ========       ========      ========       ========         ========
<FN>

                                     See notes to consolidated financial statements.
</FN>
</TABLE>
                                       36
<PAGE>

                               KOMAG, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

Foreign  Exchange  Gains and Losses:  The Company  enters into foreign  currency
forward exchange contracts to reduce the impact of currency fluctuations on firm
purchase order commitments for equipment and construction-in-process.  Gains and
losses  related  to these  contracts  are  included  in the  cost of the  assets
acquired.  The Company had approximately  $10,320,000 and $17,125,000 in foreign
exchange  forward  purchase  contracts  outstanding  at  December  29,  1996 and
December 31, 1995, respectively. These forward exchange contracts were comprised
of Yen, Malaysian  Ringgit,  and Singapore Dollar foreign  currencies.  The fair
market value of these foreign  exchange  contracts was not materially  different
from the  contract  value at December 29,  1996.  The Company had  approximately
$358,000 of unhedged  Japanese  yen-based firm purchase  commitments at December
31, 1995. There were no such unhedged purchase commitments at December 29, 1996.

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

Short-Term  Investments:  The Company  invests its excess cash in  high-quality,
short-term  debt  instruments.  None of the Company's debt security  investments
have  maturities  greater than one year.  At December 29, 1996,  all  short-term
investments are designated as available for sale.  Interest and dividends on the
investments are included in interest income.

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

                                                         Fiscal Year Ended
                                                     -----------------------
                                                        1996        1995
                                                     ---------- ------------
                                                         (in thousands)
 Municipal auction rate preferred stock                 $2,500     $198,636
 Corporate debt securities                              55,618        3,062
 Mortgage-backed securities                             35,699       19,462
                                                     ---------- ------------
                                                       $93,817     $221,160
                                                     ========== ============

 Amounts included in cash and cash equivalents         $91,317      $22,361
 Amounts included in short-term investments              2,500      198,799
                                                     ---------- ------------
                                                       $93,817     $221,1 
                                                     ========== ============

                                       37
<PAGE>

There were no realized gains or losses on the Company's  investments during 1996
as all investments  were held to maturity during the year. The Company  utilizes
zero-balance  accounts and other cash  management  tools to invest all available
funds, including bank balances in excess of book balances.

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

Property, Plant and Equipment:  Property, plant and equipment are stated at cost
less accumulated depreciation and amortization.  Depreciation is computed by the
straight-line  method  over  the  estimated  useful  lives  of the  assets.  The
estimated  useful life of the  Company's  buildings is 30 years.  Furniture  and
equipment are generally depreciated over 3 to 5 years and leasehold improvements
are amortized over the shorter of the lease term or the useful life.

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

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

Stock  Compensation:  The Company has adopted Statement of Financial  Accounting
Standard No. 123,  "Accounting  for  Stock-Based  Compensation"  ("FAS 123"). In
accordance  with the  provisions of FAS 123, the Company  applies APB Opinion 25
and related  Interpretations  in  accounting  for its  stock-based  compensation
plans. Note 5 to the Consolidated Financial Statements contains a summary of the
pro forma  effects to reported  net income and  earnings  per share for 1996 and
1995 as if the Company had elected to recognize  compensation  cost based on the
fair value of the options granted at grant date as prescribed by FAS 123.

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

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

Fiscal  Year:  The  Company  uses a 52--53 week fiscal year ending on the Sunday
closest to December 31. The years ended December 29, 1996, December 31, 1995 and
January 1, 1995 were each comprised of 52 weeks.

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


NOTE 2.  SEGMENT AND GEOGRAPHIC INFORMATION

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

                                       38
<PAGE>
<TABLE>

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

                                               1996           1995           1994
                                           -----------    -----------    -----------
                                                         (in thousands)
<S>                                        <C>            <C>            <C>        
Net sales
   To customers from U.S. operations       $   316,658    $   344,218    $   315,540
   To customers from Far East operations       261,133        168,030         76,851
   Intercompany from Far East operations        75,608         25,123         16,881
   Intercompany from U.S. operations            22,232          6,683             --
                                           -----------    -----------    -----------
                                               675,631        544,054        409,272
   Eliminations                                (97,840)       (31,806)       (16,881)
                                           -----------    -----------    -----------
   Total net sales                         $   577,791    $   512,248    $   392,391
                                           ===========    ===========    ===========

Operating income
   U.S. operations                         $     9,108    $    63,755    $    52,104
   Far East operations                         107,774         67,930         25,080
                                           -----------    -----------    -----------
                                               116,882        131,685         77,184
   Eliminations                                 (4,389)        (2,601)          (239)
                                           -----------    -----------    -----------
   Total operating income                  $   112,493    $   129,084    $    76,945
                                           ===========    ===========    ===========

Identifiable assets
   U.S. operations                         $   708,436    $   573,006    $   387,907
   Far East operations                         381,015        201,915        124,048
                                           -----------    -----------    -----------
                                             1,089,451        774,921        511,955
   Eliminations                               (151,094)       (88,606)       (87,860)
                                           -----------    -----------    -----------
   Total identifiable assets               $   938,357    $   686,315    $   424,095
                                           ===========    ===========    ===========

Export sales by domestic operations included the following:

                                                      Fiscal Year Ended
                                           -----------------------------------------
                                               1996           1995           1994
                                           -----------    -----------    -----------
                                                         (in thousands)
Far East (see Note 12)                      $  249,130    $   151,000     $  133,574
Europe                                              --             --          1,258

</TABLE>
                                       39

<PAGE>

NOTE 3.  CONCENTRATION OF CUSTOMER AND SUPPLIER RISK

The Company  performs  ongoing credit  evaluations  of its customers'  financial
conditions and generally requires no collateral. Significant customers accounted
for the following percentages of net sales in 1996, 1995 and 1994:

                                             Fiscal Year Ended
                                    ------------------------------------
                                       1996        1995         1994
                                    ----------- ------------ -----------
Seagate Technology, Inc.                 52%         44%         40%
Western Digital Corporation              22%         12%         12%
Quantum Corporation/MKE                  18%         23%         23%
Hewlett-Packard Company                 -10%         15%         21%

In 1996,  Seagate  merged with Conner  Peripherals,  Inc. In  addition,  Quantum
ceased disk drive  production in Milpitas,  California and Penang,  Malaysia and
contracted  with  its  Japanese   manufacturing   partner,   Matsushita-Kotobuki
Electronics  Industries,  Ltd.  ("MKE"),  to manufacture all of its disk drives.
Percentages   for  1996,   1995  and  1994   represent  the  combined  sales  to
Seagate/Conner and Quantum/MKE.

