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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K


|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934        
|          
|           |  | For the fiscal year ended December 28,
    2003                                                 
|          
|or        
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                                 

Commission file number 0-16852

Komag, Incorporated


(Exact name of registrant as specified in its
charter)


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

1710 Automation Parkway, San Jose, California
95131


(Address of Principal Executive Offices,
including Zip Code)


Registrants telephone number, including
area code:


(408) 576-2000


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


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

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

Common Stock, $0.01 par value


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

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

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

The
aggregate market value of voting stock held by non-affiliates of
the Registrant as of February 23, 2004, was approximately
$374,323,374 based on the closing sale price for shares of the
Registrants Common Stock (as reported by the Nasdaq
National Market for the last trading date prior to that date).
On June 29, 2003, which was the business day of the
Registrants most recently completed second quarter, the
aggregate market value of voting stock held by non-affiliates of
the Registrant was approximately $74,292,450 based on the
closing sale price of $11.99 for shares of the Registrants
common stock as reported by the Nasdaq National Market. Shares
of Common Stock held by each officer, director and holder of 5%
or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a
conclusive determination for other purposes.

On
February 23, 2004, 27,395,695 shares of the
Registrants Common Stock, $0.01 par value, were
outstanding.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN
BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS:


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

DOCUMENTS INCORPORATED BY REFERENCE

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

Komag,
Incorporated Proxy Statement for the Annual Meeting of
Stockholders to be held on May 12, 2004, Part III.



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KOMAG, INCORPORATED

TABLE OF CONTENTS TO ANNUAL REPORT ON FORM
10-K

|             |  |                                                                                           |  |      |    | 
|------------ |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|             |  |                                                                                           |  | Page
|             |  |                                                                                           |  |     
|Item 1.      |  | Business                                                                                  |  |      | 2  | 
|Item 2.      |  | Properties                                                                                |  |      | 21 | 
|Item 3.      |  | Legal Proceedings                                                                         |  |      | 21 | 
|Item 4.      |  | Submission of Matters to a
    Vote of Security Holders                                   |  |      | 21 | 
|Item 5.      |  | Market for Registrants
    Common Equity and Related Stockholder Matters                 |  |      | 23 | 
|Item 6.      |  | Selected Consolidated
    Financial Data                                                  |  |      | 24 | 
|Item 7.      |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |  |      | 26 | 
|Item 7A.     |  | Quantitative and Qualitative
    Disclosures about Market Risk                            |  |      | 36 | 
|Item 8.      |  | Consolidated Financial
    Statements and Supplementary Data                              |  |      | 37 | 
|Item 9.      |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure  |  |      | 64 | 
|Item 9A.     |  | Controls and Procedures                                                                   |  |      | 64 | 
|Item 10.     |  | Directors and Executive
    Officers                                                      |  |      | 64 | 
|Item 11.     |  | Executive Compensation                                                                    |  |      | 64 | 
|Item 12.     |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |      | 64 | 
|Item 13.     |  | Certain Relationships and Related Transactions                                            |  |      | 64 | 
|Item 14.     |  | Principal Accountant Fees and Services                                                    |  |      | 64 | 
|Item 15.     |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                      |  |      | 65 | 
|EXHIBIT 23.1
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32  



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PART I

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






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

General

We design, manufacture and market thin-film
media, or disks, that are incorporated into disk drives. We are
the worlds largest independent manufacturer of thin-film
media with a 35% market share of the total merchant disk
supplier market and 16% of the overall disk market as of the
fourth quarter of 2003 according to TrendFOCUS, a storage
research firm. Due to our market leadership and significant
research and development efforts, we have developed a deep
understanding of market needs in the disk drive market and offer
a broad portfolio of advanced solutions to address those needs.
Our customers include many of the worlds largest disk
drive manufacturers, including Hitachi Global Storage
Technologies (HGST), Maxtor Corporation (Maxtor), and Western
Digital Corporation (Western Digital).

Disks such as the ones we manufacture are
incorporated into disk drives, which are the primary storage
medium for digital data. Technology advances have greatly
increased the storage capacity of individual disks, lowering the
per gigabyte (GB) cost of storage. The lower cost of
storage has facilitated the adoption of disk drives into a broad
range of new applications, providing new areas of market growth
for disks and disk drives. High-volume, high-growth applications
for disk drives include personal computers, enterprise storage
systems, communications infrastructure and consumer electronics
appliances. The increase in storage capacity used in existing
and new applications is expected to generate increased demand
for disk drives and higher demand for disks such as those we
sell.

Industry Background



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

Increasing demand for digital data storage and
low-cost, high-performance disk drives has resulted in growing
demand for thin-film disks. According to TrendFOCUS, the total
storage capacity of all disk drives shipped grew by 91.3% on a
compounded annual basis between 1997 and 2002, reaching
8.8 million terabytes shipped in 2002. There are 1,000 GB
in a terabyte. According to IDC, the annual total storage
capacity and number of units of all hard disk drives to be
shipped between 2002 and 2007 are expected to grow at compounded
annual rates of approximately 45.1% and 10.3%, respectively. We
believe there are a number of key factors driving this demand,
including:



| |   |                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increased demand for personal computers with high
    storage capacities driven by consumer multi-media, broadband and
    wireless applications, increased business usage and
    proliferation of computers in developing economies;    
|
| |  | increased demand for enterprise storage driven by
    a broader deployment of applications which require significant
    storage capacity, such as enterprise software, data warehousing,
    data recovery, and data security operations;

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| |   |                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increased demand for new consumer electronic
    applications which require significant digital data storage
    capability, including digital video and audio recorders, video
    game platforms, emerging high-definition television
    applications, and global positioning systems.

Disk drives are the primary devices used for
storing, managing, and protecting the digital data associated
with most of these applications. According to TrendFOCUS, in the
fourth quarter of 2003, four disk drive
manufacturers  HGST, Maxtor, Seagate Technology
(Seagate), and Western Digital  accounted for 84% of
disk drive units shipped.

Disk Market

Thin-film media, or disks, are enabling
components in disk drives. The technical advances by disk
suppliers, along with those of other component suppliers, have
improved the performance and storage capacity of disk drives and
dramatically lowered the cost per GB stored. Disk suppliers help
drive technology innovation in disk drives by increasing storage
capacities per square inch of disk surface, referred to as areal
density, and improving reliability. For example, todays
areal densities allow for up to approximately 80 GB of
storage per 3 1/2-inch disk. We expect that current
technologies, including synthetic anti-ferromagnetically coupled
layers, or SAF, will soon lead to increases in areal densities
of up to approximately 160 GB of storage per
3 1/2-inch disk. We believe that other emerging
technologies, including perpendicular magnetic recording media,
or PMR, will further increase areal density.

There are significant barriers to entry to the
disk market. To succeed, we believe disk suppliers must have
strong relationships with the leading disk drive manufacturers,
the engineering expertise to enable technology leadership, the
economies of scale to achieve efficient low-cost operations and
meet customer timing and volume requirements.

From 1990 through approximately 1996, the disk
industry struggled to keep up with rapidly increasing demand.
Beginning in 1995, many companies in the disk industry undertook
aggressive expansion plans. In 1997, the widespread adoption of
magneto-resistive (MR) head technology significantly
increased areal densities, thereby allowing disk drive
manufacturers to meet consumer demand for higher capacity by
using fewer disks per drive. Despite increasing demand for disk
drives during the period from 1997 through the third quarter of
2002, this lower disk-per-drive ratio resulted in relatively
flat demand for disks during this period and substantial excess
disk production capacity. The impact of excess capacity fell
disproportionately on the independent disk manufacturers because
disk drive manufacturers, such as International Business
Machines Corp. (IBM), Maxtor and Seagate, chose to fill their
internal disk production capacity before buying from independent
disk manufacturers. As a result of these developments, much of
the overcapacity in the disk industry was consolidated or taken
out of service and most of the independent disk manufacturing
was moved abroad and away from the largest disk purchasing
companies located in the United States.

Recently, we believe supply and demand in the
disk market have come into balance. This is a result of
improving end-market demand, rationalized disk manufacturing
capacity and stabilization in the disk-per-drive ratio at
approximately one to one. As the disk drive industry has
continued to grow and demand for new products has accelerated,
leading disk drive makers increasingly rely on independent disk
suppliers for a broad range of products and to meet their
growing disk requirements. We believe only a few independent
disk suppliers remain that have the established customer
relationships, technology and scale to meet the requirements of
large disk drive manufacturers.

Competitive Strengths

We are the worlds largest, and only
U.S.-headquartered, independent supplier of disks. We believe
that our leadership position is attributable to our ability to
simultaneously drive technological advances and manufacture
high-performance products at competitive prices. Our major
competitive strengths include the following:



| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Worlds Leading Independent Disk
    Supplier.We are the worlds
    largest independent manufacturer of thin-film media with a 35%
    market share of the total merchant disk supplier market and 16%
    of the

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | overall disk market as of the fourth quarter of
    2003 according to TrendFOCUS. Due to our market leadership and
    significant research and development efforts, we have developed
    a deep understanding of market needs in the disk drive market
    and offer a broad portfolio of advanced solutions to address
    those needs. Additionally, as a market leader, we believe the
    scale of our manufacturing and our technology development
    programs provide us with competitive advantages in maintaining
    and growing our market share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Technology Leadership.We have been in the thin-film media
    business for over 20 years, during which time we have
    invested heavily in research and development. Our research and
    development team is comprised of over 350 people in the
    United States and Malaysia who are focused on developing next-
    generation products and efficient manufacturing processes.
    Recent examples of our success in technology innovation include
    being, we believe, the first independent merchant disk supplier
    to ship 80 GB disks and to transition to SAF media for
    certain 80 GB applications. Additionally, we believe we are
    currently a leader in developing next-generation technologies,
    such as perpendicular recording media (PMR) to allow us to
    stay at the forefront of technology development in the disk
    industry. We believe our research and development strategy
    allows us to design and manufacture high volumes of advanced
    disks for our customers.                                                                                                                                                                                                                                                                         
|
| |  | Strong Relationships With Top-Tier Disk Drive
    Manufacturers.We have developed
    strong relationships with many of the leading disk drive
    manufacturers, including HGST, Maxtor, and Western Digital,
    which represented approximately 55% of global disk drive sales
    in the fourth quarter of 2003 according to TrendFOCUS. We have
    entered into production agreements with Western Digital and
    Maxtor. These agreements have further strengthened our
    relationships with them as significant customers. Our San Jose,
    California headquarters and research and development operations
    are in close proximity to the design centers of many of the
    worlds largest disk drive manufacturers. Our ability to
    have our design teams work in such close proximity to our
    customers has, in part, facilitated the strong and collaborative
    customer relationships that we have established with these large
    disk drive manufacturers. We devote significant time working
    with our customers to produce disks that are highly specialized
    and customized for our customers particular technological
    requirements, and these close relationships provide added
    insight into our customers product and technology roadmaps.
|
| |  | Low-Cost, Efficient Manufacturing Operations.We believe our manufacturing
    operations located in Malaysia are among the lowest-cost in our
    industry. Our operations are located in the same region as the
    manufacturing operations of many of the worlds largest
    disk drive manufacturers. We believe the location of our
    manufacturing operations, together with our experience in the
    industry and our economies of scale, provide us with timing and
    cost advantages in delivering consistently high-quality products
    to our customers in high volumes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Broad Range of Disk Products to Address Large
    and Emerging Markets.We provide a
    broad range of disk products that are incorporated into disk
    drives for desktop, enterprise and consumer electronics
    applications. Our primary market focus has been in the desktop
    market, which TrendFOCUS estimates represented approximately 63%
    of the total disk drive market during the fourth quarter of
    2003, and the majority of the highest volume business of our
    largest customers. As our customers pursue applications and
    products in other promising growth areas, such as the enterprise
    server and consumer electronics storage markets, we believe we
    are well positioned to meet their needs based on our ability to
    produce a wide range of products with varying areal densities
    and form factors.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Experienced Management Team.Our management team has extensive
    experience in the disk and disk drive industry and has
    successfully positioned Komag as the leading thin-film media
    company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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Strategy

Our primary goal is to maintain our position as
the leading independent provider of disks. The key elements of
our strategy are as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maintain Technology Leadership.We intend to maintain and extend our
    technology leadership in the disk market by continuing to invest
    in leading-edge research and development. We intend to continue
    to focus our technology development efforts primarily on large
    and emerging market opportunities, such as high-density storage
    for personal computers, enterprise storage systems,
    communications infrastructure and consumer electronics
    appliances. We believe we have led the transition to SAF media
    for 80 GB per disk applications and are actively developing
    disks for our customers with up to 160 GB per disk. In
    August 2003, we announced a new benchmark in our proprietary PMR
    media, a next generation technology for improving areal density,
    and intend to continue to pursue new technologies such as PMR in
    an effort to achieve technological advantages over our
    competitors.                                                                                                    
|
| |  | Continue Improving Manufacturing Efficiency
    and Reducing Production Costs.We
    intend to continue improving the efficiency and quality of our
    manufacturing operations in Malaysia where we believe we can
    achieve lower costs than other disk manufacturers. We believe
    that our advanced manufacturing operations allow us to
    accelerate delivery of high volumes of reasonably priced disks,
    which enable our customers to rapidly introduce new products. As
    the leading independent disk supplier, we believe our highly
    experienced operations personnel can continue to drive yield
    improvements and reduce costs faster than our competitors. We
    believe our strategy of improving our manufacturing efficiency
    while reducing costs contributes to our customers success
    and will help grow our market share.                                                                                                                                                                                          
|
| |  | Leverage Collaborative Relationships with Disk
    Drive Manufacturers.We have
    established strong relationships with our customers, enabling us
    to participate in establishing technological and design
    requirements for new products. We believe that close technical
    collaboration with our customers and their other component
    suppliers during the design of our customers new disk
    drives facilitates integration of our disks, improves our
    ability to achieve cost-effective, high-volume manufacturing
    rapidly, and enhances the likelihood that we will remain a
    significant supplier of disks for high-performance disk drive
    products.                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Maintain a Diverse Customer Base.According to TrendFOCUS, as of the
    fourth quarter of 2003, four major disk drive manufacturers
    accounted for over 84% of worldwide disk drive sales. For the
    quarter ended December 28, 2003, our largest customers
    included HGST, Maxtor and Western Digital, which, according to
    TrendFOCUS, together represented approximately 55% of all global
    disk drive sales during the fourth quarter of 2003. In order to
    expand our market penetration and further diversify our customer
    base, we recently began production for a new major disk drive
    customer. We continue to target additional high-volume disk
    drive manufacturers and believe that our combination of
    high-performance products and competitive pricing will enable us
    to further diversify our customer mix. In combination with
    offering a broad product mix to address multiple storage
    markets, we believe this strategy will reduce our dependence on
    the success of any one customer or market.
|
| |  | Balance Capacity Growth with Customer Demand.Our strategy is to balance, in a
    cost-effective manner, our investments in new capacity with the
    expected growth in demand for our products. Our current
    production capacity is 20 million disks per quarter. We
    recently announced that we will increase our production capacity
    by approximately 20% by the end of June 2004, through capital
    expansion. We expect equipment upgrades and process improvements
    in the second half of 2004 to increase quarterly capacity to
    25 million disks per quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Technology

We believe our technological strength has allowed
us to achieve and maintain our position as the leading
independent supplier to the thin-film media market. Our
technological strength stems from the depth of our

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understanding of materials science and the
interplay between disks, heads, and other disk drive components.
Our disk manufacturing expertise is evidenced by our history of
delivering reliable products in high volume.


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

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



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

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

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

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

In order to manufacture the best possible disks
and achieve the high yields we desire, we require excellent raw
materials, including highly-polished substrates. Our polished
substrates, in conjunction with our automatic optical inspection
systems and the latest disk buff process, provide us with high
yields. At the same time, we have developed our polishing,
texturing, final test, and packaging technology to achieve low
costs for the materials and operating supplies needed to make
our disks. Finally, our multi-layer sputter process, with
nanometer-thin structures, provides magnetic stability,
mechanical durability, and corrosion resistance, which we
believe are at the forefront of our industry. To improve
durability and corrosion resistance, we have developed and
qualified advanced diamond-like carbon films specifically for
each of our sputter tools. Each method enables production of
carbon films as thin as one-tenth microinch thick with
extraordinary hardness and durability.

Research, Development, and
Engineering

Our research, development, and engineering
efforts focus on emphasizing key technology advancements in disk
functionality, reliability, quality and manufacturing
efficiency. We believe that improving yields and reducing costs
are critical to improving our overall operating results. We also
focus on emerging media storage technologies aimed at disk
designs needed several years from now.

We often partner with our customers and other
disk drive component makers in areas of technology development
such as magnetic recording heads. We believe our most advanced
longitudinal disks, that feature

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SAF-coupled layers to enhance thermal stability,
will support a recording density of up to 160 GB per disk,
which is approximately 100% higher than the most advanced disk
in production today. Further, we are continuing to develop our
proprietary PMR media, which we believe will have storage
capability of 240 to 300 GB per disk when fully developed.
We expect these advancements will be achieved with extensions of
our current production equipment, which suggests a limited need
to replace equipment to keep pace with technology improvement
during the next few years.


As of December 28, 2003, we employed over
350 people in our worldwide research and development program.
Our expenditures (and percentage of net sales) on research,
development, and engineering activities (excluding in-process
research and development), were $42.1 million (9.6%) in
fiscal 2003, $37.2 million (13%) in fiscal 2002, and
$39.5 million (14.0%) in fiscal 2001.

Products and Customers

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

Our products offer a range of coercivities, glide
height capabilities and other parameters to meet specific
customer requirements. Unit sales of 3 1/2-inch 60 GB
and 80 GB disks together represented 59% of our fourth
quarter of 2003 unit shipment volume. Sales of 3 1/2-inch
40 GB disks represented the remaining 3 1/2-inch disk
unit shipment volume in the fourth quarter of 2003. In addition,
we shipped 36 GB per platter 84 mm disks and
17 GB per platter 65 mm disks for high-end server
drives.

We manufacture substrates primarily for our own
use in finished disks. By doing so, we reduce our dependence on
third-party suppliers of substrates. If we have substrate
capacity in excess of our finished disk requirements, we have
sold, and may continue to sell, our substrates to third parties.
By selling our substrates to third parties, we better-utilize
our factories, reduce our overall cost per disk, and establish
customer relationships with disk drive manufacturers.

For the year ended December 28, 2003, our
principal customers included HGST, Maxtor and Western Digital,
who together accounted for approximately 92% of net sales in
that period. In August 2003, HGST qualified us as a
second-source provider of 80 GB SAF media for use with its
new 3 1/2-inch desktop drive. In October 2003, we announced
an expanded business relationship with Maxtor, which includes
dedicated media production capacity, a five-year supply
agreement, and the naming of Komag as a strategic external media
supplier of Maxtor. Additionally, in connection with our
acquisition of Western Digitals media operations in 1999,
we entered into a volume purchase agreement, which was extended
through April 2005. Further, in October 2003, we began volume
production of 80 GB disks for a new major disk drive
customer.

We generally make sales pursuant to purchase
orders rather than long-term contracts. These purchase orders
may be changed or canceled by customers on short notice without
significant penalty.

Competition

The market for our products is highly
competitive, and we expect competition to continue in the
future. Competitors in the thin-film media industry fall mainly
into two groups: Asian-based independent disk manufacturers and
captive disk manufacturers. Our major Asian-based independent
competitors include Fuji Electric, Hoya, Showa Denko and Trace
Storage. The captive disk manufacturers who produce thin-film
media internally for their own use include HGST, Maxtor and
Seagate. Many of these competitors have greater financial
resources, greater technical and manufacturing resources and
more extensive name recognition than us. We are the sole
U.S.-headquartered independent disk manufacturer.

Manufacturing

As of December 28, 2003, we have three
manufacturing facilities located in Penang and Sarawak, Malaysia
with a total of approximately 890,000 square feet, a large
portion of which contains Class 100 or

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better clean room environments. These facilities
have a finished units production capacity of 20 million
finished disks per quarter. We expect to increase, through
capital expansion, the manufacturing capacity of these
facilities by approximately 20% by the end of June 2004. We
expect that equipment upgrades and process improvements will
further increase quarterly capacity to 25 million units in
the second half of 2004. We intend to continue to balance, in a
cost-effective manner, our investments in new capacity with the
expected growth in demand for our products.


Maintaining low product cost is critical to our
ability to sustain profitability. The cost of our products is
sensitive to many factors, including production volume, yield,
materials and operating supplies consumed, and manufacturing
location. Our processes have required substantial investment in
equipment and factory buildings. This investment leads to a high
fixed cost structure, making our costs sensitive to changes in
production volume. Over the last several years, we have improved
our yields while advancing areal density. At the same time, we
have successfully reduced the cost of materials and operating
supplies. Further, we have consolidated our manufacturing
activities in Malaysia in order to reduce the cost of labor and
services. We believe that our production volumes, yield, and the
low cost of our Malaysian manufacturing facilities give us one
of the lowest cost structures in the industry.

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

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



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

Most of the critical process steps are conducted
in Class 100 or better clean room environments. Throughout
the process, disks are handled by highly automated equipment to
reduce contamination and enhance process precision. Minute
impurities in materials, particulate contamination or other
production

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problems can reduce production yields and, in
extreme cases, cause production to be suspended for prolonged
periods.


Environmental Regulation

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

We have from time to time upgraded our wastewater
treatment facilities to improve the performance and consistency
of our wastewater processing. Our Malaysian manufacturing
facilities located in Penang and Sarawak recently received
ISO 14001 certification. ISO 14001 is a voluntary set
of standards that provides companies with a structure for
managing the potential environmental impact of their operations.
In order to obtain ISO certification, we developed and
implemented a formal program to ensure that our manufacturing
operations are consistent with minimizing hazardous waste,
preventing pollution of air and water, and protecting the
environment.

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

Patents and Proprietary Information

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

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

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

Employees

As of December 28, 2003, on a worldwide
basis, we had 4,743 employees. Of the total, 3,941 were
full-time employees, 802 were employed on a temporary basis,
4,291 were employed in manufacturing, 358 in

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research, development, and engineering, 94 in
sales, administrative, and management positions, 377 were
employed in the United States and 4,366 were employed at
offshore facilities.


We believe that our future success will depend in
large part upon our ability to continue to attract, retain, and
motivate highly-skilled and dedicated employees. We have no
employees who are represented by a labor union, and we have
never experienced a work stoppage.

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RISK FACTORS

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

Risks Related to Our Business

We have a history of operating losses and
recently emerged from chapter 11 bankruptcy. Despite our
recent profitability during each of our four most recent fiscal
quarters, we cannot assure you that we will be able to maintain
or grow profits in the future.

We experienced substantial operating losses from
1998 to 2002. Prior to reporting net income in each of our four
most recent quarters ending December 28, 2003, our last
profitable quarter, excluding one-time credits, was the fourth
quarter of 1997. We recorded a net loss of $68.1 million
during the fiscal year ended December 31, 2000, a net loss
of $296.4 million during the fiscal year ended
December 30, 2001 and a net profit of $270.5 million
for the fiscal year ended December 29, 2002, largely
because of a gain of $396.4 million for extinguishment of
indebtedness and revaluation of assets and liabilities for
fresh-start reporting. In August 2001, after defaulting on our
debt obligations, we filed a voluntary petition for relief under
chapter 11 of the United States Bankruptcy Code. We emerged
from chapter 11 bankruptcy on June 30, 2002. Due to
the factors discussed below in this Risk Factors section,
including the very competitive, capital intensive and
historically cyclical nature of the disk and disk drive markets
upon which our business is dependent, we cannot assure you that
we will be able to sustain or grow our recent profitability.

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

The market for our products depends on economic
conditions affecting the disk drive manufacturing and related
markets, particularly the desktop personal computer market. We
believe that a substantial majority of our finished unit sales
were incorporated into disk drives manufactured by our customers
for the desktop personal computer market. Because of this
concentration in a single market, which we expect to continue,
our business is tightly linked to the success of the personal
computer market. The personal computer market has historically
been seasonal and cyclical and has experienced periods of
oversupply and reduced production levels, resulting in
significantly reduced demand for disks and pricing pressures.
The effect of these cycles on suppliers, including disk
manufacturers, has been magnified by disk drive
manufacturers practice of ordering components, including
disks, in excess of their needs during periods of rapid growth,
which increases the severity of the drop in the demand for
components during periods of reduced growth or contraction.
Accordingly, downturns in the desktop personal computer market
may cause disk drive manufacturers to delay or cancel projects,
reduce their production or reduce or cancel orders for our
products. This, in turn, may lead to longer sales cycles, delays
in payment and collection, and pricing pressures, causing us to
realize lower revenues and margins.

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

Our business is characterized by high fixed
overhead costs including expensive plant facilities and
production equipment. Our per unit costs and our gross margin
are significantly affected by the number of units we produce and
the amount of our production capacity that we utilize. Our
production capacity is currently approximately 20 million
disks per quarter. We anticipate that we will increase, through
capital expansion, our production capacity by approximately 20%
by the end of June 2004. We expect that equipment

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upgrades and process improvements will increase
quarterly capacity by an additional one million units in the
second half of 2004. If we underutilize our production capacity
for any reason including lack of customer demand or cancellation
or delay of customer orders, we could experience significantly
higher unit production costs, lower margins and potentially
significant losses. Underutilization of our production capacity
could also result in equipment write-offs, restructuring charges
and employee layoffs. For example, from our 1997 fiscal year to
the third quarter of our 2002 fiscal year, our gross margin was
severely adversely affected by our underutilization of our
capacity. If our production capacity is underutilized for any
reason, our financial results and our business would be severely
harmed.


