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 April 2, 2006
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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
           Large accelerated filer þ Accelerated filer o Non-accelerated filer 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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEEDING FIVE YEARS

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

     On April 2, 2006, 30,729,574 shares of the Registrant’s common stock, $0.01 par value, were issued and outstanding.

INDEX
KOMAG, INCORPORATED

	Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)		4
Condensed Consolidated Statements of Income — three months ended April 2, 2006 and April 3, 2005		4
Condensed Consolidated Balance Sheets — April 2, 2006 and January 1, 2006		5
Condensed Consolidated Statements of Cash Flows — three months ended April 2, 2006 and April 3, 2005.		6
Notes to Condensed Consolidated Financial Statements (Unaudited)		7-14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk		21
Item 4. Controls and Procedures		23
PART II. OTHER INFORMATION
Item 1A. Risk Factors		24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 6. Exhibits		39
SIGNATURES		40
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

2

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     This report contains forward-looking statements within the meaning of the United States (US) 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 (SEC). 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.

3

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

KOMAG, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)

	Three Months Ended
	April 2, 2006			April 3, 2005
Net sales	$	208,512		$	140,275
Cost of sales		149,419			105,212
Gross profit		59,093			35,063
Operating expenses:
Research, development, and engineering		15,075			11,155
Selling, general, and administrative		8,024			5,535
Gain on disposal of assets		(60	)		(389	)
		23,039			16,301
Operating income		36,054			18,762
Other income (expense):
Interest income		2,071			750
Interest expense		(441	)		(441	)
Other income (expense), net		(476	)		(28	)
		1,154			281
Income before income taxes		37,208			19,043
Provision for income taxes		971			516
Net income	$	36,237		$	18,527
Basic net income per share	$	1.22		$	0.66
Diluted net income per share	$	1.09		$	0.59
Number of shares used in basic per share computations		29,685			28,261
Number of shares used in diluted per share computations		33,499			32,313

See accompanying notes to condensed consolidated financial statements.

4

KOMAG, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)

	April 2, 2006			January 1, 2006
ASSETS
Current assets
Cash and cash equivalents	$	105,989		$	99,984
Short-term investments		85,000			105,050
Accounts receivable (less allowances of $1,978 and $2,866, respectively)		119,462			116,217
Inventories		72,517			54,000
Prepaid expenses and deposits		1,418			1,846
Total current assets		384,386			377,097
Property, plant, and equipment, net		439,247			351,046
Other assets		3,291			3,308
	$	826,924		$	731,451
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Trade accounts payable	$	143,557		$	97,901
Customer advances		122,540			102,898
Accrued expenses and other liabilities		16,880			28,585
Total current liabilities		282,977			229,384
Long-term debt		80,500			80,500
Deferred rent		2,694			2,562
Total liabilities		366,171			312,446
Stockholders’ equity
Common stock, $0.01 par value per share:
Authorized - 50,000 shares
Issued and outstanding - 30,730 and 30,092 shares, respectively		307			301
Additional paid-in capital		263,741			267,920
Deferred stock-based compensation		—			(9,695	)
Accumulated other comprehensive loss		(645	)		(634	)
Retained earnings		197,350			161,113
Total stockholders’ equity		460,753			419,005
	$	826,924		$	731,451

See accompanying notes to condensed consolidated financial statements.

5

KOMAG, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Three Months Ended
	April 2, 2006			April 3, 2005
Operating Activities
Net income	$	36,237		$	18,527
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, plant, and equipment		14,476			10,100
Tax provision charged to additional paid-in capital		810			297
Amortization and adjustments of intangible assets		44			942
Stock-based compensation		3,536			841
Deferred rent		132			640
Non-cash interest charges		38			38
Gain on disposal of assets		(60	)		(389	)
Changes in operating assets and liabilities:
Accounts receivable, net		(3,245	)		(6,442	)
Inventories		(18,517	)		(6,167	)
Prepaid expenses and deposits		428			984
Trade accounts payable		16,767			12,771
Customer advances		19,642			—
Accrued expenses and other liabilities		(11,555	)		(5,733	)
Net cash provided by operating activities		58,733			26,409
Investing Activities
Acquisition of property, plant, and equipment		(73,988	)		(16,615	)
Purchases of short-term investments		(36,850	)		(67,150	)
Proceeds from sales and maturities of short-term investments		56,900			60,150
Proceeds from disposal of property, plant, and equipment		99			443
Other		(65	)		—
Net cash used in investing activities		(53,904	)		(23,172	)
Financing Activities
Repurchase of common stock		(1,049	)		—
Proceeds from sale of common stock		2,225			2,164
Net cash provided by financing activities		1,176			2,164
Increase in cash and cash equivalents		6,005			5,401
Cash and cash equivalents at beginning of period		99,984			26,410
Cash and cash equivalents at end of period	$	105,989		$	31,811

See accompanying notes to condensed consolidated financial statements.

6

KOMAG, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

APRIL 2, 2006

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

     The accompanying unaudited condensed consolidated financial statements include the accounts of Komag, Incorporated (the Company), a Delaware corporation, and its wholly-owned subsidiaries. These financial statements have been prepared in accordance with United States of America (US) generally accepted accounting principles 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 US generally accepted accounting principles. 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 three months ended April 2, 2006, are not necessarily indicative of the results that may be expected for the year ending December 31, 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 1, 2006, 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 US 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 2006 fiscal year will include 52 weeks. The three-month reporting periods included in this report include 13 weeks.

     Cash and Cash Equivalents: The Company considers as a cash equivalent any bank deposit, money market investment, and any highly-liquid investment that has an original maturity at the date of purchase of three months or less.

     Short-Term Investments: The Company invests its excess cash in high-quality, short-term debt instruments and auction rate preferred securities. At April 2, 2006, all short-term investments are designated as available for sale. Interest and dividends on the investments are included in interest income. The costs of the Company’s investments approximate fair value; accordingly, there were no realized gains or losses.

7

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

	April 2, 2006		January 1, 2006
Raw materials	$	58,885	$	39,230
Work in process		7,811		6,489
Finished goods		5,821		8,281
	$	72,517	$	54,000

     Computation of Net Income Per Share: The Company determines net income per share in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share.

     Basic net income per common share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income 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. The dilutive effect of outstanding contingently convertible debt is reflected in diluted net income per share by application of the if-converted method. Interest expense related to the contingently convertible debt is an adjustment to net income for the diluted net income per share calculations.

8

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

	Three Months Ended
	April 2, 2006		April 3, 2005
Numerator for basic net income per share:
Net income as reported	$	36,237	$	18,527
Numerator for diluted net income per share:
Net income as reported	$	36,237	$	18,527
Interest adjustment related to contigently convertible debt		441		441
	$	36,678	$	18,968
Denominator for basic net income per share:
Weighted average shares outstanding		29,685		28,261
Denominator for diluted net income per share:
Weighted average shares		29,685		28,261
Effect of dilutive securities:
Contingently convertible shares under convertible debt		3,049		3,049
Stock options		473		522
Warrants		—		460
Stock purchase rights		292		21
		33,499		32,313
Basic net income per share	$	1.22	$	0.66
Diluted net income per share	$	1.09	$	0.59

     Recent Accounting Pronouncements: In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, Inventory Costs (SFAS 151). SFAS 151 clarifies the accounting for inventory when there are 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 Company adopted this pronouncement beginning in fiscal year 2006. The adoption of SFAS 151 had no 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 154). SFAS 154 replaces APB No. 20 and FASB Statement No. 3. SFAS 154 provides guidance on the accounting for

9

and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS 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 154. The Company adopted this pronouncement beginning in fiscal year 2006. The adoption of SFAS 154 had no material effect on the Company’s financial position or results of operations.

Note 2. Stock-Based Compensation

Change in Accounting Principle

     Effective January 2, 2006, the Company adopted SFAS No. 123R, Share-Based Payment (SFAS 123R) using the modified prospective method, in which compensation cost is recognized based on the requirements of SFAS 123R for (a) all share-based payments granted or modified after the effective date and (b) for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date.

     As permitted under SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), the Company elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for stock-based awards to employees through January 1, 2006. Accordingly, compensation cost for stock options and stock purchase rights was measured as the excess, if any, of the market price of the Company’s common stock at the date of grant over the exercise price. Stock-based compensation expense related to stock options issued and stock purchase rights amounted to approximately $3.5 million and $0.8 million for the three months ended April 2, 2006 and April 3, 2005, respectively.

     The Company elected to amortize stock-based compensation for awards outstanding and unvested on its adoption of SFAS 123R as well as for awards granted on or after its adoption of SFAS 123R on a ratable basis over the requisite service (vesting) period for the entire award. The vesting period for stock options has generally been four years and the vesting for stock purchase rights generally has been three years.

Plan Description

     The 2002 Qualified Stock Plan (the 2002 Stock Plan) provides for the grant of incentive stock options to the Company’s employees, and for the grant of non-statutory stock options, stock purchase rights, stock appreciation rights, performance shares and performance units to the Company’s employees, directors, and consultants. The term for stock options granted may not exceed 10 years.

     As of April 2, 2006, the Company had authorized a total of 4,242,054 shares of its common stock for issuance under the 2002 Stock Plan. As of April 2, 2006, the Company had a net balance of 838,701 shares of the Company’s common stock reserved for issuance under the 2002 Stock Plan. Of the 838,701 shares reserved for future issuance under the 2002 Stock Plan, 29,833 shares are for stock purchase rights deferred under a deferred compensation plan, 679,812 shares are for the exercise of outstanding stock options, and 129,056 shares are for

10

future grants of stock options and stock purchase rights.

Summary of Assumptions and Activity

     The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the assumptions noted below. There were no option grants in the first three months of 2006. The following assumptions were used to estimate the fair value of option grants in the first three months of 2005: risk-free interest rate of 4.04%, expected volatility of the market price of the Company’s common stock of 71.8%, no dividend yield, and a weighted-average expected life of 4.0 years. The weighted-average fair value of options granted during the first three months of 2005 was $11.43 per share.

     The following table sets forth a summary of option activity for the first quarter of 2006:

						Weighted-average
						Remaining		Aggregate
				Weighted-average		Contractual		Intrinsic
	Shares			Exercise Price		Term		Value
				(per share)		(years)
Outstanding at January 1, 2006		868,853		$	12.99
Granted		—			—
Exercised		(188,434	)	$	11.79
Cancelled		(607	)	$	13.41
Outstanding at April 2, 2006		679,812		$	13.33		7.58	$	23,297,419
Exercisable at April 2, 2006		295,224		$	12.12		7.39	$	10,474,866

     The total intrinsic value of options exercised during the three months ended April 2, 2006 and April 3, 2005 was $6.6 million and $1.9 million, respectively. Upon the exercise of options, the Company issues new common stock from its authorized shares.

11

     The following table sets forth a summary of the Company’s stock purchase rights for the three months ended April 2, 2006:

				Weighted-average
				Grant Date
	Shares			Fair Value
				(per share)
Outstanding at January 1, 2006		573,201		$	22.34
Granted		473,374			46.76
Vested		(145,437	)		20.65
Cancelled		(1,814	)		30.98
Outstanding at April 2, 2006		899,324		$	35.45

     In the first three months of 2006, the Company recorded $1.6 million of stock-based compensation expense related to stock purchase rights. The cumulative effect of adopting SFAS 123R related to applying an estimated forfeiture rate to unvested stock purchase rights outstanding on the date of adoption was a $0.2 million credit, which was credited to cost of sales, research, development, and engineering expenses, and selling, general, and administrative expenses. The Company determines the fair value of stock purchase rights based on the Nasdaq closing stock price on the date of grant. Compensation expense related to stock purchase rights is amortized on a ratable basis over the vesting period of 36 months.

     As of April 2, 2006, there was approximately $33.8 million of total unrecognized compensation cost related to employee and director stock-based compensation arrangements. The cost is expected to be recognized on a ratable basis over the remaining vesting period of the stock-based awards which have a weighted average remaining vesting period of 1.37 years. The total fair value of stock-based awards vested during the quarter ended April 2, 2006 was approximately $3.8 million.

     As a result of adopting SFAS 123R on January 2, 2006, the Company’s income before provision for income taxes, and net income for the three months ended April 2, 2006, were approximately $1.0 million and $0.9 million lower, respectively, than if it had continued to account for share-based compensation under APB Opinion No. 25. Basic and diluted net income per share for the three months ended April 2, 2006 were approximately $0.02 and $0.03 lower, respectively, due to the adoption of SFAS 123R.

