10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended October 2, 2005

Commission File Number 0-16852

KOMAG, INCORPORATED

(Registrant)

Incorporated in the State of Delaware
I.R.S. Employer Identification Number 94-2914864
1710 Automation Parkway, San Jose, California 95131
Telephone: (408) 576-2000

     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 whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes þ No o

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No þ

     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

     On October 2, 2005, 29,942,401 shares of the Registrant’s common stock, $0.01 par value, were issued and outstanding.

INDEX
KOMAG, INCORPORATED

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Statements of Income — three and nine months ended October 2, 2005 and October 3, 2004		4
	Condensed Consolidated Balance Sheets — October 2, 2005 and January 2, 2005		5
	Condensed Consolidated Statements of Cash Flows — nine months ended October 2, 2005 and October 3, 2004		6
	Notes to Condensed Consolidated Financial Statements (Unaudited)		7-14
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15-38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		39
Item 4.	Controls and Procedures		40
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		41
Item 2.	Unregistered Sales of Equity Securities		41
Item 3.	Defaults Upon Senior Securities		41
Item 4.	Submission of Matters to a Vote of Security Holders		41
Item 5.	Other Information		41
Item 6.	Exhibits		41
SIGNATURES			42
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

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FORWARD-LOOKING INFORMATION

     This report contains forward-looking statements within the meaning of the U.S. federal securities laws that involve risks and uncertainties. Certain statements contained in this report are not purely historical including, without limitation, statements regarding our expectations, beliefs, intentions, anticipations, commitments, or strategies regarding the future that are forward-looking. These statements include those discussed in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, including “Results of Operations,” “Critical Accounting Policies,” and “Liquidity and Capital Resources,” and elsewhere in this report. These statements include statements concerning product development, product acceptance, product demand, shipping volumes, projected revenues, international revenues, pricing pressures, sales returns, gross profit, expenses, reserves, taxes, net income, capital spending, and liquidity requirements.

     In this report, the words “may,” “could,” “would,” “might,” “will,” “should,” “plan,” forecast,” “anticipate,” “believe,” “expect,” “intend,” “estimate,” “predict,” “potential,” “continue,” “future,” “moving toward” or the negative of these terms or other similar expressions also identify forward-looking statements. Our actual results could differ materially from those forward-looking statements contained in this report as a result of a number of risk factors, including, but not limited to, those set forth in the section entitled “Risk Factors” and elsewhere in this report. You should carefully consider these risks, in addition to the other information in this report and in our other filings with the Securities and Exchange Commission. All forward-looking statements and reasons why results may differ included in this report are made as of the date of this report, and we assume no obligation to update any such forward-looking statement or reason why such results might differ.

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

KOMAG, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
	October 2, 2005			October 3, 2004			October 2, 2005			October 3, 2004
Net sales	$	180,011		$	102,424		$	493,026		$	327,148
Cost of sales		129,124			79,256			358,996			245,422
Gross profit		50,887			23,168			134,030			81,726
Operating expenses:
Research, development, and engineering		12,054			9,720			36,043			30,385
Selling, general, and administrative		6,090			3,923			17,412			13,185
Loss (gain) on disposal of assets		400			(230	)		(1,349	)		(630	)
		18,544			13,413			52,106			42,940
Operating income		32,343			9,755			81,924			38,786
Other income (expense):
Interest income		1,552			342			3,346			851
Interest expense		(441	)		(437	)		(1,324	)		(2,744	)
Other, net		(297	)		(75	)		(348	)		(142	)
		814			(170	)		1,674			(2,035	)
Income before income taxes		33,157			9,585			83,598			36,751
Provision for income taxes		1,175			321			3,196			1,146
Net income	$	31,982		$	9,264		$	80,402		$	35,605
Basic net income per share	$	1.09		$	0.33		$	2.79		$	1.31
Diluted net income per share	$	0.97		$	0.31		$	2.48		$	1.20
Number of shares used in basic per share computations		29,396			27,792			28,842			27,200
Number of shares used in diluted per share computations		33,381			31,334			32,969			30,759

See notes to condensed consolidated financial statements.

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KOMAG, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	October 2, 2005			January 2, 2005
ASSETS
Current assets
Cash and cash equivalents	$	74,921		$	26,410
Short-term investments		104,000			77,700
Accounts receivable (less allowances of $1,687 and $1,075, respectively)		116,090			79,213
Inventories		49,380			35,815
Prepaid expenses and other current assets		3,109			1,815
Total current assets		347,500			220,953
Property, plant, and equipment (net of accumulated depreciation of $128,332 and $99,065, respectively)		271,435			205,642
Other assets		3,356			4,500
	$	622,291		$	431,095
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Trade accounts payable	$	70,640		$	43,082
Customer advances		64,625			—
Accrued expenses and other liabilities		22,143			19,887
Total current liabilities		157,408			62,969
Long-term debt		80,500			80,500
Long-term deferred rent		1,922			—
Total liabilities		239,830			143,469
Stockholders’ equity
Common stock, $0.01 par value per share:
Authorized — 50,000 shares
Issued and outstanding — 29,942 and 28,065 shares, respectively		299			281
Additional paid-in capital		263,058			241,960
Deferred stock-based compensation		(6,774	)		(91	)
Retained earnings		125,878			45,476
Total stockholders’ equity		382,461			287,626
	$	622,291		$	431,095

See notes to condensed consolidated financial statements.

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KOMAG, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended
	October 2, 2005			October 3, 2004
Operating Activities
Net income	$	80,402		$	35,605
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, plant, and equipment		31,907			27,499
Tax adjustment to additional paid-in capital		3,156			—
Amortization and adjustments of intangible assets		1,029			2,422
Stock-based compensation		4,185			555
Deferred rent		1,922			—
Non-cash interest charges		115			398
Gain on disposal of assets		(1,349	)		(630	)
Changes in operating assets and liabilities:
Accounts receivable, net		(36,877	)		(2,244	)
Inventories		(13,565	)		(10,897	)
Prepaid expenses and deposits		(1,294	)		(492	)
Trade accounts payable		12,473			(4,322	)
Accrued expenses and other liabilities		66,881			(7,987	)
Net cash provided by operating activities		148,985			39,907
Investing Activities
Acquisition of property, plant, and equipment		(84,358	)		(49,312	)
Purchases of short-term investments		(220,350	)		(112,600	)
Proceeds from short-term investments		194,050			88,850
Proceeds from disposal of property, plant, and equipment		3,092			1,290
Other		—			(256	)
Net cash used in investing activities		(107,566	)		(72,028	)
Financing Activities
Payment of debt		—			(116,341	)
Proceeds from the issuance of long-term debt		—			77,419
Proceeds from issuance of common stock, net of issuance costs		7,092			68,368
Net cash provided by financing activities		7,092			29,446
Increase (decrease) in cash and cash equivalents		48,511			(2,675	)
Cash and cash equivalents at beginning of period		26,410			27,208
Cash and cash equivalents at end of period	$	74,921		$	24,533

See notes to condensed consolidated financial statements

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KOMAG, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

OCTOBER 2, 2005

Note 1. Basis of Presentation and Summary of Significant Accounting Policies

     The accompanying unaudited condensed consolidated financial statements include the accounts of Komag, Incorporated, a Delaware corporation (the Company), and its wholly-owned subsidiaries. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America. While the financial information furnished is unaudited, in the opinion of management, all normal recurring adjustments considered necessary for a fair presentation of the condensed consolidated financial position, operating results, and cash flows for the periods presented, have been included. Operating results for the nine months ended October 2, 2005, are not necessarily indicative of the results that may be expected for the year ending January 1, 2006. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended January 2, 2005, which are included in the Company’s Annual Report on Form 10-K.

     Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

     Fiscal Year: The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. The Company’s 2005 fiscal year will include 52 weeks. Accordingly, the Company’s three-month and nine-month reporting periods ended October 2, 2005, included 13 weeks and 39 weeks, respectively. Because the Company’s 2004 fiscal year included 53 weeks, its three-month and nine-month reporting periods ended October 3, 2004, included 13 weeks and 40 weeks, respectively.

     Reclassification: Certain amounts in fiscal 2004 as reported on the Condensed Consolidated Balance Sheet and Condensed Consolidated Statements of Cash Flows have been reclassified to conform to the current year presentation. The Company reclassified $77.7 million in auction rate securities from cash and cash equivalents to short-term investments on the Condensed Consolidated Balance Sheet as of January 2, 2005. The Company also reclassified $66.6 million and $42.9 million in auction rate securities from cash and cash equivalents to short-term investments as of October 3, 2004 and December 28, 2003, respectively. These reclassifications decreased cash flows from investing activities by $23.7 million in the Condensed Consolidated Statements of Cash Flows for the nine months ended October 3, 2004. The reclassification to short-term investments is based on the latest interpretation of cash equivalents pursuant

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to Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 95, Statement of Cash Flows.

     Cash and Cash Equivalents: The Company considers as a cash equivalent any bank deposit, money market investments and any highly-liquid investment that mature within three months of its purchase date.

     Short-Term Investments: The Company invests its excess cash in high-quality, short-term debt instruments and auction rate preferred securities (which the Company rolls over every three months or less). Interest and dividends on the investments are included in interest income. The cost of the Company’s investments approximates fair value.

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

	October 2, 2005		January 2, 2005
Raw materials	$	33,841	$	20,647
Work in process		7,689		7,785
Finished goods		7,850		7,383
	$	49,380	$	35,815

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

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

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     The following table reflects the effect on the Company’s net income and income per share had the fair value method been applied to all outstanding and unvested awards. The table is in thousands, except per share amounts.

	Three Months Ended						Nine Months Ended
	October 2, 2005			October 3, 2004			October 2, 2005			October 3, 2004
Net income, as reported	$	31,982		$	9,264		$	80,402		$	35,605
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		1,658			185			4,185			555
Deduct: Stock-based compensation expense determined under the fair value method for all awards, net of related tax effects		(2,300	)		(887	)		(6,216	)		(2,799	)
Pro forma net income	$	31,340		$	8,562		$	78,371		$	33,361
Net income per share:
Basic — as reported		1.09		$	0.33		$	2.79		$	1.31
Diluted — as reported		0.97		$	0.31		$	2.48		$	1.20
Basic — pro forma		1.07		$	0.31		$	2.72		$	1.23
Diluted — pro forma		0.95		$	0.29		$	2.42		$	1.12

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

     In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (SFAS 123R). SFAS 123R is a revision of SFAS 123, which addresses financial accounting and reporting for costs associated with stock-based compensation. SFAS 123 addresses all forms of share-based payment (SBP) awards, including shares issued under employee stock purchase plans, stock options, restricted stock, and stock appreciation rights. SFAS 123R requires the Company to adopt the new accounting provisions beginning in its first quarter of 2006, and applies to all outstanding and unvested SBP awards at the Company’s adoption date. The Company is allowed to select one of two alternative transition methods, each having different reporting implications. On March 29, 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB 107) on SFAS 123R to assist preparers by simplifying some of the implementation challenges of SFAS 123R. The Company has not completed its evaluation or determined the impact of adopting SFAS 123R. However, we expect the adoption to have a significant impact on our net income and net income per share.

     Computation of Net Income Per Share: The Company determines net income per share in accordance with SFAS No. 128, Earnings per Share.

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

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     The following table sets forth the computation of net income per share. The table is in thousands, except per share amounts.

	Three Months Ended				Nine Months Ended
	October 2, 2005		October 3, 2004		October 2, 2005		October 3, 2004
Numerator for basic net income per share:
Net income as reported	$	31,982	$	9,264	$	80,402	$	35,605
Numerator for diluted net income per share:
Net income as reported	$	31,982	$	9,264	$	80,402	$	35,605
Interest adjustment related to contigently convertible debt		441		437		1,324		1,210
	$	32,423	$	9,701	$	81,726	$	36,815
Denominator for basic income per share:
Weighted average shares		29,396		27,792		28,842		27,200
Denominator for diluted income per share:
Weighted average shares		29,396		27,792		28,842		27,200
Effect of dilutive securities:
Contingently convertible shares under convertible debt		3,049		3,049		3,049		2,722
Stock options		629		288		583		468
Warrants		—		201		287		357
Stock purchase rights		307		4		208		12
		33,381		31,334		32,969		30,759
Basic net income per share	$	1.09	$	0.33	$	2.79	$	1.31
Diluted net income per share	$	0.97	$	0.31	$	2.48	$	1.20

     In January 2004, the Company issued $80.5 million of 2.0% Convertible Subordinated Notes (the Notes). The Notes are convertible, under certain circumstances, into shares of the Company’s common stock at an initial conversion price of $26.40, or approximately 3,049,000 shares. In October 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 04-08, Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share. This consensus, which became effective in the fourth quarter of 2004, requires the Company to include these additional shares in its calculation of diluted earnings per share as of the date of issuance of the Notes (the first quarter of 2004). Accordingly, these shares have been included in the Company’s diluted earnings per share calculations for the first, second, and third quarters of 2005 and 2004. Therefore, diluted net income per share has been adjusted for the three-month and nine-month periods ended October 3, 2004, to $0.31 and $1.20, respectively, from $0.33 and $1.27, respectively.

     Recent Accounting Pronouncements: In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities (VIE), which was issued in January 2003. The Company is required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation has been applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and non-controlling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If

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determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE. The Company’s adoption of FIN 46R had no impact on its consolidated financial statements.

     In December 2004, the FASB issued SFAS No. 151 (SFAS 151), Inventory Costs. SFAS 151 clarifies the accounting for inventory when there are abnormal amounts of idle facility expense, freight, handling costs, and wasted materials. Under existing generally accepted accounting principles, items such as idle facility expense, excessive spoilage, double freight, and re-handling costs may be “so abnormal” as to require treatment as current period charges rather than recorded as adjustments to the value of the inventory. SFAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after the date this Statement is issued. The Company will adopt this pronouncement beginning in fiscal year 2006. The adoption of SFAS 151 is not expected to have a material effect on the Company’s financial position or results of operations.

     In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces APB No. 20 and FASB Statement No. 3. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS No. 154. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will adopt this pronouncement beginning in fiscal year 2006.

Note 2. Concentration of Customer, Supplier, and Geographic Risk

     The following table reflects the percentage of the Company’s revenue by major customer:

	Three Months Ended						Nine Months Ended
	October 2, 2005			October 3, 2004			October 2, 2005			October 3, 2004
Maxtor Corporation		34	%		48	%		33	%		48	%
Western Digital Corporation		25	%		8	%		21	%		12	%
Hitachi Global Storage Technologies *		20	%		36	%		22	%		29	%
Seagate Technology		16	%		—			18	%		5	%

* (including sales to Hitachi Global Storage Technologies’ contract manufacturer, Excelstor)

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     The Company relies on a limited number of suppliers for some of the materials and equipment used in its manufacturing processes, including aluminum blanks, aluminum substrates, nickel plating solutions, polishing and texturing supplies, and sputtering target materials. Kobe Steel, Ltd. is the Company’s sole supplier of aluminum blanks, which is a fundamental component in producing disks. The Company also relies on a single supplier, Heraeus Incorporated, for a substantial quantity of its sputtering target requirements, and on OMG Fidelity, Incorporated for supplies of nickel plating solutions.

     A majority of the Company’s long-lived assets is located at its Malaysian manufacturing facilities. These assets totaled $250.5 million as of October 2, 2005, and $190.0 million as of January 2, 2005. The majority of the Company’s sales is delivered to manufacturing facilities located in Asia.

Note 3. Income Taxes

     The Company’s manufacturing facilities, which are located in Malaysia, have been granted various tax holidays with varying expiration dates. In July 2005, the Malaysian government agreed to reset the expiration dates of the existing tax holidays to December 2006 and approved a new, 10-year tax holiday covering all of the Company’s Malaysian operations. The new tax holiday commences in January 2007 and expires in December 2016.

     In the first, second, and third quarters of 2005 and 2004, the Company utilized deferred tax assets generated prior to the Company’s reorganization in 2002. The Company provided a full valuation allowance against all tax assets; therefore, upon utilization of those deferred tax assets, the Company first reduced intangible assets to zero and then credited additional paid-in capital for the remaining $3.0 million in 2005. Future benefits from those previously fully reserved assets will be credited to additional paid-in capital.

Note 4. Accrued Expenses and Other Liabilities

     The following table summarizes accrued expenses and other liabilities balances at October 2, 2005 and January 2, 2005 (in thousands):

	October 2, 2005		January 2, 2005
Accrued compensation and benefits	$	19,408	$	15,777
Other liabilities		2,735		4,110
	$	22,143	$	19,887

Note 5. Customer Advances

     In June and July 2005, the Company entered into supply agreements with three major customers. Each agreement requires that the Company supply and the customer purchase certain specified media volumes and that the Company supply media from existing and new production capacity to meet such purchase requirements, subject to certain exceptions. Under the supply agreements, the customers are

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required to pay certain advances covering future purchases of media from the Company. One of the agreements is for an initial period of eighteen months after the Company has commenced full capacity production from its new capacity, subject to certain extension and renewal periods. Another supply agreement expires in 2008, and the third supply agreement, which expires in 2009, has certain renewal periods.

Note 6. Deferred Rent

     In December 2004, the Company signed a second amendment to its lease on its headquarters facility, which became effective in January 2005. The second amendment to the lease agreement included scheduled rent increases. The Company recognizes lease obligations with scheduled rent increases over the term of the lease on a straight-line basis in accordance with FASB Technical Bulletin 85-3 Accounting for Operating Leases with Scheduled Rent Increases. Accordingly, the total amount of base rentals over the term of the lease for the Company’s headquarter facility is charged to expense on a straight-line method, with the amount of rental expense in excess of lease payments recorded as a deferred rent liability.

Note 7. Stock Purchase Rights

     In the first nine months of 2005, the Company issued a total of 498,060 stock purchase rights (net of terminations) with an exercise price of $0.01. The vesting for the stock purchase rights grants is one-third at the end of each of the first three anniversaries of the date of grant, subject to the employee, non-employee board member, or consultant continuing to be a service provider of the Company on each such date. In the first nine months of 2005, the Company initially recorded $10.6 million of deferred stock- based compensation to the consolidated balance sheet. This amount is being ratably amortized to expense over the vesting period.

