KOMAG INC /DE/
10-Q, 1998-05-01
MAGNETIC & OPTICAL RECORDING MEDIA
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                                  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 March 29, 1998
                         Commission File Number 0-16852



                               KOMAG, INCORPORATED
                                  (Registrant)



                      Incorporated in the State of Delaware
                I.R.S. Employer Identification Number 94-2914864
               1704 Automation Parkway, San Jose, California 95131
                            Telephone: (408) 576-2000


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

On March 29, 1998, 52,894,878 shares of the Registrant's common stock, $0.01
par value, were issued and outstanding.

<PAGE>

Part 1.  Financial Information
Item 1.   Financial Statements
                              KOMAG, INCORPORATED
                       CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In Thousands, except per share data)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                      Three Months Ended
                                                     -------------------
                                                     March 29, March 30,
                                                     1998      1997
                                                     --------- ---------
<S>                                                       <C>       <C>
Net sales                                             $76,057  $167,242
Cost of sales                                         107,652   127,927
                                                     --------- ---------
      GROSS PROFIT (LOSS)                             (31,595)   39,315

Operating expenses:
   Research, development and engineering               14,944    12,013
   Selling, general and administrative                  4,611    10,145
                                                     --------- ---------
                                                       19,555    22,158
                                                     --------- ---------
      OPERATING INCOME (LOSS)                         (51,150)   17,157

Other income (expense):
   Interest income                                      2,552     1,185
   Interest expense                                    (4,554)   (1,467)
   Other, net                                           4,323       687
                                                     --------- ---------
                                                        2,321       405


Income (loss) before income taxes, minority interest,
   and equity in joint venture income (loss)          (48,829)   17,562
Provision for income taxes                               --       2,986
                                                     --------- ---------

Income (loss) before minority interest
   and equity in joint venture income (loss)          (48,829)   14,576
Minority interest in net income (loss) of 
   consolidated subsidiary                                (95)      182
   joint venture                                       (9,424)    3,405
                                                     --------- ---------
     NET INCOME (LOSS)                               ($58,158)  $17,799
                                                     ========= =========

Basic income (loss) per share                          ($1.10)    $0.34
                                                     ========= =========
Diluted income (loss) per share                        ($1.10)    $0.33
                                                     ========= =========
Number of shares used in basic computation             52,875    51,811
                                                     ========= =========
Number of shares used in diluted computation           52,875    53,906
                                                     ========= =========
<FN>
                 See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>

                              KOMAG, INCORPORATED
                          CONSOLIDATED BALANCE SHEETS
                                 (In Thousands)
<TABLE>
<CAPTION>
                                                      March 29,   December 28,
                                                           1998           1997
                                                   -------------  -------------
                                                    (unaudited)      (note)
<S>                                                <C>            <C>
ASSETS
Current Assets
     Cash and cash equivalents                          $96,951       $133,897
     Short-term investments                              76,700         32,300
     Accounts receivable less allowances of
          $3,835 in 1998 and $4,424 in 1997              47,892         77,792
     Accounts receivable from related parties             2,086          4,106
     Inventories:
          Raw materials                                  32,043         33,730
          Work-in-process                                17,918         17,490
          Finished goods                                 10,601         15,558
                                                   -------------  -------------
               Total inventories                         60,562         66,778
     Prepaid expenses and deposits                        3,790          3,697
     Income taxes receivable                              3,469         24,524
     Deferred income taxes                               28,595         28,595
                                                   -------------  -------------
               Total current assets                     320,045        371,689
Investment in Unconsolidated Joint Venture               18,775         30,126
Property, Plant and Equipment
     Land                                                 7,785          9,526
     Building                                           123,726        126,405
     Equipment                                          831,151        793,561
     Furniture                                           11,784         11,791
     Leasehold improvements                             138,977        141,111
                                                   -------------  -------------
                                                      1,113,423      1,082,394
     Less allowances for depreciation and
        amortization                                   (430,286)      (403,798)
                                                   -------------  -------------
               Net property, plant and equipment        683,137        678,596
Deposits and Other Assets                                 3,962          4,253
                                                   -------------  -------------
                                                     $1,025,919     $1,084,664
                                                   =============  =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
     Trade accounts payable                             $26,052        $40,043
     Accounts payable to related parties                  2,993          7,093
     Accrued compensation and benefits                   16,860         13,596
     Other liabilities                                    5,046          3,605
     Restructuring liability                             10,128         11,253
                                                   -------------  -------------
                Total current liabilities                61,079         75,590
Long-term Debt                                          260,000        245,000
Deferred Income Taxes                                    73,335         73,335
Other Long-term Liabilities                               1,070            960
Minority Interest in Consolidated Subsidiary              3,500          3,595
Stockholders' Equity
     Preferred stock                                        --             --
     Common stock                                           529            528
     Additional paid-in capital                         402,704        401,869
     Retained earnings                                  223,318        281,476
     Accumulated foreign currency translation
        adjustments                                         384          2,311
                                                   -------------  -------------
                Total stockholders' equity              626,935        686,184
                                                   -------------  -------------
                                                     $1,025,919     $1,084,664
                                                   =============  =============
<FN>
Note:   The balance sheet at December 28, 1997 has been derived from the
        audited financial statements at that date.

                See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>

                              KOMAG, INCORPORATED
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                            Three Months Ended
                                                         ------------------------
                                                          March 29,    March 30,
                                                               1998         1997
                                                         -----------  -----------
<S>                                                             <C>          <C>
OPERATING ACTIVITIES
    Net income (loss)                                      ($58,158)     $17,799
    Adjustments to reconcile net income (loss) to
      net cash provided by operating activities:
       Depreciation and amortization                         34,635       28,576
       Provision for losses on accounts receivable             (838)       1,034
       Equity in net (income) loss of unconsolidated
           joint venture                                      9,424       (3,405)
       Gain on disposal of property, plant and equipment     (2,728)         (79)
       Deferred rent                                            110          123
       Minority interest in net income (loss) of
           consolidated subsidiary                              (95)         182
       Changes in operating assets and liabilities:
           Accounts receivable                               30,738      (18,003)
           Accounts receivable from related parties           2,020       (5,164)
           Inventories                                        6,216          328
           Prepaid expenses and deposits                        (93)        (860)
           Trade accounts payable                           (13,991)     (27,236)
           Accounts payable to related parties               (4,100)       1,428
           Accrued compensation and benefits                  3,264       (1,966)
           Other liabilities                                  1,441        1,369
           Income taxes receivable                           21,055       12,194
           Restructuring liability                           (1,125)        --
                                                         -----------  -----------
               Net cash provided by operating
                   activities                                27,775        6,320

INVESTING ACTIVITIES
    Acquisition of property, plant and equipment            (41,378)     (67,560)
    Purchases of short-term investments                    (196,800)     (14,235)
    Proceeds from short-term investments at maturity        152,400         --
    Proceeds from disposal of property, plant and
      equipment                                               4,930          327
    Deposits and other assets                                   291         (320)
    Dividend distribution from unconsolidated
      joint venture                                            --          1,535
                                                         -----------  -----------
               Net cash used in investing
                   activities                               (80,557)     (80,253)

FINANCING ACTIVITIES
    Increase in long-term obligations                        15,000       75,000
    Sale of Common Stock, net of issuance costs                 836        1,966
                                                         -----------  -----------
               Net cash provided by financing
                   activities                                15,836       76,966

    Increase (decrease) in cash and cash equivalents        (36,946)       3,033
    Cash and cash equivalents at beginning of year          133,897       90,741
                                                         -----------  -----------
    Cash and cash equivalents at end of period              $96,951      $93,774
                                                         ===========  ===========
<FN>
                 See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>


KOMAG, INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
MARCH 29, 1998


NOTE 1 - BASIS OF PRESENTATION

        The accompanying unaudited consolidated financial statements 
have been prepared in accordance with generally accepted accounting 
principles for interim financial information and with the 
instructions to Form 10-Q and Article 10 of Regulation S-X.  
Accordingly, they do not include all of the information and footnotes 
required by generally accepted accounting principles for complete 
financial statements. In the opinion of Management, all adjustments 
(consisting of normal recurring accruals) considered necessary for a 
fair presentation have been included. Operating results for the 
three-month period ended March 29, 1998 are not necessarily 
indicative of the results that may be expected for the year ending 
January 3, 1999.