     During the first quarter of 2006, the Company announced the anticipated retirement of its Chief Executive Officer (CEO) later in 2006. Certain agreements were entered into with the CEO as a result of the anticipated retirement. The agreements were filed as exhibits to the Form 10-K filed for the year ended January 1, 2006. Under the agreements, the vesting of certain stock options and stock purchase rights will be accelerated in connection with the CEO’s retirement. The Company recorded an additional $1.0 million of stock-based compensation expense in the first quarter of 2006 related to the modification of the CEO’s stock options and stock purchase rights.

     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, prior to

12

fiscal 2006, the Company provided 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.

     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 for the first quarter of 2005. The table is in thousands, except per share data.

	Three
	Months
	Ended
	April 3, 2005
Net income, as reported	$	18,527
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		841
Deduct: Stock-based compensation expense determined under the fair value method for all awards, net of related tax effects		(1,566	)
Pro forma net income	$	17,802
Net income per share:
Basic — as reported	$	0.66
Diluted — as reported	$	0.59
Basic — pro forma	$	0.63
Diluted — pro forma	$	0.56

Note 3. Concentration of Customer, Supplier, and Geographic Risk

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

	Three Months Ended
	April 2, 2006			April 3, 2005
Western Digital Corporation		35	%		19	%
Hitachi Global Storage Technologies (1)		22	%		25	%
Maxtor Corporation		21	%		35	%
Seagate Technology		18	%		16	%

(1) Includes sales to Hitachi Global Storage Technologies’ contract manufacturer, Excelstor

     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,

13

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 $407.1 million as of April 2, 2006, and $319.6 million as of January 1, 2006. The majority of the Company’s sales is delivered to manufacturing facilities located in Asia.

Note 4. Accrued Expenses and Other Liabilities

     The following table (in thousands) summarizes accrued expenses and other liabilities balances at April 2, 2006 and January 1, 2006:

	April 2, 2006		January 1, 2006
Accrued compensation and benefits	$	14,384	$	24,986
Other liabilities		2,496		3,599
	$	16,880	$	28,585

Note 5. Customer Advances

     The Company entered into supply agreements, including certain amendments to these agreements, with three major customers in 2005, and another major customer in the first quarter of 2006. 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 required to pay certain advances covering future purchases of media from the Company. The customer advances, which totaled $122.5 million and $102.9 million as of April 2, 2006 and January 1, 2006, respectively, are to be repaid to the customers via a credit of a specified dollar amount per disk on future sales.

14

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 2006; our expectation that our revenues will increase by 5% to 10% in the second quarter of 2006 compared to the first quarter of 2006; 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 35 million disks a quarter by the second quarter of 2006, and to 43 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.

15

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.

     Due to continuing strong customer demand and supply agreements entered into with each of our four major customers in 2005 and 2006, we increased our capacity to approximately 32 million disks a quarter by the end of the first quarter of 2006. We are currently in the process of expanding our capacity to 35 million disks a quarter, which we plan to achieve in the second quarter of 2006. We expect to expand further our capacity and exit the fourth quarter of 2006 with a capacity of 43 million disks a quarter. If we are unable to utilize our expanded capacity, we may be unable to increase or sustain our gross margins.

     A majority of our revenue, expense, and capital purchasing activities is transacted in US 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). In July 2005, Malaysia removed its currency peg to the US 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.

16

     The following discussion compares the results of operations for the first quarter ended April 2, 2006, to the results of operations for the first quarter ended April 3, 2005. To facilitate an understanding of this discussion, we have provided the following table. The table (in thousands) reflects income statement components for the first quarters of 2006 and 2005, and also reflects income statement components as a percentage of net sales.

	Three Months Ended
	April 2, 2006					April 3, 2005
Net sales	$	208,512		100.0	%	$	140,275		100.0	%
Cost of sales		149,419		71.7	%		105,212		75.0	%
Gross profit		59,093		28.3	%		35,063		25.0	%
Research, development, and engineering expense		15,075		7.2	%		11,155		8.0	%
Selling, general, and administrative expense		8,024		3.8	%		5,535		3.9	%
Gain on disposal of assets		(60	)	(0.0	%)		(389	)	(0.3	%)
Interest income		(2,071	)	(1.0	%)		(750	)	(0.5	%)
Interest expense		441		0.2	%		441		0.3	%
Other expense, net		476		0.2	%		28		0.0	%
Provision for income taxes		971		0.5	%		516		0.4	%
Net income	$	36,237		17.4	%	$	18,527		13.2	%

Net Sales

     Consolidated net sales in the first quarter of 2006 were $208.5 million, a 48.6% increase compared to $140.3 million in the first quarter of 2005. Our finished unit sales volume increased to 31.9 million units in the first quarter of 2006 from 22.2 million in the first quarter of 2005. The increase in consolidated net sales primarily reflected the increase in our sales volume due to higher demand in the industry. Our average selling price increased slightly in the first quarter of 2006 compared to the first quarter of 2005.

     Other disk sales, which generally include single-side disks, aluminum substrate disks, plated disks, textured disks, and polished disks, were $25.8 million in the first quarter of 2006, compared to $17.4 million in the first quarter of 2005. The increase reflected higher sales of textured disks and polished disks. The increase in other disk sales was related to higher customer demand. Disk substrate sales vary from period to period based on customer requirements.

     Finished disk shipments for desktop and consumer applications together represented 93% of our unit shipment volume in the first quarter of 2006 compared to 94% in the first quarter of 2005. The remaining finished disk shipments in the first quarter of 2006 and 2005 were for enterprise drives. Sales of 100GB and above per platter disks increased to 31% of net sales in the first quarter of 2006, compared to 18% in the first quarter of 2005.

     In the first quarter of 2006, sales to Western Digital Corporation (Western Digital), Hitachi Global Storage Technologies (HGST) (including sales to HGST’s contract manufacturer, Excelstor), Maxtor Corporation (Maxtor), and Seagate Technology (Seagate), accounted for 35%, 22%, 21%, and 18%, respectively, of our total net sales. In the first quarter of 2005, sales to Western Digital, HGST, Maxtor, and Seagate accounted for 19%, 25%, 35%, and

17

16%, respectively, of our total net sales. Our sales are concentrated among a few customers. We expect to continue to derive a substantial portion of our sales from these customers, and from a small number of other customers. In December 2005, Seagate and Maxtor announced that they entered into a definitive agreement under which Seagate will acquire Maxtor. The transaction is expected to be completed as early as May 2006.

     We entered into supply agreements, including certain amendments to these agreements, with Western Digital, Maxtor and Seagate in 2005, and with HGST in the first quarter of 2006. Each agreement requires that we supply, and the customer purchase, certain specified media volumes, and that we supply media from existing and new production capacity to meet such purchase requirements, subject to certain exceptions. Under the supply agreements, these customers are required to pay certain advances covering future purchases of media from the Company. The customer advances, which totaled $122.5 million and $102.9 million as of April 2, 2006 and January 1, 2006, respectively, are to be repaid to the customers via a credit of a specified dollar amount per disk on future sales.

     Based on continuing strong market demand, we expect total net sales for the second quarter to increase by 5% to 10% from the first quarter of 2006. This level of total net sales reflects current continuing strong demand for finished disks, as well as demand for our substrates.

Gross Profit

     Our gross profit percentage increased 3.3 percentage points to 28.3% for the first quarter of 2006, compared to 25.0% for the first quarter of 2005. In the first quarter of 2006, there was a positive gross profit impact of 2.5 percentage points due to a higher average selling price and a 0.8 percentage point increase due to lower costs per unit.

Research, Development, and Engineering Expenses

     Research, development and engineering (R&D) expenses in the first quarter of 2006 were $15.1 million compared to $11.2 million in the first quarter of 2005. The increase primarily reflects higher headcount and related compensation expense.

Selling, General, and Administrative Expenses

     Selling, general, and administrative (SG&A) expenses of $8.0 million in the first quarter of 2006 were $2.5 million higher than the $5.5 million incurred in the first quarter of 2005. The increase primarily reflected higher stock compensation expense of $1.5 million, higher incentive compensation of $0.5 million, and higher headcount and related compensation expense of $0.5 million. The higher stock compensation is primarily due to an additional $1.0 million of stock-based compensation expense in the first quarter of 2006 related to the modification of stock options and stock purchase rights for our Chief Executive Officer (CEO). During the first quarter of 2006, we announced the anticipated retirement of our CEO later in 2006. Certain agreements were entered into with the CEO as a result of the anticipated retirement. The agreements were filed as exhibits to the Form 10-K filed for the year ended January 1, 2006. Under the agreements, the vesting of certain stock options and stock purchase rights will be accelerated in connection with the CEO’s retirement.

18

Interest Expense

     Interest expense reflected interest on our $80.5 million, 2% convertible subordinated notes, which were issued on January 28, 2004.

Other income (expense), net

     Other income (expense), net primarily consists of foreign currency gains and losses.

Tax provision

     Our tax provision for the three months ended April 2, 2006 is based on our annual effective tax rate of 2.6% in accordance with SFAS No. 109, Accounting for Income Taxes. We currently have separate tax holidays at our different manufacturing facilities located in Malaysia which continue through 2006 and a new ten year tax holiday begins in January 2007 through 2016 which covers all of our manufacturing facilities in Malaysia.

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 US generally accepted accounting principles. We regularly evaluate our estimates, including those related to our net sales, 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 been historically, which could result in significant changes in future returns. Since estimated sales returns are recorded as a reduction in net sales, any significant difference between our estimated and actual experience or changes in our estimate would be reflected in our reported net sales in the period we determine that difference. There were no significant changes from the prior quarter estimates in the first three months of 2006.

Inventory Obsolescence

     Our policy is to provide for inventory obsolescence based upon an estimated obsolescence percentage

19

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 the prior quarter estimates in the first three months of 2006.

Liquidity and Capital Resources

     As of April 2, 2006, we had $191.0 million in cash, cash equivalents, and short-term investments, which reflected a $14.0 million decrease during the quarter. This decrease primarily reflected $74.0 million of spending on property, plant, and equipment, offset by a $58.7 million increase resulting from consolidated operating activities, and $1.2 million in net proceeds from sales of common stock under our stock incentive plans.

     In July 2005, Malaysia removed its currency peg to the US dollar in favor of a managed float system. As of April 2, 2006, we held approximately $36.0 million (Malaysian ringgit 132.1 million) of cash and cash equivalents that were denominated in Malaysian ringgit.

     Consolidated operating activities generated $58.7 million in cash in the first three months of 2006. The primary components of this amount include the following:

• net income of $36.2 million, net of non-cash depreciation and amortization of property, plant and equipment of $14.5 million and other net non-cash charges of $4.5 million;

• an accounts receivable increase of $3.2 million, which reflected an increase in sales during the first quarter of 2006 compared to fourth quarter of 2005;

• an inventory increase of $18.5 million, which primarily reflected increased inventory to support increased production and sales volumes;

• an accounts payable increase of $16.8 million, which primarily reflected increased inventory and higher capital spending; and

• an accrued expenses and other liabilities increase of $8.1 million, which primarily reflected a net increase in customer advances, offset by payments of incentive compensation accruals.

     Our total capital spending in the first three months of 2006 was $102.9 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. For the remainder of 2006, we plan to spend approximately $200.0 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

20

specified corporate transactions (as described in the offering prospectus for the Notes) occur. As of April 2, 2006, the Notes were 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 $3.4 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 April 2, 2006, there were no liabilities outstanding related to this bank guarantee.

     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.

     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 April 2, 2006, our long-term debt obligations, operating lease obligations, and unconditional purchase obligations were as follows (in thousands):

	Remainder
	of
	2006		2007		2008		2009		2010		Thereafter		Total
Long-Term Debt Obligations	$	—	$	—	$	—	$	—	$	—	$	80,500	$	80,500
Operating Lease Obligations		2,078		2,203		2,051		3,154		3,146		13,241		25,873
Unconditional Purchase Obligations (1)		6,594		1,225		1,184		1,184		1,184		2,075		13,446
Total Contractual Cash Obligations	$	8,672	$	3,428	$	3,235	$	4,338	$	4,330	$	95,816	$	119,819

(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.

     As of April 2, 2006, we had approximately $5.6 million of non-cancelable capital commitments. This amount is included in the table above under Unconditional Purchase Obligations.

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

21

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 US 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 US dollar has been pegged at 3.8 ringgits to one US dollar by the Malaysian government. In July 2005, Malaysia removed its currency peg to the US 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 three months of 2006, our spending on payroll, manufacturing and operating expenses, and raw materials and capital purchases that were denominated in ringgit was approximately $89.5 million. Additionally, in the first three months of 2006, we paid approximately $23.4 million denominated in Malaysian ringgit to a Malaysian supplier for raw materials purchases, 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 April 2, 2006, we held approximately $36.0 million (Malaysian ringgit 132.1 million) of cash and cash equivalents that were denominated in Malaysian ringgit. We currently do not hedge the exposure to fluctuations in the Malaysian ringgit.

