WD Media (KOMG) 10-Q 2008 Q2 Quarterly report

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 July 1, 2007
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. Yesþ Noo

     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 filerþ      Accelerated filero      Non-accelerated filero

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yeso Noþ

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. Yesþ Noo

     On July 1, 2007, 30,362,919 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 Operations — three and six months ended July 1, 2007 and July 2, 2006		4
Condensed Consolidated Balance Sheets — July 1, 2007 and December 31, 2006		5
Condensed Consolidated Statements of Cash Flows — six months ended July 1, 2007 and July 2, 2006		6
Notes to Condensed Consolidated Financial Statements (Unaudited)		7-13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk		22
Item 4. Controls and Procedures		24
PART II. OTHER INFORMATION
Item 1A. Risk Factors		25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 4. Submission of Matters to a Vote of Security Holders		43
Item 6. Exhibits		45
SIGNATURES		46
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

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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 the proposed merger, product development, product acceptance, product demand, product transition plans, shipping volumes, projected revenues, international revenues, pricing pressures, sales returns, gross profits, 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.

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

KOMAG, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Six Months Ended
	July 1, 2007			July 2, 2006			July 1, 2007			July 2, 2006
Net sales	$	187,173		$	233,627		$	451,839		$	442,139
Cost of sales		181,045			168,659			386,705			318,078
Gross profit		6,128			64,968			65,134			124,061
Operating expenses:
Research, development, and engineering		15,406			16,081			31,905			31,156
Selling, general, and administrative		11,707			9,125			20,174			17,149
Gain on disposal of assets		(166	)		(26	)		(220	)		(86	)
		26,947			25,180			51,859			48,219
Operating income (loss)		(20,819	)		39,788			13,275			75,842
Other income (expense):
Interest income		2,300			1,867			3,759			3,938
Interest expense		(1,637	)		(441	)		(2,148	)		(882	)
Other income (expense), net		3			41			(2	)		(435	)
		666			1,467			1,609			2,621
Income (loss) before income taxes		(20,153	)		41,255			14,884			78,463
Provision for income taxes		823			966			2,883			1,937
Net income (loss)	$	(20,976	)	$	40,289		$	12,001		$	76,526
Basic net income (loss) per share	$	(0.72	)	$	1.35		$	0.41		$	2.57
Diluted net income (loss) per share	$	(0.72	)	$	1.21		$	0.42		$	2.31
Number of shares used in basic per share computations		29,084			29,883			29,625			29,784
Number of shares used in diluted per share computations		29,084			33,544			33,841			33,525

See accompanying notes to condensed consolidated financial statements.

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KOMAG, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

	July 1, 2007			December 31, 2006
ASSETS
Current assets
Cash and cash equivalents	$	99,888		$	129,632
Short-term investments		83,150			41,500
Accounts receivable (less allowances of $1,431 and $2,326 respectively)		112,597			140,230
Inventories		191,667			104,181
Prepaid expenses and other current assets		2,126			2,119
Total current assets		489,428			417,662
Property, plant, and equipment (net of accumulated depreciation of $270,943 and $219,388, respectively)		533,330			542,585
Deferred income taxes		5,343			7,346
Other assets		12,986			10,094
	$	1,041,087		$	977,687
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Trade accounts payable	$	126,796		$	139,477
Customer advances		79,045			127,181
Accrued expenses and other current liabilities		19,825			25,412
Total current liabilities		225,666			292,070
Long-term debt		250,000			80,500
Other long term liabilities		3,810			3,091
Total liabilities		479,476			375,661
Stockholders’ equity
Common stock, $0.01 par value per share:
Authorized - 120,000 shares
Issued and outstanding - 30,363 and 31,178 shares, respectively		304			312
Additional paid-in capital		329,828			283,679
Accumulated other comprehensive loss		(628	)		(611	)
Retained earnings		232,107			318,646
Total stockholders’ equity		561,611			602,026
	$	1,041,087		$	977,687

See accompanying notes to condensed consolidated financial statements.

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KOMAG, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	July 1, 2007			July 2, 2006
Operating Activities
Net income	$	12,001		$	76,526
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization of property, plant, and equipment		52,263			32,753
Deferred income taxes		2,234			—
Tax provision (benefit) charged to additional paid-in capital		(94	)		1,572
Stock-based compensation		8,842			8,713
Non-cash interest charges		241			77
Other non-cash charges		184			267
Foreign exchange loss		2,041			502
Changes in operating assets and liabilities:
Accounts receivable, net		27,661			(11,737	)
Inventories		(87,486	)		(21,421	)
Prepaid expenses and other current assets		(238	)		476
Trade accounts payable		(15,817	)		40,206
Customer advances		(48,136	)		37,262
Accrued expenses and other liabilities		(5,120	)		(5,946	)
Other non-current assets		985			—
Net cash (used in) provided by operating activities		(50,439	)		159,250
Investing Activities
Acquisition of property, plant, and equipment		(41,806	)		(177,409	)
Purchases of short-term investments		(122,300	)		(77,850	)
Proceeds from short-term investments		80,650			124,900
Proceeds from disposal of property, plant, and equipment		262			162
Other		5			(67	)
Net cash used in investing activities		(83,189	)		(130,264	)
Financing Activities
Proceeds from issuance of long-term debt, net of issuance costs		243,215			—
Repurchase of common stock		(140,417	)		(1,080	)
Proceeds from sale of common stock		1,021			3,235
Net cash provided by financing activities		103,819			2,155
Effect of exchange rate changes on cash and cash equivalents		65			1,074
Increase (decrease) in cash and cash equivalents		(29,744	)		32,215
Cash and cash equivalents at beginning of period		129,632			99,984
Cash and cash equivalents at end of period	$	99,888		$	132,199

See accompanying notes to condensed consolidated financial statements.

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KOMAG, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

July 1, 2007

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 six months ended July 1, 2007, are not necessarily indicative of the results that may be expected for the year ending December 30, 2007. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 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 2007 fiscal year will include 52 weeks. The three-month and six-month reporting periods included in this report include 13 weeks and 26 weeks, respectively.

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

	July 1, 2007		December 31, 2006
Raw materials	$	152,459	$	78,701
Work in process		18,292		15,900
Finished goods		20,916		9,580
	$	191,667	$	104,181

     Derivative Financial Instruments: In the second quarter of 2007, the Company commenced hedging a portion of its forecasted ringgit based expenses to help mitigate short term exposure to fluctuations of the currency by entering foreign exchange forward rate contracts. We account for our derivative and hedging activities under SFAS No. 133,Accounting for Derivative and Hedging Activities

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(SFAS 133). The assets or liabilities associated with our derivative instruments and hedging activities are recorded at fair value in other current assets or other current liabilities, respectively, in our Condensed Consolidated Balance Sheets. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting.

     A majority of our sales, expense, and capital purchasing activities is transacted in U.S. dollars. However, a large portion of our payroll, certain manufacturing and operating expenses, and inventory and capital purchases is transacted in the Malaysian ringgit (ringgit), subjecting us to foreign currency risk. We enter foreign currency forward contracts, generally with maturities of 12 months or less, to reduce the volatility of cash flows primarily related to forecasted expenses denominated in ringgit. In addition, we utilize foreign exchange forward contracts to mitigate foreign currency exchange rate risk associated with ringgit denominated liabilities.

     Cash Flow Hedging Activities: All hedging relationships are formally documented at the inception of the hedge and must be highly effective in offsetting changes to future cash flows on hedged transactions. The effectiveness of the cash flow hedge contracts, excluding time value, is assessed monthly using regression analysis. The effective portion of gains or losses resulting from changes in fair value of these hedges is initially reported as a component of accumulated other comprehensive income in stockholders’ equity. The gross amount of the effective portion of gains or losses resulting from changes in fair value of these hedges is subsequently reclassified into operating expenses in the period when the forecasted transaction is recognized in the Condensed Consolidated Statements of Operations. The effective portion of gains or losses on hedges recognized in accumulated other comprehensive income at the end of each quarter will be reclassified to earnings within 12 months. The ineffective portion of gains or losses resulting from changes in fair value, if any, is reported immediately in our Condensed Consolidated Statements of Operations in cost of goods sold.