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

We believe that we have limited capability to
further expand our production capacity using our existing
facilities to meet incremental increases in future demand for
our disk products. If demand for our products were to
significantly exceed these capacity levels, we may not be able
to satisfy this increased demand. To increase our production
capacity to meet significant increases in demand for our disks,
we would be required to expand our existing facilities,
construct new facilities or acquire entities with additional
production capacities. These alternatives would require
significant capital investments by us and would require us to
seek additional equity or debt financing. There can be no
assurance that such financing would be available to us when
needed on acceptable terms, or at all. If we were unable to
expand capacity on a timely basis to meet increases in demand,
we could lose market opportunities for sales and our market
share could decline. Further, we cannot assure you that the
increased demand for our disk products would continue for a
sufficient period of time to recoup our capital investments
associated with increasing our production capacity.

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

Our customers are disk drive manufacturers. A
relatively small number of disk drive manufacturers dominate the
disk drive market. According to TrendFOCUS, four of these
manufacturers accounted for 84% of disk drive sales during the
fourth quarter of 2003. Accordingly, we expect that the success
of our business will continue to depend on a limited number of
customers who have comparatively strong bargaining power in
negotiating contracts with us.

In fiscal 2003, 38% of our net sales were to
Western Digital, 37% were to Maxtor and 17% were to HGST. During
fiscal 2002, 61% of our net sales were to Western Digital and
30% were to Maxtor. During fiscal 2001, 59% of our net sales
were to Western Digital and 27% were to Maxtor. If any one of
our significant customers were to reduce their disk requirements
or develop or expand capacity to produce disks for internal use
and we are unable to replace these orders with sales to new
customers, our sales would be reduced and, our business would
suffer.

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

Disk drive manufacturers such as HGST, Maxtor,
and Seagate have large internal thin-film media manufacturing
operations and are able to produce a substantial percentage of
their disk requirements. We compete directly with these internal
operations when we market our products to these disk drive
companies, and indirectly when we sell our disks to customers
who must compete with vertically-integrated disk drive
manufacturers. Vertically-integrated companies have the
opportunity to keep their disk-making operations fully utilized,
thus lowering their costs of production. This cost advantage
contributes to the pressure on us and other independent disk
manufacturers to sell disks at lower prices and can severely
affect our profitability. Vertically-integrated companies are
also able to achieve a large manufacturing scale that supports
the development resources necessary to advance technology
rapidly. We may not have sufficient resources or manufacturing
scale to be able to compete effectively with these companies as
to production costs or technology development.

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

The market for our products is highly
competitive, and we expect competition to continue in the
future. Competitors in the thin-film media industry fall mainly
into two groups: Asian-based independent disk manufacturers and
captive disk manufacturers. Our major Asian-based independent
competitors include Fuji Electric, Hoya, Showa Denko and Trace
Storage. The captive disk manufacturers who produce thin-film
media internally for their own use include HGST, Maxtor and
Seagate. In late 2002, IBM entered into a joint venture with
Hitachi. The joint venture, named Hitachi Global Storage
Technologies, or HGST, includes Hitachis and IBMs
disk drive operations and a portion of IBMs thin-film
media operations, and evidences the increasing concentration and
economies of scale in our industry. Many of these competitors
have greater financial resources than we have, which could allow
them to adjust to fluctuating market conditions better than us.
Further, they may have greater technical and manufacturing
resources, more extensive name recognition, more marketing
power, a broader array of product lines and preferred vendor
status. To the extent our competitors continue to consolidate
and achieve greater economies of scale, we will face additional
competitive challenges. If we are not able to compete
successfully in the future, we would not be able to gain
additional market share for our products, or we may lose our
existing market share, and our operating results could be harmed.

Price competition may force us to lower our
prices, causing our net sales and gross margin to
suffer.

We face significant price competition in the disk
industry. High levels of competition have historically put
downward pressure on prices per unit. Additionally, the average
selling price of disks and disk drives rapidly declines over
their commercial life as a result of technological enhancements,
productivity improvements and industry supply increases. We may
be forced to lower our prices or add new products and features
at lower prices to remain competitive, and we may otherwise be
unable to introduce new products at higher prices. We cannot
assure you that we will be able to compete successfully in this
kind of price competitive environment. Lower prices would reduce
our ability to generate sales, and our gross margin would
suffer. If we fail to mitigate the effect of these pressures
through reducing the cost of our products or changing our
product mix, our net sales and gross margin could be adversely
affected.

Price declines are also affected by any
imbalances between demand and supply. For most of 2002, as in
the several years prior, disk supply exceeded demand. As
independent suppliers like us struggled to utilize their
capacity, the excess disk supply caused average selling prices
for disks to decline. Pricing pressure on component suppliers
was also compounded by high consumer demand for inexpensive
personal computers and consumer devices. In the fourth quarter
of 2002 and throughout 2003, disk prices were relatively stable,
but there is no certainty that this trend will continue. These
supply and demand factors and industry-wide competition could
adjust again and force disk prices down, which would put
pressure on our gross margin.

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

With short product life cycles and the rapid
technological change experienced in the disk drive industry, we
must frequently qualify new products with our disk drive
manufacturing customers, based on criteria such as quality,
storage capacity, performance, and price. Qualifying disks for
incorporation into new disk drive products requires us to work
extensively with the customer and the customers other
suppliers to meet product specifications. Therefore, customers
often require a significant number of product presentations and
demonstrations, as well as substantial interaction with our
senior management, before making a purchasing decision.
Accordingly, our products typically have a lengthy sales cycle,
which can range from six to twelve months or longer. During this
time, we may expend substantial financial resources and
management time and effort, while having no assurances that a
sale will result, or that disk drive programs ultimately will
result in high-volume production. To the extent we expend
significant resources to qualify products without realizing
sales, our operations will suffer.

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

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

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

We rely on a limited number of suppliers for some
of the materials and equipment used in our manufacturing
processes, including aluminum blanks, aluminum substrates,
nickel plating solutions, polishing and texturing supplies, and
sputtering target materials. For example, Kobe Steel, Ltd. is
our sole supplier of aluminum blanks, a fundamental component in
producing our disks. We also rely on OMG Fidelity, Inc. and
Heraeus Incorporated for supplies of nickel plating solutions
and sputtering target materials, respectively. The supplier base
has been weakened by the poor financial condition of the
industry in recent years, and some suppliers have exited the
business. Our production capacity would be limited if one or
more of these materials were to become unavailable or available
in reduced quantities, or if we were unable to find alternative
suppliers. For example, due to the significant growth in demand
for our disk products in the fourth quarter of 2002, our sales
were smaller during the quarter than the available market
opportunity due to our inability to acquire additional aluminum
substrates. If our sources of materials and supplies were
limited or unavailable for a significant period of time, our
production, operating results and ability to grow our business
could be adversely affected.

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

The disk industry has experienced rapid
technological change, and if we are unable to anticipate and
develop products and production technologies on a timely basis,
our competitive position could be harmed. In general, the life
cycles of disk drive programs are short. For example, between
approximately 1999 and 2002, areal density rose dramatically on
an annual basis. Additionally, disks must be more customized to
each disk drive program. Short program life cycles and
customization have increased the risk of product obsolescence,
and as a result, supply chain management, including just-in-time
delivery, has become a standard industry practice. In order to
sustain customer relationships and sustain profitability, we
must be able to develop new products and technologies in a
timely fashion that can help customers reduce their
time-to-market performance, and continue to maintain operational
excellence that supports high-volume manufacturing ramps and
tight inventory management throughout the supply chain.
Accordingly, we have invested and intend to continue to invest
heavily in our research and development program. If we cannot
respond to this rapidly changing environment or fail to meet our
customers demanding product and qualification
requirements, we will not be able to compete effectively. As a
result, we would not be able to maximize the use of our
production facilities and our profitability would be negatively
impacted.

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

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

Advances in disk drive technology require
continually lower flying heights and higher areal density. Until
recently, areal density was roughly doubling from year-to-year
and even today continues to increase rapidly, requiring
significant improvement in every aspect of disk design. These
advances require substantial on-going

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process and technology development. New process
technologies, including synthetic anti-ferromagnetic, or SAF and
perpendicular recording media, or PMR, must support
cost-effective, high-volume production of disks that meet these
ever-advancing customer requirements for enhanced magnetic
recording performance. We may not be able to develop and
implement these technologies in a timely manner in order to
compete effectively against our competitors products or
entirely new data storage technologies. In addition, we must
transfer our technology from our U.S.-based research and
development center to our Malaysian manufacturing operations. If
we cannot advance our process technologies or do not
successfully implement those advanced technologies in our
Malaysian operations, or if technologies that we have chosen not
to develop prove to be viable competitive alternatives, we would
not be able to compete effectively. As a result, we would lose
market share and face increased price competition from other
manufacturers, and our operating results would suffer.


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

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

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

Our finished disks are primarily manufactured
from aluminum substrates, which are the primary substrate used
in desktop PC and enterprise applications. Some disk
manufacturers emphasize the use of glass as a basis for the
manufacture of their disks to primarily serve the mobile
personal computer market and certain other consumer
applications. These applications are expected to achieve
significant growth in the near future. To the extent glass-based
applications were to achieve significant growth in the market
place, we may lose market share if we were unable to move
rapidly to produce glass-based disks to address the demand.

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

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

Furthermore, our ability to transfer funds from
our Malaysian operations to the United States is subject to
Malaysian rules and regulations. In 1999, the Malaysian
government repealed a regulation that restricted the amount of
dividends that a Malaysian company may pay to its stockholders.
If not repealed, this regulation would have potentially limited
our ability to transfer funds to the United States from our
Malaysian

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operations. If similar regulations are enacted in
the future, we may not be able to finance our U.S.-based
research and development and/or repay our U.S. debt obligations.


We are subject to a number of risks of conducting
business outside of the United States. Our sales to customers in
Asia, including the foreign subsidiaries of domestic disk drive
companies, account for substantially all of our net sales.
Further, while customers assemble a substantial portion of their
disk drives in Asia, they subsequently sell these products
throughout the world. Therefore, our high concentration of Asian
sales does not accurately reflect the eventual point of
consumption of the assembled disk drives. We anticipate that
international sales will continue to represent the majority of
our net sales, and as a result the success of our business is
subject to factors affecting global markets generally.

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



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

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

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

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

It is commonplace to protect technology through
patents and other forms of intellectual property rights in
technically sophisticated fields. In the disk and disk drive
industries, companies and individuals have initiated actions
against others in the industry to enforce intellectual property
rights. Although we attempt to protect our intellectual property
rights through patents, copyrights, trade secrets and other
measures, we may not be able to adequately protect our
technology. In addition, we may not be able to discover
significant infringements of our technology or successfully
enforce our rights to our technology if we discover infringing
uses by others, and such infringements could have a negative
impact on our ability to compete effectively. Competitors may be
able to develop similar technology and also may have or may
develop intellectual

16



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##### Table of Contents



property rights and enforce those rights to
prevent us from using such technologies, or demand royalty
payments from us in return for using such technologies. Either
of these events may affect our production, which could
materially reduce our revenues and harm our operating results.


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

We have occasionally received, and may receive in
the future, communications from third parties that assert
violation of intellectual property rights alleged to cover
certain of our products or manufacturing processes or equipment.
We evaluate on a case-by-case basis whether it would be
necessary to defend against such claims or to seek licenses to
the rights referred to in such communications. In certain cases,
we may not be able to negotiate necessary licenses on
commercially reasonable terms, or at all. Also, if we have to
defend such claims, we could incur significant expenses and our
managements attention could be diverted from our core
business. Further, we may not be able to anticipate claims by
others that we infringe on their technology or successfully
defend ourselves against such claims. Any litigation resulting
from such claims could have a material adverse effect on our
business and financial results.

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

Our operating results historically have
fluctuated significantly on both a quarterly and annual basis.
Additionally, as a result of our emergence from bankruptcy on
June 30, 2002, we are operating our business with a new
capital structure and have been subject to the fresh-start
reporting prescribed by generally accepted accounting
principles. Our balance sheet beginning as of June 30, 2002
reflects the application of these rules. As a result, our
operating results in any quarter may not reflect our future
performance, particularly because our financial condition and
results of operations are not comparable to those in our
historical financial statements ended prior to June 30,
2002. We believe that our future operating results will continue
to be subject to quarterly variations based on a wide variety of
factors, including:



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

17



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We cannot forecast with certainty the impact of
these and other factors on our revenues and operating results in
any future period. Our expense levels are based, in part, on
expectations as to future revenues. If our revenue levels are
below expectations, our operating results are likely to suffer.

Given our reliance on manufacturing facilities
and suppliers in Asia, another outbreak of SARS or another
infectious disease may negatively impact our operating
results.

If there is another outbreak of severe acute
respiratory syndrome (SARS) as occurred at the end of 2002 in
China, Hong Kong, Singapore, and Vietnam, such an outbreak, or
an outbreak of another such infectious disease, or the fear of
such an outbreak, could have a negative impact on our
operations. The outbreak that occurred in 2002 had an impact on
the ability of our management, sales and customer service
employees to travel between the executive and research
facilities in California, manufacturing operations in Malaysia,
and customer sites throughout Asia. Our normal operating
processes could be hindered by a number of disease-related
factors upon a future extended occurrence, including, but not
limited to:



| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | disruptions in our manufacturing facilities in
    Malaysia;                                                                  
|
| |  | disruptions at our third-party suppliers located
    in China or other affected countries;                                    
|
| |  | disruptions in our customers operations in
    Singapore, Malaysia or other affected countries;                              
|
| |  | reduced travel between our U.S.-based research
    and development facility and our Malaysian manufacturing
    locations; and
|
| |  | reduced travel between ourselves, customers, and
    suppliers.                                                               

Because of our reliance on our Malaysian
manufacturing facilities and significant distribution to
customers in Asia, if another outbreak occurs or spreads to
other areas, our sales and operating results could be harmed.

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

We have in the past and from time to time in the
future may acquire businesses, products or technologies that we
believe complement or expand our existing business. Acquisitions
involve numerous risks, including the following:



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

Acquisitions may also cause us to:



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

18



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##### Table of Contents



For example, in 2000, we acquired HMT Technology
Corporation (HMT), another disk manufacturer. As a result of the
acquisition of HMT, we acquired debt liabilities, real property
and manufacturing facilities and incurred significant
transaction costs related to the acquisition that raised our
ongoing operational expenses and fixed costs. We were unable to
utilize our increased capacity and generate sufficient revenues
to cover the increased costs and have since sold a majority of
all unused facilities.

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

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

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



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

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



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

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

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

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

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

We have protective provisions in place designed
to provide our board of directors with time to consider whether
a hostile takeover is in our best interests and that of our
stockholders. Our certificate of incorporation provides that we
have three classes of directors. As a result, a person could not
take control of the board until the third annual meeting after
the closing of the merger, since a majority of our directors
will not stand for

19



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election until that third annual meeting. This
provision could discourage potential acquisition proposals and
could delay or prevent a change in control of the company and
also could diminish the opportunities for a holder of our common
stock to participate in tender offers, including offers at a
price above the then-current market price for our common stock.
These provisions also may inhibit fluctuations in our stock
price that could result from takeover attempts.


RISKS RELATED TO OUR INDEBTEDNESS

We are leveraged, and our debt service
requirements will continue to make us vulnerable to economic
downturns and impose restrictions on our operations.

We recently completed a public common stock
offering of 4.0 million shares (of which 0.5 million
were sold by selling stockholders) and a public
$80.5 million Convertible Subordinated Notes offering. We
used the proceeds of the offerings to redeem all of our
outstanding Senior Notes. Even though we redeemed all of the
outstanding Senior Notes using the proceeds of the common stock
offering and the debt offering, we now have debt service
obligations under the Convertible Subordinated Notes. As a
result, we may be required to use a substantial portion of our
cash flow from operations to meet our obligations on our
Convertible Subordinated Notes, thereby reducing the
availability of cash flow to fund our business. Debt service
obligations arising from the offering of our Convertible
Subordinated Notes could limit our flexibility in planning for
or reacting to changes in our industry, and could limit our
ability to borrow more money for operations and implement our
business strategy in the future. In addition, our leverage may
restrict our ability to obtain additional financing in the
future. We will continue to be more leveraged than some of our
competitors, which may place us at a competitive disadvantage
because our interest and debt repayment requirements makes us
more susceptible to downturns in our business.

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

Most of our operations are conducted through, and
most of our assets are held by, our subsidiaries. Therefore, we
are dependent on the cash flow of our subsidiaries to meet our
debt obligations. Our subsidiaries are separate legal entities
that have no obligation to pay any amounts due under the
Convertible Subordinated Notes, or to make any funds available
therefore, whether by dividends, loans or other payments. Our
subsidiaries have not guaranteed the payment of the Convertible
Subordinated Notes. Except to the extent we may ourselves be a
creditor with recognized claims against our subsidiaries,
subject to any limitations contained in our debt agreements, all
claims of creditors and holders of preferred stock, if any, of
our subsidiaries will have priority with respect to the assets
of such subsidiaries over the claims of our creditors, including
holders of the Convertible Subordinated Notes.

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

The new Convertible Subordinated Notes have not
been guaranteed by our subsidiaries, and payments on the
Convertible Subordinated Notes are required to be made only by
us. We may not have direct access to the assets of our
subsidiaries unless these assets are transferred by dividend or
otherwise to us. The ability of our subsidiaries to pay
dividends or otherwise transfer assets to us is subject to
various restrictions, including restrictions under other
agreements to which we are a party under applicable law.

20



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##### Table of Contents






Item 2.     Properties

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

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

In February 2004, we acquired a substrate
facility in Malaysia, including land, a building, and equipment.
The manufacturing building is 123,000 square feet.




Item 3.     Legal
Proceedings

None.




Item 4.     Submission
of Matters to Vote of Security Holders

No matters were submitted to our stockholders
during our fourth quarter of 2003.

Executive Officers of the Registrant

The following table sets forth the name, age, and
other information regarding the Companys executive
officers as of February 29, 2004. No family relationship
exists between any of the directors or executive officers of the
Company.

|                       |  |    |  |                                                                   
|---------------------- |  | -- |  | ------------------------------------------------------------------
|Thian Hoo Tan          |  | 55 |  | Chief Executive Officer and Director                              
|Michael A. Russak      |  | 57 |  | President and Chief Technical Officer                             
|Christopher H. Bajorek |  | 60 |  | Executive Vice President, Advanced Technology                     
|Ray L. Martin          |  | 60 |  | Executive Vice President, Sales and Customer
    Service          
|Peter S. Norris        |  | 52 |  | Executive Vice President, Strategic Business
    Development      
|Kathleen A. Bayless    |  | 47 |  | Vice President, Chief Financial Officer and
    Secretary         
|Ali Dabier             |  | 45 |  | Vice President, Managing Director of Komag USA
    (Malaysia) Sdn.
|William G. Hammack     |  | 54 |  | Vice President, Human Resources                                   
|Kamran Honardoost      |  | 41 |  | Vice President, New Product Introduction and
    Design           
|Kheng Huat Oung        |  | 44 |  | Vice President, Media Operations, Komag USA
    (Malaysia) Sdn.   
|Tsutomu T. Yamashita   |  | 49 |  | Vice President, Process Development                               

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

21



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##### Table of Contents



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

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

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

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

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

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

Mr. Hammackjoined our company in June 2002, as
Vice President, Human Resources. He previously held the title of
Vice President, Human Resources at Zambeel, Inc. from 2001 to
2002. Prior to that, he served as Vice President, Human
Resources at QRS Corporation from 1999 to 2001. From 1982 to
1999, he served as Vice President, Human Resources at General
Electric Medical Systems/Diasonics. Mr. Hammack holds a
B.A. degree from San Diego State University.

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

Mr. Oungjoined
our company in 1992 as a Manufacturing Supervisory Engineer for
our first manufacturing facility in Penang, Malaysia. A year
later, he was promoted to the position of Polish Texture
Manager, and

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subsequently became the operations Director in
1997 after leading various operations functions in the company.
He was promoted to General Manager for the Penang Operations in
1999, and was promoted to vice President in February 2004.
Before joining our company, he was the Manufacturing Engineering
Manager with Loda Electronics Sdn. Bhd., Penang. Mr. Oung
holds a B.E. degree in Electrical Engineering from the
University of New South Wales, Australia.


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

PART II




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

On June 30, 2002, we emerged from
chapter 11 bankruptcy, and all of the outstanding shares of
our common stock were cancelled as required under the approved
plan of reorganization. On that date, we issued new shares of
our common stock. During the period from July 1, 2002 to
July 9, 2002, our new common stock was not traded.
Beginning on July 10, 2002, the new shares of our common
stock began trading on the OTC Bulletin Board under the symbol
KOMGQ, and on February 25, 2003, our common stock began
trading on the Nasdaq National Market under the symbol KOMG.

The following table sets forth, for the periods
indicated, the high and low closing sale prices for our new
common stock, as reported by the OTC Bulletin Board from
July 10, 2002 through February 24, 2003, and the
Nasdaq National Market from February 25, 2003.

|     |                                                  |      |   |       |  |  |   |       | 
|---- | ------------------------------------------------ | ---- | - | ----- |  |  | - | ----- | 
|     |                                                  | High |   | Low  
|     |                                                  |      |   |      
|2002 |                                                  |      |   |       |  |  |   |      
|     | First Quarter                                    |      | $ | 0.05  |  |  | $ | 0.01  | 
|     | Second Quarter                                   |      |   | 0.03  |  |  |   | 0.01  | 
|     | Third Quarter (beginning July 10)                |      |   | 5.00  |  |  |   | 2.30  | 
|     | Fourth Quarter                                   |      |   | 4.62  |  |  |   | 2.50  | 
|2003 |                                                  |      |   |       |  |  |   |      
|     | First Quarter (through February 24)              |      |   | 5.90  |  |  |   | 4.33  | 
|     | First Quarter (February 25 through
    March 30) |      |   | 7.50  |  |  |   | 6.09  | 
|     | Second Quarter                                   |      |   | 11.99 |  |  |   | 7.15  | 
|     | Third Quarter                                    |      |   | 18.00 |  |  |   | 11.49 | 
|     | Fourth Quarter                                   |      |   | 20.93 |  |  |   | 13.52 | 

As of February 23, 2004, there were
27,395,695 shares of our common outstanding held by 67 holders.

Dividend Policy

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

23



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##### Table of Contents






Item 6.     Selected
Consolidated Financial Data

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

|                                                                                                      |  |              |         |              |  |   |               |   |                             |  |      |         |      |  |   |          |   |  |   |         |   |  |   |          |  
|----------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ------------ |  | - | ------------- | - | --------------------------- |  | ---- | ------- | ---- |  | - | -------- | - |  | - | ------- | - |  | - | -------- | -
|                                                                                                      |  |              |         |              |  |   |               |   |                            
|                                                                                                      |  | Successor    |         | Successor    |  |   | Predecessor   |   | Predecessor Company        
|                                                                                                      |  | Company      |         | Company      |  |   | Company       |   |                            
|                                                                                                      |  |              |         |              |  |   |               |   |                            
|                                                                                                      |  | Fiscal Year  |         | Six Months   |  |   | Six Months    |   | Fiscal Year Ended          
|                                                                                                      |  | Ended        |         | Ended        |  |   | Ended         |   |                            
|Consolidated Statements of Operations Data                                                            |  | 2003         |         | Dec 29, 2002 |  |   | June 30, 2002 |   | 2001                        |  | 2000 |         | 1999
|                                                                                                      |  |              |         |              |  |   |               |   |                             |  |      |         |     
|Net sales                                                                                             |  | $            | 438,292 |              |  | $ | 174,749       |   |                             |  | $    | 111,955 |      |  | $ | 282,613  |   |  | $ | 358,463 |   |  | $ | 331,946  |  
|Gross profit (loss)                                                                                   |  |              | 107,422 |              |  |   | 31,740        |   |                             |  |      | 1,558   |      |  |   | (6,740   | ) |  |   | 30,740  |   |  |   | (23,891  | )
|Restructuring/impairment charges(3)(5)(7)(9)(10)                                                      |  |              |        |              |  |   | 34,763        |   |                             |  |      | 4,318   |      |  |   | 57,430   |   |  |   | 5,293   |   |  |   | 187,965  |  
|Operating income (loss)(1)(3)(5)(7)(9)(10)(11)                                                        |  |              | 49,419  |              |  |   | (36,380       | ) |                             |  |      | (27,674 | )    |  |   | (145,927 | ) |  |   | (39,275 | ) |  |   | (291,030 | )
|Interest expense(8)(11)                                                                               |  |              | 13,153  |              |  |   | 6,553         |   |                             |  |      |        |      |  |   | 155,192  |   |  |   | 45,428  |   |  |   | 23,319   |  
|Other income, net(4)                                                                                  |  |              | 250     |              |  |   | 2,150         |   |                             |  |      | 397,009 |      |  |   | 3,771    |   |  |   | 4,824   |   |  |   | 1,493    |  
|Reorganization costs, net                                                                             |  |              |        |              |  |   |              |   |                             |  |      | 6,511   |      |  |   | 6,066    |   |  |   |        |   |  |   |         |  
|Income (loss) before cumulative effect of
    change in accounting principle(1)(2)(3)(5)(7)(8)(9)(10) |  |              | 36,040  |              |  |   | (41,919       | ) |                             |  |      | 359,924 |      |  |   | (296,395 | ) |  |   | (68,058 | ) |  |   | (283,049 | )
|Cumulative effect of change in accounting
    principle (6)                                           |  |              |        |              |  |   |              |   |                             |  |      | (47,509 | )    |  |   |         |   |  |   |        |   |  |   |         |  
|Net income
    (loss)(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)                                              |  | $            | 36,040  |              |  | $ | (41,919       | ) |                             |  | $    | 312,415 |      |  | $ | (296,395 | ) |  | $ | (68,058 | ) |  | $ | (283,049 | )
|Basic net income (loss) per share(12)                                                                 |  | $            | 1.53    |              |  | $ | (1.84         | ) |                             |  |      |        |      |  |   |         |   |  |   |        |   |  |   |         |  
|Diluted net income (loss) per share(12)                                                               |  | $            | 1.47    |              |  | $ | (1.84         | ) |                             |  |      |        |      |  |   |         |   |  |   |        |   |  |   |         |  
|                                                                                                      | 
|                                                                                                      | 
|                                                                                                      |  |              |         |              |  |   |               |   |                            
|                                                                                                      |  |              |         |              |  |   |               |   | Predecessor Company        
|                                                                                                      |  | Successor    |         | Successor    |  |   |               |   |                            
|                                                                                                      |  | Company      |         | Company      |  |   |               |   |                            
|                                                                                                      |  |              |         |              |  |   |               |   | As of the Fiscal Year Ended
|                                                                                                      |  | As of        |         | As of        |  |   |               |   |                            
|Consolidated Balance Sheet Data                                                                       |  | Dec 28, 2003 |         | Dec 29, 2002 |  |   |               |   | 2001                        |  | 2000 |         | 1999
|                                                                                                      |  |              |         |              |  |   |               |   |                             |  |      |         |     
|Property, plant and equipment, net, and land and
    buildings held for sale                          |  | $            | 184,536 |              |  | $ | 221,014       |   |                             |  |      |         |      |  | $ | 256,856  |   |  | $ | 354,873 |   |  |   | $313,455 |  
|Total assets                                                                                          |  |              | 347,807 |              |  |   | 317,200       |   |                             |  |      |         |      |  |   | 407,850  |   |  |   | 633,061 |   |  |   | 475,871  |  
|Current portion of long-term debt                                                                     |  |              | 20,247  |              |  |   | 10,229        |   |                             |  |      |         |      |  |   |         |   |  |   | 216,740 |   |  |   | 260,000  |  
|Long-term debt (less current portion)                                                                 |  |              | 95,801  |              |  |   | 129,923       |   |                             |  |      |         |      |  |   |         |   |  |   | 137,545 |   |  |   | 22,891   |  
|Liabilities subject to compromise                                                                     |  |              |        |              |  |   |              |   |                             |  |      |         |      |  |   | 516,173  |   |  |   |        |   |  |   |         |  
|Stockholders equity (deficit)                                                                        |  | $            | 166,588 |              |  | $ | 127,960       |   |                             |  |      |         |      |  | $ | (144,939 | ) |  | $ | 151,861 |   |  |   | $ 78,713 |  



---



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Results of operations for 2003 included a
    $3.0 million gain on the sale of idle equipment and
    properties.                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (2) | Net income for 2003 included an income tax
    benefit of $0.8 million related to withholding taxes
    previously accrued which are no longer payable as a result of a
    tax exemption.                                                                                                                                                                                                                                                                                                                           
|
| | (3) | Results of operations for the six months ended
    December 29, 2002 included a $33.9 million impairment
    charge related to the write-off of all remaining goodwill, in
    accordance with Statement of Financial Accounting Standards
    (SFAS) No. 142, Goodwill and Other Intangible Assets
    (SFAS No. 142).                                                                                                                                                                                              
|
| | (4) | Results of operations for the six months ended
    June 30, 2002, included other income of $379.0 million
    associated with the extinguishment of liabilities subject to
    compromise as of June 30, 2002, and other income of
    $17.3 million to revalue the Companys assets and
    liabilities at June 30, 2002, to fair value as prescribed
    by fresh-start reporting under Statement of Position 90-7
    (SOP 90-7), Financial Reporting by Entities in
    Reorganization Under the Bankruptcy Code.