        For further information, refer to the consolidated financial 
statements and footnotes thereto included in the Company's Annual 
Report on Form 10-K for the year ended December 28, 1997.

        The Company uses a 52-53 week fiscal year ending on the Sunday 
closest to December 31. The three-month reporting periods for the 
comparable years included in this report are each comprised of 
thirteen weeks.


NOTE 2 - INVESTMENT IN DEBT SECURITIES

        The Company invests its excess cash in high-quality, short-term 
debt and equity instruments. None of the Company's investments in 
debt securities have maturities greater than one year. The following 
is a summary of the Company's investments by major security type at 
amortized cost which approximates fair value:

                                                   March 29,  December 28,
                                                        1998          1997
(in thousands)                                  ------------- -------------

Corporate debt securities                            $27,763       $56,837
Mortgage-backed securities                            72,620        79,419
Municipal auction rate preferred stock                76,700        32,300
                                                ------------- -------------
                                                    $177,083      $168,556
                                                ============= =============


Amounts included in cash and cash equivalents       $100,383      $136,256
Amounts included in short-term investments            76,700        32,300
                                                ------------- -------------
                                                    $177,083      $168,556
                                                ============= =============

        The Company utilizes zero-balance accounts and other cash 
management tools to invest all available funds including bank 
balances in excess of book balances.


NOTE 3 - INCOME TAXES

        The Company has not recorded an income tax provision or benefit 
in the first quarter of  1998 due to a projected 1998 pre-tax loss at 
its U.S. operations and various tax holidays in effect at its 
Malaysian operations.  In the first quarter of 1997, the Company 
recorded a 17% estimated tax rate.  The estimated tax rate at the end 
of the first quarter of 1997 anticipated taxable income in fiscal 
year 1997 for the Company's U.S. operations and the effect of tax 
holidays at the Company's Malaysian operations.  In the third quarter 
of 1997, the Company revised its tax rate estimate in anticipation of 
a loss for fiscal year 1997 and recorded a tax benefit representing 
the utilization of available loss carrybacks associated with its U.S. 
operations.  No additional utilization of loss carrybacks is 
available for the U.S. operations.  

        The Company's wholly-owned thin-film media operation, Komag USA 
(Malaysia) Sdn. ("KMS"), operates under an initial five-year tax 
holiday which commenced in July 1993.  Assuming KMS fulfills certain 
commitments under its license to operate within Malaysia, this 
initial tax holiday may be extended for an additional five-year 
period by the Malaysian government.  KMS has also been granted a ten-
year tax holiday for its second and third plant sites in Malaysia.  
The commencement date for this new tax holiday has not been 
determined as of March 29, 1998.


NOTE 4 - TERM DEBT AND LINES OF CREDIT

        The Company's credit facilities total $345,000,000 and are 
comprised of five agreements: a five-year term loan that expires in 
2002, two separate revolving line of credit agreements that expire in 
2002 and two separate four-year revolving line of credit agreements 
that expire in 1999 and 2000.  These agreements may be extended, 
subject to bank approvals, annually for an additional year, thus 
perpetuating their multiyear tenors.  In January 1998, the Company 
borrowed an additional $15,000,000 under its unsecured credit 
facilities.  At March 29, 1998, $85,000,000 remained available under 
these unsecured credit facilities. The availability of funds under 
these lines of credit is subject to compliance with certain financial 
covenants, including limitations on the number and size of 
consecutive quarterly losses and maintenance of minimum tangible net 
worth balances.  The Company anticipates that it may need to amend 
certain covenants before the end of the year to avoid being out of 
compliance.  There can be no assurance that these funds will remain 
available should the Company violate its existing loan covenants or 
be unable to favorably amend such covenants at any future date.


NOTE 5 - COMPREHENSIVE INCOME (LOSS)

        As of the beginning of fiscal year 1998, the Company has adopted 
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), 
"Reporting Comprehensive Income."  SFAS 130 establishes new rules for 
the reporting and display of comprehensive income and its components; 
however, the adoption of this statement had no impact on the 
Company's net income (loss) or stockholders' equity.  SFAS 130 
requires the Company's foreign currency translation adjustments, 
which prior to adoption were reported separately in stockholders' 
equity, be included in other comprehensive income (loss).

        The following are the components of comprehensive income (loss):

                                                    Three Months Ended
                                                ---------------------------
                                                   March 29,     March 30,
                                                        1998          1997
        (in thousands)                          ------------- -------------
        Net income (loss)                           ($58,158)      $17,799
        Foreign currency translation adjustments      (1,927)       (1,556)
                                                ------------- -------------
        Comprehensive income (loss)                 ($60,085)      $16,243
                                                ============= =============

        Accumulated foreign currency translation adjustments on the 
accompanying Consolidated Balance Sheets account for all of the 
Company's accumulated other comprehensive income at March 29, 1998 
and December 28, 1997. 


NOTE 6 - RESTRUCTURING LIABILITY 

        During the third quarter of 1997, the Company implemented a 
restructuring plan based on an evaluation of the size and location of 
its existing production capacity relative to the short-term market 
demand outlook.  Under the restructuring plan, the Company 
consolidated its U.S. manufacturing operations onto its new campus in 
San Jose, California and closed two older factories in Milpitas, 
California.  The first of the two Milpitas factories was closed at 
the end of the third quarter of 1997 and the second factory was 
closed in January 1998. Over time the Company expects that its 
Malaysian manufacturing operations will account for an increasing 
portion of the Company's production output. These facilities are 
closer to customers' disk drive assembly plants in Southeast Asia and 
enjoy certain cost and tax advantages over the Company's U.S. 
manufacturing facilities.  

        The planned restructuring actions resulted in a charge of $52.2 
million and included reducing headcount, vacating leased facilities, 
consolidating operations and disposing of assets. The restructuring 
charge included $3.9 million for severance costs associated with 
approximately 330 terminated employees, $33.0 million for the write-
down of the net book value of equipment and leasehold improvements, 
$10.1 million related to equipment order cancellations and other 
equipment-related costs, and $5.2 million for facility closure costs.  
Non-cash items included in the restructuring charge totaled 
approximately $33.0 million.  At March 29, 1998, $10.1 million 
related to the restructuring activities remained in current 
liabilities. The Company has made cash payments totaling 
approximately $9.1 million primarily for severance and equipment-
related costs. The majority of the remaining restructuring liability, 
primarily related to equipment order cancellations and facility 
closure costs, is expected to be settled in 1998.


NOTE 7 - EARNINGS (LOSS) PER SHARE

        In 1997, the Financial Accounting Standards Board issued 
Statement No. 128 (FAS 128), "Earnings per Share", which the Company 
adopted for its fiscal year ending December 28, 1997.  FAS 128 
replaced the calculation for primary and fully diluted earnings per 
share with basic and diluted earnings per share.  Unlike primary 
earnings per share, basic earnings per share excludes any dilutive 
effects of options, warrants and convertible securities.  Diluted 
earnings per share is very similar to the previously reported primary 
earnings per share. Earnings per share amounts for all periods 
presented have been restated to conform to FAS 128 requirements.