     During the second quarter of 2007, the Company recorded less than $0.1 million of net unrealized losses on derivative financial instruments to accumulated other comprehensive income. There were no reclassifications to operating expenses during the second quarter of 2007. The ineffective portion of gains or losses resulting from changes in fair value was not material. The loss representing time value excluded from the assessment of hedge effectiveness was less than $0.1 million in the second quarter of 2007, which is included in cost of goods sold in the Condensed Consolidated Statement of Operations. As of July 1, 2007, we had foreign currency forward contracts to purchase approximately $87.4 million in ringgit. As of July 1, 2007, these foreign currency forward contracts outstanding had a fair value of $0.6 million, included in other current liabilities and a fair value of $0.5 million, included in other current assets.

     Non-designated Hedging Activities:Some of the Company’s foreign exchange forward contracts are not designated as hedging instruments under SFAS 133. Accordingly, any gains or losses resulting from changes in the fair value of these forward contracts are reported immediately in cost of goods sold. The gains and losses on these forward contracts generally offset the gains and losses associated with the underlying foreign-currency-denominated liabilities, which are also reported in cost of goods sold, in the Condensed Consolidated Statements of Operations.

     Computation of Net Income (Loss) Per Share:Basic net income (loss) per common share is computed by dividing income (loss) available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing income (loss)

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available to common stockholders by the weighted-average number of shares and dilutive potential shares of common stock outstanding during the period. The dilutive effect of outstanding options and unvested common stock 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 income available to common stockholders for the diluted net income per share calculation.

     The computation of diluted net loss per share for the second fiscal quarter of 2007 excludes the interest adjustment related to the contingently convertible debt of $1.6M and common stock equivalents of 4.8 million shares of common stock since their inclusion would be antidilutive.

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

	Three Months Ended					Six Months Ended
	July 1, 2007			July 2, 2006		July 1, 2007		July 2, 2006
Numerator for basic net income (loss) per share:
Net income (loss) as reported	$	(20,976	)	$	40,289	$	12,001	$	76,526
Numerator for diluted net income (loss) per share:
Net income (loss) as reported	$	(20,976	)	$	40,289	$	12,001	$	76,526
Interest adjustment related to contigently convertible debt		—			441		2,148		882
	$	(20,976	)	$	40,730	$	14,149	$	77,408
Denominator for basic net income per share:
Weighted average shares outstanding		29,084			29,883		29,625		29,784
Denominator for diluted net income per share:
Weighted average shares outstanding		29,084			29,883		29,625		29,784
Effect of dilutive securities:
Shares under contingently convertible debt		—			3,049		3,983		3,049
Stock options		—			369		136		429
Unvested common stock		—			243		97		263
		29,084			33,544		33,841		33,525
Basic net income (loss) per share	$	(0.72	)	$	1.35	$	0.41	$	2.57
Diluted net income (loss) per share	$	(0.72	)	$	1.21	$	0.42	$	2.31

     Recent Accounting Pronouncements:In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109(FIN 48). FIN 48 provides guidance on recognition and measurement of uncertainties in income taxes and is applicable for fiscal years beginning after December 15, 2006. The Company adopted this pronouncement beginning in fiscal year 2007. The adoption of FIN 48 had no material effect on the Company’s financial position or results of operations.

     In September 2006, the FASB issued SFAS No. 157,Fair Value Measurement(SFAS 157).SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements and is applicable for fiscal years beginning after November 15, 2007. The Company has not yet completed the evaluation or determined the impact of adopting SFAS 157.

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     In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(SFAS 159). SFAS 159 permits companies to choose to measure certain financial instruments and other items at fair value. The standard requires that unrealized gains and losses be reported in earnings for items measured using the fair value option and is applicable for fiscal years beginning after November 15, 2007. The Company has not yet completed the evaluation or determined the impact of adopting SFAS 159.

Note 2. Common Stock

     The Company repurchased and retired 0.5 million and 4.3 million shares of Company common stock at an average share price of $27.71 and $32.18, for a total cost of $13.8 million and $138.8 million in the three and six months ended July 1, 2007, respectively. These share repurchases are part of a March 2007 share repurchase authorization by the board of directors for an amount up to $200 million. The Company does not expect to repurchase additional shares under this authorization as the Merger Agreement prohibits such stock repurchases (see Note 8 on Proposed Acquisition). The Company immediately retired the shares repurchased, which decreased common stock by $5,000 and $43,000 for the par value of the common stock retired, additional paid-in capital by $5.4 million and $40.3 million and retained earnings by $8.4 million and $98.5 million, in the three and six months ended July 1, 2007, respectively. In addition, the Company has made periodic repurchases of common stock in connection with an employee stock plan.

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

     The following table reflects the percentage of the Company’s net sales by major customer (2):

	Three Months Ended						Six Months Ended
	July 1, 2007			July 2, 2006			July 1, 2007			July 2, 2006
Western Digital Corporation		40	%		38	%		37	%		37	%
Seagate Technology		34	%		32	%		35	%		36	%
Hitachi Global Storage Technologies (1)		18	%		26	%		19	%		24	%

(1)	Includes sales to Hitachi Global Storage Technologies’ contract manufacturer.
(2)	Total revenue used to calculate the customer concentration percentage excludes the sale of approximately $2.3 and $13.5 million of precious metal inventory in the three and six months ended July 1, 2007. No such sales occurred in the 2006 periods.

     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 primary supplier of aluminum blanks, which is a fundamental component in producing disks. The Company also relies on Heraeus Incorporated and Williams Advanced Materials, Incorporated for its sputtering target requirements, and on OMG Fidelity, Incorporated for supplies of nickel plating solutions.

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     A majority of the Company’s long-lived assets is located at its Malaysian manufacturing facilities. These assets totaled $497.9 million as of July 1, 2007, and $506.2 million as of December 31, 2006. The majority of the Company’s sales is delivered to manufacturing facilities located in Asia.

Note 4. Accrued Expenses and Other Current Liabilities

     The following table (in thousands) summarizes accrued expenses and other liabilities balances at July 1, 2007 and December 31, 2006:

	July 1, 2007		December 31, 2006
Accrued compensation and benefits	$	10,679	$	22,481
Other current liabilities		9,146		2,931
	$	19,825	$	25,412

Note 5. Customer Advances

     The Company has supply agreements with each of its major customers. Under the supply agreements, the Company supplies certain media volumes subject to the terms and conditions of the agreements. The customers provided cash advances covering future purchases of media from the Company. The customer advances, which totaled $79.0 million and $127.2 million as of July 1, 2007 and December 31, 2006, respectively, are to be repaid to the customers based on a specified dollar amount per disk purchased. During the three and six months ended July 1, 2007, customer advances repaid to customers were $22.1 million and $48.3 million, respectively. The agreements generally provide for repayment at the end of the term of the agreement if not fully paid in connection with purchases. The terms of the current arrangements expire on various dates through December 2009.

Note 6. Debt

Conversion of Convertible Subordinated Notes due 2024

     On March 28, 2007, the Company called for redemption on April 17, 2007, all $80.5 million of then outstanding principal amount of its 2.0% Convertible Subordinated Notes due 2024 (the Notes). All of the Notes were converted into 3.0 million shares of the Company’s common stock in April 2007. In accordance with the terms of the Notes, each $1,000 principal amount of the Notes was converted into 37.8788 shares of the Company’s common stock. As a result of the redemption, accrued interest of $0.3 million, unamortized loan issuance fees of $2.6 million and the outstanding debt balance of $80.5 million were re-classified to additional paid in capital with the exception of $30 thousand for the par value of the common stock issued, which was re-classified to common stock. The Company did not incur any gains or losses as a result of the conversion.

Convertible Subordinated Notes due 2014

     On March 28, 2007, the Company completed an offering of $250 million of 2.125% Convertible Subordinated Notes (the New Notes). The New Notes mature on April 1, 2014, bear interest at a rate of 2.125% per

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annum, and require semiannual interest payments beginning on October 1, 2007. The New Notes may be converted, at the option of the holder, into shares of the Company’s common stock based upon a base conversion rate of 17.2414 shares of common stock per $1,000 principal amount of the notes. The conversion rate is equivalent to a base conversion price of approximately $58.00 per share and is subject to adjustment in certain dilution events. If at the time of conversion, the Company’s common stock price exceeds the base conversion price, holders will receive up to an additional 13.2836 shares of common stock per $1,000 principal amount of the notes, as determined pursuant to a specified formula.

