LAM RESEARCH CORP, 10-K405, 1999-09-24

LAM RESEARCH CORP
10-K405, 1999-09-24
SPECIAL INDUSTRY MACHINERY, NEC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-12933
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LAM RESEARCH CORPORATION
(EXACT NAME OF REGISTRANT, AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 94-2634797
(STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)

4650 CUSHING PARKWAY, 94538
FREMONT, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

(510) 659-0200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

COMMON STOCK, PAR VALUE $0.001 PER SHARE
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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 [ ]

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

The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the average of the closing price of the Common Stock on
September 1, 1999, as reported by the Nasdaq National Market, was approximately
$1,903,367,000. Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common Stock has been excluded
from this computation in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
of such status for other purposes.

As of September 1, 1999, the Registrant had outstanding 39,061,385 shares
of Common Stock.

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DOCUMENTS INCORPORATED BY REFERENCE

Parts of Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on November 4, 1999 are incorporated by reference into
Part III of this Form 10-K Report. (The Report of the Compensation Committee and
the Comparative Stock Performance graph of the Registrant's Proxy Statement are
expressly not incorporated by reference herein.)

PART I

The index to Exhibits is located on pages 62 to 65.

ITEM 1. BUSINESS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

With the exception of historical facts, the statements contained in this
discussion are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and are subject to the Safe Harbor
provisions created by that statute. Such forward-looking statements include, but
are not limited to, statements that relate to the Company's future revenue,
product development, demand, acceptance and market share, competitiveness, gross
margins, levels of research and development ("R&D") and operating expenses,
management's plans and objectives for current and future operations of the
Company, the effects of the Company's reorganization and consolidation of
operations and facilities, the ability of the Company to complete contemplated
reorganizations or consolidations on time or within anticipated costs and the
sufficiency of financial resources to support future operations and capital
expenditures. Such statements are based on current expectations and are subject
to risks, uncertainties and changes in condition, significance, value and
effect, including those discussed below and under the heading Risk Factors
within the section of this report entitled Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other documents
the Company files from time to time with the Securities and Exchange Commission;
specifically, the Company's quarterly reports on Forms 10-Q and the Company's
current reports on Form 8-K. Such risks, uncertainties and changes in condition,
significance, value and effect could cause actual results to differ materially
from those expressed herein and in ways not readily foreseeable. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof and of information currently and reasonably
known. The Company undertakes no obligation to release the results of any
revisions to these forward-looking statements which may be made to reflect
events or circumstances which occur after the date hereof or to reflect the
occurrence or effect of anticipated or unanticipated events.

THE COMPANY

Lam Research Corporation ("Lam" or the "Company") designs, manufactures,
markets and services semiconductor processing equipment used in the fabrication
of integrated circuits. Lam is recognized as a leading supplier of front-end
wafer processing equipment to the worldwide semiconductor industry. The
Company's products are used selectively to etch away portions of various films
("etch") to create an integrated circuit. Etch processes, which are repeated
numerous times during the fabrication cycle, are required to manufacture every
type of semiconductor device produced today. With the acquisition of OnTrak
Systems, Inc. ("OnTrak"), completed in August 1997, Lam has added both chemical
mechanical planarization ("CMP") and post-CMP wafer cleaning product lines. CMP
is currently the planarization technology of choice for manufacturing sub-0.35
micron integrated circuits with multiple metal layers.

Lam sells a broad range of plasma ("dry") etch products to address specific
applications. The etch product portfolio includes the Exelan(TM) system and
Rainbow(TM)("Rainbow") and TCP(R) product lines. Lam's TCP etchers utilize a
high-density plasma process to etch device features down to 0.18 micron and
below. Most of the Company's current etch products are available as stand-alone
systems or as process modules ("PMs") used on Lam's Alliance(TM) ("Alliance")
multi-chamber cluster platform. The Company markets both the DSS-200(R) and
Synergy(TM) product lines of post-CMP wafer cleaners, which are used to remove

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residual slurries and other contaminants from wafer surfaces, both after CMP
polishing and before and after essential semiconductor process steps. Lam's
Teres(TM) CMP polishing system leverages Lam's post-CMP wafer cleaning expertise
to provide the Company's first fully integrated polishing and cleaning solution.

PRODUCTS

Semiconductor wafers are subjected to a complex series of process steps
that result in the simultaneous creation of many individual integrated circuits.
The five basic steps of semiconductor wafer fabrication include
photolithography, deposition, etch, CMP and post-CMP wafer cleaning. Quality
assurance tests are often conducted between each step. Lam products are
currently used in three important steps in the front-end of the wafer processing
manufacturing cycle: etch, CMP and post-CMP wafer cleaning. Most of the
Company's current etch products are available as stand-alone systems or as PMs
used on the Alliance multi-chamber cluster platform. Lam also supplies advanced
control system software with all systems for production management.

Etch Products

The etch process defines line-widths and other micro features on integrated
circuits. Plasma etching was developed to meet the demand for device geometries
smaller than three microns. Plasma consists of ions and neutral species that
react with exposed portions of the wafer to produce the finely delineated
features and patterns of the integrated circuit. Today, manufacturers of
advanced integrated circuits require etch systems that create features of 0.25
micron and below (approximately 1/300 the thickness of a human hair). In the
near future, systems capable of producing devices with feature sizes smaller
than 0.20 micron will be needed. In addition to continually shrinking feature
sizes, advanced manufacturing facilities are now producing integrated circuits
on 200 mm (8 inch diameter) silicon wafers, but a transition is in progress that
will increase standard wafer diameters to 300 mm (12 inches). To accommodate
these decreasing line-widths and anticipated increasing wafer diameters,
manufacturers will increasingly require more precise control over the etching
process. Lam's family of etch systems incorporates plasma technologies designed
to meet both current and future needs.

Rainbow(TM). The first Rainbow etch single chamber system was introduced in
1987. The Rainbow series of products addresses processes that utilize wafer
sizes up to 200 mm and feature line-width sizes as small as 0.18 micron in some
cases. The Rainbow product line, also available on the Alliance platform,
includes the Rainbow 4400, 4500, 4600 and 4700 system series for etching of
different films. These systems are designed to accommodate certain hardware and
process enhancements.

4520XLE(TM) and Exelan(TM). The 4520XLE is a dual frequency oxide etch
system that offers an extended process window and capabilities for sub-0.25
micron geometries. The 4520XLE is well suited for next-generation etch regimes
associated with copper damascene processes. The Exelan is Lam's latest oxide
etch system offering, announced in June 1999. It provides all the process
flexibility and advanced etch capabilities of Lam's proven dual frequency
systems at a low cost of ownership.

TCP(R). Lam's TCP product line of high-density, low-pressure etch systems,
which was introduced in late 1992, incorporates the Company's patented
Transformer Coupled Plasma(TM) source technology, which is now being used for
etching 0.25 micron and smaller geometries. The Company currently offers the TCP
9600SEII and TCP 9600PTX, generally for metal etch applications, the TCP
9400SEII and TCP 9400PTX, generally for polysilicon, polycide and shallow trench
isolation ("STI") etch applications, and the TCP 9100PTX, generally for oxide
etch applications. These systems are currently used in the production of a broad
range of advanced logic and memory devices, while R&D has demonstrated their
continued application in advanced next-generation features and production, such
as STI. The TCP series operates at low pressures for improved pattern control
and high plasma density for higher etch rates. The TCP systems are available as
a standalone, single wafer configuration or in conjunction with the Alliance
multi-chamber cluster platform.

