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

                                    FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
    For the fiscal year ended January 2, 2000

OR

[ ] 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                               (I.R.S. Employer
incorporation or organization)                               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:

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

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

                          Common Stock, $0.01 par value

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

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

                            [Cover page 1 of 2 pages]
<PAGE>
     The aggregate  market value of voting stock held by  non-affiliates  of the
Registrant as of March 13, 2000 was  approximately  $186,274,104  based upon the
closing  sale price for shares of the  Registrant's  Common Stock as reported by
the Nasdaq National Market for the last trading date prior to that date). Shares
of Common Stock held by each  officer,  director and holder of 5% or more of the
outstanding  Common Stock have been  excluded in that such persons may be deemed
to be affiliates.  This  determination  of affiliate status is not necessarily a
conclusive determination for other purposes.

     On March 13,  2000,  approximately  65,874,918  shares of the  Registrant's
Common Stock, $0.01 par value, were outstanding.

                       Documents Incorporated by Reference

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

     Komag,  Incorporated Proxy Statement for the Annual Meeting of Stockholders
to be held on May 10, 2000, Part III.

                                       2
<PAGE>
                               KOMAG, INCORPORATED

                 TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K


                                                                            Page

Item 1.    Business ......................................................  4-19

Item 2.    Properties ....................................................    20

Item 3.    Legal Proceedings .............................................    20

Item 4.    Submission of Matters to Vote of Security Holders .............    21

Item 5.    Market for Registrant's Common Equity and Related
             Stockholder Matters .........................................    23

Item 6.    Selected Consolidated Financial Data ..........................    24

Item 7.    Management's Discussion and Analysis of Financial
             Condition and Results of Operations ......................... 25-35

Item 7A.   Financial Market Risks ........................................    36

Item 8.    Consolidated Financial Statements ............................. 37-66

Item 9.    Changes In and Disagreements with Accountants and
             Financial Disclosure ........................................    67

Item 10.   Directors and Executive Officers ..............................    67

Item 11.   Executive Compensation ........................................    67

Item 12.   Security Ownership of Certain Beneficial Owners
             and Management ..............................................    67

Item 13.   Certain Relationships and Related Transactions ................    67

Item 14.   Exhibits, Financial Statement Schedules and Reports
             on Form 8-K ................................................. 69-73

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<PAGE>
                                     PART I

ITEM 1. BUSINESS

     Komag,  Incorporated  ("we",  or "us")  designs,  manufactures  and markets
thin-film media  ("disks"),  the primary storage medium for digital data used in
computer  hard disk drives.  We believe we are the world's  largest  independent
manufacturer  of  thin-film  media  and are  well  positioned  as a  broad-based
strategic   supplier   of  choice  for  the   industry's   leading   disk  drive
manufacturers.  Our  business  strategy  relies on the  combination  of advanced
technology,  high-volume  manufacturing  and low cost. Our products are made for
the high-end desktop and  high-capacity/high-performance  enterprise segments of
the disk drive market and are used in products such as personal computers,  disk
arrays,   network  attached  storage,   network  file  servers  and  engineering
workstations. We manufacture leading-edge disk products primarily for 3 1/2-inch
form factor hard disk drives.  We were organized in 1983 and are incorporated in
the State of Delaware.

     Our business is subject to risks and  uncertainties,  a number of which are
discussed under "Risk Factors."

     Increasing demand for digital storage and low-cost,  high-performance  hard
disk drives has resulted in strong unit demand for these products. International
Data Corporation  ("IDC")  forecasts that worldwide disk drive unit shipments in
2000  through 2003 will grow at a 12.6%  compound  annual  growth rate.  Greater
processing power, more sophisticated operating systems and application software,
high-resolution graphics, larger databases and the emergence of the Internet are
among the  developments  that have  required ever higher  performance  from disk
drives. For example,  the first 5 1/4-inch hard disk drive,  introduced in 1980,
offered a capacity of five  megabytes  (one million bytes is a megabyte or "MB")
with an areal  density of less than two megabits (one million bits is a megabit;
eight bits is one byte) per square inch.  Current-generation  3 1/2-inch  drives
typically  have  capacities  of 4.3 to 73  gigabytes  (one  billion  bytes  is a
gigabyte or "GB") with areal densities of approximately 3.1 to 7.8 gigabits (one
billion bits is a gigabit) per square inch.  Today's areal  densities  allow for
approximately 10 GB of storage per 3 1/2-inch disk platter.  By the end of 2000,
we expect that increases in areal densities will allow for  approximately  20 GB
of storage per 3 1/2-inch  disk.  Advances  in  component  technology  have been
critical to improving the  performance  and storage  capacity of disk drives and
lowering the cost per bit stored.

     We have capitalized on our  technological  strength in thin-film  processes
and our  manufacturing  capabilities 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  understanding of materials science and the
interplay  between disks,  heads and other drive  components.  Our manufacturing
expertise in thin-film media is evidenced by our history of delivering  reliable
products in high volume.

                                       4
<PAGE>
We currently  manufacture  thin-film  media in Malaysia and through  Asahi Komag
Co., Ltd.  ("AKCL"),  a joint venture with Asahi Glass Co., Ltd. ("Asahi Glass")
and Vacuum Metallurgical  Company,  which manufactures  thin-film media in Japan
and Thailand.  We  manufacture  aluminum disk substrate  products  primarily for
internal use through our subsidiary,  Komag Material  Technology,  Inc.  ("KMT")
located in Santa Rosa,  California.  A 20%  minority  interest in KMT is held by
Kobe Steel USA  Holdings  Inc.  ("Kobe  USA"),  together  with Kobe Steel,  Ltd.
("Kobe") and other affiliated companies.

Technology

     We manufacture and sell thin-film magnetic media on rigid disk platters for
use in hard disk  drives.  These  drives are used to record,  store and retrieve
digital information. Inside a disk drive, the media or disk rotates at speeds of
up to 10,000  rpm.  The head  scans  across  the disk as it spins,  magnetically
recording or reading information. The domains where each bit of magnetic code is
stored are extremely small and precisely placed. The tolerances of the disks and
recording  heads are  extremely  demanding  and the  interaction  between  these
components is one of the most critical design aspects in an advanced disk drive.

     The primary factors governing the density of storage achievable on a disk's
surface are (1) the minimum distance at which read/write heads can reliably pass
over the  surface  of the disk to  detect a change  in  magnetic  polarity  when
reading from the disk,  defined as glide  height  (measured  in  microinches  or
millionths  of an inch);  (2) the  strength of the  magnetic  field  required to
change  the  polarity  of a bit of data on the  magnetic  layer  of a disk  when
writing, defined as coercivity (measured in oersteds--"Oe"), and (3) the ability
of  the  head  to   discriminate   a  signal   from   background   media   noise
(signal-to-noise  ratio). As glide height is reduced,  smaller bits can be read.
The higher the  coercivity  of the media,  the smaller the width of the bit that
can be stored. The signal-to-noise ratio is determined by the choice of magnetic
materials and the method for depositing  those  materials on the disk's surface.
Our plating,  polishing and texturing  processes  produce a uniform disk surface
with relatively few defects,  which permits the read/write heads to fly over the
disk surface at glide  heights of 0.6 to 0.9  microinches.  The magnetic  alloys
deposited on the surfaces of our disks have high coercivity, low noise and other
desirable magnetic characteristics.  The combination of these factors results in
more data stored in a given area on the disk surface.

     Significant increases in areal densities continued in 1999. We believe that
the number of gigabits per square inch on a typical disk  increased by over 100%
in  1999.  In  1999,  approximately  98% of  our  unit  sales  were  based  upon
magnetoresitive    ("MR")    technology,    including    more   advanced   giant
magnetoresistive  ("GMR") and 2% inductive  technology.  An MR disk is optimized
for use with MR heads  that use  separate  read and  write  elements.  The write
element is made from  conventional  inductive  materials but the read element is
made of a material whose electrical resistance changes when subjected to changes
in a magnetic  field.  MR heads are more sensitive to magnetic fields than prior
inductive  technology.  This increased sensitivity enables MR heads to read more
densely packed,  smaller sized bits. Advanced giant  magnetoresitive (GMR) disks
accounted  for 42% of 1999 unit  sales.  We  believe  that MR and GMR disks will
continue to be the predominate media for disk drives in 2000.

Products, Customers and Marketing

     We sell primarily MR and GMR media for 3 1/2-inch disk drives. We have also
historically sold disks for 5 1/4-inch drives and other disk drive form factors.
Our products offer a range of coercivities,  glide height capabilities and other
parameters  to meet  specific  customer  requirements.  Unit sales of 3 1/2-inch
disks capable of storing at least 6.8 GB per platter accounted for approximately
88% of our unit

                                       5
<PAGE>
sales in the fourth quarter of 1999. We anticipate that the majority of our unit
sales in the first  quarter of 2000 will be 3 1/2-inch  disks capable of storing
at least 10 GB per  platter at 7200 rpm and we are close to  obtaining  customer
qualification of 3 1/2-inch products capable of storing up to 15 GB per platter.

     Prior to  1997,  market  demand  for  advanced  thin-film  media  typically
exceeded  supply.  In  mid-1997,  the rate of growth in demand for media  slowed
abruptly due in large  measure to the rapid  advancement  in  increased  storage
capacity per disk achieved through the use of MR technology.  As a result, drive
designs  incorporated  fewer disks and recording heads to achieve the disk drive
capacities  demanded by the market.  In addition,  based upon historical  supply
shortages and forecasts  for  continued  strong demand growth rates,  we and our
competitors  (both independent and captive  suppliers) began adding  significant
media manufacturing capacity in 1996, which for the most part became operational
in 1997.  The  increased  supply  of media  generated  by the  expanded  factory
capacity,  coupled with the  tremendous  improvement  in disk storage  capacity,
allowed the overall  supply of thin-film  media to catch up to, and then exceed,
market demand.  Captive media  suppliers  (owned by vertically  integrated  disk
drive  customers)   utilized  their  capacity  at  the  expense  of  independent
suppliers,  such as us,  during this  period.  As a result,  in each of the last
three years,  the market for disks produced by independent  suppliers  decreased
sharply and pricing  pressures  intensified.  In 1997,  1998 and 1999,  we idled
certain  equipment and facilities to more closely align our production  capacity
to  demand  for  our  products.   These  restructuring  activities  resulted  in
significant restructuring and impairment charges.

     We believe that there remains  excess media  capacity  within the industry.
Certain  media   manufacturers   have  idled  capacity  and  restructured  their
operations.  StorMedia, Inc., an independent media supplier, declared bankruptcy
in late 1998. We believe that the  longer-term  success of the  thin-film  media
industry is dependent upon growth in demand for disks and further  consolidation
within  the media  industry.  Improvements  in  enabling  technologies,  such as
increased bandwidth  capability that will speed data transfers over the Internet
that  will  promote  use  of  other   storage-intensive   applications  such  as
multimedia, are expected to increase demand for storage capacity.

     We  primarily  sell our  media  products  to  independent  OEM  disk  drive
manufacturers  for  incorporation  into hard disk drives that are marketed under
the  manufacturers'  own  labels.  We have also  historically  sold our disks to
computer system manufacturers who make disk drives for their own use or for sale
in the  open  market.  We  work  closely  with  customers  as  they  design  new
high-performance  disk drives and generally customizes our products according to
customer specifications.

     Two customers accounted for approximately 87% of our net sales in 1999. Net
sales to major customers were as follows:  Western Digital Corporation ("Western
Digital")--71%  and  Maxtor  Corporation  ("Maxtor")--16%.  Sales are  generally
concentrated in a small number of customers due to the high volume  requirements
of the dominant  disk drive  manufacturers  and their  tendency to rely on a few
suppliers  because of the close  interrelationship  between media and other disk
drive  components.  Given the relatively small number of  high-performance  disk
drive manufacturers, we expect that we will continue our dependence on a limited
number of customers.  In April 1999, we acquired the assets of Western Digital's
media operation and also entered into a volume  purchase  agreement with Western
Digital  (see  "Item  7.  Management's  Discussion  and  Analysis  of  Financial
Condition and Result of Operations" below). As a result of the acquisition,  and
related  volume  purchase  agreement,  our sales are  expected to remain  highly
concentrated with Western Digital.

     Sales  were made in 1999  directly  to disk drive  manufacturers  worldwide
(except media sales into Japan) from our U.S. and Malaysian operations. Sales of
media for assembly into disk drives  within Japan are made solely  through AKCL.
On a selective  basis,  we have used AKCL to distribute our products to Japanese
drive  manufacturers for assembly outside of Japan. In 1999, we did not use AKCL
to  distribute  our

                                       6
<PAGE>
products.   In  1998,  we  sold  product  to   Matsushita-Kotobuki   Electronics
Industries,  Ltd. ("MKE") in Japan and to MKE's Singapore manufacturing facility
through AKCL. Media sales to the Far East from our U.S. and Malaysian operations
represented  95%,  83%  and  96% of our  net  sales  in  1999,  1998  and  1997,
respectively.  Our customers assemble a substantial portion of their disk drives
in the Far East and  subsequently  sell  these  products  throughout  the world.
Therefore,  our high concentration of Far East sales does not accurately reflect
the eventual  point of  consumption  of the assembled  disk drives.  All foreign
sales are  subject to certain  risks  common to all export  activities,  such as
government  regulation  and the risk of  imposition  of tariffs  or other  trade
barriers.  Foreign  sales  must  also  be  licensed  by  the  Office  of  Export
Administration of the U.S. Department of Commerce.

     Our sales are  generally  made  pursuant  to  purchase  orders  rather than
long-term  contracts.  At January  2,  2000,  our  backlog  of  purchase  orders
scheduled  for  delivery  within 90 days  totaled  approximately  $61.7  million
compared  to $69.6  million at January 3,  1999.  These  purchase  orders may be
changed or canceled by customers on short notice  without  significant  penalty.
Accordingly,  the backlog  should not be relied upon as  indicative of sales for
any future period.

Manufacturing

     Our manufacturing  expertise in thin-film media is evidenced by our history
of  delivering  reliable  products in high volume.  Through the  utilization  of
proprietary processes and techniques, we have the capability to produce advanced
disk products that generally exhibit uniform performance  characteristics.  Such
uniform  performance  characteristics  enhance  the  reliability  of  the  drive
products manufactured by our customers.  In addition,  these characteristics can
raise  production  yields on the  customers'  manufacturing  lines,  which is an
important cost  consideration  especially in  high-performance  disk drives with
large  component  counts.  Manufacturing  costs are  highly  dependent  upon our
ability to effectively  utilize 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 all of
our worldwide manufacturing operations.  The process technologies employed by us
historically  required  substantial capital investment.  In addition,  long lead
times to  install  new  increments  of  physical  capacity  complicate  capacity
planning.

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

     1. Sizing and Grinding of the Substrate:  A raw aluminum blank substrate is
sized by  precisely  cutting  the inner  and  outer  diameter  of the  blank.  A
mechanical  grinding  process  is then  utilized  to provide a  relatively  flat
surface on the substrate prior to nickel alloy plating.

     2. Nickel Alloy Plating and Polishing of the Substrate: Through a series of
chemical baths aluminum  substrates are plated with a uniform nickel  phosphorus
layer in order to provide  support for the magnetic  layer.  Next, this layer is
polished to achieve the required flatness.

                                       7
<PAGE>
     3. Fine  Polishing,  Texturing  and Cleaning:  During these process  steps,
disks are smoothed and cleaned to remove surface defects to allow the read/write
heads of the disk drives to fly at low and constant levels over the disks.

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

     5. Glide Test and  Certification:  In  robotically  controlled  test cells,
disks are first tested for surface defects optically, then for a specified glide
height  and  finally  certified  for  magnetic  properties.  Based on these test
results, disks are graded against customers' specific performance requirements.

     Most of the  critical  process  steps are  conducted in Class 100 or better
environments.   Throughout   the  process,   disks  are  generally   handled  by
custom-designed  and, in many cases,  self-built  automated  equipment to reduce
contamination  and enhance process  precision.  Minute  impurities in materials,
particulate  contamination  or other production  problems can reduce  production
yields and, in extreme cases, result in the prolonged  suspension of production.
Although no  contamination  problems have required  prolonged  suspension of our
production  to  date,  no  assurance  can be given  that we will not  experience
manufacturing problems from contamination or other causes in the future.

     As areal density increases,  recording heads are required to read and write
smaller  data bits packed more tightly  together on the surface of the disk.  To
accomplish  this, the read/write  head must fly closer to the disks' surfaces in
order  to  discriminate  smaller,  weaker  magnetic  signals.  During  1999,  we
optimized  processes  introduced  in 1998 to allow  customers to achieve  higher
density.  At the same  time,  we were  able to  increase  our  production  yield
substantially while lowering the cost of materials and supplies used.

Facilities and Production Capacity

     Based on analysis of our production  capacity and our expectations of media
market demand,  we implemented  restructuring  plans during 1997, 1998 and 1999.
Under  the 1997  restructuring  plan,  we  consolidated  our U.S.  manufacturing
operations  onto our new campus in San Jose,  California  by  closing  two older
factories in Milpitas,  California. The first of the two Milpitas facilities was
closed at the end of the  third  quarter  of 1997 and the  second  facility  was
closed in January 1998.  Under the 1998  restructuring  plan, we ceased  sputter
through  test  operations  at our oldest San Jose,  California  facility  in the
fourth  quarter of 1998. At the end of the second quarter of 1999, we closed the
former  Western  Digital media  operation,  nearly  fifteen  months ahead of our
original  transition  plan.  Further,  during  the  third  quarter  of 1999,  we
implemented a plan to cease volume  production of finished media in the U.S. and
consolidate  administrative  and research  and  development  functions  into one
facility in San Jose.  By the end of the fourth  quarter of 1999,  we had closed
the two remaining manufacturing facilities in San Jose, California. In addition,
we exited the San Jose administrative building during the first quarter of 2000.
At January 2, 2000, our joint venture,  AKCL, and we had facilities in the U.S.,
Malaysia, Japan and Thailand.

     As of January 2,  2000,  we  occupied  one  factory in the U.S.  comprising
approximately   44,000   square  feet  of  floor  space,   an  R&D  facility  of
approximately   188,000  square  feet  and  an   administrative   facility  with
approximately  82,000 square feet. In the first quarter of 2000, we consolidated
our  administrative  and research  and  development  functions  into the 188,000
square foot building. The 82,000 square foot

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<PAGE>
building  was  subleased  in the first  quarter  of 2000.  In  addition,  we had
terminated the lease on our 225,000 square foot  production  facility and are in
the process of exiting the facility in the first  quarter of 2000.  Further,  we
acquired several leased facilities in 1999 totaling approximately 137,000 square
feet as part of the acquisition of Western  Digital's media operation during the
year.  These  facilities are unoccupied and we are actively  engaged in locating
new  tenants  for the  buildings.  The  remaining  U.S.  production  facility is
occupied  by  a  majority-owned   subsidiary  (KMT),   located  in  Santa  Rosa,
California,  which  manufactures  aluminum  substrates  and  is  engaged  in the
research, development and pilot production of plated and polished substrates.

     We own three  production  facilities  in Malaysia,  two in Penang  totaling
approximately  615,000 square feet and one in Sarawak of  approximately  275,000
square  feet.  One of the Penang  factories  performs  all of our process  steps
except aluminum  substrate  preparation and the other is equipped to perform the
fine polish through test steps.  The Sarawak  factory is primarily  dedicated to
substrate,  plating and polishing operations.  We have strategically located the
majority of our manufacturing capacity in Malaysia.  These facilities are closer
to the  customers'  disk  drive  assembly  plants  in  Southeast  Asia and enjoy
significant cost and tax advantages.

     AKCL occupies  approximately  544,000 square feet of building space. AKCL's
Japanese facilities,  which are approximately 309,000 square feet, are primarily
dedicated  to fine  polish  through  test and its  Thailand  facility,  which is
approximately 235,000 square feet, is designed for plating and polishing.

Research, Development and Engineering

     Since  our  founding,  we  have  focused  on the  development  of  advanced
thin-film disk designs as well as the process technologies  necessary to produce
these  designs.  Our  spending and capital  investment  for R&D are aimed at the
investigation,  design, development and testing of new products and processes as
well as the development of more efficient and cost effective  processes that can
be integrated into  manufacturing  in a commercially  viable manner.  We utilize
both in-line and static sputtering  systems in our U.S. research and development
facility for development and prototype production.

     Our R&D efforts in 1999 have included the  development of  alternatives  to
aluminum-based  substrates,  such as glass-based substrates. We expect that disk
drive  manufacturers  will adopt glass  based  disks as the cost of  glass-based
media  technologies  decreases  and/or  demands  for  increasingly  high-density
products require the  technological  advantages  offered by glass. We have filed
several  patents  relating  to the glass  substrate  manufacturing  process.  We
believe that the new process offers the ability to manufacture  glass substrates
at a lower cost than current glass  substrates.  Furthermore,  the cost of glass
substrates  manufactured  with  these  new  processes  is  expected  to be  less
expensive than equivalent  aluminum-based  substrates.  However, as discussed in
our  "Risk  Factors"  section,  we  cannot  assure  you  that we will be able to
successfully commercialize the new glass substrate processes.

     Our  expenditures  (and  percentage of sales) on research,  development and
engineering activities, were $44.3 million (13.3%) in fiscal 1999, $61.6 million
(18.7%) in fiscal 1998 and $51.4 million (8.1%) in fiscal 1997.

Strategic Alliances

     We have  established  joint  ventures with Asahi Glass and Kobe. We believe
these  alliances have enhanced our competitive  position by providing  research,
development,  engineering  and  manufacturing  expertise  that reduce  costs and
technical risks and shorten product development cycles.

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<PAGE>
     Asahi Komag Co., Ltd. ("AKCL")

     In 1987, we formed a partnership (Komag Technology  Partners) with the U.S.
subsidiaries  of two Japanese  companies,  Asahi Glass and Vacuum  Metallurgical
Company. The partners simultaneously formed a wholly owned subsidiary,  AKCL, to
manufacture and distribute  thin-film disks in Yonezawa,  Japan. Under the joint
venture agreement, we contributed technology developed prior to January 1987 and
licensed technology  developed after January 1987, to the extent such technology
relates to  sputtered  thin-film  hard disk  media,  for a 50%  interest  in the
partnership.  The Japanese partners  contributed equity capital  aggregating 1.5
billion yen (equivalent to approximately  $11 million at that time).  AKCL began
commercial production in 1988.

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

     We made no disk sales to AKCL in 1999  compared to 3% in 1998 and less than
14% in 1997.  We  purchased  less  than 1% of AKCL's  unit  output  during  1999
compared  to  approximately  1% and 11% in 1998 and 1997,  respectively.  Future
distribution  sales of  AKCL-produced  disks to U.S.  customers  will  depend on
market dynamics.