     Upon the occurrence of a fundamental change of the Company (which would generally include a change of control (including of our board of directors), liquidation or dissolution of the Company or the failure of our shares to be listed on a national securities exchange or other trading market), holders may require the Company to repurchase some or all of their notes for cash at a price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any. Also, if a fundamental change occurs, the Company may be required in certain circumstances to increase the conversion rate for any notes converted in connection with such fundamental change by a specified number of shares of our common stock. On June 28, 2007, the Company entered into an Agreement and Plan of Merger with Western Digital Corporation (Western Digital) and State M Corporation, a wholly-owned subsidiary of Western Digital, pursuant to which State M Corporation commenced a cash tender offer on July 11, 2007 for all outstanding shares of our common stock. If the tender offer is successfully completed, it will constitute a fundamental change. The Company does not expect that the consummation of the current tender offer would result in an increase in the conversion rate, however, the Company cannot assure you that such an increase will not be triggered since the determination is made under the indenture for the New Notes based on the average of the closing price of the Company’s common stock over a five consecutive trading day period ending on the trading day immediately preceding the effective date of the fundamental change.

     There are no financial covenants or guarantees and there is no collateral associated with the New Notes. In connection with the issuance of the New Notes, the Company incurred approximately $6.8 million of loan issuance fees. The loan issuance fees, which are included in other assets on the condensed consolidated balance sheet, are being amortized on a straight-line basis over the 7-year maturity of the New Notes. On July 1, 2007, unamortized loan fees were $6.6 million.

Note 7. Income Taxes

     The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (FIN 48),on January 1, 2007. Total unrecognized income tax benefits at the date of adoption were $0.7 million and remained unchanged from the amount of the Company’s pre-implementation income tax contingency reserves. The unrecognized income tax benefits, if realized, will not affect the annual effective tax rate but will be credited to additional paid in capital.

     Unrecognized tax benefits are expected to decrease by $0.2 million within the next 12 months due to the anticipated lapse of an applicable statute of limitation.

     Interest and penalties related to unrecognized income tax benefits will be accrued in interest expense and selling, general and administrative expense, respectively. The Company has not accrued interest or penalties as of

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the date of adoption because they are not applicable.

     The Company and its subsidiaries file income tax returns in the U.S., California, the Netherlands and Malaysia. The tax years 2000 to 2006 remain open to examination in each of these major taxing jurisdictions.

Note 8. Commitments and Contingencies

     The Company provides indemnification to customers under customer contracts for potential intellectual property infringement claims involving the Company's products. The company has received such a claim for reimbursement of legal defense costs from its customers in connection with a claim of intellectual property infringement. The Company can not currently estimate the amount of potential liability related to such claim. As of July 1, 2007, the expense incurred by the Company under customer indemnity provisions has not been material.

Note 9. Proposed Acquisition

     On June 28, 2007, the Company entered into an Agreement and Plan of Merger with Western Digital Corporation and State M Corporation, an indirect wholly-owned subsidiary of Western Digital, pursuant to which State M Corporation commenced a cash tender offer on July 11, 2007 for all outstanding shares of our common stock at a price per share of $32.25. Unless extended pursuant to the terms and conditions set forth in the Agreement and Plan of Merger, the tender offer was originally scheduled to expire on August 7, 2007, but was extended by Western Digital Corporation until September 5, 2007. In the event the tender offer is successfully completed, State M Corporation will merge with and into Komag and Komag will become an indirect wholly-owned subsidiary of Western Digital Corporation, and each share of Komag common stock not purchased in the tender offer will be converted into the right to receive $32.25 in cash. The tender offer and merger are subject to customary closing conditions, including certain regulatory approvals. We currently expect that the merger will be completed in the third quarter of 2007. The merger agreement provides for the payment by the Company of a termination fee of $38 million if the merger agreement is terminated in certain circumstances in connection with a competing third-party acquisition proposal and certain other circumstances. The boards of directors of each of the Company, Western Digital and State M Corporation have unanimously approved the tender offer and the merger, on the terms and subject to the conditions set forth in the merger agreement. Western Digital is a significant customer of the Company (see Note 3).

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

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

     The following discussion contains predictions, estimates, and other forward-looking statements that involve a number of risks and uncertainties about our business, including but not limited to: our belief that we are a leading independent supplier of disks; our belief that we have developed a deep understanding of market needs and market trends 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 belief that we will continue to investigate areas where we can expand our presence in the disk market; our belief that we have implemented strong product development and product transition plans, including with respect to our PMR product transition plans; our belief that the estimates and judgments made regarding future events in connection with the preparation of our financial statements are reasonable; and our belief that the planned merger will be completed in the third quarter of 2007. 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 sales, 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 and product developments, pricing pressures, changes in customer demand, and general economic conditions, as well as those discussed in the Risk Factors section below. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of such statements. Readers should review the Risk Factors section below, as well as other documents filed from time to time by us with the SEC.

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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 located 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 primarily 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 a number of factors, including the 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 or produce for internal use. 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.

     We have begun a significant product transition to more advanced, perpendicular magnetic recording media (PMR) technology. This is an important and substantial product undertaking for us, and, if not effectively implemented, may have a material adverse impact on our results of operations. Our PMR media products require greater quantities of precious metals like ruthenium, compared to our longitudal magnetic recording (LMR) products. This has led to a significant increase in the level of our precious metal inventory. Ruthenium has at times been in scarce supply leading to increasing prices and price volatility. Though the price of ruthenium has recently subsided, it may continue to be volatile in the future. We believe we have secured sufficient supply of ruthenium to support our PMR product requirements. We continue to work internally and with our suppliers to reduce our ruthenium requirements through product design modifications and efficiencies in manufacturing processes.

     We sold approximately 25.8 million disks in the second quarter of 2007, a significant decrease from the prior fiscal quarter. The resulting revenue reduction, operating loss and negative operating cash flow was primarily due to market pressures negatively affecting both unit volumes and average selling prices, the transition to PMR media, costs associated with substantially lower yield and utilization driven by a high level of new products and new product qualifications, and the continued high costs of precious metals.

     In response to the announcement of the proposed merger with Western Digital or due to possible uncertainty about the proposed merger, customers may delay or defer purchasing decisions or elect to switch to other suppliers. In particular, prospective customers could be reluctant to do business with the Company due to uncertainty about the direction of the Company’s offerings and willingness to support existing products. To the extent that the proposed merger creates uncertainty, our financial results could be adversely affected.

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     A majority of our sales, 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. Foreign exchange gains and losses are reported in Cost of Sales. In the second quarter of 2007, we commenced hedging a portion of the ringgit denominated expenses to help mitigate short term exposure to fluctuation of the currency.

     The following discussion compares the results of operations for the three and six months ended July 1, 2007, to the results of operations for the three and six months ended July 2, 2006. To facilitate an understanding of this discussion, we have provided the following table. The table (in thousands) reflects components of our statements of operations for the three and six months ended July 1, 2007 and July 2, 2006, respectively, and also reflects operating statement components as a percentage of net sales.

	Three Months Ended										Six Months Ended
	July 1, 2007					July 2, 2006					July 1, 2007					July 2, 2006
Net sales	$	187,173		100.0	%	$	233,627		100.0	%	$	451,839		100.0	%	$	442,139		100.0	%
Cost of sales		181,045		96.7	%		168,659		72.2	%		386,705		85.6	%		318,078		71.9	%
Gross profit		6,128		3.3	%		64,968		27.8	%		65,134		14.4	%		124,061		28.1	%
Research, development, and engineering		15,406		8.2	%		16,081		6.9	%		31,905		7.0	%		31,156		7.1	%
Selling, general, and administrative expense		11,707		6.3	%		9,125		3.9	%		20,174		4.5	%		17,149		3.9	%
Gain on disposal of assets		(166	)	(0.1	%)		(26	)	(0.0	%)		(220	)	(0.1	%)		(86	)	(0.0	%)
Interest income		2,300		1.2	%		1,867		0.8	%		3,759		0.8	%		3,938		0.9	%
Interest expense		(1,637	)	(0.9	%)		(441	)	(0.2	%)		(2,148	)	(0.5	%)		(882	)	(0.2	%)
Other income (expense), net		3		0.0	%		41		0.0	%		(2	)	(0.0	%)		(435	)	(0.1	%)
Provision for income taxes		823		0.4	%		966		0.4	%		2,883		0.6	%		1,937		0.4	%
Net income/ (loss)	$	(20,976	)	(11.2	%)	$	40,289		17.2	%	$	12,001		2.7	%	$	76,526		17.3	%

Net Sales

     Consolidated net sales of $187.2 million in the second quarter of 2007 were 19.9% lower compared to $233.6 million in the second quarter of 2006. Finished unit sales decreased to 25.8 million in the second quarter of 2007 from 36.6 million in the second quarter of 2006. The decrease in consolidated net sales primarily reflected the decrease in our sales volume due to lower demand for the Company’s media products. Our average selling price (ASP) decreased by approximately four percent in the second quarter of 2007 compared to the second quarter of 2006.