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CMP Product

Teres(TM). Lam developed the Teres CMP integrated polishing and cleaning
system with Linear Planarization Technology(TM) ("LPT(TM)"), which uses a
high-speed belt instead of the rotating table used in conventional polishers.
LPT offers a wider process window and more flexible polishing options than
conventional systems. Lam has designed the Teres system to planarize patterned
films with higher removal rates and better uniformity and planarity than
conventional systems currently offer. The Teres is supplied with an integrated
Synergy(TM) post-CMP cleaning system (see discussion below) to provide dry
in/dry out production.

Post-CMP Wafer Cleaning Products

DSS-200(R). The DSS-200 cleaning system has a number of features that
distinguish it from competitive cleaning methods. Double-sided scrubbing
technology with chemical cleaning simultaneously scrubs both sides of the wafer
with proprietary brushes top and bottom, while limiting contact that can
contaminate the backside of the wafer. For selected applications, brush cleaning
systems provide significant advantages over traditional batch wet bench cleaning
and ultrasonic cleaning systems, including improved cleaning efficiency, reduced
chemical usage, a smaller footprint and greater process flexibility. In
addition, single wafer processing minimizes the risks inherent in processing
wafers in batches.

Synergy(TM). Synergy products combine double-sided scrubbing technology and
Chemical Mechanical Cleaning ("CMC"(TM)) technology to perform mechanical
cleaning and chemical cleaning simultaneously in a single-step process. The
applications for the Synergy family include oxide, STI, tungsten and copper
cleaning. In response to the worldwide demand for a dry in/dry out CMP solution,
Lam provides the Synergy Integra(TM) which incorporates advanced cleaning
technology with a platform that integrates the polisher and cleaner. Integrated
systems are the result of partnerships between Lam and key polishing vendors.

"Lam", "Transformer Coupled Plasma", "Teres", "Exelan", "4520XLE",
"Rainbow", "Advanced Capability Rainbow", "Alliance", "Linear Planarization
Technology", "LPT", "CMC", "Synergy", "OnTrak" and "Synergy Integra" are
trademarks of Lam Research Corporation. "TCP", "Lam Research" and "DSS-200" are
registered trademarks of Lam Research Corporation.

RESEARCH AND DEVELOPMENT

The market for semiconductor capital equipment is characterized by rapid
technological change. The Company believes that continued and timely development
of new products and enhancements to existing products are necessary for it to
maintain its competitive position. Accordingly, the Company devotes a
significant portion of its personnel and financial resources to R&D programs and
seeks to maintain close relationships with its customers to be responsive to
their product needs.

The Company's net R&D expenses during fiscal 1999, 1998 and 1997 were
approximately $142.5 million, $206.5 million and $192.3 million, respectively,
and represented 22.0%, 19.6% and 17.9% of total revenue, respectively. Current
projects include the continued development of advanced etch, CMP and post-CMP
wafer cleaning products.

The Company expects to continue to make substantial investments in R&D. The
Company also must manage product transitions successfully, as introductions of
new products could adversely affect sales of existing products. There can be no
assurance that future technologies, processes or product developments will not
render the Company's existing or anticipated product offerings obsolete or that
the Company will be able to develop and introduce new products or enhancements
to its existing products and processes in a timely manner which will satisfy
customer needs or achieve market acceptance. The failure to do so could
adversely affect the Company's business.

MARKETING, SALES AND SERVICE

The Company's marketing and sales efforts are focused on building long-term
relationships with its customers. These efforts are supported by a team of
product marketing managers, sales personnel, equipment
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engineers and process engineers that works closely with individual customers to
find solutions to their process needs. After-sales support is an essential
element of the Company's marketing and sales program. The Company maintains an
ongoing support relationship with its customers and has an extensive network of
field service personnel in place throughout the United States, Europe, Japan and
Asia Pacific. In addition, the Company maintains an in-house group of highly
skilled application engineers to respond to customer process needs worldwide,
when a higher level of technical expertise is required. The Company believes
that its extensive support programs and close working relationships with its
customers improves its competitiveness.

The Company has more than 40 sales and support centers located throughout
the United States, Europe, Japan and Asia Pacific, through which direct sales
personnel sell and service the Company's products. The Company offers its
customers a comprehensive warranty package on all released products.

Export sales accounted for approximately 33%, 39% and 42% of net sales in
fiscal 1999, 1998 and 1997, respectively. Export sales consist of sales from the
Company's U.S. operating subsidiary to non-affiliated customers in non-U.S.
countries. During fiscal 1999, 1998 and 1997, the Company downsized its
worldwide operations and in fiscal 1998, it discontinued its manufacturing
operations in Korea. A significant portion of the Company's sales and operations
will be subject to certain risks, including tariffs and other barriers,
difficulties in staffing and managing foreign subsidiary and branch operations,
potentially adverse tax consequences and the possibility of difficulty in
accounts receivable collection. There can be no assurance that any of these
factors will not have a material adverse effect on the Company's business,
financial position, results of operations and cash flows. Reference is made to
Note C of the Company's Consolidated Financial Statements, included in Item 8
herein, for further information concerning export sales, which information is
incorporated herein by this reference.

CUSTOMERS

The Company's customers include certain of the world's leading
semiconductor manufacturers. In fiscal 1999 and 1997, no individual customer
accounted for more than 10% of Lam's total revenue. Revenue from Intel
Corporation accounted for 12% of total revenue in fiscal 1998.

The Company's business depends upon the capital expenditures of
semiconductor manufacturers, which in turn depend on the current and anticipated
market demand for integrated circuits and products utilizing integrated
circuits. During calendar 1998, the semiconductor industry experienced a
slowdown resulting from depressed DRAM pricing and manufacturing over-capacity.
This caused semiconductor manufacturers to reduce their capital equipment
investments, and in certain cases customers have either rescheduled or canceled
capital equipment purchases. Also, during calendar 1998, the Asian regions were
faced with difficulties in their financial markets, which have also had an
adverse impact on the ability of Asian customers to purchase capital equipment.
No assurance can be given that the Company's revenue and operating results will
not be further adversely affected if downturns in the semiconductor industry and
difficulties in the Asian regions' financial markets continue or slowdowns in
the U.S. or European economies occur.

BACKLOG

The Company schedules production of its systems based upon order backlog
and customer commitments. Included in backlog for the Company are orders for
which written authorizations have been accepted and shipment dates have been
assigned. The Company's policy on backlog is to make adjustments to reflect
customer push-outs and deferrals of delivery dates, as well as cancellations, so
that only those orders for which equipment is scheduled to be shipped within 12
months are reflected in the Company's published backlog amounts. As of June 30,
1999 and 1998, the Company's order backlog was approximately $233 million and
$130 million, respectively. During calendar 1998, the semiconductor market
experienced a slowdown as a result of depressed DRAM pricing, over-capacity and
the financial crisis in Asia. This slowdown caused certain semiconductor
manufacturers to delay their capital equipment purchase decisions and, in
certain cases, to reschedule or cancel capital equipment purchases. All orders
of the Company's products are subject to cancellation by the customer, in some
cases with limited penalty. Because some orders are received for systems to be
shipped in the same quarter and because of possible customer changes in delivery
schedules and

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cancellations of orders, the Company's backlog at any particular date is not
necessarily indicative of actual sales for any succeeding period.