     AKCL's  1999  net  loss  was  significantly  lower  than  in  1998,  due to
substantially higher unit sales volumes,  and improving yields,  somewhat offset
by lower average selling prices.  However, AKCL's current financing arrangements
may not be sufficient if losses continue at AKCL. There can be no assurance that
additional  financing  will be available to AKCL.  Failure to secure  additional
financing could have a material  adverse affect on AKCL's business and financial
results.  We have no  obligation  to provide  or  guarantee  financing  to AKCL.
Further, due to the AKCL losses, our investment in AKCL was written down to zero
in 1999.  We did not record  $2.6  million in losses as such  action  would have
reduced the net book value of the  investment in AKCL below zero. We will record
our share of AKCL's  net  income  only to the extent  that such  income  exceeds
losses  incurred  subsequent to the date on which the investment  balance became
zero.

     Komag Material Technology, Inc. ("KMT")

     In 1988,  we  formed a wholly  owned  subsidiary,  KMT,  to secure a stable
supply of aluminum substrates of satisfactory quality for our products. In 1989,
Kobe, a leading worldwide supplier of blank aluminum substrates, purchased a 45%
interest in KMT for $1.4 million.  In December  1995,  we reacquired  25% of the
outstanding  Common  Stock of KMT by  purchasing  shares  from  Kobe  for  $6.75
million.  Our purchase raised our total ownership percentage of KMT to 80%. Kobe
holds one seat on KMT's Board of Directors.

                                       10
<PAGE>
     Under agreements  between Kobe and us, Kobe will supply substrate blanks to
KMT while we will  purchase  the  majority  of KMT's  entire  output of finished
substrates.  In  combination,   KMT,  Kobe,  and  our  Sarawak  facility  supply
substantially all of our substrate requirements.

     Equity Positions Held by Asahi Glass and Kobe in Komag

     Asahi  Glass and Kobe each  purchased  two million  shares of newly  issued
Common  Stock  from  us  for  $20  million  in  January  1989  and  March  1990,
respectively. In 1992, Asahi Glass transferred ownership of its shares to a U.S.
subsidiary of Asahi Glass.  Under their  respective  stock purchase  agreements,
Asahi  Glass and Kobe each have the right to purchase  additional  shares of our
Common Stock on the open market to increase their respective equity interests in
us to 20%, to maintain their  percentage  interest in us by purchasing their pro
rata shares of any new equity issuance by us and to require us to register their
shares for resale,  either on a demand basis or  concurrent  with an offering by
us. Each stock purchase  agreement  further  provides that we shall use our best
efforts to elect a representative of each investor to our Board of Directors and
to include such  representatives on the Nominating Committee of the Board. There
were no  purchases  or  sales of our  stock  by Asahi  Glass or Kobe in 1999 and
according  to our stock  records  March 13,  2000,  Asahi  America and Kobe held
2,000,000  and  2,000,002  shares  of  Common  Stock,  respectively.   Sales  of
significant  amounts of the security  holdings of Asahi Glass and/or Kobe in the
future could adversely affect the market price of our Common Stock. Any sales by
either  party,  however,  would  relieve us of our  obligation  to nominate that
party's representative for election to the Board of Directors.

     Western Digital Corporation

     In April of 1999, we purchased  Western  Digital's media operation for 10.8
million  shares of common  stock and an  unsecured  note for $30.1  million.  In
addition, we assumed certain leases for equipment and facilities. As part of the
purchase,  we entered into a volume  purchase  agreement  with  Western  Digital
whereby  Western  Digital  is  obligated,  over the three  years  following  the
acquisition date, to purchase a significant  majority of its media  requirements
from us. As a result,  Western  Digital  was our largest  customer  in 1999.  We
expect them to remain our largest customer in the foreseeable  future. (see Item
7--"Management's  Discussion and Analysis of Financial  Condition and Results of
Operations")

Competition

     Current thin-film disk competitors fall into three groups: U.S. independent
manufacturers,  U.S. captive  manufacturers,  and Japanese/Asian  manufacturers.
Based upon research conducted by an independent market research firm, we believe
we are the  leading  independent  supplier  of  thin-film  disks.  The only U.S.
independent  thin-film disk  competitor in 1999 was HMT Technology  Corporation.
Japan-based  thin-film disk  competitors  include Fuji Electric  Company,  Ltd.;
Mitsubishi  Chemical  Corp.;  Showa Denko K.K.; and HOYA  Corporation.  The U.S.
captive  manufacturers  include  IBM and OEM disk drive  manufacturers,  such as
Seagate Technology,  Inc. ("Seagate") and Western Digital (prior to April 1999),
which  manufacture  disks  as a part of  their  vertical  integration  programs.
Western  Digital  sold its media  operation  to us during the second  quarter of
1999.  In  addition,  Maxtor  received a portion of its disk  requirements  from
MaxMedia,  a subsidiary  of Hyundai  Electronics  America.  Hyundai  Electronics
America is a major  shareholder of Maxtor. To date, IBM and other OEM disk drive
manufacturers have sold nominal quantities of disks in the open market.

                                       11
<PAGE>
     Prior  to  1997,  the  U.S.   independent   manufacturers,   U.S.   captive
manufacturers,  and  Japanese/Asian  manufacturers  each supplied  approximately
one-third  of the  worldwide  thin-film  disk unit  output.  We believe that the
captive manufacturers increased their market share to approximately 40%, 50% and
55% in 1997,  1998 and 1999,  respectively.  The increased  market share for the
captive  suppliers  heightened  price  competition  among the independent  media
suppliers for the remaining  available market. This significant pricing pressure
adversely  affected the financial  results of independent  suppliers,  including
ours. See "Risk Factors--Competition."

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  continuously  upgraded our  waste-water  treatment  facilities  to
improve  the  performance   and  consistency  of  our  waste-water   processing.
Nonetheless,  industrial  waste-water discharges from our facilities may, in the
future, be subject to more stringent regulations. Failure to comply with present
or future regulations could result in the suspension or cessation of part or all
of our operations.  Such regulations could restrict our ability to expand at our
present locations or could require us to acquire costly equipment or incur other
significant expenses.

Patents and Proprietary Information

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

     We regard  elements of our equipment  designs and processes as  proprietary
and confidential and rely upon employee and vendor nondisclosure  agreements and
a system  of  internal  safeguards  for  protection.  Despite  these  steps  for
protecting  proprietary  and  confidential  information,  there  is a risk  that
competitors  may  obtain  and use  such  information.  Furthermore,  the laws of
certain foreign countries in which we do business may provide a lesser degree of
protection to our proprietary and confidential  information than provided by the
laws of the U.S.  In  addition,  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 such information may be used or disclosed 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 such 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.  No  assurance  can be given

                                       12
<PAGE>
that we will be able to  negotiate  necessary  licenses  on terms that would not
have a material adverse effect on our business or that any litigation  resulting
from such claims  would not have a material  adverse  effect on our business and
financial results.

Employees

     As of January 2, 2000, on a worldwide  basis, we had 3,488 employees (3,250
of which are  regular  employees  and 238 of which were  employed on a temporary
basis),  including  3,252 in  manufacturing,  129 in research,  development  and
engineering and 107 in sales,  administrative and management  positions.  Of the
total, 2,856 are 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.  None of our employees are  represented  by a labor union and we have
never experienced a work stoppage.

Risk Factors

     Our business is subject to a number of risks and uncertainties.  While this
discussion represents our current judgment on the risks facing us and the future
direction  of our  business,  such risks and  uncertainties  could cause  actual
results to differ materially from any future  performance  suggested herein. The
discussion contained in Item 1--"Business" and Item 7--"Management's  Discussion
and  Analysis  of  Financial  Condition  and  Results  of  Operations"  contains
predictions,  estimates  and other  forward-looking  statements  that  involve a
number of risks and uncertainties. These statements may be identified by the use
of words such as  "expects,"  "anticipates,"  "intends,"  "plans,"  and  similar
expressions.  While some of the discussion in Item  7--"Management's  Discussion
and Analysis of Financial  Condition and Results of  Operations"  represents our
current   judgment  on  the  future   direction  of  our  business,   risks  and
uncertainties  could cause actual results to differ  materially  from any future
performance  suggested herein.  In particular,  the actions taken to restructure
our U.S.  operations  might  disrupt  our  ability to execute  against  customer
obligations and operational  improvement  plans.  Such failures to execute would
jeopardize the anticipated improvements in our financial performance.  We sell a
single product into a market  characterized  by rapid  technological  change and
sudden  shifts  in the  balance  between  supply  and  demand.  Further,  we are
dependent on a limited number of customers,  some of whom also  manufacture some
or most of their own disks internally. Due to the volume purchase agreement with
Western  Digital  Corporation  ("WDC"),  our results  continue to remain  highly
dependent on the relative success of WDC in the data storage market. Competition
in the market,  defined by both technology offerings and pricing, can be fierce,
especially  during times of excess  available  capacity.  Such  conditions  were
prevalent in 1997, 1998 and 1999.  Other factors that could cause actual results
to differ are the following:  changes in the industry supply-demand relationship
and  related  pricing  for  enterprise  and desktop  disk  products;  timely and
successful   qualification   of   next-generation   products;   utilization   of
manufacturing facilities;  changes in manufacturing efficiencies,  in particular
product yields and material input costs;  extensibility of process  equipment to
meet more stringent future product  requirements;  structural changes within the
disk  media  industry  such  as  combinations,   failures,   and  joint  venture
arrangements;  vertical  integration and consolidation within our customer base;
our  dependence  on  a  limited   number  of  customers  for  sales;   increased
competition;  timely and successful  deployment of new process technologies into
manufacturing;  the availability of certain  sole-sourced raw material  supplies
and retention of key employees.  In addition,  our business requires substantial
investments for research and development activities and for physical assets such
as  equipment  and  facilities  that are  dependent  on our access to  financial
resources.  We are  currently  in  default  under  certain  financial  covenants
contained in our bank  facilities  and we cannot assure you that we will be able
to negotiate

                                       13
<PAGE>
amendments to these credit  facilities on  commercially  reasonable  terms.  Our
ability  to raise  additional  funding  will be  dependent  upon  improving  our
financial performance as well as the status of our credit facilities.  These and
other risks are  discussed  more fully  below.  We undertake  no  obligation  to
publicly release the result of any revisions to our  forward-looking  statements
that may be made to reflect events or circumstances  after the date hereof or to
reflect the occurrence of unanticipated events.

Customers Have Demanding Product Requirements

     Our thin-film disk products  primarily serve the 3 1/2-inch hard disk drive
market, where product performance,  consistent quality,  price, and availability
are of great  competitive  importance.  Short  program  life-cycles  and product
customization  increase  the risk of  inventory  obsolescence.  To succeed in an
industry characterized by rapid technological developments, we must continuously
advance our thin-film  technology at a pace  consistent  with or faster than our
competitors.  If we are  unable to keep pace with  rapid  advances,  we may lose
market share and face increased price competition from other manufacturers. Such
competition could materially adversely affect our results of operations.

The Thin-Film Media Industry Is Very Competitive

     In 1999, as in 1998,  media supply  exceeded  media  demand.  The result of
excess  media  supply  has been  declines  in  average  selling  prices for disk
products as independent  suppliers  struggle to utilize their capacity.  Pricing
pressure on component  suppliers is further  compounded by high consumer  demand
for sub-$1,000 personal computers. Structural change in the disk media industry,
including combinations, failures and joint venture arrangements, may be required
before media supply and demand balances.

     In response to high  historical  and  projected  growth  rates for the disk
drive market at the time, a majority of our competitors  (both  independent disk
and  captive  disk   manufacturers)   and  we   substantially   increased   disk
manufacturing  capacity  in 1997 to  satisfy  the  anticipated  demand  for disk
products. These significant investments in capable new disk production capacity,
combined  with the  slowdown  in  demand,  have  resulted  in excess  disk media
capacity in the merchant market as drive  manufacturers  source a higher portion
of their disk requirements from their captive media operations.

     Low-cost  manufacturing has become more important as pricing pressures have
increased.  During  the  third  quarter  of 1999,  we  announced  that all media
production would be consolidated into our Malaysian  factories.  During the last
month of 1999, all of our media production occurred in our Malaysian  factories.
While we believe  that our  manufacturing  operations  in Malaysia can provide a
competitive cost advantage  relative to most other thin-film disk  manufacturers
that  operate  exclusively  or  primarily  in  the  U.S.  or  Japan,  our  media
manufacturing is now concentrated in one foreign country (see "Risks  Associated
with Foreign Operations and Joint Ventures" below).

     In  general,  the life  cycles  of recent  disk  drive  programs  have been
shortening.  Additionally,  media  must be more  customized  to each disk  drive
program.  Supply chain management,  including  just-in-time delivery, is rapidly
becoming a standard industry  practice.  Timely  development of new products and
technologies that assist customers in reducing their time-to-market  performance
and operational  excellence that supports  high-volume  manufacturing  ramps and
tight inventory management  throughout the supply chain will be keys to both the
maintenance of constructive  customer  relationships and our  profitability.  We
cannot  assure  you that we will be able to  respond  to this  rapidly  changing
environment  in a  manner  that  will  maximize  utilization  of our  production
facilities  and  minimize  our  inventory

                                       14
<PAGE>
losses. Furthermore, there are a relatively large number of capable competitors,
some with greater financial resources than us.

Bank Credit Facilities

     The size of our second  quarter 1998 net loss  resulted in a default  under
certain financial covenants contained in our bank credit facilities. At the time
of the covenant default we had $260 million of debt outstanding  against a total
borrowing  capacity of $345 million under our various  senior  unsecured  credit
facilities.  As a result of the covenant  default,  our lenders withdrew the $85
million in unused borrowing capacity.  We are not in payment default under these
credit  facilities  as we have  continued to pay all  interest  charges and fees
associated  with these  facilities  on their  scheduled  due dates.  Of the $260
million of debt  outstanding,  $85 million matures in the fourth quarter of 2000
and $175 million  matures in 2002. To date, our lenders have not accelerated any
principal  payments under our credit  facilities.  We are currently  negotiating
with our lenders for  amendments to our existing  credit  facilities.  We cannot
assure  you  that  we  will be able to  obtain  such  amendments  to our  credit
facilities on commercially  reasonable  terms. If we do not  successfully  amend
these credit facilities,  we would remain in technical default of our bank loans
and the lenders would retain their rights and remedies under the existing credit
agreements.  In addition,  if the maturities of the credit facilities due in the
fourth quarter of 2000 are not extended,  we may not have  sufficient  financial
resources to meet our fourth quarter $85 million  payment  obligations.  For the
long term, we will likely need to  restructure  our debt  obligations  and raise
additional  funds to operate our business.  Inability to raise  additional funds
may force us to reduce or  suspend  operations.  Raising  additional  funds or a
significant debt restructuring may require significant dilution to shareholders.

Customer Concentration

     Our  sales  are   concentrated  in  a  small  number  of  customers.   This
concentration is due to the high-volume  requirements of the dominant disk drive
manufacturers and their tendency to rely on a few suppliers because of the close
interrelationship  between media  performance and disk drive performance and the
complexity  of  integrating  components  from  a  variety  of  suppliers.   Also
influencing customer concentration are the increases in areal densities that led
to decreases in the platter count per drive. With lower platter counts,  captive
disk drive  manufacturers have excess internal media capacity and they rely less
on independent  sources of media.  Our net sales to major customers in 1999 were
as follows:

*    Western Digital Corporation ("Western Digital") - 71%
*    Maxtor Corporation ("Maxtor") - 16%

     During 1999,  IBM and Seagate  produced more than 80% of their media demand
internally  and MMC  Technology,  Inc.  supplied  approximately  45% of Maxtor's
requirement for media. Hyundai Electronics America owns MMC Technology, Inc. and
is also one of Maxtor's major  shareholders.  To date, MMC Technology,  Inc. and
the captive media operations of IBM and Seagate have sold minimal  quantities of
disks in the merchant market.

     Given the relatively  small number of disk drive  manufacturers,  we expect
that we will continue to depend on a limited  number of customers.  In addition,
our customers are based in the United States.  Should U.S. based drive companies
lose market share to foreign competitors, it could have a negative impact on our
sales.

                                       15
<PAGE>
     Our sales are generally  made pursuant to purchase  orders that are subject
to cancellation,  modification or rescheduling without significant penalties. We
cannot assure you that our current  customers will continue to place orders with
us,  that  orders by existing  customers  will  recover to the levels of earlier
periods or that we will be able to obtain orders from new customers.

     Our sales are significantly connected to Western Digital's performance.  In
April of 1999, we purchased  Western  Digital's media operation.  As part of the
purchase,  we entered into a volume  purchase  agreement  with  Western  Digital
whereby  Western  Digital  is  obligated,  over the three  years  following  the
acquisition date, to purchase a significant  majority of its media  requirements
from us. We also acquired  building and equipment  leases with  remaining  lease
commitments  of  $71  million  from  Western  Digital.  The  leased  assets  are
substantially  unused  and thus,  to the  extent  that we cannot  terminate  our
obligations under the leases, we will suffer a cash drain.

Our Sole Product Is Sold To Hard Disk Drive Manufacturers

     Our sole product,  thin-film media, is used in hard disk drives. Demand for
our  high-performance,  thin film  disks  depends  upon the demand for hard disk
drives and our ability to provide high quality, technically superior products at
competitive prices.

     The hard disk drive industry is very  competitive.  With short product life
cycles and rapid technological change, new products must be qualified frequently
and high volume  production must be achieved  rapidly.  Hard disk drive programs
have  increasingly  become  "bimodal" in that a few programs are high-volume and
the remaining  programs are small in terms of volume.  Supply and demand balance
can change quickly from customer to customer and program to program. Further, we
make  substantial  investments in qualifying on new programs  whether or not the
customer program or our share of the program  ultimately  results in high volume
production.

Rapid Technological Change

     We believe  that our  future  success  depends,  in large  measure,  on our
ability to develop and implement new process technologies in a timely manner and
to continually improve these technologies. New process technologies must support
cost-effective,   high-volume  production  of  thin-film  disks  that  meet  the
ever-advancing   customer   requirements   for   enhanced   magnetic   recording
performance.

     In this regard, in 1999 we developed a new disk carbon overcoat and process
that allows a thinner carbon overcoat without  compromising  disk durability and
reliability.  The new carbon  overcoat  process  was scaled up during the fourth
quarter of 1999.

     Advances  in hard disk drive  technology  demand  continually  lower  glide
heights and higher areal densities.  These advances require substantial on-going
process  and   technology   development.   Additionally,   the   development  of
alternatives to aluminum-based  substrates,  such as glass-based substrates, may
require  substantial   investments  in  new  process  technologies  and  capital
expenditures.  We expect  that disk drive  manufacturers  will adopt glass based
disks as the cost of glass-based media technologies decreases and/or demands for
increasingly  high-density products require the technological advantages offered
by  glass.  We have  filed  several  patents  relating  to the  glass  substrate
manufacturing  process.  We believe  that the new process  offers the ability to
manufacture  glass  substrates  at a lower cost than current  glass  substrates.
Furthermore,  the cost of glass substrates manufactured with these new processes
is expected to be less  expensive  than  equivalent  aluminum-based  substrates.
However, we

                                       16
<PAGE>
cannot  assure you that we will be able to  successfully  commercialize  the new
glass  substrate  processes.  Our ability to  commercialize  the glass substrate
processes  depends,  in  part,  on  our  partnering   relationships  with  glass
suppliers.

     Although we have a significant,  ongoing research and development effort to
advance our process  technologies and the resulting  products,  we cannot assure
you that we will be able to develop and implement such  technologies in a timely
manner in order to compete  effectively  against  competitors'  products  and/or
entirely new data storage technologies. Technology knowledge must be transferred
overseas  from  our  U.S.  research  and  development  center  to our  Malaysian
manufacturing  operations.   Our  results  of  operations  would  be  materially
adversely  affected  if our  efforts  to advance  our  process  technologies  or
implement  those  advanced  technologies  in our  Malaysian  operations  are not
successful or if the  technologies  that we have chosen not to develop proved to
be viable competitive alternatives.

Operating Results Are Subject To Quarterly Fluctuations

     We believe that our future operating results will continue to be subject to
quarterly variations based upon a wide variety of factors, including:

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

     Because thin-film disk manufacturing  requires a high level of fixed costs,
our gross margins are also extremely sensitive to changes in volume. At constant
average  selling  prices,  reductions  in  our  manufacturing  efficiency  cause
declines in our gross margins.  Additionally,  decreasing  market demand for our
products generally results in reduced average selling prices and/or low capacity
utilization that, in turn, adversely affect gross margins and operating results.

We Have Consolidated Our Media Manufacturing Operations To Our Malaysian
Factories

     During the third  quarter of 1999, we announced  that all media  production
would be  consolidated  into our Malaysian  factories.  During the last month of
1999,  100% of our media  production  occurred in Malaysia.  We believe that our
manufacturing  operations in Malaysia can provide a competitive  cost  advantage
relative to most other thin-film disk manufacturers that operate  exclusively or
primarily  in the

                                       17
<PAGE>
U.S.  or  Japan.  However,  with the  closure  of the U.S.  media  manufacturing
operations,  we are now  fully  dependent  on our  Malaysian  media  operations.
Technology  developed at our U.S.  research and  development  center must now be
first  implemented  at our Malaysian  facilities  without the benefit of initial
implementation at a U.S. factory. We continue to manufacture aluminum substrates
at our factory in Santa Rosa, California.

Risks Associated With Foreign Operations And Joint Ventures

     In 1999,  our sales to  customers  in the Far East,  including  the foreign
subsidiaries of domestic disk drive companies,  accounted for  approximately 95%
of our net sales from our U.S. and Malaysian facilities.  Our customers assemble
a substantial portion of their disk drives in the Far East and subsequently sell
these products  throughout the world.  Therefore,  our high concentration of Far
East 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.  All of our sales are currently  priced
in U.S.  dollars  worldwide.  Certain  costs at our  foreign  manufacturing  and
marketing  operations  are  incurred  in the local  currency.  We also  purchase
certain operating  supplies and production  equipment from Japanese suppliers in
yen-denominated transactions.  Accordingly, our operating results are subject to
the risks inherent with international operations, including, but not limited to:

*    compliance  with  or  changes  in the law and  regulatory  requirements  of
     foreign jurisdictions;
*    fluctuations in exchange rates, tariffs or other barriers;
*    difficulties in staffing and managing foreign operations;
*    exposure to taxes in multiple jurisdictions; and
*    transportation delays and interruptions.