Kobe Steel, Ltd.  ("Kobe") supplies aluminum  substrate blanks to Komag Material
Technology,  Inc. ("KMT"), and the Company in turn purchases KMT's entire output
of finished  substrates.  The Company also purchases  substantial  quantities of
finished substrates from Kobe in addition to the substrates  purchased from KMT.
In combination,  KMT and Kobe supply in excess of 95% of the Company's substrate
requirements. The Company also relies on a limited number of other suppliers, in
some  cases  a  sole  supplier,   for  certain  other   materials  used  in  its
manufacturing  processes.  These  materials  include nickel  plating  solutions,
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 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 4.  STOCKHOLDER'S EQUITY

In 1995, the Company raised  $122,100,000  from the sale of 3,500,000  shares of
Common Stock in a follow-on public stock offering.

                                       40
<PAGE>

NOTE 5.  STOCK OPTION PLANS AND STOCK PURCHASE PLAN

At December 29, 1996, the Company has stock-based  compensation plans, which are
described below. The Company has elected to follow  Accounting  Principles Board
Opinion  No.  25,  "Accounting  for  Stock  Issued  to  Employees"  and  related
Interpretations in accounting for its plans.  Accordingly,  no compensation cost
has been  recorded in the  financial  statements  for its stock option and stock
purchase plans. Had  compensation  cost for the stock-based  compensation  plans
been determined  consistent with Statement of Financial  Accounting Standard No.
123,  "Accounting  for Stock-Based  Compensation,"  the Company's net income and
earnings  per share would have been reduced to the pro forma  amounts  indicated
below:

                                                Fiscal Year Ended
                                        -------------------------------
                                          1996                  1995
                                        --------              ---------
                                            (in thousands, except per 
                                                 share amounts)
Net income:  As reported                $109,974              $106,815
             Pro forma                   102,355               103,584

EPS:         As reported                   $2.07                 $2.14
             Pro forma                      1.93                  2.08


FAS 123 is applicable only to options  granted  subsequent to December 31, 1994,
its pro forma effect will not be fully reflected until 1999.

Under the  Company's  stock  option plans  ("Plans"),  options to purchase up to
15,760,000 shares of Common Stock may be granted to key employees and directors.
The Plans provide for issuing both  incentive  stock  options and  non-qualified
stock options, both of which must be granted at fair market value at the date of
grant.  Outstanding  options  generally vest over four years and expire no later
than ten years from the date of grant.  Options may be exercised in exchange for
cash or outstanding shares of the Company's Common Stock.  Approximately  5,400,
17,000 and 11,000 shares of the Company's Common Stock were received in exchange
for option exercises in 1996, 1995 and 1994, respectively. At December 29, 1996,
approximately 2,191,000 options were available for grant and 7,936,000 shares of
Common Stock were reserved for future issuance under these Plans.  Approximately
1,917,000 and 1,487,000, of the outstanding options were exercisable at December
29, 1996 and December 31, 1995, respectively.

For purposes of the pro forma disclosure, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the  following  assumptions  used for  grants  in 1996 and  1995,  respectively:
risk-free  interest rates of 6.1% and 6.4%;  volatility  factors of the expected
market  price  of  the  Company's  Common  Stock  of  60.0%  and  59.3%;  and  a
weighted-average expected life of the options of 5.9 and 6.2 years. There was no
dividend  yield  included  in  the  calculation  as the  Company  does  not  pay
dividends.  The  weighted-average  fair value of options granted during 1996 and
1995 is $12.88 and $8.58, respectively.

                                       41
<PAGE>

A summary of stock option transactions is as follows:


                                     Shares        Exercise Price       Total
                                   --------    ---------------------   -------- 
                                               (in thousands, except
                                                 per share amounts)
Outstanding at January 2, 1994        6,382      $ 0.49    - $ 12.00   $ 48,194 
    Granted                           1,382         7.88   -   13.38     12,551
    Exercised                        (1,811)        0.49   -   12.00     (9,850)
    Cancelled                        (1,254)        2.17   -   12.00    (10,728)
                                   --------    ---------------------   -------- 
                                                                       
Outstanding at January 1, 1995        4,699         2.90   -   13.38     40,167
    Granted                           1,479        11.63   -   35.94     24,528
    Exercised                          (997)        2.90   -   12.94     (7,174)
    Cancelled                          (153)        2.90   -   25.63     (1,567)
                                   --------    ---------------------   -------- 
                                                                       
Outstanding at December 31, 1995      5,028         3.13   -   35.94     55,954
    Granted                           1,651        20.38   -   36.00     42,351
    Exercised                          (635)        3.13   -   29.81     (5,714)
    Cancelled                          (299)        8.13   -   35.25     (4,913)
                                   --------    ---------------------   -------- 
                                                                       
Outstanding at December 29, 1996      5,745       $ 3.13   - $ 36.00   $ 87,678
                                   ========    =====================   ========
                                                                    
<TABLE>

The following table summarizes  information concerning currently outstanding and
exercisable options (option shares in thousands):
<CAPTION>