Note 8. Derivative Financial Instruments

     The Company accounts for its derivative and hedging activities under SFAS No. 133. The assets or liabilities associated with its derivative instruments and hedging activities are recorded at fair value in prepaid expenses and other current assets or other current liabilities, respectively, in the consolidated balance sheets. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting.

     As of October 2, 2005, the Company had foreign exchange forward contracts to purchase approximately $13.3 million of Japanese Yen for cash flow payments denominated in Japanese Yen for future equipment purchases. As of October 2, 2005, the company had not designated these foreign exchange forward contracts as a cash flow hedge in accordance with SFAS No. 133. The fair value of the Company’s forward contracts was recorded as a $0.1 million other current liability, and a corresponding loss in other income (expense) for the quarter ended October 2, 2005. Fair value is determined by the counterparty to the foreign exchange forward contracts. As of October 3, 2005, the Company’s foreign currency forward contracts were designated and qualify as cash flow hedges under SFAS No. 133. The effectiveness of the contracts that qualify as cash flow hedges will be assessed quarterly through an

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evaluation of critical terms and other criteria required by SFAS No. 133. The effective portion of gains or losses resulting from changes in fair value will initially be reported as a component of accumulated other comprehensive income or (loss), net of any tax effects, in stockholders’ equity and subsequently reclassified into depreciation expense over the useful life of the purchased equipment. The ineffective portion of gains or losses resulting from changes in fair value, if any, is reported in other income (expense) in the consolidated statements of income.

     The Company’s foreign exchange forward contracts have maturities of less than 12 months. The Company does not use foreign exchange forward contracts for speculative or trading purposes.

Note 9. Subsequent Event

     In November 2005, the Company entered into an Employment Agreement (the Agreement) with one Executive officer: Paul G. Judy.

     The Agreement specifies base salary compensation, a term of employment of twenty-one (21) months, benefits and certain other severance benefits described below, subject to compliance with various terms and conditions, including the execution of a release of claims. The Agreement also includes non-solicitation obligations of the officer.

     The Agreement provides that if the officer’s employment terminates other than voluntarily or for “cause” prior to a “change in control” (as such terms are defined in the Agreement) or more than six months following a change in control, the executive officer will receive a severance amount equal to twelve (12) months of base salary. The officer will also receive accelerated vesting of a portion of outstanding and unvested non-qualified stock options and restricted stock.

     In addition, the Agreement provides the same severance payments referred to in the preceding paragraph, plus an additional cash severance payment based on target incentive bonus amounts and acceleration of any outstanding and unvested stock options and restricted stock, if the officer’s employment is terminated other than voluntarily or for cause within six months of a change of control.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included in Part I. Financial Information, Item 1. Condensed Consolidated Financial Statements of this report.

     The following discussion contains predictions, estimates, and other forward-looking statements that involve a number of risks and uncertainties about our business, including but not limited to: our belief that we are a leading independent supplier of disks; our belief that we have developed a deep understanding of market needs in the disk drive market; our belief that our manufacturing and technology development programs provide us with competitive advantages in maintaining and growing our market share; our belief that we have developed strong relationships with many of the leading disk drive manufacturers; our belief that 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; our plan to continue to generate cash from our operations for the remainder of 2005; our expectation that our revenues will increase by 2% to 4% in the fourth quarter of 2005 compared to the third quarter of 2005; our expectation that variable and fixed manufacturing costs per unit will be similar between the third and fourth quarters of 2005; our belief that we will continue to investigate areas where we can expand our presence in the disk market; our expectation that we will continue to generate cash from operations; our expectation that we will fund our expansion with cash from operations and customer advances; our expectation that we will expand our disk manufacturing capacity to 31 million disks a quarter by the first quarter of 2006, and to 40 million disks a quarter by the end of 2006; and our belief that the estimates and judgments made regarding future events in connection with the preparation of our financial statements are reasonable. These statements may be identified by the use of words such as “expects,” “anticipates,” “intends,” “plans,” and similar expressions. In addition, forward-looking statements include, but are not limited to, statements about our beliefs, estimates, or plans about our ability to maintain low manufacturing and operating costs and costs per unit, our ability to estimate revenues, shipping volumes, pricing pressures, returns, reserves, demand for our disks, selling, general, and administrative expenses, taxes, research, development, and engineering expenses, spending on property, plant, and equipment, expected sales of disks and the market for disk drives generally and certain customers specifically, and our beliefs regarding our liquidity needs.

     Forward-looking statements are estimates reflecting the best judgment of our senior management, and they involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Our 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, technological developments, pricing pressures, changes in customer demand, and general economic conditions, as well as those discussed in the Risk Factors section below. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of such statements. Readers should review the Risk Factors section below, as well as other documents filed from time to time by us with the SEC.

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     Due to continuing strong customer demand and supply agreements entered into with three of our major customers, in the first nine months of 2005, we increased our capacity to approximately 27 million disks per quarter. We are currently in the process of expanding our capacity by approximately four million disks a quarter to 31 million disks per quarter, which we plan to achieve by the end of the first quarter of 2006. We expect to expand our capacity to 40 million units per quarter by the end of 2006. If we are unable to utilize our expanded capacity, we may be unable to increase or sustain our gross margins.

Results of Operations

Overview

     Komag, Incorporated was incorporated in Delaware in 1983. We are headquartered in San Jose, California. All of our manufacturing facilities are in Malaysia.

     We design, manufacture, and market thin-film media (disks), which are incorporated into disk drives. Disks, such as the ones we manufacture, serve as a primary storage medium for digital data. 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 generally 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.

     A majority of our revenue, expense, and capital purchasing activities is transacted in U.S. dollars. However, a large portion of our payroll, certain manufacturing and operating expenses, and inventory and capital purchases is transacted in the Malaysian ringgit (ringgit). On July 21, 2005, Malaysia removed its currency peg to the U.S. dollar in favor of a managed float system. Changes in exchange rates could adversely affect the amount we spend on our payroll, certain manufacturing and operating expenses, and raw materials and capital purchases.

     Our three-month and nine-month reporting periods ended October 2, 2005 included 13 weeks and 39 weeks, respectively. Because our 2004 fiscal year contained 53 weeks, our three-month and nine-month reporting periods ended October 3, 2004 included 13 weeks and 40 weeks, respectively.

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Net Sales

     Consolidated net sales of $180.0 million in the third quarter of 2005 were 75.8% higher than the $102.4 million of net sales in the third quarter of 2004. Finished unit sales increased to 27.5 million in the third quarter of 2005 from 16.6 million in the third quarter of 2004. Finished unit average selling price increased by 2.9% in the third quarter of 2005 compared to the third quarter of 2004.

     Other disk sales in the third quarter of 2005 were $24.3 million, compared to $11.1 million in the third quarter of 2004.

     Consolidated net sales in the first nine months of 2005 increased by $165.9 million, to $493.0 million compared to $327.1 million in the first nine months of 2004. Our finished unit sales volume increased by 51.9% in the first nine months of 2005, to 77.3 million units from 50.9 million units in the first nine months of 2004. The volume increase was partially offset by a 3.1% decrease in our finished unit average selling price for the first nine months of 2005 compared to the first nine months of 2004.

     Other disk sales in the first nine months of 2005 were $61.8 million, compared to $34.1 million in the first nine months of 2004.

     The finished unit shipment and other disk sales increase in the first nine months of 2005 compared to the same period in 2004 resulted from an overall improvement in industry conditions, which resulted in a significant increase in our customers’ demand. The decline in the finished unit average selling price in the first nine months of 2005 compared to the same period in 2004 primarily reflected the higher mix of more mature product offerings in the current year period.

     In the third quarter of 2005, sales to Maxtor Corporation (Maxtor), Western Digital Corporation (Western Digital), Hitachi Global Storage Technologies (HGST) (including sales to HGST’s contract manufacturer, Excelstor), and Seagate Technology (Seagate), accounted for 34%, 25%, 20%, and 16%, respectively, of our revenue. In the third quarter of 2004, sales to Maxtor, HGST, Western Digital, and Seagate accounted for 48%, 36%, 8%, and zero, respectively, of our revenue. We expect to continue to derive a substantial portion of our sales from these customers.

     Sales of 100GB and above per platter disks increased to 30% of net sales in the third quarter of 2005, compared to 10% in the third quarter of 2004. The increase reflected the continued customer migration to higher storage densities.

     Finished disk shipments for desktop and consumer applications together represented 92% of our unit shipment volume in the third quarter of 2005. The remaining finished disk shipments in the third quarter of 2005 were disks for high-end server (enterprise) drives.

     Overall demand remains very strong entering the traditionally seasonally strong fourth quarter. We expect revenue in the fourth quarter of 2005 to increase by 2% to 4% compared to the third quarter of 2005.

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Gross Profit

     For the third quarter of 2005, we achieved a gross profit percentage of 28.3% compared to a gross profit percentage of 22.6% for the third quarter of 2004. Improved manufacturing yields, the economies of scale associated with higher factory utilization, and higher sales and production volumes accounted for a 3.6-point increase. In addition, an increase in the finished unit average selling price accounted for a 2.1-point increase in gross profit.

     For the first nine months of 2005, we achieved a gross profit percentage of 27.2% compared to a gross profit percentage of 25.0% for the first nine months of 2004. Improved manufacturing yields, the economies of scale associated with higher factory utilization, and higher sales and production volumes accounted for a 4.6-point increase. This was offset by a decline in the finished unit average selling price, which accounted for a 2.4-point reduction.

     As we are currently operating at full manufacturing capacity, we expect variable and fixed manufacturing costs per unit in the fourth quarter of 2005 to be similar to the third quarter of 2005, excluding the impact of fluctuations in the exchange rate for the Malaysian ringgit.

Research, Development, and Engineering Expenses

     Research, development and engineering (R&D) expenses in the third quarter of 2005 were $12.1 million compared to $9.7 million in the third quarter of 2004. R&D expenses in the first nine months of 2005 were $36.0 million compared to $30.4 million in the first nine months of 2004. The increases primarily reflected higher incentive compensation, higher payroll expenses related to increased headcount, and higher stock compensation expense.

     As a percentage of sales, we expect R&D spending in the fourth quarter of 2005 to be slightly higher than the third quarter of 2005.

Selling, General, and Administrative Expenses

     Selling, general, and administrative (SG&A) expenses in the third quarter of 2005 were $6.1 million compared to $3.9 million in the third quarter of 2004. SG&A expenses in the first nine months of 2005 were $17.4 million compared to $13.2 million in the first nine months of 2004. The increases primarily reflected higher incentive compensation, higher stock compensation expense, and higher payroll expenses related to increased headcount.

     As a percentage of sales, we expect SG&A spending in the fourth quarter of 2005 to be similar to the third quarter of 2005.

Interest Expense

     Interest expense in the third quarter of 2005 and 2004 was $0.4 million, and reflected interest on our $80.5 million, 2% Convertible Subordinated Notes, which were issued on January 28, 2004.

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     Interest expense in the first nine months of 2005 was $1.3 million, and reflected interest on our 2% Convertible Subordinated Notes. Interest expense in the first nine months of 2004 was $2.7 million, and included $1.1 million of interest expense on our 2% Convertible Subordinate Notes, and $1.6 million of interest on the Senior Secured Notes and certain promissory notes. The Senior Secured Notes and promissory notes were redeemed in full, including accrued interest, in February 2004. There was no gain or loss on the redemption, and there were no unamortized debt issuance costs.

Income Taxes

     Our effective income tax rates, which reflect tax expenses related to our U.S. and international operations, were 3.5% and 3.8%, respectively, for the three and nine months ended October 2, 2005, and 3.3% and 3.1%, respectively, for the three and nine months ended October 3, 2004.

     Our manufacturing facilities, which are located in Malaysia, have been granted various tax holidays with varying expiration dates. In July 2005, the Malaysian government agreed to reset the expiration dates of the existing tax holidays to December 2006 and approved a new, 10-year tax holiday covering all of our Malaysian operations. The new tax holiday commences in January 2007 and expires in December 2016.

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. We regularly evaluate our estimates, including those related to our revenues, allowance for inventories, commitments and contingencies, income taxes, and asset impairments. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. 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.

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     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. There were no significant changes from prior year estimates in the first nine months of 2005.

Impairment of Long-lived Assets

     Long-lived assets are evaluated 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. There were no impairments of long-lived assets in the first nine months of 2005.

Inventory Obsolescence

     Our policy is to provide for inventory obsolescence 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 provide additional charges for future known or anticipated events. There were no significant changes from prior year estimates in the first nine months of 2005.

Liquidity and Capital Resources

     Cash, cash equivalents, and short-term investments of $178.9 million at the end of the third quarter of 2005 increased by $74.8 million from the end of the 2004 fiscal year. The increase primarily reflected a $149.0 million increase resulting from consolidated operating activities, $7.1 million in proceeds from the sale of common stock, and $3.1 million in proceeds from idle equipment sales, offset by $84.4 million of spending on property, plant, and equipment.

     On July 21, 2005, Malaysia removed its currency peg to the U.S. dollar in favor of a managed float system. As of October 2, 2005, we held approximately $41.5 million (Malaysian ringgit 156.5 million) of cash and cash equivalents that were denominated in Malaysian ringgit.

     Consolidated operating activities generated $149.0 million in cash in the first nine months of 2005. The primary components of this change include the following:

• net income of $80.4 million, net of non-cash depreciation and amortization of property, plant and equipment of $31.9 million and other non-cash charges and gains of $9.1 million;

• an accounts receivable increase of $36.9 million primarily due to an increase in sales during the first nine months of 2005 compared to the first nine months of 2004;

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• an inventory increase of $13.6 million;

• a prepaid expense increase of $1.3 million primarily due to the payment of insurance premiums;

• an accounts payable increase of $12.5 million related to increased inventory and higher capital spending; and

• an accrued expenses and other liabilities increase of $66.9 million, which primarily reflected the receipt of customer advances.

     Our total capital spending in the first nine months of 2005 was $99.4 million (on an accrual basis), and included capital expenditures to increase our substrate and finished disk capacity, to improve our equipment capability for the manufacture of advanced products, and for projects designed to improve yield and productivity. There are no non-cancelable capital commitments as of October 2, 2005. For the remainder of 2005, we plan to spend approximately $100 million on property, plant, and equipment in order to increase our finished disk and related substrate capacity and continue to ramp new production processes. We expect to fund this capital spending with cash from operations and customer advances.

     We have $80.5 million of 2% Convertible Subordinated Notes (the Notes) outstanding. The Notes mature on February 1, 2024, bear interest at 2.0%, and require semiannual interest payments beginning on August 1, 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 equals or exceeds $31.68 for at least 20 trading days in any 30 consecutive trading day period within any of our fiscal quarters; 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) certain specified corporate transactions (as described in the offering prospectus for the Notes) occur. As of October 2, 2005, the Notes were not convertible. 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, 2011, 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. There are no financial covenants, guarantees, or collateral associated with the Notes.

     We have a Malaysian ringgit 12.5 million (approximately $3.3 million) bank guarantee. There is no expiration date on the bank guarantee. No interest will be charged on the bank guarantee, but there is a commission of 0.05% on the amount of bank guarantee utilized. As of October 2, 2005, there were no liabilities outstanding related to this bank guarantee.

     We have a Malaysian ringgit 2.0 million (approximately $0.5 million) stand-by letter of credit (LOC), which expires in January 2006. The LOC is secured by fixed deposits of Malaysian ringgit 2.0 million.

     We lease our research and administrative facility in San Jose, California under an operating lease, which expires in 2014. Additionally, we lease certain equipment under operating leases. These leases expire on various dates through 2008. We have no capital leases.

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     We currently anticipate that existing cash and cash equivalents, and cash generated from operations, will be adequate to meet our cash needs for at least the next 12 months.

     As of October 2, 2005, our long-term debt obligations, operating lease obligations, and unconditional purchase obligations were as follows (in thousands):

	Remainder
	of
	2005		2006		2007		2008		2009		Thereafter		Total
Long-Term Debt Obligations	$	—	$	—	$	—	$	—	$	—	$	80,500	$	80,500
Operating Lease Obligations		20		2,334		2,053		2,046		3,147		16,384		25,984
Unconditional Purchase Obligations (1)		2,873		1,335		1,196		1,155		1,155		3,466		11,180
Total Contractual Cash Obligations	$	2,893	$	3,669	$	3,249	$	3,201	$	4,302	$	100,350	$	117,664

(1) 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.

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RISK FACTORS

     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, or other unexpected events 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. Further, this Form 10-Q contains forward-looking statements and actual results may differ significantly from the results contemplated by our forward-looking statements.

Risks Related to Our Business

Our business is concentrated in the disk drive market, so 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. Our products are incorporated into disk drives manufactured by our customers for the desktop personal computer market as well as the enterprise storage systems market and electronic device market. Because of the concentration of our products in the disk drive market, which we expect to continue, our business is linked to the success of this market. The disk drive 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. It is very difficult to achieve and maintain profitability and revenue growth in the disk drive industry because the average selling price of a disk drive rapidly declines over its commercial life as a result of technological enhancement and increases in supply. The effect of these cycles on suppliers has been magnified by disk drive manufacturers’ practice of ordering components, including disks, in excess of their needs during periods of rapid growth, thereby increasing the severity of the drop in the demand for components during periods of reduced growth or contraction. Accordingly, downturns in the disk drive 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, pricing pressures, and unused capacity, causing us to realize lower revenues and margins and causing our operating results to suffer. For example, in the fourth quarter of fiscal year 2003, disk drive manufacturers appear to have overbuilt product, which resulted in an excess of supply of disk drives that was not fully corrected until approximately the third quarter of fiscal year 2004. Due to these factors, forecasts may not be achieved, either because expected sales do not occur or because they occur at lower prices or on terms that are less favorable to us. This increases the chances that our revenues and margins could be lower than the expectations of investors and analysts, which could make our stock price more volatile.

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We are in the process of significantly increasing the scope of our manufacturing operations in Malaysia, and if we fail to successfully manage and integrate our expanding operations, we may be unable to exploit potential market opportunities, which would materially and adversely affect our business.