     Our Malaysian  operations  accounted for a significant  portion of our 1999
consolidated  net  sales.  In  2000,  substantially  all of our net  sales  will
originate from our Malaysian  operations.  Prolonged disruption of operations in
Malaysia for any reason would cause  delays in shipments of our  products,  thus
materially  adversely  affecting our results of operations.  Changes in relative
currency  values can be swift and  unpredictable.  The ability to transfer funds
from our Malaysian operations to the United States is subject to local 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
shareholders.  This  regulation  would have  potentially  limited our ability to
transfer  funds to the United  States from our Malaysian  operations.  While the
political and economic issues in Southeast Asia have not had a material  adverse
affect on our  Malaysian  operations,  we cannot  assure you that future  events
would not cause a disruption in our operations.

We May Not Be Able To Attract And Retain Key Personnel

     Our future  success  depends  on the  continued  service  of our  executive
officers,  our  highly  skilled  research,  development  and  engineering  team,
manufacturing team and other key administrative, sales and marketing and support
personnel.  Competition for skilled personnel is intense, and we may not be able
to attract,  assimilate or retain highly qualified  personnel in the future.  In
this regard,  we have several new executive  officers,  including our President,
Chief  Executive  Officer,  Vice  President  -- Chief  Financial  Officer,  Vice
President  -- Corporate  Controller  and Vice  President -- Worldwide  Front-End
Operations.

                                       18
<PAGE>
We Rely On A Limited Number of Suppliers For Materials And Equipment Used In Our
Manufacturing Processes

     We  rely  on a  limited  number  of  suppliers,  and in  some  cases a sole
supplier,  for some of the  materials and  equipment  used in our  manufacturing
processes including aluminum substrates, nickel plating solutions, polishing and
texturing supplies, and sputtering target materials. As a result, our production
capacity  would be  limited  if one or more of these  materials  were to  become
unavailable  or  available  in  reduced  quantities.   If  such  materials  were
unavailable for a significant period of time, our results of operations would be
adversely  affected.  The supplier base has been weakened by the poor  financial
condition of the industry and some  suppliers have either exited the business or
failed.

Earthquakes Or Other Natural Or Man-made Disasters Could Disrupt Our Operations

     Our California R&D facility,  KMT, AKCL, Kobe, other Japanese  suppliers of
key manufacturing  supplies and our Japanese supplier of sputtering machines are
each 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. We cannot assure you
that natural or man-made disasters will not result in a prolonged  disruption of
production in the future.  If any natural or man-made  disasters do occur,  they
could have a material adverse effect on our results of operations.

Year 2000 Issues Present Technological Risks And Could Cause Disruption To Our
Business

     Although we have not  experienced  any Year 2000  problems,  it is possible
that, even after January 1, 2000, Year 2000-related issues may cause problems or
disruptions.  While we believe that all of our systems are Year 2000  compliant,
we cannot  assure you that we will not  discover a software bug during and after
2000 that requires us to upgrade, modify or replace our software. We also cannot
provide any assurance that governmental services, utility companies,  customers,
suppliers and others  outside our control will not  experience  future Year 2000
problems.

Our Business Depends Upon Our Ability To Protect Our Patents And Information
Rights

     Protection of technology  through  patents and other forms of  intellectual
property rights in technically sophisticated fields is commonplace.  In the disk
drive  industry,  it is not uncommon for companies and  individuals  to initiate
actions against others in the industry to enforce intellectual  property rights.
We cannot  assure  you that  others  have not or will not  perfect  intellectual
property  rights and  enforce  those  rights to  prevent  us from using  certain
technologies  or  demand  royalty  payments  from us in return  for using  those
technologies.  Either of these actions may have a material adverse affect on our
results  of  operations.  As a  measure  of  protection,  we have  entered  into
cross-license agreements with certain customers.

     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 such 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.  No  assurance  can be given  that we will be able to  negotiate
necessary  licenses on terms that would not have a material adverse effect on us
or that any  litigation  resulting  from such  claims  would not have a material
adverse effect on our business and financial results.

                                       19
<PAGE>
     We cannot  assure you that we will  anticipate  claims that we infringe the
technology  of others or  successfully  defend  ourselves  against  such claims.
Similarly, we cannot assure you that we will discover significant  infringements
of our  technology or  successfully  enforce our rights to our  technology if we
discover infringing uses.

The Market Price Of Our Stock Has Been Depressed

     The market  price of our common  stock has been  depressed  in  response to
actual and anticipated quarterly variations in:

*    our operating results;
*    perceptions of the disk drive industry's relative strength or weakness;
*    developments in our relationships with our customers and/or suppliers;
*    announcements  of alliances,  mergers or other  relationships by or between
     our competitors and/or customers;
*    announcements  of  technological  innovations  or new products by us or our
     competitors;
*    the success or failure of new product qualifications;
*    developments related to patents or other intellectual property rights;
*    status of our bank loans; and
*    other events or factors.

     We expect this  volatility  to continue in the  future.  In  addition,  any
shortfall or changes in our revenue, gross margins,  earnings or other financial
results from analysts' expectations could cause the price of our Common Stock to
fluctuate  significantly.  In recent  years,  the stock  market in  general  has
experienced  extreme  price and  volume  fluctuations  which  have  particularly
affected the market price of many technology companies and which have often been
unrelated to the operating  performance of those  companies.  These broad market
fluctuations  may  adversely  affect  the  market  price  of our  Common  Stock.
Volatility  in the price of stocks of companies in the hard disk drive  industry
has been particularly  high,  especially during 1997, 1998 and 1999. During this
period, the price of our stock fell to a low of $1 5/8 during the fourth quarter
of 1999 from a high of $35 1/8  during the  second  quarter of 1997.  See "Price
Range of Common Stock."

     Recovery of the stock price is contingent upon a correction in the industry
supply   and   demand   imbalance   as  well  as  on   internal   execution   on
industry-mandated  technology, cost and yields targets. The timing of the supply
and demand correction may be influenced by structural changes including mergers,
acquisitions and failures.

                                       20
<PAGE>
ITEM 2. PROPERTIES

     Worldwide   (excluding  AKCL),  we  currently  occupy  facilities  totaling
approximately  1.2 million square feet. In addition,  we have unoccupied  leased
facilities  totaling  approximately  0.1  million  square  feet for which we are
actively engaged in locating new tenants. We own three manufacturing  facilities
in  Malaysia,  two in Penang and one in Sarawak.  The square  footage of each of
these facilities and acreage of the related land parcels are 340,000 square feet
and 13 acres,  275,000 square feet and 18 acres,  and 275,000 square feet and 89
acres.  We lease one  manufacturing  facility in Santa Rosa,  California.  These
facilities are leased for the following terms:

        Facility Size          Current Lease
        (square feet)          Term Expires            Extension Options
        -------------          ------------            -----------------

           188,000              January 2007                      20 years
            58,875  (4)            June 2013          2 options at 5 years
            97,000  (1)        February 2001          2 options at 5 years
            82,000  (2)           March 2007                      20 years
            44,000                April 2004                       5 years
            30,000  (4)           April 2003                     36 months
            25,000  (4)           April 2003                     36 months
            23,000  (3)           April 2003                       5 years

(1)  This  facility  was  vacated  in the third  quarter  of 1997 as part of our
     restructuring plan and subleased in December 1997.
(2)  This  facility was  partially  vacated in January 2000 and fully vacated in
     February 2000 and subleased in January 2000.
(3)  This facility was vacated in June 1999, partially subleased in October 1999
     and completely subleased in March 2000.
(4)  These facilities are unoccupied.

ITEM 3. LEGAL PROCEEDINGS

     There are no material legal proceedings to which either our subsidiaries or
we are a party or to which any of our property is subject.

                                       21
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

     No matters were submitted to our stockholders  during our fourth quarter of
1999.

EXECUTIVE OFFICERS OF THE REGISTRANT

     As of February 29, 2000, our executive officers are as follows:

Name                     Age   Position
----                     ---   --------

Thian Hoo Tan             51   President, Chief Executive Officer and Director
Christopher H. Bajorek    56   Executive Vice President--Chief Technical Officer
Ray Martin                56   Senior Vice President--Customer Sales and Service
Edward H. Siegler         49   Vice President--Chief Financial Officer and
                                 Secretary
Kathleen A. Bayless       43   Vice President--Corporate Controller
Timothy H. Starkey        47   Vice President--Worldwide Front-End Operations
Thiam Seng Tan            43   Vice President--Penang Operations
Eric Tu                   46   Vice President--Media Manufacturing
Tsutomu T. Yamashita      45   Vice President--Process Development

     Mr. Thian Hoo Tan was appointed  President and Chief  Executive  Officer in
August  1999.  Mr.  Tan  started  our first San Jose,  California  manufacturing
facility in 1989, Penang operations in 1993, and 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 by the Board
to his present  position.  Before  joining the Company in 1989, Mr. Tan was Vice
President  of  Operations  at HMT  Technology.  Mr.  Tan holds a M.S.  degree in
Physics from the University of Malaya in Kuala Lumpur.

     Dr.  Bajorek  joined  the  Company  and was  elected  to the newly  created
position of Senior Vice  President-Chief  Technical Officer in June 1996. He was
promoted to Executive Vice President-Chief Technical Officer in January of 2000.
Prior to  joining  the  Company,  Dr.  Bajorek  was Vice  President,  Technology
Development and  Manufacturing,  for the Storage Systems  Division of IBM in San
Jose,  California.  During his 25-year career with IBM, Dr. Bajorek held various
positions in research and  management  related to magnetic  recording,  magnetic
bubble and optical storage  applications.  He holds a Ph.D. degree in Electrical
Engineering and Business Economics from the California  Institute of Technology.
Dr.  Bajorek  is a  director  of the  International  Disk  Drive  Equipment  and
Materials Association (IDEMA), an industry trade association.  He is also one of
fifteen scientists awarded the Millennium award by IEEE.

     Mr.  Martin  joined  the  Company  in  October  1997  and  served  as  Vice
President--Product Assurance and Product Test until his promotion to Senior Vice
President--Customer Sales and Service in June 1998. From 1990 to 1997, he headed
product  engineering  and  head/media  development  as  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, and IBM. Mr. Martin holds a
B.S. degree in Mechanical Engineering from Kansas State University.

                                       22
<PAGE>
     Mr.  Siegler  joined  the  Company  in 1987 and has  served in a variety of
financial management roles. He was promoted to Vice  President--Chief  Financial
Officer in  February  2000.  He also serves as  Secretary.  Prior to joining the
Company,  Mr.  Siegler  held  management  positions  at several  high-technology
concerns. Mr. Siegler holds a B.A. degree from Stanford University and an M.B.A.
from Santa Clara University.

     Ms. Bayless  joined the Company in August 1994 as Corporate  Controller and
was promoted to Vice President in February  2000.  Prior to joining the Company,
she held various management positions with 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.  Thiam Seng Tan joined the  Company in  December  1993 as  Director  of
Quality Assurance. He was appointed Vice President--Penang Operations in October
1998.  Prior to joining the Company,  Mr. Tan held  positions in  manufacturing,
engineering,  customer service and materials  management at Hewlett Packard Sdn.
Bhd. from 1979 to 1993. Mr. Tan holds a B.Sc.  degree in Mechanical  Engineering
from the University of London.

     Mr.  Starkey  joined the  Company in 1989 as  President  of Komag  Material
Technology,  Inc. (KMT), a Komag subsidiary  located in Santa Rosa,  California.
During  that time he has also  served on the Board of  Directors  for KMT and is
currently   the   Chairman.   He  was  promoted  to  Vice   President--Substrate
Manufacturing  of Komag,  Incorporated in February 2000. Mr. Starkey has over 20
years experience in the recording media industry.  Prior to joining the Company,
he was a General Manager at Domain  Technology and held  Engineering  Management
positions at Verbatim,  Corporation.  Mr.  Starkey holds a Bachelor's  degree in
Electrical Engineering from Bradley University.

     Mr. Tu rejoined the Company as Vice  President--U.S.  Media  Operations  in
July 1998.  After the  closure of the U.S.  manufacturing  operation  and recent
worldwide   reorganization,   Mr.  Tu  was   appointed   Vice   President--Media
Manufacturing  and is heading process  development for certain process areas and
pilot line  operation  in the U.S. He also carries the  responsibility  of media
operation at our Penang facility. He previously worked for us from 1988 to 1993.
Prior to  rejoining  us, Mr. Tu held senior  manufacturing  positions  with Kobe
Precision,  Inc.,  a  manufacturer  of  aluminum  substrates  and Fuji  Electric
(Malaysia) Sdn. Bhd., a computer hard disk maker in Malaysia.  Mr. Tu holds a MS
degree in Mechanical Engineering from University of Missouri.

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

                                       23
<PAGE>
                                    PART II

ITEMS 5, 6, 7 and 8.

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

     Our Common Stock is traded on the Nasdaq  National  Market under the symbol
KMAG.  The  following  table sets forth the range of high and low closing  sales
prices,  as reported  on the Nasdaq  National  Market.  At March 13, 2000 we had
approximately  422 holders of record of our Common Stock and  65,874,918  shares
outstanding.

                                                             Price Range of
                                                              Common Stock
                                                             ---------------
                                                             High        Low
                                                             ----        ---
          1998
              First Quarter                                  15.63      12.06
              Second Quarter                                 15.50       5.63
              Third Quarter                                   6.13       2.63
              Fourth Quarter                                 11.00       2.13

          1999
              First Quarter                                  15.25       4.31
              Second Quarter                                  4.63       3.06
              Third Quarter                                   4.25       3.00
              Fourth Quarter                                  3.94       1.63

          2000
              First Quarter (through March 24, 2000)          4.81       2.22

DIVIDEND POLICY

     We have never paid cash dividends on our Common Stock. We presently  intend
to retain all cash for use in the operation and expansion of our business and do
not anticipate paying any cash dividends in the near future. Our debt agreements
prohibit the payment of dividends without the lenders' consent.

                                       24
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The following  table sets forth  selected  consolidated  financial data and
other  operating  information  of Komag,  Incorporated.  The financial  data and
operating  information is derived from the consolidated  financial statements of
Komag,  Incorporated  and should be read in  conjunction  with the  consolidated
financial  statements,  related notes and other financial  information  included
herein.

<TABLE>
<CAPTION>
                                                            Fiscal Year Ended (4)
                                        ---------------------------------------------------------------
                                         1999 (1)      1998 (2)      1997 (3)       1996        1995
                                        ---------     ---------     ----------     --------    --------
                                       (in thousands, except per share amounts and number of employees)
<S>                                     <C>           <C>           <C>            <C>         <C>
Consolidated Statements of
  Operations Data:
Net Sales                               $ 331,946     $ 328,883     $  631,082     $577,791    $512,248
Gross Profit (Loss)                       (22,709)      (62,752)        93,546      175,567     197,486
Restructuring/Impairment Charges          187,965       187,768         52,157           --          --
Income (Loss) Before
  Minority Interest and Equity
  in Joint Venture Income (Loss)         (281,859)     (338,789)       (16,838)     100,553     101,410
Minority Interest in Net Income (Loss)
  of Consolidated Subsidiary                 (212)          544            400          695       1,957
Equity in Net Income (Loss) of
  Unconsolidated Joint Venture             (1,402)      (27,003)        (4,865)      10,116       7,362
Net Income (Loss)                       $(283,049)    $(366,336)    $  (22,103)    $109,974    $106,815

Basic Net Income (Loss) Per Share       $   (4.54)    $   (6.89)    $    (0.42)    $   2.15    $   2.24
Diluted Net Income (Loss) Per Share     $   (4.54)    $   (6.89)    $    (0.42)    $   2.07    $   2.14

Consolidated Balance Sheet Data:
Working Capital                         $(201,881)    $ (92,844)    $  296,099     $142,142    $252,218
Net Property, Plant & Equipment           313,455       470,017        678,596      643,706     329,174
Current portion of long-term debt         260,000       260,000             --           --          --
Long-term Debt (less current portion)          --            --        245,000       70,000          --
Stockholders' Equity                       78,713       323,807        686,184      697,940     574,564
Total Assets                            $ 475,871     $ 694,095     $1,084,664     $938,357    $686,315

Number of Employees at Year-end             3,488         4,086          4,738        4,101       2,915
</TABLE>

(1)  Results of operations  for 1999 included  $143.7  million in  restructuring
     charges and a $44.3 million impairment  charge.  The restructuring  charges
     primarily  related  to the  closing  of the  Company's  U.S.  manufacturing
     operations  based on an evaluation of the size and location of its existing
     production  capacity relative to the short-term and long-term market demand
     outlook.  The  impairment  charge related to the write-down of goodwill was
     based on reduced cash flow

                                       25
<PAGE>
     expectations  influenced by continuing  difficult  market  conditions.  The
     goodwill  had  originated   from  the   acquisition   of  Western   Digital
     Corporation's media operation.
(2)  Results of  operations  for 1998  included a $187.8  million  restructuring
     charge  that  primarily  related  to an  asset  impairment  charge  of $175
     million.  The asset impairment charge effectively  reduced asset valuations
     to reflect the economic effect of industry price erosion for disk media and
     projected  under  utilization  of the  Company's  production  equipment and
     facilities.  Based on analysis of the Company's production capacity and its
     expectations  of the media market over the remaining  life of the Company's
     fixed assets,  the Company  concluded  that it would not be able to recover
     the book value of those assets.
(3)  Results  of  operations  for 1997  included a $52.2  million  restructuring
     charge related to the  consolidation  of the Company's  U.S.  manufacturing
     operations.
(4)  The Company paid no cash dividends during the five-year period.

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

Results of Operations

Overview

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

1999 vs. 1998

     Adverse market conditions, which began in mid-1997, continued to impact the
thin-film  media market  throughout  1998 and 1999.  Demand for disk drives grew
rapidly during the mid-1990s and industry  forecasts  were for continued  strong
growth.  The Company and a majority of its competitors  (both  independent  disk
manufacturers and captive disk manufacturers owned by vertically integrated disk
drive  customers)  committed  to  expansion  programs in 1996 and  substantially
increased  their  media  manufacturing  capacity in 1997.  In 1997,  the rate of
growth in demand for disk drives fell. Disk drive manufacturers abruptly reduced
orders for media from independent  suppliers and relied more heavily on internal
capacity to supply a larger  proportion of their media  requirements.  The media
industry's capacity  expansion,  coupled with the decrease in the rate of demand
growth,  has resulted in excess  media  production  capacity.  This excess media
production  capacity  caused sharp  declines in average  selling prices for disk
products as independent suppliers struggled to utilize their capacity.

     In addition to adversities caused by the excess supply of media, 1998 was a
year of tremendous transition for the Company and the disk drive industry.  Disk
drive programs utilizing newer, more advanced, magnetoresistive ("MR") media and
recording heads replaced older generation programs utilizing inductive media and
heads. By the end of 1998 most disk drives were manufactured with MR components.
The transition to MR disk drives has led to significant, unprecedented increases
in areal  density  and,  therefore,  the  amount of data that can be stored on a
single disk  platter.  Increased  disk  storage  capacity  per disk allows drive
manufacturers  to offer  lower-priced  disk  drives  at given  capacity

                                       26
<PAGE>
points,   especially  in  the  price-sensitive  desktop  segment,   through  the
incorporation of fewer components into their disk drives.  The rapid advancement
in storage  capacity per disk platter has further slowed disk demand  throughout
the industry. According to industry market analysts, this resulting reduction in
the average  number of disks per drive will likely  result in flat to  declining
disk demand in 2000.  The  significant  amount of captive  capacity  employed by
certain  disk  drive   manufacturers   also   continues  to  reduce  the  market
opportunities for independent disk suppliers such as the Company.

     In April  1999,  the  Company  purchased  the  assets  of  Western  Digital
Corporation's  ("WDC's")  media  operation.  Additionally,  the  Company and WDC
signed a volume  purchase  agreement  under which the Company agreed to supply a
substantial  portion of WDC's media needs over the next three  years.  Under the
volume purchase  agreement WDC began to purchase most of its media  requirements
from the Company after the closing date.  Due to  assimilation  of the WDC media
operation,  the Company  initially  expected that second quarter 1999 unit sales
from the  combined  operations  would grow  sequentially  in the range of 20-35%
compared to the Company's first quarter of 1999 results. However, in response to
competitive  market  conditions  the Company's  customers  reduced the number of
disks per drive to support  the  delivery  of lower  priced  disk  drives to the
rapidly expanding,  low-cost segment of the PC market. As a result,  actual unit
shipments for the second quarter fell considerably  short of these  expectations
as customer order reductions (including those from WDC) and  lower-than-expected
volumes on certain new product programs restricted  sequential unit sales growth
to approximately 10%. These customer actions,  the continuing  imbalance between
the  supply and demand  for disk  products,  and the lack of new  data-intensive
applications  continue to depress the Company's  financial  performance.  Due to
this weak unit demand the Company  closed the former WDC media  operation at the
end of  June  1999,  nearly  fifteen  months  ahead  of the  Company's  original
transition plan.

     Disk industry conditions remain very difficult.  Increased storage capacity
per disk  continues  to limit  overall  unit demand in the disk  industry  while
excess production capacity within the industry continues to push average selling
prices for disk products lower.  Vertically integrated disk drive customers such
as  Seagate  and IBM are also  supplying  a  larger  percentage  of  their  disk
requirements  internally  as a direct result of the lower disk  consumption  per
drive facilitated by the increased storage capacity per platter.  As a result of
these  negative  industry  trends,   the  Company  has  experienced   continuing
deterioration in its revenue forecasts during the course of 1999.

     Following the closure of the former WDC media  operation at the end of June
1999,  the Company  announced  in July 1999 that it would reduce the size of its
U.S.  operations further in response to the poor industry  conditions.  Later in
August 1999,  the Company  indicated  that it would cease volume  production  of
finished  disks in the U.S.,  close two  manufacturing  facilities  in San Jose,
California,  and institute  staged work force  reductions  that would affect 980
people by the end of 1999.  These  reductions,  combined with the June 1999 work
force reduction of 400 people, lowered the employment base at the Company's U.S.
operations  from 1,950 people in April 1999  (subsequent  to the  acquisition of
WDC's media  operation)  to 630 people by year end. As a result of these actions
the Company  expects to realize  cash savings of  approximately  $20 million per
quarter in U.S.  payroll costs, a 67% reduction from the second quarter of 1999.
The Company employed  approximately  630 people in its U.S.  operations and 2850
people in its Malaysian manufacturing  operations at the end of fiscal 1999. The
Company  recorded a restructuring  charge of $139.3 million in the third quarter
for the write-off of equipment and leasehold improvements in the U.S. production
facilities   scheduled  for  closure  and  for  severance  pay  related  to  the
reorganization of its U.S. operations.

                                       27
<PAGE>
     After completion of the phase out of volume  production,  the Company's San
Jose  site  is  solely  focused  on  activities  related  to  research,  process
development,  and  product  prototyping.  Selling,  general  and  administrative
functions  also remain in San Jose.  The Company's  highly  automated  substrate
manufacturing  in Santa  Rosa,  California  will  continue  to produce  low-cost
aluminum substrates and perform advanced  development work for both aluminum and
glass substrates.  The Company believes that the shift of high volume production
to its cost-advantaged Malaysian manufacturing plants will improve the Company's
overall cost structure,  result in lower unit production  costs, and improve the
Company's  ability to  respond to the  continuing  price  pressures  in the disk
industry.