24



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##### Table of Contents





| |     |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (5) | Results of operations for the six months ended
    June 30, 2002, included a $4.3 million
    restructuring/impairment charge in connection with the shutdown
    of the Companys research and development facility in Santa
    Rosa, California,                                                                                                                                                                 
|
| | (6) | Results of operations for the six months ended
    June 30, 2002, included a $47.5 million transitional
    impairment loss under SFAS No. 142. The loss was recognized
    as the cumulative effect of a change in accounting principle in
    the Companys consolidated statement of operations.                                                                                                                 
|
| | (7) | Results of operations for 2001 included a
    $45.8 million impairment charge related to the write-down
    of land and buildings held for sale, a $4.4 million
    impairment charge related to manufacturing equipment no longer
    in service, and restructuring charges of $7.2 million
    primarily related to lease obligations on equipment no longer in
    service and additional facility closure costs.
|
| | (8) | Results of operations for 2001 included a
    $99.1 million interest expense charge related to accretion
    to bring the subordinated convertible notes up to their full
    face value of $230.0 million.                                                                                                                                                                                                         
|
| | (9) | Results of operations for 2000 included a net
    $5.3 million restructuring charge, including an
    $8 million charge in connection with the ceasing of the
    Companys Santa Rosa manufacturing operations, less a net
    $2.7 million reversal of charges previously accrued for the
    1997, 1998, and 1999 restructurings.                                                                                



|     |                                                                                                                                                                                                                                                                                                                                                                                                   
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Results of operations for 1999 included
    $143.7 million in restructuring charges and a
    $44.3 million impairment charge. The restructuring charges
    related primarily to the closing of the Companys
    U.S. manufacturing operations. The impairment charge
    related to the write-down of goodwill, which originated from the
    acquisition of Western Digitals media operation.
|    
|(11) | In accordance with SOP 90-7, we did not record
    interest expense on our outstanding debt during the chapter 11
    proceedings from August 24, 2001, through June 30,
    2002.                                                                                                                                                                                                                
|    
|(12) | Earnings per share of the Predecessor Company are
    not presented, as the amounts are not meaningful.                                                                                                                                                                                                                                                                                           

25



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

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

Results of Operations



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

Our net sales are driven by the level of demand
for disks by disk drive manufacturers and the average selling
prices of our disks. Demand for our disks is dependent on unit
growth in the disk drive market, the growth of storage capacity
in disk drives, which affects the number of disks needed per
drive, and the number of disks our customers purchase from
external suppliers. Average selling prices are dependent on
overall supply and demand for disks and our product mix.

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

Adverse conditions in the disk market, which
began in mid-1997, impacted our business through the first half
of 2002. Disk drive demand grew rapidly during the mid-1990s,
and industry forecasts were for continued strong growth. In
1996, along with many of our competitors including both
independent disk manufacturers and captive disk manufacturers
owned by vertically integrated disk drive companies, we
committed to expansion programs that substantially increased
disk-manufacturing capacity by the end of 1997. Our expansion
was principally financed with debt. In 1997, the rate of growth
in demand for disk drives fell. Further, technology advances
provided by magneto-resistive recording heads allowed the disk
drive manufacturers to use fewer heads and disks to achieve
desired drive capacity, further reducing demand for disks.

Due to excess capacity in the industry, weakening
demand for disks and pricing pressures, we began to focus on
consolidating our U.S.-based manufacturing operations into
Malaysia from 1999 through 2001. After all operations were
consolidated into Malaysia, we continued to focus on fully
utilizing the capacity in our Malaysian operations.

Even though we were able to lower costs as a
result of consolidating manufacturing in Malaysia, we continued
to service a large debt balance incurred during our expansion,
which became due in June 2001. As a result, in August 2001,
after defaulting on our debt obligations, we filed a voluntary
petition for relief under chapter 11 of the United States
Bankruptcy Code, or chapter 11. Our plan of reorganization
was confirmed by the bankruptcy court on May 9, 2002. In
accordance with SOP 90-7, we adopted fresh-start reporting
and reflected the effects of the adoption in the consolidated
financial statements for the period ended June 30, 2002.
The plan became effective and we emerged from chapter 11 on
June 30, 2002.

While operating under chapter 11, we expanded our
customer base and continued to invest heavily in research and
development to maintain our technological leadership. We believe
that we emerged from bankruptcy with a more competitive capital
structure. Additionally, the shift of high-volume production to
our cost-advantaged Malaysian manufacturing plants has improved
our overall cost structure, resulting in lower unit production
costs. Our headquarters located in San Jose, California is
focused solely on activities related to research, process
development, and product prototyping. Our selling, general, and
administrative functions also remain in California.

26



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##### Table of Contents



As a result of the adoption of fresh-start
reporting, the results of operations for periods ended after
June 30, 2002 are prepared on a different basis of
accounting. Therefore, the results of operations prior to
June 30, 2002 (predecessor company) are not comparable to
the periods after June 30, 2002 (successor company).

The following discussion compares the results of
operations for the fiscal year ended December 28, 2003, to
the results of operations for the fiscal year ended
December 29, 2002, and compares the results of operations
for the fiscal year ended December 29, 2002, to the results
of operations for the fiscal year ended December 30, 2001.
To facilitate an understanding of this discussion, we have
provided the table below. The table shows our results of
operations for the 2003, 2002, and 2001 fiscal years. Results of
operations for 2002 include the combined income statement
activity of the successor company and the predecessor company,
and are not intended to be a presentation in accordance with
accounting principles generally accepted in the United States of
America.

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

|                                                                        |                                                                              |              |         |              |  |              |          |         |  |   |         |          |  
|----------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------ | ------- | ------------ |  | ------------ | -------- | ------- |  | - | ------- | -------- | -
|                                                                        |                                                                              | Year Ended   |         | Year Ended   |  | Year Ended  
|                                                                        |                                                                              | Dec 28, 2003 |         | Dec 29, 2002 |  | Dec 30, 2001
|                                                                        |                                                                              |              |         |              |  |             
|Net sales                                                               |                                                                              | $            | 438,292 |              |  | $            | 286,704  |         |  | $ | 282,613 |         
|Cost of sales                                                           |                                                                              |              | 330,870 |              |  |              | 253,406  |         |  |   | 289,353 |         
|                                                                        |                                                                              |              |         |              |  |              |          |         |  |   |         |         
|                                                                        | Gross profit (loss)                                                          |              |         | 107,422      |  |              |          | 33,298  |  |   |         | (6,740   | )
|Research, development, and engineering expense                          |                                                                              |              | 42,085  |              |  |              | 37,196   |         |  |   | 39,546  |         
|Selling, general, and administrative expense                            |                                                                              |              | 18,939  |              |  |              | 17,739   |         |  |   | 19,929  |         
|Amortization of goodwill                                                |                                                                              |              |        |              |  |              |         |         |  |   | 22,797  |         
|Gain on disposal of assets                                              |                                                                              |              | (3,021  | )            |  |              | (3,448   | )       |  |   | (515    | )       
|Impairment charges related to goodwill                                  |                                                                              |              |        |              |  |              | 33,870   |         |  |   |        |         
|Restructuring charges                                                   |                                                                              |              |        |              |  |              | 5,211    |         |  |   | 57,430  |         
|In-process research and development                                     |                                                                              |              |        |              |  |              | 6,784    |         |  |   |        |         
|Interest income                                                         |                                                                              |              | (524    | )            |  |              | (325     | )       |  |   | (1,528  | )       
|Interest expense                                                        |                                                                              |              | 13,153  |              |  |              | 6,553    |         |  |   | 155,192 |         
|Other income, net                                                       |                                                                              |              | (250    | )            |  |              | (399,159 | )       |  |   | (3,771  | )       
|Reorganization costs, net                                               |                                                                              |              |        |              |  |              | 6,511    |         |  |   | 6,066   |         
|Provision for (benefit from) income taxes                               |                                                                              |              | 1,000   |              |  |              | 1,987    |         |  |   | (9,433  | )       
|Minority interest/ equity interest in net loss of
    related companies |                                                                              |              |        |              |  |              | 2,374    |         |  |   | 3,942   |         
|                                                                        |                                                                              |              |         |              |  |              |          |         |  |   |         |         
|                                                                        | Income (loss) before cumulative effect of change
    in accounting principle |              |         | 36,040       |  |              |          | 318,005 |  |   |         | (296,395 | )
|Cumulative effect of change in accounting
    principle                 |                                                                              |              |        |              |  |              | (47,509  | )       |  |   |        |         
|                                                                        |                                                                              |              |         |              |  |              |          |         |  |   |         |         
|                                                                        | Net income (loss)                                                            |              | $       | 36,040       |  |              | $        | 270,496 |  |   | $       | (296,395 | )
|                                                                        |                                                                              |              |         |              |  |              |          |         |  |   |         |         



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



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

Net sales for 2003 were $438.3 million, an
increase of $151.6 million from net sales of
$286.7 million in 2002. The improvement was attributable
primarily to increased finished disk sales, an improved finished
disk average selling price, and increased other disk sales.

Finished disk shipments in 2003 increased to
69.7 million units, a 46.1% increase compared to
47.7 million units in 2002. The increase primarily
reflected an overall improvement in market conditions that began
in the third quarter of 2002, market share gains, and our early
qualification on new advanced programs.

27



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##### Table of Contents



The finished disk average selling price improved
to $5.65 in 2003 compared to $5.61 in 2002. The overall
improvement in market conditions resulted in a more stable
pricing environment in 2003.

Other disk sales, which are comprised of plated
polished aluminum substrates, textured substrates, and
single-sided disks, were $44.6 million in 2003 compared to
$19.3 million in 2002. The increase reflected higher demand
from customers in fiscal 2003. Disk substrate sales vary from
period to period based on customer requirements.

Based on current customer demand, we expect total
revenue for the first quarter of 2004 to be similar to the
fourth quarter of 2003. Historically, we have experienced a
seasonal slowdown from our fourth quarter to our first quarter.
However, we expect the seasonal slowdown to be offset by a
fourteenth week in the first quarter of 2004, compared to the
standard thirteen weeks. (Our 2004 fiscal year will contain
53 weeks. Accordingly, the first quarter of 2004 will be
comprised of fourteen weeks, and all other quarters of 2004 will
include thirteen weeks.)

In 2003, Western Digital accounted for
approximately 38% of net sales, Maxtor accounted for 37% of net
sales, HGST accounted for 17% of net sales, and sales to other
customers were approximately 8% of net sales. In 2002, Western
Digital accounted for approximately 61% of net sales, Maxtor
accounted for 30% of net sales, and sales to other customers
were less than 10% of net sales.

We expect to continue to derive a substantial
portion of our sales from Western Digital, Maxtor, and HGST, and
from a small number of other customers. In order to expand our
market penetration and further diversify our customer base, we
recently began production for a new major disk drive customer.
We are actively targeting additional high-volume disk drive
manufacturers, and believe that our technology leadership, broad
range of products, and competitive pricing will enable us to
diversify further our customer mix.



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

Our overall gross profit percentage of 24.5% in
2003 was 12.9 points higher than our overall 2002 gross profit
percentage of 11.6% in 2002. The economies of scale associated
with higher sales and production volumes in 2003, as well as
lower variable costs in 2003, significantly lowered our cost per
disk, and accounted for 12.2 points of the improvement.
Additionally, the overall improvement in average finished disk
average selling price accounted for 0.7 points of the gross
profit percentage improvement.

We expect slightly lower variable costs per unit
in 2004 compared to 2003 while continuing to advance our
technology. We expect our fixed cost per unit in 2004 to vary
based on changes in production volumes from 2003.



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

Research, development, and engineering (R&D)
expenses were $42.1 million in 2003, a $4.9 million
increase compared to $37.2 million in 2002. The increase
primarily reflected increased headcount and related compensation
expenses. We expect R&D spending in 2004 to be, as a
percentage of net sales, similar to 2003 levels.



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

Selling, general, and administrative (SG&A)
expenses were $18.9 million in 2003, a $1.2 million
increase over $17.7 million in 2002. The increase primarily
reflected higher professional and consulting fees. We expect
selling, general, and administrative expenses in 2004 to be, as
a percentage of net sales, similar to 2003 levels.



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

Gain on disposal of assets in 2003 was
$3.0 million, and primarily included a $1.0 million
gain on the sale of our Fremont, California land and buildings
and the sale of idle manufacturing equipment. Gain on disposal
of assets in 2002 was $3.4 million, and primarily reflected
the sale of idle manufacturing equipment.

28



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##### Table of Contents





| |                                           
| | ------------------------------------------
| | Impairment Charges Related to
    Goodwill

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



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

Restructuring charges of $5.2 million in
2002 included $4.3 million related to the closure of the
Companys Santa Rosa, California, research and development
facility, Komag Material Technology (KMT) in the second quarter
of 2002, $0.9 million related to professional fees
associated with the chapter 11 bankruptcy case, and Exit
Facility fees.



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

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



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

Interest expense increased by $6.6 million
in 2003, from $6.6 million in 2002 to $13.2 million in
2003. We recorded a full year of interest expense in 2003. In
2002, we recorded interest expense on our new debt for the
second half of 2002 subsequent to our emergence from chapter 11
bankruptcy on June 30, 2002.



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

Other income, net in 2003 was $0.3 million.
Other income, net in 2002 was $399.2 million, and primarily
included a net gain of $396.4 million associated with the
chapter 11 cancellation of liabilities subject to
compromise and fresh-start reporting, and a net
$2.2 million property tax refund.



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

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

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



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

Our wholly-owned thin-film media operation, KMS,
received an eight-year extension of its tax holiday, which
expired in June 2003, for its first plant site. The extension
extends the tax holiday through June 2011. KMS has also been
granted additional tax holidays for its second and third plant
sites in Malaysia. These tax holidays are effective through
December 2006 and 2008, respectively. The extended tax holiday
granted to KMSs first plant site applies to income
generated by new products using new technologies. In 2003, the
tax holiday increased the Companys net income by
approximately $21.2 million ($0.90 per basic share and
$0.86 per diluted share). In 2002, the tax holiday decreased the
Companys net loss by approximately $7.1 million
($0.31 per basic and diluted share) for the second six months of
2002, and increased net income by approximately
$1.1 million for the first six months of 2002.

KMS recorded tax expense of $1.5 million in
2003 related to the sale of old technology product no longer
covered under the extended tax holiday at our first plant site.
We utilized $5.4 million of Malaysian capital

29



---



##### Table of Contents



allowances and net operating loss carryforwards
($1.5 million tax-effected). Upon emergence from bankruptcy
on June 30, 2002, we provided a full valuation allowance
against all tax assets; therefore, upon utilization of the
capital allowances and net operating loss carryforwards in the
fourth quarter of 2003, a reduction of $1.5 million was
made to intangible assets. The $1.5 million adjustment
reduced the volume purchase agreement by $1.5 million.


In 2003, we received approval from the Malaysian
government for the exemption of withholding tax on royalty
payments made by our Malaysian operations to our subsidiary in
the Netherlands. The exemption is for a period of five years
effective retroactively from January 2002 through December 2006.
As a result, we recorded a net income tax benefit of
$0.6 million related to withholding taxes we previously
accrued. These withholding taxes are no longer payable.

An additional income tax expense of
$0.1 million in 2003 pertained to foreign taxes.

Income tax expense of $2.0 million in 2002
represented foreign withholding taxes on royalty and interest
payments



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

In April 2002, we purchased Kobe Steel USA
Holdings, Inc.s (Kobe USA) 20% share of KMT in
exchange for certain idle assets. The purchase increased our
ownership percentage of KMT to 100%. In the third quarter of
2002, we closed the KMT operation.

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



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

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

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



| |                 
| | ----------------
| | 2002 versus 2001



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

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

Our average selling price declined to $5.61 in
2002 compared to $6.16 in 2001. The decrease was primarily
related to our efforts to increase market share, as well as
continued general pricing pressure from customers due to excess
capacity for the majority of 2002. With the strength of the
fourth quarter 2002 shipments and customer demand, and migration
of sales to new advanced products, our average selling price in
the fourth quarter of 2002 increased slightly from the third
quarter of 2002.

30



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##### Table of Contents



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

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

Gross
Profit

Our overall gross profit percentage of 11.6% in
2002 was 14.0 points higher than our overall 2001 gross loss
percentage of 2.4% in 2001. The economies of scale associated
with higher sales and production in the second half of 2002
significantly lowered our cost per disk, and accounted for 24.1
points of the increase. However, the higher sales volume was
offset by the lower average selling price, which accounted for a
decline of 10.1 points.

Research,
Development, and Engineering

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

Selling,
General, and Administrative

SG&A expenses were $17.7 million in
2002, a $2.2 million decrease over $19.9 million in
2001. The decrease is primarily related to lower headcount and
payroll-related cost, which were partially offset by stock
compensation expense, which was not applicable in 2001.

Amortization of
Goodwill

Amortization of goodwill was zero in 2002 and
$22.8 million in 2001. The decrease reflected the cessation
of amortization of goodwill beginning in January 2002, in
accordance with SFAS 142.

Gain on Disposal
of Assets

Gain on disposal of assets was $3.4 million
in 2002, compared to $0.5 million in 2001. Asset sales in 2002
and 2001 primarily reflected the sale of idle manufacturing
equipment.

Impairment
Charges Related to Goodwill

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

Restructuring/
Impairment Charges

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

31



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##### Table of Contents



We did not record impairment charges in 2002.
Impairment charges of $50.2 million in 2001 included a
$35.4 million write-down of land and buildings held for
sale in Eugene, Oregon, and Fremont, California in the second
quarter, and an additional $10.4 million write-down on the
same properties in the fourth quarter. The impairment
write-downs resulted from currently-depressed market conditions
for commercial real estate, and were based on an independent
valuation (net of estimated selling costs). We also recorded
$4.4 million of impairment charges for manufacturing
equipment no longer in service in 2001.

In-Process
Research and Development

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

Interest
Expense

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

Other Income,
Net

Other income in 2002 was $399.2 million, and
primarily included a net gain of $396.4 million associated
with the chapter 11 cancellation of liabilities subject to
compromise and fresh-start reporting, and a net
$2.2 million property tax refund.

Other income of $3.8 million in 2001
primarily included $2.0 million in refunds for
manufacturing work not completed by vendors, $0.7 million
in cash received on a note receivable that had been written off,
and $0.6 million in realized gain on cumulative translation
adjustments. The remaining $0.5 million primarily
represented other miscellaneous income.

Reorganization
Costs, Net

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

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

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

Income
Taxes

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

In 2002, the tax holidays at our wholly-owned
thin-film media operation, KMS, increased our net income by
$8.2 million. The tax holidays had no impact on our net
losses in 2001.

32



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##### Table of Contents



Minority/ Equity
Interest in Net Loss of Related Companies

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

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

Cumulative
Effect of Change in Accounting Principle

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

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

Critical Accounting Policies

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

Allowance for
Sales Returns

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

Since estimated sales returns are recorded as a
reduction in revenues, any significant difference between our
estimated and actual experience or changes in our estimate would
be reflected in our reported revenues in the period we determine
that difference.



| |                  
| | -----------------
| | Long-lived Assets

Long-lived assets are evaluated as one group for
impairment whenever events or changes in circumstances indicate
that these assets may be impaired or the estimated useful lives
are no longer appropriate. We consider the primary indicators of
impairment to include significant decreases in unit volumes,
unit prices or significant increases in production costs. We
review our long-lived assets for impairment based on estimated
future undiscounted cash flows attributable to the assets. In
the event that these cash flows are not expected to be
sufficient to recover the recorded value of the assets, the
assets are written down to their estimated fair values utilizing
discounted estimates of future cash flows. The discount rate
used is based on the estimated incremental borrowing rate at the
date of the event that triggers the impairment.

In October 2003, we sold our idle Fremont,
California land and building. The land and buildings had been
valued at $23.6 million. We recognized a gain of
approximately $1.0 million on the sale.

33



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##### Table of Contents



Inventory
Obsolescence

Our policy is to maintain an inventory
obsolescence reserve based upon an estimated obsolescence
percentage applied to the inventory based on age, historical
trends, and requirements to support forecasted sales. In
addition, and as necessary, we may establish specific reserves
for future known or anticipated events. The reserve for
inventory obsolescence was approximately $2.6 million at
December 28, 2003 and $1.7 million at
December 29, 2002.

Liquidity and Capital Resources

Cash and cash equivalents of $70.1 million
at the end of the 2003 fiscal year increased by
$46.5 million from the end of the 2002 fiscal year. The
increase primarily reflected a $76.2 million increase
resulting from consolidated operating activities,
$26.8 million in proceeds from the sale of assets, and
$0.6 million from sales of stock, offset by
$30.8 million in debt repayments, $25.9 million of
spending on property, plant, and equipment, and
$0.4 million in intangible asset acquisitions.

Consolidated operating activities generated
$76.2 million in cash in 2003. The primary components of
this change include the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | net income of $36.0 million, net of non-cash
    depreciation and amortization of property, plant and equipment
    of $38.6 million, $6.7 million of non-cash interest
    expense, $3.8 million of non-cash amortization of
    intangible assets, $1.5 million in non-cash income tax
    expense, and $2.0 million of amortization of deferred
    stock-based compensation, less a $3.0 million gain on asset
    disposals;
|
| |  | an accounts receivable increase of
    $14.4 million primarily due to increased sales in the
    fourth quarter of 2003 compared to the fourth quarter of 2002;                                                                                                                                                                                                                                                                  
|
| |  | an inventory increase of $10.6 million for
    certain key materials and finished unit inventory to support
    first quarter 2004 sales;                                                                                                                                                                                                                                                                                        
|
| |  | an accounts payable increase of $4.7 million
    related to the inventory increase; and                                                                                                                                                                                                                                                                                                                                          
|
| |  | an accrued expenses and other liabilities
    increase of $11.3 million, which primarily reflected higher
    salary and incentive compensation accruals.                                                                                                                                                                                                                                                                        

In 2003, we spent $25.9 million on capital
equipment purchases to improve our manufacturing and research
and development capabilities, and repaid $30.8 million of debt.
We received $26.8 million in proceeds from the sale of idle
land, buildings, and manufacturing equipment. Sales of assets
vary from quarter to quarter; however, we have sold the majority
of our idle assets.