     In September 2005, we began to hedge some of our foreign currency risk related to anticipated equipment purchases denominated in Japanese yen by entering into foreign exchange forward contracts that generally have maturities of 12 months or less. The Company has designated these foreign exchange forward contracts as a cash flow hedge in accordance with SFAS No. 133. 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 April 2, 2006, we had foreign exchange contracts to purchase approximately $3.5 million of Japanese yen. The fair value of our forward contracts was recorded as a $0.2 million other current liability as of April 2, 2006.

     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.

     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.

22

     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 April 2, 2006, 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.

Changes in Internal Control Over Financial Reporting

     There has been no change in our internal control over financial reporting during our first fiscal quarter ended April 2, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

23

Limitations on the Effectiveness of Controls

     Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected.

PART II. OTHER INFORMATION

ITEM 1A. 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 investors may lose part or all of their 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 consumer 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. Historically, it has been 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, productivity improvement and increases in supply. In addition, intense price competition among personal computer manufacturers also tends to cause the average selling price of a disk drive to decline even further.

     The effect of these cycles on suppliers historically 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. Further, 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

24

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 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 chance that our revenues and margins could be lower than the expectations of investors and analysts, which could make our stock price more volatile.

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. In the first quarter of 2006, we had a manufacturing capacity of approximately 32 million units per quarter and expect to increase our capacity to approximately 43 million units per quarter by the end of 2006. We are expanding our capacity as a result of commitments we have made to each of our four major 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 fully our additional capacity. In addition, the high 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. 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.

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. Because of our small customer base, the loss of any one significant customer could have a materially adverse impact on our business operations. A relatively small number of disk drive manufacturers dominates the disk drive market. In addition, we anticipate that Seagate’s proposed acquisition of Maxtor would make the combined Seagate-Maxtor company the largest disk drive manufacturer in the industry. We expect that the success of our business will continue to depend on a limited number of customers. In the first quarter of 2006, 35% of our total net sales were to Western Digital, 22% were to HGST, 21% were to Maxtor, and 18% were to Seagate. If the

25

combined Seagate-Maxtor company or any one of our other significant customers reduces its disk requirements, cancels existing orders, develops or expands capacity to produce its own disks, or requires us to reduce our prices before we are able to reduce costs, 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. Any further mergers, acquisitions, consolidations, or other significant transactions involving our significant customers may adversely affect our business and operating results.

     In addition, 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.

The proposed Seagate acquisition of Maxtor will reduce our total number of significant customers, which may result in reduced sales and thereby adversely affect our business, revenues and operating results.

     In December 2005, two of our major customers, Seagate and Maxtor, announced that they entered into a definitive agreement under which Seagate will acquire Maxtor. The transaction is expected to be completed as early as May 2006, subject to obtaining shareholder approvals and customary regulatory approvals. Until the closing, Seagate and Maxtor will continue to operate as separate businesses. Upon closing of the proposed merger, we anticipate that the combined Seagate-Maxtor company will be the largest disk drive manufacturer in the industry. Since each of Seagate and Maxtor are currently two of our largest customers, the anticipated merger will reduce our total number of customers. We cannot forecast with any certainty the impact that Seagate’s proposed acquisition of Maxtor may have on our business, revenues, and operating results. We face high levels of competition for customers in the disk industry, and the merger and consolidation of two of our significant customers may further reduce our bargaining power, result in reduced demand for our products, lead to downward pricing pressure, and otherwise negatively impact our revenues. The combined Seagate-Maxtor company may have greater financial resources and greater technical and manufacturing resources than Seagate and Maxtor have as stand-alone companies.

     In addition, there can be no assurance that the proposed merger will be successfully completed in a timely manner without disruption to their business operations, or that the combined company will maintain each of Seagate’s and Maxtor’s prior purchasing levels of our products. In addition, the new combined company may impose new product requirements, modifications and demands on us as they seek to maximize their post-merger operational efficiencies and economies of scale. If we fail to mitigate the effects of these risks and pressures, and successfully serve the evolving customer requirements of the combined Seagate-Maxtor company, our business and operations would be adversely affected.

Our agreements with each of our major customers require us to meet certain production volumes, 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.

26

     We have entered into strategic supply agreements with each of our major customers that require us to meet certain production 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. 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.

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 qualified 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. We also rely on Heraeus Incorporated, for a substantial quantity of our sputtering target requirements, and on OMG Fidelity, Inc. for supplies of nickel plating solutions. As a result of increased worldwide demand, the supply of sputtering target materials has been constrained over the past year, and has recently intensified, resulting in longer lead times and product allocation from certain target suppliers. 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 be assured that we will be able to obtain adequate supplies of critical materials and equipment in a timely and economic manner, or at all. The success of our products also depends on our ability to effectively integrate materials that use leading-edge technology. If we are unable to successfully manage the integration of materials obtained from third party suppliers, 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. 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 greater technical and manufacturing resources, more marketing power, and a broader array of products. 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, develop new

27

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. 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. 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. 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.

If we are not able to attract and retain key personnel, including a successor Chief Executive Officer for our company, our business and 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. In February 2006, our Chief Executive Officer, Thian Hoo Tan, announced his intention to retire as an officer and director of the Company later in 2006. We have started an executive search for a successor. This search has been initiated as part of our succession planning, and will include both internal and external candidates. There is no guarantee that we will find a suitable and qualified successor to Mr. Tan in a timely manner, and even if a successor is hired, we may not be able to successfully retain such person for an extended period of time, which could adversely affect our business. 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 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. We are in the process of significantly expanding our production capacity to approximately 43 million units per quarter by the end of 2006 from approximately 32 million units per quarter for the first quarter of 2006. We have in the past, and may in the future, experience periods of underutilized capacity. For example, 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. 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

28

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.

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

     Disk drive manufacturers such as HGST, Maxtor, and Seagate have large internal thin-film media manufacturing operations, and are able to produce a substantial percentage of their disk requirements. We compete directly with these internal operations when we market our products to these disk drive companies, and 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 are in Malaysia and our foreign operations and international sales subject us to additional risks inherent in doing business on an international level that could make it more costly and difficult to conduct our business.

     Our manufacturing operations are consolidated in Malaysia. As a result, technology developed at our US-based research and development center must be first implemented for high-volume production at our Malaysian facilities. Therefore, we rely heavily on electronic communications between our US 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 US operations, the manufacture and shipment of our products would be delayed, and our results of operations would suffer. In addition, a tsunami, flood, earthquake, political instability, act of terrorism or other disaster or condition that adversely affects our facilities or ability to manufacture our products could significantly harm our business, financial condition and operating results.

     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 seven years, the exchange rate between the ringgit and the US dollar was pegged at 3.8 ringgits to one US dollar by the Malaysian government. In July 2005, Malaysia removed its currency peg to the US 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 quarter of 2006, our spending on payroll, manufacturing, and operating expenses, and raw materials and capital purchases that were denominated in ringgit was approximately $89.5 million. Additionally, in the first quarter of 2006, we paid approximately $23.4 million US

29

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 US is subject to Malaysian rules and regulations.

     There are a number of other risks associated with conducting business outside of the US. Our Malaysian operations account for substantially all of our net sales. Our sales are primarily made to Asian customers, including the foreign subsidiaries of domestic disk drive companies. 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;

• 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.

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.

     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.

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. Customization has increased the risk of product obsolescence, and as a result, supply chain management, including just-in-time delivery, has become a standard industry practice. In order to sustain customer relationships and sustain profitability, we must be able to develop new products and technologies in a timely fashion in order to help customers reduce

30

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. The success of any new product introduction is dependent on a number of factors, including market acceptance, our ability to manage the risks associated with product transitions, and the risk that a new product will have quality problems or other defects in the early stages of introduction that were not anticipated in the design of such product. 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. The continuing need for high-capacity disk drives requires disks with higher storage capacity. Higher storage capacity on the surface of a disk is achieved by increasing its areal density. Areal density 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 synthetic anti-ferromagnetically coupled layers and perpendicular magnetic recording, 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 US-based research and development center to our Malaysian manufacturing operations.

     If we cannot advance our process technologies or do not successfully transfer those advanced technologies at high yields to our Malaysian operations, or if technologies that we have chosen not to develop prove to be viable competitive alternatives, we would not be able to compete effectively. As a result, we would lose market share and face increased price competition from other manufacturers, and our operating results would suffer.

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

     The manufacture of our products requires a tightly-controlled, multi-stage process, and the use of high-quality materials. Efficient production of our products requires utilization of advanced manufacturing techniques and clean room facilities. Disk fabrication occurs in a highly controlled, clean environment to minimize particles and other yield-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.

31

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, enterprise applications, and high-capacity consumer 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 do not protect our patents and other intellectual property rights, our net sales 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 net sales and harm our operating results.

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

     We have occasionally received, and may receive in the future, communications from third parties that assert violation of intellectual property rights alleged to cover certain of our products or manufacturing processes or equipment. We evaluate on a case-by-case basis whether it would be necessary to defend against such claims or to seek licenses to the rights referred to in such communications. 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

32

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;

• actions by our competitors, including announcements of new products or technological innovations;

• availability of disks versus demand for disks;

• the cyclical nature of the disk drive industry;

• our ability to develop and implement new and efficient manufacturing process technologies;

• increases in our production and engineering costs associated with initial design and production of new product programs;

• our ability to execute future product development and production ramps effectively;

• fluctuations in exchange rates, particularly between the US 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

• 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.

33

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.

     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

34

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.

     Even if we are in compliance in all material respects with all present environmental regulations, it is often difficult to estimate the future impact of environmental matters, including potential liabilities. If we have to make significant capital expenditures or pay significant expense in connection with remedial actions or to continue to comply with applicable environmental laws, our business, financial condition and operating results could suffer. 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.

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

     Our US 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.

35

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 that, among other things, 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:

• 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.

36

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 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.

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.

37

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) The following table provides information about the repurchase of our common stock during the quarter ended April 2, 2006:

					Total
					Number of
					Shares		Maximum Number
					Purchased		(or Approximate
					as Part of		Dollar Value)
	Total		Average		Publicly		of Shares
	Number of		Price		Announced		that May Yet Be
	Shares		Paid per		Plans or		Purchased under the
Period	Purchased (1)		Share		Programs		Plans or Programs
January 2 to January 29		—		—		—		—
January 30 to February 26		22,165	$	46.76		—		—
February 27 to April 2		268	$	49.16		—		—
Total		22,433	$	46.76		—		—

(1) Shares repurchased from certain of our officers pursuant to net share tax settlement transactions upon the vesting of shares of restricted common stock held by such officers.

38

ITEM 6. Exhibits

10.1	Volume Purchase Agreement dated March 31, 2006 between Hitachi Global Storage Technologies Singapore Pte., Ltd. And Komag USA (Malaysia) Sdn., and Komag, Incorporated.*
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, furnished herewith

* 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.

39

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: May 3, 2006	BY:	/s/ Thian Hoo Tan
	Thian Hoo Tan
	Chief Executive Officer
	Komag, Incorporated
DATE: May 3, 2006	BY:	/s/ Kathleen A. Bayless
	Kathleen A. Bayless
	Senior Vice President, Chief Financial Officer
	Komag, Incorporated

40

EXHIBIT INDEX

10.1	Volume Purchase Agreement dated March 31, 2006 between Hitachi Global Storage Technologies Singapore Pte., Ltd. And Komag USA (Malaysia) Sdn., and Komag, Incorporated.*
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, furnished herewith

* 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

EX-10.1

Exhibit 10.1

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

VOLUME PURCHASE AGREEMENT

     This Volume Purchase Agreement (“VPA”), dated as of March 31, 2006 (the “Effective Date”), is made by and between Komag USA (Malaysia) Sdn., a Malaysia unlimited liability company (“Komag”), Komag, Incorporated, a Delaware Corporation (“Komag Inc.”), and Hitachi Global Storage Technologies Singapore Pte., Ltd., a Singapore corporation (“HITACHI GST”).

BACKGROUND

     A. HITACHI GST (and/or its Affiliates) desires to purchase certain Media Products in accordance with the terms of this VPA.

     B. Komag desires to sell to HITACHI GST (and/or its Affiliates) certain Media Products in accordance with the terms of this VPA.

     NOW THEREFORE, for and in consideration of the covenants, conditions, and undertakings hereinafter set forth, the parties agree as follows:

ARTICLE 1: DEFINITIONS

     For the purposes of this VPA, unless the context otherwise requires, the following terms will have the respective meanings set out below and grammatical variations of such terms will have corresponding meanings:

     1.1 [Intentionally Omitted]

     1.2 “Affiliate” of a party means any entity that directly or indirectly controls, is under common control with, or is controlled by, such party. As used in this definition, “control” means possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through beneficial ownership of securities or other ownership interests, by contract or otherwise).