Net Sales

     Net sales for 1999 increased slightly to $331.9 million,  up 1% from $328.9
million in 1998. The increase was due to a combination of a 19% increase in unit
sales  volume and a 15% decrease in the overall  average  selling  price.  Price
reductions  have been common on  individual  product  offerings in the thin-film
media industry in response to  significant  pricing  pressures  generated by the
imbalance  in supply and  demand  for  thin-film  media.  Distribution  sales of
product  manufactured  by AKCL  decreased to less than $0.1 million in 1999 from
$2.5 million in 1998.

     During 1999 sales to Western  Digital  Corporation  and Maxtor  Corporation
accounted for  approximately  71% and 16%,  respectively,  of  consolidated  net
sales. During 1998 sales to Western Digital Corporation,  Maxtor Corporation and
International  Business Machines  accounted for approximately  43%, 25% and 18%,
respectively of consolidated net sales. Net sales to each of the Company's other
customers were less than 10% during 1999 and 1998.  The Company  expects that it
will continue to derive a  substantial  portion of its sales from WDC and from a
few other  customers.  The  distribution  of sales among customers may vary from
quarter to quarter based on the match of the Company's product capabilities with
specific  disk drive  programs of customers.  However,  as a result of the April
1999 acquisition of WDC's media operation and related volume purchase agreement,
the  Company's  sales  are  expected  to  remain  highly  dependent  upon  WDC's
performance in the disk drive industry.

Gross Margin

     The Company  incurred a negative  gross margin  percentage  of 6.8% in 1999
compared to a negative gross margin percentage of 19.1% in 1998. Unit production
increased  15.7% in 1999  relative to 1998,  however,  the Company  continued to
operate below capacity in 1999. The 1999 gross margin benefited from a full year
of the effects of the 1998 restructuring/impairment charges as well as a partial
year from the 1999  restructuring.  Improvements in  manufacturing  yields (9.2%
gross margin  impact),  material and  operating  supply costs (8.6% gross margin
impact) and lower  depreciation  expense (4.1% gross margin impact) had the most
significant  positive  impact on the 1999 gross  margin  compared  to 1998.  The
effect of these manufacturing cost reductions more than offset the effect of the
decline in the overall  average  selling  price on the  Company's  gross  margin
(17.6%).

Operating Expenses

     Research and development  ("R&D") expenses  decreased 28.2% ($17.4 million)
in 1999  relative  to 1998.  Decreased  R&D  staffing  and  lower  facility  and
equipment costs (primarily due to the 1998 asset impairment charges and the 1999
restructuring  charges)  accounted  for most of the  decrease  in R&D  expenses.
Selling,  general and administrative ("SG&A") expenses decreased $0.9 million in

                                       28
<PAGE>
1999  compared to 1998.  The  decrease in SG&A  expenses was mainly due to lower
payroll  and  fixed  costs of $3.0  million  primarily  as a result of the third
quarter  1999  restructuring  charges,  somewhat  offset by an increase in bonus
expense of $1.4 million and higher provisions for bad debt of $0.7 million.

     In 1999, the Company  recorded $17.3 million of amortization of intangibles
primarily related to the goodwill  associated with the Company's  acquisition of
WDC's media  operation.  This  acquisition was recorded in the second quarter of
1999 as a business  combination  using the purchase method of accounting.  Under
this method the Company recorded the following (in millions):

         Purchase Price Paid:
           Common Stock                                         $ 34.6
           Note Payable                                           21.2
                                                                ------
         Total Costs                                            $ 55.8
                                                                ======
         Assets Acquired:
           Goodwill                                             $ 79.2
           Volume Purchase Agreement                               4.7
           Equipment                                               5.3
           Inventory                                               2.1
         Liabilities Assumed:
           Remaining Lease Obligations
            for Equipment Removed from Service                   (26.5)
           Facility Closure Costs                                 (5.6)
           Purchase Order Cancellation
              Liabilities                                         (2.6)
           Other Liabilities                                      (0.8)
                                                                ------
         Net Assets Acquired                                    $ 55.8
                                                                ======

                                       29
<PAGE>
     The Company  recognized  goodwill and other  intangibles in connection with
the  acquisition  of the WDC media  operation  in the  amount of $83.9  million.
Goodwill  reflects  the  difference  between  the fair  value of the net  assets
acquired and  consideration  paid.  Under purchase  accounting rules the Company
also recorded  liabilities  that  increased  the amount of goodwill  recognized.
These  liabilities  included  estimated  costs for the closure of the former WDC
media operation as well as costs related to the remaining lease  obligations for
equipment taken out of service due to the closure.

     During  1999,  the  Company  paid a total of  approximately  $13.3  million
against  liabilities  arising from this  transaction  including  equipment lease
obligations ($7.6 million),  rent ($1.3 million),  property taxes ($1.2 million)
and other liabilities  ($3.2 million).  Equipment lease obligations are expected
to be paid monthly through mid-2002.  At January 2, 2000, the current portion of
the equipment lease obligations was approximately $10.2 million. The majority of
the  facility  closure  costs,  purchase  order  cancellation  costs  and  other
liabilities  associated  with the WDC  transaction  are  expected  to be paid by
mid-2000.

     Based on reduced cash flow expectations  influenced by continuing difficult
market  conditions  through  the end of the third  quarter of 1999,  the company
recorded an impairment  charge of approximately  $44.3 million to write down the
goodwill balance. This charge was recorded on the Statement of Operations on the
line  captioned  "Restructuring/impairment  charges."  The  fair  value  of  the
goodwill as of the end of the third quarter of 1999 was determined  based on the
discounted  cash flows  resulting from expected sales volumes to WDC through the
remaining period of the volume purchase  agreement.  This charge,  combined with
the goodwill amortization for the second, third and fourth quarters, reduced the
goodwill balance to approximately $23.0 million at January 2, 2000. The goodwill
is being  amortized  over the three year term of the Company's  volume  purchase
agreement with Western Digital.  Future impairment assessments will be performed
by the Company if events or changes in circumstances  indicate that the carrying
amount  of the  goodwill  may not be  fully  recoverable.  If  such  assessments
indicate the carrying value of the goodwill will not be recoverable, as measured
based on the discounted  cash flow method,  the carrying amount will be adjusted
to fair value. The discounted cash flow estimates that will be used will contain
management's  best estimates,  using  appropriate and customary  assumptions and
projections at the time.

     The Company  recorded  restructuring/impairment  charges of $188.0 million,
$187.8 million and $52.2 million in 1999, 1998 and 1997, respectively.

     During the third quarter of 1997, the Company  implemented a  restructuring
plan  involving the  consolidation  of its U.S.  manufacturing  operations.  The
Company  recorded a $52.2  million  restructuring  charge  which  included  $3.9
million  for  severance  costs  associated  with  approximately  330  terminated

                                       30
<PAGE>
employees (all in the U.S. and predominately  all from the manufacturing  area),
$33.0 million for the  write-down of the net book value of excess  equipment and
disposed of leasehold  improvements,  $10.1 million  related to equipment  order
cancellations and other  equipment-related  costs, and $5.2 million for facility
closure  costs.  Non-cash  items  included in the  restructuring  charge totaled
approximately $33.0 million.

     In the second quarter of 1998, the Company implemented a restructuring plan
which included a reduction in the Company's U.S. and Malaysian workforce and the
cessation of operations at its oldest San Jose,  California  plant.  The Company
recorded a restructuring  charge of $187.8 million,  which included $4.1 million
for severance costs (approximately 170 employees,  predominately in the U.S. and
approximately 63%, 33%, and 4% from the manufacturing area, engineering area and
sales, general and administrative area, respectively.),  $5.8 million related to
equipment  order  cancellations  and other  equipment  related  costs,  and $2.9
million for facility closure costs. The asset impairment component of the charge
was $175.0  million and  effectively  reduced  asset  valuations  to reflect the
economic  effect of  industry  price  erosion  for disk media and the  projected
under-utilization of the Company's production equipment and facilities. The fair
value of these assets was determined  based upon the estimated future cash flows
to be generated by the assets,  discounted at a market rate of interest  (15.8%)
The cash component of the total charge was $12.8 million.  Non-cash items in the
restructuring/impairment charge totaled $175.0 million.

     The Company  incurred lower facility  closure costs than anticipated in the
restructuring  charges.  The  oldest  Milpitas  plant  was  sublet  sooner  than
anticipated  and the  Company  reached a lease  termination  agreement  with its
landlord on the second  Milpitas plant in the third quarter of 1998. The Company
thereby  avoided  expected  future rent payments and the cost of renovating  the
facility to its original lease condition.  Additionally,  the Company determined
that it would  not  close  its  oldest  San  Jose,  California  facility  at the
expiration of its lease. As a result, the Company did not incur costs to restore
the  facility  to  its  original  lease   condition  as   contemplated   in  the
restructuring   charge.   Higher  than  expected   costs  for  equipment   order
cancellations offset the lower facility closure costs.

                                       31
<PAGE>

     The following tables summarize these restructuring activities.

1997 Restructuring Reserve

<TABLE>
<CAPTION>
                           Writedown Net Book     Equipment Order
                           Value of Equipment    Cancellations And     Facility
                             and Leasehold             Other           Closure    Severance
(in millions)                 Improvements         Related Costs       Costs        Costs     Total
                              ------------         -------------       -----        -----     -----
<S>                           <C>                  <C>              <C>         <C>        <C>
Expensed in 1997                 $ 33.0               $10.1            $ 5.2       $ 3.9      $ 52.2
Charged to Reserve                (33.0)               (4.2)            (0.3)       (3.4)      (40.9)
                                 ------               -----            -----       -----      ------
Balance at December 28, 1997         --                 5.9              4.9         0.5        11.3

Charged to Reserve                   --                (7.9)            (1.9)       (0.4)      (10.2)
Adjustment to Reserve                --                 5.5             (3.0)       (0.1)        2.4
                                 ------               -----            -----       -----      ------
Balance at January 3, 1999           --                 3.5               --          --         3.5

Charged to Reserve                   --                (1.7)              --          --        (1.7)
                                                      -----            -----       -----      ------
Balance at January 2, 2000       $   --               $ 1.8            $  --       $  --      $  1.8
                                 ======               =====            =====       =====      ======

1998 Restructuring Reserve

                                                  Equipment Order
                                  Asset          Cancellations And     Facility
                                Impairment             Other           Closure    Severance
(in millions)                     Charge           Related Costs       Costs        Costs     Total
                              ------------         -------------       -----        -----     -----

Expensed in 1998                 $175.0               $ 5.9            $ 2.8       $ 4.1      $ 187.8
Charged to Reserve               (175.0)               (5.1)              --        (4.5)      (184.6)
Adjustment to Reserve                --                  --             (2.8)        0.2         (2.6)
                                 ------               -----            -----       -----      -------
Balance at January 3, 1999           --                 0.8               --        (0.2)         0.6

Reaoolocated Reserve                 --                (0.2)              --         0.2           --
                                                      -----            -----       -----      -------
Balance at January 2, 2000       $   --               $ 0.6            $  --       $  --      $   0.6
                                 ======               =====            =====       =====      =======
</TABLE>
        At  January  2,  2000,  $2.4  million  related  to  these  restructuring
activities remained in current  liabilities.  The Company has made cash payments
totaling  approximately  $29.4 million primarily for severance,  equipment order
cancellations  and  facility  closure  costs.  The  majority  of  the  remaining
liability,  primarily  for  equipment  order  cancellations,  is  expected to be
settled through the use of cash by the end of the first quarter of 2000.

        The Company recorded restructuring charges of $4.3 million in the second
quarter of 1999. This  restructuring  charge primarily  related to severance pay
associated with 400 terminated  employees (all in the U.S. and predominately all
from the  manufacturing  area).  The  entire  $4.3  million  was paid out to the
employees during the second and third quarters of 1999.

                                       32
<PAGE>
        During  the  third   quarter  of  1999,   the  Company   implemented   a
restructuring  plan  based on an  evaluation  of the size  and  location  of its
existing  production  capacity  relative to the short-term and long-term  market
demand outlook.  Under the 1999 restructuring plan, the Company decided to close
its U.S.  manufacturing  operations in San Jose,  California.  The restructuring
actions  resulted in a charge of $139.3  million and included  $98.5 million for
leasehold  improvements  and  equipment  write-offs,  $17.7  million  for future
liabilities under  non-cancelable  equipment leases associated with equipment no
longer being used, $15.6 million for severance pay associated with approximately
980  terminated  employees  (all in the  U.S.  and  predominately  all  from the
manufacturing  area),  and $7.5 million in plant closure  costs.  Non-cash items
included in the restructuring  charge totaled  approximately $98.5 million.  The
following table summarizes these 1999 restructuring activities:

1999 Restructuring Reserves

<TABLE>
<CAPTION>
                             Writedown Net Book   Liabilities Under
                            Value of Equipment     Non-Cancelable    Facility
                               and Leasehold         Equipment        Closure    Severance
(in millions)                  Improvements           Leases           Costs       Costs      Total
                               ------------           ------           -----       -----      -----
<S>                           <C>                  <C>             <C>         <C>        <C>
Expensed in 1999                 $ 98.5               $ 17.7          $ 7.5       $ 19.9     $ 143.6
Charged to Reserve                (98.5)                (3.9)          (3.0)       (15.1)     (120.5)
                                 ------               ------          -----       ------     -------
Balance at January 2, 2000       $   --               $ 13.8          $ 4.5       $  4.8     $  23.1
                                 ======               ======          =====       ======     =======
</TABLE>

     At  January  2,  2000,  $23.1  million  related  to the 1999  restructuring
activities remained in current liabilities. During the third and fourth quarters
of 1999, the Company made cash payments totaling $22.0 million. Cash outflows of
approximately  $9.3 million associated with severance pay and closure costs will
occur primarily during the first quarter of 2000. Cash payments of approximately
$13.8 million under the equipment leases will be made monthly through mid-2002.

Interest Income/Expense and Other Income

     Interest  income  decreased  $3.6 million  (41.1%) in 1999 relative to 1998
primarily due to a lower average  investment  balance in 1999.  Interest expense
increased  $4.1 million  (21.4%) in 1999 compared to 1998.  The higher  interest
expense was due to higher  outstanding debt balance and higher interest rates in
1999 compared to 1998.  Other income  decreased $3.3 million in 1999 relative to
1998.  The  decline  was  primarily  due to a $2.4  million  decrease in foreign
exchange gains.

Income Taxes

     In February  2000,  the Company  obtained  favorable  resolution of various
federal tax return  audits which had been in process as of the fiscal year ended
January 2, 2000.  These audits were  resolved with no taxes owed by the Company.
As a result,  the related income tax liability as of January 2, 2000 was reduced
by $27.0 million and the  provision for income taxes for the fourth  quarter and
year ended 1999 reflect this  adjustment.  The  Company's  income tax benefit of
approximately  $25.8 million for 1999 primarily  represents the above  mentioned
adjustment, net of foreign withholding taxes.

                                       33
<PAGE>
     Komag USA (Malaysia)  Sdn.  ("KMS"),  the Company's  wholly owned thin-film
media operation in Malaysia, was granted an extension of its initial tax holiday
by the Malaysian  government for a period of five years commencing in July 1998.
KMS has also been granted an additional  ten-year tax holiday for its second and
third plant sites in Malaysia. The government determined in the third quarter of
1999 that  earnings  from the  second  and third  plant  sites  will be tax free
through 2001. The remaining period of the ten-year holiday will be reassessed in
2001 based on achieving  certain  investment  criteria.  The tax holidays had no
impact on either the Company's 1999 or 1998 net loss.

Minority Interest in Consolidated Subsidiary/Equity in Unconsolidated Joint
Venture

     The minority  interest in the net income (loss) of consolidated  subsidiary
during 1999  represented  Kobe Steel USA Holdings  Inc.'s  ("Kobe USA") share of
Komag Material Technology,  Inc.'s ("KMT") net income (loss). KMT recorded a net
loss  of $1.1  million  and  net  income  of $2.7  million  in  1999  and  1998,
respectively.

     The Company owns a 50% interest in AKCL and records its share of AKCL's net
income (loss) as equity in net income (loss) of  unconsolidated  joint  venture.
The Company recorded a loss of $1.4 million as its equity in AKCL's net loss for
1999  compared to a net loss of $27.0 million  recorded for 1998.  Substantially
higher unit sales volumes and higher  yields,  somewhat  offset by lower average
selling prices, resulted in improved operating results at AKCL in 1999. However,
due to  continuing  losses at AKCL,  the  Company's  investment in AKCL has been
written down to zero.  During  1999,  the Company did not record $2.6 million in
losses as it would have  reduced  the net book value of the  investment  in AKCL
below zero. Assuming AKCL reports net income in future periods, the Company will
record its share of such income  only to the extent by which the income  exceeds
the  losses  incurred  subsequent  to the date on which the  investment  balance
became zero.

1998 vs. 1997

     Operating  results  for 1998 were  significantly  lower than 1997.  Adverse
market conditions,  which began late in the second quarter of 1997,  intensified
during  1998.  The  decrease  in demand for  enterprise-class  media late in the
second  quarter of 1997,  combined  with a major  expansion of media  production
capacity by both  independent  media  suppliers and captive media  operations of
disk  drive  manufacturers,  resulted  in an excess  supply of  enterprise-class
media.  Net sales  decreased  sharply to $129.7  million in the third quarter of
1997, down  sequentially  from $175.1 million in the second quarter of 1997. The
Company's  gross margin  percentage  fell to 0.2% in the third  quarter of 1997,
down from 20.4% in the second  quarter of 1997.  Net sales and the gross  margin
percentage  improved to $159.0 million and 11.6%,  respectively,  for the fourth
quarter of 1997.

     In December  1997,  however,  weakened  demand for desktop media  products,
combined  with the  continuing  slow  recovery  of the  enterprise-class  market
segment,  lowered  overall  media  demand.  The  excess  supply  of media in the
merchant market  heightened price competition among independent media suppliers,
including  the Company.  The Company's net sales in the first quarter and second
quarter  of 1998  dropped  significantly  to $76.1  million  and $78.8  million,
respectively.  The  combination of the lower overall  average selling prices and
low production  volumes  resulted in negative gross margin  percentages of 41.5%
and 45.2%,  respectively,  for the first quarter and second quarter of 1998. Due
to the Company's expectation that the media industry's  supply/demand  imbalance
would  extend  into  1999,  the  Company   adjusted  its  expectations  for  the
utilization of its installed  production  capacity and recorded a  restructuring
charge of $187.8 million which included a $175.0 million asset impairment

                                       34
<PAGE>
charge in the second quarter of 1998. Net sales for the third quarter and fourth
quarter of 1998  increased  sequentially  to $81.3  million  and $92.7  million,
respectively.  The gross margin percentages improved  sequentially to a negative
3.4% and a positive 7.9%, respectively,  in the third and fourth quarter of 1998
The  asset  impairment  charge  resulted  in a  reduction  in  depreciation  and
amortization  of  approximately  $10.2  million  in the  third  quarter  of 1998
compared to the second quarter of 1998. Higher unit volume, higher manufacturing
yields, and reduced  depreciation,  payroll and material input costs resulted in
substantial  improvements  in gross  margin  for the third  quarter  and  fourth
quarter of 1998.

Net Sales

     Net sales for 1998  decreased  to $328.9  million,  down 47.9% from  $631.1
million in 1997. The decrease was due to a combination of a 36% decrease in unit
sales  volume and a 19%  decrease  in the overall  average  selling  price.  The
Company  has  traditionally  prevented  significant  reductions  in its  overall
average selling price through transitions to higher-priced, more technologically
advanced  product  offerings.  The effect of price  reductions  in  response  to
significant  pricing  pressures  generated by the imbalance in supply and demand
for thin-film  media during 1998 more than offset the effect of  transitions  to
more advanced product offerings.  Distribution sales of product  manufactured by
AKCL decreased to $2.5 million in 1998 from $10.5 million in 1997.

Gross Margin

     The Company  incurred a negative  gross margin  percentage of 19.1% in 1998
compared to a positive gross margin percentage of 14.8% in 1997. Unit production
decreased 37% in 1998 relative to 1997. The Company operated well below capacity
in 1998 in order to match unit  production  to the sharply  lower demand for its
products.  The combination of the lower overall  average  selling price,  higher
unit production costs related to underutilized capacity, and lower manufacturing
yields resulted in the negative gross margin percentage in 1998.

Operating Expenses

     Research and development  ("R&D") expenses  increased 19.9% ($10.2 million)
in 1998  relative to 1997.  The  additional  R&D effort was directed  toward the
introduction of new product  generations,  process  changes to manufacture  such
products,  process  improvements  to increase  yields and reduce  material input
costs of products in volume  production,  and increased  development  efforts to
qualify  new  products  with  customers.  Selling,  general  and  administrative
("SG&A")  expenses  decreased  $7.8  million  in 1998  compared  to 1997.  Lower
provisions for bonus and profit sharing programs  (decrease of $3.8 million) and
lower  provisions  for bad  debt  (decrease  of $2.4  million)  resulted  in the
majority of the overall decrease in SG&A between the years. Excluding provisions
for bonus and profit sharing  programs and provisions for bad debt in 1998, SG&A
expenses  decreased $1.6 million.  The lower spending was primarily due to lower
payroll and other  employee-related  costs as a direct  result of  restructuring
activities completed in the fourth quarter of 1997 and second quarter of 1998.

                                       35
<PAGE>
Interest Income/Expense and Other Income

     Interest  income  increased  $4.1 million  (85.2%) in 1998 relative to 1997
primarily due to a higher average investment  balance in 1998.  Interest expense
increased  $10.1 million  (110.8%) in 1998 compared to 1997. The higher interest
expense was due to a higher outstanding debt balance in 1998 compared to 1997.

Income Taxes

     The Company's income tax provision of  approximately  $1.3 million for 1998
primarily  represents  foreign  withholding  taxes.  The Company's  wholly-owned
thin-film  media  operation,  Komag USA  (Malaysia)  Sdn.  ("KMS"),  received an
extension  of its initial  five-year  tax holiday for an  additional  five years
commencing  in July 1998.  KMS has also been  granted a ten-year tax holiday for
its second and third plant sites in Malaysia.  The government  determined in the
third  quarter of 1999 that  earnings from the second and third plant sites will
be tax free through 2001. The remaining  period of the ten-year  holiday will be
reassessed  in 2001 based on  achieving  certain  investment  criteria.  The tax
holidays had no impact on the Company's 1998 net loss. The tax provision benefit
of 55% for 1997 primarily  represents tax loss  carrybacks  associated  with the
Company's U.S. operations.  As a result of profitable operations at KMS in 1997,
the  tax  holiday   reduced  the  Company's  1997   consolidated   net  loss  by
approximately  $16.6  million  ($0.32 per share under both the basic and diluted
methods).