                                                    Three Months Ended
                                                ---------------------------
                                                   March 29,     March 30,
                                                        1998          1997
                                                ------------- -------------
       (in thousands, except per share amounts)   
       Numerator: Net income (loss)                 ($58,158)      $17,799
                                                ------------- -------------
       Denominator for basic
          income (loss) per share
          weighted-average shares                     52,875        51,811
                                                ------------- -------------
       Effect of dilutive securities:
          Employee stock options                         --          2,095
                                                ------------- -------------
       Denominator for diluted
          income (loss) per share                     52,875        53,906
                                                ------------- -------------
       Basic income (loss) per share                  ($1.10)        $0.34
                                                ============= =============
       Diluted income (loss) per share                ($1.10)        $0.33
                                                ============= =============


NOTE 8 - USE OF ESTIMATES

        The preparation of financial statements in conformity with 
generally accepted accounting principles requires management to make 
extimates and assumptions that affect the amounts reported in the 
financial statements and accompanying notes.  Actual results could 
differ from those estimates.

<PAGE>

                             KOMAG, INCORPORATED

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Results of Operations:

        The following discussion contains predictions, estimates and other 
forward-looking statements that involve a number of risks and 
uncertainties.  While this outlook represents the Company's current 
judgment on the future direction of the business, such risks and 
uncertainties could cause actual results to differ materially from any 
future performance suggested herein.  Factors that could cause actual 
results to differ include the following: industry supply-demand 
relationship and related pricing for enterprise and desktop disk 
products; successful product qualification of next-generation products; 
successful deployment of new process technologies into manufacturing; 
utilization of manufacturing facilities; rate of improvement in 
manufacturing efficiencies; extensibility of process equipment to meet 
more stringent future product requirements; availability of sufficient 
cash resources, including continuing access to its bank credit 
facilities; vertical integration and consolidation within the Company's 
limited customer base; increased competition; availability of certain 
sole-sourced raw material supplies; and the risk factors listed in the 
Company's Form 10-K for the fiscal year ended December 28, 1997 filed in 
March 1998.  The Company undertakes no obligation to publicly release 
the result of any revisions to these forward-looking statements which 
may be made to reflect events or circumstances after the date hereof or 
to reflect the occurrence of unanticipated events.

Overview 
     Operating results for the first quarter of 1998 were significantly 
lower than the first quarter of 1997.  Adverse market conditions, which 
began late in the second quarter of 1997, intensified in the first 
quarter of 1998.  Late in the second quarter of 1997, demand for thin-
film media products fell abruptly as an excess supply of enterprise-
class disk drives caused drive manufacturers to reduce build plans for 
this class of drives. The decrease in demand for enterprise-class media, 
combined with a major expansion of media production capacity at both 
independent media suppliers and captive media operations of disk drive 
manufacturers, resulted in an excess supply of enterprise-class media.  
Orders for the Company's enterprise-class media products were reduced in 
the third quarter of 1997 as drive manufacturers reduced drive 
production and relied more heavily on their own captive media 
operations.  Net sales decreased sharply to $129.7 million in the third 
quarter of 1997, down sequentially from $175.1 million in the second 
quarter of 1997.  The gross margin percentage fell to 0.2% in the third 
quarter of 1997, down from 20.4% in the second quarter of 1997. Net 
sales and the gross margin percentage improved to $159.0 million and 
11.6%, respectively, for the fourth quarter of 1997.  

     In December 1997, several disk drive manufacturers initiated 
cutbacks in their desktop product manufacturing plans for early 1998 in 
response to supply and demand imbalances within that industry segment.  
Weakened demand for desktop media products, combined with the continuing 
slow recovery of the enterprise-class market segment, lowered media 
demand at independent media suppliers as captive media operations 
supplied a larger share of the industry's media requirements.  The 
resulting excess supply of media heightened price competition among 
independent media suppliers.  Net sales in the first quarter of 1998 
dropped 52% sequentially to $76.1 million as a result of both lower unit 
sales volumes and a decrease of approximately 10% in the overall average 
selling price for the Company's products.   Low utilization of the 
Company's factories during the first quarter of 1998 pushed unit 
production costs up substantially as fixed costs were spread over fewer 
production units.  The combination of the lower overall average selling 
price and significantly higher average unit production cost resulted in 
a negative gross margin percentage of 41.5% for the first quarter of 
1998.

Revenue
        Net sales decreased 55% in the first quarter of 1998 relative to 
the first quarter of 1997. The year-over-year decrease was due to a 
combination of a 47% decrease in unit sales volume and a 14% decrease in 
the overall average selling price.  First quarter 1998 unit sales 
declined to 7.2 million disks from 13.8 million disks in the first 
quarter of 1997. The majority of the decrease in the overall average 
selling price occurred between the fourth quarter of 1997 and the first 
quarter of 1998 due to the adverse market conditions for both desktop 
and enterprise-class media products discussed above. Price reductions 
are common on individual product offerings in the thin-film media 
industry. The Company has traditionally prevented significant reductions 
in its overall average selling price through transitions to higher-
priced, more technologically advanced product offerings. Unit sales of 
magnetoresistive ("MR") products increased to 73% of unit sales from 43% 
of unit sales in the first quarter of 1997.  In the first quarter of 
1998, the effect of pricing pressures generated by the imbalance in 
supply and demand for thin-film media, however, more than offset the 
effect of continuing transition to MR product offerings.  

        In addition to sales of internally produced disk products, the 
Company has historically resold products manufactured by its Japanese 
joint venture, Asahi Komag Co., Ltd. (AKCL).  Distribution sales of 
thin-film media manufactured by AKCL were $2.4 million in the first 
quarter of 1998 compared to $2.7 million in the first quarter of 1997.  
The Company expects that distribution sales of AKCL product will remain 
at a similar level throughout 1998.

        During the first quarter of 1998 four customers accounted for 90% 
of consolidated net sales: Maxtor Corporation (33%), Western Digital 
Corporation (33%), Quantum Corporation, together with its Japanese 
manufacturing partner, Matsushita-Kotobuki Electronics Industries, Ltd. 
("MKE") (14%), and Seagate Technologies, Inc. (10%).  The Company 
expects that it will continue to derive a substantial portion of its 
sales from relatively few customers.  The distribution of sales among 
customers may vary from quarter to quarter based on the match of the 
Company's product capabilities with specific disk drive programs of the 
customers. 

        The Company expects that net sales will increase sequentially in 
the second quarter of 1998 to the $100-$125 million range.  Higher unit 
production volumes and expected yield improvements should reduce the 
average unit production cost.  Price competition, however, is expected 
to continue into the second quarter of 1998.  The Company believes that 
the overall average selling price will most likely fall sequentially, 
but that the rate of decline will be less than the 10% decline of the 
first quarter of 1998.  As a result of the continuing price pressures, 
the Company expects to incur a net loss in the second quarter of 1998.

Gross Margin
        The Company incurred a negative gross margin percentage of 41.5% 
in the first quarter of 1998 compared to a gross margin of 23.5% in the 
first quarter of 1997.  The combination of the lower overall average 
selling price and substantial period costs related to underutilized 
capacity resulted in the negative gross margin percentage for the first 
quarter of 1998. 