     1.3 [Intentionally Omitted]

     1.4 “Component” means a component of a HITACHI GST product.

     1.5 [Intentionally Omitted]

     1.6 “Days” means consecutive calendar days.

     1.7 “Defect” has the meaning set forth in Section 5.5.1.

1

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

     1.8 “Delivery Date” or “Scheduled Delivery Date” means the date of delivery of Products as specified in Pull Requests.

     1.9 [Intentionally Omitted]

     1.10 “Disentanglement” has the meaning set forth in Section 9.4.1.

     1.11 “Effective Date” has the meaning set forth in the opening paragraph of this VPA.

     1.12 [Intentionally Omitted]

     1.13 “Exhibit” means an attachment to this VPA that is referenced in Section 2.4. Exhibits are incorporated herein by reference thereto.

     1.14 “FGI” has the meaning set forth in Section 5.1.

     1.15 “First Executive Conference” has the meaning set forth in Section 12.4.

     1.16 “Force Majeure Event” means an act of nature, civil disruption, power outage, public enemy, government action, or freight embargo beyond the control of a party.

     1.17 “HDDs” means hard disk drives.

     1.18 “Initial Term” has the meaning set forth in Section 9.1.

     1.19 “JIT Hubs” has the meaning set forth in Section 5.3.

     1.20 “Komag Group” means Komag Inc. and all of its subsidiaries.

     1.21 “Komag Shortfall” has the meaning set forth in Section 4.3.2.

     1.22 “Komag Shortfall Remedy Trigger” has the meaning set forth in Section 4.3.3.

     1.23 “Lead Time” means, for purposes of this VPA, the minimum length of time prior to a specific Delivery Date that Komag must receive a Pull Request to ensure delivery by such date, not to exceed 8 hours.

     1.24 [Intentionally Omitted]

     1.25 “Material Default” shall mean the occurrence of any of the following, provided that in the event any of the following conditions are cured within the time periods set forth therein, then no Material Default shall have occurred:

          1.25.1 Failure of Komag to deliver (subject to the conditions and requirements of Sections 4.3.2 and 6.7) in a given Quarter the Purchase Requirements during the applicable Quarter, or the failure of Komag to accept a valid and compliant Purchase Order in accordance with Section 5.2.2 (but subject to Section 5.5), and the

2

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

failure by Komag to remedy such condition within ten (10) business days after Komag has received notice thereof (which notice must explicitly assert the existence and the nature of such condition under this Section 1.25.1);

          1.25.2 Failure of HITACHI GST (subject to the conditions and requirements of Sections 4.3 and 5.5.1) to timely issue valid and compliant Purchase Orders pursuant to Section 5.2.1 or HITACHI GST’s cancellation of such Purchase Orders, and the failure by HITACHI GST to cure such breach within ten (10) business days after HITACHI GST has received notice of such default (which notice must explicitly assert the existence and the nature of such condition under this Section 1.25.2);

          1.25.3 Other than (i) a failure of Komag under Section 1.25.1 above, (ii) a failure of HITACHI GST under Section 1.25.2 above and (iii) a breach of a payment obligation of HITACHI GST under Section 6.6, a material breach by either party of any obligation, covenant, or condition under this Agreement that is susceptible of cure, and the failure by the breaching party to cure such breach within thirty (30) Days after the breaching party has received notice of such default (which notice must explicitly assert the existence and the nature of such condition under this Section 1.25.3), provided that if the cure requires more than thirty (30) Days, a Material Default will be deemed to exist if the breaching party fails to (i) promptly take action to cure such breach as quickly as reasonably possible; or (ii) cure such breach within sixty (60) Days after the breaching party has received notice of such default;

          1.25.4 A failure of HITACHI GST to meet its payment obligations under Section 6.6, or

          1.25.5 An assignment or attempted assignment in violation of Section 12.5.

     1.26 “Media” means recording disks, manufactured by any entity, as used in data storage devices.

     1.27 [Intentionally Omitted]

     1.28 “New Capacity” means the increase in media capacity by Komag in connection with this Agreement.

     1.29 “Next Quarter” has the meaning set forth in Section 6.1.3.

     1.30 “Offset” has the meaning set forth in Section 6.5.4.

     1.31 “Overdue” has the meaning set forth in Section 6.6.

     1.32 “Price” or “Prices” means the amount(s) charged for Products, as specified in Section 6.1.

     1.33 “Product” means the Media manufactured by Komag.

3

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

     1.34 “Program” means a HITACHI GST product classification, currently including, for example, “Vancouver 4” and “Kurofune 2” disk drives. A Program may include various capacities, numbers of disks per drive or drive performance specifications.

     1.35 [Intentionally Omitted]

     1.36 “Pull Request” means a request made by HITACHI GST to Komag for delivery of Product(s) to HITACHI GST from a JIT Hub.

     1.37 “Purchase Order” means a purchase order placed by HITACHI GST or any subsidiary of HITACHI GST to Komag for Products as contemplated by this VPA.

     1.38 “Purchase Requirements^” has the meaning set forth in Section 4.1.1.

     1.39 “Quarter” means the applicable calendar quarter ending on March 31, June 30, September 30 and December 31 of a given calendar year.

     1.40 [Intentionally Omitted]

     1.41 “Second Term” has the meaning set forth in Section 9.1.

     1.42 “Section” means a numbered section of this VPA.

     1.43 “Specifications” means designs, drawings, prints and written descriptions, specification reviews and requirements for Products that have been developed or mutually accepted by HITACHI GST and Komag as of the date of this VPA, or which may be developed or mutually accepted by HITACHI GST and Komag during the term of this VPA.

     1.44 “Tolling Period” has the meaning set forth in Section 12.2.

     1.45 “Unit” means a single Product.

     1.46 “Unit Shortfall” has the meaning set forth in Section 5.5.1.

     1.47 “VPA” means this Volume Purchase Agreement, including the Exhibits.

     1.48 “HITACHI GST Shortfall Remedy Trigger” has the meaning set forth in Section 5.5.1.2.

2 ARTICLE 2: AGREEMENT STRUCTURE

     2.1 Background. Each party agrees to diligently cooperate with the other party to accomplish the objectives of this VPA.

     2.2 Agreement Components. This VPA consists of this VPA (including its Exhibits), Purchase Orders and Pull Requests. If there is a conflict among the terms and conditions of the various documents or an ambiguity created by differences therebetween, the order of precedence will be (i) this VPA (excluding its Exhibits), (ii) the Exhibits, and

4

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

(iii) the Purchase Orders and Pull Requests. The VPA does not supersede the existing Goods Agreement #4902SD0054 (“Goods Agreement”), attached as Exhibit E, originally executed between Komag and IBM, which has been assigned by IBM to Hitachi Global Storage Technologies, Inc. In addition, this VPA does not supersede any unexpired Statements of Work to the Goods Agreement entered into between Komag and HITACHI GST and/or its Affiliates.

     2.3 Purchase Order. Purchase Orders will be used to convey the Price and number of Units, and accordingly Purchase Orders must contain the following: Komag-designated part number, Price, Units ordered, customer name, ship to address (destination), bill to address, and Purchase Order number. The parties acknowledge that such Purchase Orders, as well as confirming documents, acknowledgments, forms, invoices and the like used in the ordinary course of business may contain other terms and conditions. Subject to Section 2.2, the parties agree that this VPA will take precedence over any such document or other communication, representation or understanding whether oral or written and that any term or condition relating to the subject matter of this VPA that is inconsistent with this VPA (whether in contradiction to, in addition to, or that would result in any ambiguity with respect to any term or condition in this VPA) will be deemed deleted and be of no force, including, but not limited to, any term or condition purporting to supersede this VPA in whole or in part or purporting to make any offer, acceptance, term, condition or other action conditional upon acceptance of, or indicating agreement to, any inconsistent term or condition. The foregoing may not be modified or waived except by written agreement of the parties, specifically referencing this VPA, and signed by officers of both parties. The parties agree that, without limiting Section 12.1, the foregoing shall not be superseded, altered, or overridden by any provision in the Uniform Commercial Code as it may have been adopted by any competent jurisdiction.

     2.4 Exhibits. The following Exhibits are incorporated into this VPA by reference and deemed to be a part hereof:

       Exhibit A: Current Prices and Sample Prices

       Exhibit B: Progress Milestones

       Exhibit C: Warranty Verification and Disposition Flow Chart

       Exhibit D: Volume/Purchase Requirements

       Exhibit E: Goods Agreement

3 ARTICLE 3: PRODUCT QUALIFICATION AND DEVELOPMENT

     3.1 Qualification Process. Each of the parties shall use commercially reasonable efforts to qualify and to keep qualified Komag’s Products on at least one Program at all

5

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

times. Such efforts will require qualification of Products in combination with other Components (such as multiple combinations of Media and recording heads), as well as the subsequent qualification of HITACHI GST’s disk drives incorporating such combinations.

     3.2 Qualification Locations. Following the Effective Date, Komag intends to manufacture Products under this Agreement at factory locations in Penang, Malaysia.

4 ARTICLE 4: PRODUCT PURCHASE AND SALE COMMITMENTS

     4.1 Volume.

          4.1.1 Subject to Section 4.3, Komag agrees that it shall supply to HITACHI GST (and/or its Affiliates and/or authorized contract manufacturers), and HITACHI GST agrees that it (and/or or its Affiliates and/or authorized contract manufacturers) shall purchase from Komag, at the volumes of Product set forth in Exhibit D (the “Purchase Requirements”). For purposes of clarification, any Hitachi GST obligations regarding the Purchase Requirements or procedures associated with the purchase of Products may be fulfilled by any HITACHI GST Affiliate.

          4.1.2 In an effort to bring the New Capacity up to its operational capacity as soon as is practicable to both (a) satisfy the Purchase Requirements and (b) maximize the availability of Product for HITACHI GST beyond the Purchase Requirements for each Quarter, Komag shall use all commercially reasonable efforts and assign all commercially reasonable resources to (1) expedite the completion of the New Capacity and the qualification of Products for HITACHI GST and (2) maximize the utilization of New Capacity and existing capacity to improve yields. HITACHI GST shall cooperate in good faith with Komag and provide all commercially reasonable assistance necessary to help achieve such goals. The parties shall meet regularly to review, develop and update plans and review progress toward goals. Komag and HITACHI GST agree that if Komag produces any Products, other than sample Products, from the New Capacity in excess of Purchase Requirements, such excess shall first be offered to HITACHI GST for purchase. If HITACHI GST declines to purchase such excess Products, then Komag may use the excess New Capacity to offer Products to its other customers.

          4.1.3 [***].

     4.2 [intentionally omitted]

     4.3 Exceptions and Qualifications to Purchase Requirements.

4.3.1 Provided that Komag remains qualified on a Program pursuant to which HITACHI GST may be able to use quantities of Products, the purchase of which would be sufficient to satisfy the Purchase Requirements of Section 4.1, then HITACHI GST must (to the extent commercially and economically reasonable) first satisfy its Purchase Requirements with purchases of Products for such Programs.

6

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

4.3.2

If Komag (a) does not deliver the Purchase Requirements due to failure of a Product or Products to qualify for a particular Program or Programs; or (b) refuses or is unable to deliver Products to satisfy duly accepted Purchase Orders in quantities equal to the Purchase Requirements for the then applicable Quarter, then HITACHI GST shall notify Komag of such condition (or, if Komag becomes aware of such condition prior to HITACHI GST becoming aware of such condition, Komag shall notify HITACHI GST immediately) and give Komag five (5) business days to remedy the condition before electing a remedy in accordance with Section 4.3.3; provided, however, in the case of clause (a) and (b) of this Section 4.3.2, if the difference between actual Komag Product deliveries and the Purchase Requirements for a Quarter (the “Komag Shortfall”) is not more than [***] percent ([***]%) of the Purchase Requirements for such Quarter, Komag may increase the Purchase Requirement for the subsequent Quarter by a number of Units equal to the Komag Shortfall, and no breach of Section 4.1.1 shall have occurred (it being understood that if Komag fails to make up the full Komag Shortfall in the subsequent Quarter, HITACHI GST may freely elect its remedies pursuant to Section 4.3.3 and this VPA).