     Other disk sales, which generally include single-side disks, aluminum substrate disks, plated disks, textured disks, and polished disks, were $42.4 million in the second quarter of 2007, compared to $23.6 million in the second quarter of 2006. The increase is primarily attributable to the substrate supply agreement we signed with Seagate in the first quarter of 2007. Disk substrate sales vary from period to period based on customer requirements. Additionally, we had sales of approximately $2.3 million from the sale of precious metal inventory in the current quarter. No such sales occurred in the second quarter of 2006.

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     Consolidated net sales in the first six months of 2007 increased by $9.7 million, to $451.8 million from $442.1 million in the first six months of 2006. Our finished media sales volume decreased by 4.2%, to 65.6 million units in the first six months of 2007 from 68.5 million units in the first six months of 2006. Other disk sales in the first six months of 2007 were $78.9 million, compared to $49.4 million in the first six months of 2006. The other disk sales increase in the first six months of 2007 compared to the same period in 2006 resulted from $13.5 million in sales of precious metal inventory in the first six months of 2007 compared to no such sales in the first six months of 2006 and from our substrate supply agreement with Seagate. The finished unit shipment decrease in the first six months of 2007 compared to the same period in 2006 resulted from the sharply lower sales during the second quarter of 2007.

     Finished disk shipments for desktop and consumer applications together accounted for all of our unit shipment volume in the second quarter and first six months of 2007 compared to 95.3% and 94.2% in the second quarter and first six months of 2006, respectively. The remaining finished disk shipments in the second quarter and first six months of 2006 were for enterprise drives.

     Sales of 160GB and above per platter disks increased to 54.6% and 46.0% of net sales in the second quarter and first six months of 2007, respectively, compared to 22.6% and 14.0% in the second quarter and first six months of 2006, respectively. The increase reflects the continued customer migration to higher storage densities.

     In the second quarter of 2007, sales to Western Digital, Seagate Technology (Seagate) and Hitachi Global Storage Technologies (HGST) (including sales to HGST’s contract manufacturer, Excelstor) accounted for 40%, 34% and 18%, respectively, of our total net sales. Our sales are concentrated among a few customers. Due to our pending merger with Western Digital, sales to Seagate and HGST may decline in future quarters. We cannot predict the rate of this decline with certainty. These customers were required to pay certain advances to us covering future purchases of media from us. The customer advances, which totaled $79.0 million and $127.2 million as of July 1, 2007 and December 31, 2006, respectively, are being repaid to the customers based on a specified dollar amount per disk purchased.

Gross Profit

     For the second quarter of 2007, we achieved a gross profit percentage of 3.3% which was a 24.5-point decrease compared to the 27.8% in the second quarter of 2006. Increased manufacturing costs accounted for a decrease of 21.6 percentage points and a decrease in the ASP accounted for a decrease of 2.9 percentage points. The higher manufacturing cost was attributable to significantly lower factory utilization and lower yield associated with transitions to new customer programs and higher costs of materials, particularly precious metals.

     For the first half of 2007, we achieved a gross profit percentage of 14.4% compared to a gross profit percentage of 28.1% for the first half of 2006, a 13.7-point decrease. Increased manufacturing costs accounted for nearly all of the decrease in the gross margin percentage.

Research, Development, and Engineering Expenses

     Research, development and engineering (R&D) expenses of $15.4 million in the second quarter of 2007 were $0.7 million lower than the $16.1 million in the second quarter of 2006. The lower R&D costs primarily reflect

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lower incentive compensation expense under the Company’s incentive compensation plans partially offset by higher program costs for new product programs.

     R&D expenses of $31.9 million in the first half of 2007 were $0.7 million higher than the $31.2 million in the first half of 2006. The increase primarily reflects higher programs costs for new product programs and higher stock-based compensation expense, partially offset by lower incentive compensation expense.

Selling, General, and Administrative Expenses

     Selling, general and administrative (SG&A) expenses of $11.7 million in the second quarter of 2007 were $2.6 million higher compared to the $9.1 million incurred in the second quarter of 2006, The increase is primarily due to $4.3 million in expenses incurred related to the proposed merger with Western Digital, partially offset by lower stock compensation expense and lower incentive compensation.

     SG&A expenses of $20.2 million in the first half of 2007 were $3.1 million higher compared to the $17.1 million incurred in the first half of 2006. The increase primarily reflects $4.3 million of expenses related to the proposed merger with Western Digital, partially offset by offset by lower stock compensation expense and lower incentive compensation.

Interest Expense

     Interest expense primarily reflected interest on our $250 million, 2.125% Convertible Subordinated Notes for the second quarter of 2007.

Tax provision

     Our income tax rate for the first six months of 2007 was 19.4% and it was 2.5% for the first six months of 2006. The effective tax rate is higher in 2007 than 2006 due to the higher United States income and lower worldwide income. Our overall tax rate is lower than the statutory rates because of the tax holiday granted to our Malaysian subsidiary, which expires in December 2016.

Critical Accounting Policies

     In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. We regularly evaluate our estimates, including those related to our net sales, valuation of inventories, commitments and contingencies, income taxes, stock based compensation, incentive compensation 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

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condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Allowance for Sales Returns

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

     Since estimated sales returns are recorded as a reduction in 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 second quarter of 2007.

Inventory Obsolescence

     Our policy is to provide for inventory obsolescence based upon an estimated obsolescence percentage applied to the inventory based on age, historical trends, and requirements to support forecasted sales. In addition, and as necessary, we may provide additional charges for future known or anticipated events. There were no significant changes from the prior quarter estimates in the second quarter of 2007.

Hedge Accounting for Derivatives

     We have international operations and during the normal course of business we are exposed to foreign currency exchange risks as a result of transactions that are denominated in currencies other than the United States dollar. We enter into foreign currency forward contracts to manage a portion of the volatility related to transactions that are denominated in foreign currencies. When specific criteria required by SFAS 133 have been met, changes in fair values of hedge contracts relating to forecasted cash flows are recorded in accumulated other comprehensive income in the Condensed Consolidated Balance Sheet until the underlying hedge transaction affects operating expenses. By their nature, our estimates of forecasted cash flows may fluctuate over time and may ultimately vary from actual transactions. We do not use foreign exchange forward contracts for speculative or trading purposes.

Provision for Income Tax and Valuation Allowance

     We account for income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. Our consolidated financial statements contain certain deferred tax assets which have arisen primarily as a result of operating losses, credits, as well as other temporary differences between financial and tax accounting basis. Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes,requires the establishment of a valuation allowance if the realization of the deferred tax assets is not more likely than not based on an evaluation of objective verifiable evidence. Significant management judgment is required in determining the

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provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against those net deferred tax assets. We evaluate the weight of all available evidence to determine whether it is more likely than not that some portion or all of the net deferred income tax assets will be realized.

     In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes(FIN 48), which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before its effect is recognized in the financial statements. FIN 48 also provides guidance on recognition, derecognition, measurement, classification, interest and penalties, classification, disclosure and transition. The Company adopted FIN 48 on January 1, 2007 and the adoption did not affect the Company’s financial statements.

Stock-based Compensation

     We account for all stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123R,Share-Based Payment.Under these provisions, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as an expense over the vesting period. Under SFAS No. 123R, we are required to use judgment in estimating the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ significantly from the original estimate, stock-based compensation expense and our results of operations could be materially impacted.

     The fair values of all stock options granted are estimated using the Black-Scholes-Merton option pricing model. The Black-Scholes-Merton model requires the input of highly subjective assumptions such as risk-free interest rates, volatility factor of the expected market price of our common stock and the weighted-average expected option life. The expected volatility factor used to value stock options was based on the historical volatility of the market price of the Company’s common stock over a period equal to the estimated weighted average life of the options. The weighted average life of the options was estimated based on an evaluation of the vesting term, contractual life, and historical and expected exercise behavior. We base the risk-free interest rate on zero coupon yields implied from U.S. Treasury issues with remaining terms similar to the expected term of the options.