        Unit production decreased to 6.5 million disks in the first 
quarter of 1998 from 13.6 million disks in the first quarter of 1997.  
The Company operated well below capacity in order to match unit 
production to the sharply lower demand for its products in the first 
quarter of 1998. The Company idled its Malaysian production operations 
for approximately two weeks during the first quarter of 1998 and 
accelerated the closure of its second Milpitas manufacturing facility. 
The Company initially planned to close this facility in June 1998.  From 
a capacity standpoint the Company believes it is currently staffed to 
produce approximately 13 million disks per quarter and has equipment in 
place to process approximately 20 million disks per quarter.

        Overall manufacturing yields declined in the first quarter of 1998 
relative to the first quarter of 1997.  The Company is currently 
deploying a new front end processing technology that generates improved 
polished substrates.  Internal manufacturing yields are beginning to 
show improvement as these new polished substrates are introduced into 
the Company's production process.  The Company plans to exit the second 
quarter of 1998 with approximately three-quarters of its products 
manufactured using this new front end processing technology.

        During the second quarter of 1998, the Company expects to begin 
high volume shipments of its new higher density disks that store 2.8 
gigabytes per disk platter. Initial volumes of these new disks will be 
manufactured with either the Company's existing or new epitaxial 
sputtering process. While the Company believes the relatively slow 
deposition rate achieved in its in-line sputtering machines will provide 
a competitive advantage, the Company will also purchase and use static 
sputtering lines.  The timely and effective deployment of the new 
substrate and epitaxial sputtering process technologies into the 
Company's manufacturing operations and continued success with new 
product qualifications are essential to the Company's financial 
performance in the second half of 1998.

Operating Expenses
        Research and development ("R&D") expenses increased 24% ($2.9 
million) in the three-month period of 1998 relative to the comparable 
period of 1997.  Increased R&D staffing, higher facility and equipment 
costs, and additional operating supplies accounted for most of the year-
over-year increase.  The additional R&D efforts were directed toward the 
introduction of new product generations, process changes to manufacture 
such products, and process improvements to increase yields of products 
currently in volume production.  Selling, general and administrative 
("SG&A") expenses decreased approximately 55% ($5.5 million) in the 
first quarter of 1998 relative to the first quarter of 1997.  Lower 
provisions for bonus and profit sharing programs (decrease of $3.3 
million) and lower provisions for bad debt (decrease of $1.9 million) 
resulted in the overall decrease in SG&A expenses between the quarters.  
Due to the operating loss in the first quarter of 1998, the Company did 
not record a provision for its bonus and profit sharing programs.  The 
decrease in the provisions for bad debt was primarily due to the lower 
outstanding trade accounts receivable balance at the end to the first 
quarter of 1998.  Excluding provisions for bonus and profit sharing 
programs and provisions for bad debt, SG&A expenses decreased $0.3 
million. 

        In the third quarter of 1997, the Company implemented a 
restructuring plan involving the consolidation of its U.S. manufacturing 
operations and recorded a restructuring charge of $52.2 million.  The 
restructuring charge included $3.9 million for severance costs 
associated with approximately 330 terminated employees, $33.0 million 
for the write-down of the net book value of equipment and leasehold 
improvements, $10.1 million related to equipment order cancellations and 
other equipment-related costs, and $5.2 million for facility closure 
costs.  Non-cash items included in the restructuring charge totaled 
approximately $33.0 million.  At March 29, 1998, $10.1 million related 
to the restructuring activities remained in current liabilities. The 
Company has made cash payments totaling approximately $9.1 million 
primarily for severance and equipment-related costs. The majority of the 
remaining restructuring liability, primarily related to equipment order 
cancellations and facility closure costs, is expected to be settled in 
1998.

Interest and Other Income/Expense
        Interest income increased $1.4 million in the first quarter of 
1998 relative to the first quarter of 1997.  The increase was due to a 
higher average cash and short-term investment balance in the first 
quarter of 1998 relative to the first quarter of 1997.  Interest expense 
increased $3.1 million in the first quarter of 1998 compared to the 
first quarter of 1997.  The Company borrowed $190.0 million under its 
credit facilities between the last week of March 1997 and early January 
1998.  Other income increased $3.6 million in the first quarter of 1998 
compared to the first quarter of 1997. Other income in the first quarter 
of 1998 included a $3.1 million gain on the sale of vacant land located 
in Milpitas, California.  

Income Taxes
        The Company has not recorded an income tax provision or benefit 
in the first quarter of  1998 due to a projected 1998 pre-tax loss at 
its U.S. operations and various tax holidays in effect at its Malaysian 
operations.  In the first quarter of 1997, the Company recorded a 17% 
estimated tax rate.  The estimated tax rate at the end of the first 
quarter of 1997 anticipated taxable income in fiscal year 1997 for the 
Company's U.S. operations and the effect of tax holidays at the 
Company's Malaysian operations.  In the third quarter of 1997, the 
Company revised its tax rate estimate in anticipation of a loss for 
fiscal year 1997 and recorded a tax benefit representing the utilization 
of available loss carrybacks associated with its U.S. operations.  No 
additional utilization of loss carrybacks is available for the U.S. 
operations.  

        The Company's wholly-owned thin-film media operation, Komag USA 
(Malaysia) Sdn. ("KMS"), operates under an initial five-year tax holiday 
which commenced in July 1993.  Assuming KMS fulfills certain commitments 
under its license to operate within Malaysia, this initial tax holiday 
may be extended for an additional five-year period by the Malaysian 
government.  KMS has also been granted a ten-year tax holiday for its 
second and third plant sites in Malaysia.  The commencement date for 
this new tax holiday has not been determined as of March 29, 1998.


Minority Interest in KMT/Equity in Net Income (Loss) of AKCL
        The minority interest in the net income (loss) of consolidated 
subsidiary represented Kobe Steel USA Holdings Inc.'s ("Kobe USA's") 20% 
share of Komag Material Technology, Inc.'s ("KMT's") net income (loss).  
KMT recorded a net loss of $0.5 million in the first quarter of 1998 and 
net income of $0.9 million in the first quarter of 1997.  

        The Company records 50% of AKCL's net income (loss) as equity in 
net income (loss) of unconsolidated joint venture.  The Company recorded 
$9.4 million as its equity in AKCL's net loss for the first quarter of 
1998, compared to the equity in AKCL's net income of $3.4 million 
recorded in the first quarter of 1997. AKCL's results for the first 
quarter of 1997 included a $5.3 million net of tax gain on AKCL's March 
1997 sale of its investment in Headway Technologies, Inc.  The Company's 
equity in this gain was $2.6 million.  Excluding the gain, the Company 
reported $0.8 million as its equity in AKCL's net income in the first 
quarter of 1997. Manufacturing yield, equipment utilization, and 
customer qualification issues adversely affected AKCL's financial 
results for the first quarter of 1998.  Additionally, AKCL wrote down 
certain underutilized equipment, including two of its five in-line 
sputtering systems.  The Company's share of these write-downs was $2.8 
million. AKCL recorded no tax benefit for the first quarter of 1998. The 
tax rate in effect for the first quarter of 1997 was 53%.  The Company 
anticipates that AKCL will likely continue to incur losses through at 
least the third quarter of 1998.  

        AKCL plans to use a combination of static and in-line sputtering 
machines to manufacture its disk products.  AKCL believes that the 
products produced by a static sputtering process will be technically 
similar to those produced by other Japanese media suppliers, thus 
improving AKCL's ability to meet specific requirements of certain 
Japanese customers on a timely basis.  AKCL may also implement the new 
epitaxial process on certain of AKCL's in-line sputtering equipment. 
However, as a result of Japanese customer preference toward static 
sputtering equipment, AKCL may convert the majority of its capacity to 
static equipment. The relative mix of in-line and static sputtering 
machines will depend on the Japanese market acceptance of products 
manufactured using in-line equipment and AKCL's ability to implement the 
epitaxial process on its in-line equipment. 