MANUFACTURING

The Company maintains facilities in Fremont, California for the manufacture
of its etch, CMP and post-CMP wafer cleaning products. In fiscal 1998, the
Company discontinued its manufacturing activities in Wilmington, Massachusetts
and in CheonAn, Korea.

The Company's manufacturing operations consist of assembling and testing
components and subassemblies that are then integrated into finished systems.
Once manufacturing has completed final testing of all electronic and
electromechanical subassemblies that make up one of the Company's products, the
completed system is process-tested with standard Lam processes. The final
assembly and testing of the Company's products are conducted in cleanroom
environments where personnel are properly attired to reduce particulate
contamination. Prior to shipping a completed system, customer representatives
may perform acceptance tests at Lam's facility. After passing these acceptance
tests, the system is vacuum-bagged in a cleanroom environment and prepared for
shipment.

During fiscal 1999, the Company entered into a five year manufacturing
agreement with Yokogawa Electric Corporation ("Yokogawa"). Under the terms of
the agreement, Yokogawa assembles transport modules ("TMs") from kits supplied
by Lam's Fremont manufacturing operations. Yokogawa integrates these TMs with
completed process modules provided by Lam, provides final test services for the
completed machine and ships them to Lam's customers in Japan.

The Company is subject to a variety of governmental regulations related to
the discharge or disposal of toxic, volatile or otherwise hazardous chemicals
used in the manufacturing process. The Company believes that it is in general
compliance with these regulations and that it has obtained (or will obtain or is
otherwise addressing) all necessary environmental permits to conduct its
business. These permits generally relate to the disposal of hazardous wastes.
Nevertheless, the failure to comply with present or future regulations could
result in fines being imposed on the Company, suspension of production,
cessation of operations or reduction in product acceptance. Additionally,
complying with such regulations could require the Company to alter current
operations, or acquire significant equipment or incur substantial other expenses
to comply with environmental regulations. Any failure by the Company to control
the use, sale or transport of, or adequately to restrict the discharge or
disposal of, hazardous substances could subject the Company to future
liabilities.

EMPLOYEES

As of September 1, 1999, the Company had approximately 2,750 full-time
employees. None of the Company's employees is represented by a union and the
Company has never experienced a work stoppage. Management considers its employee
relations to be good.

Each employee of the Company has signed agreements to maintain the
confidentiality of the Company's proprietary information, and most key employees
have stock or stock option arrangements with the Company that provide for the
vesting of their interests over several years.

COMPETITION

The semiconductor manufacturing equipment industry is highly competitive.
The Company faces substantial competition throughout the world. Management
believes that to remain viable it will require significant financial resources
to offer a broad range of products, to maintain customer service and support
centers worldwide and to invest in product and process R&D. Certain of the
Company's existing and potential competitors have substantially greater
financial resources and more extensive engineering, manufacturing, marketing and
customer service and support organizations. Lam expects its competitors to
continue to improve the design and performance of their current products and
processes and to introduce new products and processes with enhanced price and
performance characteristics. If the Company's competitors enter into strategic
relationships with leading semiconductor manufacturers covering etch, CMP or
post-CMP wafer

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cleaning products similar to those sold by the Company, its ability to sell its
products to those manufacturers could be adversely affected. No assurance can be
given that the Company will continue to compete successfully in the United
States or worldwide.

The Company faces significant competitive factors in the etch equipment
market, including etch quality, repeatability, process capability and
flexibility, and overall cost of ownership, which may be effected by factors
such as reliability, software automation, throughput, customer support and
system price. Although Lam believes that it competes favorably with respect to
many of these factors, the Company's ability to compete successfully in this
market will depend upon its ability to introduce product enhancements and new
products on a timely basis. There can be no assurance that the Company will
continue to compete successfully in the future. In the etch equipment market,
the Company's primary competitors are Applied Materials, Inc., Tokyo Electron
Limited ("TEL") and Hitachi Ltd.

The Teres CMP system developed by the Company faces significant competition
from multiple current and future competitors. Companies currently offering CMP
systems include Applied Materials, Inc., Ebara Corp., SpeedFam-IPEC, Inc., and
Strasbaugh.

In CMP slurry removal and cleaning applications, Lam's competitor's include
DaiNippon Screen Manufacturing Co. Ltd. and VERTEQ.

PATENTS AND LICENSES

The Company has a policy of seeking patents on inventions governing new
products and processes developed as part of its ongoing research, engineering
and manufacturing activities. Lam holds United States patents and corresponding
foreign patents covering various aspects of its products. The Company believes
that the duration of its patents generally exceeds the life cycles of the
technologies disclosed and claimed therein. Lam's patents which cover material
aspects of its current core products have current durations ranging from
approximately 9 to 16 years. Lam believes that although the patents it holds and
may obtain will be of value, they will not alone determine the Company's
success, which depends principally upon its engineering, marketing, service and
manufacturing skills. However, in the absence of patent protection, the Company
may be vulnerable to competitors who attempt to imitate its products,
manufacturing techniques and processes. In addition, other companies and
inventors may receive patents that contain claims applicable or similar to the
Company's products and processes. The sale of products covered by such patents
could require licenses that may not be available on acceptable terms, or at all.

From time to time, Lam has received notices from third parties alleging
infringement of such parties' patent or other intellectual property rights by
the Company's products. In such cases, it is the policy of the Company to defend
the claims or negotiate licenses on commercially reasonable terms, where
considered appropriate. However, no assurance can be given that Lam will be able
in the future to negotiate necessary licenses on commercially reasonable terms,
or at all, or that any litigation resulting from such claims would not have a
material adverse effect on the Company's business and financial results. For
further discussion of legal matters see Item 3 "Legal Proceedings".

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EXECUTIVE OFFICERS OF THE COMPANY

As of September 24, 1999, the executive officers of the Company, who are
elected by and serve at the discretion of the Board of Directors, were as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
James W. Bagley............................. 60 Chairman and Chief Executive Officer
Stephen G. Newberry......................... 46 President and Chief Operating Officer
Mercedes Johnson............................ 45 Vice President, Finance and Chief Financial
Officer
Hsui-Sheng (Way) Tu......................... 42 President, Asia Operations
David E. Bayly.............................. 48 Vice President, North America and Europe Sales
and Field Operations
Gregor A. Campbell.......................... 40 Vice President and General Manager, Etch
Products Organization
Craig Garber................................ 41 Vice President, Corporate Finance and Treasurer
Richard H. Lovgren.......................... 45 Vice President, General Counsel and Secretary
</TABLE>

James W. Bagley became Chief Executive Officer and a Director of Lam upon
consummation of the Merger with OnTrak. Effective September 1, 1998, Mr. Bagley
was appointed Chairman of the Board of Lam. Mr. Bagley currently is a director
of KLA-Tencor Corporation, Teradyne, Inc., Kulicke & Soffe Industries, Inc.,
Micron Technology, Inc. and SEMI/SEMATECH. From June 1996 to August 1997, Mr.
Bagley served as Chairman of the Board and Chief Executive Officer of OnTrak.
Prior to joining OnTrak, Mr. Bagley was employed by Applied Materials, Inc. for
15 years in various senior management positions, most recently as Chief
Operating Officer and Vice Chairman of the Board. Mr. Bagley held various
management positions at Texas Instruments, Inc. before he joined Applied
Materials, Inc.