4.3.3

In the event that (A) Komag does not make up the Komag Shortfall in the immediately following Quarter, or (B) the Komag Shortfall is more than [***] percent ([***]%) of the Purchase Requirements for any Quarter (each a “Komag Shortfall Remedy Trigger”), then HITACHI GST and Komag shall meet to discuss an amicable resolution and allocation of the Purchase Requirements, which shall be set forth in writing and reference this VPA, and in the event that such resolution has not been reached within five (5) business days of HITACHI GST’s notice to Komag of the Komag Shortfall Remedy Trigger, then HITACHI GST shall then be entitled at its sole discretion to elect the following remedies:

4.3.3.1

continue under the terms of this VPA and reduce the Purchase Requirements for the relevant Quarter only and make allocations to and purchase Units from other suppliers; or

4.3.3.2

continue under the terms of this VPA and allow Komag to increase the Purchase Requirements for the subsequent Quarter (and for that Quarter only) by a number of Units determined by HITACHI GST, up to a number equal to the Komag Shortfall (it being understood that if Komag fails to make up such Komag Shortfall amount determined by HITACHI GST in the subsequent Quarter, HITACHI GST may freely elect its remedies pursuant to this Section 4.3.3 and this VPA); or

7

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

4.3.3.3 terminate this VPA in accordance with Section 9.2 and take the Offset under Section 6.7 below.

5 ARTICLE 5: PURCHASE OF PRODUCTS BY HITACHI GST

     5.1 Forecasts and Planning Schedules. HITACHI GST shall provide to Komag a current written forecast of demand for Products HITACHI GST expects to purchase during the first twelve (12) months of the term of this VPA, which forecast shall include the Purchase Requirements for each Quarter and may include forecasts for additional Product needs. Thereafter during the term of this VPA, on a monthly basis, HITACHI GST shall provide an updated forecast for any quantities of such Product HITACHI GST expects to purchase in the following twelve (12) months, which forecast shall include the Purchase Requirements for each Quarter and may include forecasts for additional product needs. The most recently issued forecast will supersede all previous forecasts. Consistent with current practice, Komag shall respond within seven (7) days with its supply commitment for the following twelve (12) months. Komag shall also provide, on a monthly basis, a daily ship schedule for the following month at least fourteen (14) days prior to each month. In addition, during the term of this VPA on a monthly basis, Komag shall provide to HITACHI GST a current written summary of the Product finished goods inventory (“FGI”) intended for HITACHI GST. This summary shall list by Komag manufacturing site and JIT Hub location the amounts and types of FGI being held by Komag for each of HITACHI GST’s Programs. All such forecasts by HITACHI GST and any confirmations or other written summaries of FGI issued by Komag are intended to be non-binding and designed only to assist the parties in allocating resources.

     5.2 Issuing Purchase Orders and Pull Requests.

5.2.1	Consistent with the parties’ current practice, HITACHI GST shall submit to Komag a [***] Purchase Order for all Units HITACHI GST must purchase pursuant to the Purchase Requirements of Section 4.1. Hitachi GST may also include other volumes provided by this VPA on the same Purchase Order.
5.2.2	With respect to Purchase Orders issued pursuant to Section 5.2.1 and in full compliance with Section 2.3, no more than two (2) business days after receipt of each such Purchase Order, Komag shall issue an acceptance of the Purchase Order in writing confirming the quantity and other terms thereof; provided, however, that if such Purchase Orders include quantities that are inconsistent with the Purchase Requirements or do not meet the requirements of Section 2.3, Komag shall follow the procedures and remedies set forth in Section 5.5.
5.2.3	HITACHI GST shall transmit a Pull Request by facsimile or other agreed upon means to communicate to Komag, at the applicable JIT Hub, the part number, quantity, delivery location and Delivery Date and time of each

8

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

Product required. HITACHI GST’s transmission of a Pull Request is authorization for Komag to deliver Product to HITACHI GST against the Purchase Order for the part numbers and quantities set forth in the Pull Request. Komag shall deliver Product from the applicable JIT Hub upon receipt of a Pull Request in accordance with applicable Lead Times. HITACHI GST and Komag shall, prior to the commencement of each Quarter, establish mutually acceptable Lead Times for Pull Requests, which Lead Times shall in no event exceed eight hours.

     5.3 Komag Production and Inventory. During the term of this VPA, HITACHI GST will be issuing forecasts and Purchase Orders and Komag will be producing FGI to meet the Purchase Requirements. HITACHI GST’s forecast for a certain Quarter is not, and should not be deemed to be, a commitment by HITACHI GST to buy or Komag to sell a specific amount of Product in a specific period of time. Komag will use just-in-time delivery hubs located at or near HITACHI GST’s manufacturing or distribution facilities in China and Thailand (“JIT Hubs”) with respect to its obligations to provide the Purchase Requirements. Komag will: (i) bear all costs associated with warehousing Products in the JIT Hub(s); (ii) ensure that HITACHI GST may withdraw Products from the JIT Hub(s) in accordance with the terms of this VPA; (iii) retain title to Products until they are physically delivered to HITACHI GST or its carrier upon withdrawal from the JIT Hub(s); (iv) fully insure or require the JIT Hub operator to fully insure all Products in transit to or stored at a JIT Hub against all risk of loss or damage until such time as HITACHI GST takes title to them; and (v) require that the JIT Hub operator take all steps necessary to protect all Products in a JIT Hub consistent with good commercial warehousing practice. The parties may enter into SOWs or other agreements regarding JIT hub practices, if needed.

     5.4 End of Life. HITACHI GST shall use commercially reasonable efforts to notify Komag as soon as possible before the termination of each Program.

     5.5 Liability on Cancellation or Deficient Issuance of a Purchase Order.

5.5.1 Section 5.2.1 Purchase Orders.

5.5.1.1 HITACHI GST must issue a Purchase Order for Units of Product equal to the Purchase Requirements in each Quarter pursuant to Section 5.2.1. In the event that HITACHI GST fails to (i) timely issue such Purchase Order, (ii) cancels such Purchase Order in writing or (iii) deficiently issues such Purchase Order (such that the aggregate number of Units requested in a given Quarter is less than the Purchase Requirements (such shortfall in the number of Units, the “Unit Shortfall”), and each of (i), (ii) or (iii), a “Defect”), Komag may elect a remedy in accordance with Section 5.5.1.2, provided, however, that prior to taking any of the foregoing actions, Komag must

9

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

(a)give HITACHI GST written notice of the Defect and give HITACHI GST a single five (5) business day period to correct such Defect and issue or re-issue such Purchase Order, and the time requirement for issuing such Purchase Order set forth in Section 5.2.1 shall be extended accordingly, and (b) if HITACHI GST’s Unit Shortfall in a given Quarter is not greater than [***] percent ([***]%) of its Purchase Requirements for that Quarter, then HITACHI GST may increase the Purchase Requirement for the subsequent Quarter by a number of Units equal to the Unit Shortfall, and no breach of Section 4.1.1 shall have occurred (it being understood that if HITACHI GST fails to make up the full Unit Shortfall in the subsequent Quarter, Komag may freely elect its remedies pursuant to Section 5.5.1.2 and this VPA).

5.5.1.2

In the event that (A) HITACHI GST fails to make up the full Unit Shortfall for a Quarter in the following Quarter, or (B) the Unit Shortfall in any given Quarter is more than [***] percent ([***]%) of the Purchase Requirements for such Quarter (each a “HITACHI GST Shortfall Remedy Trigger”), then HITACHI GST and Komag shall meet to discuss an amicable resolution and allocation of the Purchase Requirements, which shall be set forth in writing and reference this VPA, and in the event that such resolution has not been reached within five (5) business days of Komag’s notice to HITACHI GST of the HITACHI GST Shortfall Remedy Trigger, then Komag shall then be entitled at its sole discretion to elect the following remedies:

5.5.1.2.1

[Intentionally Omitted]

5.5.1.2.2

waive the breach and continue under the terms of this VPA; Komag shall be free to use the Unit Shortfall in that Quarter only for any other purpose it elects, including manufacturing Products to sell to third party purchasers; furthermore, if Komag wishes to reduce the Purchase Requirements on a going forward basis as a result of the Unit Shortfall, the parties shall meet in good faith to discuss a mutually acceptable solution, such meeting to include an executive from each party if desired by the other

10

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

	party (the parties may also use the Dispute Resolution method of Section 12.4); or
5.5.1.2.3	waive the breach and continue under the terms of this VPA and allow HITACHI GST to increase the Purchase Requirement for the subsequent Quarter by a number of Units determined by HITACHI GST, up to a number equal to the Unit Shortfall, but at least [***]% of the Purchase Requirements for that Quarter (it being understood that if HITACHI GST fails to make up the agreed amount of Unit Shortfall in the subsequent Quarter, Komag may freely elect its remedies pursuant to this Section 5.5.1.1 and this VPA).
5.5.1.2.4	If Hitachi GST does not make up the Unit Shortfall as set forth in Section 5.5.1.2.3, Komag may invoke the dispute resolution procedures in either 6.2.1 or 12.4. In such discussions, the parties will explore in good faith all available options to mitigate harm to Komag, which may include, but are not limited to, reducing or extending the term of this VPA, reducing or increasing the Purchase Commitment for future Quarters, and other measures to allow Komag to mitigate its damages, such as transferring capacity to other customers.

6 ARTICLE 6: PRICE AND PAYMENT TERMS FOR PRODUCTS

     6.1 Product Pricing. All Prices shall be in U.S. Dollars.

6.1.1	Current Prices. The current Unit Prices that HITACHI GST will pay for all Products purchased during the first Quarter pursuant to this VPA are in U.S. Dollars and set forth in Exhibit A (the “Prices”). The Prices for such Products are subject to adjustment following the first Quarter of the term of this VPA in accordance with Section 6.1.3.
6.1.2	[***]. In the event that HITACHI GST elects to challenge the pricing of the Products under this Section 6.1.2, the parties shall follow the procedures set forth in Section 6.2 below.
6.1.3	Subsequent Prices for All Products. Komag shall make commercially reasonable efforts to increase efficiencies and take other measures so as to

11

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

reduce prices on an ongoing basis. The parties agree to negotiate in good faith to set the Prices for any Products under any Program. Such negotiations must commence on a date beginning no later than fifty (50) Days before the beginning of the Quarter following the then current Quarter (the “Next Quarter”) and the parties must conclude such negotiations no later than twenty (20) Days before the beginning of the Next Quarter. Komag shall, no later than nineteen (19) Days before the beginning of the Next Quarter, notify HITACHI GST of the mutually agreed-upon Prices applicable to the Next Quarter by means of a pricing letter. Notwithstanding the foregoing, the parties agree that the review of such Prices shall not require the parties to modify any of the non-price terms of this VPA.

     6.2 Pricing Disputes.

6.2.1

In the event the parties cannot agree upon pricing as described in Section 6.1.2 or Section 6.1.3, either party may, upon written notice to the other, submit such dispute to the Chief Executive Officer of Komag and the Chief Operating Officer of HITACHI GST, or their respective designees, who shall meet to attempt to resolve the dispute by good faith negotiations. The parties may also use the Dispute Resolution procedure set forth in Section 12.4.

6.2.2

Audit Rights. With respect to [***] Section 6.1.2, HITACHI GST may appoint an independent auditor (reasonably acceptable to Komag) to validate Komag’s records [***].

     6.3 [Intentionally Omitted]

     6.4 [Intentionally Omitted]

     6.5 Invoices. For shipments through Komag’s designated JIT Hub, Komag shall invoice HITACHI GST upon delivery of Product to the delivery location indicated on the Pull Request. For shipments direct to HITACHI GST, Komag will invoice upon shipment. Terms for payment of all invoices will be net [***] Days from date of invoice.

     6.6 Late Payment. If HITACHI GST fails to make a timely payment on any invoice, Komag will provide HITACHI GST with a notice of late payment and give HITACHI GST [***] Days to pay the invoice. If HITACHI GST fails to make full payment on the invoice within the [***] Day period, KOMAG may invoke the dispute resolution procedure of Section 6.2.1 or 12.4. In any event, the executives of both HITACHI GST and KOMAG shall attempt in good faith to reach a mutually acceptable resolution within [***] Days.

     6.7 Right of Offset. HITACHI GST may immediately set off and recoup any amounts HITACHI GST (including its subsidiaries or Affiliates) owes Komag (including its subsidiaries and Affiliates), regardless of when payment is due, against any debt, credit or other obligation or liability payable by Komag to HITACHI GST, including the [***]

12

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

Balance (regardless of whether such debt, credit, obligation or liability arose out of or relates to this VPA) (the “Offset”), and such Offset will be effective even if a receiver, custodian, trustee, examiner, liquidator or similar official has been appointed for Komag or any substantial portion of its assets, upon the occurrence of the following events:

6.7.1.1	ten (10) business days after Komag’s receipt of written notice from HITACHI GST of Komag’s Material Default, unless such failure or performance is corrected within such ten-day period; or
6.7.1.2	Komag’s cessation of business, liquidation or dissolution; or
6.7.1.3	the occurrence of any insolvency event described in Section 9.3; or

     assignment or attempted assignment in violation of Section 12.4. After the Offset, in the event the [***] Balance remains positive, Komag shall make a cash payment of the remaining [***] Balance to HITACHI GST in a reasonable period of time not to exceed [***] Days.