        AKCL's current financing arrangements may not be sufficient
in light of AKCL's expected continuing losses and capital costs to 
implement the new epitaxial sputtering process.  There can be no assurance
that additional financing will be available to AKCL.  Failure to secure
additional financing could have a material adverse affect on AKCL's
business and financial results.


Liquidity and Capital Resources:

        Cash and short-term investments of $173.7 million at the end of 
the first quarter of 1998 increased $7.5 million from the end of the 
prior fiscal year. Consolidated operating activities generated $27.8 
million in cash during the first three months of 1998.  First quarter's 
operating loss of $58.2 million, net of non-cash depreciation charges of 
$34.6 million and the non-cash equity loss from AKCL of $9.4 million, 
consumed $14.1 million.  The net change in certain working capital 
accounts provided $42.0 million. Reductions in accounts receivable 
($32.8 million) and inventories ($6.2 million) related to the lower 
sales volume in the first quarter of 1998 offset a decrease in accounts 
payable ($18.1 million) related to the lower production volume.  
Additionally, the Company received $21.1 million in U.S. and California 
income tax refunds during the first quarter of 1998. The Company 
borrowed $15.0 million under its credit facilities and spent $41.4 
million on capital requirements during the first three months of 1998.  
Proceeds from sales of property, plant and equipment (primarily the sale 
of vacant land in Milpitas, California) generated $4.9 million.  Sales 
of Common Stock under the Company's stock option programs generated $0.8 
million.  

        Total capital expenditures for 1998 are currently planned at 
approximately $120 million.  Three-quarters of the capital expenditure 
plan is targeted for process improvements, including costs to modify the 
Company's in-line equipment for the new epitaxial sputtering process, 
and productivity enhancements.

        Current noncancellable capital commitments total approximately $68 
million.  The Company currently has $85 million available under its $345 
million unsecured, multi-year bank lines of credit. The availability of 
funds under these lines of credit is subject to compliance with certain 
financial covenants, including limitations on the number and size of 
consecutive quarterly losses and maintenance of minimum tangible net 
worth balances.  The Company currently expects to remain in compliance
with its financial covenants through at least the first half of 1998. 
There can be no assurance that these funds will remain available
should the Company violate its existing loan covenants or be 
unable to favorably amend such covenants at any future date. The Company 
intends to evaluate and pursue other alternative sources of funding to 
supplement its current bank credit facilities. There can be no assurance 
that any such additional funds will be sufficient for the Company's 
needs. If the Company is unable to obtain sufficient capital, it could 
be required align its operations with the available funding.  Such 
action could have a material adverse affect on the Company's results of 
operations.




PART II. OTHER INFORMATION
        ITEM 1. Legal Proceedings-Not Applicable.

        ITEM 2. Changes in Securities-Not Applicable.

        ITEM 3. Defaults Upon Senior Securities-Not Applicable.

        ITEM 4. Submission of Matters to a Vote of Security Holders-Not 
                Applicable.

        ITEM 5. Other Information-Not Applicable.

        ITEM 6. Exhibits and Reports on Form 8-K

                (a) Exhibit 10.20-Second Amendment to Amended and Restated 
                    Credit Agreement by and among Komag, Incorporated and
                    BankBoston, N.A. as agent.

                    Exhibit 27-Financial Data Schedule.

                (b)     Not Applicable

<PAGE>

                                   SIGNATURES



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




                               KOMAG, INCORPORATED
                                  (Registrant)








DATE:   May 1, 1998                  BY:  /s/ William L. Potts, Jr. 
       -----------------              --------------------------------------
                                             William L. Potts, Jr.
                                             Senior Vice President and
                                             Chief Financial Officer

DATE:   May 1, 1998                   BY: /s/ Stephen C. Johnson
        -----------------             --------------------------------------
                                              Stephen C. Johnson
                                              President and
                                              Chief Executive Officer



 

SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT

This SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT 
(this "Amendment") is entered into as of March 23, 1998 by and among 
KOMAG, INCORPORATED, a Delaware corporation ("Borrower"), the banks from 
time to time party to the Credit Agreement described below, together 
with their respective successors and assigns (each a "Bank" and 
collectively the "Banks"), and BANKBOSTON, N.A., a national banking 
association ("BankBoston"), as agent for the Banks (in such capacity, 
the "Agent"), with reference to the following facts:

A. The Borrower, the Banks, and the Agent are parties to that 
certain Amended and Restated Credit Agreement dated as of June 20, 1997, 
by and among the Borrower, the Banks, and the Agent, as amended by that 
certain First Amendment to Amended and Restated Credit Agreement dated 
as of October 9, 1997, by and among the Borrower, the Banks, and the 
Agent (as amended, the "Credit Agreement").  The Credit Agreement and 
all related and supporting documents collectively are referred to in 
this Amendment as the "Loan Documents."

B. The parties desire to amend certain provisions contained in 
the Credit Agreement as set forth below.

NOW, THEREFORE, in consideration of the promises and the 
agreements, provisions and covenants herein contained, the parties 
hereto agree as follows:

1. Defined Terms.  Capitalized terms not otherwise defined 
herein shall have the same meanings as set forth in the Credit 
Agreement.

2. Amendments to Credit Agreement.  The Credit Agreement is 
hereby amended as follows:
(a) The following defined terms are added to Section 1.1 
in their proper alphabetical order:
"'Consolidated Current Liabilities':  At any 
date of determination, the Consolidated Liabilities which 
may properly be classified as current liabilities in 
accordance with GAAP."
"'Consolidated Liabilities':  At any date of 
determination, the total liabilities of the Borrower and its 
Consolidated Subsidiaries on a consolidated basis determined 
in accordance with GAAP (including (i) any balance sheet 
liability with respect to a Pension Plan recognized pursuant 
to Financial Accounting Standards Board Statements 87 or 88 
and (ii) any withdrawal liability under Section 4201 of 
ERISA with respect to a withdrawal from a Multiemployer 
Plan, as such liability may be set forth in a notice of 
withdrawal liability under Section 4219 (and as adjusted 
from time to time subsequent to the date of such notice))."
"'Consolidated Quick Assets':  At any date of 
determination, the total cash, marketable securities and 
accounts receivable of the Borrower and its consolidated 
Subsidiaries on a consolidated basis in accordance with 
GAAP."
"'Minimum Quick Ratio':  At any date of 
determination during a Quick Ratio Measurement Period, a 
Quick Ratio equal to or greater than the correlative amount 
indicated below:
Period
Quick Ratio
March 23, 1998 through March 29, 1998
0.70  : 1.00
March 30, 1998 through June 28, 1998
0.65  : 1.00
June 29, 1998 through September 27, 1998
0.675 : 1.00
September 28, 1998 through January 3, 1999
0.80  : 1.00
January 4, 1999 through April 4, 1999
0.90  : 1.00
April 5, 1999 and thereafter
1.00  : 1.00