Stephen G. Newberry joined the Company in August 1997 as Executive Vice
President and Chief Operating Officer. In July 1998, Mr. Newberry was promoted
to President of Lam. Previously, he was employed by Applied Materials, Inc. for
17 years, most recently as Group Vice President of Global Operations and
Planning. From 1990 to 1992, Mr. Newberry served as Vice President of Applied
Materials Japan and was responsible for Customer Service, Engineering and
Manufacturing. Upon his return to the United States, Mr. Newberry served in a
variety of executive management positions at Applied Materials, Inc.

Mercedes Johnson joined the Company in April 1997. She was formerly Vice
President and Worldwide Operations Controller of Applied Materials, Inc., where
she also served as Senior Director and Worldwide Business Operations Controller,
Director and Senior Controller for Chemical Vapor Deposition ("CVD") and Etch
Technologies Group, Manager of International Treasury and Division Controller of
Etch Products Division. Prior to joining Applied Materials, Inc., Ms. Johnson
held senior finance and controller positions at Nanometrics, Inc., NCR
Corporation and Hewlett-Packard Company.

Hsui-Sheng (Way) Tu joined the Company in 1983 and has held various
positions with the Company. In August 1997, Mr. Tu was appointed President, Asia
Operations. In 1996, Mr. Tu was named President of Lam, which position he held
until August 1997. In 1994, Mr. Tu was named Vice President of the Oxide Etch
Business Unit. In 1992, he was named Vice President of Asian Operations. Before
joining the Company, Mr. Tu was Process Engineering Supervisor for Fairchild
Semiconductor.

David E. Bayly joined the Company in February 1998 as Vice President, North
America and Europe Sales and Field Operations. He was formerly Vice President of
Sales at Tencor Instruments, Inc. Mr. Bayly has also previously held executive
positions at Novellus Systems, Inc. Mr. Bayly's career started at Hewlett-
Packard Company and he has been in the semiconductor equipment business since
1982.

Gregor A. Campbell joined the Company in November 1997 as Vice President
and General Manager, Etch Products Organization. Prior to joining the Company,
Dr. Campbell was a Director and Chief Executive Officer of Trikon Technologies,
Inc.

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Craig Garber joined the Company in September 1997 as Vice President,
Corporate Finance and Treasurer. Before joining the Company, and since 1984, Mr.
Garber held various finance positions at Applied Materials, Inc. His most recent
position at Applied Materials, Inc. was Assistant Treasurer and Senior Director
of Treasury Operations.

Richard H. Lovgren joined the Company in 1995 as Vice President, General
Counsel and Corporate Secretary. Before joining the Company, and since 1979, Mr.
Lovgren held various legal positions at Advanced Micro Devices, Inc. His most
recent position at Advanced Micro Devices, Inc. was Director and Deputy General
Counsel.

ITEM 2. PROPERTIES

The Company's executive offices and principal manufacturing and R&D
facilities are located in Fremont, California, and currently are under leases
expiring from 2000 to 2014. As a result of the restructurings of its operations,
the Company has excess unoccupied facilities. The Company has subleased some of
these idle facilities and is attempting to sublease the remainder of these idle
facilities in Fremont and San Jose, California.

In addition, the Company leases office space for its service and sales
personnel throughout the United States, Europe, Japan and Asia Pacific. The
Company has subleased, or is negotiating subleases, with respect to certain of
those facilities as part of its restructurings and consolidation.

The Company's fiscal 1999 rental payments for the facilities occupied as of
June 30, 1999, aggregated approximately $19.6 million and are subject to
periodic increases. The Company believes that its existing facilities are well
maintained and in good operating condition.

ITEM 3. LEGAL PROCEEDINGS

In October, 1993, Varian Associates, Inc. ("Varian") brought suit against
the Company in the United States District Court, for the Northern District of
California, seeking monetary damages and injunctive relief based on the
Company's alleged infringement of certain patents held by Varian. By order of
the Court, those proceedings were bifurcated into an initial phase to determine
the validity of the Varian patents and Lam's infringement (if any), and a
secondary phase to determine damages to Varian (if any) and whether Lam's
infringement (if shown) was willful. On April 13, 1999, the Court issued an
interlocutory order construing the meaning of the terms of the patent claims at
issue in the action. To date, however, there has been no determination as to the
actual scope of those claims, or whether Lam's products have infringed or are
infringing Varian's patents. A trial date is currently scheduled for March 2000.
Furthermore, there have been no findings in the action which have caused the
Company reasonably to believe that any infringement, if found, or any damages,
if awarded, would have a material adverse effect on the Company's operating
results or the Company's financial position.

In September, 1999 Tegal Corporation ("Tegal") brought suit against the
Company in the United States District Court, for the Eastern District of
Virginia, seeking monetary damages and injunctive relief based on the Company's
alleged infringement of certain patents held by Tegal. Specifically, Tegal
identified the Company's 4520XL and Exelan products as infringing the patents
Tegal is asserting. To date, however, there has been no determination as to the
actual scope of those claims or whether Lam's products have infringed or are
infringing Tegal's patents. No trial date is currently scheduled in the action.
Furthermore, there have been no findings in the action which have caused the
Company reasonably to believe that any infringement, if found, or any damages,
if awarded, would have a material adverse effect on the Company's operating
results or the Company's financial position.

9
<PAGE> 10

licenses on commercially reasonable terms, or at all, or that any litigation
resulting from such claims would not have a material adverse effect on the
Company's business and financial results.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The information required by this Item is incorporated by reference from
"Item 6. Selected Financial Data," below.

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------------
1999 1998 1997 1996 1995
--------- ---------- ---------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Total revenue.................. $ 647,955 $1,052,586 $1,073,197 $1,332,713 $836,581
Gross margin................... 233,364 374,142 349,793 643,198 406,874
Restructuring charges.......... 53,372 148,858 9,021 -- --
Purchased technology for
research and development..... 5,000 12,100 -- -- --
Merger costs................... -- 17,685 -- -- --
Operating income (loss)........ (113,201) (180,924) (60,776) 218,855 119,945
Net income (loss).............. (112,913) (144,599) (30,676) 145,878 90,279
Net income (loss) per share
Basic........................ $ (2.93) $ (3.80) $ (0.83) $ 4.32 $ 3.07
Diluted...................... $ (2.93) $ (3.80) $ (0.83) $ 3.95 $ 2.65
BALANCE SHEET:
Working capital................ $ 494,875 $ 603,580 $ 462,171 $ 516,162 $343,410
Total assets................... 979,451 1,150,772 1,035,049 1,031,497 698,416
Long-term obligations, less
current portion.............. 326,500 334,174 46,592 54,099 97,399
Mandatorily redeemable
preferred stock.............. -- -- -- -- 6,522
</TABLE>