At December 28, 2003, our long-term debt
obligations, operating lease obligations, and unconditional
purchase obligations, were as follows (in thousands):

|                                      |                                    |      |        |        |  |      |        |        |  |      |        |            |  |       |        |        |  |   |     |     |  |   |   |   |  |   |         |         | 
|------------------------------------- | ---------------------------------- | ---- | ------ | ------ |  | ---- | ------ | ------ |  | ---- | ------ | ---------- |  | ----- | ------ | ------ |  | - | --- | --- |  | - | - | - |  | - | ------- | ------- | 
|                                      |                                    | 2004 |        | 2005   |  | 2006 |        | 2007   |  | 2008 |        | Thereafter |  | Total
|                                      |                                    |      |        |        |  |      |        |        |  |      |        |            |  |      
|Long-Term Debt Obligations(1)         |                                    | $    | 20,247 |        |  | $    | 20,259 |        |  | $    | 20,271 |            |  | $     | 55,163 |        |  | $ | 108 |     |  | $ |  |   |  | $ | 116,048 |        
|Operating Lease Obligations(2)        |                                    |      | 3,952  |        |  |      | 3,482  |        |  |      | 3,341  |            |  |       | 415    |        |  |   | 5   |     |  |   |  |   |  |   | 11,195  |        
|Unconditional Purchase Obligations(3) |                                    |      | 2,240  |        |  |      | 730    |        |  |      | 140    |            |  |       |       |        |  |   |    |     |  |   |  |   |  |   | 3,110   |        
|                                      |                                    |      |        |        |  |      |        |        |  |      |        |            |  |       |        |        |  |   |     |     |  |   |   |   |  |   |         |        
|                                      | Total Contractual Cash Obligations |      | $      | 26,439 |  |      | $      | 24,471 |  |      | $      | 23,752     |  |       | $      | 55,578 |  |   | $   | 113 |  |   | $ |  |  |   | $       | 130,353 | 
|                                      |                                    |      |        |        |  |      |        |        |  |      |        |            |  |       |        |        |  |   |     |     |  |   |   |   |  |   |         |        



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These debt obligations were repaid as of February
    2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(2) | These represent gross operating lease
    obligations, and are not reduced by sublease income.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(3) | Unconditional purchase obligations are defined as
    agreements to purchase goods or services that are enforceable
    and legally binding, and that specify all significant terms,
    including: fixed or minimum quantities to be purchased; fixed,
    minimum, or variable pricing provisions; and the approximate
    timing of the transactions. The amounts are based on our
    contractual commitments; however, it is possible we may
    negotiate lower payments if we choose to exit these contracts
    earlier.

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Current non-cancelable capital commitments as of
December 28, 2003 were $1.5 million. For 2004, we plan
to spend approximately $60.0 million on property, plant,
and equipment for projects designed to increase capacity and
improve yield and productivity, as well as to improve equipment
capability for the manufacture of advanced products. The
estimated capital spending includes $10.0 million for the
purchase of a Malaysian substrate manufacturing facility. The
purchase closed in January 2004.

We lease our research and administrative facility
in San Jose, California under an operating lease. We also lease
and sublease another building in San Jose. Both of these leases
expire in 2007, and have renewal options for five years. We also
lease a building, which we no longer occupy, in Santa Rosa,
California. This lease expires in April 2004. We have no capital
leases.

We had a revolving credit facility (the Exit
Facility) that we entered into on June 30, 2002
simultaneously with our emergence from bankruptcy that initially
allowed for advances of up to $15.0 million, with a
$3.0 million letter of credit sub-facility. As of
December 28, 2003, there were no borrowings under the Exit
Facility. The Exit Facility had a maturity date of June 30,
2005. We terminated the exit facility on January 28, 2004.

As of December 28, 2003, we had outstanding
$63.2 million of cash pay notes and $52.0 million of
paid-in-kind (PIK) notes (Senior Secured Notes), and
$0.9 million of secured and unsecured promissory notes.

On September 30, 2003, we completed the sale
of our idle Fremont, California land and buildings. The net
proceeds from the sale of the land and buildings were
approximately $24.0 million, resulting in a gain of
approximately $1.0 million. The sale was recorded in the
fourth quarter of 2003. On October 21, 2003, we used 50% of
the net proceeds ($12.1 million) to pay down our debt as
required under the terms of our Senior Notes Indenture due in
2007. Additionally, we made required principal payments of
$5.0 million on the Senior Notes in the third and fourth
quarters of 2003, and in January 2004.

In 2003, we received consent from a majority of
the holders of the Senior Secured Notes and the lender under the
Exit Facility to redeem in full the Junior Secured Notes.
Accordingly, in December 2003, we fully redeemed the Junior
Secured Notes, including accrued interest, for $8.3 million.

On January 28, 2004, we announced the
closing of our offering of 4.0 million shares of our common
stock at $20.00 per share, of which selling security holders
sold 0.5 million shares, and $80.5 million of 2.0%
Convertible Subordinated Notes (the Notes). Total net proceeds
to the Company from these offerings were approximately
$144.0 million. We used $111.5 million of the net
proceeds to redeem in full our Senior Secured Notes, including
accrued interest, as of February 26, 2004.

The Notes mature on February 1, 2024, bear
interest at 2%, and require semiannual interest payments
beginning on August 1, 2004. We expect that the semiannual
interest payments of $0.8 million will not have a material
effect on our liquidity in 2004. The Notes will be convertible,
under certain circumstances, into shares of our common stock
based on an initial effective conversion price of $26.40.
Holders of the Notes may convert the Notes into shares of our
common stock prior to maturity if: 1) the sale price of our
common stock exceeds a specified threshold; 2) the trading
price of the Notes falls below a specified threshold prior to
February 19, 2019; 3) the Notes have been called for
redemption; or 4) specified corporate transactions occur.
We may redeem the Notes on or after February 6, 2007, at
specified declining redemption premiums. Holders of the Notes
may require us to purchase the Notes on February 1, 2001,
2014, or 2019, or upon the occurrence of a fundamental change,
at a purchase price equal to 100% of the principal amount of the
Notes, plus accrued and unpaid interest.

On October 7, 2003, we announced an expanded
business relationship with Maxtor, which includes specific
dedicated media production capacity including a capacity
expansion effort, a five-year supply agreement and the naming of
Komag as a strategic external media supplier of Maxtor.

Based on current operating forecasts, we
anticipate that our cash balance, estimated cash from 2004
operations, and the remaining proceeds from the new debt and
equity offerings after redemption of the Senior Secured Notes
(discussed above) will be adequate to support our continuing
operations and capital spending plan, and to make interest
payments on the new debt for at least the next twelve months.

35



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##### Table of Contents



Other

Not applicable.






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

We are exposed to foreign currency exchange rate
risk. We currently do not use derivative financial instruments
to hedge such risk.

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

A substantial majority of our revenue, expense,
and capital purchasing activities are transacted in
U.S. dollars. However, a large portion of our payroll,
certain operating expenses, and capital purchases are transacted
in other currencies, primarily Malaysian ringgit. Since late
1998, the ringgit has been pegged at a conversion rate of 3.8
Malaysian ringgit to the U.S. dollar. If the pegging is
lifted in the future, we will evaluate whether or not we will
enter any hedging contracts for the Malaysian ringgit. Expenses
recorded in Malaysian ringgit in 2003 totaled approximately
$45.2 million.

As of December 28, 2003, we had
$63.2 million in Senior Secured Notes outstanding with a
maturity date in June 2007, and an interest rate at the greater
of 8% per annum, or the prime rate plus 3%. At December 28,
2003, the prime rate was 4%. A hypothetical 100 basis point
increase in interest rates would result in approximately
$0.6 million of additional interest expense each year. The
Senior Secured Notes were repaid in full in February 2004.

36



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##### Table of Contents






Item 8.Consolidated
Financial Statements and Supplementary Data

KOMAG, INCORPORATED

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                                                                    |  |   
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|Report of Independent Auditors                                                                                                                                      |  | 38
|Consolidated Statements of Operations, Fiscal
    Year 2003, Six Months Ended December 29, 2002, Six Months
    Ended June 30, 2002, and Fiscal Year 2001           |  | 39
|Consolidated Balance Sheets, December 28,
    2003 and December 29, 2002                                                                                            |  | 40
|Consolidated Statements of Cash Flows, Fiscal
    Year 2003, Six Months Ended December 29, 2002, Six Months
    Ended June 30, 2002, and Fiscal Year 2001           |  | 41
|Consolidated Statements of Stockholders
    Equity, Fiscal Year 2003, Six Months Ended December 29,
    2002, Six Months Ended June 30, 2002, and Fiscal Year 2001 |  | 42
|Notes to Consolidated Financial Statements                                                                                                                          |  | 43

37



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Komag, Incorporated


We have audited the accompanying consolidated
balance sheets of Komag, Incorporated and subsidiaries (the
Company) as of December 28, 2003 and December 29,
2002, and the related consolidated statements of operations,
stockholders equity, and cash flows for the year ended
December 28, 2003, the six-month periods ended
December 29, 2002 and June 30, 2002, and the year
ended December 30, 2001. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Komag, Incorporated and
subsidiaries as of December 28, 2003 and December 29,
2002, and the results of their operations and their cash flows
for the year ended December 28, 2003, the six-month periods
ended December 29, 2002 and June 30, 2002, and the
year ended December 30, 2001, in conformity with accounting
principles generally accepted in the United States of America.

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

As discussed in Notes 1, 2, and 3 to the
consolidated financial statements, the Companys plan of
reorganization under Chapter 11 of the United States
Bankruptcy Code became effective on June 30, 2002. As a
result of the adoption of fresh-start reporting in
accordance with Statement of Position 90-7, Financial
Reporting by Entities in Reorganization under the Bankruptcy
Code, the consolidated financial statements as of and for
the year ended December 28, 2003 and as of and for the
six-month period ended December 29, 2002 are presented on a
different reporting basis than the periods before the emergence
from bankruptcy, and are therefore not comparable.



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

San Francisco, California

January 16, 2004, except as to the first and

 second paragraphs of Note 17, which are 
 as of January 27, 2004 and February 27, 
 2004, respectively

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##### Table of Contents



KOMAG, INCORPORATED

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


|                                                                       |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |              |   |   |         |         |         |   |          |          |          |  
|---------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------- | ------- | ------------ | ------ | - | ------------- | ------- | ------------ | - | - | ------- | ------- | ------- | - | -------- | -------- | -------- | -
|                                                                       |                                                                                                                                                                                                  | Successor         |         | Successor    |        |   | Predecessor   |         | Predecessor 
|                                                                       |                                                                                                                                                                                                  | Company           |         | Company      |        |   | Company       |         | Company     
|                                                                       |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |             
|                                                                       |                                                                                                                                                                                                  | Year              |         | Six Months   |        |   | Six Months    |         | Year        
|                                                                       |                                                                                                                                                                                                  | Ended             |         | Ended        |        |   | Ended         |         | Ended       
|                                                                       |                                                                                                                                                                                                  | Dec 28, 2003      |         | Dec 29, 2002 |        |   | June 30, 2002 |         | Dec 30, 2001
|                                                                       |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |             
|Net sales                                                              |                                                                                                                                                                                                  | $                 | 438,292 |              |        | $ | 174,749       |         |              |   | $ | 111,955 |         |         | $ | 282,613  |         
|Cost of sales                                                          |                                                                                                                                                                                                  |                   | 330,870 |              |        |   | 143,009       |         |              |   |   | 110,397 |         |         |   | 289,353  |         
|                                                                       |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |              |   |   |         |         |         |   |          |         
|                                                                       | Gross profit (loss)                                                                                                                                                                              |                   |         | 107,422      |        |   |               | 31,740  |              |   |   |         | 1,558   |         |   |          | (6,740   | )       
|Operating expenses:                                                    |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |              |   |   |         |         |         |   |          |         
|                                                                       | Research, development, and engineering                                                                                                                                                           |                   |         | 42,085       |        |   |               | 18,400  |              |   |   |         | 18,796  |         |   |          | 39,546   |         
|                                                                       | Selling, general, and administrative                                                                                                                                                             |                   |         | 18,939       |        |   |               | 9,483   |              |   |   |         | 8,256   |         |   |          | 19,929   |         
|                                                                       | Amortization of goodwill                                                                                                                                                                         |                   |         |             |        |   |               |        |              |   |   |         |        |         |   |          | 22,797   |         
|                                                                       | Gain on disposal of assets                                                                                                                                                                       |                   |         | (3,021       | )      |   |               | (1,310  | )            |   |   |         | (2,138  | )       |   |          | (515     | )       
|                                                                       | Impairment charges related to goodwill                                                                                                                                                           |                   |         |             |        |   |               | 33,870  |              |   |   |         |        |         |   |          |         |         
|                                                                       | Restructuring/impairment charges                                                                                                                                                                 |                   |         |             |        |   |               | 893     |              |   |   |         | 4,318   |         |   |          | 57,430   |         
|                                                                       | In-process research and development                                                                                                                                                              |                   |         |             |        |   |               | 6,784   |              |   |   |         |        |         |   |          |         |         
|                                                                       |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |              |   |   |         |         |         |   |          |         
|                                                                       |                                                                                                                                                                                                  |                   | 58,003  |              |        |   | 68,120        |         |              |   |   | 29,232  |         |         |   | 139,187  |         
|                                                                       |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |              |   |   |         |         |         |   |          |         
|                                                                       | Operating income (loss)                                                                                                                                                                          |                   |         | 49,419       |        |   |               | (36,380 | )            |   |   |         | (27,674 | )       |   |          | (145,927 | )       
|Other income (expense):                                                |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |              |   |   |         |         |         |   |          |         
|                                                                       | Interest income                                                                                                                                                                                  |                   |         | 524          |        |   |               | 132     |              |   |   |         | 193     |         |   |          | 1,528    |         
|                                                                       | Interest expense                                                                                                                                                                                 |                   |         | (13,153      | )      |   |               | (6,553  | )            |   |   |         |        |         |   |          | (155,192 | )       
|                                                                       | Other income, net                                                                                                                                                                                |                   |         | 250          |        |   |               | 2,150   |              |   |   |         | 397,009 |         |   |          | 3,771    |         
|                                                                       |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |              |   |   |         |         |         |   |          |         
|                                                                       |                                                                                                                                                                                                  |                   | (12,379 | )            |        |   | (4,271        | )       |              |   |   | 397,202 |         |         |   | (149,893 | )       
|                                                                       |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |              |   |   |         |         |         |   |          |         
|                                                                       | Income (loss) before reorganization costs,
    income taxes, minority interest/equity interest in net loss of
    related companies, and cumulative effect of change in accounting
    principle |                   |         | 37,040       |        |   |               | (40,651 | )            |   |   |         | 369,528 |         |   |          | (295,820 | )       
|Reorganization costs, net                                              |                                                                                                                                                                                                  |                   |        |              |        |   |              |         |              |   |   | 6,511   |         |         |   | 6,066    |         
|Provision for (benefit from) income taxes                              |                                                                                                                                                                                                  |                   | 1,000   |              |        |   | 1,268         |         |              |   |   | 719     |         |         |   | (9,433   | )       
|                                                                       |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |              |   |   |         |         |         |   |          |         
|                                                                       | Income (loss) before minority
    interest/equity interest in net loss of related companies, and
    cumulative effect of change in accounting principle                                         |                   |         | 36,040       |        |   |               | (41,919 | )            |   |   |         | 362,298 |         |   |          | (292,453 | )       
|Minority interest/equity interest in net loss of
    related companies |                                                                                                                                                                                                  |                   |        |              |        |   |              |         |              |   |   | (2,374  | )       |         |   | (3,942   | )       
|                                                                       |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |              |   |   |         |         |         |   |          |         
|                                                                       | Income (loss) before cumulative effect of
    change in accounting principle                                                                                                                     |                   |         | 36,040       |        |   |               | (41,919 | )            |   |   |         | 359,924 |         |   |          | (296,395 | )       
|Cumulative effect of change in accounting
    principle                |                                                                                                                                                                                                  |                   |        |              |        |   |              |         |              |   |   | (47,509 | )       |         |   |         |         
|                                                                       |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |              |   |   |         |         |         |   |          |         
|                                                                       |                                                                                                                                                                                                  | Net income (loss) |         | $            | 36,040 |   |               | $       | (41,919      | ) |   |         | $       | 312,415 |   |          | $        | (296,395 | )
|                                                                       |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |              |   |   |         |         |         |   |          |         
|Basic net income (loss) per share                                      |                                                                                                                                                                                                  | $                 | 1.53    |              |        | $ | (1.84         | )       |              |   |   |         |         |         |   |          |         
|                                                                       |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |              |   |   |         |         |         |   |          |         
|Diluted net income (loss) per share                                    |                                                                                                                                                                                                  | $                 | 1.47    |              |        | $ | (1.84         | )       |              |   |   |         |         |         |   |          |         
|                                                                       |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |              |   |   |         |         |         |   |          |         
|Number of shares used in basic per share
    computations              |                                                                                                                                                                                                  |                   | 23,504  |              |        |   | 22,840        |         |              |   |   |         |         |         |   |          |         
|                                                                       |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |              |   |   |         |         |         |   |          |         
|Number of shares used in diluted per share
    computations            |                                                                                                                                                                                                  |                   | 24,518  |              |        |   | 22,840        |         |              |   |   |         |         |         |   |          |         
|                                                                       |                                                                                                                                                                                                  |                   |         |              |        |   |               |         |              |   |   |         |         |         |   |          |         

See notes to consolidated financial statements.

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KOMAG, INCORPORATED

CONSOLIDATED BALANCE SHEETS

(In thousands)


|                                         |                                                                              |                                                                     |         |              |         |   |         |         |         | 
|---------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------- | ------------ | ------- | - | ------- | ------- | ------- | 
|                                         |                                                                              | Dec 28, 2003                                                        |         | Dec 29, 2002
|                                         |                                                                              |                                                                     |         |             
|ASSETS                                  
|Current assets                           |                                                                              |                                                                     |         |              |         |   |         |        
|                                         | Cash and cash equivalents                                                    |                                                                     | $       | 70,058       |         |   | $       | 23,520  |        
|                                         | Accounts receivable (less allowances of $1,064
    and $1,101, respectively) |                                                                     |         | 60,628       |         |   |         | 46,241  |        
|                                         | Inventories                                                                  |                                                                     |         | 25,501       |         |   |         | 14,925  |        
|                                         | Prepaid expenses and deposits                                                |                                                                     |         | 2,756        |         |   |         | 2,288   |        
|                                         |                                                                              |                                                                     |         |              |         |   |         |        
|                                         |                                                                              | Total current assets                                                |         |              | 158,943 |   |         |         | 86,974  | 
|Property, plant, and equipment, net      |                                                                              |                                                                     | 184,536 |              |         |   | 196,414 |        
|Land and buildings held for sale         |                                                                              |                                                                     |        |              |         |   | 24,600  |        
|Intangible assets, net                   |                                                                              |                                                                     | 4,257   |              |         |   | 9,142   |        
|Other assets                             |                                                                              |                                                                     | 71      |              |         |   | 70      |        
|                                         |                                                                              |                                                                     |         |              |         |   |         |        
|                                         |                                                                              | $                                                                   | 347,807 |              |         | $ | 317,200 |        
|                                         |                                                                              |                                                                     |         |              |         |   |         |        
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities                      |                                                                              |                                                                     |         |              |         |   |         |        
|                                         | Current portion of long-term debt                                            |                                                                     | $       | 20,247       |         |   | $       | 10,229  |        
|                                         | Trade accounts payable                                                       |                                                                     |         | 40,117       |         |   |         | 35,371  |        
|                                         | Accrued expenses and other liabilities                                       |                                                                     |         | 25,054       |         |   |         | 13,717  |        
|                                         |                                                                              |                                                                     |         |              |         |   |         |        
|                                         |                                                                              | Total current liabilities                                           |         |              | 85,418  |   |         |         | 59,317  | 
|Long-term debt                           |                                                                              |                                                                     | 95,801  |              |         |   | 129,923 |        
|                                         |                                                                              |                                                                     |         |              |         |   |         |        
|                                         |                                                                              | Total liabilities                                                   |         |              | 181,219 |   |         |         | 189,240 | 
|Stockholders equity                     |                                                                              |                                                                     |         |              |         |   |         |        
|                                         | Common stock, $0.01 par value per share:                                     |                                                                     |         |              |         |   |         |         |        
|                                         |                                                                              | Authorized  50,000 shares                                          |         |              |         |   |         |         |         | 
|                                         |                                                                              | Issued and outstanding  23,753 and
    23,172 shares, respectively |         |              | 238     |   |         |         | 232     | 
|                                         | Additional paid-in capital                                                   |                                                                     |         | 172,457      |         |   |         | 171,876 |        
|                                         | Deferred stock-based compensation                                            |                                                                     |         | (228         | )       |   |         | (2,229  | )      
|                                         | Accumulated deficit                                                          |                                                                     |         | (5,879       | )       |   |         | (41,919 | )      
|                                         |                                                                              |                                                                     |         |              |         |   |         |        
|                                         |                                                                              | Total stockholders equity                                          |         |              | 166,588 |   |         |         | 127,960 | 
|                                         |                                                                              |                                                                     |         |              |         |   |         |        
|                                         |                                                                              | $                                                                   | 347,807 |              |         | $ | 317,200 |        
|                                         |                                                                              |                                                                     |         |              |         |   |         |        

See notes to consolidated financial statements.