     We are in the process of significantly increasing the scope of our manufacturing operations in Malaysia. We are in the process of expanding our manufacturing capacity by approximately four million disks per quarter to 31 million disks per quarter, which we plan to achieve by the end of the first quarter of 2006. We expect to expand further our capacity to 40 million units per quarter by the end of 2006. We are expanding our capacity as a result of commitments we have made to certain customers pursuant to strategic supply agreements. In the event we do not increase our capacity as planned on a timely basis, we could lose significant future orders from major customers. In the event we are successful in expanding our manufacturing capacity as planned, there can be no assurance we will receive sufficient orders to utilize our additional capacity. In addition, the utilization of our expanded capacity is dependent on our obtaining sufficient operating supplies and raw materials from our limited and sole source suppliers to accommodate the increased capacity. We do not have binding commitments from these limited and sole source suppliers to provide sufficient supplies and raw materials to fully utilize the additional capacity.

     Addressing the challenges of our capacity expansion requires, and will continue to require, substantial management attention and financial resources. We expect to fund our expansion efforts with cash from operations and customer advances. In the event that our expansion efforts require additional funding, or if we have insufficient resources to fund our expansion efforts, we may need to seek additional capital, which may not be available on favorable terms, or at all. If we are unable to successfully develop and integrate our expanded manufacturing operations in Malaysia in a timely and effective manner, our business could be materially and adversely affected.

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 profit are significantly affected by the number of units we produce and the amount of our production capacity that we utilize. In the third quarter of 2004, we completed the installation of additional equipment, which increased our production capacity from approximately 20 million disks a quarter to approximately 24 million disks a quarter. Our finished disk shipments were below this capacity level in the third quarter and fourth quarter of 2004. In the first nine months of 2005, we increased our capacity to approximately 27 million disks a quarter. We are currently in the process of expanding our capacity by approximately four million disks a quarter to 31 million disks a quarter, which we plan to achieve by the end of the first quarter of 2006. We expect to expand our capacity to 40 million units per quarter by the end of 2006. If we are unable to utilize our expanded capacity, we may be unable to increase or sustain our gross margins.

     If our capacity utilization decreases for any reason, including lack of customer demand or cancellation or delay of customer orders, we could experience significantly higher unit production costs, lower margins, and potentially significant losses, as occurred for several years prior to 2003. Underutilization of our production capacity could also result in equipment write-offs, restructuring charges, and employee layoffs. If our production capacity is underutilized for any reason, our financial results and our business would be severely harmed.

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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.

     In the third quarter of 2004, we completed the installation of additional equipment, which increased our production capacity to approximately 24 million disks a quarter. In the first nine months of 2005, we increased our capacity to approximately 27 million disks a quarter, and we are currently operating at full manufacturing capacity. Based on very strong demand that currently exceeds our manufacturing capacity and expected continuing strong overall market growth, we are in the process of expanding our capacity by approximately four million disks per quarter. We expect initial incremental capacity from this expansion in the fourth quarter of 2005 and total capacity of approximately 31 million disks a quarter by the end of the first quarter of 2006. Additionally, we plan to expand further our capacity during 2006 at our current manufacturing sites in Malaysia, in an attempt to keep up with the growing demand for media. This further additional capacity is expected to be available beginning in the second quarter of 2006 with total capacity of approximately 40 million disks a quarter by the end of 2006. If demand for our products at any point in time were to exceed significantly our capacity levels, we may not be able to satisfy the increased demand. To increase further our production capacity to meet significant increases in demand for our disks beyond the expansion in process, if needed, we would be required to expand further our existing facilities, construct new facilities, or acquire entities with additional production capacities. These alternatives would require significant capital investments by us and may 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.

Our customer supply agreements with several of our major customers require us to meet certain production demands and volume goals, and if we fail to successfully perform under these agreements, we may incur substantial costs and expenses, and our business could be materially and adversely affected.

     We have entered into strategic supply agreements and arrangements with several of our major customers that require us to meet certain production demands and volume goals. Pursuant to these agreements, monies have been advanced to us to help fund the expansion of our capacity, and if we fail to meet the agreed upon volume goals, we may need to refund some of our customer advances. Even if we succeed in expanding our production capacity in a timely and effective manner as required by our contractual obligations, there can be no assurance that we will meet the product specifications or timetables required by our customers for delivery. In addition, forecast modifications or cancellations by our customers under our customer agreements may result in underutilization of our production capacity, which could result in equipment write-offs, restructuring charges, and employee layoffs. Moreover, certain of our customer agreements include expanded indemnification obligations. Our inability to perform successfully and competently our obligations under our agreements may cause us to incur substantial costs and expenses, and would have an adverse effect on our business, results of operations, and financial condition.

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

     We sell most of our products to a limited number of customers. Our customers are disk drive manufacturers. A relatively small number of disk drive manufacturers dominates the disk drive market. According to Dataquest, four of these manufacturers (HGST, Maxtor, Seagate, and Western Digital) accounted for approximately 80% of worldwide hard disk drive sales in 2004. Accordingly, we expect that the success of our business will continue to depend on a limited number of customers that have comparatively strong bargaining power in negotiating contracts with us.

     In the first nine months of 2005, 33% of our net sales were to Maxtor, 22% were to HGST, 21% were to Western Digital, and 18% were to Seagate. In 2004, 48% of our net sales were to Maxtor, 29% were to HGST, 12% were to Western Digital, and 5% were to Seagate. If any one of our significant customers reduces its disk requirements, cancels existing orders or develops or expands capacity to produce its own disks, and we are unable to replace these orders with sales to new customers, our sales would be reduced and our business, financial condition, and operating results would suffer. Our ability to maintain strong relationships with our significant customers is essential to our future performance. Mergers, acquisitions, consolidations, or other significant transactions involving our significant customers may adversely affect our business and operating results.

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 substrate blanks, which is a fundamental component in producing our disks. Further, as a result of current increased worldwide demand, the supply of sputtering target materials is constrained, resulting in longer lead times and product allocation from certain suppliers. We rely on a single supplier, Heraeus Incorporated, for a substantial quantity of our sputtering target requirements. In addition, we also rely on OMG Fidelity, Inc. for supplies of nickel plating solutions. The supplier base has been weakened by the poor financial condition of the industry in recent years, and some suppliers have exited the business. Additionally, the increasing demand for many of these materials provides our sole-source suppliers with additional bargaining power. Our production capacity would be limited if one or more of these materials were to become unavailable or available in reduced quantities, or if we were unable to find alternative suppliers. If our sources of materials and supplies were limited or unavailable for a significant period of time or the costs of such materials were to increase, our production, operating results, and ability to grow our business could be adversely affected. We cannot assure you that we will be able to obtain adequate supplies of critical components in a timely and economic manner, or at all. The success of our products also depends on our ability to effectively integrate parts and components that use leading-edge technology. If we are unable to successfully manage the integration of parts obtained from third party suppliers, our business, financial condition and operating results could suffer.

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Changes in the accounting treatment of stock-based awards may adversely affect our reported results of operations.

     In December 2004, the FASB issued SFAS 123R, which is a revision of SFAS 123. SFAS 123R is currently expected to be effective for Komag beginning in the first quarter of 2006. SFAS 123R requires all share-based payments to employees to be recognized in the financial statements based on their fair values and does not permit pro forma disclosure as an alternative to financial statement recognition. The adoption of the SFAS 123R fair value method may have a significant adverse impact on our reported results of operations because the stock-based compensation expense will be charged directly against our reported earnings. The impact of our adoption of SFAS 123R cannot be predicted at this time because it would depend in part on the future fair values and number of share-based payments granted in the future. However, we expect the adoption to have a significant impact on our net income and net income per share.

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

     We face significant price competition in the disk industry, even during periods when demand is stable. High levels of competition have historically put downward pressure on unit prices. 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 be assured 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 increased sales volume 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. Supply and demand conditions have improved since 2002, resulting in a more stable pricing environment. Supply and demand factors and industry-wide competition could adjust in the future and force disk prices down, which, in turn, would put pressure on our gross margin.

     Increasing competition could reduce the demand for our products and/or the prices of our products as a result of the introduction of technologically better and cheaper products, which could reduce our revenues. In addition, new competitors could emerge and rapidly capture market share. If we fail to compete successfully against current or future competitors, our business, financial condition and operating results will 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

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companies, and compete 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. HGST previously announced that it intends to consolidate its internal thin-film media manufacturing operations in China, which could result in decreased demand for our products by HGST or increased pricing pressure. 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, which would negatively impact our net sales and market share.

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.

     Additionally, because a large portion of our payroll, certain manufacturing and operating expenses, and inventory and capital purchases is transacted in the Malaysian ringgit (ringgit), we are particularly sensitive to any change in the foreign currency exchange rate for the ringgit. For approximately the last seven years, the exchange rate between the ringgit and the U.S. dollar has been pegged at 3.8 ringgits to one U.S. dollar by the Malaysian government. On July 21, 2005, Malaysia removed its currency peg to the U.S. dollar in favor of a managed float system. The change in exchange rates could adversely affect the amount we spend on our payroll, certain manufacturing and operating expenses, and raw materials and capital purchases. In the first nine months of 2005, our spending on payroll, manufacturing, and operating expenses, and raw materials and capital purchases that were denominated in ringgit was approximately $161.5 million. Additionally, in the first nine months of 2005, we paid approximately $57.8 million U.S. dollars to a Malaysian supplier for raw materials purchases, based on a cost plus a percentage arrangement. This Malaysian supplier incurs certain costs that are denominated in ringgit; therefore, any change in the valuation of the ringgit could materially impact the cost per unit we pay for such raw materials.

     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. Had it not been

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repealed, this regulation would have potentially limited our ability to transfer funds to the United States from our Malaysian operations. Because a significant percentage of our revenues is generated from our Malaysian operations, we would be unable to finance our U.S.-based research and development and/or repay our U.S. debt obligations if similar regulations are enacted in the future.

     Additionally, there are a number of risks associated with conducting business outside of the United States. Our sales to Asian customers, including the foreign subsidiaries of domestic disk drive companies, account for substantially all of our net sales. While our Asian 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;

• 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 do not effectively manage the risks associated with international operations and sales, our business, financial condition, and operating results could suffer.

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 primarily into two groups: Asian-based independent disk manufacturers, and captive disk manufacturers. Our major Asian-based independent competitors include Fuji Electric, Hoya, and Showa Denko (of which Trace Storage Technology became a part in mid-2004). 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 than we have, which could allow them to adjust to fluctuating market conditions better than we. Further, they may have

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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. Our competitors may also lower their product prices to gain market share, sell their products with other products to increase demand for their products, develop new technology which would significantly reduce the cost of their products, or offer more products than we do and therefore enter into agreements with customers to supply their products as part of a larger supply agreement. 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.

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 our 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.

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.

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 is subject to 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. 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

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able to develop new products and technologies in a timely fashion in order to 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. 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 process and technology development. New process technologies, including SAF and PMR, must support cost-effective, high-volume production of disks that meet these ever-advancing customer requirements for enhanced magnetic recording performance. We may not be able to develop and implement these technologies in a timely manner in order to compete effectively against our competitors’ products or entirely new data storage technologies. In addition, we must transfer our technology from our U.S.-based research and development center to our Malaysian manufacturing operations.

     If we cannot advance our process technologies or do not successfully implement those advanced technologies in our Malaysian operations, or if technologies that we have chosen not to develop prove to be viable competitive alternatives, we would not be able to compete effectively. As a result, we would lose market share and face increased price competition from other manufacturers, and our operating results would suffer. Further, as we introduce more technologically advanced product offerings, they can result in lower introductory yields, which would negatively impact our gross margins.

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-limiting 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 production 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.

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

     Our finished disks are manufactured primarily 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 PC 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.

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, many of whom would be extremely difficult to replace. Acquiring and retaining talented personnel who possess the advanced skills we require has been difficult, particularly at our Malaysian manufacturing facilities where there is high growth in the marketplace 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.

     Our protection of our intellectual property is limited. It is commonplace to protect technology through patents and other forms of intellectual property rights in technically sophisticated fields. We may not receive patents for our pending or future patent applications, and any patents that we own or that are issued to us may be invalidated, circumvented or challenged. 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 protect adequately 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 property rights and enforce those rights to prevent us from using such technologies, or demand royalty payments from us in return for using such technologies. Either of these events may affect our production, which could materially reduce our revenues and harm our operating results.

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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. We may have to litigate to enforce patents issued or licensed to us, to protect trade secrets or know-how owned by us or to determine the enforceability, scope and validity of our proprietary rights and the proprietary rights of others. Enforcing or defending our proprietary rights could be expensive and might not bring us timely and effective relief. 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. 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;

• fluctuations in exchange rates, particularly between the U.S. dollar and the Malaysian ringgit;

• 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;

• structural changes within the disk industry, including combinations, failures, and joint venture arrangements; and

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• changes in tax regulations in foreign jurisdictions that could potentially reduce our tax incentives in areas such as Malaysian capital allowances, tax holidays, and exemptions on withholding tax on royalty payments made by our Malaysian operations to our subsidiary in The Netherlands.

     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. Many of our expenses are relatively fixed and difficult to reduce or modify. The fixed nature of our operating expenses will magnify any adverse effect of a decrease in revenue on our operating results. Because of these and other factors, period to period comparisons of our historical results of operations are not a good predictor of our future performance. If our future operating results are below the expectations of stock market analysts, our stock price may decline. Our ability to predict demand for our products and our financial results for current and future periods may be affected by economic conditions. This may adversely affect both our ability to adjust production volumes and expenses and our ability to provide the financial markets with forward-looking information. If our revenue levels are below expectations, our operating results are likely to suffer.

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

     We have in the past acquired, and in the future may acquire, businesses, products, equipment, or technologies that we believe will 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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     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.

From time to time, we may have to defend lawsuits in connection with the operation of our business.

     We are subject to litigation in the ordinary course of our business. If we do not prevail in any lawsuit which may occur we could be subject to significant liability for damages, our patents and other proprietary rights could be invalidated, and we could be subject to injunctions preventing us from taking certain actions. If any of the above occurs, our business and financial position could be harmed.

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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.

Terrorist attacks may adversely affect our business and operating results

     The continued threat of terrorist activity and other acts of war or hostility, including the war in Iraq, have created uncertainty in the financial and insurance markets, and have significantly increased the political, economic, and social instability in some of the geographic areas in which we operate. Acts of terrorism, either domestic or foreign, could create further uncertainties and instability. To the extent this results in disruption or delays of our manufacturing capabilities or shipments of our products, our business, operating results, and financial condition could be adversely affected.

Compliance with the rules and regulations concerning corporate governance may be costly, time-consuming, and difficult to achieve, which could harm our operating results and business.

     The Sarbanes-Oxley Act (the Act), which was signed into law in October 2002, mandates, among other things, that companies maintain rigorous corporate governance measures, and imposes comprehensive reporting and disclosure requirements. The Act also imposes increased civil and criminal penalties on a corporation, its chief executive and chief financial officers, and members of its board of directors, for securities law violations. In addition, the Nasdaq National Market, on which our common stock is traded, has adopted and is considering the adoption of additional comprehensive rules and regulations relating to corporate governance. These rules, laws, and regulations have increased the scope, complexity, and cost of our corporate governance, reporting, and disclosure practices. Because compliance with these rules, laws, and regulations is costly and time-consuming, our management’s attention could be diverted from managing our day-to-day business operations, and our operating expenses could increase. In addition, because of the inherent limitations in all financial control systems, it is possible that, in the future, a material weakness may be found in our internal controls over financial reporting, which could affect our ability to insure proper financial reporting.

     Further, our board members, Chief Executive Officer, and Chief Financial Officer face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business.

In the future, we may need additional capital, which may not be available on favorable terms, or at all.

     Our business is capital-intensive and we may need more capital in the future. Our future capital requirements will depend on many factors, including:

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• the rate of our sales growth;

• the level of our profits or losses;

• the timing and extent of our spending to expand manufacturing capacity, support facilities upgrades and product development efforts;

• the timing and size of business or technology acquisitions;

• the timing of introductions of new products and enhancements to our existing products; and

• the length of product life cycles.

     If we require additional capital it is uncertain whether we will be able to obtain additional financing on favorable terms, if at all. Further, if we issue equity securities in connection with additional financing, our stockholders may experience dilution and/or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products and services in a timely manner, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements or may be forced to limit the number of products and services we offer, any of which could seriously harm our business.

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

     We have in place protective provisions designed to provide our board of directors with time to consider whether a hostile takeover is in our and our stockholders’ best interests. Our certificate of incorporation provides for 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 takeover, since a majority of our directors will not stand for election until that third annual meeting. This provision could discourage potential acquisition proposals and could delay or prevent a change in control of the company, and also could diminish the opportunities for a holder of our common stock to participate in tender offers, including offers at a price above the then-current market price for our common stock. These provisions also may inhibit fluctuations in our stock price that could result from takeover attempts.

Risks Related to our Indebtedness

We are leveraged, and our debt obligations will continue to make us vulnerable to economic downturns.

     In the first quarter of 2004, we 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. Debt service obligations arising from the offering of our Convertible Subordinated Notes could limit our ability to borrow more money for operations and implement our business strategy 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 make us more susceptible to downturns in our business.

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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, and payments on the Convertible Subordinated Notes are required to be made only by us. 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.

     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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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 and auction rate preferred securities (which the Company rolls over every three months or less), which are accounted for as cash equivalents or short-term investments, depending on the period of time from the purchase date to the maturity date.

     We are exposed to foreign currency exchange rate risk. A majority of our revenue, expense, and capital purchasing activities is transacted in U.S. dollars. However, a large portion of our payroll, certain manufacturing and operating expenses, and inventory and capital purchases is transacted in the Malaysian ringgit (ringgit). For approximately the last seven years, the exchange rate between the ringgit and the U.S. dollar has been pegged at 3.8 ringgits to one U.S. dollar by the Malaysian government. On July 21, 2005, Malaysia removed its currency peg to the U.S. dollar in favor of a managed float system. Changes in exchange rates could adversely affect the amount we spend on our payroll, certain manufacturing and operating expenses, and raw materials and capital purchases. In the first nine months of 2005, our spending on payroll, manufacturing and operating expenses, and raw materials and capital purchases that were denominated in ringgit was approximately $161.5 million. Additionally, we paid approximately $57.8 million denominated in Malaysian ringgit to a Malaysian supplier for raw materials purchases in the first nine months of 2005, based on a cost plus a percentage arrangement. The Malaysian supplier incurs certain costs denominated in ringgit; therefore, any change in the valuation of the ringgit could impact the cost per unit we pay for such raw materials. As of October 2, 2005, we held approximately $41.5 million (Malaysian ringgit 156.5 million) of cash and cash equivalents that were denominated in Malaysian ringgit.