Liquidity and Capital Resources

     As of July 1, 2007, we had $183.0 million in cash, cash equivalents and short-term investments, which reflects an $11.9 million increase during the first half of 2007. The increase primarily reflected $243.2 million in net proceeds from our debt offering, offset by $140.4 million used to repurchase common stock, $41.8 million of spending on property, plant, and equipment and a $50.4 million decrease resulting from our operating activities. The primary components of this change included the following:

• net income of $12.0 million, net of non-cash depreciation and amortization of property, plant and equipment of $52.3 million and other non-cash charges of $13.4 million;

• an accounts receivable decrease of $27.7 million, which primarily reflected decreased sales;

• an inventory increase of $87.5 million, which primarily reflected increased precious metal inventory to support our transition to PMR products;

• an accounts payable decrease of $15.8 million;

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• a net decrease in customer advances of $48.1 million, which primarily reflected repayments of advances to customers; and

• an accrued expenses and other liabilities decrease of $5.1 million, which primarily reflected payments of 2006 incentive compensation accruals, offset by an increase in fees associated with the proposed acquisition.

     Our total capital spending in the first six months of 2007 was $43.1 million (on an accrual basis), and included capital expenditures to improve our capability to manufacture our advanced PMR products, for projects designed to improve yield and productivity and a new enterprise resource planning system that was implemented in the second quarter of 2007.

     In April 2007, holders of $80.5 million of 2% Convertible Notes (the Notes) converted their Notes into shares of our common stock. In connection with the conversion of the Notes, the Company issued 3,049,234 shares of its common stock. These 3,049,234 shares of common stock have been included in the number of diluted shares outstanding for the earnings per share calculation since the 2.0% Notes were issued in 2004. As such, the conversion of the Notes into shares of common stock did not further impact the number of diluted shares.

     On March 28, 2007, we completed an offering of $250 million of 2.125% Convertible Subordinated Notes (the New Notes). The New Notes mature on April 1, 2014, bear interest at a rate of 2.125% per annum, and require semiannual interest payments beginning on October 1, 2007. The New Notes may be converted, at the option of the holder, into shares of our common stock based upon a base conversion rate of 17.2414 shares of common stock per $1,000 principal amount of the notes. The conversion rate is equivalent to a base conversion price of approximately $58.00 per share and is subject to adjustment in certain dilution events. If at the time of conversion, the Company’s common stock price exceeds the base conversion price, holders will receive up to an additional 13.2836 shares of common stock per $1,000 principal amount of the notes, as determined pursuant to a specified formula. Upon the occurrence of a fundamental change of the Company (which would generally include a change of control (including of our board of directors), liquidation or dissolution of the Company or the failure of our shares to be listed on a national securities exchange or other trading market), holders may require us to repurchase some or all of their notes for cash at a price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any. Also, if a fundamental change occurs, we may be required in certain circumstances to increase the conversion rate for any notes converted in connection with such fundamental change by a specified number of shares of our common stock. There are no financial covenants, guarantees, or collateral associated with the New Notes.

     The Company repurchased and retired 0.5 million and 4.3 million shares of Company common stock at an average share price of $27.71 and $32.18, for a total cost of $13.8 million and $138.8 million in the three and six months ended July 1, 2007, respectively. These share repurchases are part of a March 2007 share repurchase authorization by the board of directors for an amount up to $200 million. The Company does not expect to repurchase additional shares under this authorization as the Agreement and Plan of Merger prohibits such stock repurchases. The Company immediately retired the shares repurchased, which decreased additional paid-in capital by $5.4 million and $40.3 million and retained earnings by $8.4 million and $98.5 million, in the three and six months ended July 1, 2007, respectively.

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     We have arranged bank guarantees of Malaysian ringgit 29.5 million (approximately $8.6 million) which are required by Malaysian utility companies and other Malaysian vendors. There is no expiration date on the bank guarantees. No interest will be charged on the bank guarantees, but there is a commission charge ranging between 0.05% and 0.10% on the amount of bank guarantee utilized. As of July 1, 2007, there were no liabilities outstanding related to the bank guarantees.

     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 2011. We have no capital leases.

     As of July 1, 2007, our long-term debt obligations, operating lease obligations, and unconditional purchase obligations were as follows (in thousands):

	Remainder
	of
	2007		2008		2009		2010		2011		Thereafter		Total
Long-Term Debt Obligations (1)	$	—	$	—	$	—	$	—	$	—	$	250,000	$	250,000
Operating Lease Obligations		1,127		2,073		3,167		3,155		3,145		10,101		22,768
Unconditional Purchase Obligations (2)		2,089		4,225		4,225		4,225		3,668		11,690		30,122
Total Contractual Cash Obligations	$	3,216	$	6,298	$	7,392	$	7,380	$	6,813	$	271,791	$	302,890

(1)	Upon the occurrence of a fundamental change, holders may require the Company to repurchase some or all of their notes for cash at a price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any. If the tender offer or the proposed merger with Western Digital is consummated, it will constitute a fundamental change.
(2)	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.

Off-Balance Sheet Arrangements

     We do not have any off-balance sheet financing arrangements or transactions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Rate Risk

     A majority of our sales, expense, and capital purchasing activities is transacted in U.S. dollars. However, a large portion of our payroll, certain manufacturing and operating expenses, and inventory and capital purchases is transacted in the Malaysian ringgit (ringgit). As a result, we are exposed to foreign currency exchange rate risk. Changes in exchange rates could adversely affect the related cash flows associated with foreign currency denominated payroll, certain manufacturing and operating expenses, and

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raw materials and capital purchases. In the first six months of 2007, our U.S. dollar-equivalent spending on payroll, manufacturing and operating expenses, and raw materials and capital purchases that were denominated in ringgit was approximately $132.7 million. Additionally, in the first six months of 2007, we paid approximately $75.8 million denominated in ringgit to a Malaysian supplier for raw materials purchases, negotiated in US dollars, 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 July 1, 2007, we held approximately $7.1 million (ringgit 24.6 million) of cash and cash equivalents that were denominated in ringgit.

     Cash Flow Hedging Activities:In the second quarter of 2007, we commenced hedging a portion of our forecasted ringgit based cash flows to help mitigate short term exposure to fluctuations of the currency by entering foreign exchange forward rate contracts. These contracts generally have maturities of 12 months or less. These transactions are designated and qualify as cash flow hedges. The derivative assets or liabilities associated with our hedging activities are recorded at fair value in other current assets and other current liabilities in our Condensed Consolidated Balance Sheet. The effective portion of gains or losses resulting from changes in fair value of these hedges is initially reported as a component of accumulated other comprehensive income in stockholders’ equity and subsequently reclassified into operating expenses, as appropriate in the period when the forecasted transaction is recorded. If we determine a hedged transaction is no longer probable but remote of occurring within the defined hedge period, we are required to reclassify the cumulative effective change in the fair values of the related hedge contracts from accumulated other comprehensive income to operating expenses. Our hedging programs are expected to reduce, but do not entirely eliminate, the impact of currency exchange rate movements in operating expenses. As of July 1, 2007, we had foreign currency forward contracts to purchase approximately $87.4 million in ringgit. As of July 1, 2007, these foreign currency forward contracts outstanding had a fair value of $0.6 million, included in other current liabilities and a fair value of $0.5 million, included in other current assets.

     Non-designated Hedging Activities. From time to time, we may utilize foreign exchange forward contracts to mitigate foreign currency risk associated with ringgit denominated liabilities. The forward contracts generally have a contractual term of approximately one to two months. The foreign exchange forward contracts we enter into that are not designated hedging instruments under SFAS 133 are accounted for as derivatives whereby the fair value of the contracts are reported as other current assets or other current liabilities in our Condensed Consolidated Balance Sheets, and gains and losses from changes in fair value are reported in cost of goods sold. The gains and losses on these forward contracts generally offset the gains and losses on the underlying foreign-currency-denominated liabilities, which are also reported in cost of goods sold, in our Condensed Consolidated Statements of Operations. As of July 1, 2007, we had forward foreign exchange contracts to purchase approximately $18.2 million in ringgit. As of July 1, 2007, these foreign currency forward contracts outstanding had a fair value of $0.4 million, included in other current liabilities.

     The counterparty to these forward contracts is a creditworthy multinational commercial bank; therefore, the risk of counterparty nonperformance is not considered to be material.

     Notwithstanding our efforts to mitigate some foreign currency exchange rate risks, there can be no assurance that our hedging activities will adequately protect us against the risks associated with foreign currency fluctuations. As of July 1, 2007, a hypothetical adverse foreign currency exchange rate movement of 10 percent or 15 percent would result in a potential loss in fair value of our forward contracts of $10.3 million and $15.5 million, respectively.

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Other Market Risks

     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 are accounted for as cash equivalents or short-term investments, depending on the period of time from the purchase date to the maturity date. The fair value of these securities approximated their carrying amounts at July 1, 2007.