<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
-------------- -------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
QUARTERLY 1999
Total revenue............... $ 142,199 $ 141,895 $ 152,976 $ 210,885
Gross margin................ 50,156 47,092 54,302 81,814
Restructuring charges....... -- 53,372 -- --
Purchased technology for
research and
development............... -- 5,000 -- --
Operating income (loss)..... (26,794) (82,850) (14,624) 11,067
Net income (loss)........... (26,772) (82,766) (14,724) 11,349
Net income (loss) per share
Basic..................... $ (0.70) $ (2.16) $ (0.38) $ 0.28
Diluted................... $ (0.70) $ (2.16) $ (0.38) $ 0.28
Price range per share....... $9.38 - $21.19 $8.38 - $22.50 $18.06 - $39.25 $26.06 - $47.00
</TABLE>

10
<PAGE> 11

<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
--------------- --------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
QUARTERLY 1998
Total revenue............... $ 289,926 $ 292,056 $ 240,018 $ 230,586
Gross margin................ 112,986 113,096 67,989 80,071
Restructuring charges....... -- -- 84,896 63,962
Purchased technology for
research and
development............... -- -- 12,100 --
Merger costs................ 17,685 -- -- --
Operating income (loss)..... (12,080) 5,167 (105,847) (68,164)
Net income (loss)........... (12,172) 3,525 (70,064) (65,888)
Net income (loss) per share
Basic..................... $ (0.32) $ 0.09 $ (1.84) $ (1.72)
Diluted................... $ (0.32) $ 0.09 $ (1.84) $ (1.72)
Price range per share....... $36.25 - $67.44 $25.13 - $49.75 $21.38 - $32.25 $18.56 - $32.38
</TABLE>

- ---------------
Stock and Dividend Information:

The Company's Common Stock is traded in the over-the-counter market under the
Nasdaq National Market symbol LRCX. The price range per share is the highest and
lowest bid prices, as reported by the National Association of Security Dealers,
Inc., on any trading day during the respective quarter.

As of June 30, 1999, the Company had 739 stockholders of record.

No cash dividends have been declared, or are anticipated to be paid by the
Company, as all available funds are intended to be employed in the operation of
the business. Additionally, certain of the Company's bank agreements restrict
the payment of dividends.

See Notes to Consolidated Financial Statements.

11
<PAGE> 12

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

With the exception of historical facts, the statements contained in this
discussion are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Exchange Act, and are subject
to the Safe Harbor provisions created by that statute. Such forward-looking
statements include, but are not limited to, statements that relate to the
Company's future revenue, product development, demand, acceptance and market
share, competitiveness, gross margins, levels of R&D and operating expenses,
management's plans and objectives for current and future operations of the
Company, the effects of the Company's on-going reorganization and consolidation
of operations and facilities, the ability of the Company to complete
contemplated reorganizations or consolidations on time or within anticipated
cost and the sufficiency of financial resources to support future operations and
capital expenditures. Such statements are based on current expectations and are
subject to risks, uncertainties, and changes in condition, significance, value
and effect, including those discussed below under the heading Risk Factors, and
other documents the Company files from time to time with the Securities and
Exchange Commission; specifically, the Company's quarterly reports on Forms 10-Q
and the Company's current reports on Form 8-K. Such risks, uncertainties and
changes in condition, significance, value and effect could cause actual results
to differ materially from those expressed herein and in ways not readily
foreseeable. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof and of
information currently and reasonably known. The Company undertakes no obligation
to release the results of any revisions to these forward-looking statements
which may be made to reflect events or circumstances which occur after the date
hereof or to reflect the occurrence or effect of anticipated or unanticipated
events. This discussion should be read in conjunction with the Consolidated
Financial Statements and Notes presented thereto on pages 32 to 57 of this Form
10-K for a full understanding of the Company's financial position and results of
operations.

RESULTS OF OPERATIONS

FISCAL 1999 VS. 1998

Total Revenue

Total revenue for the fiscal year ended June 30, 1999 was 38% lower
compared to the prior fiscal year. During calendar 1998, the semiconductor
equipment market experienced a downturn brought on in large part by depressed
DRAM pricing, production overcapacity and the difficulties in the Asian
financial markets. During the second half of fiscal 1999, the semiconductor
equipment industry began to show signs of a slow and moderate recovery. Lam's
quarterly revenue also began to increase during the second half of fiscal 1999;
however, the fiscal 1999 revenue for each quarterly period was still lower than
the quarterly revenue achieved during each quarter of fiscal 1998. Sales for all
of Lam's products decreased when compared to the prior year. Lam's
single-chamber etch products experienced the greatest decrease. The Company's
products sales continued to shift from the single-chamber etch to the
multi-chamber cluster products. The decrease in the sale of single-chamber etch
systems represented approximately 62% of the total decrease in total revenue.

Regional geographic breakdown of revenue is as follows:

<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
------------
1999 1998
---- ----
<S> <C> <C>
North America.......................................... 46% 45%
Europe................................................. 21% 18%
Asia Pacific........................................... 25% 30%
Japan.................................................. 8% 7%
</TABLE>

The decrease in revenue from the Asia Pacific region was largely the result
of the difficulties surrounding its financial markets during calendar 1998, as
well as overcapacity in the DRAM markets.

The semiconductor equipment industry appears to have started a slow and
moderate recovery in fiscal 1999. The Company believes that revenues will
increase moderately on a quarterly basis for at least the first half of fiscal
2000 compared to the revenue level achieved during the fourth quarter of fiscal
1999.

12
<PAGE> 13

Gross Margin

The Company's gross margin percentage increased slightly to 36.0% for
fiscal 1999, compared to 35.5% for fiscal 1998. During fiscal 1998, the Company
incurred a charge of $31.9 million to write-off inventory related to the exited
CVD and Flat Panel Display ("FPD") operations. However, the fiscal 1999 gross
margin percentages were unfavorably impacted by the Company's lower sales volume
compared to fiscal 1998 and continued competitive pricing pressures. During the
second half of fiscal 1999, the gross margin percentage began to increase as a
result of the Company's continued cost reductions in manufacturing and economies
of scale achieved by higher revenues. Lam believes that its fiscal 2000 gross
margins will increase moderately due to volume increases and the result of the
Company's new "lean" manufacturing process.

Research and Development

R&D expenses for the fiscal year ended June 30, 1999 were 22.0% of total
revenue, compared to 19.6% of total revenue for the prior fiscal year, due to
significantly lower revenue rates, even though R&D expenses decreased 31.0% in
fiscal 1999 compared to fiscal 1998. The Company's overall downsizing
activities, including the Company's exiting of the FPD and CVD operations during
calendar 1998, largely contributed to the overall decline in R&D expenses in
absolute dollars, which were, however, partially offset by increased levels of
spending related to the Company's CMP products. The Company expects to continue
to make substantial investments in R&D in fiscal 2000.

Selling, General and Administrative

Selling, general and administrative ("SG&A") expenses were 22.5% of total
revenue for fiscal 1999, as compared to 19.2% of total revenue for the prior
fiscal year, but decreased in absolute dollars from $201.9 million in fiscal
1998 to $145.7 million in fiscal 1999. The reduction in SG&A expenses is largely
a result of the fiscal 1999 and 1998 restructuring programs and management's
continuing efforts to improve administrative efficiencies.