     In late September 2005, we began to hedge some of our foreign currency risk related to anticipated foreign currency denominated equipment purchases by entering into foreign exchange forward contracts that generally have maturities of 12 months or less. As of October 2, 2005 the Company had not designated these foreign exchange forward contracts as a cash flow hedge in accordance with SFAS No. 133. As of October 3, 2005 these transactions were designated and qualify as cash flow hedges. The derivatives associated with our hedging activities are marked to market at fair value and any resulting liability is recorded in other liabilities and any resulting asset is recorded to prepaid and other current assets in the Condensed Consolidated Balance Sheets. The effective portion of gains or losses resulting from changes in fair value is initially reported as a component of accumulated other comprehensive income (loss), net of any tax effects, in stockholders’ equity and subsequently reclassified into depreciation expense in the periods in which the related equipment purchase is depreciated after the forecasted transaction actually occurs. The ineffective portion of gains or losses resulting from changes in fair value is reported in interest and other income, net in the Consolidated Statements of Operations. Our hedging programs reduce, but do not entirely eliminate, the impact of currency exchange rate movements.

     As of October 2, 2005 we had foreign exchange contracts to purchase approximately $13.3 million of Japanese Yen. The fair value of our forward contracts was recorded as a $0.1 million other current liability as of October 2, 2005.

     The counterparty to these forward contracts is a creditworthy multinational commercial bank. The risks of counterparty nonperformance associated with these contracts are not considered to be material.

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     Notwithstanding our efforts to mitigate some foreign currency exchange rate risks, there can be no assurances that our mitigating activities will adequately protect us against the risks associated with foreign currency fluctuations.

     We have $80.5 million in convertible subordinated notes outstanding. These notes bear interest at 2% and mature in February 2024. A hypothetical 100 basis point increase in interest rates would result in approximately $0.8 million of additional interest expense each year.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     As of October 2, 2005, our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has conducted an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a — 15(b) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely manner.

Internal Control over Financial Reporting

     Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:

• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.

40

Changes in Internal Control Over Financial Reporting

     There has been no change in our internal control over financial reporting during our third fiscal quarter ended October 2, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

     Not applicable.

ITEM 2. Unregistered Sales of Equity Securities

     Not applicable.

ITEM 3. Defaults Upon Senior Securities

     Not applicable.

ITEM 4. Submission of Matters to a Vote of Security Holders

     Not applicable.

ITEM 5. Other Information

In November 2005, the Company entered into an employment agreement with an executive officer. For more information on the agreement, please refer to Note 9 of the Notes to Condensed Consolidated Financial Statements (Unaudited) included in this report on Form 10-Q. The form of employment agreement is filed as an exhibit to this report on Form 10-Q.

ITEM 6. Exhibits

10.1	Media Supply Agreement dated July 4, 2005 between Seagate Technology International and Komag USA (Malaysia) Sdn. And Komag, Incorporated. *
10.2	Addendum to Business Agreement between Maxtor, Inc. and Komag, Incorporated dated October 6, 2003, as amended on July 8, 2005.*
10.3	Form of Officer Employment Agreements.
31.1	Rule 13a — 14 (a) Certification of Chief Executive Officer
31.2	Rule 13a — 14 (a) Certification of Chief Financial Officer
32	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

* Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

41

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

KOMAG, INCORPORATED
(Registrant)
DATE: November 7, 2005	BY:	/s/ Thian Hoo Tan
	Thian Hoo Tan
	Chief Executive Officer
DATE: November 7, 2005	BY:	/s/ Kathleen A. Bayless
	Kathleen A. Bayless
	Senior Vice President, Chief Financial Officer

42

EXHIBIT INDEX

10.1	Media Supply Agreement dated July 4, 2005 between Seagate Technology International and Komag USA (Malaysia) Sdn. And Komag, Incorporated. *
10.2	Addendum to Business Agreement between Maxtor, Inc. and Komag, Incorporated dated October 6, 2003, as amended on July 8, 2005.*
10.3	Form of Officer Employment Agreements.
31.1	Rule 13a — 14 (a) Certification of Chief Executive Officer
31.2	Rule 13a — 14 (a) Certification of Chief Financial Officer
32	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

* Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

43

EX-10.1

EXHIBIT 10.1

***CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO THE CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED AS [****]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

MEDIA SUPPLY AGREEMENT

This Media Supply Agreement (“Agreement”) is between Seagate Technology International (“Seagate”) and Komag USA (Malaysia) Sdn. and Komag, Incorporated (collectively “Komag”). The individuals signing this Agreement represent that they are authorized to sign on behalf of their companies.

Seagate Technology International
Signature:	4/s/ David A. Wickersham
Print Name:	David A. Wickersham
Title:	Chief Operating Officer
Date:	July 4, 2005
Address for	Attn: Corporate Contracts
Notices to	c/o Seagate Technology LLC
Seagate:	920 Disc Drive, MS SV15A2
	Scotts Valley, CA 95066
Phone No.:	831-439-7288
Fax No.	831-438-7132
Effective Date:	July 4, 2005
Expiration Date:	October 1, 2009 with automatic 1
	year renewals
Agreement No.	31036
Komag USA (Malaysia) Sdn.
Signature:	4/s/ Kheng Huat Oung
Print Name:	Kheng Huat Oung
Title:	VP, Managing Director
Date:	July 4, 2005
Address for	Attn: Kheng Haut Oung, VP
Notices to Komag	Komag USA (Malaysia) Sdn.
	Bayan Lepas Free Industrial Zone,
	Phase III
	11900 Penang, Malaysia
Phone No.:	011-604-643-9449
Fax No.	011-604-644-8356
Komag, Incorporated
Signature:	4/s/ Ray L. Martin
Print Name:	Ray L. Martin
Title:	Executive Vice President, Customer
	Sales and Service
Date:	July 4, 2005
Address for	Komag, Incorporated
Notices to Komag	1710 Automation Parkway
	San Jose, CA 95131-1873
Phone No.:	408-576-2206
Fax No.	408-894-0471

The parties agree as follows:

1. PRODUCT ORDERS

     1.1. Product and Price List. Exhibit A provides a list of the media products (“Products”) that Seagate may purchase from Komag and the prices that Komag will charge. Seagate and Komag may update the price list from time to time by agreement to reflect changes to the Products or prices.

     1.2. Purchase Orders. Seagate will order Product by submitting purchase orders to Komag. Seagate’s purchase orders will contain, at a minimum: (a) Product description; (b) quantity; (c) price; (d) Seagate’s ship-to and bill-to addresses; (e) requested delivery date; and (f) an indication whether the Product is subject to sales tax.

-1-

PORTIONS DENOTED WITH [***] HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

Seagate may issue two types of purchase orders, “discrete” purchase orders and “blanket” purchase orders, as described below:

     (a) Discrete Purchase Orders. A discrete purchase order is an order for a discrete amount of Product to be delivered on a specified delivery date. Discrete purchase orders are firm commitments by Seagate, but may be cancelled or rescheduled as specified in this Agreement

     (b) Blanket Purchase Orders. A blanket purchase order is an order for an amount of Product to be determined in the future and to be delivered over a period of time. Seagate uses blanket purchase orders as an administrative convenience to track orders and to give Komag a reference number for invoicing. Blanket purchase orders are treated as forecasts only and are non-binding on Seagate.

     1.3. Order Acceptance. Komag will accept or reject discrete purchase orders placed under this Agreement within [****]. After [****] days, if Komag does not notify Seagate otherwise, then the order will be deemed accepted.

     1.4. This Agreement Controls. If the terms of this Agreement contradict the terms of any purchase order or order acceptance, the terms of this Agreement will take precedence. No boilerplate terms in either party’s order-tracking documents will apply. Terms in this Agreement may only be modified in writing, signed by authorized Seagate and Komag personnel and must state that the modified terms supersede the Media Supply Agreement dated July 4, 2005.

     1.5. Affiliated Purchasers. Seagate’s affiliates that control, are controlled by, or are under common control with Seagate may purchase Products under this Agreement directly from Komag at the same prices and on the same terms set forth in this Agreement.

     1.6. Contract Manufacturers. Seagate’s contract manufacturers may purchase Products under this Agreement directly from Komag at the same prices and on the same terms as set forth in this Agreement, so long as the contract manufacturer purchases the Products to incorporate into Seagate products. Seagate’s contract manufacturers are not beneficiaries under this Agreement and are not entitled to enforce this Agreement against either party. Komag is responsible for entering into separate agreements with any Seagate contract manufacturers.

     1.7. Right to Incorporate and Resell. Seagate may incorporate the Products into Seagate products and may resell the Products in any market Seagate elects, subject to export control regulations.

2. PRICING

     2.1. [****].

     2.2. Cost Reductions. Komag and Seagate will work together to reduce the costs and expenses to make and deliver the Products to Seagate. If the costs or expenses decrease, Komag will work with Seagate to lower the prices charged to Seagate accordingly.

3. SHIPMENT AND DELIVERY

     3.1. Incoterms. Unless specified otherwise, Komag will ship all Products to Seagate “DDU DESTINATION.”

     (a) “DDU.” The term DDU means Delivered Duty Unpaid, as defined in International Chamber of Commerce, Incoterms 2000. Komag will pay the costs of carriage and bear the risk of loss to deliver the Products to Seagate’s destination. Komag will pay the costs and bear the risk of loss for any warehousing before delivery to the destination.

     (b) “Destination.” Seagate’s destination will always be the incoming dock at Seagate’s factory, regardless of whether the Products are shipped through an intermediary cross-dock facility, or stored in a “just-in-time” warehouse or vendor managed inventory before delivery to the incoming dock at Seagate’s factory.

-2-

PORTIONS DENOTED WITH [***] HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

     3.2. Just-in-Time Warehouse and Supplier Managed Inventory. If requested by Seagate, Komag will establish a “just-in-time” inventory delivery system in a Seagate-designated and mutually acceptable (not to be unreasonably withheld) warehouse (“JIT Warehouse”) or a supplier managed inventory stocking location system at a Seagate-designated location on Seagate’s premises (“SMI Stocking Location”) where Komag will maintain an inventory of its Products. Komag will be responsible for the costs and risk of loss for its Products at the JIT Warehouse or SMI Stocking Location. Komag will maintain a minimum of [****] of inventory, or other mutually acceptable minimum stocking level of inventory of Products to be maintained in the JIT Warehouse or SMI Stocking Location. Komag will replenish the JIT Warehouse or SMI Stocking Location to the minimum stocking levels as Seagate pulls Products from either location. After receiving Seagate’s notice to pull Product, Komag will have Products shipped from the JIT Warehouse or SMI Stocking Location to Seagate. All Product shipped to the JIT warehouse will be covered by non-cancelable purchase orders as described in Section 6.5.

     3.3. Import and Export Formalities. If Products will be exported or imported before arriving at Seagate’s final ship-to destination, Komag will be the exporter of record and will be responsible for performing all export formalities; Seagate will be the importer of record and will be responsible for performing all import formalities. For imports to the United States, Suppler will provide the customs clearance documentation specified in Exhibit B.

     3.4. On-Time Delivery. Continuity of supply is a material provision of this Agreement. If Komag does not deliver any Product as set forth below, then Seagate may require Komag to ship Product by an expedited mode of transportation at Komag’s expense.

     (a) Direct Orders. Komag will deliver Products to Seagate on the delivery date specified in Seagate’s Order.

     (b) JIT and SMI Orders. Komag will ship Product to Seagate on the delivery date specified in Seagate’s pull notice documentation and replenish the inventory of all JIT Warehouses and SMI Stocking Locations to maintain the minimum stocking levels in the JIT Warehouses and SMI Stocking Locations at all times.

     3.5. Packaging and Marking. Komag will mark the Products for shipment as designated by Seagate. Komag will package the Products for shipment in accordance with standard commercial practices acceptable to common carriers at the lowest shipping rate available. Komag’s shipping containers must display: (a) the date of shipment; (b) Seagate’s order number; (c) the Product part number; (d) the Product revision level and lot number; and (e) the quantity in the container.

     3.6. Order Placement. Purchase Orders for product manufactured in Komag’s Malaysian facilities but destined for the U.S. should be placed with Komag, U.S. Purchase Orders for products manufactured in Komag’s Malaysian facilities to be shipped to countries should be placed directly with the appropriate Malaysian factory.

4. INVOICING AND PAYMENT

     4.1. Invoices and Payment Terms. Komag may invoice Seagate with each delivery. Payment will be due [****]. Seagate’s local finance department may designate specific days of the month as deadlines for submitting invoices. If Komag submits its invoice after the local invoice deadline, then the invoice will not be deemed received by Seagate until the next invoice deadline.

     4.2. Right to Offset. If at any time Seagate has any credits owing from Komag, Seagate may offset the credits against any payments due to Komag.

5. PRODUCT SPECIFICATIONS AND CHANGES

     5.1. Product Specifications. Komag will comply with the Product descriptions and specifications referenced in Exhibit C, the Quality Standards identified in Exhibit D, and any other agreed upon specifications, standard operating procedures, or processes furnished or adopted by Seagate, including any samples furnished to and approved by Seagate (collectively the “Specifications”).

-3-

PORTIONS DENOTED WITH [***] HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

     5.2. Specification Changes. Komag may not change the form, fit, or function of any Product, or its manufacturing process or manufacturing location, without Seagate’s prior written approval. Seagate may change the Specifications at any time. Komag will use its best efforts to comply with the changes. [****].

     5.3. Product Information. Komag will provide the following information regarding the Products to Seagate upon request:

     (a) a bill of materials that includes all material used in manufacturing or assembly processes, and the related costs;

     (b) a list of component and process sub-suppliers;

     (c) a complete diagram flow chart for all Products with lead-time identified for key process steps; and

     (d) a description of the Product manufacturing process and a list of the equipment used in the manufacturing process.

     5.4. Seagate Property. Komag will return to Seagate any tools, drawings, or other materials provided by Seagate at the termination of this Agreement or upon Seagate’s request.

     5.5. Komag Property. Seagate will return to Komag shipping cassettes used to transport media and substrate products from Komag to Seagate. Cassettes must be returned in the condition as-received by Seagate. Bulk shipping boxes and re-usable packaging will be returned by Seagate to Komag in a condition consistent with wear and tear associated with normal shipping practices.

6. FORECASTS, CAPACITY PLANNING, AND FLEXIBILITY

     6.1. Forecasts. Seagate will provide forecasts to Komag from time to time as agreed between the parties. Seagate’s forecasts are not binding on Seagate; however, Komag will secure and allocate capacity in accordance with Seagate’s forecasts. Komag will treat any blanket purchase order as a forecast for the purpose of allocating capacity.

     6.2. Capacity Planning. Komag will provide a written notice to Seagate within [****] days after receiving Seagate’s forecasts, confirming it will meet Seagate’s forecasts. Komag will notify Seagate immediately if it is unable to meet any forecast. Komag will procure and maintain all necessary equipment, personnel, facilities, and other materials required to manufacture Products according to the Specifications in volumes sufficient to meet Seagate’s forecasts. At Seagate’s request, Komag will meet with Seagate to plan Komag’s capacity.

     6.3. End-of-Life Capacity. Komag will give Seagate at least [****] notice before it stops accepting orders for any Product. During the 6-month notice period, Seagate may continue to place orders for the discontinued Product. Seagate may schedule deliveries of the discontinued Product for up to [****] after the last date that Komag will accept orders. Komag will continue to manufacture and deliver the discontinued Product to Seagate to meet Seagate’s scheduled deliveries. [****] deliver the discontinued Product to Seagate until Seagate has qualified a new source for the discontinued Product.

     6.4. Upside Flexibility. [****].

     6.5. Downside Flexibility. Seagate may reschedule any delivery up to [****] beyond the original delivery date. Seagate may cancel any purchase order, in whole or in part, as follows:

     (a) Cancellation without Charge. [****]. This does not include product already shipped to the JIT hub which is covered by non-cancelable purchase orders:

[****]

     (b) Cancellation Fees. [****].

-4-

PORTIONS DENOTED WITH [***] HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

     (c) Duty to Mitigate. [****].

7. PRODUCT WARRANTY

     7.1. Warranty Period. The warranty period for the Products will be fifteen (15) months from the date of delivery to Seagate unless a different warranty period is specified in Exhibit A.

     7.2. Warranties Terms. During the warranty period Komag warrants the following:

     (a) The Products will fully comply with the Specifications;

     (b) The Products will fully comply with Seagate’s Product Stewardship Requirements;

     (c) The Products will be free from defects in material, workmanship and design;

     (d) The Products will be of merchantable quality; and

     (e) The Products will be fit for the use intended by Seagate.

     7.3. Warranty Remedies. If the Products do not meet the warranties, Seagate may elect one or more of the following remedies:

     (a) Seagate may require Komag to repair or replace the Products;

     (b) Seagate may return the Products to Komag at Komag’s expense for a full refund;

     (c) Seagate may correct the non-compliance and charge Komag for the cost to make the correction.

     7.4. Remedies Nonexclusive. The remedies listed above are in addition to any other remedies available to Seagate in law or equity. The obligation to provide repaired or replacement Products during the warranty period continues whether or not Komag has discontinued manufacturing the Products.

8. RELIANCE ON SUPPLIER

     8.1. Advice Regarding Intended Use. Seagate will rely on Komag’s expertise and advice in the selection and use of Komag’s Products. Komag will assign personnel to work with Seagate who are reasonably qualified to advise Seagate in the selection and use of Komag’s Products. Komag must request relevant information from Seagate regarding Seagate’s selection and use of the Products, and must notify Seagate if it believes that there are potential problems in Seagate’s selection and use of the Products.

     8.2. Return of Product. If a Product does not function properly in the manner in which it is used by Seagate, and if Seagate provided sufficient information to Komag regarding Seagate’s intended use for the Product such that Komag should have known that the Product would not function properly, then Seagate may return the Product to Komag as non-conforming.