7 ARTICLE 7: SHIPMENT AND DELIVERY OF PRODUCTS

     7.1 Shipment of Product. Consistent with the existing JIT Hub agreement(s) and pull processes, Product delivery made by Komag will be DDU to the JIT Hub. HITACHI GST will assume title after Products have been pulled from JIT Hub. Both parties also understood that Komag will bear risk of loss or damage during transportation or storage prior to HITACHI GST accepted title transfer. Late Delivery. Komag shall notify HITACHI GST immediately if for any reason Komag fails to comply or anticipates that it may fail to comply with the timing terms of a Pull Request (i.e., failure to meet a Delivery Date). In the event of a late delivery, without limiting the rights and remedies available to HITACHI GST under this VPA, the parties will cooperate in good faith to minimize the disruption caused to HITACHI GST by such late delivery.

     7.2 [Intentionally Omitted]

8 ARTICLE 8: WARRANTIES

     8.1 General Mutual Warranties. Each party has the corporate power and authority to own its properties and to carry on its business as now being conducted and as contemplated to be conducted. Each party is duly qualified to do business and in good standing as a foreign corporation under the laws of each jurisdiction in which the failure to be so qualified would have a material adverse effect on it.

     8.2 KOMAG Warranties. In addition to the warranty provisions set forth in the Goods Agreement and SOW, for a period of fifteen (15) months from the date of Komag’s invoice for each Unit of Product (the “Warranty Period”), Komag represents and warrants

13

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

that each Unit of Product is (i) free from defects in materials or workmanship and (ii) conforms to the Specifications.

     8.3 Warranty Procedure. The parties agree to use the return material authorization process described in the Warranty Verification and Disposition flow chart set forth in Exhibit C to manage and dispose of the Products returned to HITACHI GST under warranty.

     8.4 [Intentionally Omitted]

     8.5 [Intentionally Omitted]

8.5.1	[Intentionally Omitted]
8.5.2	[Intentionally Omitted]
8.5.3	[Intentionally Omitted]
8.5.4	[Intentionally Omitted]
8.5.5	[Intentionally Omitted]
8.5.6	[Intentionally Omitted]

9 ARTICLE 9: TERM AND TERMINATION

     9.1 Term. The term of this VPA shall begin on the Effective Date and shall continue for thirty-six (36) months from January 1, 2007 (the “Initial Term”). The term of the VPA shall automatically be extended for an additional twelve (12) months beyond the Initial Term (the “Second Term”) unless either party gives written notice to the other party no later than six (6) months prior to the end of the Initial Term that it does not want to extend the term of the VPA for the Second Term.

     9.2 Termination for Cause. Either party may terminate this VPA in the event of a Material Default (including the occurrence of a Force Majeure Event that causes a delay exceeding the Tolling Period) of this VPA by the other party, upon notice to such other party, which notice must describe the reason for such termination and must specify the termination date, which termination date must be no earlier than five (5) Days after the date of such notice. The parties acknowledge that neither party will have the right to terminate this Agreement due to any breach of this Agreement other than a Material Default or insolvency event under Section 9.3 or a Force Majeure Event beyond the tolling period in Section 12.2.

     9.3 Termination for Insolvency. This VPA may be terminated by either party by notice to the other party upon (i) the commencement by the other party of a voluntary or involuntary proceeding under any federal, state, provincial or foreign bankruptcy law or similar law which is not dismissed within ninety (90) Days; (ii) the appointment for the other party of a receiver, trustee or similar official or a general assignment for the benefit of

14

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

such party’s creditors; (iii) the winding up or liquidation of the other party; or (iv) a party becomes unable to pay its debts either because it is subject to a Suspension of Payments order, bankruptcy, or other insolvency proceeding. In the case of (i) to (iv) above, termination may also be effected by serving notice on the liquidator, administrator, or receiver, as the case may be.

     9.4 Rights Upon Termination.

          9.4.1 Disentanglement. Upon termination by either party for any reason under this Agreement, Komag shall complete delivery and HITACHI GST shall accept delivery on all open monthly Purchase Orders for already completed Products included in the Purchase Requirements, and HITACHI GST shall pay for all such Products properly delivered and invoiced in accordance with Article 6, and Komag and HITACHI GST shall cooperate to ensure an orderly separation (collectively, a “Disentanglement”).

          9.4.2 Termination by Komag or HITACHI GST. In the event that either Komag or HITACHI GST terminates this VPA pursuant to either Section 9.2 or Section 9.3, such termination is without prejudice to the terminating party’s rights to recover for damages with respect to the breach that gave rise to the right to terminate.

     9.5 Survival. The following provisions will survive the termination or expiration of this VPA: Articles 1, 2, 6, 8, 9.4, 10, 11, and 12, as well as any obligations arising before the effective date of termination or expiration.

10 ARTICLE 10: OTHER PROVISIONS

     10.1 The terms relating to limitation of liability, indemnification and intellectual property set forth set forth in the Goods Agreement shall apply to all purchases under this VPA.

     10.2 [Intentionally Omitted]

     10.3 EACH HITACHI GST SUBSIDIARY THAT ISSUES PURCHASE ORDERS TO KOMAG UNDER THIS AGREEMENT IS A THIRD PARTY BENEFICIARY OF THE RIGHTS AND REMEDIES AFFORDED HITACHI GST AS CONTAINED IN THIS AGREEMENT.

11 ARTICLE 11: CONFIDENTIALITY

     11.1 [Intentionally Omitted]

     11.2 [Intentionally Omitted]

     11.3 [Intentionally Omitted]

     11.4 [Intentionally Omitted]

15

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

     11.5 Confidentiality of Agreement. In addition to the confidentiality and exchange of information terms of the Goods Agreement, each party agrees that the terms and conditions, but not the existence, of this VPA will be treated as the other’s Confidential Information and that no reference to the terms and conditions of this VPA or to activities pertaining thereto can be made in any form of public or commercial advertising without the prior written consent of the other party; provided, however, that each party may disclose the terms and conditions of this VPA: (i) as required by law, as set forth in the Goods Agreement; (ii) to legal counsel of the parties; (iii) in connection with the requirements of a public offering, secondary offering, debt offering, or securities filing of the parties, or otherwise as obligated by law; (iv) in confidence, to accountants, banks, and financing sources and their advisors; or (v) in confidence, in connection with the enforcement of this VPA or rights under this VPA. In the event of (i), (iii) (iv) and (v), each party agrees to redact terms that are not necessary or required by the disclosure.

     11.6 [Intentionally Omitted]

     11.7 [Intentionally Omitted]

12 ARTICLE 12: GENERAL

     12.1 Governing Law. The choice of law for this VPA shall be the same as set forth in the Goods Agreement.

     12.2 Force Majeure. Neither party shall be liable for its failure to perform any of its obligations hereunder due to a Force Majeure Event, provided that the party suffering such delay immediately notifies the other party of the delay and provided further that the period of delay shall not exceed ninety (90) days (the "Tolling Period"). In the event that the delay exceeds the Tolling Period, the non-breaching party may terminate this VPA pursuant to Section 9.2. For avoidance of doubt, this provision is intended to clarify and supplement the force majeure provision of the Goods Agreement with respect to matters covered by this VPA.

     12.3 Trademarks. Nothing in this VPA gives either party a right to use the other party’s name, trademark(s), or trade name(s), directly or indirectly, without the other party’s prior written consent, except as may be required by applicable law or court order. In such a case, the party required to disclose such information shall provide prompt notice of such requirement in order that the other party may seek appropriate protective orders.

     12.4 Dispute Resolution. The parties agree that any material dispute between the parties relating to this VPA may be handled as follows:

12.4.1 Upon the request of any party, the parties will submit the dispute to a panel of two senior executives (Vice-President or more senior) of each party. Either party may initiate this proceeding by notifying the other party in writing pursuant to the notice provisions of Section 12.11. Within five (5) Days from the date of receipt of the notice, the parties’ executives shall confer (via

16

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

telephone or in person) in an effort to resolve such dispute (the “First Executive Conference”). The decision of the executives shall be final and binding on the parties. Each party’s executives shall be identified by notice to the other party and may be changed at any time thereafter also by notice to the other party. In the event that the dispute cannot resolved in the First Executive Conference, either party is free to pursue any remedies available to it in law or equity, consistent with the terms of this VPA.

     12.5 Assignment. Except as set forth in this Section 12.5, neither this Agreement, nor any of the rights or obligations hereunder, may be assigned, transferred, subcontracted or delegated by a party hereto to any third party (other than an Affiliate of the assigning party), including without limitation, by operation of law or pursuant to a Change of Control, as defined below, without the prior written consent of the other party. Notwithstanding the foregoing, (a) Komag may assign this Agreement, and the rights and obligations hereunder, without the prior consent of HITACHI GST, in connection with a Change of Control and (b) HITACHI GST may assign this Agreement, and the rights and obligations hereunder, without the prior consent of Komag, to a third party in connection with a Change of Control. However, in the event of such Change in Control, the other party (i.e., the party NOT undergoing the Change in Control) may terminate this Agreement upon ninety (90) days notice, and HITACHI GST may exercise its offset rights for any remaining [***] Balance pursuant to Section 6.7. For purposes of this Section 12.5, "Change of Control” shall mean (i) any sale, lease, exchange or other transfer (in one transaction or series of transactions) of all, or substantially all, of the assets of such party, (ii) any consolidation or merger or other combination of a party in which such party is not the continuing or surviving corporation or pursuant to which shares of such party’s common stock would be converted into cash, securities or other property (other than a merger of such party in which the holders of such party’s common stock immediately prior to the merger hold at least a majority of the outstanding securities of the combined entity), or (iii) any transaction (or series of related transactions) pursuant to which any person (as defined in Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act”), becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 35% or more of such party’s outstanding common stock. Any purported assignment of this VPA or the rights or obligations of a party under this VPA in violation of this Section 12.5 shall be null, void and of no further force or effect and shall constitute a Material Default.

     12.6 Severability. If any of the provisions of this VPA are held by a court or other tribunal of competent jurisdiction to be unenforceable, the remaining portions of this VPA will remain in full force and effect.

     12.7 Failure to Enforce. The failure of either party to enforce at any time or for any period of time the provisions of this VPA will not be construed to be a waiver of such provisions or of the right of such party to enforce each and every provision of this VPA in the future.

17

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

     12.8 Agency. This VPA does not create a principal to agent, employer to employee, partnership, joint venture, or any other relationship except that of independent contractors between Komag and HITACHI GST.

     12.9 Request in Writing. All requests such as Pull Requests, acceptances/rejections, notices, must be made or confirmed in writing. Such writings must take the form of electronic mail (receipt confirmed), facsimile (receipt-confirmed) and/or posted letter (return-receipt).

     12.10 Counterparts. This VPA may be executed in one or more counterparts, each of which will be deemed to be an original, but all of which will be considered one and the same instrument. A photocopy of a signature or a facsimile of a signature shall be as valid as an original.

     12.11 Notices. Except as otherwise provided herein, all notices hereunder will be deemed given if (a) in writing and delivered personally; or (b) sent by facsimile transmission that is confirmed by return facsimile or e-mail; to the parties at the following addresses (or at such other addresses as will be specified by like notice):

(i)	if to HITACHI GST, to:
	Hitachi Global Storage Technologies, Inc.
	5600 Cottle Road
	San Jose, CA 95193
	Attention: Mr. Ed Kwong, Procurement
	Fax No.: (408) 717-9298
	With a copy to:
	Hitachi Global Storage Technologies, Inc.
	Hitachi GST Legal Department
	Attention: Paula Gani
	5600 Cottle Road
	San Jose, CA 95193
	Fax No.: (408) 717-9289
(ii)	if to Komag to:
	Komag USA (Malaysia) Sdn. Bayan Lepas Free Trade Zone
	Phase III
	11900 Penang
	Malaysia
	FX: 011-604-643-9881Attention: Kheng Huat Oung, Vice President, GM, Media Operations

18

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

With a copy to:

Komag, Incorporated

1710 Automation Parkway

San Jose, California 95131

Attention: Chief Financial Officer

Fax No.: (408) 944-9234

and

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

Attention:      Page Mailliard, Esq.

                      Selwyn Goldberg, Esq.

Fax No.: (650) 493-6811

Any notice given by mail will be effective when received. Any notice given by electronic mail or facsimile transmission will be effective when the appropriate electronic mail or facsimile transmission acknowledgment is received.

     12.12 Amendments. This VPA may only be amended in writing signed by authorized representatives of each of the parties. To be effective, such amendments must specifically reference this VPA.