                                      Options Outstanding              Options Exercisable
                       -------------------------------------------  --------------------------  
                                          Remaining
       Range of           Number          Contractual     Exercise     Number       Exercise
   Exercise Prices      Outstanding       Life (yrs)*     Price*     Exercisable     Price*
--------------------   --------------    -------------    --------  -------------  -----------
<C>                         <C>              <C>           <C>         <C>            <C>  
$3.13 - $12.00              2,838            6.0           $8.93       1,711          $9.00
12.01 -  20.00              1,015            8.1           13.33          60          16.40
20.01 -  28.00              1,581            9.1           24.46         108          21.98
28.01 -  36.00                311            9.2           31.79          38          31.46
                       ----------                                   --------    
                            5,745                                      1,917
                       ==========                                   ========    
<FN>
*Weighted-Average                        
</FN>
</TABLE>

Under the terms of the Employee  Stock  Purchase  Plan,  employees  may elect to
contribute up to 10% of their compensation  toward the purchase of shares of the
Company's  Common Stock.  The purchase price per share will be the lesser of 85%
of the fair  market  value of the  stock on the  first  day of  enrollment  in a
twenty-four  month offering  period or the last day of each  semi-annual  period
within the  twenty-four  month  offering  period.  The total number of shares of
stock that may be issued under the Plan cannot exceed 2,800,000  shares.  Shares
issued under this plan approximated  352,000,  431,000 and 469,000 in 1996, 1995
and 1994,  respectively.  At December 29, 1996  approximately  46,000  shares of
Common Stock were reserved for future issuance under this Plan.

                                       42
<PAGE>

For  purposes  of the pro forma  disclosure,  the fair  value of the  employees'
purchase  rights  has  been  estimated  using  the   Black-Scholes   model  with
assumptions  that,  except for an  expected  life of six  months  and  risk-free
interest  rates of 5.6% and 6.4% in 1996 and 1995,  were  consistent  with those
used for the Company's stock option plans described above. The  weighted-average
fair  value of those  purchase  rights  granted  in 1996 and 1995 was  $5.09 and
$6.36, respectively.


NOTE 6.  BONUS AND PROFIT SHARING PLANS

The Company and its  subsidiaries  maintain  various cash profit  sharing plans.
Under the terms of the cash profit  sharing  plans,  a percentage of semi-annual
operating  profit, as defined in the plans, is allocated among all employees who
meet certain criteria.  In 1996, under the terms of the Company's bonus plans, a
percentage of consolidated annual operating profit, as defined in the respective
bonus  plans,  was  paid to  eligible  employees.  In  1995  and  1994,  various
percentages of an operating  unit's annual operating  profit,  as defined in the
respective  bonus plans,  was paid to eligible  employees.  The Company expensed
$9,078,000, $19,990,000 and $9,083,000 under these bonus and cash profit sharing
plans in 1996, 1995 and 1994, respectively.

The Company and its  subsidiaries  maintain  savings and deferred profit sharing
plans.  Employees  who meet certain  criteria are  eligible to  participate.  In
addition  to  voluntary  employee  contributions  to these  plans,  the  Company
contributes  four  percent of  semi-annual  consolidated  operating  profit,  as
defined  in the  plans.  These  contributions  are  allocated  to  all  eligible
employees.  Furthermore,  the  Company  matches  a  portion  of each  employee's
contributions  to the  plans up to a maximum  amount.  The  Company  contributed
$5,573,000,  $6,653,000  and  $4,081,000  to the  plans in 1996,  1995 and 1994,
respectively.

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


NOTE 7.  INCOME TAXES

The provision for income taxes consists of the following:

                                       Fiscal Year Ended
                          ---------------------------------------------
                             1996             1995              1994
                           --------         --------          --------
                                         (in thousands)
Federal:
    Current                $  3,988         $ 16,496          $ 13,482
    Deferred                 10,265           14,830             4,437
                           --------         --------          --------
                             14,253           31,326            17,919
State:                                                       
    Current                     496           (1,284)              264
    Deferred                  2,888            2,588             4,272
                           --------         --------          --------
                              3,384            1,304             4,536
Foreign:                                                     
    Current                   2,958            1,179               755
                           --------         --------          --------
                                                             
                           $ 20,595         $ 33,809          $ 23,210
                           ========         ========          ========

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

                                       43
<PAGE>

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

                                                      Fiscal Year End
                                                ----------------------------
                                                   1996              1995
                                                --------           ---------
                                                       (in thousands)
Depreciation                                    $ (9,656)          $ (7,284)
State income taxes                               (11,988)            (7,295)
Deferred income                                  (25,764)           (13,588)
Other                                            (10,398)            (9,476)
                                                --------           --------
Gross deferred tax liabilities                   (57,806)           (37,643)
                                                --------           --------
                                                                  
Inventory valuation adjustments                    3,448              1,578
Accrued compensation and benefits                  2,956              2,270
State income taxes                                 5,123                901
Other                                              4,052              3,820
Tax benefit of net operating losses               35,046             34,789
                                                --------           --------
Gross deferred tax assets                         50,625             43,358
                                                --------           --------
                                                                  
Deferred tax asset valuation allowance           (35,046)           (34,789)
                                                --------           --------
                                                                  
                                                $(42,227)          $(29,074)
                                                ========           ======== 
                                                           
As of December 29, 1996, a 60%-owned  subsidiary of the Company,  Dastek Holding
Company,  has a federal tax net operating  loss  carryforward  of  approximately
$100,000,000.  The Company has fully  reserved for the potential  future federal
tax  benefit of this net  operating  loss in the  deferred  tax asset  valuation
allowance due to the fact that its  utilization  is limited to the  subsidiary's
separately computed future taxable income and that the subsidiary has no history
of  operating  profits.  The deferred tax asset  valuation  allowance  increased
$257,000,  $1,189,000  and  $7,308,000  in  fiscal  years  1996,  1995 and 1994,
respectively.  The  $100,000,000  net  operating  loss  carryforward  expires at
various dates through 2010.
<TABLE>