Fiscal 1998 Restructuring Charge

The Company's business overall outlook in late January 1998 was that the
industry had entered into a steep downturn brought on by depressed DRAM pricing
and the Asia financial crisis. The Company therefore announced a set of
restructuring activities in a news release on February 12, 1998. At that time,
the Company's assessment, related to industry conditions, was that its revenues
for the March and June 1998 quarters would decline by approximately 20%. The
Company's restructuring plans aligned its cost structure to its level of
revenues by exiting its CVD business and all of its Flat Panel Display ("FPD")
business, consolidating its manufacturing facilities and substantially reducing
its remaining infrastructure and workforce. The Company's actual June 1998
revenues were in line with those expectations; however, by the mid-June 1998
time-frame, industry conditions further deteriorated and the outlook for future
quarters significantly worsened. The Company projected revenues to decrease to a
run-rate of approximately $180 million per quarter and determined it needed once
more to reduce its cost structure in line with the projected reductions in
revenue. Accordingly, another separate restructuring plan was developed and
announced in June 1998. During fiscal 1998, the Company recorded a total
restructuring charge of $148.9 million relating to severance and benefits, lease
payments on vacated facilities, the write-off of fixed assets, excess and
obsolete inventory, credits on returned equipment and other exit costs. As a
result of the fiscal 1998 restructurings, the Company reduced its global
workforce by approximately 28%. During fiscal 1999, the Company recorded an
adjustment to the restructuring reserve of $1.5 million for the recovery of a
previously written-off machine. At June 30, 1999, a total of $25.0 million of
restructuring-related accruals remained on the Company's balance sheet, of which
$10.8 million, $12.4 million and $1.8 million, respectively, relate to future
severance and benefit cash payments, lease payments and credits on returned
equipment. There will be further charges against these restructuring reserves
established, as the Company completes this restructuring program.

13
<PAGE> 14

Below is a table summarizing restructuring activity relating to the fiscal
1998 restructurings:

<TABLE>
<CAPTION>
LEASE EXCESS
SEVERANCE PAYMENTS ABANDONED AND CREDITS ON OTHER
AND ON VACATED FIXED OBSOLETE RETURNED EXIT
BENEFITS FACILITIES ASSETS INVENTORY EQUIPMENT COSTS TOTAL
--------- ---------- --------- --------- ---------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Fiscal year 1998 provision........ $ 40,317 $16,998 $ 47,341 $ 31,933 $ 6,547 $ 5,722 $148,858
Cash payments..................... (9,766) (1,518) -- -- -- -- (11,284)
Non-cash charges.................. -- -- (47,341) (31,933) (4,135) (5,722) (89,131)
-------- ------- -------- -------- ------- ------- --------
Balance at June 30, 1998.......... 30,551 15,480 -- -- 2,412 -- 48,443
Adjustment........................ -- -- -- -- 1,528 -- 1,528
Cash payments..................... (19,777) (3,039) -- -- (2,150) -- (24,966)
-------- ------- -------- -------- ------- ------- --------
Balance at June 30, 1999.......... $ 10,774 $12,441 $ -- $ -- $ 1,790 $ -- $ 25,005
======== ======= ======== ======== ======= ======= ========
</TABLE>

Fiscal 1999 Restructuring Charge

During the quarter ended September 30, 1998, the semiconductor equipment
market contracted beyond the anticipated $3.2 billion revenue level to $2.6
billion according to Dataquest. The Company's shortfall of revenues during the
September, 1998 quarter was in line with the industry as a whole, and resulted
in revenues falling to $142.2 million for the quarter ended September 30, 1998.
At that point in time, the Company projected that its quarterly revenues would
remain closer to the $140 - $150 million levels for at least the next several
quarters. This necessitated another restructuring plan and further cost
reductions through employee terminations, facilities consolidations, a
contraction of operating activities and the write-off of vacated plant related
assets. This plan was announced and publicly communicated on November 12, 1998.
During the second quarter of fiscal 1999, the Company recorded a restructuring
charge of $53.4 million, relating to severance compensation and benefits for
involuntarily terminated employees worldwide (representing approximately 15% of
the global workforce), lease payments on abandoned facilities, the write-off of
related leasehold improvements and fixed assets and credits on returned
equipment. At June 30, 1999, $10.9 million of this charge remains accrued on the
Company's consolidated balance sheet of which $4.9 million relates to severance
and benefits, $0.7 million relates to lease payments on vacated facilities and
$5.4 million relates to credits on returned equipment. There will be further
charges against this restructuring reserve in fiscal 2000, as the Company
completes the restructuring program.

Below is a table summarizing restructuring activity relating to the fiscal
1999 restructuring:

<TABLE>
<CAPTION>
LEASE
SEVERANCE PAYMENTS ABANDONED CREDITS ON
AND ON VACATED FIXED RETURNED
BENEFITS FACILITIES ASSETS EQUIPMENT TOTAL
--------- ---------- --------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fiscal year 1999 provision............ $16,521 $1,125 $28,141 $7,585 $53,372
Cash payments......................... (11,663) (440) -- (258) (12,361)
Non-cash charges...................... -- -- (28,141) (1,959) (30,100)
------- ------ ------- ------ -------
Balance at June 30, 1999.............. $ 4,858 $ 685 $ -- $5,368 $10,911
======= ====== ======= ====== =======
</TABLE>

The Company's restructuring actions in fiscal 1999 and 1998 were expected
to reduce its quarterly spending rate by approximately $11.0 million and $35.0
million, respectively, for salaries, benefits and employee-related expenses, and
by approximately $6.0 million and $6.6 million, respectively, related to
facility and depreciation costs. The Company has carried-out, and continues to
carry-out, its restructuring activities according to its original plans and
timelines and it believes that the anticipated cost reductions did not vary and
will not materially from its original expectations and plans. The Company
intends to operate at levels of spending that are consistent with its ability to
generate revenues. Therefore, spending levels may increase or decrease depending
upon the Company's assessment of its current needs. The Company does not believe
that its decision to exit the CVD and FPD business will have a material impact
on its ability to generate future revenue growth.

14
<PAGE> 15

Purchased Technology for R&D

During the third quarter of fiscal 1998, Lam purchased a non-exclusive
license for Trikon's MORI(TM) source technology. Lam recorded a charge of $12.1
million for the initial payment of the license and for the purchase of an R&D
system from Trikon. During fiscal 1999, $5.0 million in additional fees for the
purchase of a non-exclusive license for MORI source technology became payable
(separate from royalties owed on shipments of MORI source-based systems
determined by rates prescribed in the license). This completes the purchase
payments for this technology. The technology is being used in a single discrete
etch product development project and has no future alternative use.

Other Income, net

Other income, net of $0.3 million in fiscal 1999 decreased from $1.8
million in fiscal 1998, due largely to the increase in interest expense as a
result of a full year's interest expense associated with the Company's $310.0
million Convertible Subordinated Notes (the "Notes"). The Notes, which were
issued in August 1997, bear interest at five percent and are due to mature on
September 1, 2002. During the fiscal year ended June 30, 1999, the Company also
had a lower rate of return on its investments than during the previous fiscal
year, consistent with the lower interest rates prevailing in the U.S. market.