     12.13 Complete Agreement. Subject to Section 2.2., this VPA, Exhibits, and specific Purchase Orders and Pull Requests set forth the complete agreement between the parties regarding their subject matter and replace all prior or contemporaneous communications, understandings or agreements, written or oral, about this subject.

     12.14 Performance During Pendency of Disputes. If a dispute arises between the parties, regardless of whether such dispute requires the use of the procedures described in Section 6.2 or Section 12.4, subject to the terms and conditions of this Agreement, (a) in no event nor for any reason shall Komag interrupt the provision of Products to HITACHI GST, delay manufacture or delivery of Products or perform any other action that prevents, slows down, or reduces in any way the provision of Products or HITACHI GST’s ability to conduct its business; and (b) each party shall continue to perform its obligations under this Agreement, unless: (x) authority to do so has been granted by the other party or conferred by a court of competent jurisdiction; or (y) this Agreement has been terminated pursuant to Section 9.2 or Section 9.3 and a Disentanglement has occurred.

19

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

     IN WITNESS WHEREOF, the parties have caused this Volume Purchase Agreement to be signed and accepted by their duly authorized representatives, effective as of the Effective Date.

Hitachi Global Storage Technologies Singapore Pte., Ltd., a Singapore corporation	Komag USA (Malaysia) Sdn. a Malaysian corporation
Komag Incorporated
a Delaware corporation

S-1

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

EXHIBIT A

PRICES

[***]

A-1

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

ADDITIONAL PAYMENT TERMS

     HITACHI Global Storage Technologies Singapore Pte., Ltd. shall make [***] payments to Komag Inc. of [***] to be applied against [***] purchases of Product in accordance with this Exhibit as set forth below. An [***] Installment shall be made by HITACHI GST on [***] in accordance with [***] Exhibit B. [***]. The [***] Amount shall be repaid by Komag, Inc. to HITACHI GST solely in accordance with [***] Section 6.7 and Section 4.3.3 of the VPA.

     The parties agree that the [***] Amount will be used by the Komag Group solely for manufacturing and operations in connection with the [***], and not for the Komag Group’s general working capital purposes.

     Starting no earlier than the first date that first production comes off the [***], and no later than [***], Komag Inc. shall make payments quarterly, within 7 days of the end of each Quarter, to Hitachi Global Storage Technologies Singapore Pte., Ltd. equal to [***] for each Unit invoiced (to HITACHI GST, its Affiliates or its authorized contract manufacturers listed below) above [***] Units per Quarter, (the "Per Unit Offset") [***], then the remainder of the [***] Balance shall become due and payable to HITACHI GST at the end of the Initial Term, and Komag Inc. shall make such payment in a reasonable period of time not to exceed 15 Days. For purposes of clarification, payments by Komag shall be made to Hitachi Global Storage Technologies Singapore Pte., Ltd only, regardless whether Products are purchased by other HITACHI GST Affiliates or authorized HITACHI GST contract manufacturers.

     HITACHI GST Authorized Contract Manufacturers*

          o Excelstor

* HITACHI GST may revise this list as needed.

A-2

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

EXHIBIT B

Progress Milestones

[***]

B-1

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

EXHIBIT C

Warranty Verification and Disposition Flow Chart

[***]

C-1

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

EXHIBIT D

Volumes

Quarter	Volume Requirement
[***] Quarter of [***]	[***] Units
[***] Quarter of [***]	[***] Units
[***] Quarter of [***] and each Quarter following the [***] Quarter of [***] through the end of the term of this VPA.	[***] Units

D-1

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

EXHIBIT E

Goods Agreement

E-1

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

GOODS

Agreement # 4902SD0054

This Base Agreement (“Base Agreement”) dated as of 5/01/2002 (“Effective Date”), between International Machines Corporation (“Buyer”) and Komag (“Supplier”), establishes the basis for a multinational procurement relationship under which Supplier will provide Buyer the Products and Services described in SOWs issued under this Base Agreement. Products and Services acquired by Buyer on or after the Effective Date will be covered by this Base Agreement. This Base Agreement will remain in effect until terminated.

1.0 Definitions:

“Affiliates” means entities that control, are controlled by, or are under common control with, a party to this Agreement.

“Agreement” means this Base Agreement and any relevant Statements of Work (“SOW”), Work Authorizations (“WA”), and other attachments or appendices specifically referenced in this Agreement.

“Participation Agreement” or “PA” means an agreement signed by one or more Affiliates which incorporates by reference the terms and conditions in this Base Agreement, any relevant SOW, and other attachments or appendices specifically referenced in PA.

“Personnel” means agents, employees or subcontractors engaged or appointed by Buyer or Supplier.

“Prices” means the agreed upon payment and currency for Products and Services, including all applicable fees, payments and taxes, as specified in the relevant SOW and/or WA.

“Products” means items that Supplier prepares for or provides to Buyer as described in a SOW.

“Services” means work that Supplier performs for Buyer as described in a SOW.

“Statement of Work” or “SOW” means any document that:

1. identifies itself as a statement of work;

2. is signed by both parties;

3. incorporates by reference the term and conditions of this Base Agreement; and

4. describes the Products and Services, including any requirements, specifications or schedules,

“Work Authorization” or “WA” means Buyer’s authorization in either electronic or tangible form for Supplier to conduct transactions under this Agreement in accordance with the applicable SOW (i.e., a purchase order, bill of lading, or other Buyer designated document). A SOW is a WA only if designated as such in writing by Buyer.

2.0 Statement of Work

Supplier will provide the Products or Services as specified in the relevant SOW only when specified in a WA. Supplier will begin work only after receiving a WA from Buyer. Buyer may request changes to a SOW and Supplier will submit to Buyer the impact of such changes. Changes accepted by Buyer will be specified in an amended SOW or change order signed by both parties. Supplier will maintain the capability to supply agreed upon Products, including parts of Products, for a period of _12_ months after withdrawal of such Products as specified in the relevant SOW. Supplier will notify Buyer of its intent to withdraw any Product and will continue to deliver such withdrawn Products for the periods as specified in the relevant SOW.

3.0 Pricing

Supplier will provide Products and Services to Buyer for the Prices. The Prices for Products and Services specified in a WA and accepted by Buyer will be the only amount due to Supplier from Buyer.

4.0 Payments and Acceptance

Terms for payment will be specified in the relevant SOW and/or WA. Payment of invoices will not be deemed acceptance of Products or Services, but rather such Products or Services will be subject to inspection, test, acceptance or rejection by Buyer until successful integration into Buyer’s products, or for a period as specified in the relevant SOW, whichever occurs first. Buyer may, at its option, either reject Products or Services that do not comply with the specifications and requirements for a refund plus any inspection, test and transportation charges paid by Buyer, or require prompt correction or replacement of such Products upon Buyer’s written instruction. Buyer may reject entire lots of Products which do not meet quality levels as specified in the relevant SOW and/or WA.

5.0 Electronic Commerce

To the extent permitted by local law, the parties will conduct transactions using an electronic commerce approach under which the parties will electronically transmit and receive legally binding purchase and sale obligations (“Documents”), including electronic credit entries transmitted by Buyer to the Supplier account specified in the relevant SOW and/or WA. The parties will enter into a separate agreement governing the transmission of such electronic transactions and associated responsibilities of the parties.

6.0 Warranties
6.1 Ongoing Warranties
Form Title: Goods	Form Release: 8/98
Form Owner: Global Procurement	Revision: 09/01

E-2

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

GOODS

Agreement # 4902SD0054

Supplier makes the following ongoing representations and warranties:

1. it has the right to enter into this Agreement and its performance of this Agreement will comply, at its own expense, with the terms of any contract, obligation, law, regulation or ordinance to which it is or becomes subject;

2. no claim, lien, or action exists or is threatened against Supplier that would interfere with Buyer’s use or sale of the Products;

3. Products and Services do not infringe any intellectual property right of a third party;

4. all authors have agreed not to assert their moral rights (personal rights associated with authorship of a work under applicable law), in the Products, to the extent permitted by law;

5. Products are free from defects in design (except for written designs provided by Buyer unless such designs are based entirely on Supplier’s specifications), material and workmanship and will conform to the warranties, specifications and requirements, including but not limited to quality requirements, in this Agreement for the time period from the date of shipment as specified in the relevant SOW and/or WA;

6. Products are safe for use consistent with and will comply with the Warranties, specifications and requirements in this Agreement;

7. Products and Services which interact in any capacity with monetary data are euro ready such that when used in accordance with their associated documentation they are capable of correctly processing monetary data in the euro denomination and respecting the euro currency formatting conventions (including the euro sign);

8. none of the Products contain nor are any of the Products manufactured using ozone depleting substances known as halons, chlorofluorocarbons, hydrochlorofluorocarbons, methyl chloroform and carbon tetrachloride as defined by the Montreal Protocol;

9. Products are new and do not contain used or reconditioned parts;

10. it is knowledgeable with, and is and will remain in full compliance with all applicable export and import laws, regulations, orders, and policies (including, but not limited to, securing all necessary clearance requirements, export and import licenses and exemptions from, and making all proper filings with appropriate governmental bodies and/or disclosures relating to the release or transfer of technology and software to non U.S. nationals);

11. it will not export, directly or indirectly, any technology, software or commodities provided by Buyer or their direct product to any of the countries or to nationals of those countries, wherever located, listed in U.S. Export Administration Regulations’ Country Groups D:1 and E:2, as modified from time to time, unless authorized by appropriate government license or regulations;

12. It will not use, disclose, or transfer across borders any information that is processed for Buyer that may identify an individual (Personal Data), except to the extent necessary to perform under this Agreement; and

13. it will comply with all applicable data privacy laws and regulations, will implement and maintain appropriate technical and other protections for the Personal Data, and will cooperate fully with Buyer’s requests for access to, correction of, and destruction of Personal Data in Supplier’s possession.

THE WARRANTIES IN THIS AGREEMENT ARE IN LIEU OF ALL OTHER WARRANTIES AND CONDITIONS, EXPRESS OR IMPLIED, INCLUDING THOSE WARRANTIES OR CONDITIONS OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

6.2 Warranty Redemption

Subject to Section 9.0 Supplier Liability for Third Party Claims, if Products or Services do not comply with the warranties in this Agreement, Supplier will repair or replace Products (at the latest revision level) or re-perform Services, or credit or refund the Price of Products or Services, such remedy at Buyer’s discretion. For such Products, Supplier will issue to Buyer a Return Material Authorization (“RMA”) within five (5) days of Buyer’s notice. If Supplier fails to repair or replace Products or re-perform Services in a timely manner, Buyer may do so and Supplier will reimburse Buyer for actual and reasonable expenses. Buyer may return Products which do not conform to the warranties in this Agreement from any Buyer location to the nearest authorized Supplier location at cost of Supplier and Supplier will, at cost of Supplier, return any repaired or replaced Product in a timely manner.

6.3 Post Warranty Service

Supplier will offer post warranty Services as specified in the relevant SOW or identify a third party which will provide such Services. In the event a third party or Buyer will provide such Services, Supplier will provide the designated party with the information required for the performance of the Services.

6.4 Defects

Supplier will, at Buyer’s discretion, repair or replace, or credit or refund Products that are Defective as specified in the relevant SOW (“Defective Products”), or where a safety defect is found. Supplier will commence such performance within five (5) calendar days of Buyer’s notice to Supplier of Defective Products. Supplier will reimburse Buyer for all actual and

Form Title: Goods	Form Release: 8/98
Form Owner: Global Procurement	Revision: 09/01

E-3

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

GOODS

Agreement # 4902SD0054

reasonable expenses incurred by Buyer for such repair and replacement of Defective Products, including expenses associated with problem diagnosis, field and finished goods inventory repair, and replacement.

7.0 Delivery

7.1 Delivery Logistics

Delivery under this Agreement means delivery to the Buyer location and delivery point as specified in the relevant SOW and/or WA. Buyer may cancel of reschedule the delivery date or change the delivery point as specified in the relevant SOW and/or WA. The term of sale will be specified in a SOW or WA. Buyer may issue a twelve (12) month rolling forecast for quantities of Products that may be required. Supplier will only deliver the Products specified in a WA. ANY PRODUCT QUANTITIES CITED IN OR PURSUANT TO THIS AGREEMENT, EXCEPT FOR QUANTITIES CITED IN A WA AS FIRM, ARE PRELIMINARY AND NON-BINDING ONLY, BUYER MAKES NO REPRESENTATION OR WARRANTY AS TO THE QUANTITY OF PRODUCTS THAT IT WILL PURCHASE, IF ANY.

