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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Commission file number 0-16852

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

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

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

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

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

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

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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

KOMAG, INCORPORATED

TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K

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PART I

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

General

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

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

Industry Background

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

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

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

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

Disk Market

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

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

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

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

Competitive Strengths

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

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

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

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Strategy

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

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

Technology

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

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

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

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

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

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

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

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

Research, Development, and Engineering

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

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

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

Products and Customers

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

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

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

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

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

Competition

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

Manufacturing

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

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

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

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

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

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

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Environmental Regulation

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

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

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

Patents and Proprietary Information

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

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

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

Employees

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

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

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RISK FACTORS

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

Risks Related to Our Business

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

      Acquisitions may also cause us to:

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

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

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

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

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

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

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

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

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

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

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

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

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

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RISKS RELATED TO OUR INDEBTEDNESS

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

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

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

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

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

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

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Item 2.     Properties

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

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

Item 3.     Legal Proceedings

      None.

Item 4.     Submission of Matters to Vote of Security Holders

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

Executive Officers of the Registrant

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

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

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

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

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

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

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

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

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

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

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

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

PART II

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

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

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

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

Dividend Policy

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

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Item 6.     Selected Consolidated Financial Data

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

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

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

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

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

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     Gross Profit

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

     Research, Development, and Engineering

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

     Selling, General, and Administrative

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

     Amortization of Goodwill

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

     Gain on Disposal of Assets

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

     Impairment Charges Related to Goodwill

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

     Restructuring/ Impairment Charges

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

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

     In-Process Research and Development

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

     Interest Expense

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

     Other Income, Net

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

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

     Reorganization Costs, Net

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

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

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

     Income Taxes

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

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

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     Minority/ Equity Interest in Net Loss of Related Companies

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

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

     Cumulative Effect of Change in Accounting Principle

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

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

Critical Accounting Policies

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

     Allowance for Sales Returns

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

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

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

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

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     Inventory Obsolescence

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Other

      Not applicable.

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

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

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

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

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Item 8.     Consolidated Financial Statements and Supplementary Data

KOMAG, INCORPORATED

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

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

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

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

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

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

	KPMG LLP

San Francisco, California

January 16, 2004, except as to the first and
second paragraphs of Note 17, which are
as of January 27, 2004 and February 27,
2004, respectively

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KOMAG, INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements.

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KOMAG, INCORPORATED

CONSOLIDATED BALANCE SHEETS