A reconciliation  of the income tax provision at the 35% federal  statutory rate
to the income tax provision at the effective tax rate is as follows:
<CAPTION>
                                                                     Fiscal Year Ended
                                                       ----------------------------------------------
                                                           1996            1995             1994
                                                       -------------- ----------------   ------------
                                                                        (in thousands)
<S>                                                          <C>              <C>            <C>    
Income taxes computed at federal statutory rate              $42,402          $47,327        $27,078
State and foreign income taxes, net of federal
   benefit                                                     5,021              868          2,961
Tax-exempt interest income                                    (1,193)          (1,434)          (827)
Permanently reinvested foreign earnings                      (26,050)         (12,634)        (6,473)
Other                                                            415             (318)           471
                                                       -------------- ----------------   ------------
                                                             $20,595          $33,809        $23,210
                                                       ============== ================  =============
</TABLE>

Foreign pretax income was  $104,300,000,  $65,903,000  and  $23,882,000 in 1996,
1995 and 1994, respectively.

                                       44
<PAGE>

Komag USA (Malaysia) Sdn.  ("KMS"),  the Company's  wholly owned thin-film media
operation in Malaysia,  was granted its initial tax holiday for a period of five
years commencing in July 1993. Assuming the Company fulfills certain commitments
under its license to operate  within  Malaysia,  this initial tax holiday may be
extended for an additional  five-year  period by the Malaysian  government.  The
impact  of  this  tax  holiday  was to  increase  net  income  by  approximately
$21,800,000  ($0.41  per share)  and  $11,500,000  ($0.23 per share) in 1996 and
1995,  respectively.  Losses incurred prior to the  commencement of this initial
tax holiday,  approximately $6,237,000,  are available for carryforward to years
following the  expiration of the tax holiday.  The Company has also been granted
an additional ten-year tax holiday for new operations in Malaysia.  This new tax
holiday has not yet commenced at December 29, 1996.

The Company has  generated  $163,600,000  of earnings  for which no U.S. tax has
been  provided as of December 29, 1996.  These  earnings  are  considered  to be
permanently invested outside the United States.


NOTE 8.  TERM DEBT AND LINES OF CREDIT

The Company has  borrowed  $70,000,000  under its line of credit  facilities  at
December  29,  1996.  These  borrowings  bear  interest  at 5.9% to  6.4%,  with
interest-only  payments  due  quarterly.  Principal  payments  under the line of
credit agreements are due six and twelve months after the borrowing date but may
be extended for additional one- to  twelve-month  periods through the year 2000.
The Company  intends to extend the principal  repayment and has  classified  the
principal as long-term debt.  Interest rates in effect for the extension periods
will be based upon prevailing Eurodollar,  Federal Funds and/or LIBOR rates plus
0.375% to 0.55% at the time of principal extension.

The Company's  credit  facilities  total  $175,000,000  and are comprised of two
separate four-year  revolving line of credit agreements which expire in 2000 and
two separate four-year revolving line of credit agreements which expire in 1999.
These  agreements may be extended,  subject to bank  approvals,  annually for an
additional  year, thus  perpetuating  their multi-year  tenors.  At December 29,
1996, $105,000,000 was available under these unsecured credit facilities.

Subsequent  to year-end the Company  increased  its total credit  facilities  to
$265,000,000 through the addition of a new five-year $75,000,000 term loan and a
$15,000,000  increase in an existing credit  facility.  The term loan expires in
2002.

The Company's credit facilities require  maintenance of certain financial ratios
and compliance with covenants that limit the amount of dividend payments without
the lenders'  consents.  At December 29, 1996, the Company is in compliance with
these debt covenants.


NOTE 9.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash and short-term investments,  accounts receivable and
certain other  liabilities on the Consolidated  Balance Sheets  approximate fair
value at December  29, 1996 and December  31, 1995 due to the  relatively  short
period to maturity of the instruments. Fair value of long-term debt was based on
quoted market prices or pricing models using current market rates.  The carrying
value on the Consolidated  Balance Sheet approximates fair value at December 29,
1996.

                                       45
<PAGE>

NOTE 10.  LEASES AND COMMITMENTS

The Company leases certain  production,  research and administrative  facilities
under  operating  leases that  expire at various  dates  between  1997 and 2007.
Certain of these  leases  include  renewal  options  varying from five to twenty
years.

At December 29, 1996,  the future  minimum  commitments  for all  noncancellable
operating leases are as follows (in thousands):

      1997                                            $7,682
      1998                                             7,814
      1999                                             7,003
      2000                                             6,268
      2001                                             4,995
      Thereafter                                      25,550
                                                     -------
      Total minimum lease payments                   $59,312
                                                     =======
 
Rental expense for all operating  leases amounted to $4,838,000,  $4,212,000 and
$4,319,000 in 1996, 1995 and 1994, respectively.

The Company has current  noncancellable  capital  commitments  of  approximately
$104,000,000.


NOTE 11.  KOMAG MATERIAL TECHNOLOGY, INC.

The Company's  financial  statements  include the consolidation of the financial
results of Komag Material Technology, Inc. ("KMT"), which manufactures and sells
aluminum disk substrate  products for  high-performance  magnetic storage media.
KMT is owned 80% by the Company and 20% by Kobe Steel USA Holdings  Inc.  ("Kobe
USA"), a U.S. subsidiary of Kobe Steel, Ltd. ("Kobe").