7.2 On-Time Delivery

The lead-time for Buyer to issue a WA prior to delivery will be specified in a SOW. Products specified in a WA for delivery with such lead-time will be delivered on time. Supplier will use reasonable efforts when Buyer requests delivery with a shorter lead-time. If Supplier cannot comply with a delivery commitment, Supplier will promptly notify Buyer of a revised delivery date and Buyer may:

1. cancel without charge Products or Services not yet delivered;

2. require Supplier to deliver Products using priority freight delivery at Supplier’s expense for the incremental freight charges; and

3. exercise all other remedies provided at law, in equity and in this Agreement.

8.0 Intellectual Property

Supplier grants Buyer all intellectual property rights licensable by Supplier which are necessary for Buyer to use and sell the Products. This Agreement does not grant either party the right to use the other party’s or their Affiliates’ trademarks, trade names or service marks.

9.0 Supplier Liability for Third Party Claims

9.1 General Indemnification

Supplier will defend, hold harmless and indemnify, including legal fees. Buyer and Buyer Personnel against third party claims that arise or are alleged to have arisen as a result of negligent or intentional acts or omissions of Supplier or Supplier Personnel or breach by Supplier of any term of this Agreement.

9.2 Intellectual Property Indemnification

Supplier will defend, or at Buyer’s option cooperate in the defense of, hold harmless and indemnify, including legal fees, Buyer and Buyer Personnel from third party claims that Supplier’s Products or Services infringe the intellectual property rights of a third party. ; provided however, Buyer shall (i) promptly notify supplier in writing of the claim, (ii) provide Supplier sole control over the defense and/or settlement of such claim, at Supplier’s expense and with Suppliers choice of counsel, and (iii) at Suppliers request and expense, provide full information and reasonable assistance to Supplier with respect to such claim. Buyer may join in defense of a claim with counsel of its choice at its expense. If such a claim is or is likely to be made. Supplier will, at its own expense and option , exercise the one or more of the following remedies that is practicable:

1. obtain for Buyer the right to continue to use and sell the Products and Services consistent with this Agreement;

2. modify the Products and Services so they are non-infringing and in compliance with this Agreement;

3. replace the Products and Services, or other affected Deliverables or Services, with non-infringing ones that comply with this Agreement; or

4. If none of the foregoing are commercially feasible, then at Buyer’s request, accept the cancellation of infringing Services and the return of the infringing Products and refund any amount paid.

9.3 Exceptions to Indemnification

Supplier will have no obligation to indemnify Buyer or Buyer Personnel for claims that Supplier’s Products or Services infringe the intellectual property rights of a third party to the extent such claims arise as a result of:

1. Buyer’s combination of Products or Services with other third party products or services not reasonably foreseeable by Supplier and such infringement or claim would have been avoided in the absence of such combination;

2. Supplier’s implementation of a Buyer originated design and such infringement or claim would have been avoided in the absence of such implementation; or

Form Title: Goods	Form Release: 8/98
Form Owner: Global Procurement	Revision: 09/01

E-4

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

GOODS

Agreement # 4902SD0054

3. modification of the Products except for intended modifications required for use of the Products and such infringement or claim would have been avoided in the absence of such modification; or

4. The use by Buyer an specified release of any Product more than thirty (300 days after supplier notifies buyer in writing that continued use of the specified release may subject Supplier to such claim of infringement, provide (A) that on or before giving such notice to Buyer, Supplier has provided Buyer with a replacement release of the affected Product, and (B) that such claim of infringement would have been avoided by the use of such replacement release.

10.0 Limitation of Liability between Supplier and Buyer

In no event will either party be liable to the other for any lost revenues, lost profits, incidental, indirect, consequential, special or punitive damages. This mutual Limitation of Liability does not limit the obligations and liability of Supplier provided in Section 9.0 Supplier Liability for Third Party Claims or Subsection 6.4 Defects. In no event will either party be liable for the respective actions or omissions of its Affiliates under this Agreement.

11.0 Supplier and Supplier Personnel

Supplier is an independent contractor and this Agreement does not create an agency relationship between Buyer and Supplier or Buyer and Supplier Personnel. Buyer assumes no liability or responsibility for Supplier Personnel. Supplier will:

1. ensure it and Supplier Personnel are in compliance with all laws, regulations, ordinances, and licensing requirements;

2. be responsible for the supervision, control, compensation, withholdings, health and safety of Supplier Personnel.

3. Inform Buyer if a former employee of Buyer will be assigned work under this Agreement, such assignment subject to Buyer approval; and

4. ensure Supplier Personnel performing Services on Buyer’s premises comply with the On Premises Guidelines and upon request, provide Buyer, for export evaluation purposes, the country of citizenship and permanent residence and immigration status of those persons. Buyer retains the right to refuse to accept persons made available by Supplier for export control reasons.

12.0 Insurance

Supplier will maintain at its expense:

1. commercial general or public liability insurance with a minimum limit per occurrence or accident of 1,000,000 USD (or local currency equivalent);

2. workers’ compensation or employer’s liability insurance as required by local law, such policies waiving any subrogation rights against Buyer; and

3. automobile liability insurance as required by local statute but not less than 1,000,000 USD (or local currency equivalent) if a vehicle will be used in the performance of this Agreement.

Insurance required under clauses (1) and (3) will name Buyer as an additional insured with respect to Buyer’s insurable interest, will be primary or non-contributory regarding insured damages or expenses, and will be purchased from insurers with an AM Best Rating of B+ or better and a financial class rating of 11 or better.

13.0 Term and Termination

13.1 Termination of this Base Agreement

Either party may terminate this Base Agreement, without any cancellation charge, for a material breach of this Agreement by the other party or if the other party becomes insolvent or files or has filed against it a petition in bankruptcy (“Cause”), to the extent permitted by law. Such termination will be effective at the end of a thirty (30) day written notice period if the Cause remains uncured. Either party may terminate this Base Agreement without Cause when there are no outstanding SOWs or WAs.

13.2 Termination of a SOW or WA

Buyer may, upon written notice to Supplier, terminate a SOW or WA:

1. with Cause effective immediately; or

2. without Cause.

Upon termination, in accordance with Buyer’s written direction, Supplier will immediately:

1. cease work;

2. prepare and submit to Buyer an itemization of all completed and partially completed Products and Services;

3. deliver to Buyer Products satisfactorily completed up to the date of termination at the agreed upon Prices in the relevant SOW and/or WA; and

4. deliver upon request any work in process.

In the event Buyer terminates without Cause, Buyer will compensate Supplier for the actual and reasonable expenses incurred by Supplier for work in process up to and including the date of termination, provided Supplier uses reasonable efforts to mitigate Buyer’s liability under this Subsection by, among other actions, accepting the return of, returning to its suppliers.

Form Title: Goods	Form Release: 8/98
Form Owner: Global Procurement	Revision: 09/01

E-5

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

GOODS

Agreement # 4902SD0054

selling to others, or otherwise using the canceled Products (including raw materials or works in process) and provided such expenses do not exceed the Prices.

14.0 General

14.1 Amendments

This Agreement may only be amended by a writing specifically referencing this Agreement which has been signed by authorized representatives of the parties.

14.2 Assignment

Neither party will assign their rights or delegate or subcontract their duties under this Agreement to third parties or Affiliates without the prior written consent of the other party, such consent not to be withheld unreasonably, except that either party may assign this Agreement in conjunction with the sale of a substantial part of its business utilizing this Agreement. Any unauthorized assignment of this Agreement is void.

14.3 Choice of Law and Forum; Waiver of Jury Trial; Limitation of Action

This Agreement and the performance of transactions under this Agreement will be governed by the laws of the country where the Buyer entering into the relevant agreement or PA is located, except that the laws of the State of New York applicable to contracts executed in and performed entirely within that State will apply if any part of the transaction is performed within the United States. The United Nations Convention on Contracts for the International Sale of Goods does not apply. The parties expressly waive any right to a jury trial regarding disputes related to this Agreement. Unless otherwise provided by local law without the possibility of contractual waiver or limitation, any legal or other action related to this Agreement must be commenced no later than two (2) years from the date on which the cause of action arose.

14.4 Communications

All communications between the parties regarding this Agreement will be conducted through the parties’ representatives as specified in the relevant sow. Supplier will use reasonable efforts to participate in replenishment logistics programs presented by Buyer.

14.5 Counterparts

This Agreement may be signed in one or more counterparts, each of which will be deemed to be an original and all of which when taken together will constitute the same agreement. Any copy of this Agreement made by reliable means (for example, photocopy or facsimile ) is considered an original.

14.6 Exchange of Information

All information exchanged is non confidential. If either party requires the exchange of confidential information, it will be made under a separate signed confidentiality agreement between the parties. The parties will not publicize the terms of this Agreement, or the relationship, in any advertising, marketing or promotional materials without prior written consent of the other party except as may be required by law, provided the party publicizing obtains any confidentiality treatment available. Supplier will use information regarding this Agreement only in the performance of this Agreement. For any business personal information relating to Supplier personnel that Supplier provides to Buyer, Supplier has obtained the agreement of the Supplier Personnel to release the information to Buyer and to allow Buyer to use such information in connection with this Agreement.

14.7 Freedom of Action

This Agreement is nonexclusive and either party may design, develop, manufacture, acquire or market competitive products or services. Buyer will independently establish prices for resale of Products or Services and is not obligated to announce or market any Products or Services and does not guarantee the success of its marketing efforts, if any.

14.8 Force Majeure

Neither party will be in default or liable for any delay or failure to comply with this Agreement due to any act beyond the control of the affected party. excluding labor disputes, provided such party immediately notifies the other.

14.9 Obligations of Affiliates

Affiliates will acknowledge acceptance of the terms of this Agreement through the signing of a PA before conducting any transaction under this Agreement.

14.10 Prior Communications and Order of Precedence

Form Title: Goods	Form Release: 8/98
Form Owner: Global Procurement	Revision: 09/01

E-6

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

GOODS

Agreement # 4902SD0054

This Agreement replaces any prior oral or written agreements or other communication between the parties with respect to the subject matter of this Agreement, excluding any confidential disclosure agreements. In the event of any conflict in these documents, the order of precedence will be:

1.	the quantity, payment and delivery terms of the relevant WA;
2.	the relevant SOW;
3.	this Base Agreement; and
4.	the remaining terms of the relevant WA.

14.11 Record Keeping and Audit Rights

Supplier will maintain (and provide to Buyer upon request) relevant business and accounting records to support invoices under this Agreement and proof of required permits and professional licenses, for a period of time as required by local law but not for leas than three (3) years following completion or termination of the relevant SOW and/or WA. All accounting records will be maintained in accordance with generally accepted accounting principles.

14.12 Severability

If any term in this Agreement is found by competent judicial authority to be unenforceable in any respect, the validity of the remainder of this Agreement will be unaffected, provided that such unenforceability does not materially affect the parties’ rights under this Agreement.

14.13 Survival

The provisions set forth in the following Sections and Subsections of this Base Agreement will survive after termination or expiration of this Agreement and will remain in effect until fulfilled; “Ongoing Warranties”, “Defects”, “Warranty Redemption”, “Intellectual Property”, “Supplier Liability for Third Party Claims”, “Limitation of Liability between Supplier and Buyer”, “Record Keeping and Audit Rights”, “Choice of Law and Forum; Waiver of Jury Trial; Limitation of Action”, “Exchange of Information”, and “Prior Communications and Order of Precedence”.

14.14 Waiver

An effective waiver under this Agreement must be in writing signed by the party waiving its right. A waiver by either party of any instance of the other party’s noncompliance with any obligation or responsibility under this Agreement will not be deemed a waiver of subsequent instances.

15.0

ACCEPTED AND AGREED TO:			ACCEPTED AND AGREED TO:
International Business Machines Corporation			Komag
By:	/s/ Gary Nakao	5/04/02	By:	Mitchell T. Shetterly	5/04/02
Buyer Signature		Date	Supplier Signature		Date
Gary Nakao			Mitchell T. Shetterly
Printed Name			Printed Name
Commodity Manager — STD			Technical Sales Manager — Komag
Title & Organization			Title & Organization
Buyer Address:			Supplier Address:
5600 Cottle Road			1710 Automation Parkway
San Jose , Ca. 95193			San Jose , Ca. 95131
USA			USA

Form Title: Goods
Form Owner: Global Procurement Form Release: 8/98
Revision: 09/01      

E-7

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: May 3, 2006	BY: /s/ Thian Hoo Tan
	Thian Hoo Tan
	Chief Executive Officer
	Komag, Incorporated

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: May 3, 2006	BY: /s/ Kathleen A. Bayless
	Kathleen A. Bayless
	Chief Financial Officer
	Komag, Incorporated

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 April 2, 2006 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

Komag, Incorporated

          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 April 2, 2006 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

Komag, Incorporated

          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.