     In 2007, we entered into a supply agreement for the purchase of precious metal inventory. Under the supply agreement we are committed to purchase certain quantities of precious metals in 2007 at the supplier’s cost for the metal. In addition, we have various other purchase commitments for precious metals in 2007. In the three and six months ended July 1, 2007, we sold a portion of our precious metal from inventory for approximately $2.3 million and $13.5 million, respectively. We continually evaluate our level of precious metal inventory and may have additional sales of precious metal inventory in future periods.

     As of July 1, 2007, we had $250 million in convertible subordinated notes outstanding that bear interest at a fixed annual interest rate of 2.125% and mature in April 2014. A hypothetical 100 basis point increase in interest rates would result in approximately $2.5 million of additional interest expense each year.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     As of July 1, 2007, 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, as of July 1, 2007, our disclosure controls and procedures were 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

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• 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

     The Company implemented a global enterprise resource planning system using SAP applications in fiscal May 2007. The implementation of these applications involved changes to certain internal controls over financial reporting, which the Company believes were material. In connection with this, we reviewed the design and operating effectiveness of key controls over financial reporting affected by the new system for the quarter ended July 1, 2007. There were no other changes that occurred during the second quarter of 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 and 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 Proposed Business Combination Transaction with Western Digital

     On June 28, 2007, we entered into an Agreement and Plan of Merger (Merger Agreement) with Western Digital and State M Corporation, an indirect wholly-owned subsidiary of Western Digital (Offeror). Pursuant to the Merger Agreement, Offeror commenced a cash tender offer on July 11,

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2007 to purchase all of our outstanding common stock at a price of $32.25 per share, net to the holder thereof in cash, without interest, less any required withholding taxes, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated as of July 11, 2007 (Offer to Purchase), and the related Letter of Transmittal (which, together with the Offer to Purchase, as each may be amended or supplemented from time to time, constitute the Offer). The Offer was originally scheduled to expire at 12:00 Midnight, New York City time, on Tuesday August 7, 2007, but has been extended by Western Digital until 7:00 a.m., New York City time, on Wednesday, September 5, 2007. Following the successful completion of the Offer, Offeror will be merged with and into Komag. The Merger Agreement contains representations, warranties and covenants of Komag, the Offeror and Western Digital, including among others, covenants of Komag concerning the conduct of its business in the ordinary course during the interim period between the execution of the Merger Agreement and the consummation of the merger. The closing of the merger is subject to customary closing conditions, including regulatory approvals and approval of the merger by the remaining stockholders of Komag, if required.

     The Merger Agreement, the Offer and the proposed merger are more fully described in the Offer to Purchase and the Letter of Transmittal, which were filed as exhibits to the Tender Offer Statement on Schedule TO filed by Offeror, Western Digital Technologies, Inc., and Western Digital with the SEC on July 11, 2007 and which were mailed to stockholders of Komag along with other related materials. More information can also be found on the Komag’s Solicitation/Recommendation Statement on Schedule 14D-9 relating to the Offer, which was also filed with the SEC on July 11, 2007 and mailed to stockholders of Komag along with other related materials.

Customer uncertainties related to the merger could adversely affect the businesses, revenues and gross margins of Komag.

     In response to the announcement of the merger or due to possible uncertainty about the merger, customers of Komag may delay or defer purchasing decisions or elect to switch to other suppliers. In particular, prospective customers could be reluctant to purchase the products and services of Komag due to uncertainty about the direction of the combined company’s offerings and willingness to support existing products. To the extent that the merger creates uncertainty among those persons and organizations contemplating purchases such that one large customer, or a significant group of smaller customers, delays, defers or changes purchases in connection with the planned merger, the results of operations of Komag would be adversely affected. Accordingly, quarterly revenues and net earnings of Komag could be substantially below expectations of market analysts and a decline in Komag’s stock price could result.

The merger is subject to the receipt of consents and approvals from government entities that may impose conditions that could have an adverse effect on Komag and could cause abandonment of the merger.

     Completion of the merger is conditioned upon, among other things, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (which expired on July 23, 2007) and expiration or termination of the applicable waiting period under the antitrust laws of the People’s Republic of China.

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     The reviewing foreign authorities may not permit the merger at all or may impose restrictions or conditions on the merger that may seriously harm the combined company if the merger is completed. These conditions could include a complete or partial license, divestiture, spin-off or the holding separate of assets or businesses. Either Komag or Western Digital may refuse to complete the merger if restrictions or conditions are required by governmental authorities that would materially adversely impact the combined company’s results of operations or the benefits anticipated to be derived by the combined company. Any delay in the completion of the merger could diminish the anticipated benefits of the merger or result in additional transaction costs, loss of revenue or other effects associated with uncertainty about the transaction. Komag and Western Digital also may agree to restrictions or conditions imposed by antitrust authorities in order to obtain regulatory approval, and these restrictions or conditions could harm the combined company’s operations as well.

     In addition, during or after the statutory waiting periods, and even after completion of the merger, governmental authorities could seek to block or challenge the merger as they deem necessary or desirable in the public interest. In addition, in some jurisdictions, a competitor, customer or other third party could initiate a private action under the antitrust laws challenging or seeking to enjoin the merger, before or after it is completed. Komag, Western Digital or the combined company may not prevail, or may incur significant costs, in defending or settling any action under the antitrust laws.

     In addition to the required regulatory clearances and approvals, the merger is subject to a number of other conditions beyond the control of Komag and Western Digital that may prevent, delay or otherwise materially adversely affect its completion. Komag and Western Digital cannot predict whether and when these other conditions will be satisfied. Further, the requirements for obtaining the required clearances and approvals could delay the completion of the merger for a significant period of time or prevent it from occurring.

Certain directors and executive officers of Komag have interests in the merger that may be different from, or in addition to, the interests of Komag stockholders.

     Executive officers of Komag negotiated the terms of the Merger Agreement under the direction of its board of directors. The board of directors of Komag unanimously adopted, approved and declared advisable the Merger Agreement and the transactions contemplated by the Merger Agreement, declared it in the best interest of the Komag stockholders for Komag to enter into the Merger Agreement and consummate the transactions contemplated by the Merger Agreement, declared the terms of the Offer and the Merger fair to the Komag stockholders and recommended that Komag stockholders tender their shares into the Offer and, if required, vote in favor of adoption of the Merger Agreement. These directors and executive officers may have interests in the merger that are different from, or in addition to or may be deemed to conflict with those of Komag stockholders or other Komag securities holders. These interests may include the continued employment of certain executive officers of Komag by the combined company and the indemnification of former Komag directors and officers by the combined company. With respect to these Komag directors and executive officers, these interests also include the treatment in the merger of employment agreements, severance policies, restricted stock units, stock options and other rights held by these directors and executive officers.

Provisions of the Merger Agreement may deter alternative business combinations and could negatively impact the stock price of Komag or the price of other Komag securities if the Merger Agreement is terminated in certain circumstances.

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     The Merger Agreement prohibits Komag from soliciting, initiating, encouraging or knowingly facilitating certain alternative acquisition proposals with any third party, subject to exceptions set forth in the Merger Agreement. The Merger Agreement also provides for the payment by Komag of a termination fee of $38 million if the Merger Agreement is terminated in certain circumstances in connection with a competing third-party acquisition proposal and certain other circumstances. These provisions limit Komag’s ability to pursue offers from third parties that could result in greater value to the Komag stockholders. The obligation to pay the termination fee may also discourage a third party from pursuing an alternative acquisition proposal. If the merger is terminated and Komag determines to seek another business combination, Komag cannot assure its stockholders or other securities holders that it will be able to negotiate a transaction with another company on terms comparable to the terms of the merger, or that it will avoid incurrence of any fees associated with the termination of the Merger Agreement.

     In the event the merger is terminated by Komag in circumstances that obligate Komag to pay the termination fee, including where Komag terminates the Merger Agreement because its board of directors withdraws its support of the merger, Komag’s stock price or the price of other Komag securities may decline.

If the proposed merger is not completed, Komag will have incurred substantial costs that may adversely affect Komag’s financial results and operations and the market price of Komag common stock or the price of other Komag securities.