Other  transactions  between  Kobe or its  distributors  and the Company were as
follows:
                                                      Fiscal Year Ended
                                                --------------------------------
                                                  1996        1995       1994
                                                --------    --------    --------
                                                         (in thousands)
Accounts payable to Kobe or its distributors:
    Balance at beginning of year                $  3,302    $  2,234   $  2,728
       Purchases                                  53,554      34,478     34,657
       Payments                                  (54,426)    (33,410)   (35,151)
                                                --------    --------   --------
          Balance at end of year                $  2,430    $  3,302   $  2,234
                                                ========    ========   ========


NOTE 12.  UNCONSOLIDATED JOINT VENTURE

In  1987,  the  Company  formed  a  partnership,   Komag   Technology   Partners
("Partnership"),  with the  U.S.  subsidiaries  of two  Japanese  companies  and
simultaneously formed a subsidiary,  Asahi Komag Co., Ltd. ("AKCL"). The Company
contributed  technology in exchange for a 50% interest in the  Partnership.  The
Partnership and its subsidiary  (joint venture)  established a facility in Japan
to manufacture and sell the Company's  thin-film  media products in Japan.  AKCL
also sells its products to the Company for resale 

                                       46
<PAGE>

outside of Japan. In 1996, the company granted AKCL various licenses to sell its
products to specified customers outside of Japan in exchange for a 5% royalty on
these sales. The Company recorded  approximately  $1,305,000 of royalty in other
income in 1996.

The  Company's  share  of  the  joint  venture's  net  income  was  $10,116,000,
$7,362,000 and $5,457,000 in 1996, 1995 and 1994, respectively.

Other transactions between the joint venture and the Company were as follows:

                                                  Fiscal Year Ended
                                          --------------------------------
                                            1996        1995        1994
                                          --------    --------    --------
                                                   (in thousands)
Accounts receivable from joint venture:
    Balance at beginning of year          $  4,906    $     96    $    227
       Sales                                69,311      21,224       1,375
       Cash receipts                       (65,901)    (16,414)     (1,506)
                                          --------    --------    --------
          Balance at end of year          $  8,316    $  4,906    $     96
                                          ========    ========    ========

Accounts payable to joint venture:
    Balance at beginning of year          $    355    $     46    $    592
       Purchases                            12,145       5,460       9,752
       Payments                            (11,951)     (5,151)    (10,298)
                                          --------    --------    --------
          Balance at end of year          $    549    $    355    $     46
                                          ========    ========    ========


Equipment  purchases  by the  Company  from  its  joint  venture  partners  were
$20,655,000, $18,195,000 and $11,571,000 in 1996, 1995 and 1994, respectively.

                                       47
<PAGE>

Summary  combined  financial  information  for the  Partnership and AKCL for the
years ended  December 31, 1996,  1995 and 1994,  and as of December 31, 1996 and
1995 is as follows. The subsidiary's total assets, liabilities,  revenues, costs
and expenses approximate 100% of the combined totals.

                                                Fiscal Year Ended
                                          ------------------------------
                                            1996       1995       1994
                                          --------   --------   --------
                                                  (in thousands)
Summarized Income Statements:
    Net sales                             $230,904   $173,177   $131,335
    Costs and expenses                     188,707    143,766    109,674
    Provision for income taxes              21,965     14,687     10,626
                                          --------   --------   --------
                      Net Income          $ 20,232   $ 14,724   $ 11,035
                                          ========   ========   ========

                                                        Fiscal Year End
                                                      -------------------
                                                        1996       1995
                                                      --------   --------
                                                        (in thousands)
Summarized Balance Sheets:
    Current assets                                    $ 79,619   $ 52,302
    Noncurrent assets                                  129,068     99,765
                                                      --------   --------
        Total Assets                                  $208,687   $152,067
                                                      ========   ========
                                                     
    Current liabilities                               $110,239   $ 71,811
    Long-term obligations                               19,902     10,412
    Partners' capital                                   78,546     69,844
                                                      --------   --------
        Total Liabilities and Partners' Capital       $208,687   $152,067
                                                      ========   ========

NOTE 13.  PARTICIPATION IN HEADWAY TECHNOLOGIES, INC.

Headway Technologies,  Inc. ("Headway") was formed in 1994 to research,  develop
and  manufacture  advanced  magnetoresistive  ("MR")  heads for the data storage
industry.  Hewlett-Packard  Company  ("HP") and AKCL (see Note 12)  provided the
initial cash funding to Headway in exchange  for equity  interests.  The Company
and Asahi America  licensed to Headway MR technology  developed  through a prior
joint  venture and  contributed  certain  research and  production  equipment in
exchange  for equity.  As a result of these  transactions,  the  Company  held a
direct voting  interest in Headway of less than 20% and had no cost basis in its
investment in Headway.  Subsequent to year-end, the Company sold its interest in
Headway for $132,000.

AKCL  invested  in  Headway  in 1994  and  recorded  partial  writedowns  of its
investment  through 1995 based upon net losses  incurred at Headway.  During the
third quarter of 1996,  Headway's major customer,  HP,  announced the closure of
its disk drive manufacturing operations. Based upon anticipated future operating
losses at Headway  arising from the loss of HP's  business,  AKCL  wrote-off its
remaining Headway investment at the end of the third quarter of 1996. Subsequent
to year-end, AKCL sold its entire interest in Headway for $10,800,000 to a group
of new investors as part of a recapitalization.  AKCL recorded the proceeds from
this sale as a gain  ($5,300,000,  net of tax) in the first quarter of 1997. The
Company  will  reflect  its 50% share of this net gain in the first  quarter  of
1997.