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KOMAG, INCORPORATED

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                                                                           |                                                                                                                                                 |                                                         |         |              |         |   |               |         |              |   |   |         |          |        |   |          |         |         |  
|---------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------------ | ------- | - | ------------- | ------- | ------------ | - | - | ------- | -------- | ------ | - | -------- | ------- | ------- | -
|                                                                                                           |                                                                                                                                                 | Successor                                               |         | Successor    |         |   | Predecessor   |         | Predecessor 
|                                                                                                           |                                                                                                                                                 | Company                                                 |         | Company      |         |   | Company       |         | Company     
|                                                                                                           |                                                                                                                                                 |                                                         |         |              |         |   |               |         |             
|                                                                                                           |                                                                                                                                                 | Year                                                    |         | Six Months   |         |   | Six Months    |         | Year        
|                                                                                                           |                                                                                                                                                 | Ended                                                   |         | Ended        |         |   | Ended         |         | Ended       
|                                                                                                           |                                                                                                                                                 | Dec 28, 2003                                            |         | Dec 29, 2002 |         |   | June 30, 2002 |         | Dec 30, 2001
|                                                                                                           |                                                                                                                                                 |                                                         |         |              |         |   |               |         |             
|Operating Activities                                                                                       |                                                                                                                                                 |                                                         |         |              |         |   |               |         |              |   |   |         |          |        |   |          |        
|Net income (loss)                                                                                          |                                                                                                                                                 | $                                                       | 36,040  |              |         | $ | (41,919       | )       |              |   | $ | 312,415 |          |        | $ | (296,395 | )      
|Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities: |                                                                                                                                                 |                                                         |         |              |         |   |               |         |              |   |   |         |          |        |   |          |        
|                                                                                                           | Gain on extinguishment of liabilities subject to
    compromise and revaluation of assets and liabilities pursuant to
    fresh-start reporting |                                                         |         |             |         |   |               |        |              |   |   |         | (396,376 | )      |   |          |        |        
|                                                                                                           | Cumulative effect of change in accounting
    principle                                                                                         |                                                         |         |             |         |   |               |        |              |   |   |         | 47,509   |        |   |          |        |        
|                                                                                                           | Impairment charges related to property, plant,
    and equipment and goodwill                                                                   |                                                         |         |             |         |   |               | 33,870  |              |   |   |         | 216      |        |   |          | 50,235  |        
|                                                                                                           | Depreciation and amortization on property, plant,
    and equipment                                                                             |                                                         |         | 38,625       |         |   |               | 24,114  |              |   |   |         | 25,998   |        |   |          | 68,925  |        
|                                                                                                           | Amortization of intangible assets                                                                                                               |                                                         |         | 3,756        |         |   |               | 1,849   |              |   |   |         | 3,609    |        |   |          | 4,284   |        
|                                                                                                           | Amortization of goodwill                                                                                                                        |                                                         |         |             |         |   |               |        |              |   |   |         |         |        |   |          | 22,797  |        
|                                                                                                           | Amortization of deferred stock-based compensation                                                                                               |                                                         |         | 1,980        |         |   |               | 2,403   |              |   |   |         |         |        |   |          |        |        
|                                                                                                           | In-process research and development expense                                                                                                     |                                                         |         |             |         |   |               | 6,784   |              |   |   |         |         |        |   |          |        |        
|                                                                                                           | Non-cash interest charges                                                                                                                       |                                                         |         | 6,657        |         |   |               | 3,090   |              |   |   |         |         |        |   |          | 134,057 |        
|                                                                                                           | Gain on liquidation of subsidiary                                                                                                               |                                                         |         |             |         |   |               |        |              |   |   |         |         |        |   |          | (579    | )      
|                                                                                                           | Gain on disposal of assets                                                                                                                      |                                                         |         | (3,021       | )       |   |               | (1,310  | )            |   |   |         | (2,138   | )      |   |          | (515    | )      
|                                                                                                           | Non-cash income tax provision                                                                                                                   |                                                         |         | 1,500        |         |   |               |        |              |   |   |         |         |        |   |          |        |        
|                                                                                                           | Deferred income taxes                                                                                                                           |                                                         |         |             |         |   |               |        |              |   |   |         |         |        |   |          | (10,810 | )      
|                                                                                                           | Minority interest/equity interest in net loss of
    related companies                                                                          |                                                         |         |             |         |   |               |        |              |   |   |         | 2,374    |        |   |          | 3,942   |        
|Changes in operating assets and liabilities:                                                               |                                                                                                                                                 |                                                         |         |              |         |   |               |         |              |   |   |         |          |        |   |          |        
|                                                                                                           | Accounts receivable, net                                                                                                                        |                                                         |         | (14,387      | )       |   |               | (25,327 | )            |   |   |         | 4,234    |        |   |          | 15,095  |        
|                                                                                                           | Inventories                                                                                                                                     |                                                         |         | (10,576      | )       |   |               | (1,288  | )            |   |   |         | (2,069   | )      |   |          | 9,676   |        
|                                                                                                           | Prepaid expenses and deposits                                                                                                                   |                                                         |         | (468         | )       |   |               | 1,070   |              |   |   |         | (1,480   | )      |   |          | 1,452   |        
|                                                                                                           | Trade accounts payable                                                                                                                          |                                                         |         | 4,746        |         |   |               | 14,498  |              |   |   |         | 5,870    |        |   |          | (10,844 | )      
|                                                                                                           | Accrued expenses and other liabilities                                                                                                          |                                                         |         | 11,337       |         |   |               | (10,416 | )            |   |   |         | 1,693    |        |   |          | (21,084 | )      
|                                                                                                           |                                                                                                                                                 |                                                         |         |              |         |   |               |         |              |   |   |         |          |        |   |          |        
|                                                                                                           |                                                                                                                                                 |                                                         | 76,189  |              |         |   | 7,418         |         |              |   |   | 1,855   |          |        |   | (29,764  | )      
|Reorganization costs, net                                                                                  |                                                                                                                                                 |                                                         |        |              |         |   |              |         |              |   |   | 6,511   |          |        |   | 6,066    |        
|                                                                                                           |                                                                                                                                                 |                                                         |         |              |         |   |               |         |              |   |   |         |          |        |   |          |        
|                                                                                                           |                                                                                                                                                 | Net cash provided by (used in) operating
    activities |         |              | 76,189  |   |               |         | 7,418        |   |   |         |          | 8,366  |   |          |         | (23,698 | )
|Investing Activities                                                                                       |                                                                                                                                                 |                                                         |         |              |         |   |               |         |              |   |   |         |          |        |   |          |        
|Acquisition of property, plant and equipment                                                               |                                                                                                                                                 |                                                         | (25,892 | )            |         |   | (7,038        | )       |              |   |   | (6,855  | )        |        |   | (25,673  | )      
|Purchases of short-term investments                                                                        |                                                                                                                                                 |                                                         |        |              |         |   |              |         |              |   |   | (338    | )        |        |   | (5,777   | )      
|Proceeds from short-term investments at maturity                                                           |                                                                                                                                                 |                                                         |        |              |         |   | 338           |         |              |   |   | 335     |          |        |   | 15,039   |        
|Proceeds from disposal of property, plant and
    equipment                                                |                                                                                                                                                 |                                                         | 26,766  |              |         |   | 1,421         |         |              |   |   | 3,043   |          |        |   | 1,200    |        
|Investment in intangible assets                                                                            |                                                                                                                                                 |                                                         | (371    | )            |         |   | (212          | )       |              |   |   | (70     | )        |        |   | 93       |        
|Changes in deposits and other assets                                                                       |                                                                                                                                                 |                                                         | (1      | )            |         |   | 21            |         |              |   |   | 29      |          |        |   | 61       |        
|                                                                                                           |                                                                                                                                                 |                                                         |         |              |         |   |               |         |              |   |   |         |          |        |   |          |        
|                                                                                                           |                                                                                                                                                 | Net cash provided by (used in) investing
    activities |         |              | 502     |   |               |         | (5,470       | ) |   |         |          | (3,856 | ) |          |         | (15,057 | )
|Financing Activities                                                                                       |                                                                                                                                                 |                                                         |         |              |         |   |               |         |              |   |   |         |          |        |   |          |        
|Payment of debt                                                                                            |                                                                                                                                                 |                                                         | (30,761 | )            |         |   | (424          | )       |              |   |   |        |          |        |   | (15,000  | )      
|Proceeds from sale of common stock, net of
    issuance costs                                              |                                                                                                                                                 |                                                         | 608     |              |         |   |              |         |              |   |   |        |          |        |   | 174      |        
|                                                                                                           |                                                                                                                                                 |                                                         |         |              |         |   |               |         |              |   |   |         |          |        |   |          |        
|                                                                                                           |                                                                                                                                                 | Net cash used in financing activities                   |         |              | (30,153 | ) |               |         | (424         | ) |   |         |          |       |   |          |         | (14,826 | )
|                                                                                                           |                                                                                                                                                 |                                                         |         |              |         |   |               |         |              |   |   |         |          |        |   |          |        
|Increase (decrease) in cash and cash
    equivalents                                                       |                                                                                                                                                 |                                                         | 46,538  |              |         |   | 1,524         |         |              |   |   | 4,510   |          |        |   | (53,581  | )      
|Cash and cash equivalents at beginning of period                                                           |                                                                                                                                                 |                                                         | 23,520  |              |         |   | 21,996        |         |              |   |   | 17,486  |          |        |   | 71,067   |        
|                                                                                                           |                                                                                                                                                 |                                                         |         |              |         |   |               |         |              |   |   |         |          |        |   |          |        
|                                                                                                           |                                                                                                                                                 | Cash and cash equivalents at end of period              |         | $            | 70,058  |   |               | $       | 23,520       |   |   |         | $        | 21,996 |   |          | $       | 17,486  |  
|                                                                                                           |                                                                                                                                                 |                                                         |         |              |         |   |               |         |              |   |   |         |          |        |   |          |        
|Supplemental disclosure of cash flow
    information                                                       |                                                                                                                                                 |                                                         |         |              |         |   |               |         |              |   |   |         |          |        |   |          |        
|                                                                                                           |                                                                                                                                                 | Cash paid for interest                                  |         | $            | 6,459   |   |               | $       | 3,176        |   |   |         | $        |       |   |          | $       | 14,703  |  
|                                                                                                           |                                                                                                                                                 | Cash paid for income taxes                              |         | $            | 25      |   |               | $       | 473          |   |   |         | $        | 561    |   |          | $       | 27      |  
|Non-cash activities                                                                                        |                                                                                                                                                 |                                                         |         |              |         |   |               |         |              |   |   |         |          |        |   |          |        
|                                                                                                           |                                                                                                                                                 | Acquisition of minority interest                        |         | $            |        |   |               | $       | 1,398        |   |   |         | $        |       |   |          | $       |        |  

See notes to consolidated financial statements.

41



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##### Table of Contents



KOMAG, INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

(In thousands)


|                                                                      |                          |              |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          |          |  
|--------------------------------------------------------------------- | ------------------------ | ------------ | -------- | ---------- |  | ----------- | ------ | ------------ |  | ------------- | -------- | ------ |  | ----- | ------ | - |  | - | -------- | - |  | - | ---- | - |  | - | -------- | -------- | -
|                                                                      |                          |              |          |            |  |             |        |              |  | Accumulated   |          |       
|                                                                      |                          | Common Stock |          | Additional |  | Deferred    |        |              |  | Other         |          |       
|                                                                      |                          |              |          | Paid-in    |  | Stock-Based |        | Accumulated  |  | Comprehensive |          |       
|                                                                      |                          | Shares       |          | Amount     |  | Capital     |        | Compensation |  | Deficit       |          | Income |  | Total
|                                                                      |                          |              |          |            |  |             |        |              |  |               |          |        |  |      
|PREDECESSOR COMPANY                                                   |                          |              |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          |         
|Balance at December 31, 2000                                          |                          |              | 111,630  |            |  | $           | 1,116  |              |  | $             | 586,133  |        |  | $     |       |   |  | $ | (435,967 | ) |  | $ | 579  |   |  | $ | 151,861  |         
|Net loss                                                              |                          |              |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   | (296,395 | ) |  |   |      |   |  |   | (296,395 | )       
|Realized gain on liquidation of subsidiary                            |                          |              |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   | (579 | ) |  |   | (579     | )       
|                                                                      |                          |              |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          |         
|                                                                      | Total comprehensive loss |              |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          | (296,974 | )
|Common stock issued under stock option and
    purchase plans         |                          |              | 295      |            |  |             | 3      |              |  |               | 171      |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   | 174      |         
|                                                                      |                          |              |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          |         
|Balance at December 30, 2001                                          |                          |              | 111,925  |            |  |             | 1,119  |              |  |               | 586,304  |        |  |       |       |   |  |   | (732,362 | ) |  |   |     |   |  |   | (144,939 | )       
|Net income for the period from December 31,
    2001 to June 30, 2002 |                          |              |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   | 312,415  |   |  |   |      |   |  |   | 312,415  |         
|Equity fresh-start adjustments on emergence from
    bankruptcy       |                          |              | (111,925 | )          |  |             | (1,119 | )            |  |               | (586,304 | )      |  |       |        |   |  |   | 419,947  |   |  |   |      |   |  |   | (167,476 | )       
|Issuance of new common stock                                          |                          |              | 22,826   |            |  |             | 228    |              |  |               | 167,248  |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   | 167,476  |         
|                                                                      |                          |              |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          |         
|Balance at June 30, 2002                                              |                          |              | 22,826   |            |  |             | 228    |              |  |               | 167,248  |        |  |       |       |   |  |   |         |   |  |   |     |   |  |   | 167,476  |         
|SUCCESSOR COMPANY                                                     |                          |              |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          |         
|Net loss for the period from July 1, 2002 to
    December 29, 2002    |                          |              |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   | (41,919  | ) |  |   |      |   |  |   | (41,919  | )       
|Deferred stock-based compensation                                     |                          |              |          |            |  |             |        |              |  |               | 4,632    |        |  |       | (4,632 | ) |  |   |          |   |  |   |      |   |  |   |         |         
|Amortization of deferred stock-based compensation                     |                          |              |          |            |  |             |        |              |  |               |          |        |  |       | 2,403  |   |  |   |          |   |  |   |      |   |  |   | 2,403    |         
|Common stock issued under stock plans                                 |                          |              | 346      |            |  |             | 4      |              |  |               | (4       | )      |  |       |        |   |  |   |          |   |  |   |      |   |  |   |         |         
|                                                                      |                          |              |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          |         
|Balance at December 29, 2002                                          |                          |              | 23,172   |            |  |             | 232    |              |  |               | 171,876  |        |  |       | (2,229 | ) |  |   | (41,919  | ) |  |   |     |   |  |   | 127,960  |         
|Net income                                                            |                          |              |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   | 36,040   |   |  |   |      |   |  |   | 36,040   |         
|Deferred stock-based compensation                                     |                          |              |          |            |  |             |        |              |  |               | (21      | )      |  |       | 21     |   |  |   |          |   |  |   |      |   |  |   |         |         
|Amortization of deferred stock-based compensation                     |                          |              |          |            |  |             |        |              |  |               |          |        |  |       | 1,980  |   |  |   |          |   |  |   |      |   |  |   | 1,980    |         
|Common stock issued under stock plans                                 |                          |              | 581      |            |  |             | 6      |              |  |               | 602      |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   | 608      |         
|                                                                      |                          |              |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          |         
|Balance at December 28, 2003                                          |                          |              | 23,753   |            |  | $           | 238    |              |  | $             | 172,457  |        |  | $     | (228   | ) |  | $ | (5,879   | ) |  | $ |     |   |  | $ | 166,588  |         
|                                                                      |                          |              |          |            |  |             |        |              |  |               |          |        |  |       |        |   |  |   |          |   |  |   |      |   |  |   |          |         

See notes to consolidated financial statements.

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KOMAG, INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1.     Basis
of Presentation

The consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation.

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

KUS proposed, and in May 2002 the Bankruptcy
Court confirmed, the Further Modified First Amended Plan of
Reorganization (the Plan), which became effective on
June 30, 2002 (see Note 2). KUS emerged from
bankruptcy on that date. In accordance with Statement of
Position 90-7 (SOP 90-7), Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code, issued by the
American Institute of Certified Public Accountants, the Company
adopted fresh-start reporting and reflected the effects of the
adoption in the consolidated financial statements for the six
months ended June 30, 2002. Fresh-start reporting requires
the recording of assets and liabilities at fair value, and
requires the recording of stockholders equity based on the
reorganization (enterprise) value.

As a result of the adoption of fresh-start
reporting, the consolidated statements of operations and
statements of cash flows for periods ended after June 30,
2002 are prepared on a basis of accounting that is different
from that utilized for periods ended prior to July 1, 2002.
Therefore, the Companys consolidated statements of
operations and cash flows for the six months ended June 30,
2002 and the year ended December 30, 2001 (which are
presented as the predecessor company) are not comparable to the
Companys consolidated statements of operations and cash
flows for the six months ended December 29, 2002 and the
year ended December 28, 2003 (which are presented as the
successor company).

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

Fiscal
Year:The
Company uses a 52-53 week fiscal year ending on the Sunday
closest to December 31. The 2001 and 2003 fiscal years were
52-week years. The six months ended December 29, 2002, and
June 30, 2002, were 26-week periods. The Companys
2004 fiscal year will contain 53 weeks. The additional week
will be included in the Companys first quarter of 2004.
Accordingly, the first quarter of 2004 will be comprised of
fourteen weeks, and all other quarters of 2004 will include
thirteen weeks.

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

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

|                |  |               |        |               |  |   |        | 
|--------------- |  | ------------- | ------ | ------------- |  | - | ------ | 
|                |  | Dec. 28, 2003 |        | Dec. 29, 2002
|                |  |               |        |              
|Raw material    |  | $             | 13,525 |               |  | $ | 9,281  | 
|Work in process |  |               | 6,134  |               |  |   | 2,350  | 
|Finished goods  |  |               | 5,842  |               |  |   | 3,294  | 
|                |  |               |        |               |  |   |        | 
|                |  | $             | 25,501 |               |  | $ | 14,925 | 
|                |  |               |        |               |  |   |        | 

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

43



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On September 30, 2003, the Company completed
the sale of its idle Fremont, California land and buildings. The
land and buildings were acquired through the merger with HMT in
October 2000 and had been idle and held for sale since 2001. The
net proceeds from the sale of the land and buildings were
approximately $24.0 million, resulting in a gain of
approximately $1.0 million. The sale was recorded in the
fourth quarter of 2003.

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

|                                               |  |               |         |               |  |   |         |  
|---------------------------------------------- |  | ------------- | ------- | ------------- |  | - | ------- | -
|                                               |  | Dec. 28, 2003 |         | Dec. 29, 2002
|                                               |  |               |         |              
|Land                                           |  | $             | 6,709   |               |  | $ | 6,709   |  
|Buildings                                      |  |               | 116,197 |               |  |   | 114,559 |  
|Leasehold improvements                         |  |               | 2,974   |               |  |   | 2,990   |  
|Furniture                                      |  |               | 1,376   |               |  |   | 1,287   |  
|Equipment                                      |  |               | 119,940 |               |  |   | 94,983  |  
|                                               |  |               |         |               |  |   |         |  
|                                               |  |               | 247,196 |               |  |   | 220,528 |  
|Less accumulated depreciation and amortization |  |               | (62,660 | )             |  |   | (24,114 | )
|                                               |  |               |         |               |  |   |         |  
|                                               |  | $             | 184,536 |               |  | $ | 196,414 |  
|                                               |  |               |         |               |  |   |         |  

Impairment of Long-lived
Assets:Long-lived
assets, including identifiable intangible assets, are evaluated
for impairment whenever events or changes in circumstances
indicate that such assets may be impaired or the estimated
useful lives are no longer appropriate. The Company reviews its
long-lived assets for impairment based on estimated future
undiscounted cash flows attributable to the assets. In the event
that such cash flows are not expected to be sufficient to
recover the recorded value of the assets, the assets are written
down to their estimated fair values utilizing discounted
estimates of future cash flows.

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

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

Cost of
Sales:Cost
of sales includes direct and indirect manufacturing costs,
inbound, outbound, and internal freight costs, purchasing and
receiving costs, quality inspection costs, and warehousing costs.

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

Stock-Based
Compensation:The
Company uses the intrinsic value method to account for employee
stock-based compensation. The intrinsic value method is in
accordance with the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. Accordingly, compensation cost is
recorded on the date of grant to the extent that the fair value
of the underlying share of common stock exceeds the exercise
price for a stock option or the purchase price for a share of
common stock.

In accordance with Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based
Compensation, and SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an Amendment of SFAS No. 123, the Company provides pro
forma disclosure of the effect on net income and earnings per
share had the fair value method, as prescribed by SFAS
No. 123, been used.

44



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table reflects the effect on the
Companys net income (loss) and income (loss) per
share after emergence from bankruptcy (the Successor Company)
for the year ended December 28, 2003 and the six months
ended December 29, 2002, and on the Companys net
income (loss) prior to emergence from bankruptcy (the
Predecessor Company) for the six months ended June 30, 2002
and the year ended December 30, 2001, had the fair value
method been applied to all outstanding and unvested awards. Upon
emergence from chapter 11 on June 30, 2002, the
Company had a significant change in the structure of
stockholders equity. Accordingly, earnings per share of
the Predecessor Company are not presented, as the amounts are
not meaningful.

The table is in thousands, except per share data.

|                                                                                                                                   |                       |                   |        |               |                     |   |               |       |               |  |   |         |   |  |   |          |   | 
|---------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ----------------- | ------ | ------------- | ------------------- | - | ------------- | ----- | ------------- |  | - | ------- | - |  | - | -------- | - | 
|                                                                                                                                   |                       |                   |        |               |                    
|                                                                                                                                   |                       | Successor Company |        |               | Predecessor Company
|                                                                                                                                   |                       |                   |        |               |                    
|                                                                                                                                   |                       | Year              |        | Six Months    |                     |   | Six Months    |       | Year         
|                                                                                                                                   |                       | Ended             |        | Ended         |                     |   | Ended         |       | Ended        
|                                                                                                                                   |                       | Dec. 28, 2003     |        | Dec. 29, 2002 |                     |   | June 30, 2002 |       | Dec. 30, 2001
|                                                                                                                                   |                       |                   |        |               |                     |   |               |       |              
|Net income (loss), as reported                                                                                                     |                       | $                 | 36,040 |               |                     | $ | (41,919       | )     |               |  | $ | 312,415 |   |  | $ | (296,395 | )
|Add: Stock-based employee compensation expense
    included in reported net income (loss), net of related tax
    effects          |                       |                   | 1,980  |               |                     |   | 2,404         |       |               |  |   |        |   |  |   |         |  
|Deduct: Stock-based compensation expense
    determined under the fair value method for all awards, net of
    related tax effects |                       |                   | (4,265 | )             |                     |   | (2,404        | )     |               |  |   | (4,895  | ) |  |   | (9,790   | )
|                                                                                                                                   |                       |                   |        |               |                     |   |               |       |               |  |   |         |   |  |   |          |  
|Pro forma net income (loss)                                                                                                        |                       | $                 | 33,755 |               |                     | $ | (41,919       | )     |               |  | $ | 307,520 |   |  | $ | (306,185 | )
|                                                                                                                                   |                       |                   |        |               |                     |   |               |       |               |  |   |         |   |  |   |          |  
|Net income (loss) per share:                                                                                                       |                       |                   |        |               |                     |   |               |       |               |  |   |         |   |  |   |          |  
|                                                                                                                                   | Basic  as reported   |                   | $      | 1.53          |                     |   | $             | (1.84 | )             |  |   |         |   |  |   |          |   | 
|                                                                                                                                   |                       |                   |        |               |                     |   |               |       |               |  |   |         |   |  |   |          |  
|                                                                                                                                   | Diluted  as reported |                   | $      | 1.47          |                     |   | $             | (1.84 | )             |  |   |         |   |  |   |          |   | 
|                                                                                                                                   |                       |                   |        |               |                     |   |               |       |               |  |   |         |   |  |   |          |  
|                                                                                                                                   | Basic  pro forma     |                   | $      | 1.44          |                     |   | $             | (1.84 | )             |  |   |         |   |  |   |          |   | 
|                                                                                                                                   |                       |                   |        |               |                     |   |               |       |               |  |   |         |   |  |   |          |  
|                                                                                                                                   | Diluted  pro forma   |                   | $      | 1.38          |                     |   | $             | (1.84 | )             |  |   |         |   |  |   |          |   | 
|                                                                                                                                   |                       |                   |        |               |                     |   |               |       |               |  |   |         |   |  |   |          |  

For pro forma disclosure purposes, the Company
used the Black-Scholes option pricing model to estimate the fair
value of each option and stock purchase right grant on the date
of grant.

The following assumptions were used to estimate
the fair value of option grants in 2003, the second six months
of 2002 (there were no grants in the first six months of 2002),
and 2001: risk-free interest rates of 2.6%, 1.3%, and 4.6%,
respectively; volatility factors of the expected market price of
the Companys common stock of 86.7%, 88.3%, and 266.0%,
respectively; and a weighted-average expected option life of
4.0, 0.5, and 4.3 years, respectively. The weighted-average
fair value of options granted during 2003, the second six months
of 2002, and 2001 was $5.77, $3.01, and $0.76, respectively.

The following assumptions were used to estimate
the fair value of employee purchase rights under the Amended and
Restated 2002 Employee Stock Purchase Plan (ESPP) in 2003:
a risk-free interest rate of 1.1%, a volatility factor of 60.8%,
and a weighted-average expected purchase rights life of six
months. The weighted-average fair value of purchase rights
granted was $7.84 in 2003. No ESPP Plan was in effect in 2002.
No ESPP shares were issued in 2001.

Because the Company does not pay dividends, there
was no dividend yield included in the pro forma disclosure
calculation.

Income Taxes:The
Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to

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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

Basic net income (loss) per common share is
computed by dividing income (loss) available to common
stockholders by the weighted-average number of shares of common
stock outstanding during the period. Diluted net income (loss)
per share is computed by dividing income (loss) available to
common stockholders by the weighted-average number of shares and
dilutive potential shares of common stock outstanding during the
period. The dilutive effect of outstanding options and stock
purchase rights is reflected in diluted net income (loss) per
share by application of the treasury stock method.

Upon emergence from chapter 11 on June 30,
2002, the Company had a significant change in the structure of
stockholders equity (see Notes 2 and 14).
Accordingly, net income (loss) per share amounts of the
Predecessor Company are not presented, as the amounts are not
meaningful.

The following table sets forth the computation of
net income (loss) per share (in thousands, except per share
amounts):

|                                                                            |                       |               |        |               |  |   |         |   | 
|--------------------------------------------------------------------------- | --------------------- | ------------- | ------ | ------------- |  | - | ------- | - | 
|                                                                            |                       | Successor     |        | Successor    
|                                                                            |                       | Company       |        | Company      
|                                                                            |                       |               |        |              
|                                                                            |                       | Year          |        | Six Months   
|                                                                            |                       | Ended         |        | Ended        
|                                                                            |                       | Dec. 28, 2003 |        | Dec. 29, 2002
|                                                                            |                       |               |        |              
|Numerator: Net income (loss)                                                |                       | $             | 36,040 |               |  | $ | (41,919 | )
|                                                                            |                       |               |        |               |  |   |         |  
|Denominator for basic income (loss) per
    share  weighted average shares |                       |               | 23,504 |               |  |   | 22,840  |  
|Effect of dilutive securities:                                              |                       |               |        |               |  |   |         |  
|                                                                            | Stock purchase rights |               |        | 456           |  |   |         |  | 
|                                                                            | Stock options         |               |        | 337           |  |   |         |  | 
|                                                                            | Warrants              |               |        | 221           |  |   |         |  | 
|                                                                            |                       |               |        |               |  |   |         |  
|Denominator for dilutive income (loss) per share                            |                       |               | 24,518 |               |  |   | 22,840  |  
|                                                                            |                       |               |        |               |  |   |         |  
|Basic net income (loss) per share                                           |                       | $             | 1.53   |               |  | $ | (1.84   | )
|                                                                            |                       |               |        |               |  |   |         |  
|Diluted net income (loss) per share                                         |                       | $             | 1.47   |               |  | $ | (1.84   | )
|                                                                            |                       |               |        |               |  |   |         |  

Incremental common shares attributable to
outstanding common stock options (assuming proceeds would be
used to purchase treasury stock) of approximately 192,000 for
2003 and 75,000 for the second six months of 2002 were not
included in the diluted net income (loss) per share
computation because the effect would have been anti-dilutive.

Incremental common shares attributable to
outstanding warrants (assuming proceeds would be used to
purchase treasury stock) of approximately 1,000,000 for the
second six months of 2002 were not included in the diluted net
income (loss) per share computation because the effect
would have been anti-dilutive.

46



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##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Incremental common shares attributable to
outstanding stock purchase rights (assuming proceeds would be
used to purchase treasury stock) of approximately 68,000 for the
second six months of 2002 were not included in the diluted net
income (loss) per share computation because the effect would
have been anti-dilutive.

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

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

Recent Accounting
Pronouncements:In November 2002, the
FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45
requires a guarantor to (i) include disclosure of certain
obligations and (ii) if applicable, at the inception of the
guarantee, recognize a liability for the fair value of other
certain obligations undertaken in issuing a guarantee. The
disclosure provisions of FIN 45 were effective for financial
statements of interim or annual reports that end after
December 15, 2002. The recognition and measurement
provisions of FIN 45 were effective for guarantees issued or
modified after December 29, 2002. The Companys
adoption of FIN 45 had no impact on its consolidated financial
statements.