Notwithstanding the foregoing, if the Quick 
Ratio measurement requirement is eliminated by virtue of 
Borrower's achievement of a Quick Ratio of 1.00 to 1.00 as 
provided in Section 3.13, but subsequently reinstated by 
virtue of Borrower's generating a fiscal quarter net loss as 
provided in Section 3.13, the Minimum Quick Ratio shall 
thereafter be 1.00 to 1.00."
"'New Senior Debt':  At any date of 
determination, the aggregate principal amount of any Debt 
(excluding Revolver Balances) that is not by its terms 
subordinated to other Debt of the Borrower or its 
Subsidiaries, which (i) constitutes Debt acquired or assumed 
on or after March 23, 1998 or (ii) constitutes replacement 
or refinancing of previously existing Debt." 
"'Quick Ratio': At any date of determination, 
the ratio of (a) Consolidated Quick Assets to (b) the sum of 
(i) Consolidated Current Liabilities plus (ii) Revolver 
Balances plus (iii) New Senior Debt."
"'Quick Ratio Measurement Period': As 
defined in Section 3.13."
"'Revolver Balances': At any date of 
determination, the aggregate principal amount of outstanding 
Revolving Loans, plus the aggregate principal amount of all 
outstanding loans of Borrower or its Consolidated 
Subsidiaries drawn under any other revolving line of 
credit."
(b) Section 2.1(a) is amended to read as follows from and 
after the effective date of this Amendment:
"(a)    The Aggregate Commitment.  Each of the 
Banks severally agrees, on the terms and conditions 
hereinafter set forth, to make loans ("Revolving Loans") to 
Borrower from time to time during the period from the date 
hereof to and including the Maturity Date, pro rata in 
accordance with its Commitment Percentage, in the aggregate 
principal amount not to exceed at any one time outstanding 
its Commitment, as such amount may be reduced pursuant to 
Section 2.1(d), provided, however, that the Banks shall not 
be obligated on any date during a Quick Ratio Measurement 
Period to make a Revolving Loan if Borrower's Quick Ratio at 
the time of the requested borrowing is less than the 
applicable Minimum Quick Ratio, and provided, further, that 
the Banks shall not be obligated on any date during a Quick 
Ratio Measurement Period to make a Revolving Loan which, 
after giving effect to the requested borrowing, would cause 
Borrower to have a Quick Ratio which is less than the 
applicable Minimum Quick Ratio.  Each borrowing under this 
Section (a "Borrowing") shall be in a minimum amount of 
$1,000,000 and in an integral multiple of $100,000 above 
such amount for a Base Rate Loan and in a minimum amount of 
$1,000,000 and in an integral multiple of $500,000 above 
such amount for a LIBOR Rate Loan.  Subject to the foregoing 
and within the limits of each Commitment, Borrower may 
borrow, repay pursuant to Section 2.2(b) and reborrow under 
this Section, provided that at no time shall the aggregate 
principal amount of outstanding Revolving Loans exceed the 
Aggregate Commitment then in effect.  Failure to satisfy the 
Minimum Quick Ratio shall not be an Event of Default."
(c) Section 2.3(c) is amended to read as follows from and 
after the effective date of this Amendment:
"(c)    LIBOR Rate Loans.  Revolving Loans which 
are LIBOR Rate Loans shall bear interest for each Interest 
Period with respect thereto on the unpaid principal amount 
thereof at a rate per annum equal to the LIBOR Rate 
determined for such Interest Period plus an amount (the 
"Applicable Margin") determined in accordance with following 
schedule:
**              If Borrower's Consolidated Funded Debt to Consolidated 
Capital is less than .15 to 1.0:  the Applicable Margin 
shall be 162.5 basis points;
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is equal to or greater than .15 to 1.0 but less than 
 .25 to 1.0:  the Applicable Margin shall be 175 basis 
points; and
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is equal to or greater than .25 to 1.0:  the 
Applicable Margin shall be 187.5 basis points.
Said rates shall be calculated quarterly based on 
Borrower's performance for the immediately preceding fiscal 
quarter for which Borrower has provided information to the 
Agent regarding the calculation of the rate and shall be 
effective five (5) Business Days following the Agent's 
receipt of such financial statements and the officer's 
certificate required to be delivered in connection therewith 
pursuant to Section 6.1(a); provided that if Borrower shall 
not have timely delivered its financial statements in 
accordance with Section 6.1(a) (after giving effect to any 
grace period set forth in Section 7.1(c)), then commencing 
on the date upon which such financial statements should have 
been delivered and continuing until such financial 
statements are actually delivered, it shall be assumed for 
purposes of determining said rates that Borrower's 
Consolidated Funded Debt to Consolidated Capital is equal to 
or greater than .25 to 1.0 (said calculations shall apply to 
existing as well as new LIBOR Rate Loans).
Notwithstanding the foregoing, at Borrower's option 
upon achievement of any of the following, in each case as 
demonstrated by Borrower's consolidated balance sheet for 
itself and its Consolidated Subsidiaries as at the end of 
the applicable period, and the related consolidated 
statements of income, stockholders' equity and statement of 
cash flows for such period, which statements are certified 
by a duly authorized officer of Borrower as being fairly 
stated in all material respects subject to year end 
adjustments, the Applicable Margin shall be adjusted as 
follows:  
(i)     Upon Borrower's achievement of a 
cumulative average Net Profit Margin for any fiscal three 
(3) month period from and after March 1, 1998 of at least 
five percent (5%) but less than ten percent (10%), the 
Applicable Margin shall be as follows: 
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is less than .15 to 1.0:  the Applicable Margin 
shall be 112.5 basis points;
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is equal to or greater than .15 to 1.0 but less than 
 .25 to 1.0:  the Applicable Margin shall be 125 basis 
points; and
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is equal to or greater than .25 to 1.0:  the 
Applicable Margin shall be 137.5 basis points.
(ii)    Upon Borrower's achievement of the 
cumulative average Net Profit Margin test as specified in 
clause (i) above, and Borrower's achievement of a cumulative 
average Net Profit Margin for any subsequent fiscal three 
(3) month period of at least five percent (5%) but less than 
ten percent (10%), the Applicable Margin shall be as 
follows:
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is less than .15 to 1.0:  the Applicable Margin 
shall be 62.5 basis points;
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is equal to or greater than .15 to 1.0 but less than 
 .25 to 1.0:  the Applicable Margin shall be 75 basis points; 
and
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is equal to or greater than .25 to 1.0:  the 
Applicable Margin shall be 87.5 basis points.
(iii)   Upon Borrower's achievement of the 
cumulative average Net Profit Margin tests as specified in 
clauses (i) and (ii) above, and Borrower's achievement of a 
cumulative average Net Profit Margin for any subsequent 
fiscal three (3) month period of at least five percent (5%), 
the Applicable Margin shall be as follows:
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is less than .15 to 1.0:  the Applicable Margin 
shall be 35 basis points;
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is equal to or greater than .15 to 1.0 but less than 
 .25 to 1.0:  the Applicable Margin shall be 42.5 basis 
points; and
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is equal to or greater than .25 to 1.0:  the 
Applicable Margin shall be 50 basis points.
(iv)    Upon Borrower's achievement of the 
cumulative average Net Profit Margin test as specified in 
clause (i) above, and Borrower's achievement of a cumulative 
average Net Profit Margin for any subsequent fiscal three 
(3) month period of at least ten percent (10%), the 
Applicable Margin shall be as follows:
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is less than .15 to 1.0:  the Applicable Margin 
shall be 35 basis points;
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is equal to or greater than .15 to 1.0 but less than 
 .25 to 1.0:  the Applicable Margin shall be 42.5 basis 
points; and
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is equal to or greater than .25 to 1.0:  the 
Applicable Margin shall be 50 basis points.
(v)     Upon Borrower's achievement of a 
cumulative average Net Profit Margin for any fiscal three 
(3) month period from and after March 1, 1998 of at least 
ten percent (10%), the Applicable Margin shall be as 
follows: 
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is less than .15 to 1.0:  the Applicable Margin 
shall be 75 basis points;
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is equal to or greater than .15 to 1.0 but less than 
 .25 to 1.0:  the Applicable Margin shall be 87.5 basis 
points; and
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is equal to or greater than .25 to 1.0:  the 
Applicable Margin shall be 100 basis points.
(vi)    Upon Borrower's achievement of the 
cumulative average Net Profit Margin test as specified in 
clause (v) above, and Borrower's achievement of a cumulative 
average Net Profit Margin for any subsequent fiscal three 
(3) month period of at least five percent (5%), the 
Applicable Margin shall be as follows:
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is less than .15 to 1.0:  the Applicable Margin 
shall be 35 basis points;
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is equal to or greater than .15 to 1.0 but less than 
 .25 to 1.0:  the Applicable Margin shall be 42.5 basis 
points; and
If Borrower's Consolidated Funded Debt to Consolidated 
Capital is equal to or greater than .25 to 1.0:  the 
Applicable Margin shall be 50 basis points.
For purposes of this Section 2.3(c), Borrower shall be 
required to furnish its fiscal three (3) month period 
financial statements only for those periods as are necessary 
to demonstrate achievement of the Net Profit Margin tests 
specified in this Section."
(d) A new Section 3.13 is added to Article III, at the end 
thereof, which shall read as follows:
"SECTION 3.13  QUICK RATIO MEASUREMENT PERIOD.  
Any fiscal month in which the Quick Ratio is required to be 
measured pursuant to the provisions of this Section 3.13 
shall be deemed to be a "Quick Ratio Measurement Period."  
The Quick Ratio shall be required to be measured monthly as 
of the last day of each fiscal month of Borrower from and 
after March 23, 1998, except that (a) the Quick Ratio shall 
not be required to be measured from and after the first date 
after March 23, 1998 on which Borrower demonstrates 
achievement of a Quick Ratio equal to or greater than 1.00 
to 1.00, provided that if Borrower has a net loss for any 
fiscal quarter period after such achievement, the Quick 
Ratio shall again be required to be measured monthly as of 
the last day of each fiscal month thereafter, and (b) 