                                       48
<PAGE>

<TABLE>
NOTE 14.  QUARTERLY SUMMARIES
(in thousands, except per share amounts, unaudited)
<CAPTION>
                                                                   1996
                                   --------------------------------------------------------------------
                                     1st Quarter      2nd Quarter       3rd Quarter      4th Quarter
                                   ---------------- ----------------- ---------------- ----------------
<S>                                    <C>             <C>               <C>              <C>     
Net sales                              $152,839        $152,208          $131,533         $141,211
Gross profit                             64,489          62,956            31,585           16,537
Net income                               42,504          42,560            16,498            8,412
                                                                       
Net income per share                      $0.80           $0.80             $0.31            $0.16
                                                                       
                                                                       
                                                                    1995
                                   --------------------------------------------------------------------
                                     1st Quarter      2nd Quarter       3rd Quarter      4th Quarter
                                   ---------------- ----------------- ---------------- ----------------
Net sales                              $105,063        $120,807          $132,835         $153,543
Gross profit                             32,767          46,020            53,322           65,377
Net income                               14,880          23,361            30,399           38,175
                                                                        
Net income per share                      $0.31           $0.48             $0.61            $0.72
                                                                        
</TABLE>
                                       49
<PAGE>

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

         Not Applicable.

                                    PART III

ITEMS 10, 11, 12 and 13.
<TABLE>

         Items  10  through  13 of Part  III  will be  contained  in the  Komag,
Incorporated  Proxy  Statement For the Annual Meeting of Stockholders to be held
May 14,  1997  (the  "1997  Proxy  Statement")  which  will be  filed  with  the
Securities  and  Exchange  Commission  no later than April 28,  1997.  The cross
reference table below sets forth the captions under which the responses to these
items are found:
<CAPTION>

10-K Item         Description                                   Caption in 1997 Proxy Statement
---------         -----------                                   -------------------------------

<S>               <C>                                         <C>                      
10                Directors and Executive Officers            "Item No. 1--Election of Directors:
                                                                    Nominees; Business
                                                                    Experience of Directors and
                                                                    Nominees" and "Additional     
                                                                    Information: Certain      
                                                                    Relationships and Related
                                                                    Transactions; Other Matters"

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

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

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

         The information set forth under the captions listed above, contained in
the 1997  Proxy  Statement,  are  hereby  incorporated  herein by  reference  in
response to Items 10 through 13 of this Report on Form 10-K.

                                       50
<PAGE>

                                     PART IV

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

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

         1.  Financial Statements.

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

Consolidated Statements of Income--Fiscal Years 1996, 1995 and 1994 
Consolidated Balance Sheets--December 29, 1996 and December 31, 1995
Consolidated Statements of Cash Flows--Fiscal Years 1996, 1995 and 1994
Consolidated  Statements of  Stockholders'  Equity--Fiscal  Years 1996, 1995 and
1994
Notes to Consolidated Financial Statements



         2.  Financial Statement Schedules.

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

Schedule II-Valuation and Qualifying Accounts

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

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

                                       51
<PAGE>

         3.  Exhibits.

3.1      Amended and Restated  Certificate  of  Incorporation  (incorporated  by
         reference  from a similarly  numbered  exhibit filed with the Company's
         Report on Form 10-K for the year ended December 31, 1995).

3.2      Bylaws  (incorporated  by  reference  from  Exhibit  3.3 filed with the
         Company's Report on Form 10-K for the year ended December 30, 1990).

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

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

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

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

10.1.4   Lease Agreement dated May 2, 1989 by and between Stony Point Associates
         I and Komag Material Technology,  Inc.  (incorporated by reference from
         Exhibit  10.1.6  filed with the  Company's  Report on Form 10-K for the
         year ended December 31, 1989).

10.1.5   Amendment  to Lease  Agreement  dated  December 28, 1990 by and between
         Milpitas-  Hillview  II  and  Komag,   Incorporated   (incorporated  by
         reference from Exhibit 10.1.11 filed with the Company's  Report on Form
         10-K for the year ended December 30, 1990).

10.1.6   Second  Amendment  to Lease  dated  December  28,  1990 by and  between
         Milpitas-Hillview  and Komag,  Incorporated  (incorporated by reference
         from Exhibit  10.1.12 filed with the Company's  Report on Form 10-K for
         the year ended December 30, 1990).

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

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

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

10.1.10  First  Amendment to Lease dated  November 3, 1995 by and between  Great
         Oaks Interests and Komag, Incorporated.

10.1.11  Lease Agreement  (B10) dated May 24, 1996 between  Sobrato  Development
         Companies #871 and Komag, Incorporated.

                                       52
<PAGE>

10.1.12  Lease Agreement  (B11) dated May 24, 1996 between  Sobrato  Development
         Companies #871 and Komag, Incorporated.

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

10.3.1   Joint  Venture  Agreement  by and among Komag,  Inc.,  Asahi Glass Co.,
         Ltd.,  and Vacuum  Metallurgical  Company  dated  November 9, 1986,  as
         amended January 7, 1987 and January 27, 1987 (incorporated by reference
         from  Exhibit  10.10.1  filed with the  Registration  Statement on Form
         S-1--File No. 33-13663)  (confidential treatment obtained as to certain
         portions).

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

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

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

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

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

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

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

10.3.9   Joint Development and  Cross-License  Agreement dated March 10, 1989 by
         and between Komag,  Incorporated,  Kobe Steel, Ltd., and Komag Material
         Technology,  Inc. (incorporated by reference from Exhibit 10.10.7 filed
         with the Company's  Report on Form 10-K for the year ended December 31,
         1989).

                                       53
<PAGE>

10.3.10  Blank  Sales  Agreement  dated  March 10,  1989 by and  between  Komag,
         Incorporated,  Kobe Steel,  Ltd., and Komag Material  Technology,  Inc.
         (incorporated by reference from a similarly numbered exhibit filed with
         the  Company's  Report on Form  10-K for the year  ended  December  31,
         1989).

10.3.11  Finished Substrate Agreement dated March 10, 1989 by and between Komag,
         Incorporated,  Kobe Steel,  Ltd., and Komag Material  Technology,  Inc.
         (incorporated   by  reference  from  Exhibit  10.10.9  filed  with  the
         Company's  Report on Form 10-K for the year ended  December  31,  1989)
         (confidential treatment obtained as to certain portions).