Minority Interest in Consolidated Subsidiary/Equity in Unconsolidated Joint
Venture

     The minority  interest in the net income of consolidated  subsidiary during
1998  represented  Kobe Steel USA  Holdings  Inc.'s  ("Kobe USA") share of Komag
Material Technology,  Inc.'s ("KMT") net income. KMT recorded net income of $2.7
million and $2.0 million in 1998 and 1997, respectively.

     The Company owns a 50% interest in AKCL and records its share of AKCL's net
income (loss) as equity in net income (loss) of  unconsolidated  joint  venture.
The  Company  recorded a loss of $27.0  million as its equity in AKCL's net loss
for  1998  compared  to a net  loss of  $4.9  million  recorded  for  1997.  The
combination of a significant  decrease in the overall  average selling price for
AKCL's disk products, lower manufacturing yields, reduced equipment utilization,
customer  qualification issues and substantial  equipment  write-downs adversely
affected AKCL's financial results for 1998.

Liquidity and Capital Resources

     Cash and cash  equivalents  and short-term  investments of $69.5 million at
the end of 1999 decreased  from $127.8 million at the end of 1998.  Consolidated
operating  activities  consumed  $32.0  million in cash during 1999.  The $283.0
million net loss for 1999,  net of non-cash  charges for  restructuring  and the
impairment  of  goodwill  of  $142.9  million,  non-cash  depreciation  of $92.6
million,  the  non-cash  amortization  charges  of $17.3  million,  net of other
miscellaneous  items,  consumed $59.4 million.  The  restructuring  charges were
recorded in 1999 based on an evaluation of the size and location of its existing
production  capacity  relative to the  short-term  and  long-term  market demand
outlook.  The  impairment  of goodwill was recorded in the third quarter of 1999
based on reduced  cash flow  expectations  influenced  by  continuing  difficult
market  conditions  through  the end of the third  quarter  of 1999.  Changes in
operating assets and liabilities  provided $27.4 million,  primarily as a result
of the increase in the  restructuring  liability  due to the 1999  restructuring
charges  recorded,  the reduction in inventory due to the closure of U.S.  media
manufacturing and a Company wide effort to manage and reduce inventory balances,
as well as the reduction in accounts  receivable due to a reduction in sales and
the  timing of the sales in 1999  compared  to 1998.  The  Company  spent  $32.0
million on capital

                                       36
<PAGE>
requirements  during 1999 primarily for equipment and building  improvements  to
support the  production  facilities.  Sales of Common Stock under the  Company's
employee stock purchase program generated $3.4 million.

     Working  capital  decreased by $109.0  million in 1999  primarily  due to a
decline in cash and cash equivalents and short-term investments of $58.3 million
and an increase in the  restructuring  liability of $21.4 million resulting from
the  1999  restructuring  charges.   Additionally,   other  current  liabilities
increased  $5.2  million  which  reduced  working  capital  in 1999.  Inventory,
accounts  receivable and other current  assets  decreased  $10.6  million,  $6.9
million  and $6.6  million,  respectively  in  1999,  further  reducing  working
capital.

     Current   noncancellable   capital  commitments  total  approximately  $2.0
million.   Total  capital   expenditures  for  2000  are  currently  planned  at
approximately  $20 million.  The 2000 capital  spending plan primarily  includes
costs for projects  designed to improve yield and  productivity as well as costs
for the installation of certain production equipment transferred from the closed
U.S. manufacturing plant to Malaysia.

     The Company is in default under certain  financial  covenants  contained in
the Company's bank credit  facilities which include the following  ratios/tests:
profitability,  quick ratio,  leverage ratio, tangible net worth, debt coverage,
and debt to  capitalization.  The Company is not in payment  default under these
credit  facilities  as all  interest  charges  and fees  associated  with  these
facilities  have  been paid on their  scheduled  due  dates.  At the time of the
covenant  default  the Company had $260  million of debt  outstanding  against a
total  borrowing  capacity of $345.0 million under the various senior  unsecured
credit  facilities.  As a result of the covenant default,  the Company's lenders
withdrew the $85 million in unused borrowing capacity. To date, the lenders have
not accelerated any principal payments under the credit facilities.  As a result
of the  technical  default  and  reclassification  of the bank  debt to  current
liabilities,  the Company's  auditors have included an explanatory  paragraph in
their audit opinion to highlight the Company's need to amend or restructure  its
debt obligations.

     The Company is currently negotiating with its lenders for amendments to the
existing credit  facilities.  There can be no assurance that the Company will be
able  to  obtain  such  amendments  to its  credit  facilities  on  commercially
reasonable  terms.  If the Company  does not  successfully  amend  these  credit
facilities,  it would  remain in  technical  default  of its bank  loans and the
lenders  would  retain  their  rights and  remedies  under the  existing  credit
agreements.  As long as the  lenders  choose  not to  accelerate  any  principal
payments,  the Company  would  continue to operate in default for the near term.
However,  the Company will likely need to raise  additional funds to restructure
its debt obligations and to operate its business for the long term.

     In March 2000, the Company entered into an agreement with an  institutional
investor to sell up to $20 million of common  stock.  The shares of common stock
will be sold  pursuant  to a private  equity  line of  credit,  under  which the
Company may exercise  "put options" to sell shares for a price equal to 90%, 92%
or 94% of market.  The shares may be sold periodically in maximum  increments of
$1.5 million to $3.5 million over a period of up to thirty months.  Upon signing
the  agreement,  the Company  issued  warrants to the investor to acquire 80,000
shares  of  common  stock  at a price  of  125%  of  market.  The  warrants  are
exercisable over a three-year period beginning in August 2000.

     Over the next several years the Company will need  financial  resources for
capital expenditures,  working capital and research and development. During 1998
and  1999,  the  Company  spent

                                       37
<PAGE>
approximately $89 million and $32 million,  respectively, on property, plant and
equipment.  In 2000,  the Company  plans to spend  approximately  $20 million on
property, plant and equipment. The Company believes that in order to achieve its
long-term growth  objectives and maintain and enhance its competitive  position,
such additional financial resources will be required.  There can be no assurance
that the Company will be able to secure such financial resources on commercially
reasonable  terms.  If the Company is unable to obtain  adequate  financing,  it
could be required to  significantly  reduce or possibly  suspend its operations,
and/or to sell  additional  securities on terms that would be highly dilutive to
current stockholders.

     In May 1999, at the Company's Annual Meeting of  Stockholders,  the Company
received  authorization  to sell and issue up to $250,000,000 of Common Stock in
equity or equity-linked  private  transactions from time to time through October
1, 2000 at a price  below  book  value but at or above the then  current  market
value of the Company's Common Stock.  Additionally,  in July 1998, the Company's
stockholders  approved a proposal  to  increase  the amount of Common  Stock the
Company is authorized to issue from 85,000,000 to 150,000,000 shares.

Other

     In June 1998, the FASB issued Statement of Financial  Accounting  Standards
No. 133,  "Accounting for Derivative  Instruments and Hedging Activities" ("SFAS
133").  SFAS 133 establishes  accounting and reporting  standards for derivative
instruments  and  for  hedging  activities.  It  requires  that  derivatives  be
recognized in the balance sheet at fair value and specifies the  accounting  for
changes in fair value.  This  statement is effective for all fiscal  quarters of
fiscal years  beginning  after June 15, 2000, and will be adopted by the Company
for its fiscal  year 2001.  The  Company is  currently  assessing  the impact of
adoption of this pronouncement on its financial statements.

                                       38
<PAGE>
ITEM 7A. FINANCIAL MARKET RISKS

     The Company is exposed to  financial  market  risks,  including  changes in
interest rates and foreign currency  exchange rates. The Company  currently does
not utilize derivative financial instruments to hedge such risks.

     The primary objective of the Company's investment activities is to preserve
principal  while  at the  same  time  maximizing  yields  without  significantly
increasing risk. The Company invests primarily in high-quality,  short-term debt
instruments.  A  hypothetical  100 basis point  increase in interest rates would
result in less than a $0.1 million decrease (less than .1%) in the fair value of
the Company's available-for-sale securities.

     The Company has long-term  debt with a notional value of $260 million which
includes  both term debt and lines of credit.  Term debt  totaling  $75  million
bears interest at a fixed rate of 7.4% per annum.  The lines of credit  totaling
$185 million bear  interest at the lenders'  base rate  (currently  8.75%).  The
Company has not hedged its exposure to fluctuations in the base interest rate. A
hypothetical  100  basis  point  increase  in  interest  rates  would  result in
approximately $1.9 million of additional interest expense per year.

     The Company  enters into foreign  currency  forward  exchange  contracts to
reduce the impact of currency  fluctuations  on firm purchase order  commitments
for  equipment  and  construction-in-process.  Gains and losses on these foreign
currency investments would generally be offset by corresponding losses and gains
on the related hedging instruments,  resulting in negligible net exposure to the
Company.

     A  substantial  majority  of the  Company's  revenue,  expense  and capital
purchasing activities are transacted in U.S. dollars.  However, the Company does
enter into these  transactions  in other  currencies,  primarily,  the 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,  the  Company  will  evaluate  whether or not it will enter any  hedging
contracts  for  the  Malaysian  ringgit.   Based  on  1999  expenses  that  were
denominated in Malaysian  ringgit,  an adverse change in exchange rates (defined
as 20% in the Malaysian  ringgit to U.S.  dollar rate) would result in a decline
in income before taxes of approximately $7 million.

                                       39
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS

                               KOMAG, INCORPORATED

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                           Page
                                                                           ----

Report of Ernst & Young LLP, Independent Auditors                             38

Consolidated Statements of Operations,
     1999, 1998 and 1997                                                      39

Consolidated Balance Sheets, 1999 and 1998                                 40-41

Consolidated Statements of Cash Flows,
     1999, 1998 and 1997                                                   42-43

Consolidated Statements of Stockholders' Equity,
     1999, 1998 and 1997                                                      44

Notes to Consolidated Financial Statements                                 45-66

                                       40
<PAGE>
                Report of Ernst & Young LLP, Independent Auditors


The Board of Directors and Stockholders
Komag, Incorporated


     We have  audited the  accompanying  consolidated  balance  sheets of Komag,
Incorporated  as of  January  2,  2000 and  January  3,  1999,  and the  related
consolidated statements of operations,  stockholders' equity, and cash flows for
each of the three  years in the period  ended  January 2, 2000.  Our audits also
included the  financial  statement  schedule  listed in the Index at Item 14(a).
These financial  statements and schedule are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements  and  schedule  based on our audits.  We did not audit the  financial
statements  of Asahi Komag Co., Ltd. (a  corporation  in which the Company has a
50% interest) as of January 3, 1999, and for each of the two years in the period
ended January 3, 1999. Those financial statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
data  included  for Asahi Komag Co.,  Ltd. as of January 3, 1999 and for each of
the two years in the period ended January 3, 1999, is based solely on the report
of the other auditors.

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

     In our opinion,  based on our audits and the report of other auditors,  the
financial statements referred to above present fairly, in all material respects,
the consolidated  financial  position of Komag,  Incorporated at January 2, 2000
and January 3, 1999, and the consolidated results of its operations and its cash
flows for each of the three  years in the  period  ended  January  2,  2000,  in
conformity with accounting  principles  generally accepted in the United States.
Also, in our opinion, the related financial statement schedule,  when considered
in relation to the basic financial statements taken as a whole,  presents fairly
in all material respects the information set forth therein.

     The  accompanying  financial  statements  have been prepared  assuming that
Komag, Incorporated will continue as a going concern. As more fully described in
Note  1,  the  Company  has  incurred  recent  operating  losses  and  is out of
compliance with certain  covenants of loan  agreements  with its lenders.  These
conditions raise  substantial doubt about the Company's ability to continue as a
going concern.  Management's plans in regard to these matters are also described
in Note 1. The financial  statements do not include any  adjustments  to reflect
the possible future effects on the  recoverability  and classification of assets
or the  amounts  and  classification  of  liabilities  that may result  from the
outcome of this uncertainty.

                                              Ernst & Young LLP

San Jose,  California
January 21, 2000, except for Note 16,
as to which the date is March 17, 2000

                                       41
<PAGE>
<TABLE>
                               KOMAG, INCORPORATED
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

<CAPTION>
                                                                 Fiscal Year Ended
                                                         -----------------------------------
                                                           1999         1998         1997
                                                         ---------    ---------    ---------
<S>                                                      <C>          <C>          <C>
Net sales to unrelated parties                           $ 148,299    $ 328,883    $ 631,082
Net sales to related party (see Note 13 and 14)            183,647           --           --
                                                         ---------    ---------    ---------
         Net sales                                         331,946      328,883      631,082
Cost of sales (see Notes 12 and 13)                        354,655      391,635      537,536
                                                         ---------    ---------    ---------
         Gross profit (loss)                               (22,709)     (62,752)      93,546

Operating expenses:
  Research, development and engineering                     44,254       61,637       51,427
  Selling, general and administrative                       18,889       19,762       27,523
  Amortization of intangibles                               17,272           --           --
  Restructuring/impairment charges                         187,965      187,768       52,157
                                                         ---------    ---------    ---------
                                                           268,380      269,167      131,107
                                                         ---------    ---------    ---------
         Operating loss                                   (291,089)    (331,919)     (37,561)

Other income (expense):
  Interest income                                            5,189        8,804        4,753
  Interest expense                                         (23,319)     (19,212)      (9,116)
  Other, net                                                 1,552        4,853        4,104
                                                         ---------    ---------    ---------
                                                           (16,578)      (5,555)        (259)
                                                         ---------    ---------    ---------
         Loss before income taxes, minority
           interest and equity in joint venture loss      (307,667)    (337,474)     (37,820)

Provision (benefit) for income taxes                       (25,808)       1,315      (20,982)
                                                         ---------    ---------    ---------
         Loss before minority interest and equity
           in joint venture loss                          (281,859)    (338,789)     (16,838)
Minority interest in net income (loss) of
  consolidated subsidiary                                     (212)         544          400
Equity in net loss of unconsolidated joint venture          (1,402)     (27,003)      (4,865)
                                                         ---------    ---------    ---------
         Net loss                                        $(283,049)   $(366,336)   $ (22,103)
                                                         =========    =========    =========
Basic and diluted loss per share                         $   (4.54)   $   (6.89)   $   (0.42)
                                                         =========    =========    =========
Number of shares used in basic and diluted computation      62,291       53,169       52,217
                                                         =========    =========    =========
</TABLE>

                 See notes to consolidated financial statements.

                                       42
<PAGE>
                               KOMAG, INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                Fiscal Year End
                                                             ----------------------
                                                               1999         1998
                                                             ---------    ---------
<S>                                                          <C>          <C>
Assets

Current Assets
  Cash and cash equivalents                                  $  25,916    $  64,467
  Short-term investments                                        43,610       63,350
  Accounts receivable (including $25,971 and $512 due from
    related parties in 1999 and 1998, respectively) less
    allowances of $2,180 in 1999 and $2,847 in 1998             36,494       43,434
  Inventories:
    Raw materials                                                7,695        8,434
    Work-in-process                                              4,820       10,672
    Finished goods                                              10,503       14,534
                                                             ---------    ---------
        Total inventories                                       23,018       33,640
  Prepaid expenses and deposits                                  3,254        4,348
  Refundable income taxes                                          815        2,216
  Deferred income taxes                                          3,767        7,883
                                                             ---------    ---------
        Total current assets                                   136,874      219,338

Investment in Unconsolidated Joint Venture                          --        1,399

Property, Plant and Equipment
  Land                                                           7,785        7,785
  Buildings                                                    134,471      128,359
  Leasehold improvements                                        36,656       86,565
  Furniture                                                     10,980       10,911
  Equipment                                                    630,221      686,169
                                                             ---------    ---------
                                                               820,113      919,789
   Less allowances for depreciation and amortization          (506,658)    (449,772)
                                                             ---------    ---------
        Net property, plant and equipment                      313,455      470,017

Net Intangible Assets                                           22,996           --
Deposits and Other Assets                                        2,546        3,341
                                                             ---------    ---------
                                                             $ 475,871    $ 694,095
                                                             =========    =========
</TABLE>

                 See notes to consolidated financial statements.

                                       43
<PAGE>
                              KOMAG, INCORPORATED
                     CONSOLIDATED BALANCE SHEETS (CONTINUED)
                    (In thousands, except per share amounts)

                                                           Fiscal Year End
                                                       ------------------------
                                                         1999           1998
                                                       ---------      ---------
Liabilities and Stockholders' Equity

Current Liabilities
  Current portion of long-term debt                    $ 260,000      $ 260,000
  Trade accounts payable                                  21,474         27,274
  Accounts payable to related parties                      2,019          1,848
  Accrued compensation and benefits                       10,048         15,544
  Other liabilities                                       19,615          3,254
  Income taxes payable                                       109            134
  Restructuring liability                                 25,490          4,128
                                                       ---------      ---------
        Total current liabilities                        338,755        312,182

Note Payable to Related Party                             21,186             --
Deferred Income Taxes                                     20,045         52,564
Other Long-term Liabilities                               13,245          1,403
Minority Interest in Consolidated Subsidiary               3,927          4,139

Commitments

Stockholders' Equity
  Preferred Stock, $0.01 par value per share:
    Authorized--1,000 shares
    No shares issued and outstanding                          --             --
  Common Stock, $0.01 par value per share:
    Authorized--150,000 shares in 1999
      and 1998
    Issued and outstanding 65,875 shares
      in 1999 and 53,887 shares in 1998                      659            539
  Additional paid-in capital                             445,384        407,549
  Accumulated deficit                                   (367,909)       (84,860)
  Accumulated other comprehensive income                     579            579
                                                       ---------      ---------
          Total stockholders' equity                      78,713        323,807
                                                       ---------      ---------
                                                       $ 475,871      $ 694,095
                                                       =========      =========

                 See notes to consolidated financial statements.

                                       44
<PAGE>
                              KOMAG, INCORPORATED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                   Fiscal Year Ended
                                                          -----------------------------------
                                                            1999         1998         1997
                                                          ---------    ---------    ---------
<S>                                                       <C>          <C>          <C>
Operating Activities
Net cash provided by (used in) operating activities--
  see detail on following page                            $ (31,954)   $  23,601    $  84,396

Investing Activities
Acquisition of property, plant and equipment                (32,017)     (89,033)    (199,112)
Purchases of short-term investments                          (9,590)     (31,050)     (37,585)
Proceeds from short-term investments at maturity             29,330           --        7,785
Proceeds from disposal of property, plant and equipment       2,240        5,449          550
Deposits and other assets                                        58          912       (1,190)
Dividend distribution from unconsolidated joint venture          --           --        1,535
                                                          ---------    ---------    ---------
        Net cash used in investing activities                (9,979)    (113,722)    (228,017)

Financing Activities
Proceeds from long-term obligations                              --       15,000      175,000
Sale of Common Stock, net of issuance costs                   3,382        5,691       11,777
                                                          ---------    ---------    ---------
        Net cash provided by financing activities             3,382       20,691      186,777
                                                          ---------    ---------    ---------
Increase (decrease) in cash and cash equivalents            (38,551)     (69,430)      43,156

Cash and cash equivalents at beginning of year               64,467      133,897       90,741
                                                          ---------    ---------    ---------
        Cash and cash equivalents at end of year          $  25,916    $  64,467    $ 133,897
                                                          =========    =========    =========
</TABLE>

                 See notes to consolidated financial statements.

                                       45
<PAGE>
                              KOMAG, INCORPORATED
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                      Fiscal Year Ended
                                                              -----------------------------------
                                                                1999         1998         1997
                                                              ---------    ---------    ---------
<S>                                                           <C>          <C>          <C>
Net loss                                                      $(283,049)   $(366,336)   $ (22,103)
Adjustments to reconcile net loss to net cash
  provided by (used in) operating activities:
    Depreciation and amortization                                92,634      116,682      128,542
    Amortization of intangibles                                  17,272           --           --
    Provision for losses on accounts receivable                    (404)      (1,125)       1,315
    Equity in net loss of unconsolidated
      joint venture                                               1,402       27,003        4,865
    Loss on disposal of equipment                                   424          481        2,854
    Impairment charge related to goodwil/property,
      plant and equipment                                        44,348      175,000           --
    Non-cash portion of restructuring charge
      related to write-off of property, plant and equipment      98,548           --       33,013
    Deferred income taxes                                       (28,403)         (59)       2,513
    Deferred rent                                                (1,890)         443          463
    Minority interest in net income (loss) of
      consolidated subsidiary                                      (212)         544          400
    Changes in operating assets and liabilities:
      Accounts receivable                                        32,803       35,995      (23,431)
      Accounts receivable from related parties                  (25,459)       3,594        4,343
      Inventories                                                12,771       33,138       (4,818)
      Prepaid expenses and deposits                               1,091         (659)        (831)
      Trade accounts payable                                     (5,800)     (12,769)     (40,046)
      Accounts payable to related parties                           171       (5,245)       3,799
      Accrued compensation and benefits                          (5,496)       1,948       (8,239)
      Other liabilities                                          (5,443)        (342)       1,683
      Income taxes (payable) refundable                           1,376       22,433      (11,179)
      Restructuring liability                                    21,362       (7,125)      11,253
                                                              ---------    ---------    ---------
        Net cash provided by (used in) operating activities   $ (31,954)   $  23,601    $  84,396
                                                              =========    =========    =========
Supplemental disclosure of cash flow information
  Cash paid for interest                                      $  20,159    $  19,683    $   8,148
  Cash paid (refunded) for income taxes                             (39)     (21,017)     (12,305)
  Income tax benefit from stock
      options exercised                                              --           --        1,834
</TABLE>

                See notes to consolidated financial statements.