     If the merger is not completed, the price of Komag common stock or the price of other Komag securities may decline to the extent that the current market price of Komag common stock or other securities reflects a market assumption that the merger will be completed. In addition, Komag has incurred and will incur substantial costs in connection with the proposed merger. These costs are primarily associated with the fees of attorneys, accountants and Komag’s financial advisors. In addition, Komag has diverted significant management resources in an effort to complete the merger and is subject to restrictions contained in the Merger Agreement on the conduct of its business. If the merger is not completed, Komag will have incurred significant costs, including the diversion of management resources, for which it will have received little or no benefit. Also, if the merger is not completed under certain circumstances specified in the Merger Agreement, Komag may be required to pay a termination fee of $38 million.

     In addition, if the merger is not completed, Komag may experience negative reactions from the financial markets and Komag’s customers, suppliers and employees. Each of these factors may adversely affect the trading price of Komag common stock or the price of other Komag securities and Komag’s financial results and operations.

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 sales and margins, which would materially and adversely affect our business.

     Our business is concentrated in the disk drive market, so the market for our products depends on the economic conditions affecting the disk drive manufacturing market and related markets. Our products are

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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. 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. 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, so any downturns in the disk drive market and related markets may decrease our sales and margins, which would materially and adversely affect our business.

The disk drive market in which our business is concentrated is seasonal and cyclical, so it is difficult to predict our sales and margins, which could make our stock price more volatile.

     The disk drive market in which our business is concentrated has historically been seasonal and cyclical, and has experienced periods of oversupply and reduced production levels, resulting in significantly reduced demand for disks and pricing pressures. The effect of these cycles on suppliers like us 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 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, during the third quarter of 2006, disk drive manufacturers appear to have overbuilt product, which resulted in an excess supply of disk drives. 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 sales and margins could be lower than the expectations of investors and analysts, which could make our stock price more volatile.

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 business and 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 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 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. We may be forced to lower our prices or add new products

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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 may lose our existing market share and may not be able to gain additional market share for our products, our business and operating results would be harmed.

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

     Our products primarily serve the 3¹/2-inch disk drive market where product performance, consistent quality, price, and availability are important competitive factors. 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 improvements in every aspect of disk design. These advances require substantial on-going process and technology development. New process technologies, such as perpendicular magnetic recording media (PMR), must support cost-effective, high-volume production of disks that meet these ever-advancing customer requirements for enhanced magnetic recording performance. We may not be able to develop and implement these technologies in a timely manner in order to compete effectively against our competitors’ products or entirely new data storage technologies. In addition, we must transfer our technology from our US-based research and development center to our Malaysian manufacturing operations. If we cannot effectively develop and implement adequate process technologies or do not successfully transfer our technologies to our Malaysian operations, or if technologies that we choose 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 could suffer.

If we fail to effectively implement our perpendicular magnetic recording media (PMR) product transition plans, our operating results will suffer.

     We are underway on a significant product transition program from longitudal magnetic recording (LMR) to advanced perpendicular magnetic recording media (PMR) products. This is an important and substantial product undertaking for us, and presents many operational challenges. For example, for both internal and external reasons, we may not be able to complete our PMR product transition plans quickly enough in order for us to compete effectively against our competitors. Internally, we may be unable to increase production of PMR products in a timely manner. Externally, we may face shortages or unexpected price increases in critical supplies, such as the precious metals necessary for the manufacture of our PMR products. In addition, our product transition plans will require us to dedicate significant financial and management resources, and if we fail to effectively manage and utilize these resources, we would not be able to compete effectively. If any of the risks occur and we are not able to effectively implement our product transition plans, our operating results will suffer.

If we are unable to minimize the use of precious metals in our products and the price and scarcity of these precious metals continue to increase, our ability to transition to PMR products could be delayed or eliminated.

     The manufacture of our PMR products currently requires the use of precious metals, such as platinum and ruthenium. These precious metals, particularly ruthenium, have previously experienced a significant increase in

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price and, at times, have become difficult to acquire. If we are unable to replace or minimize the use of ruthenium in our PMR products and cannot obtain sufficient quantities of ruthenium at commercially reasonable prices, as an initial matter, our ability to transition over to the manufacture of our PMR products may be slowed. If there are shortages in ruthenium supply and the price of ruthenium rises, we could experience the following adverse effects:

• our PMR products could become more expensive and therefore less competitive than alternative or existing technologies regardless of technological superiority; or

• our PMR products could simply become unsustainably expensive to manufacture, which would require us to abandon the development of PMR products and cause us to sell more LMR products.

Because we depend on a limited number of suppliers, if for any reason we are unable to obtain adequate supplies of high quality materials or equipment, 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 primary supplier of aluminum substrate blanks, which is a fundamental component in producing our disks. We also rely on Heraeus Incorporated and Williams Advanced Materials, Incorporated for a substantial quantity of our sputtering target requirements, and on OMG Fidelity, Incorporated for supplies of nickel plating solutions.

     As a result of increased worldwide demand, the supply of sputtering target precious metal materials and related target manufacturing, capacity has been constrained recently, resulting in longer lead times and limited product allocations from certain target suppliers. The increasing demand for many of these materials provides our sole-source suppliers with additional bargaining power. Further, the production cycle for certain sputter target supplies is lengthy, requiring us to significantly increase inventories of precious metals to support the production ramp of our PMR media decreasing our operating cash flow. We have also entered into volume purchase commitments for precious metals. If we have not accurately forecasted our requirements for these precious metals, we may have excess or insufficient supplies. If we have excess supplies of precious metals we may not be able to sell the excess in a timely manner or without incurring a loss. If we have insufficient supplies of precious metals we may be required to slow our transition plans to PMR. If one or more of these materials were to become unavailable or available in reduced quantities and we were not able to find an alternative supplier for that material, in addition to the risks delineated above with respect to ruthenium in particular, we could experience the following adverse effects to our business in general:

• our production capacity could be reduced if we lack the supplies necessary to manufacture the number of products for which we have sales orders, which could cause us to breach agreements with our customers, make price concessions or otherwise cause a reduction in our revenues;

• we might have to modify our products, which could both delay shipment of those products and cause those modified products to be more expensive to manufacture resulting is a lower rate of return on those products;

• even if we were able to obtain alternative supplies, those supplies could be more expensive, thereby causing our costs of production to increase;

• if we are not able to pass these price increases along to our customers, our operating margins would decline; and

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• we might be delayed in shipping products or unable to ship products at all, which could cause existing and potential customers to make purchases from our competitors, thus causing our revenues and margins to decline.

     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. In addition, 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 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 harmed.

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

     We sell 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 would materially and adversely affect our business and sales. In addition, if our current customers do not continue to place orders with us or if we are unable to obtain orders from new customers, our business and sales will likewise suffer. A relatively small number of disk drive manufacturers dominate the disk drive market. We expect that the success of our business will continue to depend on a limited number of customers. In the second quarter of 2007, 40% of our media and substrate sales were to Western Digital, 34% were to Seagate and 18% were to HGST. Due to our pending merger with Western Digital, we expect sales to Seagate and HGST to decline sharply in future quarters.

     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.

Our agreements with each of our major customers require us to meet certain production volumes and to provide certain credits on future disk sales, and if we fail to successfully perform under these agreements, we may incur substantial costs and expenses, and our business and financial condition could be materially and adversely affected.

     We have entered into strategic supply agreements, including certain amendments to these agreements, with each of our major customers that require us to meet certain production volume goals. In addition, under the terms of these supply agreements, our customers are required to pay certain advances to us covering future purchases of media from us. The customer advances, which totaled $79.0 million as of July 1, 2007, are to be repaid to our customers based on a specified dollar amount per disk on future purchases. 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, due to our inability to meet product specifications or timetables required by our customers for delivery, we

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may need to refund some of our customer advances. In addition, the agreements generally provide for repayment of the advances at the end of the term of the agreement if the advances are not fully paid based on purchases. The terms of the current arrangements expire on various dates through December 2009. Our inability to successfully and competently perform our obligations under our agreements may cause us to incur substantial costs and expenses, and would have a material adverse effect on our business and financial condition.

Our failure to timely and efficiently transition our enterprise resource planning software from the system we currently use to a new system, could adversely affect our business and financial results.

     We use enterprise resource planning software in the operation of our business and maintenance of business and financial data related to our daily operations. The Company implemented a global enterprise resource planning system using SAP applications in fiscal May 2007. We may experience unexpected difficulties in transitioning to the new software, including difficulties related to the failure or inefficient operation of the new software. Such difficulties or failures could result in our inability to access business and financial information stored on the system or the loss of such information and the inability to report our financial results on a timely basis. Any inability to access, or loss of, such information as a result of the transition or otherwise could affect our daily operations, including our ability to ship products and invoice our customers, which could have a significant adverse impact on our business and financial results.