Tax Benefit

For fiscal year 1999, Lam did not record an income tax benefit on the loss
before income taxes as compared to a tax benefit of $34.5 million recorded for
fiscal year 1998. No net tax benefit was recorded in fiscal 1999 because it was
offset by a valuation allowance. At June 30, 1999, the Company has gross
deferred tax assets arising from non-deductible temporary differences, tax loss
and tax credit carryforwards of $202.0 million. The gross deferred tax assets
are offset by a valuation allowance of $84.7 million and deferred tax
liabilities of $9.9 million. Realization of the majority of the net deferred tax
assets is dependent on the Company's ability to generate future taxable income.
Management believes that it is more likely than not that the assets will be
realized based on forecasted income. However, there can be no assurance that the
Company will meet its expectations of future income. Management will evaluate
the realizability of the deferred tax assets quarterly and assess the need for
additional valuation allowance.

Transition to Single European Currency

The Company established a team to address issues raised by the introduction
of the Single European Currency ("Euro") for initial implementation as of
January 1, 1999, and through the transition period to January 1, 2002. Lam met
all related legal requirements by January 1, 1999, and expects to meet all legal
requirements through the transition period. Lam does not expect the cost of any
related system modifications to be material and does not currently expect that
the introduction and use of the Euro will materially affect its foreign exchange
and hedging activities, or will result in any material increase in transaction
costs. The Company will continue to evaluate the impact over time of the
introduction of the Euro; however, based on currently available information
management does not believe that the introduction of the Euro has or will have a
material adverse impact on the Company's financial condition or results of its
operations.

Year 2000 Issues

The Company relies heavily on its existing application software and
operating systems. The Year 2000 compliance issue (in which systems do not
properly recognize date-sensitive information when the year changes from 1999 to
2000) creates risks for the Company: if internal data management, accounting
and/or manufacturing or operational software and systems do not adequately or
accurately process or manage day or date information beyond the year 1999, there
could be an adverse impact on the Company's operations. To address the issue,
the Company has assembled a task force to review and assess internal software,
data management, accounting, manufacturing and operational systems to ensure
that they do not malfunction as a result of the Year 2000 date transition. The
review and corrective measures are proceeding in parallel. These reviews and
corrective measures are intended to encompass all significant categories of
internal systems used

15
<PAGE> 16

by the Company, including data management, accounting, manufacturing, sales,
human resources and operational software and systems. The Company is also
working with its significant suppliers of products and systems to ensure that
the products and systems supplied to the Company, and the products the Company
supplies to its customers, are Year 2000-compliant.

The Company has identified all critical systems necessary to the Company's
internal system operations and has asked suppliers to provide assurances that
such systems are Year 2000-compliant, or to identify replacement or upgrade
systems. In many instances, the Company has developed upgrades internally which
will assure Year 2000 compliance of these systems. With respect to Year 2000
compliance of our suppliers' systems, the Company is in the process of
evaluating and assessing the adequacy of responses from its various suppliers,
and requesting further responses and assurances where appropriate. This process
is largely complete and is expected to be fully completed by the end of calendar
1999.

The Company's existing internal systems encompassing core manufacturing,
service, sales, inventory and warranty operations, which will be replaced by the
next-generation system, are currently Year 2000-compliant and can continue to
support the Company's significant operational systems, as needed. Many of the
Company's cash management and payroll operations are handled on an out-sourced
basis, and the Company has received written assurances from its providers that
the systems providing these outsource services are Year 2000-compliant. As
separate internal systems affecting individual and group-level company
operations are replaced or upgraded over time in the ordinary course of
business, all such replacement or upgrade systems will be Year 2000-compliant.
Such separate individual and group level internal systems are not believed to
affect material operations of the Company and the cost to replace or upgrade
such individual or group level internal systems in the ordinary course of
business, though not fully known at this time, is not expected to be material.
The Company does not separately track and budget the internal costs incurred in
connection with the Year 2000 compliance project. Substantially all such
expenses have been, or will be, included in the operational budgets of the
effected groups. The Company's next-generation enterprise resource planning and
information system will replace many of the system operations currently being
performed by existing internal system software. Implementation of this
next-generation system is now scheduled for completion during the first half of
calendar 2000, and the Company has received assurances that it will be Year
2000-compliant.

With respect to compliance of the products the Company supplies to its
customers, the Company adheres to Year 2000 test case scenarios established by
SEMATECH, an industry group comprised of US semiconductor manufacturers. The
Company's compliance efforts, and review and identification of corrective
measures and contingency planning (where necessary), are substantially complete.
The application systems and software of a significant number of the products
currently supplied to the Company's customers are Year 2000-compliant, with the
remainder expected to be so by the end of the second quarter of fiscal 2000.
With respect to certain of the Company's products already installed in the
field, the Company has determined that in most instances where the application
systems and software are not Year 2000-compliant, there is either no appreciable
effect or the effect during the product's operation is limited to certain
aspects of the product's ability to report data concerning its operational
parameters. However, the product's operation or manufacturing capabilities or
quality are not affected. The Company is in the process of identifying and
offering to customers product upgrades by the end of the first quarter of fiscal
2000, with the goal of resolving all material programs and systems prior to the
Year 2000 date transition. In this regard, the Company is incurring, and will
continue to incur throughout fiscal 2000, various costs to provide customer
support regarding Year 2000 issues. Through the end of fiscal 1999, these costs
have totaled less than $3 million, with total program costs estimated through
completion to be approximately $5 million. The Company estimates that most, if
not substantially all, of these estimated costs going forward will be off-set by
revenues from product upgrades and customer service and support. Accordingly,
the full cost of these activities is not expected to be material and, to the
extent will be borne by the Company, have already in large part been incurred by
the Company.

In connection with its review and implementation of corrective measures,
both to ensure that its internal products and systems and the application
systems accompanying the products sold to its customers are Year 2000-compliant,
the Company expects both to replace some software and systems and to upgrade
others where appropriate. As a contingency with respect to products the Company
currently offers to its customers, the Company may replace all non-compliant
application systems and software with systems and software
16
<PAGE> 17

demonstrated to be Year 2000-compliant. With respect to products and systems
supplied to the Company for use internally, the Company may upgrade all
non-compliant products and systems and, where necessary or where no reasonable
upgrade is available, replace such non-compliant products and systems with
products and systems demonstrated to be Year 2000-compliant.

The Company's failure to ensure, at all or in a timely or reasonable
manner, that its products are Year 2000-compliant may cause disruption in the
ability of the Company's customers to derive expected productivity from those
products or to integrate the products fully and functionally into certain
automated manufacturing environments. With respect to products and systems the
Company purchases for use internally, failure to ensure Year 2000 compliance may
cause disruption in the Company's automated accounting, financial planning, data
management and manufacturing operations which could have a material effect on
the Company's short-term ability to manage its day-to-day operations in an
efficient, cost-effective and reliable manner.

One of the responsibilities of the Company's Year 2000 compliance task
force has been to develop contingency plans to maintain operations under a
number of hypothetical scenarios. The Company has begun the development of a
contingency plan and expects to have the contingency plan in place prior to
December 1999. In the event the Company fails to anticipate the degree of
disruptions caused by Year 2000 problems, the Company's systems could be
affected in some or all of the following respects:

- disruptions of an extended period (i.e. in excess of one week) in the
economic infrastructure of the regions in which the Company does
business, including power, communication and transportation system
disruptions, could materially effect the Company's ability to deliver
systems as scheduled or to provide in a timely manner spare parts or
warranty support for such systems; and

- disruptions of an extended period (i.e. generally in excess of 30 days)
could materially effect the Company's inventory supply of parts for
system manufacture and delay scheduled system or spare parts shipments to
our customers.