                                       46
<PAGE>
                              KOMAG, INCORPORATED
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                              Accumu-
                                                                                               lated
                                                                                Retained       Other
                                              Common Stock         Additional   Earnings/     Compre-
                                         ----------------------     Paid-in   (Accumulated    hensive
                                          Shares       Amount       Capital      Deficit)     Income       Total
                                         ---------    ---------    ---------    ---------    ---------   ---------
<S>                                      <C>          <C>          <C>          <C>          <C>         <C>
Balance at December 29, 1996                51,696    $     517    $ 388,305    $ 303,579    $   5,539   $ 697,940

Net loss                                                                          (22,103)                 (22,103)
Accumulated translation adjustment                                                              (3,228)     (3,228)
                                                                                                         ---------
Total Comprehensive Loss                                                                                   (25,331)
                                                                                                         ---------
Common Stock issued under stock
  option and purchase plans, including
  related tax benefits                       1,098           11       13,564                                13,575
                                         ---------    ---------    ---------    ---------    ---------   ---------
Balance at December 28, 1997                52,794          528      401,869      281,476        2,311     686,184

Net loss                                                                         (366,336)                (366,336)
Accumulated translation adjustment                                                              (1,732)     (1,732)
                                                                                                         ---------
Total Comprehensive Loss                                                                                  (368,068)
                                                                                                         ---------
Common Stock issued under stock
  option and purchase plans                  1,093           11        5,680                                 5,691
                                         ---------    ---------    ---------    ---------    ---------   ---------
Balance at January 3, 1999                  53,887          539      407,549      (84,860)         579     323,807

Net loss and comprehensive loss                                                  (283,049)                (283,049)

Common Stock issued under Asset
  Purchase Agreement                        10,783          108       34,465                                34,573

Common Stock issued under stock
  option and purchase plans                  1,205           12        3,370                                 3,382
                                         ---------    ---------    ---------    ---------    ---------   ---------
Balance at January 2, 2000                  65,875    $     659    $ 445,384    ($367,909)   $     579   $  78,713
                                         =========    =========    =========    =========    =========   =========
</TABLE>

                 See notes to consolidated financial statements.

                                       47
<PAGE>
                               KOMAG, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

The  financial  statements  have been  prepared on a going  concern  basis.  The
Company has incurred  cumulative  operating losses and is not in compliance with
certain financial covenants of its various bank agreements.  Such non-compliance
constitutes an event of default under the  agreements.  The Company has not been
in payment  default under these credit  facilities  and has continued to pay all
interest  charges  and other  fees  associated  with these  facilities  on their
scheduled due dates. Amounts outstanding under these unsecured credit agreements
at January 2, 2000 amounted to $260,000,000. To date, the Company's lenders have
not accelerated any principal  payments under these  facilities.  The Company is
currently  negotiating  with its lenders for  amendments to its existing  credit
facilities.  There can be no  assurance  that the Company will be able to obtain
such amendments to its credit  facilities on commercially  reasonable  terms. In
the event that the Company does not successfully  amend its credit facilities or
restructure its debt obligations, the Company could be required to significantly
reduce or possibly suspend its operations,  and/or sell additional securities on
terms that would be highly dilutive to current  stockholders of the Company. The
financial  statements  do not include any  adjustments  to reflect the  possible
future effects on the recoverability and classification of assets or the amounts
and classification of assets and liabilities that may result from the outcome of
this uncertainty.

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

Foreign  Exchange Gains and Losses:  The Company may enter into foreign currency
forward exchange contracts to reduce the impact of currency fluctuations on firm
purchase order commitments for equipment and construction-in-process.  Gains and
losses  related  to these  contracts  are  included  in the  cost of the  assets
acquired.  The Company had $7,000 of Malaysian  ringgit and $33,000 of Singapore
dollar based firm purchase commitments at January 2, 2000. There were no foreign
exchange contracts outstanding at January 2, 2000 and January 3, 1999.

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

Short-Term  Investments:  The Company  invests its excess cash in  high-quality,
short-term  debt  instruments.  None of the Company's debt security  investments
have  maturities  greater  than one year.  At January 2,  2000,  all  short-term
investments are designated as available for sale.  Interest and dividends on the
investments are included in interest income.

                                       49
<PAGE>
The following is a summary of the Company's  investments  by major security type
at amortized cost, which approximates fair value:

                                                        Fiscal Year Ended
                                                      ---------------------
                                                        1999         1998
                                                      --------     --------
                                                         (in thousands)
     Municipal auction rate preferred stock           $ 39,200     $ 63,350
     Corporate debt securities                           7,339       33,765
     Mortgage-backed securities                         24,650       34,060
                                                      --------     --------
                                                      $ 71,189     $131,175
                                                      ========     ========

     Amounts included in cash and cash equivalents    $ 27,579     $ 67,825
     Amounts included in short-term investments         43,610       63,350
                                                      --------     --------
                                                      $ 71,189     $131,175
                                                      ========     ========

There were no realized gains or losses on the Company's  investments during 1999
as all investments  were held to maturity during the year. The Company  utilizes
zero-balance  accounts and other cash  management  tools to invest all available
funds, including bank balances in excess of book balances.

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

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

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

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

Stock  Compensation:  The Company has adopted Statement of Financial  Accounting
Standard No. 123,  "Accounting  for  Stock-Based  Compensation"  ("FAS 123"). In
accordance  with the  provisions of FAS 123, the Company  applies APB Opinion 25
and related  Interpretations  in  accounting  for its  stock-based  compensation
plans. Note 5 to the Consolidated Financial Statements contains a summary of the
pro- forma effects to reported net loss and basic and diluted loss per share for
1999, 1998 and 1997 as if the Company had elected to recognize compensation cost
based on the fair value of the options  granted at grant date as  prescribed  by
FAS 123.

Income  Taxes:  The  provision  (benefit)  for  income  taxes is based on pretax
financial  accounting  income (loss).  Deferred tax assets and  liabilities  are
recognized for the expected tax  consequences of temporary  differences  between
the tax and book basis of assets and  liabilities.  The provision  (benefit) for
income taxes also includes foreign withholding taxes.

                                       50
<PAGE>
Loss Per  Share:  The  Company  determines  loss per  share in  accordance  with
Financial  Accounting  Standards Board  Statement No. 128,  "Earnings per Share"
("FAS 128").

                                                   Fiscal Year Ended
                                         -------------------------------------
                                           1999          1998          1997
                                         ---------     ---------     ---------
                                        (in thousands, except per share amounts)

Numerator: Net loss                      $(283,049)    $(366,336)    $ (22,103)
                                         ---------     ---------     ---------
Denominator for basic and
  diluted loss per share -
  weighted-average shares                   62,291        53,169        52,217
                                         ---------     ---------     ---------
Basic and diluted loss per share         $   (4.54)    $   (6.89)    $   (0.42)
                                         =========     =========     =========

Incremental  common shares  attributable  to the future  exercise of outstanding
options (assuming proceeds would be used to purchase treasury stock) of 442,000,
1,135,000 and 1,849,000 for 1999, 1998 and 1997, respectively, were not included
in the diluted  loss per share  computation  because the effect  would have been
antidilutive.

Comprehensive  Income (Loss): In June 1997, the Financial  Accounting  Standards
Board issued  Statement of Financial  Accounting  Standards No. 130,  "Reporting
Comprehensive  Income"  ("SFAS 130").  SFAS 130 requires that all items that are
required  to  be  recognized  under   accounting   standards  as  components  of
comprehensive  income  (loss)  be  reported  in a  financial  statement  that is
displayed with the same  prominence as other financial  statements.  All periods
presented  reflect the  adoption of SFAS 130.  Accumulated  other  comprehensive
income is primarily comprised of accumulated translation adjustments.

Fiscal  Year:  The  Company  uses a 52-53 week  fiscal year ending on the Sunday
closest to December  31. The years ended  January 2, 2000 and  December 28, 1997
were  comprised of 52 weeks.  The year ended January 3, 1999 was comprised of 53
weeks.

Derivative  Instruments  and Hedging  Activities:  In June 1998, the FASB issued
Statement of Financial  Accounting Standards No. 133, "Accounting for Derivative
Instruments  and  Hedging   Activities"   ("SFAS  133").  SFAS  133  establishes
accounting and reporting  standards for derivative  instruments  and for hedging
activities.  It requires that  derivatives be recognized in the balance sheet at
fair  value and  specifies  the  accounting  for  changes  in fair  value.  This
statement is effective for all fiscal  quarters of fiscal years  beginning after
June 15, 2000,  and will be adopted by the Company for its fiscal year 2001. The
Company is currently  assessing the impact of adoption of this  pronouncement on
its financial statements.

Use of Estimates:  The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions that affect the amounts

                                       51
<PAGE>
reported in the financial  statements  and  accompanying  notes.  Actual results
could differ from those estimates.

NOTE 2. SEGMENT AND GEOGRAPHIC INFORMATION

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

The  Company  adopted  Statement  of  Financial  Accounting  Standards  No. 131,
"Disclosures  About  Segments of an Enterprise and Related  Information"  ("SFAS
131") at January 3, 1999.  SFAS 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 131,
the Company's operations are treated as one operating segment as it only reports
profit and loss  information on an aggregate basis to chief  operating  decision
makers of the Company.

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

                                                     Fiscal Year Ended
                                            -----------------------------------
                                              1999         1998         1997
                                            ---------    ---------    ---------
                                                      (in thousands)
Net sales
  To customers from U.S. operations         $ 115,554    $ 157,408    $ 290,986
  To customers from Far East operations       216,392      171,475      340,096
  Intercompany from Far East operations        73,201       88,890      121,945
  Intercompany from U.S. operations            31,945       33,360       38,310
                                            ---------    ---------    ---------
                                              437,092      451,133      791,337
  Eliminations                               (105,146)    (122,250)    (160,255)
                                            ---------    ---------    ---------
  Total net sales                           $ 331,946    $ 328,883    $ 631,082
                                            =========    =========    =========

Operating loss
  U.S. operations                           $(204,172)   $(205,852)   $(112,022)
  Far East operations                         (86,917)    (127,837)      70,821
                                            ---------    ---------    ---------
                                             (291,089)    (333,689)     (41,201)
  Eliminations                                     --        1,770        3,640
                                            ---------    ---------    ---------
  Total operating loss                      $(291,089)   $(331,919)   $ (37,561)
                                            =========    =========    =========

Long lived assets
  U.S. operations                           $  55,690    $ 202,286    $ 355,470
  Far East operations                         283,307      272,471      357,505
                                            ---------    ---------    ---------
  Total long lived assets                   $ 338,997    $ 474,757    $ 712,975
                                            =========    =========    =========

                                       52
<PAGE>
External  sales by geographic  location,  which is determined by the  customers'
sold to address, are as follows:

                                                     Fiscal Year Ended
                                            -----------------------------------
                                              1999         1998         1997
                                            ---------    ---------    ---------
                                                       (in thousands)

Malaysia                                    $ 162,635    $  86,495    $ 112,952
Singapore                                     149,344      151,854      304,358
U.S.                                           16,570       33,154        9,213
All Other Far East Countries                    1,964          487        1,572
Europe                                            971       23,990       11,896
Japan (see Note 13)                               337       25,698       91,342
Thailand                                          125        7,205       99,749
                                            ---------    ---------    ---------
    Total net sales                         $ 331,946    $ 328,883    $ 631,082
                                            =========    =========    =========

NOTE 3. CONCENTRATION OF CUSTOMER AND SUPPLIER RISK

The Company  performs  ongoing credit  evaluations  of its customers'  financial
conditions and generally requires no collateral. Significant customers accounted
for the following percentages of net sales in 1999, 1998 and 1997:

                                                    Fiscal Year Ended
                                            -----------------------------------
                                              1999         1998         1997
                                            ---------    ---------    ---------
Western Digital Corporation                    71%          43%          38%
Maxtor Corporation                             16%          25%          19%
International Business Machines               <10%          18%          10%
Quantum Corporation/MKE                       <10%         <10%          15%
Seagate Technology, Inc.                      <10%         <10%          14%

In April of 1999, the Company  purchased  Western  Digital  Corporation's  (WDC)
media  operation.  As part of the  purchase,  the Company and WDC entered into a
volume  purchase  agreement  whereby  WDC is  obligated,  over the  three  years
following the acquisition date, to purchase a significant  majority of its media
requirements from the Company.

Kobe Steel, Ltd.  ("Kobe") supplies aluminum  substrate blanks to Komag Material
Technology,  Inc.  ("KMT"),  and the Company in turn  purchases  the majority of
KMT's entire output of finished substrates. The Company also relies on a limited
number of other  suppliers,  in some cases a sole

                                       53
<PAGE>
supplier, for certain other materials used in its manufacturing processes. These
materials  include nickel  plating  solutions,  certain  polishing and texturing
supplies and sputtering target materials.  These suppliers work closely with the
Company to optimize the Company's production  processes.  Although this reliance
on a limited number of suppliers, or a sole supplier, entails some risk that the
Company's  production capacity would be limited if one or more of such materials
were to become  unavailable  or  available  in reduced  quantities,  the Company
believes that the advantages of working  closely with these  suppliers  outweigh
such risks. If such materials should be unavailable for a significant  period of
time, the Company's results of operations could be adversely affected.

NOTE 4. STOCKHOLDER'S EQUITY

In July  1998,  the  Company's  stockholders  approved  at a Special  Meeting of
Stockholders  a proposal to increase  the amount of Common  Stock the Company is
authorized to issue from 85,000,000 to 150,000,000 shares.

In May 1999,  the  Stockholders  granted the Company  authorization  to sell and
issue up to  $250,000,000  of Common  Stock in equity or  equity-linked  private
transactions  from time to time  through  October 1, 2000 at a price  below book
value but at or above the then  current  market  value of the  Company's  Common
Stock.

NOTE 5. STOCK OPTION PLANS AND STOCK PURCHASE PLAN

At January 2, 2000, the Company has stock-based  compensation  plans,  which are
described below. The Company has elected to follow  Accounting  Principles Board
Opinion  No.  25,  "Accounting  for  Stock  Issued  to  Employees"  and  related
Interpretations in accounting for its plans.  Accordingly,  no compensation cost
has been  recorded in the  financial  statements  for its stock option and stock
purchase plans. Had  compensation  cost for the stock-based  compensation  plans
been determined  consistent with Statement of Financial  Accounting Standard No.
123, "Accounting for Stock-Based  Compensation," the Company's net loss and loss
per share would have been increased to the pro forma amounts indicated below:

                                                   Fiscal Year Ended
                                         -------------------------------------
                                           1999          1998           1997
                                         ---------     ---------      --------
                                        (in thousands, except per share amounts)

Net loss:               As reported      $(283,049)    $(366,336)     $(22,103)
                        Pro forma         (303,793)     (396,390)      (36,833)

Basic and diluted EPS:  As reported         ($4.54)       ($6.89)       ($0.42)
                        Pro forma            (4.88)        (7.46)        (0.71)

For purposes of the pro forma disclosure, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used for grants in

                                       54
<PAGE>
1999, 1998 and 1997,  respectively:  risk-free  interest rates of 5.8%, 5.5% and
6.3%;  volatility  factors of the expected market price of the Company's  Common
Stock of 90.4%,  63.4% and 61.9%;  and a  weighted-average  expected life of the
options of 4.3, 4.7 and 6.5 years.  There was no dividend  yield included in the
calculation as the Company does not pay  dividends.  The  weighted-average  fair
value of options granted during 1999, 1998 and 1997 was $2.72, $4.29 and $11.06,
respectively.

For  purposes  of the pro forma  disclosure,  the fair  value of the  employees'
purchase  rights under the Employee Stock Purchase Plan has been estimated using
the Black-Scholes model assuming risk-free interest rates of 5.8%, 5.5% and 6.5%
in 1999, 1998 and 1997, respectively.  Volatility factors of the expected market
price  were  90.4%,  63.5% and 60% for 1999,  1998 and 1997,  respectively.  The
weighted-average  expected life of the purchase  rights was six months for 1999,
1998 and 1997. The weighted-average  fair value of those purchase rights granted
in 1999, 1998 and 1997 was $2.90, $3.09 and $6.37, respectively.

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

In  September  1997,  the  Company's  Board  of  Directors   approved  the  1997
Supplemental  Stock Option Plan  ("Supplemental  Plan").  Under the Supplemental
Plan,  the  Company  may grant  nonqualified  stock  options to  purchase  up to
6,100,000  shares of Common Stock.  In December  1999,  the  Company's  Board of
Directors approved an increase of 1,500,000 shares in the total number of shares
that may be issued under the Supplemental Plan to a total of 7,600,000 shares.

Under the Company's stock option plans ("Plans"),  the Company may grant options
to purchase up to 25,860,000  shares of Common Stock.  Options may be granted to
employees, directors, independent contractors and consultants. The Restated 1987
Stock  Option  Plan  provides  for  issuing  both  incentive  stock  options and
nonqualified  stock options,  both of which must be granted at fair market value
at the date of grant. The Supplemental  Stock Option Plan and the Komag Material
Technology,  Inc.  Stock  Option Plan  provide for  issuing  nonqualified  stock
options,  which  must be  granted  at fair  market  value at the date of  grant.
Outstanding  options generally vest over four years and expire no later than ten
years from the date of grant.  Options may be  exercised in exchange for cash or
outstanding  shares of the Company's  Common Stock. No options were exercised in
exchange for outstanding  shares of the Company's Common Stock in 1999 and 1998.
Approximately  16,000  shares of the  Company's  Common  Stock were  received in
exchange for option exercises in 1997.

In October 1997, the Company's  Board of Directors  approved an option  exchange
program,  subject to election by the option holders, whereby options to purchase
1,806,000  shares of the Company's Common Stock at prices ranging from $19.75 to
$36.00 per share were  canceled and reissued at $19.44 per share,  which was the
fair  market  value of the  Company's  Common  Stock at that time.  The  average
exercise price of the canceled options was  approximately  $26.62 per share. The
new options  generally vest over two to four years.  The option exchange program
was not available to the Company's executive officers or non-employee members of
the Company's Board of Directors.

In June 1998,  the  Company's  Board of  Directors  approved an option  exchange
program,  subject to election by the option holders, whereby options to purchase
7,551,000  shares of the Company's  Common Stock at prices ranging from $6.19 to
$31.06 per share were  canceled and  reissued at $5.35 per share,  which was the
fair  market  value of the  Company's  Common  Stock at that time.  The  average

                                       55
<PAGE>
exercise  price of the  canceled  options  was  approximately  $15.65 per share.
Vesting  under the new options  remained  unchanged,  however,  the options were
subject to a one year prohibition on exercisability. The option exchange program
was  available to  executive  officers  but was not  available to the  Company's
non-employee members of the Company's Board of Directors.

At January 2, 2000, approximately 1,815,000 shares of Common Stock were reserved
for future option grants and 15,349,000 shares of Common Stock were reserved for
the  exercise  of  outstanding  options.  Approximately  4,486,000,  950,000 and
2,297,000  of the  outstanding  options  were  exercisable  at  January 2, 2000,
January 3, 1999 and December 28, 1997, respectively.

                                       56
<PAGE>
A summary of stock option transactions is as follows:

                                                         Weighted-
                                                          average
                                            Shares    Exercise Price    Total
                                           ---------     ---------    ---------
                                                   (in thousands, except
                                                     per share amounts)

Outstanding at December 29, 1996               5,745     $   15.26    $  87,678
  Granted                                      4,141         22.38       92,685
  Exercised                                     (678)         9.66       (6,549)
  Cancelled                                   (2,314)        25.42      (58,817)
                                           ---------     ---------    ---------
Outstanding at December 28, 1997               6,894         16.68      114,997
  Granted                                     11,290          7.43       83,842
  Exercised                                     (168)         8.55       (1,432)
  Cancelled                                   (9,200)        15.23     (140,122)
                                           ---------     ---------    ---------
Outstanding at January 3, 1999                 8,816          6.50       57,285
  Granted                                      9,934          3.92       38,815
  Exercised                                      (34)         9.33         (317)
  Cancelled                                   (3,367)         6.28      (21,205)
                                           ---------     ---------    ---------
Outstanding at January 2, 2000                15,349     $    4.86    $  74,578
                                           =========     =========    =========

                                       57
<PAGE>
The following table summarizes  information concerning currently outstanding and
exercisable options (option shares in thousands):

                            Options Outstanding            Options Exercisable
                    -----------------------------------   ---------------------
                                   Remaining
   Range of            Number     Contractual   Exercise    Number      Exercise
Exercise Prices     Outstanding   Life (yrs)*    Price*   Exercisable    Price*
---------------     -----------   -----------    ------   -----------    ------
 $1.69 - $3.00          3,543         9.9         $2.59          49        2.68
  3.01 -  4.00          4,428         9.5          3.74           9        3.20
  4.01 -  5.35          5,900         6.7          5.33       3,501        5.35
  5.36 - 12.63          1,286         6.0          9.35         736        9.17
 12.64 - 28.44            102         6.1         23.07         101       23.13
 28.45 - 34.13             90         6.9         34.12          90       34.12
                      -------                               -------
                       15,349                                 4,486
                      =======                               =======

* Weighted-average

Under the terms of the Employee Stock Purchase Plan ("ESPP Plan"), employees may
elect to  contribute  up to 10% of their  compensation  toward the  purchase  of
shares of the Company's  Common Stock.  The purchase price per share will be the
lesser of 85% of the fair market value of the stock on the first day or the last
day of each semi-annual offering period.

In May 1999, the  Shareholders  approved a 2,550,000 share increase in the total
number of shares  that may be issued  under the ESPP Plan.  The total  number of
shares  of stock  that may be  issued  under the Plan  cannot  exceed  7,400,000
shares.  Shares issued under the ESPP Plan approximated  1,170,000,  925,000 and
436,000 in 1999, 1998 and 1997, respectively.  At January 2, 2000, approximately
2,115,000  shares of Common Stock were  reserved for future  issuance  under the
ESPP Plan.

NOTE 6. BONUS AND PROFIT SHARING PLANS

Under the terms of the  Company's  cash profit  sharing  plan, a  percentage  of
consolidated  semi-annual operating profit, as defined in the plan, is allocated
among all employees who meet certain criteria.  Under the terms of the Company's
bonus plans, a percentage of consolidated annual operating profit, as defined in
the respective bonus plans, is paid to eligible employees.  The bonus plans also
include provisions for discretionary  bonuses.  The Company expensed  $1,486,000
under the  discretionary  bonus  provisions  in 1999.  No bonus and cash  profit
sharing  provision based on operating profits was recorded in 1999 and 1998. The
Company  expensed  $1,966,000 under these bonus and cash profit sharing plans in
1997.

The Company and its  subsidiaries  maintain  savings and deferred profit sharing
plans.  Employees  who meet certain  criteria are  eligible to  participate.  In
addition  to  voluntary  employee  contributions  to these  plans,  the  Company
contributes  four  percent of  semi-annual  consolidated  operating  profit,  as
defined  in the  plans.  These  contributions  are  allocated  to  all  eligible
employees.  Furthermore,  the  Company  matches  a  portion  of each  employee's
contributions  to the  plans up to a maximum  amount.  The  Company  contributed
$615,000,  $695,000  and  $2,534,000  to the  plans  in  1999,  1998  and  1997,

                                       58
<PAGE>
respectively.  Expenses for the  Company's  bonus and profit  sharing  plans are
included in selling, general and administrative expenses.