     8.3. Limits on Reliance. Komag will have no obligation to accept return of non-conforming Products under this Section 8, if Seagate does not disclose sufficient information about its intended use of Products, or if Komag warns Seagate in writing of a potential problem with Seagate’s intended use of Products and Seagate disregards Komag’s warnings.

9. ONGOING QUALITY AND RELIABILITY

     9.1. Quality Standards. Komag warrants that Products will meet the Quality Standards set forth in Exhibit D, will be free from defects in material, workmanship, and design for the warranty period identified in Section 7 of this Agreement, and will conform to the Specifications (collectively “Quality Standards”). The warranty for the replaced or repaired Product will be the same as the original Product. Komag will implement quality and reliability assurance measures to ensure compliance with the foregoing and will report on such measures to Seagate at Seagate’s request.

-5-

PORTIONS DENOTED WITH [***] HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

     9.2. Yield Benchmark. [****]. Seagate will make all reasonable efforts to notify Komag of its plan to exercise its right not to purchase Product to minimize Komag’s inventory exposure.

     9.3. Line Fallout. The parties will work together on any ongoing basis to determine the cause of any defects in Products that fail Seagate’s drive testing which Seagate determines are not due to its assembly or disassembly process. Komag will provide a credit to Seagate based on mutually agreed media-related or substrate-related defects.

     9.4. Product Stewardship Requirements. Seagate’s current Product Stewardship Requirements are attached as Exhibit E. Seagate will update the Product Stewardship Requirements from time to time and will make the updated versions available to Suppler. Updated versions of the Product Stewardship Requirement will automatically be incorporated herein as part of this Agreement without any further action by the parties. Komag must immediately notify Seagate if any of its Products include chemicals or compounds in amounts that exceed the threshold amounts listed in the Product Stewardship Requirements. Each shipment of Products to Seagate will constitute a certification by Komag that the Products shipped meet the Product Stewardship Requirements. Upon Seagate’s request, Komag will provide sufficient documentation to Seagate to show that the Products conform to the Product Stewardship Requirements. Komag will maintain processes and policies designed to protect the environment and employee health and safety at any facility where services related to this Agreement are performed.

     9.5. ISO 9000 Certification. Komag must have a total quality system in place that meets ISO 9000 certification requirements. Komag will work toward QS 9000 certification, if not already QS 9000 certified.

     9.6. Manufacturing Process Inspections. Seagate may inspect Komag’s manufacturing locations, warehouses, and other facilities during normal business hours with reasonable notice to Komag. Komag will provide Seagate with its own inspection, quality and reliability data upon request.

     9.7. Corrective Action. Whenever a Product does not perform as warranted, Seagate may request that Komag implement a containment plan within [****] after the failure. Komag must provide Seagate with a detailed failure analysis identifying root cause within five days after the failure. Komag will work with Seagate to determine the effect of the failures on Seagate’s products and customers; and Komag will implement a corrective action plan that is acceptable to Seagate to eliminate the effect of the failures on Seagate’s products and customers. Komag will maintain the effectiveness of all corrective actions implemented as well as apply these corrective actions to other Products when and where applicable.

     9.8. Epidemic Failure; Product Recall. If there are multiple Product failures due to the same or related causes, or if any Products do not meet Seagate’s allowable DPPM described in the Specifications, or Seagate’s Product Stewardship Requirements, then Seagate may require Komag to accept return of all Products. Seagate may also elect to recall and return to Komag all Products that have been incorporated into Seagate’s products and distributed to Seagate’s customers and end users. If Seagate recalls Komag’s Products from Seagate’s customers or end users, Komag will negotiate in good faith a settlement for the associated charges based on the actual and reasonable costs associated with recalling and returning the Products. Seagate to provide documentation detailing costs.

     9.9. Failure Rate. Seagate may measure the failure rates of the Products in rates in a number of different ways. Komag will comply with the failure measurement system and failure rate limits as designated by Seagate, which may include one or more of the following:

     (a) Annualized Return Rate. The parties will determine a common goal for the annualized return rate (“ARR”) for each Product. Komag will report the actual ARR for each Product on a monthly basis. If the actual ARR for any Product exceeds the ARR goal, then Komag will designate a team that will determine root cause of the returns and will report to Seagate at weekly meetings until the actual ARR for the Product is below the ARR goal.

     (b) [****].

     9.10. Supplier Quality Management Procedures. Komag will comply with the Seagate supplier quality management procedures provide by Seagate Supplier Quality Engineering.

-6-

     9.11. Product Acceptance. Products purchased under this Agreement will be subject to inspection and test by Seagate or its designees at such times and places as agreed between the parties. Unless otherwise specified in any order, final inspection and acceptance of Products by Seagate will be at Seagate’s facilities.

10. CONTINUITY OF SUPPLY

     10.1. Disaster Recovery Plan. Komag must provide a written disaster recovery plan to Seagate within 30 days after execution of this Agreement. The disaster recovery plan must demonstrate Komag’s ability to ensure continuity of supply of the Products in the quantity forecasted by Seagate and the quality required under this Agreement. Upon Seagate’s request, Komag will evaluate and test its disaster recovery plan and certify to Seagate that the plan is fully operational.

11. CONFIDENTIALITY

     11.1. Marking Confidential Information. During this Agreement, each party may learn confidential business or technical information related to the disclosing party (“Confidential Information”). In order to be protected under this Agreement, any Confidential Information must be clearly marked as “confidential”, “secret” or with a similar legend. No party will have any responsibility under this Agreement for any information that is not so marked at the time of disclosure. Any oral or visual disclosures must be designated as confidential at the time of the disclosure and confirmed as confidential in a written notice delivered within 20 days after the disclosure, describing the oral or visual information disclosed and stating that the information is confidential.

     11.2. Nondisclosure. Each party will protect the Confidential Information of the other party against unauthorized disclosure using the same degree of care, but no less than a reasonable care as it uses to protect its own information of a similar kind. The Confidential Information may be disclosed to employees, affiliates, or consultants of the recipient who have entered into nondisclosure agreements with the recipient. Komag may only use Seagate’s Confidential Information for the benefit of Seagate.

     11.3. Confidentiality Period. The duty to protect Confidential Information expires 2 years after expiration of this Agreement.

     11.4. Exclusions. The obligation of confidentiality do not apply to information that (a) is generally known to the public or otherwise in the public domain other than through breach of confidentiality; (b) information that the other party can show was known to the recipient before receipt from the disclosing party; (d) is disclosed by a third party without breach of any obligation of confidentiality; (e) is independently developed by the recipient; or (f) is required to be disclosed by a court, administrative agency, or other governmental body, or by operation of law.

     11.5. Return of Information. Each party will return or destroy the Confidential Information of the other upon request upon expiration or termination of this Agreement.

     11.6. Other Nondisclosure Agreements. The parties may also enter into separate nondisclosure agreements governing specific disclosures. To the extent that the terms of any separate nondisclosure agreements are more restrictive than the terms of this Agreement, then the more restrictive terms will control for the specific disclosure.

     11.7. Publicity. Neither party may disclose the existence or terms of this Agreement to any third party without the prior written consent of the other except as required by law or as necessary to comply with other obligations stated in this Agreement. Neither party may issue any press releases related to this Agreement without the written consent of the other party.

12. INDEMNIFICATION AND DEFENSE

     12.1. General Indemnification. Komag will defend and indemnify Seagate and Seagate’s affiliates, directors, employees and contractors (collectively “Indemnitees”) against any claim or action brought by a third party against an Indemnitee arising from (a) an allegation of Komag’s negligence or willful misconduct; (b) any breach by Komag of its obligations to Seagate under this Agreement, or (c) any breach by Komag of its obligations to Seagate under any other Agreement between the parties.

-7-

PORTIONS DENOTED WITH [***] HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

     12.2. Infringement Indemnification. Komag will defend and indemnify each Indemnitee against any claim or action brought by a third party against an Indemnitee, alleging that a Product infringes a patent, copyright, trademark, trade secret, trade name, trade dress, mask work or other intellectual property right.

     12.3. Indemnification Procedures. Seagate will promptly notify Komag of any claim or action and provide Komag reasonable assistance and cooperation in the defense of the claim or action. Any Indemnitee may, at its own cost, participate through its own attorneys in the investigation, defense, settlement, or trial of the claim or action. Komag may not without consultation with Seagate enter into any settlement of any claim or action that involves a remedy other than the payment of money or receipt of license to permit continued supply of Product by Komag. If Komag does not defend the claim or action to the reasonable satisfaction of Seagate, Seagate may, after consultation with Komag, assume full control of the defense.

     12.4. Payment of Damages and Defense Costs. Komag will pay all damages awarded or agreed to in settlement against an Indemnitee. Komag will pay all reasonable costs incurred by an Indemnitee in defending the claim or action. Komag will not be obligated to pay damages to an Indemnitee to the extent that the damages were caused by (a) an Indemnitee’s own gross misconduct; (b) an Indemnitee’s use of Komag’s Products in combination with other products if the sole cause of the infringement is the other products; or (c) an Indemnitee’s modification to the Products made without Komag’s knowledge.

13. LIMITATION OF LIABILITY

     13.1. Limitation of Amount of Liability. Seagate will not be liable to Komag, regardless of the basis of liability or the form of action, for any amounts exceeding the total price paid by Seagate to Komag, net of all discounts and refunds, over the 12-month period before the liability arose.

     13.2. Limitation of Type of Liability. Seagate will not be liable to Komag for any consequential, incidental, indirect, special, economic, or punitive damages even if Seagate has been advised of the possibility of such damages.

14. TERM AND TERMINATION

     14.1. [****]

     14.2. [****]

     14.3. [****]

     14.4. [****]

     14.5. [****]

     14.6. [****]

15. DISPUTE RESOLUTION

     15.1. Good-Faith Negotiation. The parties will attempt to resolve any dispute relating to this Agreement through good-faith informal negotiation.

     15.2. Mediation. If the parties are unable to resolve the dispute through good faith informal negotiation, they will participate in mediation before an agreed mediator from Judicial Arbitration and Mediation Services (“JAMS”). Either party may initiate mediation by providing a written request for mediation to the other party and to JAMS. The request must describe the dispute and the relief requested. The mediation will be scheduled within ten business days after the request. The mediation will take place at a JAMS facility in California. The parties will cooperate with JAMS and with one another in selecting a mediator from a JAMS panel of neutrals, and in scheduling the mediation proceedings. The parties will participate in the mediation in good faith. The parties will bear their own expenses in mediation, but will share all fees to JAMS equally.

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     15.3. Arbitration. If the parties are unable to resolve the dispute through mediation, they will submit the dispute to final, binding arbitration under Rules of Arbitration of the International Chamber of Commerce (“ICC Rules”). Either party may initiate arbitration by providing a written request for arbitration to the other party and to the International Chamber of Commerce. The arbitration will be held in Santa Clara County, California, USA. If the amount of the claim is less than US $1,000,000, then one arbitrator will conduct the arbitration. If the amount in dispute is equal to or greater than US $1,000,000, then a panel of three arbitrators will conduct the arbitration. The arbitrator or arbitrators will be selected in accordance with the ICC Rules and must have expertise in the subject matter of the dispute. The arbitrator or arbitrators may award specific performance, injunctions, or other equitable relief. Judgment upon any arbitration award may be entered in any court with jurisdiction over either party. If either party fails to appear at any properly noticed arbitration proceeding, an award may be entered against the absent party. The parties will bear their own expenses in mediation, but will share all fees to ICC equally.

     15.4. Equitable Relief Excluded. Either party may seek equitable relief to enforce the rights granted in Sections 10, 11, or 12 or to obtain a temporary restraining order or other provisional remedy to preserve the status quo or prevent irreparable harm.

     15.5. Survival and Attorney’s Fees. This Section 15 will survive the Agreement’s termination or expiration. This Section 15 may be enforced by any court of competent jurisdiction, and a party seeking enforcement will be entitled to an award of all costs, fees and expenses, including attorney’s fees, to be paid by the party against whom enforcement is ordered.

16. INSURANCE

     16.1. Minimum Insurance Requirements. Komag will maintain Commercial General Liability insurance of not less than $2,000,000 Combined Single Limit for Bodily Injury and Property Damage. Komag’s general liability insurance must include coverage for broad form property damage, blanket contractual liability, advertising and personal injury liability, and products/completed operations. Komag’s insurance must name Seagate, its officers, employees and agents as additional insureds. Komag will also maintain Automobile Liability insurance with a combined single limit for Bodily Injury and Property Damage of not less than $1,000,000 per occurrence. Komag may maintain a lesser limit of General Liability or Automobile Liability insurance if the policy, combined with Komag’s Umbrella or Excess Liability policy, meets the respective minimum coverage limits for General Liability and Automobile Liability insurance required under this Agreement.

     16.2. Workers’ Compensation and Employer’s Liability Insurance. If Komag has employees or acquires employees during the term of this Agreement, then Komag must maintain Workers’ Compensation insurance as required by statute; and Employer’s Liability insurance in not less than the amounts that follow (or as otherwise required by applicable state law). The policy must permit (or be endorsed to permit) Komag’s waiver of insurer’s subrogation rights against Seagate and Komag agrees to waive its subrogation rights.

(a)	Bodily injury by accident	$500,000 per accident
(b)	Policy limit by disease	$500,000 policy limit
(c)	Bodily injury by disease	$500,000 per employee

     16.3. Proof of Insurance and General Requirements. Komag’s required insurance must (a) respond as primary coverage concerning Komag’s indemnity and insurance obligations under this Agreement and neither Seagate nor its insurers will be required to pay for any portion of such obligations; and (b) contain a standard cross liability endorsement or severability of interest clause. Komag must provide Seagate with proof of insurance satisfactory to Seagate. Komag will immediately notify Seagate of any material change in its insurance. Komag’s certificate of insurance must provide that no cancellation of the insurance will be effective without ten days’ advance written notice to Seagate. In no event will any required insurance coverage or limits reduce Komag’s obligations to Seagate under this Agreement.

17. MISCELLANEOUS

     17.1. Relationship of the Parties. Komag and Seagate are independent contractors.

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     17.2. No Intellectual Property Rights Granted. Except as expressly provided, this Agreement does not grant either party any right to the other party’s patents, copyrights, trademarks, trade secrets, or other forms of intellectual property.

     17.3. Assignment. Due to the nature of each party’s duties and Seagate’s reliance on Komag’s performance in supplying Products, Seagate may assign this Agreement to any third party upon written notice to Komag, with Komag’s consent. Komag may assign this Agreement only with the prior written consent of Seagate. The transfer of a controlling ownership interest in Komag will constitute an assignment for purposes of this section. This Agreement will be binding upon and will inure to the benefit of the parties and their permitted successors and assigns.

     17.4. Compliance with all Laws. Komag, and all Products supplied by Komag and work performed by Komag, must comply with all applicable laws and regulations in effect, including those governing environment, health and safety, and labor and employment practices. Komag must require that its sub-suppliers also comply with all applicable laws and regulations in effect. Upon request, Komag will certify that it complies with all applicable laws and regulations. Seagate may audit Komag to confirm Komag’s compliance with this Section.

     17.5. Export Controls. Each party will comply with all applicable export, re-export and foreign policy controls and restrictions imposed by the U.S. and the country in which they are located, including the U.S. Export Administration Regulations. Komag may not export, re-export or allow to be disclosed, any technical data received from Seagate or the product of any technical data to any person or destination to the extent prohibited by law.

     17.6. English Language; Governing Law. English is the authoritative text of this Agreement, and all communications and proceedings must be conducted in English. If this Agreement is translated, then the English language version will control. The laws of the State of California, USA govern this Agreement, without regard to any conflicts of laws rules. The United Nations Convention on Contracts for International Sale of Goods does not apply to this Agreement.

     17.7. Force Majeure. Neither party will be liable to the other if its performance is delayed by acts of nature beyond its control. If a force majeure condition prevents Komag’s performance for more than 60 days, then Seagate may terminate this Agreement or cancel any unfilled orders without liability owed to Komag.

     17.8. Severability; Survival. The terms of this Agreement are severable. If any term is unenforceable for any reason, then that term will be enforced to the fullest extent possible, and the Agreement will remain in effect. All obligations that by their terms or nature survive termination of this Agreement will continue until fully performed.

     17.9. Written Amendments; Electronic Business Transactions. This Agreement may be changed only by written amendment signed by both parties. The parties may exchange electronic documents in lieu of printed purchase orders, order acknowledgments, or forecasts. Komag will comply with Seagate’s designated system of exchanging electronic documents and will bear its own costs to participate in the system. Neither party will contest the validity or enforceability of electronically transmitted purchase orders or order acknowledgments on the grounds that they fail to comply with the Statute of Frauds or similar laws requiring that contracts be in writing (such as UCC Section 2-201 or any state-law equivalent). Neither party is prohibited from asserting that an electronic document is invalid for any reason that would also invalidate a written document.

     17.10. Entire Agreement; No Waiver; Notices. This Agreement and the documents referred to in it are the entire agreement of the parties with respect to this subject matter, superseding all prior or contemporaneous agreements. No failure or delay in exercising any right will be considered a waiver of that right. All notices and other communications must be delivered to the addresses designated on the first page of this Agreement.

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EXHIBIT A
PRODUCT AND PRICE LIST

Product	Komag	Seagate
Description	Part No.	Part No.	Unit	Price

[****]

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EXHIBIT B
CUSTOMS CLEARANCE DOCUMENTATION

For Product that must be cleared through customs, Komag must provide customs documentation (sometimes referred to as a “proforma invoice” or “customs invoice”) for the purpose of facilitating customs clearance. The customs documentation must be in English and must include the following information:

1. SHIPPING INFORMATION

§	Date of shipment;
§	Invoice number and shipment number;
§	Seagate purchase order number;
§	Shipper name and address;
§	Ship to party (name and address including attention party if available) and bill to party (name and address);
§	Custom Broker (name);
§	Shipments from all countries, except China or Hong Kong, using wood pallets must state “the solid wood packing materials are totally free from bark, and apparently free from live plant pests”;
§	Shipments from China or Hong Kong, not using solid wood packing materials (“SWPM”) must state “this shipment contains no SWPM.” If SWPM is used, a separate Chinese or Hong Kong government issued certificate of fumigation is required”;
§	Name, contact information and signature of responsible individual — must be a responsible employee of the exporter who has knowledge or who can readily obtain knowledge of the transaction;
§	Incoterm and named place; and
§	Shipment gross weight.