10.3.12  Stock Purchase Agreement between Komag, Incorporated and Kobe Steel USA
         Holdings Inc. dated November 17, 1995 (incorporated by reference from a
         similarly numbered exhibit filed with the Company's Report on Form 10-K
         for the year ended December 31, 1995).

10.3.13  Substrate  Agreement  by  and  between  Kobe  Steel,  Ltd.  and  Komag,
         Incorporated  dated November 17, 1995 (incorporated by reference from a
         similarly numbered exhibit filed with the Company's Report on Form 10-K
         for the year ended December 31, 1995) (confidential  treatment obtained
         as to certain portions).

10.3.14  License Amendment Agreement among Komag,  Incorporated,  Komag Material
         Technology,   Inc.  and  Kobe  Steel,  Ltd.  dated  November  17,  1995
         (incorporated by reference from a similarly numbered exhibit filed with
         the  Company's  Report on Form  10-K for the year  ended  December  31,
         1995).

10.3.15  Substrate Sales Amendment  Agreement among Komag,  Incorporated,  Komag
         Material Technology,  Inc. and Kobe Steel, Ltd. dated November 17, 1995
         (incorporated by reference from a similarly numbered exhibit filed with
         the  Company's  Report on Form  10-K for the year  ended  December  31,
         1995).

10.3.16  Joint Venture  Amendment  Agreement  among Komag,  Incorporated,  Komag
         Material  Technology,  Inc.  and Kobe  Steel USA  Holdings  Inc.  dated
         November 17, 1995  (incorporated by reference from a similarly numbered
         exhibit filed with the Company's Report on Form 10-K for the year ended
         December  31,  1995)  (confidential  treatment  obtained  as to certain
         portions).

10.4.1   Restated 1987 Stock Option Plan,  effective  January 31, 1996 and forms
         of agreement  thereunder  (incorporated  by reference  from a similarly
         numbered  exhibit filed with the Company's  report on Form 10-Q for the
         quarter ended June 30, 1996).

10.4.2   Komag,   Incorporated  1996  Management  Bonus  Plan  (incorporated  by
         reference  from a similarly  numbered  exhibit filed with the Company's
         Report on Form 10-Q for the quarter ended June 30, 1996).

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

10.4.4   Komag, Incorporated Discretionary Bonus Plan.

                                       54
<PAGE>

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

10.5.2   Amendment No. 1 to Komag, Incorporated Deferred Compensation Plan dated
         January 1, 1997.

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

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

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

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

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

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

10.11    Letter  dated   February  10,  1992  from  the   Malaysian   Industrial
         Development  Authority addressed to Komag,  Incorporated  approving the
         "Pioneer  Status" of the Company's thin- film media venture in Malaysia
         (incorporated  by reference from Exhibit 10.28 filed with the Company's
         report on Form 10-K for the year ended January 3, 1993).

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

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

10.14    First  Amendment  to  Credit  Agreement--Three  Year  Facility--by  and
         between Komag,  Incorporated and Wells Fargo Bank, N.A. (formerly First
         Interstate Bank of California)  dated March 29, 1995  (incorporated  by
         reference  from a similarly  numbered  exhibit filed with the Company's
         Report on Form 10-K for the year ended December 31, 1995).

                                       55
<PAGE>

10.15    Second  Amendment  to Credit  Agreement--Three  Year  Facility--by  and
         between Komag,  Incorporated and Wells Fargo Bank, N.A. (formerly First
         Interstate Bank of California) dated December 15, 1995 (incorporated by
         reference  from a similarly  numbered  exhibit filed with the Company's
         Report on Form 10-K for the year ended December 31, 1995).

10.16    Credit Agreement between Komag, Incorporated and The Industrial Bank of
         Japan,   Limited,   San  Francisco   Agency  dated  December  15,  1995
         (incorporated by reference from a similarly numbered exhibit filed with
         the  Company's  Report on Form  10-K for the year  ended  December  31,
         1995).

10.17    First Amendment to Credit Agreement by and between Komag,  Incorporated
         and The Industrial Bank of Japan,  Limited,  San Francisco Agency dated
         November 19, 1996.

10.18    Second Amendment to Credit Agreement by and between Komag, Incorporated
         and The Industrial Bank of Japan,  Limited,  San Francisco Agency dated
         January 31, 1997.

10.19    Credit  Agreement  between Komag,  Incorporated and The Dai-Ichi Kangyo
         Bank, Limited, San Francisco Agency dated October 7, 1996.

10.20    First Amendment to Credit Agreement between Komag, Incorporated and The
         Dai-Ichi Kangyo Bank, Limited,  San Francisco Agency dated November 25,
         1996.

10.21    Third  Amendment  to  Credit  Agreement--Three  Year  Facility--by  and
         between Komag,  Incorporated  and Wells Fargo Bank,  N.A. dated January
         31, 1997.

10.22    Credit   Agreement   dated  as  of  February   7,  1997  among   Komag,
         Incorporated,  institutional  lenders and The Industrial Bank of Japan,
         Limited, San Francisco Agency, as agent for the lenders.

11.1     Computation of Income per Share.

21       List of Subsidiaries.

23.1     Consent of Ernst & Young LLP.

23.2     Consent of Chuo Audit Corporation.

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

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

                                       56
<PAGE>

         (b) Reports on Form 8-K.

         Not Applicable

Undertaking

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

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

         The  preceding  undertaking  shall be  incorporated  by reference  into
registrant's Registration Statements on Form S-8 Nos. 33-16625 (filed August 19,
1987),  33-19851  (filed January 28, 1988),  33-25230  (filed October 28, 1988),
33-41945  (filed July 29, 1991),  33-45469  (filed  February 3, 1992),  33-53432
(filed  October 16,  1992),  33-80594  (filed June 22,  1994),  33-62543  (filed
September 12, 1995), and 333-06081 (filed June 14, 1996).

                                       57
<PAGE>

SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Milpitas, California on
this 4th day of March, 1997.