NOTE 7.  INCOME TAXES

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

                                                      Fiscal Year Ended
                                              ---------------------------------
                                                1999        1998         1997
                                              --------    ---------    --------
                                                       (in thousands)
Federal:
  Current                                     $  1,369    $      59    $(24,036)
  Deferred                                     (20,555)         (59)      2,192
                                              --------    ---------    --------
                                               (19,186)          --     (21,844)
State:
  Current                                            2            2        (490)
  Deferred                                      (7,848)          --         321
                                              --------    ---------    --------
                                                (7,846)           2        (169)
Foreign:
  Current                                        1,224        1,313       1,031
                                              --------    ---------    --------
                                              $(25,808)   $   1,315    $(20,982)
                                              ========    =========    ========

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

                                       59
<PAGE>
Deferred tax assets (liabilities) are comprised of the following:

                                                           Fiscal Year End
                                                        ----------------------
                                                          1999          1998
                                                        ---------     --------
                                                            (in thousands)

State income taxes                                       $(8,647)     $(10,649)
Deferred income                                          (10,028)      (34,023)
Other                                                     (1,370)       (7,892)
                                                        ---------     --------
Gross Deferred tax liabilities                           (20,045)      (52,564)
                                                        ---------     --------
Depreciation                                               2,666           319
Inventory valuation adjustments                              365         2,283
Accrued compensation and benefits                            288         2,442
State income taxes                                            --         2,484
Other                                                        448           355
Tax benefit of net operating losses                      176,478        97,846
Tax benefit of credit carryforwards                       35,213        33,085
                                                        --------      --------
Gross Deferred tax assets                                215,458       138,814
Deferred tax asset valuation allowance                  (211,691)     (130,931)
                                                        --------      --------
Net Deferred tax assets                                    3,767         7,883
                                                        --------      --------
                                                        $(16,278)     $(44,681)
                                                        ========      ========

As of January 2, 2000,  the Company has federal and state tax net operating loss
carryforwards of approximately $384,000,000 and $122,000,000,  respectively. The
Company  also has federal and state tax credit  carryforwards  of  approximately
$16,800,000 and $18,400,000,  respectively.  The Company's federal net operating
losses expire  beginning in 2013 through 2019 and the state net operating losses
expire  beginning  in 2003  through  2004.  The  Company's  federal  tax  credit
carryovers  expire  beginning  in 2000  through  2019 and the state  tax  credit
carryforwards  expire  beginning in 2003 through 2006. Due to the uncertainty of
the timing and amount of future  income,  the Company has fully reserved for the
potential future tax benefit of all net operating loss and credit  carryforwards
in the deferred tax asset valuation allowance.

Dastek Holding Company, a 60%-owned subsidiary of the Company, has a federal tax
net operating loss carryforward of approximately  $100,000,000.  The Company has
fully  reserved  for the  potential  future  federal  tax  benefit  of this  net
operating  loss in the deferred tax asset  valuation  allowance  due to the fact
that its utilization is limited to the subsidiary's  separately  computed future
taxable income and that the subsidiary has no history of operating profits.  The
net operating losses expire beginning in 2009 through 2011.

The  deferred  tax asset  valuation  allowance  increased  $80,760,000  in 1999,
$63,885,000 in 1998, and $32,000,000 in 1997.

                                       60
<PAGE>
A reconciliation  of the income tax provision at the 35% federal  statutory rate
to the income tax provision at the effective tax rate is as follows:

<TABLE>
<CAPTION>
                                                               Fiscal Year Ended
                                                      ----------------------------------
                                                        1999         1998         1997
                                                      ---------    ---------    --------
                                                                 (in thousands)
<S>                                                   <C>          <C>          <C>
Income taxes computed at federal statutory rate       $(107,683)   $(118,116)   $(13,237)
State and foreign income taxes, net of federal
  benefit                                                (6,622)       1,315         907
Permanently reinvested foreign (earnings) losses         15,052       46,446     (25,597)
Losses for which no current year benefit available       72,095       70,995      16,561
Other                                                     1,350          675         384
                                                      ---------    ---------    --------
                                                      $ (25,808)   $   1,315    $(20,982)
                                                      =========    =========    ========
</TABLE>

Foreign pretax income (loss) was ($101,400,000),  ($131,400,000) and $74,400,000
in 1999, 1998 and 1997, respectively.

In February 2000, the Company obtained  favorable  resolution of various federal
income tax audits which had been in process as of January 2, 2000.  These audits
were resolved with no taxes owed by the Company. As a result, the related income
tax liability as of January 2, 2000 was reduced by  $27,000,000  million and the
provision for income taxes for the year ended 1999 reflects this adjustment.

Komag USA (Malaysia) Sdn.  ("KMS"),  the Company's  wholly owned thin-film media
operation  in  Malaysia,  was granted an extension of its initial tax holiday by
the Malaysian government for a period of five years commencing in July 1998. KMS
has also been  granted an  additional  ten-year  tax  holiday for its second and
third plant sites in Malaysia. The government determined in the third quarter of
1999 that  earnings  from the  second  and third  plant  sites  will be tax free
through 2001. The remaining period of the ten-year holiday will be reassessed in
2001 based on achieving  certain  investment  criteria.  The tax holidays had no
impact on either the Company's  1999 or 1998 net loss. In 1997,  the tax holiday
reduced the Company's  net loss by  approximately  $16,596,000  ($0.32 per share
under both the basic and diluted methods).

NOTE 8. TERM DEBT AND LINES OF CREDIT

The Company  has  borrowed  $260,000,000  under its term debt and line of credit
facilities  at January 2, 2000 and  January 3, 1999.  At January 2, 2000,  these
borrowings  incurred interest at 7.4% to 8.5%, with  interest-only  payments due
quarterly.

The Company is in default under  certain  financial  covenants  contained in the
Company's  bank credit  facilities  which  include the  following  ratios/tests:
profitability,  quick ratio,  leverage ratio, tangible net worth, debt coverage,
and debt to  capitalization.  The Company is not in payment  default under these
credit  facilities  as all  interest  charges  and fees  associated  with  these
facilities  have  been paid on their  scheduled  due  dates.  At the time of the
covenant  default the Company had  $260,000,000  of debt

                                       61
<PAGE>
outstanding against a total borrowing capacity of $345,000,000 under the various
senior unsecured credit  facilities.  As a result of the covenant  default,  the
Company's  lenders  withdrew the $85,000,000 in unused  borrowing  capacity.  To
date, the lenders have not accelerated  any principal  payments under the credit
facilities. The Company is currently negotiating with its lenders for amendments
to the existing credit facilities.

NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash and short-term investments,  accounts receivable and
certain other  liabilities on the Consolidated  Balance Sheets  approximate fair
value at January 2, 2000 and January 3, 1999 due to the relatively  short period
to maturity of the  instruments.  As of January 2, 2000 and January 3, 1999, the
Company was in default of its debt covenants and the fair value of the Company's
debt borrowings was approximately  $211,000,000 and $251,000,000,  respectively.
The fair  value of the bank  borrowings  was based on the  discounted  cash flow
method in 1999 and by quoted  market  prices or  pricing  models  using  current
market  rates in  1998.  See Note 1 for fair  value of  foreign  currency  hedge
contracts.

NOTE 10. LEASES AND COMMITMENTS

The Company leases certain  production,  research and administrative  facilities
under  operating  leases that  expire at various  dates  between  2000 and 2013.
Certain of these  leases  include  renewal  options  varying from five to twenty
years.

At January  2,  2000,  the future  minimum  commitments  for all  noncancellable
operating leases are as follows (in thousands):

                                                      Facilities
                                                       Held for
                                          Facilities   Disposal/
                                           Occupied    Sublease      Total
                                            -------     -------     -------
     2000                                   $ 2,435     $ 2,839     $ 5,274
     2001                                     2,567       2,979       5,546
     2002                                     2,584       3,060       5,644
     2003                                     2,606       2,517       5,123
     2004                                     2,493       2,387       4,880
     Thereafter                               4,763      16,371      21,134
                                            -------     -------     -------
     Total minimum lease payments           $17,448     $30,153     $47,601
                                            =======     =======     =======

Rental expense for all operating  leases amounted to $6,605,000,  $6,573,000 and
$8,047,000 in 1999, 1998 and 1997, respectively.

                                       62
<PAGE>
In January  2000,  the  Company  entered a sublease  as the  sub-lessor  for the
administrative  building in San Jose,  California.  The term of the  sublease is
from  January 14, 2000  through  March 14,  2007.  The  payments for each of the
following five years and  thereafter,  which have not been included in the table
above, are as follows (in thousands):

               2000                                     $   916
               2001                                       1,408
               2002                                       1,450
               2003                                       1,494
               2004                                       1,539
               Thereafter                                 3,562
                                                        -------
               Total                                    $10,369
                                                        =======

The Company has current  noncancellable  capital  commitments  of  approximately
$1,956,000.

NOTE 11. RESTRUCTURING CHARGES

During  the  third  quarter  of  1997,  the  Company  evaluated  the size of its
production  capacity  relative to market demand and  implemented a restructuring
plan to close two older Milpitas,  California facilities. The Company recorded a
$52.2  million  restructuring  charge which  included $3.9 million for severance
costs associated with  approximately  330 terminated  employees (all in the U.S.
and  predominately  all from the  manufacturing  area),  $33.0  million  for the
write-down  of the net book  value of excess  equipment  that was  scrapped  and
disposed of leasehold  improvements,  $10.1 million  related to equipment  order
cancellations and other  equipment-related  costs, and $5.2 million for facility
closure  costs.  Non-cash  items  included in the  restructuring  charge totaled
approximately $33.0 million.

In the second quarter of 1998 several customers reduced orders for the Company's
products  in response to  downward  adjustments  in their disk drive  production
build schedules.  Due to the expectation that the media industry's supply/demand
imbalance would extend into 1999, the Company  adjusted its expectations for the
utilization of its installed production capacity.  Based on this analysis of the
Company's  production capacity and its expectations of the media market over the
remaining  life of the Company's  fixed assets,  the Company  concluded  that it
would not be able to recover the book value of those  assets  based on projected
undiscounted  cash flows. As a result,  the Company  implemented a restructuring
plan in June 1998 that included a reduction in the Company's  U.S. and Malaysian
workforce and the  cessation of  operations  at its oldest San Jose,  California
plant.  The Company  recorded a  restructuring  charge of $187.8  million  which
included  $4.1  million  for  severance  costs   (approximately  170  employees,
predominately  in  the  U.S.  and  approximately   69%,  27%  and  4%  from  the
manufacturing area, engineering area and sales, general and administrative area,
respectively),  $5.9 million related to equipment order  cancellations and other
equipment  related costs, and $2.8 million for facility closure costs. The asset
impairment  component of the charge was $175.0 million and  effectively  reduced
asset valuations to reflect the economic effect of recent industry price erosion
for disk media and the projected  under-utilization  of the Company's production
equipment and  facilities.  The fair value of these assets was determined  based
upon the estimated  future cash flows to be generated by the assets,  discounted
at a market rate of interest  (15.8%) The cash component of the total charge was
$12.8

                                       63
<PAGE>
million.  Non-cash items in the  restructuring/impairment  charge totaled $175.0
million.

The Company  incurred  lower  facility  closure  costs than  anticipated  in the
restructuring  charges.  The  oldest  Milpitas  plant  was  sublet  sooner  than
anticipated  and the  Company  reached a lease  termination  agreement  with its
landlord on the second  Milpitas plant in the third quarter of 1998. The Company
thereby  avoided  expected  future rent payments and the cost of renovating  the
facility to its original lease condition.  Additionally,  the Company determined
that it would  not  close  its  oldest  San  Jose,  California  facility  at the
expiration of its lease.  As a result the Company did not incur costs to restore
the  facility  to  its  original  lease   condition  as   contemplated   in  the
restructuring   charge.   Higher  than  expected   costs  for  equipment   order
cancellations  offset the lower facility closure costs. A total of 515 employees
were terminated in the restructuring activities.

The following tables summarize these restructuring activities.

1997 Restructuring Reserve

<TABLE>
<CAPTION>
                              Writedown Net Book   Equipment Order
                              Value of Equipment  Cancellations And   Facility
                                and Leasehold           Other         Closure    Severance
(in millions)                   Improvements        Related Costs      Costs       Costs     Total
                                   ------              -------         ------      ------    ------
<S>                                <C>                 <C>             <C>         <C>       <C>
Expensed in 1997                   $33.0               $ 10.1          $  5.2      $  3.9    $ 52.2
Charged to Reserve                 (33.0)                (4.2)           (0.3)       (3.4)    (40.9)
                                   -----               ------          ------      ------    ------
Balance at December 28, 1997          --                  5.9             4.9         0.5      11.3

Charged to Reserve                    --                 (7.9)           (1.9)       (0.4)    (10.2)
Adjustment to Reserve                 --                  5.5            (3.0)       (0.1)      2.4
                                   -----               ------          ------      ------    ------
Balance at January 3, 1999            --                  3.5              --          --       3.5

Charged to Reserve                    --                 (1.7)             --          --      (1.7)
                                   -----               ------          ------      ------    ------
Balance at January 2, 2000         $  --               $  1.8          $   --      $   --    $  1.8
                                   =====               ======          ======      ======    ======
</TABLE>

1998 Restructuring Reserves

<TABLE>
<CAPTION>
                               Asset       Equipment Order    Facility
                             Impairment   Cancellations And    Closure   Severance
(in millions)                  Charge    Other Related Costs    Costs      Costs     Total
                               ------           ------          ------     ------    ------
<S>                            <C>              <C>             <C>        <C>       <C>
Expensed in 1998               $175.0           $  5.9          $  2.8     $  4.1    $187.8
Charged to Reserve             (175.0)            (5.1)             --       (4.5)   (184.6)
Adjustment to Reserve              --               --            (2.8)       0.2      (2.6)
                               ------           ------          ------     ------    ------
Balance at January 3, 1999         --              0.8              --       (0.2)      0.6
Reallocated Reserve                --             (0.2)             --        0.2        --
                               ------           ------          ------     ------    ------
Balance at January 2, 2000     $   --           $  0.6          $   --     $   --    $  0.6
                               ======           ======          ======     ======    ======
</TABLE>

                                       64
<PAGE>
At January 2,  2000,  $2.4  million  related to these  restructuring  activities
remained in current  liabilities.  The Company has made cash  payments  totaling
approximately   $29.4  million   primarily  for   severance,   equipment   order
cancellations  and  facility  closure  costs.  The  majority  of  the  remaining
liability,  primarily  for  equipment  order  cancellations,  is  expected to be
settled  through  the use of cash by the end of the first  quarter of 2000.  The
Company recorded  restructuring charges of $4.3 million in the second quarter of
1999. This  restructuring  charge related to severance costs associated with 400
terminated   employees  all  in  the  U.S.  and   predominately   all  from  the
manufacturing area. The entire $4.3 million was paid out to the employees during
the second and third quarter of 1999.

During the third quarter of 1999, the Company  implemented a restructuring  plan
based on an  evaluation  of the size and  location  of its  existing  production
capacity  relative to the short-term and long-term market demand outlook.  Under
the 1999 restructuring plan, the Company decided to close its U.S. manufacturing
operations in San Jose,  California.  The  restructuring  actions  resulted in a
charge of $139.3 million and included  $98.5 million for leasehold  improvements
and  equipment   write-offs,   $17.7  million  for  future   liabilities   under
non-cancelable  equipment leases associated with equipment no longer being used,
$15.6 million for severance pay  associated  with  approximately  980 terminated
employees (all in the U.S. and predominately  all from the manufacturing  area),
and  $7.5  million  in plant  closure  costs.  Non-cash  items  included  in the
restructuring charge totaled approximately $98.5 million.

1999 Restructuring Reserves

<TABLE>
<CAPTION>
                               Writedown Net Book  Liabilities Under
                               Value of Equipment   Non-Cancelable    Facility
                                 and Leasehold         Equipment       Closure   Severance
(in millions)                    Improvements            Leases         Costs      Costs     Total
                                 ------------            ------         -----      -----     -----
<S>                                <C>                   <C>            <C>        <C>       <C>
Expensed in 1999                   $ 98.5                $ 17.7         $ 7.5      $19.9     $143.6
Charged to Reserve                  (98.5)                 (3.9)         (3.0)     (15.1)    (120.5)
                                   ------                ------         -----      -----     ------
Balance at January 2, 2000         $   --                $ 13.8         $ 4.5      $ 4.8     $ 23.1
                                   ======                ======         =====      =====     ======
</TABLE>

At January 2, 2000, $23.1 million related to the 1999  restructuring  activities
remained in current  liabilities.  During the third and fourth quarters of 1999,
the  Company  made cash  payments  totaling  $22.0  million.  Cash  outflows  of
approximately  $9.3 million associated with severance pay and closure costs will
occur primarily during the first quarter of 2000. Cash payments of approximately
$13.8 million under the equipment leases will be made monthly through mid-2002.

                                       65
<PAGE>
NOTE 12. KOMAG MATERIAL TECHNOLOGY, INC.

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

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

                                                        Fiscal Year Ended
                                                  -----------------------------
                                                   1999       1998       1997
                                                  -------    -------    -------
                                                         (in thousands)
Accounts payable to Kobe or its distributors:
  Beginning of year                               $ 1,799    $ 4,830    $ 2,430
      Purchases                                    15,031     23,758     52,308
      Payments                                    (14,823)   (26,789)   (49,908)
                                                  -------    -------    -------
         End of year                              $ 2,007    $ 1,799    $ 4,830
                                                  =======    =======    =======

NOTE 13. UNCONSOLIDATED JOINT VENTURE

In  1987,  the  Company  formed  a  partnership,   Komag   Technology   Partners
("Partnership"),  with the  U.S.  subsidiaries  of two  Japanese  companies  and
simultaneously formed a subsidiary,  Asahi Komag Co., Ltd. ("AKCL"). The Company
contributed  technology in exchange for a 50% interest in the  Partnership.  The
Partnership and its subsidiary  (joint venture)  established a facility in Japan
to manufacture and sell the Company's  thin-film  media products in Japan.  AKCL
has also  historically  sold its  products to the Company for resale  outside of
Japan. In 1996, the Company  granted AKCL various  licenses to sell its products
to  specified  customers  outside of Japan in exchange for a 5% royalty on these
sales. The Company recorded approximately $3,303,000,  $1,989,000 and $1,388,000
of  royalty  in other  income in 1999,  1998 and 1997,  respectively.  Equipment
purchases  by the  Company  from its joint  venture  partners  were  $2,836,000,
$14,458,000 and $17,836,000 in 1999, 1998 and 1997, respectively.  In 1997, AKCL
sold its entire  interest in another  company for  $10,800,000 to a group of new
investors as part of a recapitalization and AKCL recorded the proceeds from this
sale as a gain ($5,300,000, net of tax).

The  Company's  share  of  the  joint  venture's  net  loss  was   ($1,402,000),
($27,003,000) and ($4,865,000) in 1999, 1998 and 1997, respectively.  Due to the
AKCL losses, the Company's  investment in AKCL was written down to zero in 1999.
During 1999, the Company did not record $2.6 million in additional  losses as it
would have  reduced  the net book value of the  investment  in AKCL below  zero.
Assuming AKCL reports net income in future periods,  the Company will record its
share of such income  only to the extent by which the income  exceeds the losses
incurred subsequent to the date on which the investment balance became zero.

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

                                                        Fiscal Year Ended
                                                  -----------------------------
                                                   1999       1998       1997
                                                  -------    -------    -------
                                                          (in thousands)
Accounts receivable from joint venture:
  Beginning of year                               $   459    $ 4,053    $ 8,316
      Sales                                           981     15,799     95,302
      Cash receipts                                  (835)   (19,393)   (99,565)
                                                  -------    -------    -------
         End of year                              $   605    $   459    $ 4,053
                                                  =======    =======    =======

Accounts payable to joint venture:
  Beginning of year                               $    19    $ 2,256    $   549
      Purchases                                       215      4,153     14,686
      Payments                                       (222)    (6,390)   (12,979)
                                                  -------    -------    -------
         End of year                              $    12    $    19    $ 2,256
                                                  =======    =======    =======

                                       66
<PAGE>
Summary  combined  financial  information  for the  Partnership and AKCL for the
years ended  December 31, 1999,  1998 and 1997,  and as of December 31, 1999 and
1998 is as follows. The subsidiary's total assets, liabilities,  revenues, costs
and expenses approximate 100% of the combined totals.

                                                     Fiscal Year Ended
                                            ------------------------------------
                                              1999         1998         1997
                                            ---------    ---------    ---------
                                                      (in thousands)
Summarized Statements of Operations:
     Net sales                              $ 189,346    $ 138,330    $ 186,474
     Costs and expenses                       197,321      192,311      200,305
     Income tax provision (benefit)                29           25       (4,101)
                                            ---------    ---------    ---------
        Net Loss                            $  (8,004)   $ (54,006)   $  (9,730)
                                            =========    =========    =========

                                                             Fiscal Year End
                                                         -----------------------
                                                           1999           1998
                                                         ---------      --------
                                                             (in thousands)
Summarized Balance Sheets:
     Current assets                                      $  58,280      $ 69,773
     Noncurrent assets                                     149,580       163,035
                                                         ---------      --------
        Total Assets                                     $ 207,860      $232,808
                                                         =========      ========

     Current liabilities                                 $ 137,686      $139,043
     Long-term obligations                                  73,260        88,892
     Partners' capital                                      (3,086)        4,873
                                                         ---------      --------
        Total Liabilities and Partners' Capital          $ 207,860      $232,808
                                                         =========      ========

NOTE 14. PURCHASE OF WESTERN DIGITAL CORPORATION'S MEDIA OPERATION

In April 1999, the Company purchased the assets of Western Digital Corporation's
("WDC's") media  operation  through the issuance of  approximately  10.8 million
shares of the Company's Common Stock and a note in the principal amount of $30.1
million.  The shares issued in the transaction,  which  represented 16.7% of the
Company's   outstanding  shares  on  a  post-issuance   basis,  were  originally
unregistered and subject to trading restrictions. WDC may resell these shares in
specified  increments  over a three and one-half year period under  registration
rights  granted  by the  Company  or under SEC  rules  after  expiration  of the
required  holding periods.  The Company  registered 30% of the shares in January
2000 pursuant to the agreement.  Principal and interest  accrued on the note are
due in three years and the note is subordinated  to the Company's  senior credit
facilities.  In the event WDC realizes a return on its Komag equity  holdings in
excess of a targeted  amount  within three years,  the excess amount will reduce
the balance due under the note. The Company  discounted the principal  amount of
the subordinated note payable to $21.2 million based on the Company's  estimated
incremental  borrowing rate at the time of the acquisition of 18% for this class
of financial instrument.

                                       67
<PAGE>
Additionally, the Company and WDC signed a volume purchase agreement under which
the Company agreed to supply a substantial portion of WDC's media needs over the
next three years. Under the volume purchase agreement WDC began to purchase most
of its media requirements from the Company after the closing date. However,  due
to weak unit demand driven by a substantial  decrease in the number of disks per
drive the Company closed the former WDC media operation at the end of June 1999,
nearly fifteen months ahead of the Company's original transition plan.