2. PRODUCT INFORMATION

§	Description of Product, grade or quality, as well as marks, numbers, and symbols under which the Product is sold, if applicable — for product description, use generic terms by which each item is commonly known.
§	Product quantities, including quantity of Product per each individual package/box, the number of packages/boxes, the number per pallet, the number of pallets, and the corresponding weights – the information must be sufficiently detailed to enable identification and matching of Product in the shipment against line items on the shipping invoice;
§	Seagate part numbers
§	Country of origin (place of manufacture) by part and quantity
§	FCC ID number, if any
§	FDA accession number, if any; if the invoice contains multiple pages, each page must be number, preferably in the following format: X of Y pages
§	Product net weight
§	Product classification information including:

o Harmonized Tariff Schedule number

o Export Control Classification Number (ECCN)

3. PRICING INFORMATION

§	Unit purchase price and type of currency (if the merchandise is not purchased, the value or usual price in the country or exportation)
§	All charges upon the Product, itemized by name and amount, including freight, insurance, commission, cases, containers, coverings and cost of packing

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§ Total purchase price and terms of payment – customs regulations require every shipping invoice accurately reflect the price to be paid by Seagate. The shipping invoices are used to declare the value of the imported Product for customs entry. Accordingly, 100% accuracy is required. Post-shipment price increases can render declarations inaccurate; therefore, price increases may not be applied to Product already shipped or in JIT or VMI inventories.

Any goods or services furnished to Komag for the production of the Product not included in the invoice price (e.g. assists such as dies, molds, tools, engineering work) — however, goods or services furnished in the destination country are excluded.

4. GLOBAL SUPPLY CHAIN SECURITY PROGRAMS

In addition to the customs documentation listed above, Komag will provide Seagate with verification that they have reviewed their supply chain processes and have the appropriate security measures in place to guard against cargo theft and cargo terrorism. Komag will conduct a self-audit of its transit lanes and of the carriers that are bringing the Products into the USA.

If Komag is eligible to participate in the US Customs-Trade Partnership Against Terrorism (“C-TPAT”) program, Seagate may require that supplier apply for participation and Komag will provide Seagate with written updates regarding the status of Komag’s C-TPAT application every 90 days. Upon acceptance, Komag will provide Seagate with a copy of its Memorandum of Understanding with U.S. Customs and Border Protection and a copy of its C-TPAT compliance certificate.

Seagate may require Komag to apply for and participate in similar programs in other jurisdictions as they are implemented and as Komag becomes eligible, such as the New Computerized Transit System (“NCTS”) proposed for the European Union.

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EXHIBIT C
PRODUCT DESCRIPTION AND SPECIFICATIONS INCORPORATED BY REFERENCE

[****]

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EXHIBIT D
QUALITY STANDARDS
Commitment to Quality Requirement

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Seagate Technology LLC SUPPLIER
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EXHIBIT E
PRODUCT STEWARDSHIP REQUIREMENTS

[****]

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1.0 APPLICABILITY

This Specification applies to:

• All parts, components, subsystems and materials (“Products”) that are supplied for assembly into products sold by Seagate, and

• All packaging (“Packaging”) for Seagate products that reach final customers, and all collateral materials (such as instruction manuals, advertising, etc.) that will be delivered with the product.

This Specification does not apply to indirect materials that are supplied to Seagate unless these are assembled into Seagate products.

2.0 PURPOSE

The purpose of this Specification is to establish specific requirements for Products that are supplied to Seagate to ensure that Seagate disc drives meet regulatory and customer requirements. The requirements of this Specification are based on Seagate’s internal Product Stewardship Standard Operating Procedure, which is periodically updated to reflect the following:

• Requirements of legislation in countries where Seagate products are sold or manufactured, and

• Requirements of customers regarding products, packaging, user documentation, and manufacturing processes.

3.0 REQUIREMENTS AND DOCUMENTATION

3.1

Requirements. Products, Packaging and manufacturing processes must meet the requirements of this Specification. Suppliers must ensure that Products and Packaging do not contain the restricted materials and substances listed in Section 4.0 of this Specification, in amounts exceeding the specified limits. In addition, Products must meet the requirements in Section 5.0.

3.2

Compliance Documentation. Suppliers will be required to report on the status of their compliance with this Specification during qualification of their Products and Packaging with Seagate and at other times designated by Seagate. To report status of compliance, Suppliers must complete a Product Stewardship Certificate and/or other documentation as specified by Seagate. The current version of the Product Stewardship Certificate that must be used by suppliers to report status of compliance can be obtained from the Seagate Supplier Quality Engineering organization. If the Supplier’s Product contains plastic (including external cables), resin, rubber, paint or ink, an analytical report indicating presence of cadmium (see Section 5.0) must also be provided. In addition, Seagate may require analytical testing for the presence of additional compounds for selected parts, components or materials. Unless specifically requested, however, suppliers are not required to provide analytical results in support of their Certificate.

A supplier must notify Seagate if they determine at any time that their Product is not in compliance with this Specification. Seagate will work with the supplier to evaluate and resolve the non-compliance.

3.2 Records. Supplier must maintain sufficient documentation regarding its Products and Packaging to support any representations of their compliance status provided in the Product Stewardship Certificate. Supplier must retain its

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documentation and make the documentation available to Seagate upon request for a minimum of 3 years from the last date the Products or Packaging are shipped to Seagate.

4.0 RESTRICTED MATERIALS AND SUBSTANCES

4.1 Requirements and exemptions related to lead (Pb), mercury (Hg), cadmium (Cd), hexavalent chromium (Cr⁺⁶), polybrominated biphenyl (PBB) flame retardants, and polybrominated diphenyl ether (PBDE) flame retardants.

The following substances are restricted by the European Restriction on Hazardous Substances (RoHS) Directive, as well as by Seagate customers: Lead (Pb), mercury (Hg), cadmium (Cd), hexavalent chromium (Cr⁺⁶), polybrominated biphenyl (PBB) flame retardants, and polybrominated diphenyl ether (PBDE) flame retardants.

Maximum acceptable concentration levels for these substances have not yet been established by the European Union. These substances may not be intentionally added to Products and materials supplied to Seagate. Seagate recognizes that these substances may be present as contaminants (impurities) in manufacturing processes. The following maximum impurity levels apply to materials or materials used in parts supplied to Seagate:

Substance	Application	Maximum Impurity Acceptable
Lead	Plastic, resin, rubber, paint, ink and lacquer	100 ppm
	External cable and overmold insulation	300 ppm
	All other applications	1000 ppm
Mercury	Pigment, paint, and ink	Zero
	All other applications	5 ppm
Cadmium	Plastic, resin, rubber, resin, paint ink and lacquer	5 ppm
	All other applications	25 ppm
Hexavalent Chromium	All applications	100 ppm
Polybrominated biphenyl (PBB) flame retardants	All applications	1000 ppm
Polybominated diphenyl ether (PBDE) flame retardants	All applications	1000 ppm

     Exemptions applicable to parts and components supplied to Seagate are as follows:

• Lead (Pb) in the glass of electronic components;

• Lead (Pb) as an alloying element in steel containing up to 0.35% lead by weight, aluminum containing up to 0.4% lead by weight, and as a copper alloy containing up to 4% lead by weight;

• Lead (Pb) in electronic ceramic parts (e.g., piezoelectronic devices); and

• Lead (Pb) in high melting temperature type solders (i.e. tin-lead solder alloys containing more than 85% lead).

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4.2 Requirements related to other materials/substances.

The following Table provides additional restrictions on the presence of chemical compounds in Products, Packaging and manufacturing processes.

Table 1: Restricted Materials / Substances

		C.	D.
	B.	Suppler Application	Limit by Supplier
A.	Chemical Abstract Number	that restriction	Product or
Chemical Compounds	(if applicable)	applies to	Packaging Wt %
4-Nitrobiphenyl	92-93-3	Product	0.1000%
Aliphatic Chlorinated Hydrocarbons	See Table 2	Product	0.1000%
(CHCs)
Anthracene oil	90640-80-5	Product	Zero
Asbestos	77536-66-4; 12172-73-5;	Product	Zero
	12001-29-5; 12001-28-4; 1332-21-4;
	77536-68-6; 77536-67-5
Amines [diethylamine, dimethylamine	109-89-7, 124-40-3,	Product	Zero
(DMA), N,N-dimethyl-acetamide,	127-19-5, 68-12-2, 35576-91-1,
N,N-dimethylformamide (DMF),	614-00-6, 123-39-7, 90-04-0,
nitrosamide, nitrosamine	60-09-3
(NMA), N-methylformamide (NMF), o- anisidine, 4-aminoazobenzene]
Beryllium and compounds	7440-41-7; 15191-85-2; 543-81-7;	Product	Zero
Beryllium acetate	13106-47-3; 13597-99-4; 1304-56-9
Beryllium carbonate
Beryllium nitrate
Beryllium oxide
Brominated and	See Table 3	Product (applies only to	Zero
chlorinated flame retardants1		plastic housing parts
		>25g.)
Butyl bromoacetate	5292-43-3	Product	Zero
Cadmium and compounds	7440-43-9	Product	See Section 4.1
		Packaging	Zero
Carbon tetrachloride	56-23-5	Product, Packaging and	Zero
		Process
Chlorinated paraffins	8029-39-8, 85535-84-8, 63449-39-8	Product and Packaging	Zero of chain length
			C10-13, chlorine
			content > 50%.
Chloroethylene, vinyl chloride	75-01-4	Product	Zero
Chromium (VI) (hexavalent) and compounds	18540-29-9; 1333-82-0	Product	See Section 4.1
		Packaging	Zero
Dibutyltin hydrogen borate (DBB)	75113-37-0	Product	0.0100%
Ethyl bromoacetate	105-36-2	Product	Zero
Halogenated dioxins and furans	See Table 4	Product	Zero
Lead and compounds (including Pb carbonates, hydrocarbonates, and Pb sulfates)	7439-92-1 (598-63-0; 1319-46-6;	Product	See Section 4.1
	7446-14-2; 10031-13-7; 78-00-2;	Packaging	0.0100% in sum for all heavy metals
	75-74-1; 301-04-2; 6080-56-4;
	12069-00-0; 15739-80-7)
Mercury and compounds	7439-97-6; 100-56-1; 627-44-1;	Product	See Section 4.1
	593-74-8; 33631-63-9; 10045-94-0;	Packaging	0.0100% in sum for
	21908-53-2; 1344-48-5		all heavy metals
Methyl bromoacetate	96-32-2	Product	Zero

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Table 1: Restricted Materials / Substances

		C.	D.
	B.	Suppler Application	Limit by Supplier
A.	Chemical Abstract Number	that restriction	Product or
Chemical Compounds	(if applicable)	applies to	Packaging Wt %
Mirex (dodecachloropenta-cyclodecane)	2385-85-5	Product	Zero
Nickel and compounds	7440-02-0, 3333-67- 3, 13463-39-3,	Product (applies only to	Zero
	12054-48-7, 1313-99-1, 12035-72-2	external case parts)	(maximum allowable
			impurity is 100 ppm)
o-Nitrobenzaldehyde	552-89-6	Product	Zero
(2-nitrobenzaldehyde)
Organostannic	Many	Product	Zero
compounds
Ozone-depleting	See Montreal Protocol	Product, Packaging and	Zero
substances	(http://www.unep.org/ozone/montreal.shtml)	Process
	for complete list
Polybrominated Biphenyl (PBB) and	See Table 5	Product	See Section 4.1
Polybrominated diphenyl ether (PBDE) flame retardants
Polychlorinated biphenyls (PCB)	27323-18-8, 106-43-4; 1336-36-3;	Product	Zero
Polychlorinated terphenyls (PCT)	12767-79-2; 11096-82-5;
	11097-69-1; 26140-60-3, 61788-33-8
Pentachlorophenol (PCP) and its	87-86-5; 131-52-2	Product	Zero
salts and compounds
Polychlorinated naphthalenes (PCN)	1321-65-9; 1335-88-2	Product	Zero
	1321-64-8; 2234-13-1
Polychlorinated phenols	Many	Product	Zero
Ugilec and DBBT (PCB substitutes)	99688-47-8, 76253-60-6	Product	Zero

¹ TBBPA (Tetra Bromobisphenol A) is a brominated flame retardant widely used in the electronics industry. TBBPA will remain in use until a UL-certified alternative has been identified. Note that TBBPA-bis (FR-720), however, is prohibited.

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Table 2 (Reference): Aliphatic Chlorinated Hydrocarbons (CHCs)

Compound	CAS Reference Number
1,1,1,2- Tetrachloroethane	630-20-6
1,1,1-Trichloroethane	71-55-6
1,1,2,2- Tetrachloroethane	79-34-5
1,1,2-Trichloroethane	79-00-5
1,1-Dichloroethylene (vinylidene chloride)	75-35-4
Pentachloroethane	76-01-7
Tetrachloromethane	56-23-5
Trichloromethane (Chloroform)	67-66-3

Table 3 (Reference): Brominated / Chlorinated Fire Retardants

Compound	CAS Reference Number
Additive brominated flame retardants
Tetrabromoethene	79-28-7
1,1,2,2-Tetrabromoethane	79-27-6
Pentabromoethane	75-95-6
1,2,3,4-Tetrabromobutane	1529-68-6
Octabromohexadecane	30262-03-4
Hexabromocyclohexane/1,2,3,4,5,6-hexabromocyclohexane	30105-40-0/1837-91-8
Tetrabromocyclodecane	30178-92-8
Hexabromocyclododecane/1,2,5,6,9,10-hexabromocyclododecane	25637-99-4/3194-55-6
Hexabromobenzene	87-82-1
Pentabromobenzene	608-90-2
Pentabromoethylbenzene	85-22-3
Pentabromoethoxybenzene	9278-85-1
1,2,4,5-Tetrabromo-3,6-bis-benzene (pentabromophenoxybenzene)	58965-66-5
Reactive brominated flame retardants
Tribromomethane (bromoform)	75-25-2
Bromoethene (vinyl bromide)	593-60-2
2-Bromoethanol	540-51-2
Dibromo-1,5-pentanediol	36511-36-1
Tribromophenol	25376-38-9
Pentabromophenol	608-71-9
Dibromostyrene	31780-26-4
Tetrabromophthalic anhydride	632-79-1
Tetrabromobisphenol A	79-94-7
Tetrabromobisphenol A-bis (FR-720, dibromopropyl ether, BDBPT)	21850-44-2
Chlorinated paraffins and waxes
Chlorinated paraffin	61788-76-9

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Table 3 (Reference): Brominated / Chlorinated Fire Retardants

Compound	CAS Reference Number
Chlorinated paraffin oils	85422-92-0
Chlorinated paraffins (C>10)	97553-43-0
Chlorinated paraffins (C10-13)	85535-84-8
Chlorinated paraffins (C14-17)	85535-85-9
Chlorinated paraffins (C18-28)	85535-86-0
Chlorinated paraffin waxes and hydrocarbon waxes	63449-39-8

Table 4 (Reference): Halogenated Dioxins and Furans

Compound	CAS Reference Number
2,3,7,8-Tetra-CDD	1746-01-6
1,2,3,7,8-Penta-CDD	40321-76-4
2,3,7,8-Tetra-CDF	51207-31-9
2,3,4,7,8-Penta-CDF	57117-31-4
1,2,3,4,7,8-Hexa-CDD	39227-28-6
1,2,3,7,8,9-Hexa-CDD	19408-74-3
1,2,3,6,7,8-Hexa-CDD	57653-85-7
1,2,3,7,8-Penta-CDF	57117-41-6
1,2,3,4,7,8-Hexa-CDF	70648-26-9
1,2,3,7,8,9-Hexa-CDF	72918-21-9
1,2,3,6,7,8-Hexa-CDF	57117-44-9
2,3,4,6,7,8-Hexa-CDF	60851-34-5
1,2,3,4,6,7,8-Hepta-CDD	35822-46-9
1,2,3,4,6,7,8,9-Octa-CDD	3268-87-9
1,2,3,4,6,7,8-Hepta-CDF	67562-39-4
1,2,3,4,7,8,9-Hepta-CDF	55673-89-7
1,2,3,4,6,7,8,9-Octa-CDF	39001-02-0
2,3,7,8-Tetra-BDD	50585-81-6
1,2,3,7,8-Penta-BDD	109333-34-8
2,3,7,8-Tetra-BDF	67733-57-7
2,3,4,7,8-Penta-BDF	131166-92-2
1,2,3,4,7,8-Hexa-BDD	110999-44-5
1,2,3,7,8,9-Hexa-BDD	110999-46-7
1,2,3,6,7,8-Hexa-BDD	110999-45-6
1,2,3,7,8-Penta-BDF	109333-34-8

PC-WORD SEAGATE CONFIDENTIAL 1ST USE: MULTI

Seagate Technology LLC SUPPLIER
PRODUCT
STEWARDSHIP/RoHS
REQUIREMENTS
Doc Number: D0000083923
Number Range: N/A
Revision: A
Sheet 8 of 10

Table 5 (Reference):
Polybrominated Biphenyl/Polybrominated Diphenyl Ether
Flame Retardants

Compound	CAS Reference Number
Polybrominated Biphenyls (PBBs)
Bromobiphenyl	2052-07-05
	2113-57-7
	92-66-0
Decabromobiphenyl	13654-09-06
Dibromobiphenyl	92-86-4
Heptabromobiphenyl	59080-40-9
	36355-01-8 (hexabromo-1,1’-biphenyl)
	67774-32-7 (Firemaster FF-1)
Hexabromobiphenyl	59080-40-9
	36355-01-8
	67774-32-7
Nonabromobiphenyl
Octabromobiphenyl	61288-13-9
Pentabromobiphenyl
Polybrominated Biphenyl	59536-65-1
Tetrabromobiphenyl	40088-45-7
Tribromobiphenyl
Polybrominated Diphenyl Ethers (PBDEs)
Bromodiphenyl Ether	101-55-3
Decabromobiphenyl Ether	1163-19-5
Dibromobiphenyl Ether	2050-47-7
Heptabromobiphenyl Ether	68928-80-3
Hexabromobiphenyl Ether	36483-60-0
Nonabromobiphenyl Ether	63936-56-1
Octabromobiphenyl Ether	32536-52-0
Pentabromobiphenyl Ether	32534-81-9
Tetrabromobiphenyl Ether	40088-47-9
Tibromobiphenyl Ether	49690-94-0

PC-WORD SEAGATE CONFIDENTIAL 1ST USE: MULTI

Seagate Technology LLC SUPPLIER
PRODUCT
STEWARDSHIP/RoHS
REQUIREMENTS
Doc Number: D0000083923
Number Range: N/A
Revision: A
Sheet 9 of 10

5.0 ADDITIONAL REQUIREMENTS FOR PARTS, COMPONENTS, SUBSYSTEMS AND MATERIALS CONTAINING PLASTIC, RUBBER, PAINT OR INK

For plastic parts >25g, the part name/number, type of plastic used, flame retardant type, plastic brand name, and plastic model name must be included in the Product’s specification. Plastic parts of any weight must be of one polymer or compatible polymers, except for large cases, which must be of no more than two types of polymer that are separable.