In December 2003, the FASB issued FASB
Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities(FIN 46R), which addresses how a business enterprise
should evaluate whether it has a controlling financial interest
in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces
FASB Interpretation No. 46, Consolidation of Variable
Interest Entities(VIE), which was issued in January 2003.
The Company will be required to apply FIN 46R to variable
interests in VIEs created after December 31, 2003. For
variable interests in VIEs created before January 1, 2004,
the Interpretation will be applied beginning on January 1,
2005. For any VIEs that must be consolidated under FIN 46R
that were created before January 1, 2004, the assets,
liabilities and noncontrolling interests of the VIE initially
would be measured at their carrying amounts with any difference
between the net amount added to the balance sheet and any
previously recognized interest being recognized as the
cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date
FIN 46R first applies may be used to measure the assets,
liabilities and noncontrolling interest of the VIE. The Company
does not expect FIN 46R to have a material impact on its
consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS
No. 150 requires that certain financial instruments, which
under previous guidance were accounted for as equity, must now
be accounted for as liabilities. The financial instruments
affected include mandatorily redeemable stock, certain financial
instruments that require or may require the issuer to buy back
some of its shares in exchange for cash or other assets and
certain obligations that can be settled with shares of stock.
SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003 and must be
applied to existing financial instruments effective with the
beginning of the first fiscal period after June 15, 2003.
The Company adopted SFAS No. 150 on the first day of its
fiscal 2003 third quarter. The adoption had no impact on the
Companys consolidated financial statements.

47



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##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 2.     Emergence
from Chapter 11 and Plan of Reorganization

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

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

In accordance with the Plan, current employees
were to receive up to 1.625 million shares of new common stock
pursuant to the Companys 2002 Qualified Stock Plan. This
distribution was approved by the Companys board of
directors in July 2002, and approved by stockholders at the
October 3, 2002 meeting. The distribution process to
employees commenced after October 3, 2002. As of
December 28, 2003, 1.125 million stock purchase rights
were granted (net of cancellations), and 0.402 million
options were granted (net of cancellations), under the 2002
Qualified Stock Plan. As of December 28, 2003,
0.487 million shares of common stock related to the stock
purchase rights had been issued (net of cancellations), and
0.335 million shares of common stock related to stock
options had been issued. As of December 28, 2003, the
Company had available to grant up to 0.098 million shares
out of the original 1.625 million shares approved.

As of the Effective Date, the Company was
authorized to issue 50.0 million shares of new common stock
with a par value of $0.01. Prior to December 28, 2003, the
Company had issued and distributed all of the shares of common
stock pursuant to the Plan. Additionally, as of
December 28, 2003, the Company had outstanding warrants to
purchase up to 1.0 million shares of new common stock at
$9.00 a share. The warrants are exercisable until June 2005.

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

In accordance with the Plan, a new
$15.0 million Secured Loan Facility (the Exit Facility) was
entered into as of the Effective Date. See Note 13 for terms of
the Exit Facility and the Senior and Junior Secured Notes.

Note
3.     Fresh-Start Reporting

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

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

48



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##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

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

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

The following amounts show the detail of Other
income, net for the fiscal year ended December 28, 2003,
the six-month periods ended December 29, 2002 and
June 30, 2002, and the fiscal year ended December 30,
2001 (in thousands):

|                                                                                    |  |               |     |               |  |   |               |  |               |  |   |         |  |  |   |       | 
|----------------------------------------------------------------------------------- |  | ------------- | --- | ------------- |  | - | ------------- |  | ------------- |  | - | ------- |  |  | - | ----- | 
|                                                                                    |  | Successor     |     | Successor     |  |   | Predecessor   |  | Predecessor  
|                                                                                    |  | Company       |     | Company       |  |   | Company       |  | Company      
|                                                                                    |  |               |     |               |  |   |               |  |              
|                                                                                    |  | Year          |     | Six Months    |  |   | Six Months    |  | Year         
|                                                                                    |  | Ended         |     | Ended         |  |   | Ended         |  | Ended        
|                                                                                    |  | Dec. 28, 2003 |     | Dec. 29, 2002 |  |   | June 30, 2002 |  | Dec. 30, 2001
|                                                                                    |  |               |     |               |  |   |               |  |              
|Gain on extinguishment of liabilities subject to
    compromise                     |  | $             |    |               |  | $ |              |  |               |  | $ | 379,027 |  |  | $ |      | 
|Gain on revaluation of assets and liabilities
    pursuant to fresh-start reporting |  |               |    |               |  |   |              |  |               |  |   | 17,349  |  |  |   |      | 
|Other income, net                                                                   |  |               | 250 |               |  |   | 2,150         |  |               |  |   | 633     |  |  |   | 3,771 | 
|                                                                                    |  |               |     |               |  |   |               |  |               |  |   |         |  |  |   |       | 
|                                                                                    |  | $             | 250 |               |  | $ | 2,150         |  |               |  | $ | 397,009 |  |  | $ | 3,771 | 
|                                                                                    |  |               |     |               |  |   |               |  |               |  |   |         |  |  |   |       | 

Other income, net in the six months ended
December 29, 2002, included a net $2.2 million
property tax refund in connection with the former HMT facilities
in Fremont, California.

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

49



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##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 4.     Related
Parties

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

During 2001 and 2002 the Company recorded its
equity share of Chahayas net loss. In accordance with the
adoption of fresh-start reporting discussed in Note 3, the
Companys remaining investment balance of $1.7 million
was written down to its estimated fair value of zero in the
second quarter of 2002. In the fourth quarter of 2002, Chahaya
ceased operations, and as of December 29, 2002, the Company
had no remaining obligations related to Chahaya.

Note 5.     Segment
and Geographic Information

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

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

50



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##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                         |                                        |               |         |               |   |  |               |         |               |  |  |         |         |   |  |         |          |  
|------------------------ | -------------------------------------- | ------------- | ------- | ------------- | - |  | ------------- | ------- | ------------- |  |  | ------- | ------- | - |  | ------- | -------- | -
|                         |                                        | Successor     |         | Successor     |   |  | Predecessor   |         | Predecessor  
|                         |                                        | Company       |         | Company       |   |  | Company       |         | Company      
|                         |                                        |               |         |               |   |  |               |         |              
|                         |                                        | Year          |         | Six Months    |   |  | Six Months    |         | Year         
|                         |                                        | Ended         |         | Ended         |   |  | Ended         |         | Ended        
|                         |                                        | Dec. 28, 2003 |         | Dec. 29, 2002 |   |  | June 30, 2002 |         | Dec. 30, 2001
|                         |                                        |               |         |               |   |  |               |         |              
|Net sales:               |                                        |               |         |               |   |  |               |         |               |  |  |         |         |   |  |         |         
|                         | To customers from US operations        |               | $       | 1,141         |   |  | $             | 815     |               |  |  | $       | 1,343   |   |  | $       | 22,141   |  
|                         | To customers from Malaysian operations |               |         | 437,151       |   |  |               | 173,934 |               |  |  |         | 110,612 |   |  |         | 260,472  |  
|                         | Intercompany from Malaysian operations |               |         | 102,680       |   |  |               | 43,532  |               |  |  |         | 34,642  |   |  |         | 72,084   |  
|                         | Intercompany from US operations        |               |         | 369           |   |  |               | 320     |               |  |  |         | 913     |   |  |         | 18,956   |  
|                         |                                        |               |         |               |   |  |               |         |               |  |  |         |         |   |  |         |         
|                         |                                        |               | 541,341 |               |   |  | 218,601       |         |               |  |  | 147,510 |         |   |  | 373,653 |         
|                         | Intercompany eliminations              |               |         | (103,049      | ) |  |               | (43,852 | )             |  |  |         | (35,555 | ) |  |         | (91,040  | )
|                         |                                        |               |         |               |   |  |               |         |               |  |  |         |         |   |  |         |         
|                         | Total net sales                        |               | $       | 438,292       |   |  | $             | 174,749 |               |  |  | $       | 111,955 |   |  | $       | 282,613  |  
|                         |                                        |               |         |               |   |  |               |         |               |  |  |         |         |   |  |         |         
|Operating income (loss): |                                        |               |         |               |   |  |               |         |               |  |  |         |         |   |  |         |         
|                         | US operations                          |               | $       | (2,679        | ) |  | $             | (38,811 | )             |  |  | $       | (10,686 | ) |  | $       | (67,520  | )
|                         | Malaysian operations                   |               |         | 52,098        |   |  |               | 2,431   |               |  |  |         | (16,988 | ) |  |         | (78,407  | )
|                         |                                        |               |         |               |   |  |               |         |               |  |  |         |         |   |  |         |         
|                         | Total operating income (loss)          |               | $       | 49,419        |   |  | $             | (36,380 | )             |  |  | $       | (27,674 | ) |  | $       | (145,927 | )
|                         |                                        |               |         |               |   |  |               |         |               |  |  |         |         |   |  |         |         
|Long-lived assets:       |                                        |               |         |               |   |  |               |         |               |  |  |         |         |   |  |         |         
|                         | US operations                          |               | $       | 16,314        |   |  | $             | 43,579  |               |  |  |         |         |   |  |         |          |  
|                         | Malaysian operations                   |               |         | 172,550       |   |  |               | 186,647 |               |  |  |         |         |   |  |         |          |  
|                         |                                        |               |         |               |   |  |               |         |               |  |  |         |         |   |  |         |         
|                         | Total long-lived assets                |               | $       | 188,864       |   |  | $             | 230,226 |               |  |  |         |         |   |  |         |          |  
|                         |                                        |               |         |               |   |  |               |         |               |  |  |         |         |   |  |         |         

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

|           |                 |               |         |               |  |   |               |         |               |  |   |        |         |  |   |         |         | 
|---------- | --------------- | ------------- | ------- | ------------- |  | - | ------------- | ------- | ------------- |  | - | ------ | ------- |  | - | ------- | ------- | 
|           |                 | Successor     |         | Successor     |  |   | Predecessor   |         | Predecessor  
|           |                 | Company       |         | Company       |  |   | Company       |         | Company      
|           |                 |               |         |               |  |   |               |         |              
|           |                 |               |         | Six Months    |  |   | Six Months    |         |              
|           |                 | Year Ended    |         | Ended         |  |   | Ended         |         | Year Ended   
|           |                 | Dec. 28, 2003 |         | Dec. 29, 2002 |  |   | June 30, 2002 |         | Dec. 30, 2001
|           |                 |               |         |               |  |   |               |         |              
|Singapore  |                 | $             | 138,584 |               |  | $ | 56,077        |         |               |  | $ | 36,611 |         |  | $ | 94,138  |        
|Malaysia   |                 |               | 137,977 |               |  |   | 84,390        |         |               |  |   | 65,288 |         |  |   | 168,384 |        
|Thailand   |                 |               | 68,855  |               |  |   | 21,332        |         |               |  |   | 4,063  |         |  |   | 298     |        
|Japan      |                 |               | 26,107  |               |  |   | 1,362         |         |               |  |   | 1,856  |         |  |   | 1,411   |        
|China      |                 |               | 21,979  |               |  |   | 462           |         |               |  |   | 194    |         |  |   | 4,749   |        
|Europe     |                 |               | 20,966  |               |  |   | 8,008         |         |               |  |   | 339    |         |  |   | 51      |        
|US         |                 |               | 15,105  |               |  |   | 3,118         |         |               |  |   | 3,604  |         |  |   | 13,732  |        
|Other Asia |                 |               | 8,719   |               |  |   |              |         |               |  |   |       |         |  |   | (150    | )      
|           |                 |               |         |               |  |   |               |         |               |  |   |        |         |  |   |         |        
|           | Total net sales |               | $       | 438,292       |  |   | $             | 174,749 |               |  |   | $      | 111,955 |  |   | $       | 282,613 | 
|           |                 |               |         |               |  |   |               |         |               |  |   |        |         |  |   |         |        

51



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##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note
6.     Concentration of Customer and
Supplier Risk

The majority of the Companys sales are
derived from a relatively small number of customers, resulting
in a concentration of credit risk with respect to trade
receivables. The Company performs ongoing credit evaluations of
its customers, and generally requires no collateral for sales to
these customers. Based on managements evaluation of
potential credit losses, the Company believes its allowance for
doubtful accounts is adequate. The Company had one customer that
accounted for $24.1 million of its accounts receivable at
December 28, 2003, and 38% of its net sales for the year
ended December 28, 2003. A second customer accounted for
$16.1 million of the Companys accounts receivable at
December 28, 2003, and 17% of its net sales for the year
ended December 28, 2003. A third customer accounted for
$14.7 million of the Companys accounts receivable at
December 28, 2003, and 37% of its net sales for the year
ended December 28, 2003.

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

Because of the Companys small customer
base, the loss of any one significant customer would have a
material impact on the Companys business operations.

Significant customers accounted for the following
percentages of net sales in 2003, 2002, and 2001:

|                                       |  |               |    |               |  |  |               |   |               |  |  |    |   |  |  |    |  
|-------------------------------------- |  | ------------- | -- | ------------- |  |  | ------------- | - | ------------- |  |  | -- | - |  |  | -- | -
|                                       |  | Successor     |    | Successor     |  |  | Predecessor   |   | Predecessor  
|                                       |  | Company       |    | Company       |  |  | Company       |   | Company      
|                                       |  |               |    |               |  |  |               |   |              
|                                       |  |               |    | Six Months    |  |  | Six Months    |   |              
|                                       |  | Year Ended    |    | Ended         |  |  | Ended         |   | Year Ended   
|                                       |  | Dec. 28, 2003 |    | Dec. 29, 2002 |  |  | June 30, 2002 |   | Dec. 30, 2001
|                                       |  |               |    |               |  |  |               |   |              
|Western Digital Corporation            |  |               | 38 | %             |  |  | 60            | % |               |  |  | 62 | % |  |  | 59 | %
|Maxtor Corporation                     |  |               | 37 | %             |  |  | 31            | % |               |  |  | 30 | % |  |  | 27 | %
|Hitachi Global Storage Technologies(1) |  |               | 17 | %             |  |  |              |   |               |  |  |   |   |  |  |   |  
|IBM                                    |  |               | 5  | %             |  |  | 7             | % |               |  |  | 1  | % |  |  |   |  



---



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

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

52



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##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 7.     Employee
Savings and Deferred Profit Sharing Plan

The Company maintains a savings and deferred
profit sharing plan. Employees who meet certain criteria are
eligible to participate. In addition to voluntary employee
contributions to the plan, the Company matches a portion of each
employees contributions to the plan, up to a maximum
amount. The Company contributed a total of $0.7 million to
the plan in 2003, $0.3 million in the second six months of
2002, $0.4 million in the first six months of 2002, and
$0.7 million in 2001. Plan expenses are included in
selling, general, and administrative expenses.

Note
8.     Impairment Charges

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

Note 9. Income Taxes

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

|         |          |               |       |               |  |   |               |       |               |  |   |     |     |  |   |         |         |  
|-------- | -------- | ------------- | ----- | ------------- |  | - | ------------- | ----- | ------------- |  | - | --- | --- |  | - | ------- | ------- | -
|         |          | Successor     |       | Successor     |  |   | Predecessor   |       | Predecessor  
|         |          | Company       |       | Company       |  |   | Company       |       | Company      
|         |          |               |       |               |  |   |               |       |              
|         |          |               |       | Six Months    |  |   | Six Months    |       |              
|         |          | Year Ended    |       | Ended         |  |   | Ended         |       | Year Ended   
|         |          | Dec. 28, 2003 |       | Dec. 29, 2002 |  |   | June 30, 2002 |       | Dec. 30, 2001
|         |          |               |       |               |  |   |               |       |              
|Federal: |          |               |       |               |  |   |               |       |               |  |   |     |     |  |   |         |        
|         | Current  |               | $     |              |  |   | $             | (65   | )             |  |   | $   |    |  |   | $       | 18      |  
|         | Deferred |               |       |              |  |   |               |      |               |  |   |     |    |  |   |         | (11,069 | )
|         |          |               |       |               |  |   |               |       |               |  |   |     |     |  |   |         |        
|         |          |               |      |               |  |   | (65           | )     |               |  |   |    |     |  |   | (11,051 | )      
|State:   |          |               |       |               |  |   |               |       |               |  |   |     |     |  |   |         |        
|         | Current  |               |       | 2             |  |   |               |      |               |  |   |     | 2   |  |   |         | 13      |  
|         | Deferred |               |       |              |  |   |               |      |               |  |   |     |    |  |   |         | 259     |  
|         |          |               |       |               |  |   |               |       |               |  |   |     |     |  |   |         |        
|         |          |               | 2     |               |  |   |              |       |               |  |   | 2   |     |  |   | 272     |        
|Foreign: |          |               |       |               |  |   |               |       |               |  |   |     |     |  |   |         |        
|         | Current  |               |       | 998           |  |   |               | 1,333 |               |  |   |     | 717 |  |   |         | 1,346   |  
|         |          |               |       |               |  |   |               |       |               |  |   |     |     |  |   |         |        
|         |          | $             | 1,000 |               |  | $ | 1,268         |       |               |  | $ | 719 |     |  | $ | (9,433  | )      
|         |          |               |       |               |  |   |               |       |               |  |   |     |     |  |   |         |        

The foreign provision for 2003 consists of
foreign income taxes of the Companys subsidiaries net of a
reversal of withholding taxes previously accrued in 2002. The
foreign provisions for 2002 and 2001 consist of withholding
taxes on royalty and interest payments and foreign taxes of the
Companys subsidiaries.

53



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                         |                                                 |                           |                               |               |         |   |      |          |         |   | 
|------------------------ | ----------------------------------------------- | ------------------------- | ----------------------------- | ------------- | ------- | - | ---- | -------- | ------- | - | 
|                         |                                                 | Dec. 28, 2003             |                               | Dec. 29, 2002
|                         |                                                 |                           |                               |              
|Deferred tax assets      |                                                 |                           |                               |               |         |   |      |         
|                         | Depreciation and amortization                   |                           | $                             | 23,739        |         |   | $    | 25,999   |        
|                         | Accrued compensation and benefits               |                           |                               | 1,262         |         |   |      | 1,637    |        
|                         | Other                                           |                           |                               | 5,344         |         |   |      | 1,815    |        
|                         | Tax benefit of net operating loss carryforwards |                           |                               | 62,729        |         |   |      | 58,465   |        
|                         | Tax benefit of credit carryforwards             |                           |                               | 31,409        |         |   |      | 27,082   |        
|                         |                                                 |                           |                               |               |         |   |      |         
|                         |                                                 | Gross deferred tax assets |                               |               | 124,483 |   |      |          | 114,998 |  
|Deferred tax liabilities |                                                 |                           | (800                          | )             |         |   | (800 | )       
|                         |                                                 |                           |                               |               |         |   |      |         
|                         |                                                 | Net deferred tax assets   |                               |               | 123,683 |   |      |          | 114,198 |  
|                         | Valuation allowance                             |                           |                               | (123,683      | )       |   |      | (114,198 | )      
|                         |                                                 |                           |                               |               |         |   |      |         
|                         |                                                 |                           | Total net deferred tax assets |               | $       |  |      |          | $       |  | 
|                         |                                                 |                           |                               |               |         |   |      |         

As of December 28, 2003, the Company has
federal and state net operating loss carryforwards of
approximately $174.6 million and $7.7 million. The
Company also has federal and state tax credit carryforwards of
approximately $11.6 million and $30.4 million,
respectively. The Companys federal and state net operating
losses expire beginning in 2019 through 2023 and 2013,
respectively. The Companys federal R&D and AMT tax
credit can be carried forward for twenty years and indefinitely,
respectively, and the state R&D credit can be carried
forward indefinitely. As a result of the Companys
chapter 11 bankruptcy proceedings, the Companys
federal and state net operating loss carryforwards were reduced
by $362.2 million and $230.4 million, respectively,
and state tax credit carryforwards were also reduced by
$10.2 million.

The utilization of the Companys net
operating losses and tax credit carryforwards is subject to a
substantial annual limitation due to the change in
ownership provisions of the Internal Revenue Code of 1986,
as amended, and similar State provisions. The ownership change
will result in an annual limitation of $8.4 million.
Consequently, some of the Companys tax attributes
carryforwards will expire before they can be fully utilized. The
Company, therefore, has reduced its federal net operating loss
carryforwards by $156.6 million, and has also reduced its
federal and state tax credits carryforwards by
$14.3 million and $7.6 million, respectively. The
Company has also provided a full valuation allowance against its
remaining net deferred tax assets due to the uncertainty of the
timing and amount of future income. The use of the
Companys net operating losses and tax credits
carryforwards generated by the Predecessor Company, will be
accounted for as a credit to intangible assets first when
utilized and then to additional paid-in-capital after the
intangible assets have been reduced to zero.

The deferred tax asset valuation allowance
increased by $9.5 million in 2003, decreased by
$236.1 million in 2002, and increased by
$177.6 million in 2001.

54



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                                |  |               |         |               |  |   |               |   |               |  |   |          |   |  |   |          |  
|------------------------------------------------------------------------------- |  | ------------- | ------- | ------------- |  | - | ------------- | - | ------------- |  | - | -------- | - |  | - | -------- | -
|                                                                                |  | Successor     |         | Successor     |  |   | Predecessor   |   | Predecessor  
|                                                                                |  | Company       |         | Company       |  |   | Company       |   | Company      
|                                                                                |  |               |         |               |  |   |               |   |              
|                                                                                |  |               |         | Six Months    |  |   | Six Months    |   |              
|                                                                                |  | Year Ended    |         | Ended         |  |   | Ended         |   | Year Ended   
|                                                                                |  | Dec. 28, 2003 |         | Dec. 29, 2002 |  |   | June 30, 2002 |   | Dec. 30, 2001
|                                                                                |  |               |         |               |  |   |               |   |              
|Income tax expense (benefit) at federal
    statutory rate                      |  | $             | 12,964  |               |  | $ | (14,228       | ) |               |  | $ | 127,056  |   |  | $ | (107,039 | )
|State income taxes, net of federal benefit                                      |  |               | 1       |               |  |   |              |   |               |  |   | 2        |   |  |   | 272      |  
|Foreign withholding taxes                                                       |  |               | (834    | )             |  |   | 1,333         |   |               |  |   | 717      |   |  |   | 1,346    |  
|Non-deductible interest expense                                                 |  |               |        |               |  |   | 586           |   |               |  |   | 496      |   |  |   | 46,920   |  
|Non-deductible goodwill amortization and
    impairment                         |  |               |        |               |  |   | 11,865        |   |               |  |   |         |   |  |   | 5,901    |  
|Non-taxable gain on the extinguishment of
    liabilities subject to compromise |  |               |        |               |  |   |              |   |               |  |   | (132,650 | ) |  |   |         |  
|Changes in estimate for tax contingencies                                       |  |               |        |               |  |   |              |   |               |  |   |         |   |  |   | 10,995   |  
|Foreign rate differential                                                       |  |               | (14,948 | )             |  |   | (2,415        | ) |               |  |   | 9,870    |   |  |   | 29,298   |  
|Losses for which no current year benefit available                              |  |               | 3,820   |               |  |   |              |   |               |  |   |         |   |  |   | 1,373    |  
|In-process research and development                                             |  |               | 0       |               |  |   | 2,374         |   |               |  |   |         |   |  |   |          |  
|Other                                                                           |  |               | (3      | )             |  |   | 1,753         |   |               |  |   | (4,772   | ) |  |   | 1,501    |  
|                                                                                |  |               |         |               |  |   |               |   |               |  |   |          |   |  |   |          |  
|                                                                                |  | $             | 1,000   |               |  | $ | 1,268         |   |               |  | $ | 719      |   |  | $ | (9,433   | )
|                                                                                |  |               |         |               |  |   |               |   |               |  |   |          |   |  |   |          |  

Foreign pretax income (loss) was
$48.0 million, $6.9 million, ($28.2) million, and
($83.7) million in 2003, the second six months of 2002, the
first six months of 2002, and 2001, respectively.

The Companys wholly owned thin-film media
operation, Komag USA (Malaysia) SDN (KMS), received an
eight-year extension of its tax holiday, which expired in June
2003, for its first plant site in Malaysia. The additional
extension extends the tax holiday through June 2011. KMS has
also been granted additional tax holidays for its second and
third plant sites in Malaysia. These tax holidays are effective
through December 2006 and 2008, respectively. The extended tax
holiday granted to KMSs first plant site applies to income
generated by new products using new technologies.

In 2003, the tax holiday increased the
Companys net income by approximately $21.2 million
($0.90 per basic share and $0.86 per diluted share). In 2002,
the tax holiday decreased the Companys net loss by
approximately $7.1 million ($0.31 per basic and diluted
share) for the second six months of 2002, and increased net
income by approximately $1.1 million for the first six
months of 2002. The tax holidays had no impact on the
Companys 2001 net loss.

In the third quarter of 2003, the Company
received approval from the Malaysian Ministry of Finance for the
exemption of withholding tax on royalty payments made by its
Malaysian operations to its subsidiary in the Netherlands. The
exemption is for a period of five years effective retroactively
from January 2002 through December 2006. As a result, the
Company recorded an income tax benefit of $0.8 million in
2003 related to withholding taxes it previously accrued in 2002.
These withholding taxes are no longer payable.

In the fourth quarter of 2003, the Company
utilized $5.4 million of Malaysian capital allowances and
net operating loss carryforwards ($1.5 million
tax-effected) for income earned for older technology products.
See

55



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 11. As of December 28, 2003, KMS
had capital allowances, unabsorbed losses, and reinvestment
allowance carryforwards of $8.0 million, which can offset
future taxable income not sheltered by tax holidays.

Note 10.     Fair
Value of Financial Instruments

The carrying values of cash and cash equivalents,
accounts receivable and certain other current assets and
liabilities approximate their fair values at December 28,
2003, and December 29, 2002, due to the relatively short
period to maturity of these instruments.

As of December 28, 2003, the fair value of
the Companys long-term debt approximated
$138.8 million. The fair value of long-term debt is
estimated based on discounted cash flow analyses using interest
rates for the same or similar debt having the same or similar
maturities and collateral requirements. As of December 29,
2002, the fair value of the Companys long-term debt
approximated its carrying values.