The Company's  acquisition  of WDC's media  operation was recorded in the second
quarter  of  1999  as a  business  combination  using  the  purchase  method  of
accounting. Under this method the Company recorded the following (in millions):

          Purchase Price Paid:
            Common Stock                                      $ 34.6
            Note Payable                                        21.2
                                                              ------
          Total Costs                                         $ 55.8
                                                              ======
          Assets Acquired:
            Goodwill                                          $ 79.2
            Volume Purchase Agreement                            4.7
            Equipment                                            5.3
            Inventory                                            2.1
          Liabilities Assumed:
            Remaining Lease Obligations
                for Equipment Removed
                from Service                                   (26.5)
            Facility Closure Costs                              (5.6)
            Purchase Order Cancellation
                Liabilities                                     (2.6)
            Other Liabilities                                   (0.8)
                                                              ------
          Net Assets Acquired                                 $ 55.8
                                                              ======

The Company  recognized  goodwill and other  intangibles in connection  with the
acquisition of the WDC media operation in the amount of $83.9 million.  Goodwill
typically  reflects the difference between the fair value of the assets acquired
and  consideration  paid.  Under  purchase  accounting  rules,  the Company also
recorded  liabilities  that increased the amount of goodwill  recognized.  These
liabilities  included  estimated  costs for the  closure of the former WDC media
operation  as well as costs  related  to the  remaining  lease  obligations  for
equipment taken out of service due to the closure.

During 1999,  the Company paid a total of  approximately  $13.3 million  against
liabilities arising from

                                       68
<PAGE>
this transaction  including  equipment lease  obligations  ($7.6 million),  rent
($1.3  million),  property  taxes ($1.2  million)  and other  liabilities  ($3.2
million).  Equipment  lease  obligations are expected to be paid monthly through
mid-2002.  At January 2,  2000,  the  current  portion  of the  equipment  lease
obligations  was  approximately  $10.2  million.  The  majority of the  facility
closure  costs,   purchase  order   cancellation  costs  and  other  liabilities
associated with the WDC transaction are expected to be paid by mid-2000.

Based on reduced  cash flow  expectations  influenced  by  continuing  difficult
market  conditions  through  the end of the third  quarter of 1999,  the company
recorded an  impairment  charge of  approximately  $44.3  million  against  this
goodwill  balance  which was recorded on the Statement of Operations on the line
captioned  "Restructuring/impairment charges." The fair value of the goodwill as
of the end of the third quarter of 1999 was  determined  based on the discounted
cash flows  resulting  from expected  sales volumes to WDC through the remaining
period of the volume purchase agreement. This charge, combined with the goodwill
amortization  for the second,  third and fourth  quarters,  reduced the goodwill
balance to approximately $23.0 million at January 2, 2000. The goodwill is being
amortized over the three year term of the Company's  volume  purchase  agreement
with Western  Digital.  Future  impairment  assessments will be performed by the
Company if events or changes in circumstances  indicate that the carrying amount
of the goodwill may not be fully recoverable.  If such assessments  indicate the
carrying value of the goodwill will not be recoverable, as measured based on the
discounted cash flow method, the carrying amount will be adjusted to fair value.
The discounted  cash flow estimates that will be used will contain  management's
best estimates,  using appropriate and customary  assumptions and projections at
the time.

Related party  transactions  between WDC and the Company  subsequent to April 8,
1999 were as follows (in thousands):

                                                                1999
                                                              --------
          Accounts receivable from WDC:
            Beginning of year                                 $     --
                Sales                                          183,511
                Cash receipts                                 (158,198)
                                                              --------
                   End of year                                $ 25,313
                                                              ========

                                       69
<PAGE>
NOTE 15. QUARTERLY SUMMARIES
(in thousands, except per share amounts, unaudited)

<TABLE>
<CAPTION>

                                                      1999
                            -----------------------------------------------------------
                            1st Quarter  2nd Quarter(1)  3rd Quarter(2)  4th Quarter(3)
                            -----------  --------------  --------------  --------------
<S>                          <C>           <C>             <C>             <C>
Net sales                    $ 90,013      $ 93,226        $  79,898       $ 68,809
Gross profit (loss)               747        (4,631)         (17,606)        (1,219)
Net income (loss)             (21,526)      (38,234)        (229,166)         5,877

Basic and diluted earnings
  (loss) per share           ($  0.40)     ($  0.60)       ($   3.50)      $   0.09


                                                      1998
                            -----------------------------------------------------------
                            1st Quarter  2nd Quarter(4)    3rd Quarter    4th Quarter
                            -----------  --------------  --------------  --------------

Net sales                     $76,057       $78,808        $  81,314        $92,704
Gross profit (loss)           (31,595)      (35,637)          (2,803)         7,283
Net loss                      (58,158)     (261,884)         (27,449)       (18,845)

Basic and diluted loss
  per share                    ($1.10)       ($4.95)          ($0.51)        ($0.35)
</TABLE>


(1)  Results for the second quarter of 1999 included a $4,321,000  restructuring
     charge,  which  primarily  related to  severance  pay  associated  with 400
     terminated employees.

(2)  Results for the third quarter of 1999 included a $139,296,000 restructuring
     charge  and a  $44,348,000  impairment  charge.  The  restructuring  charge
     primarily  related  to the  closing  of the  Company's  U.S.  manufacturing
     operations  based on an evaluation of the size and location of its existing
     production  capacity relative to the short-term and long-term market demand
     outlook.  The  impairment  charge related to the write-down of goodwill was
     based on reduced cash flow expectations  influenced by continuing difficult
     market  conditions.  The goodwill had  originated  from the  acquisition of
     Western Digital Corporation's media operation.

(3)  In February  2000,  the Company  obtained  favorable  resolution of various
     federal tax return  audits  which had been in process as of the fiscal year
     ended January 2, 2000. These audits were resolved with no taxes owed by the
     Company.  As a result,  the related  income tax  liability as of January 2,
     2000 was reduced by $27.0  million and the  provision  for income taxes for
     the fourth quarter and year ended 1999 reflect this adjustment.

(4)  Results   for  the  second   quarter  of  1998   included  a   $187,768,000
     restructuring  charge which primarily related to an asset impairment charge
     of $175,000,000.  The asset  impairment  charge  effectively  reduced asset
     valuations  to reflect the economic  effect of industry  price  erosion for
     disk media and projected  under  utilization  of the  Company's  production
     equipment and  facilities.  Based on analysis of the  Company's  production
     capacity and its  expectations  of the media market over the remaining life
     of the Company's fixed assets,  the Company  concluded that it would not be
     able to recover the book value of those assets.

                                       70
<PAGE>
NOTE 16. SUBSEQUENT EVENTS

In March 2000,  the Company  entered  into an  agreement  with an  institutional
investor to sell up to $20 million of common  stock.  The shares of common stock
will be sold  pursuant  to a private  equity  line of  credit,  under  which the
Company may exercise  "put options" to sell shares for a price equal to 90%, 92%
or  94% of  market  price.  The  shares  may be  sold  periodically  in  maximum
increments of $1.5 million to $3.5 million over a period of up to thirty months.
Upon  signing the  agreement,  the Company  issued  warrants to the  investor to
acquire  80,000 shares of common stock at a price equal to 125% of market price.
The warrants are exercisable over a three-year period beginning in August 2000.

                                       71
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE.

     Not Applicable.

                                    PART III

ITEMS 10, 11, 12 and 13.

     Items  10  through  13  of  Part  III  will  be  contained  in  the  Komag,
Incorporated  Proxy  Statement for the Annual Meeting of Stockholders to be held
May 10,  2000  (the  "2000  Proxy  Statement"),  which  will be  filed  with the
Securities  and Exchange  Commission  no later than April 19,  2000.  The cross-
reference table below sets forth the captions under which the responses to these
items are found:

<TABLE>
<CAPTION>
10-K Item    Description                                 Caption in 1999 Proxy Statement
---------    -----------                                 -------------------------------
<S>          <C>                                         <C>
10           Directors and Executive Officers            "Item No. 1--Election of Directors:
                                                            Director Nominees; Business
                                                            Experience of Nominees and
                                                            Directors" and "Additional
                                                            Information: Certain
                                                            Relationships and Related
                                                            Transactions; Other Matters"

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

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

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

     The information set forth under the captions listed above, contained in the
1999 Proxy Statement, are hereby incorporated herein by reference in response to
Items 10 through 13 of this Report on Form 10-K.

                                       72
<PAGE>
                                     PART IV

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

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

          1.   Financial Statements.

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

Consolidated Statements of Operations--Fiscal Years 1999, 1998 and 1997
Consolidated Balance Sheets--January 2, 2000 and January 3, 1999
Consolidated Statements of Cash Flows--Fiscal Years 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity--Fiscal Years 1999, 1998
  and 1997
Notes to Consolidated Financial Statements

          2.   Financial Statement Schedules.

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

Schedule II--Valuation and Qualifying Accounts

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

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

                                       73
<PAGE>
          3.   Exhibits.

3.1     Amended and  Restated  Certificate  of  Incorporation  (incorporated  by
        reference from Exhibit 3.1 filed with the Company's  report on Form 10-Q
        for the quarter ended September 27, 1998).

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

4.1     Registration  Rights Agreement  between Komag,  Incorporated and Western
        Digital  Corporation dated April 8, 1999 (incorporated by reference from
        Exhibit 4.1 filed with the Registration  Statement on Form S-3--File No.
        33-93051)

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

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

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

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

10.1.11 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).

10.1.12 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).

10.1.13 Asset  Purchase  Agreement  between  the  Company  and  Western  Digital
        Corporation dated April 8, 1999  (incorporated by reference from Exhibit
        10.1.13  filed with the  Company's  report of Form 10-Q for the  quarter
        ended  July 4, 1999)  (Confidential  treatment  requested  as to certain
        portions.)

10.1.14 Volume  Purchase  Agreement dated as of April 8, 1999 by and between the
        Company and Western Digital Corporation  (incorporated by reference from
        Exhibit  10.1.14  filed with the  Company's  report of Form 10-Q for the
        quarter  ended July 4, 1999)  (Confidential  treatment  requested  as to
        certain portions.)

10.1.15 Sublease   Agreement  (B11)  dated  January  10,  2000,  between  Komag,
        Incorporated and 2Wire, Inc.

                                       74
<PAGE>
10.1.16 Second  Amendment to Lease dated March 16, 1999 by and between  Northern
        Trust Bank of California N.A. and Komag material Technology, Inc.

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

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

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

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

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

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

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

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

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

                                       75
<PAGE>
10.3.9  Joint  Development and  Cross-License  Agreement dated March 10, 1989 by
        and between Komag,  Incorporated;  Kobe Steel,  Ltd.; and Komag Material
        Technology,  Inc.  (incorporated by reference from Exhibit 10.10.7 filed
        with the Company's  report on Form 10-K for the year ended  December 31,
        1989).

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

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

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

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

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

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

10.3.16 Joint  Venture  Amendment  Agreement  among Komag,  Incorporated;  Komag
        Material  Technology,  Inc.;  and Kobe  Steel USA  Holdings  Inc.  dated
        November 17, 1995  (incorporated by reference from Exhibit 10.3.16 filed
        with the Company's  report on Form 10-K for the year ended  December 31,
        1995) (confidential treatment obtained as to certain portions). . 10.4.1
        Restated 1987 Stock Option Plan, effective January 31, 1996 and forms of
        agreement  thereunder  (incorporated  by reference  from Exhibit  10.4.1
        filed with the Company's  report on Form 10-Q for the quarter ended June
        30, 1996).

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

10.4.2  Komag,  Incorporated  Management  Bonus  Plan As  Amended  and  Restated
        January 22, 1997  (incorporated  by reference  from Exhibit 10.4.2 filed
        with the  Company's  report on Form 10-K for the year  ended  January 3,
        1999).

                                       76
<PAGE>
10.4.3  1988 Employee Stock Purchase Plan Joinder  Agreement  dated July 1, 1993
        between Komag,  Incorporated and Komag USA (Malaysia) Sdn. (incorporated
        by reference from Exhibit  10.11.11  filed with the Company's  report on
        Form 10-K for the year ended January 2, 1994).

10.4.4  Komag, Incorporated  Discretionary Bonus Plan (incorporated by reference
        from Exhibit 10.4.4 filed with the Company's report on Form 10-K for the
        year ended December 29, 1996).

10.4.5  Komag, Incorporated 1997 Supplemental Stock Option Plan Amended June 12,
        1998  (incorporated  by  reference  from  Exhibit  10.4.5 filed with the
        Company's report on Form 10-K for the year ended January 3, 1999).

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

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

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

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

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

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

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

                                       77
<PAGE>
10.12   Credit Agreement between Komag,  Incorporated and The Industrial Bank of
        Japan,   Limited,   San  Francisco   Agency  dated   December  15,  1995
        (incorporated  by reference  from Exhibit 10.16 filed with the Company's
        report on Form 10-K for the year ended December 31, 1995).

10.13   First Amendment to Credit  Agreement by and between Komag,  Incorporated
        and The Industrial Bank of Japan,  Limited,  San Francisco  Agency dated
        November 19, 1996 (incorporated by reference to Exhibit 10.17 filed with
        the Company's report on Form 10-K for the year ended December 29, 1996).

10.14   Second Amendment to Credit Agreement by and between Komag,  Incorporated
        and The Industrial Bank of Japan,  Limited,  San Francisco  Agency dated
        January 31, 1997  (incorporated by reference to Exhibit 10.18 filed with
        the Company's report on Form 10-K for the year ended December 29, 1996).

10.15   Credit  Agreement  between Komag,  Incorporated  and The Dai-Ichi Kangyo
        Bank, Limited,  San Francisco Agency dated October 7, 1996 (incorporated
        by reference to Exhibit  10.19 filed with the  Company's  report on Form
        10-K for the year ended December 29, 1996).

10.16   First Amendment to Credit Agreement between Komag,  Incorporated and The
        Dai-Ichi Kangyo Bank,  Limited,  San Francisco Agency dated November 25,
        1996  (incorporated  by  reference  to  Exhibit  10.20  filed  with  the
        Company's report on Form 10-K for the year ended December 29, 1996).

10.17   Credit Agreement dated as of February 7, 1997 among Komag, Incorporated,
        institutional  lenders and The Industrial  Bank of Japan,  Limited,  San
        Francisco Agency, as agent for the  lenders(incorporated by reference to
        Exhibit 10.22 filed with the Company's  report on Form 10-K for the year
        ended December 29, 1996).

10.18   Amended and Restated  Credit  Agreement  Among Komag,  Incorporated  and
        BankBoston,  N.A. as agent (incorporated by reference from Exhibit 10.23
        filed with the Company's  report on Form 10-Q for the quarter ended June
        29, 1997).

10.19   First Amendment to Amended and Restated  Credit  Agreement dated October
        9,  1997  among  Komag,  Incorporated  and  BankBoston,  N.A.  as  agent
        (incorporated  by reference  from Exhibit 10.24 filed with the Company's
        report on Form 10-Q for the quarter ended September 28, 1997).

10.20   Second  Amendment to Amended and Restated  Credit  Agreement dated March
        23,  1998  among  Komag,  Incorporated  and  BankBoston,  N.A.  as agent
        (incorporated  by reference  from Exhibit 10.20 filed with the Company's
        report on Form 10-Q for the quarter ended March 29, 1998).

21      List of Subsidiaries.

23.1    Consent of Ernst & Young LLP, independent auditors.

                                       78
<PAGE>
23.2    Consent of Chuo Audit Corporation.

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

27      Financial Data Schedule.

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

 (b) Reports on Form 8-K.

         Not Applicable

                                       79
<PAGE>
Undertaking

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

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

     The  preceding   undertaking   shall  be  incorporated  by  reference  into
registrant's Registration Statements on Form S-8 Nos. 33-16625 (filed August 19,
1987),  33-19851  (filed January 28, 1988),  33-25230  (filed October 28, 1988),
33-41945  (filed July 29, 1991),  33-45469  (filed  February 3, 1992),  33-53432
(filed  October 16,  1992),  33-80594  (filed June 22,  1994),  33-62543  (filed
September 12, 1995), 333-06081 (filed June 14, 1996), 333-23095 (filed March 11,
1997),  333-31297  (filed  July 15,  1997),  333-48867  (filed  March 30,  1998)
333-84567  (filed August 5, 1999) and on Form S-3 No.  333-93051 (filed December
17, 1999) and S-3/A No. 333-81263 (filed December 17, 1999).

                                       80
<PAGE>
                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in San Jose, California on
this 31st day of March, 2000.

                                           Komag, Incorporated

                                           By Thian Hoo Tan
                                              ----------------------------------
                                           Thian Hoo Tan
                                           President and Chief Executive Officer


                                POWER OF ATTORNEY

     KNOW ALL  PERSONS  BY THESE  PRESENTS,  that each  person  whose  signature
appears herein constitutes and appoints Thian Hoo Tan and Edward H. Siegler, 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.

                                       81
<PAGE>
     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:

       Name                        Title                              Date
       ----                        -----                              ----

THIAN HOO TAN             President, Chief Executive              March 31, 2000
-----------------------   Officer and Director
(Thian Hoo Tan)           (Principal Executive Officer)


EDWARD H. SIEGLER         Vice President, Chief Financial         March 31, 2000
-----------------------   Officer and Secretary (Principal
(Edward H. Siegler)       Financial Officer)


KATHLEEN A. BAYLESS       Vice President, Corporate Controller    March 31, 2000
-----------------------   (Principal Accounting Officer)
(Kathleen A. Bayless)


CHRIS A. EYRE             Director                                March 31, 2000
-----------------------
(Chris A. Eyre)


IRWIN FEDERMAN            Director                                March 31, 2000
-----------------------
(Irwin Federman)


GEORGE A. NEIL            Director                                March 31, 2000
-----------------------
(George A. Neil)


MICHAEL R. SPLINTER       Director                                March 31, 2000
-----------------------
(Michael R. Splinter)


ANTHONY SUN               Director                                March 31, 2000
-----------------------
(Anthony Sun)


MASAYOSHI TAKEBAYASHI     Director                                March 31, 2000
-----------------------
(Masayoshi Takebayashi)


*By EDWARD H. SIEGLER
    ---------------------
    (Edward H. Siegler,
    Attorney-in-Fact)

                                       82
<PAGE>
ITEM 14(d) FINANCIAL STATEMENT SCHEDULES

                               KOMAG, INCORPORATED
                 Schedule II--VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

<TABLE>
<CAPTION>
Col. A                               Col. B         Col. C         Col. D        Col. E
------                               ------         ------         ------        ------
                                                    Additions
                                     Balance at     Charged to                  Balance
                                     Beginning      Costs and                   at End
Description                          of Period      Expenses      Deductions    of Period
-----------                          ---------      --------      ----------    ---------
<S>                                   <C>           <C>               <C>        <C>
Year ended December 28, 1997
  Allowance for doubtful accounts     $1,984        $ 1,286           $(28)      $3,298
  Allowance for sales returns          1,103          7,145 (1)      7,122 (2)    1,126
                                      ------        -------         ------       ------
                                      $3,087        $ 8,431         $7,094       $4,424
                                      ======        =======         ======       ======

Year ended January 3, 1999
  Allowance for doubtful accounts     $3,298        $(1,125)        $    8       $2,165
  Allowance for sales returns          1,126          7,654 (1)      8,098 (2)      682
                                      ------        -------         ------       ------
                                      $4,424        $ 6,529         $8,106       $2,847
                                      ======        =======         ======       ======

Year ended January 2, 2000
  Allowance for doubtful accounts     $2,165        $  (404)        $   --       $1,761
  Allowance for sales returns            682          3,105 (1)      3,368 (2)      419
                                      ------        -------         ------       ------
                                      $2,847        $ 2,701         $3,368       $2,180
                                      ======        =======         ======       ======
</TABLE>

(1)  Additions to the allowance for sales returns are netted against sales.
(2)  Actual sales returns of subsequently  scrapped product were charged against
     the allowance for sales  returns.  Actual sales returns of product that was
     subsequently  tested and shipped to another  customer were netted  directly
     against sales.
(3)  The Company  recorded a restructuring  charge of $52,157,000 to consolidate
     its U.S. manufacturing operations.
(4)  Charges against the  restructuring  liability  included non-cash charges of
     $33,013,000  for the  write-off  of the net  book  value of  equipment  and
     leaseholds,  and cash charges of approximately $7,891,000 for severance and
     equipment related costs.
(5)  The Company recorded a restructuring charge of $187,768,000 which primarily
     related to an asset  impairment  charge due to industry  price  erosion for
     disk media and the projected  under utilization of the Company's production
     equipment and facilities.
(6)  Charges against the  restructuring  liability  included non-cash charges of
     $175,000,000  for  the  asset   impairment   charge  and  cash  charges  of
     approximately $19,893,000 for severance and equipment related costs.
(7)  The  Company   recorded   restructuring   charges  of  $143,617,000  and  a
     $44,348,000  impairment charge. The restructuring  charge primarily related
     to the closing of the Company's U.S.  manufacturing  operations based on an
     evaluation  of the size and  location of its existing  production  capacity
     relative  to the  short-term  and  long-term  market  demand  outlook.  The
     impairment charge related to the write-down of goodwill is based on reduced
     cash  flow   expectations   influenced  by  continuing   difficult   market
     conditions.
(8)  Charges against the  restructuring  liability  included non-cash charges of
     $143,080,000  for asset  impairment  charges  and the  goodwill  impairment
     charge and cash charges of  $23,523,000  for  severance  and  equipment and
     facility related costs.

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<PAGE>
                        REPORT OF INDEPENDENT ACCOUNTANTS

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

     We have audited the accompanying consolidated balance sheets of Asahi Komag
Co., Ltd. and its subsidiary  (the  "Company") as of December 31, 1998 and 1997,
and the consolidated statements of income, cash flows, and changes in equity for
the years ended December 31, 1998, 1997 and 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

     In our opinion,  based on our audit, the financial  statements  referred to
above present  fairly,  in all material  respects,  the  consolidated  financial
position of the Company as of December 31, 1998 and 1997,  and the  consolidated
results of its  operations  and its cash flows for the years ended  December 31,
1998, 1997 and 1996 in conformity with generally accepted accounting  principles
applicable in the United States of America.

     The consolidated financial statements as of and for the year ended December
31,  1998 have  been  translated  into  United  States  Dollars  solely  for the
convenience  of the  reader.  Our audit  included  the  translation,  and in our
opinion such  translation  has been made in accordance  with the basis stated in
note 2h to the consolidated financial statements.

                                          CHUO AUDIT CORPORATION

Tokyo, Japan
January 22, 1999

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