For plastic parts >25g, the part must not have paint, lacquer, or varnish, which as dry matter increases the weight of the plastic part by more than 1%, and no in-mold decoration (IMD).

Plastic parts >25g must have a permanent visible marking in accordance with ISO 11469; plastic parts <25g, but having adequate surface area (minimum 14mm X 70mm) for marking, must also have a permanent visible mark in accordance with ISO 11469.

Plastic components >100g must be made from the same type of plastic.

ICP-AEP testing of a representative sample is required for Products that contain plastic (including external cables), resin, rubber, paint or ink, including semiconductor/IC housings and connector housings.

Standards for measurement are as follows:

1) Pre-conditioning: Typical examples are as follows:

• Wet decomposition method specified in BS EN 1122; 2001, “Plastics—Determination of cadmium—Wet decomposition method”;

• Incineration under the existence of sulfuric acid; and

• Pressurized acid decomposition done in a sealed container (a microwave decomposition method).

Precipitates must be dissolved using established methodology.

2) Measurement method: Use any one of ICP-AES (OES) (Inductively Coupled Plasma-Atomic [Optical] Emission Spectroscopy) or AAS (Atomic Absorption Spectroscopy), or ICP-MS (Inductively Coupled Plasma Mass Spectroscopy).

3) Laboratory analysis must be performed by an independent, third party government-certified (if applicable) laboratory. Laboratory reports must reference the applicable Seagate Part Number.

PC-WORD SEAGATE CONFIDENTIAL 1ST USE: MULTI

Seagate Technology LLC SUPPLIER
PRODUCT
STEWARDSHIP/RoHS
REQUIREMENTS
Doc Number: D0000083923
Number Range: N/A
Revision: A
Sheet 10 of 10

6.0 DEFINITIONS

6.1	Intentionally introduced: Deliberately utilized in the formulation of a material or component where the restricted chemical’s continued presence is desired in the final product to provide a specific characteristic, appearance or quality.
6.2	Limit by Product or Packaging Weight %: Seagate-specified weight of a chemical compound that can be present, expressed as a percent of the total weight of the individual product, part, component or packaging provided by the supplier.
6.3	Packaging: Supplier-provided packaging for Seagate products that reach final customers.
6.4	Process: Process refers to a manufacturing process resulting in Products or Packaging materials that are incorporated into Seagate products delivered to customers. Processes are defined to include the chemical inputs used in those processes, such as solvents and cleaning solutions.
6.5	Product: Supplier-provided parts, components, subsystems and materials.
6.6	Zero: For the purposes of certifying compliance with this Specification, zero shall be defined as meaning that a chemical compound is not present at a concentration greater than one part per million.

PC-WORD SEAGATE CONFIDENTIAL 1ST USE: MULTI

EXHIBIT F
BUSINESS CONTINUITY,
EMERGENCY RESPONSE,
AND DISASTER RECOVERY PLANS

A. GENERAL

     1. Komag recognizes that these terms and conditions apply to each of Komag’s facilities, buildings, or operations that will be used to supply Products under this Agreement, including those warehouses that will be used to store property used in connection with the supply of Products.

     2. Komag will maintain site-specific Emergency Response Plans and Disaster Recovery Plans, which will be made available to Seagate upon request.

     3. Komag shall disclose to Seagate upon request, fire protection designs and capabilities for each warehouse building or operation that will store or distribute property used in connection with supply of the Products.

B. COMPLIANCE WITH LAW

     1. Komag must have a written and implemented plan that ensures compliance with local environmental, health, safety and fire protection laws. The plan must contain a description of potential hazards and corresponding control plans, and details of how Komag will ensure compliance with laws and regulations and with the terms of the Agreement and this Exhibit F.

     2. Komag must implement and maintain appropriate risk control and response measures for foreseeable emergencies, including fire, natural disasters at the operations or warehouse sites or during shipment.

     3. Seagate reserves the right, but not the obligation, to require Komag, to undertake periodic inspections in order to verify compliance with this standard and any other requirements of the contract with Seagate. Seagate reserves the right to inspect buildings and operations upon reasonable notice.

C. PROHIBITIONS FOR ALL FACILITIES USED TO STORE SEAGATE WIP AND FINISHED GOODS

     The following business risk conditions are prohibited at or near warehouses used to store Seagate materials, such as finished product, components, or manufacturing equipment:

     1. Storage of flammable liquids in any quantities greater than those required for maintenance and operation of Komag’s facilities.

     2. Storage of flammable or oxidizing gases or aerosols in any quantities greater than those required for maintenance and operation of Komag’s facilities.

     3. Storage of toxic or corrosive liquids or gases in any quantities greater than those required for maintenance and operation of Komag’s facilities.

D. REPORTING OF DISRUPTION OF PRODUCT SUPPLY

     Komag will report to Seagate within one business day the discovery of any incident that could result in the disruption of the supply of Product to Seagate.

-18-

E. DISASTER RECOVERY PLAN

     Komag will implement the following disaster recovery plan to ensure the continuity of Product supply in the event of a major interruption to its facilities’ ability to maintain production. These requirements include the recovery of documentation, manufacturing systems, materials, key personnel, and plan and equipment.

     1. General

     The objective of these requirements is to enable reinstitution of supply of Product within a time period agreed upon by Seagate and Komag.

     2. Requirements

     (a) Komag will maintain backup copies of all documentation needed to ensure supply of the Product, including but not limited to: drawings, files, process aids, tooling drawings, process control data, materials receiving inspection data, floor layouts, process flowcharts, bills of material, and training plans.

     (b) Komag will plan for restoration or replacement of manufacturing IT systems and hardware.

     (c) Komag will back up materials relating to supplier records, and will negotiate supplier agreements to ensure replacement of critical parts.

     (d) Komag will cross-train key personnel for purposes of replacement due to a loss of any key individuals. Komag will maintain adequate job description and training materials to allow for hiring of replacements.

     (e) Komag will have a contingency plan for moving production to an alternate facility if interruption of Product supply is estimated to exceed 10 days.

-19-

PORTIONS DENOTED WITH [***] HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

EXHIBIT G
VOLUME COMMITMENT
AND PAYBACK AMORTIZATION SCHEDULE

1. Volume Commitment.

          [****]

Effective Date Committed Volume

[****]

2. Consideration.

          [****]

          [****]

-20-

EX-10.2

Exhibit 10.2

CONFIDENTIAL TREATMENT REQUESTED – PUBLICLY FILED COPY

***CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT. THE COPY FILED HEREWITH OMITS THE INFORMATION SUBJECT TO THE CONFIDENTIALITY REQUEST. OMISSIONS ARE DESIGNATED AS [****]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

Addendum to Business Agreement Between Maxtor, Inc and Komag, Inc.
Dated October 6, 2003

     This Addendum (the “Addendum”) to the Business Agreement, effective October 6, 2003, by and between Maxtor Corporation, a Delaware corporation (“Maxtor”), Komag Inc., a Delaware corporation (“Komag USA”) and Komag USA (Malaysia) Sdn., a Malaysian unlimited liability company (“Komag Malaysia” and together with Komag USA, “Komag”) (the “Business Agreement”) is made pursuant to Section 6.3 of the Business Agreement. All terms not otherwise defined in this Addendum shall have the meanings ascribed to them in the Business Agreement.

1.	Komag will provide incremental media volume to Maxtor of 4 million units per quarter (the “Quarterly Incremental Capacity”). The Quarterly Incremental Capacity, currently anticipated to be [****] product, is intended to be over and above that provided under the terms of the Business Agreement.
2.	The tooling installed by Komag to provide the volume of product in Paragraph 1 shall be defined as “Incremental Tools” as specified in the Business Agreement. Komag will not necessarily use sputter tooling provided by Intevac, Inc.
3.	The detailed plan of acquisition, installation, testing, and qualification (the “Install Plan”) will be attached hereto. Upon completion of the Install Plan, Komag will begin to provide the full Quarterly Incremental Capacity to Maxtor, which obligation shall cease on the earlier of October 6, 2008, which is the termination date of the Business Agreement, or such earlier date that the Business Agreement may terminate in accordance with its terms.
4.	Maxtor will prepay media purchases in the amount of US$50 million (the “Pre-payment Amount”), which amount shall be paid back by a per disk payment credit equal to [****] for each disk invoiced (the “Per Disk Credit”) from the date determined in paragraph 6 below until such time as the Pre-payment Amount is repaid in full by Komag. Komag will issue credit memos at the end of each calendar month from the date determined in paragraph 6 below. Komag will use it’s best efforts to insure that the credit memos for all product shipped in a given Maxtor fiscal quarter are issued before the end of said quarter. In no case, however, shall Maxtor be required to pay invoices for disks for which the corresponding credit memo for the Per Disk Credit has not been issued.
5.	The Pre-payment Amount will be paid by Maxtor to Komag in four installments of US$12.5 million due on the date set forth in the next sentence, [****]. However, the first payment due

PORTIONS DENOTED WITH [***] HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

	as listed in the prior sentence shall be made within seven (7) business days after the Effective Date of this Addendum.
6.	The Per Disk Credit will apply to all Maxtor purchases of disks under the Business Agreement and be effective for all invoices for deliveries made on or after the date of the first production media delivery from the Quarterly Incremental Capacity agreed to in the Install Plan. Baseline prices will be those already committed or negotiated in the future as provided in the Business Agreement. Komag agrees that the prices it shall charge Maxtor for the purchase of Product under the Business Agreement [****]. Maxtor may appoint an auditor to validate Komag’s records to confirm that Maxtor is receiving such pricing. Pricing for 2006 shall be negotiated [****], and shall not exceed the pricing set forth in [****], for the same or similar products.
7.	Komag will use its commercially reasonable efforts to achieve Maxtor’s volume goal 14.5 million units per quarter prior to [****], according to a ramp to be agreed upon in the Install Plan and negotiated improvements thereafter.
8.	In addition to the agreement on assignment of this Addendum covered in Section 6.2 of the Business Agreement, Komag, Inc. agrees that in the case that any of the conditions listed in Section 6.2.1 of the Business Agreement occur, and there is a positive pre-payment balance in favor of Maxtor, then that positive pre payment balance will be returned to Maxtor [****] prior to the effective date of any such assignment or any such condition described.
9.	In addition to the agreement on termination for cause of this Addendum covered in Section 6.1.3 of the Business Agreement, Komag, Inc. agrees that in the case that any of the conditions listed in Section 6.1.3 of the Business Agreement occur such that Maxtor gives notice of such condition of a termination because of such condition to Komag, and there is a positive pre-payment balance in favor of Maxtor, then that positive Pre Payment balance will be returned to Maxtor [****].
10.	If Komag is not capable of achieving Maxtor’s volume goal of 14.5 million units per quarter prior to [****], then the remaining positive pre-payment balance shall be repaid in full to Maxtor [****].
11.	This Addendum is Confidential Information under the Mutual Nondisclosure Agreement dated October 1, 1997 and amends the Business Agreement. All other terms of the Business Agreement remain in full force and effect.
12.	This Addendum will not become effective until the last date of execution by the duly authorized signatories of each party (“Effective Date”).

-2-

Agreed to by Maxtor Corporation	Agreed to by Komag, Inc.
/s/ David Beaver	/s/ Michael A. Russak
David Beaver	Michael A. Russak
Senior Vice President Worldwide Materials and Chief Procurement Officer	President and Chief Technical Officer
Agreed to by Komag USA (Malaysia) SDN
/s/ K.H. Oung
K.H. Oung
Vice President and Managing Director
Malaysian Operations
Dated: July 8, 2005

-3-

EX-10.3

Exhibit 10.3

FORM OF

EXECUTIVE EMPLOYMENT AGREEMENT

     This Agreement is entered into as of [DATE] (the “Effective Date”) by and between the Company and [NAME] (“Executive”).

     1.    Duties and Scope of Employment.

            (a)    Position and Duties. As of the Effective Date, Executive will [continue to] serve as [TITLE] of the Company, reporting to the Chief Executive Officer [or his delegate]. Executive will render such business and professional services in the performance of his or her duties, consistent with Executive’s position within the Company, as shall reasonably be assigned to him by the Chief Executive Officer [and/or the Company’s Board of Directors (the “Board”)]. Executive’s [title,] duties and responsibilities may be altered, modified and changed as the [Chief Executive Officer and/or Board] deems appropriate.

            (b)    Obligations. During the Term, Executive will perform his or her duties faithfully and to the best of his or her ability and will devote his or her full business efforts and time to the Company. For the duration of the Term, Executive agrees not to engage in any other employment, occupation or consulting activity for any direct or indirect remuneration without the prior written approval of [the Board and/or the Chief Executive Officer].

            (c)    Conflicting Employment. Executive agrees that, while employed by the Company, he or she will not engage in any other employment, occupation, consulting or other business activity directly related to the business in which the Company is now involved or becomes involved during the term of Executive’s employment, nor will Executive engage in any other activities that conflict with Executive’s obligations to the Company.

     2.    Term. Executive’s employment with the Company pursuant to this Agreement (the “Term”) will commence on the Effective Date and will continue, unless otherwise terminated earlier as provided herein, until the date that is twenty-four (24) months¹ from the Effective Date. Notwithstanding the foregoing, the parties agree that Executive’s employment with the Company will be “at-will” employment and may be terminated at any time with or without cause by giving the Executive a written notice. Executive understands and agrees that neither his or her job performance nor promotions, commendations, bonuses or the like from the Company give rise to or in any way serve as the basis for continuation, modification, amendment, or extension, by implication or otherwise, of his or her employment with the Company. However, as described in this Agreement, Executive may be entitled to severance benefits depending on the circumstances of Executive’s termination of employment with the Company as expressly provided in Sections 6 and 7 of this Agreement.

     3.    Compensation.

            (a)    Base Salary. During the Term, the Company will pay Executive as compensation for his or her services, a base salary at the annualized rate of $[EXECUTIVE’S

¹ The term of Paul Judy’s agreement is twenty-one (21) months.

SALARY AMOUNT] ²(the “Base Salary”). The Base Salary will be paid periodically in accordance with the Company’s normal payroll practices and is subject to lawfully required withholdings. Annual adjustments to the Base Salary may be made in the Company’s sole discretion.

            (b) Target Incentive Plan.    Executive will be eligible to participate in the Company’s Target Incentive Plan, and for such annual bonuses as are payable under the plan (“Incentive Bonus”).

     4.    Employee Benefits. During the Term, Executive will continue to be entitled to participate in the employee benefit plans currently and hereafter maintained by the Company of general applicability [to other senior executives of the Company, including, without limitation, the Company’s group medical, dental, vision, disability, life insurance, vacation and flexible-spending account plans and programs] [as identified in his letter of appointment]. The Company reserves the right to cancel or change the benefit plans and programs it offers to its employees at any time.

     5.    Equity. Executive may from time to time be eligible to receive a grant of stock options and/or restricted stock, as the Board of Directors deems appropriate.

     6.    Severance.

            (a)    Involuntary Termination Without Cause Prior to a Change of Control or More than 6 Months Following a Change of Control. If Executive’s employment with the Company terminates other than voluntarily or for “Cause” prior to a “Change of Control” (both as defined herein) or more than six months following a Change of Control, and Executive signs and does not revoke a release of claims with the Company in the form provided by the Company, the Company shall provide severance pay and benefits, subject to certain conditions, as follows:

       (i)    The Company shall provide monetary severance to Executive equal to [twelve (12) months’ of Base Salary for the Executive Vice President and Chief Technical Officer, the Chief Operating Officer, Executive Vice Presidents, Senior Vice Presidents and the covered Vice President] [twenty-four (24) months of Base Salary for the Chief Executive Officer]. Such severance shall be paid over a period of [twelve (12) months or twenty-four (24) months, as applicable] following the date of termination (the “Severance Period”) through Severance Payments made in the same installments and subject to the same deductions as Executive’s Base Salary at the time of termination. The Severance Payments shall be subject to offset for any amounts then owed to the Company by Executive. [In lieu of the foregoing paragraph the following text is included in the agreement with an officer based in Malaysia: The Company shall provide monetary severance to Executive equal to one month of Base Salary for each year of service plus

² The specific salaries for the Executives who are party to this Agreement are as follows: TH Tan, Chief Executive Officer - $550,000; Tim Harris, Executive VP & Chief Operating Officer — $365,000; Michael Russak, Executive VP, Chief Technical Officer — $390,000; Ray Martin, Executive VP, Customer Sales & Service — $345,000; Peter Norris, Executive VP, Strategic Business Development — $190,000; Kathleen Bayless, Senior VP, Chief Financial Officer — $296,800; Tsutomu Yamashita, Senior VP, Process Development - - $290,000; William Hammack, Senior VP, Human Resources — $203,496; Kheng Huat Oung, VP, Managing Director, Media Operations, Komag USA (Malaysia) Sdn. - $136,084; Paul Judy, Vice President, Corporate Controller & Chief Accounting Officer — $200,000.

2

one month of contractual bonus plus 8 (eight) weeks of pay in lieu of notice. Such severance shall be paid in a lump sum within 30 (thirty) days of the last day of employment. The Severance Payments shall be subject to offset for any amounts then owed to the Company by Executive.]