                              Komag, Incorporated

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


                                POWER OF ATTORNEY

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

                                       58
<PAGE>
<TABLE>

         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:
<CAPTION>

         Name                                                 Title                                     Date

  <S>                                                   <C>                                         <C>
  TU CHEN                                               Chairman of the Board                       March 4, 1997
-----------------------                                   and Director
  (Tu Chen)                                               


  STEPHEN C. JOHNSON                                    President, Chief Executive Officer          March 4, 1997
-----------------------
(Stephen C. Johnson)


  WILLIAM L. POTTS, JR.                                 Senior Vice President-Chief                 March 4, 1997
------------------------                                  Financial Officer and Secretary 
  (William L. Potts, Jr.)                                (Principal Financial and         
                                                          Accounting Officer)             
                                                         

  CRAIG R. BARRETT                                      Director                                    March 4, 1997
-----------------------
  (Craig R. Barrett)


  CHRIS A. EYRE                                         Director                                    March 4, 1997
-----------------------
  (Chris A. Eyre)


  IRWIN FEDERMAN                                        Director                                    March 4, 1997
-----------------------
  (Irwin Federman)


  GEORGE A. NEIL                                        Director                                    March 4, 1997
-----------------------
  (George A. Neil)


  MAX PALEVSKY                                          Director                                    March 4, 1997
-----------------------
   (Max Palevsky)


  ANTHONY SUN                                           Director                                    March 4, 1997
-----------------------
  (Anthony Sun)


  MASAYOSHI TAKEBAYASHI                                 Director                                    March 4, 1997
-----------------------
  (Masayoshi Takebayashi)


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

                                       59
<PAGE>


ITEM 14(d) FINANCIAL STATEMENT SCHEDULES
<TABLE>

                                                KOMAG, INCORPORATED

                                                    Schedule II
                                         VALUATION AND QUALIFYING ACCOUNTS
                                                   (in thousands)
<CAPTION>

Col. A                                             Col. B            Col. C          Col. D              Col. E
------                                             ------            ------          ------              ------
                                                                     Additions
                                                   Balance at        Charged to                          Balance
                                                   Beginning         Costs and                           at End
Description                                        of Period         Expenses        Deductions          of Period
-----------                                        ---------         ----------      ----------          ---------
<S>                                                 <C>               <C>            <C>                  <C>     
Year ended January 1, 1995
        Allowance for doubtful accounts             $  1,682          $   (195)      $   --               $  1,487
        Allowance for sales returns                    1,875             2,146(1)       3,285(2)               736
                                                    --------          --------       --------             --------
           Sub total                                   3,557             1,951          3,285                2,223
        Restructuring liability                       15,887(3)           --           15,887(4)              --
                                                    --------          --------       --------             --------
                                                    $ 19,444          $  1,951       $ 19,172             $  2,223
                                                    ========          ========       ========             ========
                                                                                                         
Year ended December 31, 1995                                                                             
        Allowance for doubtful accounts             $  1,487          $  1,519       $   --               $  3,006
        Allowance for sales returns                      736             2,351(1)       1,814(2)             1,273
                                                    --------          --------       --------             --------
                                                    $  2,223          $  3,870       $  1,814             $  4,279
                                                    ========          ========       ========             ========
                                                                                                         
Year ended December 29, 1996                                                                             
        Allowance for doubtful accounts             $  3,006          $ (1,011)      $     11             $  1,984
        Allowance for sales returns                    1,273             3,528(1)       3,698(2)             1,103
                                                    --------          --------       --------             --------
                                                    $  4,279          $  2,517       $  3,709             $  3,087
                                                    ========          ========       ========             ========
                                                                      
<FN>

(1)  Additions to the allowance for sales returns are netted against sales.

(2)  Actual sales returns of subsequently  scrapped product were charged against
     the allowance for sales  returns.  Actual sales returns of product that was
     subsequently  tested and shipped to another  customer were netted  directly
     against sales.

(3)  Relates  to  the  1993  restructuring  of  the  Company's   thin-film  head
     operation.

(4)  Primarily  represents  operating losses incurred during the shutdown of the
     Company's thin-film head operation.

</FN>
</TABLE>
                                       60
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


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

     We have audited the accompanying consolidated balance sheets of Asahi Komag
Co.,  Ltd.  and  subsidiary  as of December  31, 1996 and 1995,  and the related
consolidated  statements of income, cash flows, and stockholder's equity for the
years then ended. We have also audited the statements of income, cash flows, and
stockholder's  equity of Asahi Komag Co.,  Ltd. for the year ended  December 31,
1994.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements  based on our audits.  We did not audit the  financial  statements of
Headway Technologies,  Inc., a company investment accounted for using the equity
method,  which  represents  six  percent  of the  Company's  total  assets as of
December 31, 1995.  Those statements were audited by other auditors whose report
has been  provided to us and our  opinion,  insofar as it relates to the amounts
included for Headway  Technologies,  Inc.,  is based solely on the report of the
other auditors.

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

     In our opinion,  based on our audit and the report of other  auditors,  the
financial  statements referred to above present fairly, in all material respects
the consolidated  financial  position of Asahi Komag Co., Ltd. and subsidiary as
of December 31, 1996 and 1995,  and the  consolidated  results of its operations
and its cash flows for the years then ended,  and the results of operations  and
cash flows of Asahi  Komag Co.,  Ltd.  for the year ended  December  31, 1994 in
conformity  with  generally  accepted  accounting  principles  applicable in the
United States of America.

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

     The consolidated financial statements as of and for the year ended December
31,  1996 have  been  translated  into  United  States  Dollars  solely  for the
convenience  of the  reader.  Our audit  included  the  translation,  and in our
opinion such  translation  has been made in accordance  with the basis stated in
note 2g to the financial statements.

                                             CHUO AUDIT CORPORATION

Tokyo, Japan
February 21, 1997

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