notwithstanding the foregoing, the Quick Ratio shall not be 
required to be measured from and after Borrower's 
achievement of a cumulative average Net Profit Margin for 
any three (3) fiscal quarter periods from and after the 
quarter ended March 31, 1998 of at least five percent (5%).  
So long as the Quick Ratio is required to be measured under 
this Section 3.13, at the request of the Agent, prior to, 
and as a condition of, each borrowing hereunder, and in any 
event within twenty-one (21) days after the last day of each 
fiscal month, Borrower shall deliver to Agent a certificate 
signed by the chief executive officer or chief financial 
officer of Borrower, setting forth in such detail as Agent 
may request the calculation of the Quick Ratio as of the 
last day of the preceding fiscal month."
(e) Section 6.2(a) is amended to read as follows:
"(a)    Profitability.  Permit, on a consolidated 
after-tax basis, (i) a net loss for the fiscal quarter 
ending March 29, 1998 of more than Sixty Million Dollars 
($60,000,000); or (ii) a net loss for the fiscal quarter 
ending June 28, 1998 of more than Fifty Million Dollars 
($50,000,000); or (iii) a net loss for the fiscal quarter 
ending September 27, 1998 of more than Ten Million Dollars 
($10,000,000); or (iv) commencing with the fiscal quarter 
ending January 3, 1999, a net loss for any two consecutive 
fiscal quarter periods; or (v) commencing with the fiscal 
quarter ending January 3, 1999, a net loss for any fiscal 
quarter in excess of an amount equal to ten percent (10%) of 
Borrower's Consolidated Tangible Net Worth as of the last 
day of such fiscal quarter."
(f) Section 6.2(b) is amended to read as follows:
"Leverage Ratio.  Permit Borrower's ratio of 
Consolidated Funded Debt to Consolidated Capital, on a 
quarterly consolidated basis, to exceed 0.4 to 1.0."
(g) Section 6.2(c) is amended to read as follows:
"Consolidated Tangible Net Worth.  Permit 
Borrower's Consolidated Tangible Net Worth, on a quarterly 
consolidated basis, to be less than $560,000,000, plus 
(i) seventy-five percent (75%) of Borrower's future fiscal 
year end consolidated net income (without deduction for any 
losses), adjusted on an annual basis beginning after the end 
of Borrower's 1997 fiscal year and including such fiscal 
year plus (ii) one hundred percent (100%) of the net 
proceeds of equity investments and issues received by 
Borrower or its Consolidated Subsidiaries adjusted on a 
consolidated quarterly basis in accordance with GAAP, 
without duplication.  For purposes hereof, the minimum 
Consolidated Tangible Net Worth requirement shall not be 
increased by equity issued through the exercise of employee 
stock options and/or employee stock purchase plans."
(h) Section 6.2(i) is amended by adding the following 
sentence at the end thereof:
"Notwithstanding the foregoing, Borrower shall have no 
obligation to comply with this Section 6.2(i) for the fiscal 
quarter ending June 28, 1998."
(i) A new subsection (k) is added to Section 6.2, by 
inserting the following at the end thereof:  
"(k)    Until Borrower's achievement of a 
cumulative average Net Profit Margin for any three (3) 
fiscal quarters from and after March 1, 1998 of at least 
five percent (5%), Borrower shall not make any payment in 
respect of any Debt (excluding Debt owing to Standard 
Chartered Bank under the $10,000,000 offshore Labuan 
revolving facility) other than the Revolving Loans, unless 
Borrower on the same day makes a payment on account of the 
Revolving Loans, such payment on account of the Revolving 
Loans to be at least pro rata in accordance with the 
aggregate principal amount of the outstanding Revolving 
Loans and the aggregate outstanding amount of such other 
Debt to be repaid."
(j) A new subsection (l) is added to Section 6.2, by 
inserting the following at the end thereof:
"(l)    Replace or refinance any Debt that is not 
by its terms subordinated to other Debt of the Borrower or 
its Subsidiaries without the prior written consent of the 
Majority Banks, which consent shall not be unreasonably 
withheld, provided such replacement financing is to replace 
Debt of like-kind, and provided that the material terms 
(including maturity, financial covenants, and pricing) of 
such replacement financing are not more burdensome to 
Borrower as those under this Agreement."
(k) The second sentence of Section 7.1(c) is amended to 
read as follows:
"Notwithstanding the foregoing, any failure of 
Borrower to perform or observe Sections 6.1(c) and (f) 
and/or 6.2(a), (b), (c), (d), (e), (f), (h), (i), (j), (k) 
or (l) shall constitute an Event of Default without regard 
to any lapse of time or cure period; or"
3. Conditions to Effectiveness.
This Amendment shall become effective as of March 23, 1998 
(the "Closing Date"), only upon:
(i)     receipt by the Agent from the Borrower of an amendment 
fee equal to Two Hundred Sixty-Two Thousand Five Hundred Dollars 
($262,500), to be distributed to the Banks on a pro rata basis in 
accordance with the respective Commitment Percentage of each Bank; 
(ii)    receipt by the Agent from the Borrower of a one-time 
Agent's fee as set forth in a side letter between the Borrower and the 
Agent dated on or about the Closing Date; 
(iii)   receipt by the Agent of the following (each of which 
shall be in form and substance satisfactory to the Agent and its 
counsel, with sufficient copies for each of the Banks): 
(a)     counterparts of this Amendment duly executed on 
behalf of the Borrower, the Agent, and the Majority Banks;
(b)     copies of resolutions of the Board of Directors 
or other authorizing documents of the Borrower, authorizing the 
execution and delivery of this Amendment; and
(iv)    completion of such other matters and delivery of such 
other agreements, documents and certificates as any Bank through the 
Agent may reasonably request.
4. Representations and Warranties.  In order to induce the 
Banks to enter into this Amendment, the Borrower represents and warrants 
to the Agent and each Bank that the following statements are true, 
correct and complete as of the effective date of this Amendment:
(a) Corporate Power and Authority.  The Borrower has all 
requisite corporate power and authority to enter into this Amendment and 
to carry out the transactions contemplated by, and perform its 
obligations under, the Credit Agreement as amended by this Amendment 
(the "Amended Agreement").  The Certificate of Incorporation and Bylaws 
of the Borrower have not been amended since the copies previously 
delivered to the Agent or Banks.  
(b) Authorization of Agreements.  The execution and 
delivery of this Amendment and the performance by the Borrower of the 
Amended Agreement have been duly authorized by all necessary corporate 
action on the part of the Borrower.  
(c) No Conflict.  The execution and delivery by the 
Borrower of this Amendment do not and will not contravene (i) any law or 
any governmental rule or regulation applicable to the Borrower, (ii) the 
Certificate of Incorporation or Bylaws of the Borrower, (iii) any order, 
judgment or decree of any court or other agency of government binding on 
the Borrower, or (iv) any material agreement or instrument binding on 
the Borrower. 
(d) Governmental Consents.  The execution and delivery by 
the Borrower of this Amendment and the performance by the Borrower of 
the Amended Agreement do not and will not require any registration with, 
consent or approval of, or notice to, or other action to, with or by, 
any federal, state or other governmental authority or regulatory body.
(e) Binding Obligation.  This Amendment and the Amended 
Agreement have been duly executed and delivered by the Borrower and are 
the binding obligations of the Borrower, enforceable against the 
Borrower in accordance with their respective terms, except in each case 
as such enforceability may be limited by bankruptcy, insolvency, 
reorganization, liquidation, moratorium or other similar laws and 
equitable principles relating to or affecting creditors' rights.
(f) Incorporation of Representations and Warranties From 
Credit Agreement.  The representations and warranties contained in 
Section 5.1 of the Credit Agreement are correct on and as of the 
effective date of this Amendment as though made on and as of such date 
(except to the extent such representations and warranties expressly 
refer to an earlier date, in which case they were true and correct as of 
such earlier date).
(g) Absence of Default.  After giving effect to this 
Amendment, no event has occurred and is continuing or will result from 
the consummation of the transactions contemplated by this Amendment that 
would constitute an Event of Default or a Potential Event of Default.  
5. Miscellaneous.
(a) Reference to and Effect on the Credit Agreement and 
the Other Loan Documents.  
(i)     On and after the Closing Date, each reference in 
the Credit Agreement to "this Agreement", "hereunder", "hereof", 
"herein" or words of like import referring to the Credit Agreement, and 
each reference in the other Loan Documents to the "Credit Agreement," 
"thereunder", "thereof" or words of like import referring to the Credit 
Agreement, shall mean and be a reference to the Amended Agreement. 
(ii)    Except as specifically amended by this 
Amendment, the Credit Agreement and the other Loan Documents shall 
remain in full force and effect and are hereby ratified and confirmed.  
(iii)   The execution, delivery and performance of this 
Amendment shall not, except as expressly provided herein, constitute a 
waiver of any provision of, or operate as a waiver of any right, power 
or remedy of the Agent or any Bank under the Credit Agreement or any of 
the other Loan Documents. 
(b) Fees and Expenses.  All reasonable and documented 
costs and expenses of the Agent, including, but not limited to, 
reasonable and documented attorneys' fees, incurred by the Agent in the 
preparation and implementation of this Amendment constitute costs and 
expenses in connection with the amendment and restructuring of the Loan 
Documents, and as such are payable by the Borrower in accordance with 
Section 9.5 of the Credit Agreement.  
(c) Headings.  Section and subsection headings in this 
Amendment are included herein for convenience of reference only and 
shall not constitute a part of this Amendment for any other purpose or 
be given any substantive effect. 
(d) Applicable Law.  THIS AMENDMENT SHALL BE GOVERNED BY, 
AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL 
LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAWS 
PRINCIPLES.
(e) Counterparts.  This Amendment may be executed in any 
number of counterparts and by different parties hereto in separate 
counterparts, each of which when so executed and delivered shall be 
deemed an original, but all such counterparts together shall constitute 
but one and the same instrument; signature pages may be detached from 
multiple separate counterparts and attached to a single counterpart so 
that all signature pages are physically attached to the same document. 
[REMAINDER INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement 
to be executed by their respective officers thereunto duly authorized, 
as of the date first above written.
KOMAG, INCORPORATED