       (ii)    If Executive elects to continue his/her benefits under the Company’s Employee Benefits Plans, including life, disability and health insurance, through COBRA, the Company shall pay the cost of COBRA continuation coverage for Executive (and, where applicable, Executive’s dependents) during the Severance Period as if Executive were still employed by the Company (the “COBRA Continuation Payments”). Executive will continue to pay the same portion of the cost of such benefits as he or she currently pays as of the last day of his/her employment with the Company. The COBRA Continuation Payments will cease, and the Company will have no further obligations with respect to the payment of any premiums for continuation coverage to Executive, as of the earlier of (a) Executive becoming eligible for comparable coverage (for example, through obtaining alternative employment); (b) the conclusion of the Severance Period; or (c) the cessation of Executive’s COBRA eligibility. [In lieu of the foregoing paragraph the following text is included in the agreement with an officer based in Malaysia: All insurance benefits will cease upon the termination of employment.]

       (iii)    Any outstanding and unvested non-qualified stock options and any restricted stock previously granted Executive shall immediately vest and become exercisable as to the number of shares that would have otherwise vested had Executive remained employed by the Company through the end of the Severance Period. Thereafter, any such awards will remain subject to the terms of the applicable stock plan, grant and/or agreement.

       (iv)    If Executive is entitled to compensation and benefits arising from termination of employment due to change of control pursuant to Section 7 below, compensation and benefits under that change of control provision shall be in lieu of and not in addition to compensation under this Section 6.

       (v)    Notwithstanding the foregoing, the Company’s obligation to make severance payments, pay bonus payments, provide benefits and vest stock and/or options hereunder is expressly conditioned upon Executive’s ongoing compliance with the provisions of the Employee Invention, Authorship, Proprietary and Confidential Information Agreement. In the event Executive breaches the terms of such agreement, the Company’s obligations hereunder shall automatically terminate, without any notice to Executive, and, in addition to any other damages to which the Company may be entitled, the Company shall be entitled to recover from Executive any payments already made to Executive hereunder.

       (vi)    Executive agrees that severance as provided herein shall be the sole consideration to which he or she is entitled in the event of the termination of his or her employment without Cause, and that severance will not be paid in the event of termination with Cause, and Executive expressly waives and relinquishes any claim to other or further consideration. [The following sentence is included only in the Executive Vice President, Chief Technical Officer’s form: Executive agrees that a change in title alone shall not mean that a position is not comparable.]

3

       (vii)    Severance pay, bonus pay, benefits and/or stock/option vesting are expressly conditioned upon Executive’s execution and delivery of a release of all claims Executive may have against the Company in a form provided by the Company.

              (b)    Voluntary Termination; Termination for Cause. If Executive’s employment with the Company terminates voluntarily by Executive or for Cause by the Company, then (i) all vesting of any restricted stock or options to purchase shares of the Company’s common stock held by Executive will terminate immediately and all payments of compensation by the Company to Executive hereunder will terminate immediately (except as to amounts already earned, including unused and accrued vacation); and (ii) Executive shall not be eligible for severance or other benefits, except in accordance with any generally applicable Company plans or policies as are then in effect. [The provision for voluntary termination in the foregoing paragraph is not included in the agreement with the Chief Operating Officer. In lieu thereof, the following separate paragraph is included in that agreement: “Should Executive voluntarily terminate employment within six (6) months of the first day of employment in of a new Chief Executive Officer, other than Executive, the Executive will be eligible to receive six (6) months of severance pay from the date of resignation. Severance pay is expressly conditioned upon Executive’s execution and delivery of a release of all claims Executive may have again the Company in a form provided by the Company. Beyond the sixth (6^th) month, should Executive resign, then (i) all vesting of any restricted stock or options to purchase shares of the Company’s common stock held by Executive will terminate immediately and all payments of compensation by the Company to Executive hereunder will terminate immediately (except as to amounts already earned, including unused and accrued vacation); and (ii) Executive shall not be eligible for severance or other benefits, except in accordance with any generally applicable Company plans or policies as are then in effect.”]

     7.    Change of Control Severance Benefits. In the event of a “Change of Control” (as defined herein) followed by Executive’s termination other than voluntarily or for “Cause” within six (6) months following the consummation of a Change of Control, Executive shall be entitled to receive benefits as set forth below, provided he or she signs and does not revoke a release of claims with the Company in a form provided by the Company. For the purpose of this Section 7, Executive shall be deemed to have been terminated other than for “Cause” if Executive is not provided with an offer of employment with the Company or successor entity following the Change of Control with comparable duties, position, responsibilities, pay and location relative to the Executive’s duties, position, responsibilities, pay and location in effect immediately prior to such Change of Control and, within thirty (30) days thereafter, Executive elects to voluntarily terminate his or her employment with the Company. Executive agrees that (1) a change in title alone shall not mean that a position is not comparable; (2) a change in duties and responsibilities that is not material shall not mean that a position is not comparable; (3) for purposes of pay, a position shall be deemed comparable if it involves a reduction of no more than ten percent (10%) of Executive’s base compensation unless in connection with similar decreases of other similarly situated employees of the Company; and (4) for purposes of location, a position shall be deemed comparable if it is within fifty (50) miles from Executive’s current work location.

              (a)    A lump sum payment within thirty (30) days of such termination equal to the Severance Payment as set forth in section 6(a)(i) above.

4

              (b)    An additional lump sum payment within thirty (30) days of such termination in an amount equal to the annual Incentive Bonus, calculated on the basis of all targets under the current Target Incentive Plan being met.

              (c)    On the date of termination, all stock options and restricted stock previously granted to Executive shall become immediately and fully vested and exercisable by Executive or his or her representative. Such exercise shall be governed by and shall be in accordance with the terms of the applicable agreement, whose terms are incorporated herein by reference.

              (d)    Executive (and, where applicable, Executive’s dependents) shall be entitled to COBRA Continuation Payments in accordance with the provisions of section 6(a)(ii) above. ³

              (e)    In the event that the benefits provided for in this agreement (a) constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), (b) would be subject to the excise tax imposed by Section 4999 of the Code, and (c) the aggregate value of such parachute payments, as determined in accordance with Section 280G of the Code and the Treasury Regulations thereunder is less than the product obtained by multiplying 3.59 by Executive’s “base amount” within the meaning of Code Section 280G(b)(3), then such benefits shall be reduced to the extent necessary (but only to that extent) so that no portion of such benefits will be subject to excise tax under Section 4999 of the Code. In the event that the benefits provided for in this agreement (a) constitute “parachute payments” within the meaning of Section 280G of the Code, (b) would be subject to the excise tax imposed by Section 4999 of the Code, and (c) the aggregate value of such parachute payments, as determined in accordance with Section 280G of the Code and the Treasury Regulations thereunder is equal to or greater than the product obtained by multiplying 3.59 by Executive’s “base amount” within the meaning of Code Section 280G(b)(3), then the Executive shall receive (i) a payment from the Company sufficient to pay such excise tax plus any interest or penalties incurred by Executive with respect to such excise tax, plus (ii) an additional payment from the Company sufficient to pay the excise tax and federal and state income and employment taxes arising from the payments made by the Company to Executive pursuant to this sentence. Unless the Company and the Executive otherwise agree in writing, the determination of Executive’s excise tax liability and the amount required to be paid or reduced under this Section shall be made in writing by the Company’s independent auditors who are primarily used by the Company immediately prior to the Change of Control (the “Accountants”). For purposes of making the calculations required by this Section, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section.⁴

              (f)    Notwithstanding the foregoing, if Executive receives the Severance Payment pursuant to this Section, he or she shall not be entitled to receive an additional Severance Payment pursuant to Section 6 hereof.

³ This paragraph is not included in the agreement with an officer based in Malaysia.

⁴ This paragraph is not included in the agreement with an officer based in Malaysia.

5

            (g)    Change of control benefits under this Section 7 are expressly conditioned upon Executive’s execution and delivery of a release of all claims Executive may have against the Company in a form provided by the Company.

     8.    Non-Solicitation. For a period of twelve (12) months following Executive’s termination of employment, Executive shall not, directly or indirectly, without the prior written consent of the Company, solicit any employee or customer of the Company, its parent or its subsidiaries to terminate his or her employment with or customer relationship to the Company, its parent or its subsidiaries.

     9.    Definitions.

            (a)    Cause. For purposes of this Agreement, “Cause” is defined as (i) an act of dishonesty made by Executive in connection with Executive’s responsibilities as an employee, (ii) Executive’s conviction of or plea of nolo contendere to, a felony or any crime involving fraud, embezzlement or any other act of moral turpitude, (iii) Executive’s gross misconduct, (iv) Executive’s unauthorized use or disclosure of any proprietary information or trade secrets of the Company or any other party to whom Executive owes an obligation of nondisclosure as a result of Executive’s relationship with the Company; (v) Executive’s willful breach of any obligations under any written agreement or covenant with the Company; or (vi) Executive’s continued failure to perform his or her employment duties after Executive has received a written demand of performance from the Company with specifically sets forth the factual basis for the Company’s belief that Executive has not substantially performed his or her duties and has failed to cure such non-performance to the Company’s satisfaction within 30 days after receiving such notice.

            (b)    Change of Control. For purposes of this Agreement, “Change of Control” of the Company is defined as: (1) any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company’s then outstanding voting securities; or (ii) the date of the consummation of a merger or consolidation of the Company with any other corporation that has been approved by the stockholders of the Company, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the company; or (iii) the date of the consummation of the sale or disposition by the Company of all or substantially all the Company’s assets.

     10.    Assignment. This Agreement will be binding upon and inure to the benefit of (a) the heirs, executors and legal representatives of Executive upon Executive’s death and (b) any successor of the Company. Any such successor of the Company will be deemed substituted for the Company under the terms of this Agreement for all purposes. For this purpose, “successor” means any person, firm, corporation or other business entity which at any time, whether by purchase, merger or other, directly or indirectly acquires all or substantially all of the assets or business of the Company. None of the rights of Executive to receive any form of compensation payable pursuant to this Agreement may be assigned or transferred except by will of the laws of

6

descent and distribution. Any other attempted assignment, transfer, conveyance or other disposition of Executive’s right to compensation or other benefits will be null and void.

     11.    Notices. All notices, requests, demands and other communications called for hereunder shall be in writing and shall be deemed given (i) on the date of delivery if delivered personally, (ii) one (1) day after being sent by a well established commercial overnight service, or (iii) four (4) days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the parties or their successor at the following addresses, or at such other addresses as the parties may later designate in writing:

  If to the Company:
  Komag, Inc.
  1710 Automation Parkway
  San Jose, CA 95131

  If to Executive:
  [NAME]
  [ADDRESS]

     12.    Severability. In the event that any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement will continue in full force and effect without said provision.

     13.    Arbitration:

              (a)    General. In consideration of Executive’s services to the Company and Executive’s receipt of the compensation, pay raises and other benefits paid to Executive by the Company, at present and in the future, the Company and Executive agree that any and all controversies, claims, or disputes between them (including any dispute Executive may have with any employee, officer, director, shareholder or benefit plan of the Company in their capacity as such or otherwise) arising out of, relating to, or resulting from Executive’s service with the Company, including any breach of this Agreement, shall be subject to binding arbitration as set forth below. [Disputes which the Company and Executive agree to arbitrate, and thereby agree to waive any right to a trial by jury, include any statutory claims under state or federal law, including but not limited to, claims under Title VII of the Civil Rights Act of 1964, the American with Disabilities Act of 1990, the Age Discrimination in Employment Act of 1967, the Older Workers Benefits Protection Act, the California Fair Employment and Housing Act, the California Labor Code, claims of harassment, discrimination or wrongful termination and any other statutory or common law claims.]⁵ Executive further understands that this Agreement to arbitrate also applies to any disputes that the Company may have with Executive, including but not limited to claims of misappropriation, fraud, conversion, interference with economic advantage or contract, breach of fiduciary duty, defamation, misrepresentation, or fraud.

              (b)    Procedure. Executive agrees that any arbitration will be administered by JAMS and that a neutral arbitrator will be selected in a manner consistent with its Employment Arbitration Rules and Procedures. Executive agrees that any arbitration hearing pursuant to this Agreement shall be conducted in San Jose, California. Executive agrees that the

⁵ Bracketed text is not included in the agreement with an officer based in Malaysia.

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arbitrator shall issue a written decision on the merits. Executive also agrees that the arbitrator shall have the power to award any remedies, including attorneys’ fees and costs, available under applicable law. Executive understands the Company will pay for any administrative or hearing fees charged by the arbitrator or JAMS except that Executive shall pay the first $200.00 of any filing fees associated with any arbitration Executive initiates. Executive agrees that the arbitration shall be conducted in accordance with the JAMS Employment Arbitration Rules and Procedures provided, however, that the Arbitrator shall allow the discovery authorized by California Code of Civil Procedure section 1283.05 or any other discovery required by law in arbitration proceedings. Also, to the extent that any of the JAMS Employment Arbitration Rules and Procedures conflict with any arbitration procedures required by applicable law, the arbitration procedures required by applicable law shall govern. Executive agrees that nothing in this Section 13 relieves him or her from any obligation he or she may have to exhaust certain administrative remedies before arbitrating any claims or disputes under this Section 13.

          (c)    Remedy. Except as provided elsewhere in this Agreement, arbitration shall be the sole, exclusive and final remedy for any dispute between Executive and the Company. Accordingly, except as provided elsewhere in this Agreement, neither Executive nor the Company will be permitted to pursue court action regarding claims that are subject to arbitration. Notwithstanding, the arbitrator will not have the authority to disregard or refuse to enforce any lawful Company policy, and that the arbitrator shall not order or require the Company to adopt a policy not otherwise required by law which the Company has not adopted.

          (d)    Availability of Injunctive Relief. The parties agree that they shall have the right to seek judicial relief in the form of injunctive and/or other equitable relief under the California Arbitration Act, Code of Civil Procedure section 1281.8(b), including but not limited to relief for threatened or actual misappropriation of trade secrets, violation of this Agreement or the Confidentiality Agreement or any other agreement regarding trade secrets, confidential information, nonsolicitation or Labor Code §2870. In the event either party seeks injunctive relief, the prevailing party shall be entitled to recover reasonable costs and attorneys’ fees.

          (e)    Administrative Relief. Executive understands that this Agreement does not prohibit Executive from pursuing an administrative claim with a local, state or federal administrative body [such as the Department of Fair Employment and Housing, the Equal Employment Opportunity Commission or the workers’ compensation board. This Agreement, does, however, preclude Executive from pursuing court action regarding any such claim].⁶

          (f)    Voluntary Nature of Agreement. Executive acknowledges and agrees that Executive is executing this Agreement voluntarily and without any duress or undue influence by the Company or anyone else. Executive further acknowledges and agrees that Executive has carefully read this Agreement and that Executive has asked any questions needed for Executive to understand the terms, consequences and binding effect of this Agreement and fully understand it, including that Executive is waiving Executive’s right to a jury trial. Finally, Executive agrees that Executive has been provided an opportunity to seek the advice of an attorney of Executive’s choice before singing this Agreement.

⁶ Bracketed text is not included in the agreement with an officer based in Malaysia.

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     14.    Existing Agreements. This Agreement supersedes and replaces any prior severance or retention plans, employment agreements and offer letters that Executive may have entered into with the Company prior to the Effective Date.

     15.    Integration. This Agreement, Executive’s stock option and restricted stock agreements with the Company, and the Employee Invention, Authorship, Proprietary and Confidential Information Agreement by and between Executive and the Company represent the entire agreement and understanding between the parties as to the subject matter herein and supersede all prior or contemporaneous agreements whether written or oral. No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in writing and signed by duly authorized representatives of the parties hereto.

     16.    Tax Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable taxes.

     17.    409A Compliance. Because of the uncertainty of the application of Section 409A of the Code to any severance benefits to be paid or provided to Executive under this Agreement, Executive and the Company agree that if Treasury Regulations or other official guidance interpreting Section 409A of the Code would subject such benefits to Section 409A and require that such benefits be provided in a different form or manner to avoid the application of Section 409A, they shall agree in writing to a different form or manner of payment in order to avoid such application.⁷

     18.    Governing Law. This Agreement will be governed by the laws of the State of California (with the exception of its conflict of laws provisions.)

     19.    Acknowledgment. Executive acknowledges that he or she has had the opportunity to discuss this matter with and obtain advice from his or her private attorney, has had sufficient time to, and has carefully read and fully understands all the provisions of this Agreement, and is knowingly and voluntarily entering into this Agreement.

EXECUTIVE	KOMAG, INCORPORATED
	By
[NAME]
	Dated:

            Dated                                                                                

⁷ This paragraph is not included in the agreement with an officer based in Malaysia.

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EX-31.1

Exhibit 31.1

RULE 13a — 14 (a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Thian Hoo Tan, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Komag, Incorporated;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report fairly present, in all material respects, the financial condition and results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a — 15(e) and 15d — 15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a — 15 (f) and 15d — 15 (f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

DATE: November 7, 2005	BY:	/s/ Thian Hoo Tan
	Thian Hoo Tan
	Chief Executive Officer

EX-31.2

Exhibit 31.2

RULE 13a — 14 (a) CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Kathleen A. Bayless, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Komag, Incorporated;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report fairly present, in all material respects, the financial condition and results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a — 15(e) and 15d — 15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a — 15 (f) and 15d — 15 (f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

DATE: November 7, 2005	BY:	/s/ Kathleen A. Bayless
	Kathleen A. Bayless
	Chief Financial Officer

EX-32

Exhibit 32

SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

     I, Thian Hoo Tan, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Komag, Incorporated on Form 10-Q for the quarterly period ended October 2, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Komag, Incorporated.

BY:	/s/ Thian Hoo Tan
Thian Hoo Tan
Chief Executive Officer

     I, Kathleen A. Bayless, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Komag, Incorporated on Form 10-Q for the quarterly period ended October 2, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such 10-Q fairly presents in all material respects the financial condition and results of operations of Komag, Incorporated.

BY:	/s/ Kathleen A. Bayless
Kathleen A. Bayless
Chief Financial Officer

     This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by Komag, Incorporated for purposes of Section 18 of the Security Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to Komag, Incorporated and will be retained by Komag, Incorporated and furnished to the Securities and Exchange Commission or its staff upon request.