Note 11.     Goodwill
and Other Intangible Assets

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

The Company completed a transitional impairment
analysis of its goodwill during the six months ended
June 30, 2002 and recorded a transitional impairment loss
of $47.5 million as of the first day of fiscal 2002. The
transitional impairment loss of $47.5 million was
recognized as the cumulative effect of a change in accounting
principle in the Companys consolidated statement of
operations. Upon the adoption of fresh-start reporting as of
June 30, 2002, the Company recorded goodwill of
$33.9 million, which equals the reorganization value in
excess of amounts allocable to identifiable net assets recorded
in accordance with SOP 90-7. In the fourth quarter of 2002,
the Company performed its first annual goodwill impairment
analysis under SFAS No. 142. Because the fair value of the
companys single reporting unit, as estimated by the
Companys market capitalization was significantly less than
net book value at December 29, 2002, the Company wrote off
the entire $33.9 million goodwill balance in the fourth
quarter of 2002.

Upon the adoption of fresh-start reporting as of
June 30, 2002, the Company recorded other intangible assets
in the amount of $17.6 million. As of December 28,
2003, other intangible assets included: 1) a volume
purchase agreement of $7.7 million (less accumulated
amortization of $4.2 million and a $1.0 million
tax-related adjustment discussed below), which was being
amortized on a straight-line basis over its useful life of two
and three-quarter years; 2) developed technology of
$3.1 million (less accumulated amortization of
$1.3 million and a $0.5 million tax-related adjustment
discussed below), which was being amortized on a straight-line
basis over its estimated useful life of three and one-half
years; and 3) patent costs of $0.6 million (less
accumulated amortization of $0.1 million).

In the fourth quarter of 2003, the Company
utilized $5.4 million of Malaysian capital allowances and
net operating loss carryforwards ($1.5 million
tax-effected). Upon emergence from bankruptcy on June 30,
2002, the Company provided a full valuation allowance against
all tax assets; therefore, upon utilization of the capital
allowances and net operating loss carryforwards in the fourth
quarter of 2003, a reduction of $1.5 million was made to
intangible assets. The $1.5 million adjustment was
allocated to reduce the volume purchase agreement by
$1.0 million and developed technology by $0.5 million.

As of December 28, 2003, the volume purchase
agreement had a net book value of $2.5 million and a
remaining estimated useful life of 15 months. The developed
technology had a net book value of $1.3 million and a
remaining estimated useful life of 24 months. In 2004,
amortization of the volume purchase agreement will approximate
$2.0 million, and amortization of developed technology will
approximate $0.7 million. In 2005, amortization of the
volume purchase agreement will approximate $0.5 million,
and amortization of developed technology will approximate
$0.6 million.

56



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Amortization of intangible assets was
$3.8 million in 2003, $1.8 million in the second half
of 2002, $3.6 million in the first half of 2002, and
$27.1 million in 2001.

The following table shows the fiscal year ended
December 28, 2003, the six-month period ended
December 29, 2002, the six-month period ended June 30,
2002, and the fiscal year ended December 30, 2001, adjusted
to exclude goodwill amortization (in thousands). Earnings per
share of the Predecessor Company are not presented, as the
amounts are not meaningful.

|                                                                                          |  |              |        |              |  |   |              |   |              |  |   |         |   |  |   |          |  
|----------------------------------------------------------------------------------------- |  | ------------ | ------ | ------------ |  | - | ------------ | - | ------------ |  | - | ------- | - |  | - | -------- | -
|                                                                                          |  | Successor    |        | Successor    |  |   | Predecessor  |   | Predecessor 
|                                                                                          |  | Company      |        | Company      |  |   | Company      |   | Company     
|                                                                                          |  |              |        |              |  |   |              |   |             
|                                                                                          |  | Year         |        | Six Months   |  |   | Six Months   |   | Year        
|                                                                                          |  | Ended        |        | Ended        |  |   | Ended        |   | Ended       
|                                                                                          |  | Dec 28, 2003 |        | Dec 29, 2002 |  |   | Jun 30, 2002 |   | Dec 30, 2001
|                                                                                          |  |              |        |              |  |   |              |   |             
|Reported net income (loss) before cumulative
    effect of change in accounting principle |  | $            | 36,040 |              |  | $ | (41,919      | ) |              |  | $ | 359,924 |   |  | $ | (296,395 | )
|Add: goodwill amortization                                                                |  |              |       |              |  |   |             |   |              |  |   |        |   |  |   | 22,797   |  
|                                                                                          |  |              |        |              |  |   |              |   |              |  |   |         |   |  |   |          |  
|Adjusted net income (loss) before cumulative
    effect of change in accounting principle |  |              | 36,040 |              |  |   | (41,919      | ) |              |  |   | 359,924 |   |  |   | (273,598 | )
|Cumulative effect of change in accounting
    principle                                   |  |              |       |              |  |   |             |   |              |  |   | (47,509 | ) |  |   |         |  
|                                                                                          |  |              |        |              |  |   |              |   |              |  |   |         |   |  |   |          |  
|Adjusted net income (loss)                                                                |  | $            | 36,040 |              |  | $ | (41,919      | ) |              |  | $ | 312,415 |   |  | $ | (273,598 | )
|                                                                                          |  |              |        |              |  |   |              |   |              |  |   |         |   |  |   |          |  

Note 12.     Accrued
Expenses and Other Liabilities

The following table summarizes accrued expenses
and other liabilities balances for fiscal 2003 and fiscal 2002
(in thousands):

|                                  |  |              |        |              |  |   |        | 
|--------------------------------- |  | ------------ | ------ | ------------ |  | - | ------ | 
|                                  |  | Dec 28, 2003 |        | Dec 29, 2002
|                                  |  |              |        |             
|Accrued compensation and benefits |  | $            | 20,608 |              |  | $ | 7,732  | 
|Restructuring liabilities         |  |              | 515    |              |  |   | 2,356  | 
|Other liabilities                 |  |              | 3,931  |              |  |   | 3,629  | 
|                                  |  |              |        |              |  |   |        | 
|                                  |  | $            | 25,054 |              |  | $ | 13,717 | 
|                                  |  |              |        |              |  |   |        | 

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

The Company recorded restructuring charges of
zero in 2003, $0.9 million in the second six months of
2002, $4.1 million in the first six months of 2002, and
$7.2 million in 2001. The $0.9 million charge in the
second six months of 2002 related to professional fees related
to the chapter 11 bankruptcy and Exit Facility fees. The
$4.1 million charge in the first six months of 2002 related
to the closure of the KMT research and development facility in
the first six months of 2002. The $7.2 million charge for
2001 reflected additional costs associated with lease
obligations on equipment no longer in service and costs for
closing the former HMT facilities.

Cash payments under the restructuring plans
totaled $1.8 million in 2003, $4.0 million in the
second six months of 2002, $1.0 million in the first six
months of 2002, and $21.0 million in 2001.

Non-cash charges against the restructuring
liabilities were $4.6 million in 2001. In 2001,
$11.4 million was reclassified from restructuring
liabilities into liabilities subject to compromise.

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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 13.     Exit
Facility and Debt

In accordance with the Plan of Reorganization,
the Company entered into a $15.0 million Exit Facility as
of the Effective Date (see Note 17). Additionally, the
Company entered into an Indenture for its Senior Secured Notes,
an Indenture for its Junior Secured Notes, and issued secured
and unsecured Promissory Notes as of the Effective Date (see
Note 17).

The Exit Facility was a revolving credit facility
providing for advances having a principal amount of up to
$15.0 million at any time outstanding, with a
$3.0 million letter of credit sub-facility. The Exit
Facility was to expire on June 30, 2005. As of
December 28, 2003, there were no borrowings under the Exit
Facility. A commitment fee of $0.3 million was paid in
order to obtain the Exit Facility, and there were ongoing unused
commitment fees due on a monthly basis at an annual rate of 0.5%
on the average unused portion of the $15.0 million facility
during the preceding month. Interest was payable monthly in
arrears at a rate of 12% per annum on the outstanding principal
amount. The Exit Facility contained affirmative, negative and
financial covenants binding on the Company and its subsidiaries.
As of December 28, 2003, the Company was in compliance with
all financial covenants.

Under the Senior Secured Notes Indenture, a total
of $128.8 million of Senior Secured Notes were issued. The
Senior Secured Notes had a cash-pay portion of
$85.3 million and a paid-in-kind (PIK) portion of
$43.5 million. The cash-pay portion of the Senior Secured
Notes: a) was due on June 30, 2007; b) was
payable in quarterly installments over a four-year period on a
straight-line basis beginning on July 15, 2003; and
c) paid interest monthly in arrears in cash, and bore
interest at the greater of 8% per annum and a rate per annum
equal to the prime rate of interest (which was 4.0% at
December 28, 2003) plus three hundred basis points. The PIK
portion of the Senior Secured Notes: a) was due on
June 30, 2007; and b) paid interest in-kind (i.e., by
increasing the principal amount of the Senior Secured Notes)
monthly in arrears, and bore interest at a rate of 12% per
annum. The Senior Secured Notes were secured by a second
priority security interest in substantially all of the
Companys assets. The Senior Secured Notes, including
accrued and unpaid interest, were due and payable in cash on
June 30, 2007. Under the Senior Secured Notes Indenture,
the Company had an obligation to make certain payments with the
net proceeds of the issuance of certain debt or equity
securities and the sale of certain assets permitted to be sold
under the indenture. In October 2003, the Company utilized 50%
($12.1 million) of the net proceeds from the sales of the
land and buildings (see Note 1) to pay down this debt. The
Senior Secured Notes indenture contained affirmative, negative
and financial covenants binding on the Company and its
subsidiaries. As of December 28, 2003, the outstanding
balance was $63.2 million of cash pay notes, and
$52.0 million of PIK notes. As of December 28, 2003,
the Company was in compliance with all financial covenants.

Under the Junior Secured Notes Indenture,
$7.0 million of Junior Secured Notes were issued. The
Company received consent in 2003 from a majority of the holders
of the Senior Secured Notes and the lender under the Exit
Facility to redeem in full the Junior Secured notes for
approximately $8.3 million. Accordingly, on
October 30, 2003, the Company called for the full
redemption of the Junior Secured Notes. The Junior Secured Notes
were redeemed in full on December 2, 2003. The Junior
Secured Notes, including accrued and unpaid interest, were
originally due and payable on December 31, 2007, bore
interest at a rate of 12% per year, and paid interest in-kind.

In connection with the treatment of the
Class 2 Allowed Secured Claims and Allowed Priority Tax
Claims, the Company issued four promissory notes to various city
and county taxing authorities in the aggregate amount of
$1.7 million. These notes bore interest at rates ranging
from 1.68% to 10.0% and had maturity dates through June 2008. As
of December 28, 2003, the balance due, including accrued
interest payable, on these notes was approximately
$0.9 million. See Note 17.

58



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As of December 28, 2003, the future minimum
principal payments due under the debt agreements, as discussed
in the preceding paragraphs, are as follows (in thousands):

|     |  |           |         | 
|---- |  | --------- | ------- | 
|     |  | Minimum  
|     |  | Principal
|     |  | Payments 
|     |  |          
|2004 |  | $         | 20,247  | 
|2005 |  |           | 20,259  | 
|2006 |  |           | 20,271  | 
|2007 |  |           | 55,163  | 
|2008 |  |           | 108     | 
|     |  |           |         | 
|     |  | $         | 116,048 | 
|     |  |           |         | 

Note
14.     Stockholders
Equity

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



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

As of December 28, 2003, the Company is
authorized to issue 50.0 million shares of common stock.
The following shares of common stock are reserved for future
issuance (in thousands):

|                                  |  |  |       | 
|--------------------------------- |  |  | ----- | 
|2002 Qualified Stock Plan         |  |  | 2,420 | 
|2002 Employee Stock Purchase Plan |  |  | 528   | 
|Warrants                          |  |  | 1,000 | 
|                                  |  |  |       | 
|                                  |  |  | 3,948 | 
|                                  |  |  |       | 



| |                          
| | -------------------------
| | 2002 Qualified Stock Plan

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

Stock purchase rights, which represent the right
to purchase the Companys common stock, may be issued under
the 2002 Stock Plan. The administrator determines the purchase
price of stock purchase rights granted under the 2002 Stock
Plan. Unless the administrator determines otherwise, the Company
may exercise a repurchase option upon the voluntary or
involuntary termination of the purchasers service with the
Company for any reason. The purchase price for shares the
Company repurchases will generally be the original price paid by
the purchaser and may be paid by cancellation of any
indebtedness of the purchaser.

As of December 28, 2003, the Company had
reserved a total of 3,275,000 shares of its common stock
for issuance under the 2002 Stock Plan. In 2002 and 2003,
495,385 stock purchase rights were converted into shares of the
companys common stock, and 9,850 stock purchase
rights were cancelled. In 2002 and 2003, 367,675 stock
options were exercised and shares of the companys stock
were issued. As of December 28, 2003, the Company had a net
balance of 2,419,838 shares of the Companys common stock
reserved for issuance under the 2002 Stock Plan. Of the
2,419,838 shares reserved for future issuance under the 2002
Stock Plan, 637,500 are for stock purchase rights deferred under
the Deferred Compensation Plan, 1,220,085 are for

59



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KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the exercise of outstanding stock options, and
562,253 are for future grants of stock options and stock
purchase rights.

A summary of stock option transactions is as
follows:

|                                 |           |                           |           |                |   |   |      |      | 
|-------------------------------- | --------- | ------------------------- | --------- | -------------- | - | - | ---- | ---- | 
|                                 |           |                           |           | Weighted-     
|                                 |           |                           |           | Average       
|                                 |           | Shares                    |           | Exercise Price
|                                 |           |                           |           |               
|                                 |           |                          
|                                 |           | (In thousands, except per
|                                 |           | share amounts)           
|Outstanding at June 30, 2002     |           |                           |          |                |   | $ |     |     
|                                 | Granted   |                           |           | 403,896        |   |   |      |     | 
|                                 | Exercised |                           |           |               |   |   |      |     | 
|                                 | Cancelled |                           |           | (405           | ) |   |      |     | 
|                                 |           |                           |           |                |   |   |      |     
|Outstanding at December 29, 2002 |           |                           | 403,491   |                |   |   |     |     
|                                 | Granted   |                           |           | 1,205,672      |   |   |      | 9.09 | 
|                                 | Exercised |                           |           | (367,675       | ) |   |      | 0.67 | 
|                                 | Cancelled |                           |           | (21,403        | ) |   |      | 5.87 | 
|                                 |           |                           |           |                |   |   |      |     
|Outstanding at December 28, 2003 |           |                           | 1,220,085 |                |   | $ | 8.68 |     
|                                 |           |                           |           |                |   |   |      |     

The following table summarizes information
concerning outstanding and exercisable options as of
December 28, 2003 (option shares in thousands):

|                |  |                     |           |                     |  |          |     |             |  |          |       |  |  |  |         |  |  |   |       | 
|--------------- |  | ------------------- | --------- | ------------------- |  | -------- | --- | ----------- |  | -------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                |  |                     |           |                    
|                |  | Options Outstanding |           | Options Exercisable
|                |  |                     |           |                    
|                |  |                     |           | Remaining           |  |          |     |            
|Range of        |  | Number              |           | Contractual         |  | Exercise |     | Number      |  | Exercise
|Exercise Prices |  | Outstanding         |           | Life (yrs)*         |  | Price*   |     | Exercisable |  | Price*  
|                |  |                     |           |                     |  |          |     |             |  |         
|$     $      |  |                     | 66,900    |                     |  |          | 0.4 |             |  | $        |      |  |  |  |        |  |  | $ |      | 
|6.48    6.48   |  |                     | 700,191   |                     |  |          | 9.2 |             |  |          | 6.48  |  |  |  | 192,215 |  |  |   | 6.48  | 
|13.16   13.16  |  |                     | 422,614   |                     |  |          | 9.6 |             |  |          | 13.16 |  |  |  | 100,380 |  |  |   | 13.16 | 
|14.45   18.86  |  |                     | 30,380    |                     |  |          | 9.7 |             |  |          | 16.37 |  |  |  |        |  |  |   |      | 
|                |  |                     |           |                     |  |          |     |             |  |          |       |  |  |  |         |  |  |   |       | 
|                |  |                     | 1,220,085 |                     |  |          |     |             |  |          |       |  |  |  | 292,595 |  |  |   |       | 
|                |  |                     |           |                     |  |          |     |             |  |          |       |  |  |  |         |  |  |   |       | 



---



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

Under the 2002 Stock Plan, as of
December 28, 2003, 1,142,735 stock purchase rights were
granted. Of this total, 487,487 were issued and outstanding
(106,977 were unvested), 17,748 were cancelled, and 637,500 were
deferred under the Deferred Compensation Plan (discussed below).



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

Employees at the director level and above are
eligible to participate in the Companys Deferred
Compensation Plan, which provides for the deferral of stock
purchase rights. Eligible employees may elect to defer any stock
purchase rights they are eligible to receive during any calendar
year the plan remains in effect. All deferrals must equal 100%
of the shares to be awarded at the fair market value, calculated
on the date of grant, of the stock purchase rights that would
have otherwise been received. Distributions shall be paid in the
form of shares of the Companys common stock at such time
as may be elected by each participant. The Deferred Compensation
Plan, which is unfunded, is administered by a committee
appointed by the Companys board of directors. As of
December 28, 2003, 637,500 shares were deferred under The
Deferred Compensation Plan. See the Deferred Stock-Based
Compensationsection below.

60



---



##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The Companys stockholders approved its 2002
Employee Stock Purchase Plan (ESPP) in October of 2002. The
Company originally reserved a total of 600,000 shares of
its common stock for issuance under the ESPP. In 2003,
71,784 shares of common stock were issued under the ESPP
Plan. The board has appointed the Companys Compensation
Committee as administrator of the ESPP. The ESPP is implemented
by offering periods lasting approximately six months in duration
with a new offering period commencing on the first trading day
on or following the first day of the fiscal month of March and
September of each year. Employees may elect to have payroll
deductions not to exceed 10% of a participants
compensation. The purchase price per share at which shares will
be sold in an offering under the ESPP is the lower of 85% of the
fair market value of a share of our common stock on the first
day of an offering period, or 85% of the fair market value of a
share of the Companys common stock on the last day of each
offering period.



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

In accordance with the Plan of Reorganization,
the Company issued warrants to purchase 1.0 million shares
of the Companys common stock. The warrants are exercisable
until June 2005 and have an exercise price of $9.00.



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

During the second six months of fiscal 2002, the
Company recorded deferred stock-based compensation of
$4.6 million, representing the difference between the
exercise price of stock options granted (which was zero) or the
purchase price of a share of common stock (which was zero), and
the fair value of the Companys stock as of the date of
grant (which ranged from $3.00 to $3.70). These amounts are
being amortized ratably as charges to operations over the
vesting periods of the individual stock options and stock
purchase rights. The vesting periods range from three to
21 months. The Company recorded $2.0 million for
amortization of deferred stock-based compensation expense for
2003, and $2.4 million for the second six months of 2002.

Note 15.     Leases
and Commitments

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

At December 28, 2003, the future minimum
commitments for non-cancelable operating facility leases,
equipment leases, and a facility sublease are as follows (in
thousands):

|     |  |          |        |          |  |   |       | 
|---- |  | -------- | ------ | -------- |  | - | ----- | 
|     |  | Minimum  |        |         
|     |  | Lease    |        | Sublease
|     |  | Payments |        | Income  
|     |  |          |        |         
|2004 |  | $        | 3,952  |          |  | $ | 1,539 | 
|2005 |  |          | 3,482  |          |  |   | 1,585 | 
|2006 |  |          | 3,341  |          |  |   | 1,633 | 
|2007 |  |          | 415    |          |  |   | 414   | 
|2008 |  |          | 5      |          |  |   |      | 
|     |  |          |        |          |  |   |       | 
|     |  | $        | 11,195 |          |  | $ | 5,171 | 
|     |  |          |        |          |  |   |       | 

Rental expense for all operating leases amounted
to $3.4 million in 2003, $1.5 million in the second
six months of 2002, $1.6 million in the first six months of
2002, and $5.3 million in 2001. Sublease rental income
amounted to $1.5 million in 2003, $0.7 million in the
second six months of 2002, $0.8 million in the first six months
of 2002, and $1.4 million in 2001.

61



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##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note
16.     Quarterly Financial Data
(Unaudited)

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

|                                                                             |  |                     |         |                |                   |   |                |   |                |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------- |  | ------------------- | ------- | -------------- | ----------------- | - | -------------- | - | -------------- |  | - | ------- | - |  | - | ------- | -
|                                                                             |  |                     |        
|                                                                             |  | 2002               
|                                                                             |  |                    
|                                                                             |  |                     |         |                |                  
|                                                                             |  | Predecessor Company |         |                | Successor Company
|                                                                             |  |                     |         |                |                  
|                                                                             |  | 1st Quarter(3)      |         | 2nd Quarter(4) |                   |   | 3rd Quarter(5) |   | 4th Quarter(6)
|                                                                             |  |                     |         |                |                   |   |                |   |               
|Net sales                                                                    |  | $                   | 61,365  |                |                   | $ | 50,590         |   |                |  | $ | 70,241  |   |  | $ | 104,508 |  
|Gross profit (loss)                                                          |  |                     | 3,123   |                |                   |   | (1,565         | ) |                |  |   | 7,388   |   |  |   | 24,352  |  
|Operating loss                                                               |  |                     | (7,786  | )              |                   |   | (19,888        | ) |                |  |   | (13,009 | ) |  |   | (23,371 | )
|Income (loss) before cumulative effect of
    change in accounting principle |  |                     | (10,182 | )              |                   |   | 370,106        |   |                |  |   | (14,405 | ) |  |   | (27,514 | )
|Cumulative effect of change in accounting
    principle                      |  |                     | (47,509 | )              |                   |   |               |   |                |  |   |        |   |  |   |        |  
|Net income (loss)                                                            |  | $                   | (57,691 | )              |                   | $ | 370,106        |   |                |  | $ | (14,405 | ) |  | $ | (27,514 | )
|Basic and diluted net loss per share(7)                                      |  |                     |         |                |                   |   |                |   |                |  | $ | (0.63   | ) |  | $ | (1.20   | )
|Number of shares used in basic and diluted per
    share computations(7)     |  |                     |         |                |                   |   |                |   |                |  |   | 22,826  |   |  |   | 22,853  |  



---



|    |                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Results of operations for 2003 included a
    $3.0 million gain on the sale of idle equipment and
    properties.                                                                                                                                                                                                          
|   
|(2) | Results for the third quarter of 2003 included an
    income tax benefit of $2.5 million related to withholding
    taxes previously accrued which are no longer payable as a result
    of a tax exemption.                                                                                                               
|   
|(3) | Results for the first quarter of 2002 included a
    $47.5 million impairment charge related to goodwill, which
    was recognized as the cumulative effect of a change in
    accounting principle as of January 1, 2002.                                                                                                 
|   
|(4) | Results for the second quarter of 2002 included
    $379.0 million in other income, net associated with the
    extinguishment of liabilities subject to compromise, and
    $17.3 million in other income, net to adjust certain
    balance sheet items to their fair value in accordance with
    fresh-start reporting.
|   
|(5) | Results for the third quarter of 2002 included a
    $6.8 million charge associated with in-process research and
    development costs.                                                                                                                                                                                    
|   
|(6) | Results for the fourth quarter of 2002 included a
    $33.9 million impairment charge related to the write-off of
    all remaining goodwill, and a $2.4 million stock
    compensation charge.                                                                                                                            
|   
|(7) | Earnings per share of the Predecessor Company are
    not presented, as the amounts are not meaningful.                                                                                                                                                                                                                    

62



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##### Table of Contents



KOMAG, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note
17.     Subsequent Events

On January 27, 2004, the Company closed the
purchase of a Malaysian substrate manufacturing facility for
$10.0 million from Trace Storage Technology Corporation
(Trace). The purchase included land, building, and equipment.
The Company is manufacturing both aluminum ground substrates and
plated and polished substrates in this factory for its own use,
and to sell Trace a portion of the output under a supply
agreement entered into in connection with the purchase.

On January 28, 2004, the Company announced
the closing of its offering of 4.0 million shares of its
common stock at $20.00 per share, of which selling security
holders sold 0.5 million shares, and $80.5 million of
2.0% Convertible Subordinated Notes Due in 2024. Total net
proceeds to the Company from these offerings were approximately
$144.0 million. The Notes mature on February 1, 2024,
bear interest at 2%, and require semiannual interest payments
beginning on August 1, 2004. Holders of the Notes may
convert the Notes into shares of the Companys common stock
prior to maturity if: 1) the sale price of the
Companys common stock exceeds a specified threshold;
2) the trading price of the Notes falls below a specified
threshold prior to February 19, 2019; 3) the Notes
have been called for redemption; or 4) specified corporate
transactions occur. The Company used $111.5 million of the
net proceeds to redeem in full its Senior Secured Notes on
February 27, 2004. The Exit Facility was terminated on
January 28, 2004.

63



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##### Table of Contents






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

None.




Item 9A.Controls
and Procedures

We maintain a rigorous set of disclosure controls
and procedures and internal controls designed to ensure that
information required to be disclosed in our filings under the
Securities Exchange Act of 1934 is recorded, processed,
summarized, and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms.
Our Chief Executive Officer and our Chief Financial Officer have
designed and evaluated our disclosure controls and procedures,
or caused such disclosure controls and procedures to be designed
under their supervision, pursuant to Rules 13a 
15(e) and 15d  15(e) of the Securities Exchange
Act of 1934 for the period covered on this Annual Report on
Form 10-K, and have determined that such disclosure
controls and procedures are effective to ensure that the
information required to be disclosed in our filings under
periodic Securities and Exchange Commission filings is gathered,
analyzed, and disclosed with adequate timeliness, accuracy, and
completeness, based on an evaluation of such controls and
procedures conducted as part of the end of the period covered by
this report.