If we are not able to attract and retain key personnel our business and operation results could be harmed.

     Our future success depends on the continued service of our executive officers, our highly-skilled research, development and engineering team, our manufacturing team, and our key administrative, sales and marketing, and support personnel, many of whom would be extremely difficult to replace. Acquiring and retaining talented personnel who possess the advanced skills we require has been difficult, particularly at our Malaysian manufacturing facilities where there is high growth in the marketplace. We may not be able to attract, assimilate, or retain highly-qualified personnel to maintain the capabilities that are necessary to compete effectively. Further, we do not have key person life insurance on any of our key personnel. If we are unable to retain existing or hire key personnel, our business 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 have significantly increased the production capacity of our manufacturing operations in Malaysia in 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 margins, and potentially significant losses. Underutilization of our production capacity could also result in

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asset impairment charges, 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 and Seagate have large internal thin-film media manufacturing operations, and are able to produce a substantial percentage of their disk requirements. We have strategic supply agreements with both of these customers. However, we also compete directly with these customers’ internal operations, 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. Both Seagate and HGST are adding internal thin film media manufacturing capacity to support the growing demand for disks drives. 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. 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 half of 2007, our spending on payroll, manufacturing, and operating expenses, and raw materials and capital purchases that were denominated in ringgit was approximately $132.7 million. Additionally, in the first half of 2007, we paid approximately $75.8 million US 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.

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     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;

• exposure to fluctuations in the value of currency;

• 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 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

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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 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.

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 mobile consumer applications. These applications are expected to achieve significant growth in the near future. Although we are currently developing glass-based products for shipment in 2007, there is no guarantee that our production efforts will be successful. 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 and effectively 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

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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 business and operating results.

          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 operating results.

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

          Our operating results historically have fluctuated significantly on both a quarterly and annual basis. We believe that our future operating results will continue to be subject to quarterly variations based on a wide variety of factors, including:

• timing of significant orders, or order cancellations;

• changes in our product mix and average selling prices;

• modified, adjusted, or rescheduled shipments;

• 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;

• availability and price of key materials;

• 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;

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• 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 sales and operating results in any future period. Our expense levels are based, in part, on expectations as to future sales. 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 sales levels are below expectations, our operating results are likely to suffer.

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

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

• difficulties in integrating the operations, technologies, products and personnel of the acquired companies, especially given the specialized nature of our technology;

• diversion of management’s attention from normal daily operations of the business;

• potential difficulties in completing projects associated with in-process research and development;

• initial dependence on unfamiliar supply chains or relatively small supply partners; and

• the potential loss of key employees of the acquired companies.

     Acquisitions may also cause us to:

• issue stock that would dilute our current stockholders’ percentage ownership;

• assume liabilities;

• record goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential periodic impairment charges;

• incur amortization expenses related to certain intangible assets;

• incur large and immediate write-offs; or

• become subject to litigation.

     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.

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

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

• the use, storage, discharge, and disposal of hazardous materials used during our manufacturing process;

• the treatment of water used in our manufacturing process; and

• air quality management.

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

     If we fail to comply with environmental regulations or fail to obtain the necessary permits:

• we could be subject to significant penalties;

• our ability to expand or operate in California or Malaysia could be restricted;

• our ability to establish additional operations in other locations could be restricted; or

• we could be required to obtain costly equipment or incur significant expenses to comply with environmental regulations.

     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 against 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 Steel, Ltd. 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

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Indonesia. If any natural or man-made disasters do occur, operations could be disrupted for prolonged periods, and our business would suffer.

Terrorist attacks may adversely affect our business and operating results.

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

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

     The Sarbanes-Oxley Act (the Act), which was signed into law in October 2002, mandates 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 increase inventories to support our transition to PMR products, 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

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• the length of product life cycles.

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

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

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

Risks Related to our Indebtedness

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

     In the first quarter of 2007, we completed a private $250 million convertible subordinated notes offering. Debt service obligations arising from the offering of our convertible subordinated notes could limit our ability to borrow more money for operations and implement our business strategy in the future.

We are 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.

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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 could be subject to various restrictions in the future.

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

     The following table provides information about the repurchase of our common stock during the quarter ended July 1, 2007:

					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 (2)
April 2 to April 29		2,499	$	27.62		—		—
April 30 to May 27		500,000	$	27.71		500,000		—
May 28 to July 1		—		—		—		—
Total		502,499	$	27.71		500,000		—

(1)	Includes 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 as well as stock repurchased under the authorized stock repurchase program.
(2)	Does not include $61.2 million of remaining board authorized repurchases as the Merger Agreement prohibits such stock repurchases.

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

     We held our annual meeting of stockholders on May 23, 2007. The meeting included a proposal to elect the following three Class II directors: Paul A. Brahe, Kenneth R. Swimm and Michael Lee Workman. This proposal was submitted as Proposal No. 1. Our other directors whose term of office continued after the meeting are Chris A. Eyre, Timothy D. Harris, Richard A. Kashnow, David G. Takata, Harry G. Van Wickle and Dennis P. Wolf. Stockholders also voted on Proposal No. 2 at the meeting, a proposal to ratify the appointment of KPMG LLP as our independent auditors for the fiscal year ending December 30, 2007.

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     Shares of our Common Stock were voted by our stockholders as follows:

			Total Vote
	Total Vote		Withheld
	For Each		From Each
	Director		Director
Proposal No. 1
(Election of Class II Directors)
Paul A. Brahe		21,378,709		2,577,794
Kenneth R. Swimm		21,376,773		2,579,730
Michael Lee Workman		21,378,043		2,578,460

							Broker
	For		Against		Abstain		Non - Vote
Proposal No. 2
(Ratification of independent auditors)		23,919,709		29,442		7,352		—

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ITEM 6. Exhibits

2.1	Agreement and Plan of Merger, dated June 28, 2007 by and among Western Digital Corporation, State M Corporation and Komag, Incorporated (incorporated by reference to the Company’s Form 8-K filed with the SEC on June 29, 2007).
2.1.1	Tender and Voting Agreement dated June 28, 2007 by and between Western Digital Corporation, State M Corporation and certain stockholders of Komag, Incorporated (incorporated by reference to Exhibit (e)(12) filed with the Company’s Schedule 14D-9 filed with the SEC on July 11, 2007).
10.1	Executive Employment Agreement between Komag, Incorporated and Timothy D. Harris effective as of August 1, 2007 (incorporated by reference to Exhibit (e)(7) filed with the Company’s Schedule 14D-9 filed with the SEC on July 11, 2007).
10.2	Form of Executive Employment Agreement (incorporated by reference to Exhibit (e)(8) filed with the Company’s Schedule 14D-9 filed with the SEC on July 11, 2007).
10.3	Form of Amendment to Restricted Stock Purchase Agreements and Stock Option Agreements for directors (incorporated by reference to Exhibit (e)(9) filed with the Company’s Schedule 14D-9 filed with the SEC on July 11, 2007).
31.1*	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed Herewith

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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: August 6, 2007	BY:	/s/ Timothy D. Harris
	Timothy D. Harris
	Chief Executive Officer Komag, Incorporated

DATE: August 6, 2007	BY:	/s/ Kathleen A. Bayless
	Kathleen A. Bayless
	Executive Vice President, Chief Financial Officer Komag, Incorporated

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EXHIBIT INDEX

2.1	Agreement and Plan of Merger, dated June 28, 2007 by and among Western Digital Corporation, State M Corporation and Komag, Incorporated (incorporated by reference to the Company’s Form 8-K filed with the SEC on June 29, 2007).
2.1.1	Tender and Voting Agreement dated June 28, 2007 by and between Western Digital Corporation, State M Corporation and certain stockholders of Komag, Incorporated (incorporated by reference to Exhibit (e)(12) filed with the Company’s Schedule 14D-9 filed with the SEC on July 11, 2007).
10.1	Executive Employment Agreement between Komag, Incorporated and Timothy D. Harris effective as of August 1, 2007 (incorporated by reference to Exhibit (e)(7) filed with the Company’s Schedule 14D-9 filed with the SEC on July 11, 2007).
10.2	Form of Executive Employment Agreement (incorporated by reference to Exhibit (e)(8) filed with the Company’s Schedule 14D-9 filed with the SEC on July 11, 2007).
10.3	Form of Amendment to Restricted Stock Purchase Agreements and Stock Option Agreements for directors (incorporated by reference to Exhibit (e)(9) filed with the Company’s Schedule 14D-9 filed with the SEC on July 11, 2007).
31.1*	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed Herewith

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