By:    /s/ William L. Potts, Jr.                                         
Title:  SVP, CFO                                         


BANKBOSTON, N.A., 
as the Agent and as a Bank


By:   /s/ Anthony Kwee                                          
Title:  Vice President                                        


COMERICA BANK - CALIFORNIA, 
as a Bank

By:                                             
Title:                                          


STANDARD CHARTERED BANK, 
as a Bank

By:    /s/ ???????                                         
Title:  AVP                                        

By:   /s/  ???????                                          
Title:  Vice President                                        


BANQUE NATIONALE DE PARIS, 
as a Bank

By:   /s/ Rafael C. Lumanlan                                          
Title:  Vice President                                        

By:    /s/ Jeffrey S. Kajisa                                         
Title:  Assistant Vice President                                        


FLEET NATIONAL BANK, 
as a Bank

By:                                             
Title:                                          


BANK OF MONTREAL, as a Bank

By:   /s/ ????????                                          
Title:  Portfolio Manager                                        


THE BANK OF NOVA SCOTIA, 
as a Bank


By:    /s/  ??????????                                                 
Title:  RM                                        


UNION BANK OF CALIFORNIA, N.A.,
as a Bank

By:   /s/ Patrick Clemens                                          
Title:  Assistant Vice President                                        


<TABLE> <S> <C>
 
<ARTICLE>      5 
<LEGEND>       THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTE
               FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED I
               ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER>   1,000 
       
<S>                                                  <C>
<PERIOD-TYPE>                                        3-MOS
<FISCAL-YEAR-END>                                    JAN-03-1999
<PERIOD-START>                                       DEC-29-1997
<PERIOD-END>                                         MAR-29-1998
<CASH>                                                   96,951
<SECURITIES>                                             76,700
<RECEIVABLES>                                            51,727
<ALLOWANCES>                                              3,835
<INVENTORY>                                              60,562
<CURRENT-ASSETS>                                        320,045
<PP&E>                                                1,113,423
<DEPRECIATION>                                          430,286
<TOTAL-ASSETS>                                        1,025,919
<CURRENT-LIABILITIES>                                    61,079
<BONDS>                                                 260,000
                                         0
                                                   0
<COMMON>                                                    529
<OTHER-SE>                                              626,406
<TOTAL-LIABILITY-AND-EQUITY>                          1,025,919
<SALES>                                                  76,057
<TOTAL-REVENUES>                                         76,057
<CGS>                                                   107,652
<TOTAL-COSTS>                                           107,652
<OTHER-EXPENSES>                                         19,555
<LOSS-PROVISION>                                           (838)
<INTEREST-EXPENSE>                                        4,554
<INCOME-PRETAX>                                         (48,829)
<INCOME-TAX>                                                  0
<INCOME-CONTINUING>                                     (58,158)
<DISCONTINUED>                                                0
<EXTRAORDINARY>                                               0
<CHANGES>                                                     0
<NET-INCOME>                                            (58,158)
<EPS-PRIMARY>                                            ($1.10)
<EPS-DILUTED>                                            ($1.10)

         

</TABLE>


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