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

PART III




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

Items 10 through 14 of Part III will be
contained in the Komag, Incorporated Proxy Statement for the
Annual Meeting of Stockholders to be held on May 12, 2004
(the 2004 Proxy Statement), which will be filed with
the Securities and Exchange Commission no later than
April 22, 2004. The cross-reference table below sets forth
the captions under which the responses to these items are found:

|          |    |             |  |                                                                    |  |                                                                                                               
|--------- | -- | ----------- |  | ------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------
|10-K Item |    | Description |  | Caption in 2003 Proxy Statement                                   
|          |    |             |  |                                                                   
|          | 10 |             |  | Directors and Executive Officers                                   |  | Item No. 1  Election
    of Directors and Compliance with Section 16(a)
    Beneficial Ownership Reporting
|          | 11 |             |  | Executive Compensation                                             |  | Executive Compensation and Related
    Information                                                          
|          | 12 |             |  | Security Ownership of Certain Beneficial Owners
    and Management |  | Stock Ownership Table                                                                                       
|          | 13 |             |  | Certain Relationships and Related Transactions                     |  | Certain Relationships and Related
    Transactions                                                          
|          | 14 |             |  | Principal Accountant Fees and Services                             |  | Principal Accountant Fees and Services                                                                      

The information set forth under the captions
listed above, contained in the 2004 Proxy Statement, are hereby
incorporated herein by reference in response to Items 10
through 14 of this Report on Form 10-K.

64



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##### Table of Contents



PART IV




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

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

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



| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consolidated Statements of Operations 
    Fiscal Year 2003, Six Months Ended December 29, 2002, Six
    Months Ended June 30, 2002, and Fiscal Year 2001              
|
| | Consolidated Balance Sheets 
    December 28, 2003 and December 29, 2002                                                                                               
|
| | Consolidated Statements of Cash Flows 
    Fiscal Year 2003, Six Months Ended December 29, 2002, Six
    Months Ended June 30, 2002, and Fiscal Year 2001              
|
| | Consolidated Statements of Stockholders
    Equity  Fiscal Year 2003, Six Months Ended
    December 29, 2002, Six Months Ended June 30, 2002, and
    Fiscal Year 2001

Notes to Consolidated Financial Statements

2.     Financial
Statement Schedules.

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

Schedule II  Valuation and
Qualifying Accounts

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

3.     Exhibits.

|        |   |             |  |                                                                                                                                                                                                                                                                                                                            
|------- | - | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |            
|Number  |   | Description
|        |   |            
|        | 2 | .1          |  | Komag Incorporateds Further Modified First
    Amended Plan of Reorganization, dated May 7, 2002
    (incorporated by reference from Exhibit 2.1 filed with the
    Companys Form 8-K filed on July 11, 2002).                                                                                                           
|        | 2 | .2          |  | Findings of Fact, Conclusions of Law and Order,
    dated May 9, 2002, Confirming Further Modified First
    Amended Plan of Reorganization of Komag, Incorporated, dated
    May 7, 2002 (incorporated by reference from
    Exhibit 2.2 filed with the Companys Form 8-K
    filed on July 11, 2002).                   
|        | 3 | .1          |  | Amended and Restated Certificate of Incorporation
    of Komag, Incorporated (incorporated by reference from
    Exhibit 3.1 filed with the Companys Form 10-Q
    filed on August 13, 2002).                                                                                                                             
|        | 3 | .2          |  | Bylaws of Komag, Incorporated (incorporated by
    reference from Exhibit 3.2 filed with the Companys
    Form 10-Q filed on August 13, 2002).                                                                                                                                                                            
|        | 4 | .1          |  | Form of Stock Certificate for Common Stock
    (incorporated by reference from Exhibit 4.1 filed with the
    Companys Form 10-Q filed on August 13, 2002).                                                                                                                                                               
|        | 4 | .2          |  | Registration Rights Agreement between Komag,
    Incorporated and certain holders of common stock and Senior
    Secured Notes due 2007, (incorporated by reference from
    Exhibit 4.2 filed with the Companys Form 10-Q
    filed on August 13, 2002), as amended by Amendment
    No. 1 thereto dated October 1, 2002.
|        | 4 | .3          |  | Form of Warrant (incorporated by reference from
    Exhibit 4.3 filed with the Companys Form 10-Q
    filed on August 13, 2002).                                                                                                                                                                                          
|        | 4 | .4          |  | Loan and Security Agreement between Komag,
    Incorporated, the lenders named therein, and Ableco Finance LLC
    as collateral agent and administrative agent (incorporated by
    reference from Exhibit 4.4 filed with the Companys
    Form 10-Q filed on August 13, 2002).                                          

65



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 4  | .5          |  | Indenture, dated June 30, 2002, governing
    the Senior Secured Notes due 2007 (incorporated by reference
    from Exhibit 4.5 filed with the Companys
    Form 10-Q filed on August 13, 2002).                                                                                                                                                              
|        | 4  | .6          |  | Form of Senior Secured Notes due 2007
    (incorporated by reference from Exhibit 4.6 filed with the
    Companys Form 10-Q filed on August 13, 2002).                                                                                                                                                                                                        
|        | 4  | .7          |  | Intercreditor Agreement dated June 30, 2002,
    between Komag, Incorporated, Ableco Finance LLC, The Bank of New
    York, and Bank One Trust Company, NA (incorporated by reference
    from Exhibit 4.9 filed with the Companys
    Form 10-K filed on March 13, 2003).                                                                                    
|        | 4  | .8          |  | Form of Indenture by and between Komag,
    Incorporated and U.S. Bank National Association
    (incorporated by reference from Exhibit 4.8 filed with the
    Companys Form S-3/ A filed on January 15, 2004).                                                                                                                                               
|        | 4  | .9          |  | Form of Convertible Note (included in
    Exhibit 4.8)                                                                                                                                                                                                                                                                                                         
|        | 10 | .1.1        |  | Lease Agreement dated May 2, 1989 by and
    between Stony Point Associates I and Komag Material Technology,
    Inc. (incorporated by reference from Exhibit 10.1.6 filed
    with the Companys report on Form 10-K for the year
    ended December 31, 1989).                                                                                               
|        | 10 | .1.2        |  | Lease Agreement (B10) dated May 24, 1996
    between Sobrato Development Companies #871 and Komag,
    Incorporated (incorporated by reference from
    Exhibit 10.1.11 filed with the Companys report on
    Form 10-K for the year ended December 29, 1996).                                                                                                
|        | 10 | .1.3        |  | Lease Agreement (B11) dated May 24, 1996
    between Sobrato Development Companies #871 and Komag,
    Incorporated (incorporated by reference from
    Exhibit 10.1.12 filed with the Companys report on
    Form 10-K for the year ended December 29, 1996).                                                                                                
|        | 10 | .1.4        |  | Sublease Agreement (B11) dated January 10,
    2000, between Komag, Incorporated and 2Wire, Inc. (incorporated
    by reference from Exhibit 10.1.15 filed with the
    Companys report on Form 10-K for the year ended
    January 2, 2000).                                                                                                                 
|        | 10 | .1.5        |  | Second Amendment to Lease dated March 16,
    1999 by and between Northern Trust Bank of California N.A. and
    Komag Material Technology, Inc. (incorporated by reference from
    Exhibit 10.1.16 filed with the Companys report on
    Form 10-K for the year ended January 2, 2000).                                                                     
|        | 10 | .2          |  | Form of Indemnification Agreement (incorporated
    by reference from Exhibit 10.2 filed with the
    Companys report on Form S-1 on August 27, 2002).                                                                                                                                                                                                        
|        | 10 | .3          |  | Asset Purchase Agreement between the Company and
    Western Digital Corporation dated April 8, 1999
    (incorporated by reference from Exhibit 10.1.13 filed with
    the Companys report on Form 10-Q for the quarter
    ended July 4, 1999) (Confidential treatment requested as to
    certain portions.)                                               
|        | 10 | .3.1        |  | Volume Purchase Agreement dated as of
    April 8, 1999 by and between the Company and Western
    Digital Corporation (incorporated by reference from
    Exhibit 10.1.14 filed with the Companys report on
    Form 10-Q for the quarter ended July 4, 1999)
    (Confidential treatment requested as to certain portions.)                                 
|        | 10 | .3.2        |  | Amendment Number 1 to Volume Purchase Agreement
    with Western Digital Corporation dated October 5, 2001
    (incorporated by reference from Exhibit 10.1 filed with the
    Companys report on Form 10-Q for the quarter ended
    September 30, 2001).                                                                                                    
|        | 10 | .4          |  | Form of Komag, Incorporated Amended and Restated
    2002 Employee Stock Purchase Plan (incorporated by reference
    from Exhibit 4.2 filed with the Companys report on
    Form S-8 on July 23, 2002).                                                                                                                                                      
|        | 10 | .4.1        |  | Amended and Restated 2002 Qualified Stock Option
    Plan and forms of agreement thereunder (incorporated by
    reference from Exhibit 4.1 filed with the Companys
    report on Form S-8 on July 23, 2002).                                                                                                                                                 
|        | 10 | .4.2        |  | Komag, Incorporated 2002 Deferred Compensation
    Plan (incorporated by reference from Exhibit 10.4.2 filed
    with the Companys report on Form S-1 on
    August 27, 2002).                                                                                                                                                                                
|        | 10 | .5.1        |  | 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).

66



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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                          
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .5.2        |  | Letter dated August 6, 2003 from the
    Malaysian Industrial Development Authority addressed to Komag
    USA (Malaysia) Sdn. extending the Pioneer Status of
    the Companys thin-film media venture in Malaysia
    (incorporated by reference from Exhibit 10.5.2 filed with
    the Companys report on Form 10-Q for the quarter
    ended September 28, 2003).
|        | 10 | .6.1        |  | Form of Executive Retention Agreement
    (incorporated by reference from Exhibit 10.6.1 filed with
    the Companys report on Form S-1 on August 27,
    2002).                                                                                                                                                                                                        
|        | 10 | .7          |  | Business Agreement by and between the Company and
    Maxtor Corporation dated October 6, 2003 (incorporated by
    reference from Exhibit 10.7 filed with the Companys
    Form S-3/ A filed on December 9, 2003).                                                                                                                                                     
|        | 21 |             |  | Subsidiaries of Komag, Incorporated as of 2003
    (incorporated by reference from Exhibit 21 filed with the
    Companys report on Form S-1 filed on August 27,
    2002).                                                                                                                                                                                             
|        | 23 | .1          |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                     
|        | 24 |             |  | Power of Attorney. Reference is made to the
    signature pages of this report.                                                                                                                                                                                                                                                                                          
|        | 31 | .1          |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                   
|        | 31 | .2          |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                   
|        | 32 |             |  | Certifications of Chief Executive Officer and
    Chief Financial Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                  

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

(b) Reports on Form 8-K.

On October 22, 2003, the Company furnished a
Form 8-K regarding the October 22, 2003, press release
announcing the Companys financial results for the third
quarter ended September 28, 2003.

On December 19, 2003, the Company filed
Form 8-K, which referenced the December 19, 2003,
press release announcing that the Company signed an agreement
with Trace Storage Technology Corporation (Trace), an
independent media supplier in Taiwan. The agreement will provide
the Company with additional substrate capacity as well as a
substrate supply relationship with Trace.

67



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in San Jose, California
on this 5th day of March, 2004.



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



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

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

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##### Table of Contents



POWER OF ATTORNEY

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

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

|                                             |  |                                                                                         |  |               |  | 
|-------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ------------- |  | 
|                                             |  |                                                                                         |  |              
|Signature                                    |  | Title                                                                                   |  | Date         
|                                             |  |                                                                                         |  |              
|                                            
|/s/ THIAN HOO TAN(Thian Hoo Tan)             |  | Chief Executive Officer and Director (Principal
    Executive Officer)                  |  | March 5, 2004
|                                            
|/s/ KATHLEEN A. BAYLESS(Kathleen A. Bayless) |  | Vice President, Chief Financial Officer and
    Secretary (Principal Financial Officer) |  | March 5, 2004
|                                            
|/s/ PAUL BRAHE(Paul Brahe)                   |  | Director                                                                                |  | March 5, 2004
|                                            
|/s/ CHRIS A. EYRE(Chris A. Eyre)             |  | Director                                                                                |  | March 5, 2004
|                                            
|/s/ NEIL S. SUBIN(Neil S. Subin)             |  | Director                                                                                |  | March 5, 2004
|                                            
|/s/ KENNETH R. SWIMM(Kenneth R. Swimm)       |  | Director                                                                                |  | March 5, 2004
|                                            
|/s/ DAVID G. TAKATA(David G. Takata)         |  | Director                                                                                |  | March 5, 2004
|                                            
|/s/ HARRY G. VAN WICKLE(Harry G. Van Wickle) |  | Director                                                                                |  | March 5, 2004
|                                            
|/s/ RAYMOND H. WECHSLER(Raymond H. Wechsler) |  | Director                                                                                |  | March 5, 2004
|                                            
|/s/ MICHAEL LEE WORKMAN(Michael Lee Workman) |  | Director                                                                                |  | March 5, 2004
|                                            
|*By                                          |  | /s/ KATHLEEN A. BAYLESS(Kathleen A. Bayless,Attorney-in-Fact)                           |  |               |  | 

69



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

|                                   |                                 |            |       |            |  |            |       |           |     |   |       |       |     |   |       |       | 
|---------------------------------- | ------------------------------- | ---------- | ----- | ---------- |  | ---------- | ----- | --------- | --- | - | ----- | ----- | --- | - | ----- | ----- | 
|Column A                           |                                 | Column B   |       | Column C   |  | Column D   |       | Column E 
|                                   |                                 |            |       |            |  |            |       |          
|                                   |                                 |            |       | Additions  |  |            |       |          
|                                   |                                 | Balance at |       | Charged to |  |            |       | Balance  
|                                   |                                 | Beginning  |       | Costs and  |  |            |       | at End   
|Description                        |                                 | of Period  |       | Expenses   |  | Deductions |       | of Period
|                                   |                                 |            |       |            |  |            |       |          
|PREDECESSOR COMPANY                |                                 |            |       |            |  |            |       |           |     |   |       |       |     |   |       |      
|Year ended December 30, 2001       |                                 |            |       |            |  |            |       |           |     |   |       |       |     |   |       |      
|                                   | Allowance for doubtful accounts |            | $     | 3,939      |  |            | $     | (473      | )   |   | $     | 1,829 |     |   | $     | 1,637 | 
|                                   | Allowance for sales returns     |            |       | 1,409      |  |            |       | 3,039     | (1) |   |       | 3,492 | (2) |   |       | 956   | 
|                                   |                                 |            |       |            |  |            |       |           |     |   |       |       |     |   |       |      
|                                   |                                 | $          | 5,348 |            |  | $          | 2,566 |           |     | $ | 5,321 |       |     | $ | 2,593 |      
|                                   |                                 |            |       |            |  |            |       |           |     |   |       |       |     |   |       |      
|Six months ended June 30, 2002     |                                 |            |       |            |  |            |       |           |     |   |       |       |     |   |       |      
|                                   | Allowance for doubtful accounts |            | $     | 1,637      |  |            | $     | (295      | )   |   | $     | 935   |     |   | $     | 407   | 
|                                   | Allowance for sales returns     |            |       | 956        |  |            |       | 751       | (1) |   |       | 1,266 | (2) |   |       | 441   | 
|                                   |                                 |            |       |            |  |            |       |           |     |   |       |       |     |   |       |      
|                                   |                                 | $          | 2,593 |            |  | $          | 456   |           |     | $ | 2,201 |       |     | $ | 848   |      
|                                   |                                 |            |       |            |  |            |       |           |     |   |       |       |     |   |       |      
|SUCCESSOR COMPANY                  |                                 |            |       |            |  |            |       |           |     |   |       |       |     |   |       |      
|Six months ended December 29, 2002 |                                 |            |       |            |  |            |       |           |     |   |       |       |     |   |       |      
|                                   | Allowance for doubtful accounts |            | $     | 407        |  |            | $     | 10        |     |   | $     | 16    |     |   | $     | 401   | 
|                                   | Allowance for sales returns     |            |       | 441        |  |            |       | 1,146     | (1) |   |       | 887   | (2) |   |       | 700   | 
|                                   |                                 |            |       |            |  |            |       |           |     |   |       |       |     |   |       |      
|                                   |                                 | $          | 848   |            |  | $          | 1,156 |           |     | $ | 903   |       |     | $ | 1,101 |      
|                                   |                                 |            |       |            |  |            |       |           |     |   |       |       |     |   |       |      
|Year ended December 28, 2003       |                                 |            |       |            |  |            |       |           |     |   |       |       |     |   |       |      
|                                   | Allowance for doubtful accounts |            | $     | 401        |  |            | $     | (3        | )   |   | $     |      |     |   | $     | 398   | 
|                                   | Allowance for sales returns     |            |       | 700        |  |            |       | 3,217     | (1) |   |       | 3,251 | (2) |   |       | 666   | 
|                                   |                                 |            |       |            |  |            |       |           |     |   |       |       |     |   |       |      
|                                   |                                 | $          | 1,101 |            |  | $          | 3,214 |           |     | $ | 3,251 |       |     | $ | 1,064 |      
|                                   |                                 |            |       |            |  |            |       |           |     |   |       |       |     |   |       |      



---



|    |                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Additions to the allowance for sales returns are
    netted against sales.                                                                                                                                                                                   
|   
|(2) | Actual sales returns of subsequently scrapped
    product were charged against the allowance for sales returns.
    Actual sales returns of product that were subsequently tested
    and shipped to another customer were netted directly against
    sales.

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##### Table of Contents



EXHIBIT INDEX

|        |    |             |  |                                                                                                                                                                                                                                                                                                                            
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1          |  | Komag Incorporateds Further Modified First
    Amended Plan of Reorganization, dated May 7, 2002
    (incorporated by reference from Exhibit 2.1 filed with the
    Companys Form 8-K filed on July 11, 2002).                                                                                                           
|        | 2  | .2          |  | Findings of Fact, Conclusions of Law and Order,
    dated May 9, 2002, Confirming Further Modified First
    Amended Plan of Reorganization of Komag, Incorporated, dated
    May 7, 2002 (incorporated by reference from
    Exhibit 2.2 filed with the Companys Form 8-K
    filed on July 11, 2002).                   
|        | 3  | .1          |  | Amended and Restated Certificate of Incorporation
    of Komag, Incorporated (incorporated by reference from
    Exhibit 3.1 filed with the Companys Form 10-Q
    filed on August 13, 2002).                                                                                                                             
|        | 3  | .2          |  | Bylaws of Komag, Incorporated (incorporated by
    reference from Exhibit 3.2 filed with the Companys
    Form 10-Q filed on August 13, 2002).                                                                                                                                                                            
|        | 4  | .1          |  | Form of Stock Certificate for Common Stock
    (incorporated by reference from Exhibit 4.1 filed with the
    Companys Form 10-Q filed on August 13, 2002).                                                                                                                                                               
|        | 4  | .2          |  | Registration Rights Agreement between Komag,
    Incorporated and certain holders of common stock and Senior
    Secured Notes due 2007, (incorporated by reference from
    Exhibit 4.2 filed with the Companys Form 10-Q
    filed on August 13, 2002), as amended by Amendment
    No. 1 thereto dated October 1, 2002.
|        | 4  | .3          |  | Form of Warrant (incorporated by reference from
    Exhibit 4.3 filed with the Companys Form 10-Q
    filed on August 13, 2002).                                                                                                                                                                                          
|        | 4  | .4          |  | Loan and Security Agreement between Komag,
    Incorporated, the lenders named therein, and Ableco Finance LLC
    as collateral agent and administrative agent (incorporated by
    reference from Exhibit 4.4 filed with the Companys
    Form 10-Q filed on August 13, 2002).                                          
|        | 4  | .5          |  | Indenture, dated June 30, 2002, governing
    the Senior Secured Notes due 2007 (incorporated by reference
    from Exhibit 4.5 filed with the Companys
    Form 10-Q filed on August 13, 2002).                                                                                                                          
|        | 4  | .6          |  | Form of Senior Secured Notes due 2007
    (incorporated by reference from Exhibit 4.6 filed with the
    Companys Form 10-Q filed on August 13, 2002).                                                                                                                                                                    
|        | 4  | .7          |  | Intercreditor Agreement dated June 30, 2002,
    between Komag, Incorporated, Ableco Finance LLC, The Bank of New
    York, and Bank One Trust Company, NA (incorporated by reference
    from Exhibit 4.9 filed with the Companys
    Form 10-K filed on March 13, 2003).                                                
|        | 4  | .8          |  | Form of Indenture by and between Komag,
    Incorporated and U.S. Bank National Association
    (incorporated by reference from Exhibit 4.8 filed with the
    Companys Form S-3/ A filed on January 15, 2004).                                                                                                           
|        | 4  | .9          |  | Form of Convertible Note (included in
    Exhibit 4.8)                                                                                                                                                                                                                                                                     
|        | 10 | .1.1        |  | Lease Agreement dated May 2, 1989 by and
    between Stony Point Associates I and Komag Material Technology,
    Inc. (incorporated by reference from Exhibit 10.1.6 filed
    with the Companys report on Form 10-K for the year
    ended December 31, 1989).                                                           
|        | 10 | .1.2        |  | Lease Agreement (B10) dated May 24, 1996
    between Sobrato Development Companies #871 and Komag,
    Incorporated (incorporated by reference from
    Exhibit 10.1.11 filed with the Companys report on
    Form 10-K for the year ended December 29, 1996).                                                            
|        | 10 | .1.3        |  | Lease Agreement (B11) dated May 24, 1996
    between Sobrato Development Companies #871 and Komag,
    Incorporated (incorporated by reference from
    Exhibit 10.1.12 filed with the Companys report on
    Form 10-K for the year ended December 29, 1996).                                                            
|        | 10 | .1.4        |  | Sublease Agreement (B11) dated January 10,
    2000, between Komag, Incorporated and 2Wire, Inc. (incorporated
    by reference from Exhibit 10.1.15 filed with the
    Companys report on Form 10-K for the year ended
    January 2, 2000).                                                                             
|        | 10 | .1.5        |  | Second Amendment to Lease dated March 16,
    1999 by and between Northern Trust Bank of California N.A. and
    Komag Material Technology, Inc. (incorporated by reference from
    Exhibit 10.1.16 filed with the Companys report on
    Form 10-K for the year ended January 2, 2000).                                 
|        | 10 | .2          |  | Form of Indemnification Agreement (incorporated
    by reference from Exhibit 10.2 filed with the
    Companys report on Form S-1 on August 27, 2002).                                                                                                                                                                    

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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                          
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .3          |  | Asset Purchase Agreement between the Company and
    Western Digital Corporation dated April 8, 1999
    (incorporated by reference from Exhibit 10.1.13 filed with
    the Companys report on Form 10-Q for the quarter
    ended July 4, 1999) (Confidential treatment requested as to
    certain portions.)                                                         
|        | 10 | .3.1        |  | Volume Purchase Agreement dated as of
    April 8, 1999 by and between the Company and Western
    Digital Corporation (incorporated by reference from
    Exhibit 10.1.14 filed with the Companys report on
    Form 10-Q for the quarter ended July 4, 1999)
    (Confidential treatment requested as to certain portions.)                                           
|        | 10 | .3.2        |  | Amendment Number 1 to Volume Purchase Agreement
    with Western Digital Corporation dated October 5, 2001
    (incorporated by reference from Exhibit 10.1 filed with the
    Companys report on Form 10-Q for the quarter ended
    September 30, 2001).                                                                                                              
|        | 10 | .4          |  | Form of Komag, Incorporated Amended and Restated
    2002 Employee Stock Purchase Plan (incorporated by reference
    from Exhibit 4.2 filed with the Companys report on
    Form S-8 on July 23, 2002).                                                                                                                                                                
|        | 10 | .4.1        |  | Amended and Restated 2002 Qualified Stock Option
    Plan and forms of agreement thereunder (incorporated by
    reference from Exhibit 4.1 filed with the Companys
    report on Form S-8 on July 23, 2002).                                                                                                                                                           
|        | 10 | .4.2        |  | Komag, Incorporated 2002 Deferred Compensation
    Plan (incorporated by reference from Exhibit 10.4.2 filed
    with the Companys report on Form S-1 on
    August 27, 2002).                                                                                                                                                                                          
|        | 10 | .5.1        |  | 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 | .5.2        |  | Letter dated August 6, 2003 from the
    Malaysian Industrial Development Authority addressed to Komag
    USA (Malaysia) Sdn. extending the Pioneer Status of
    the Companys thin-film media venture in Malaysia
    (incorporated by reference from Exhibit 10.5.2 filed with
    the Companys report on Form 10-Q for the quarter
    ended September 28, 2003).
|        | 10 | .6.1        |  | Form of Executive Retention Agreement
    (incorporated by reference from Exhibit 10.6.1 filed with
    the Companys report on Form S-1 on August 27,
    2002).                                                                                                                                                                                                        
|        | 10 | .7          |  | Business Agreement by and between the Company and
    Maxtor Corporation dated October 6, 2003 (incorporated by
    reference from Exhibit 10.7 filed with the Companys
    Form S-3/ A filed on December 9, 2003).                                                                                                                                                     
|        | 21 |             |  | Subsidiaries of Komag, Incorporated as of 2003
    (incorporated by reference from Exhibit 21 filed with the
    Companys report on Form S-1 filed on August 27,
    2002).                                                                                                                                                                                             
|        | 23 | .1          |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                     
|        | 24 |             |  | Power of Attorney. Reference is made to the
    signature pages of this report.                                                                                                                                                                                                                                                                                          
|        | 31 | .1          |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                   
|        | 31 | .2          |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                   
|        | 32 |             |  | Certifications of Chief Executive Officer and
    Chief Financial Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                  

72