The Company's spares inventory, distribution system and customer support
organization, as well as the contingency plans implemented by the Company, are
intended to ensure that temporary disruptions to regional and global
infrastructure systems will have no materially adverse effect on the Company's
operations and financial performance. However, extended disruptions in these
systems beyond the Company's control or ability to remedy, such as described
above, could impact the Company's ability to deliver product and services to our
customers on schedule and to maintain Company operations and provide appropriate
employee support (including payroll and benefits), and would, thereby,
potentially have a materially adverse effect on the Company's operations and
financial performance.

The Company believes that its Year 2000 compliance project will be
completed on a timely basis, and in advance of the Year 2000 date transition,
and will not have a material adverse effect on the Company's financial condition
or overall trends in the results of operations. However, there can be no
assurance that delays or problems, including the failure to ensure Year 2000
compliance by systems or products supplied to the Company by a third party, will
not have an adverse effect on the Company, its financial performance or the
competitiveness or customer acceptance of its products. Further, the Company's
current understanding of expected costs is subject to change as the project
progresses, and does not include potential costs related to actual customer
claims or the cost of internal software and hardware replaced in the normal
course of business (whose installation otherwise in the normal course of
business may be accelerated to provide solutions to Year 2000 compliance
issues).

FISCAL 1998 VS. 1997

Merger

On August 5, 1997, the stockholders of Lam approved the issuance of Lam
Common Stock under the Agreement and Plan of Merger (the "Merger Agreement")
between Lam and OnTrak. Each share of OnTrak common stock, par value $0.0001 per
share, ("OnTrak Common Stock") was exchanged for 0.83 of a share of Lam common
stock, par value $0.001 per share, ("Lam Common Stock") and each option and
right to

17
<PAGE> 18

acquire one share of OnTrak Common Stock was exchanged for options and rights to
purchase 0.83 of a share of Lam Common Stock. On August 5, 1997, the value of
the Lam Common Stock issued in connection with the Merger was approximately $396
million. The transaction was accounted for as a pooling of interests and
structured to qualify as a tax-free reorganization. All historical financial
data of the Company, for the periods prior to the Merger included herein
reflects the combination of the historical financial information of both Lam and
OnTrak.

Total Revenue

Total revenue for the fiscal year ended June 30, 1998 was 2% lower compared
to the prior fiscal year. During fiscal 1998, the Company's product mix
continued to shift towards a higher percentage of sales of the Company's
multi-chamber Alliance systems. Conversely, the percentage of revenues from
sales of the Company's single-chamber systems declined from fiscal 1997 to
fiscal 1998. Revenues from the Company's Alliance systems grew by approximately
29% from 1997 levels, while revenues from single-chamber systems declined by
approximately 30%.

In addition to the shift in product mix, the Asian regions began
experiencing difficulties surrounding their financial markets and economies
during the second half of fiscal 1998. Revenues from the Asian regions declined
5.6% from 1997 levels, while revenues from the North America and European
regions increased 1.9% and 1.8%, respectively.

Gross Margin

Lam's gross margin percentage increased to 35.5% for fiscal 1998, compared
to 32.6% for fiscal 1997. Gross margin percentages for both fiscal years 1998
and 1997 were impacted by certain charges and adjustments described below.
During fiscal 1998, and as a result of the Company's restructuring actions (see
Note P to the Consolidated Financial Statements), Lam wrote-off $31.9 million of
inventory related to the exited CVD and FPD operations. During fiscal 1997, and
in response to the faster than anticipated customer transition from
single-chamber to multi-chamber cluster systems and costs associated with
continuing revisions to the design and features of such multi-chamber products,
Lam established additional reserves of approximately $42.0 million relating to
excess and obsolete inventory and related commitments. In addition, during
fiscal 1997, Lam re-evaluated its warranty and installation reserves and
established additional reserves of approximately $15.0 million due to greater
warranty and installation support costs associated with newer product lines. The
fiscal 1998 gross margin percentage improved slightly from fiscal 1997, as a
result of improved margins on the multi-chamber cluster systems partially offset
by the effect of an unfavorable product mix and a decrease in royalty income.

Research and Development

R&D expenses for the fiscal year ended June 30, 1998 were 19.6% of total
revenue, compared to 17.9% of total revenue for the prior fiscal year. During
fiscal 1998, Lam increased its investment in R&D related to the development of
its Teres system.

Selling, General and Administrative

SG&A expenses as a percentage of revenue for fiscal 1998 were virtually
flat, compared to fiscal 1997.

Fiscal 1997 Restructuring Charge

During the Company's first fiscal 1997 quarter ended September 30, 1996,
the Company projected and announced that revenues would be lower than previous
quarters due to an anticipated 20% semiconductor equipment market decline.
Revenues during that quarter fell to $299.2 million, a decrease of 24% from the
prior quarter. The Company assessed that market conditions would remain
depressed and, therefore, that its revenues would continue to be adversely
affected. Accordingly, and as announced on August 26, 1996, the Company
organizationally restructured its business units into a more centralized
structure and cut its global workforce by approximately 11%. As a result, during
the first quarter of fiscal 1997, Lam recorded a
18
<PAGE> 19

restructuring charge of $9.0 million for costs related primarily to severance
and benefits, lease payments on vacated facilities and the write-off of fixed
assets. During fiscal 1998, the Company revised its estimate relating to
severance and benefits and transferred the excess balance of remaining lease
payments on vacated facilities to severance and benefits. As of June 30, 1998,
$1.3 million of the restructuring charge remained in accrued liabilities,
relating to severance and benefits. There will be further charges against these
restructuring reserves established into fiscal 2000.

Below is a table summarizing restructuring activity relating to the fiscal
1997 restructurings:

<TABLE>
<CAPTION>
LEASE PAYMENTS
SEVERANCE AND ON VACATED ABANDONED
BENEFITS FACILITIES FIXED ASSETS TOTAL
------------- ------------------ ------------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fiscal year 1997 provision...................... $6,170 $1,789 $1,062 $9,021
Cash payments................................... (5,592) (703) -- (6,295)
Non-cash charges................................ -- -- (1,062) (1,062)
------ ------ ------ ------
Balance at June 30, 1997........................ 578 1,086 -- 1,664
Adjustment...................................... 1,086 (1,086) -- --
Cash payments................................... (406) -- -- (406)
------ ------ ------ ------
Balance at June 30, 1998........................ $1,258 $ -- $ -- $1,258
====== ====== ====== ======
</TABLE>

During fiscal 1998, the Company restructured its operations to reduce its
global workforce and to focus more on its core etch and CMP product groups, as
well as to exit its FPD and CVD operations (see further discussion under Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under caption "Fiscal 1998 Restructuring Charge").

Merger Costs

During the first quarter of fiscal 1998, Lam recorded costs of $17.7
million relating to the merger with OnTrak. Such expenses were related to
investment advisory fees, legal and accounting fees, financial printing costs
and other direct merger-related expenditures.

Purchased Technology for R&D

During the third quarter of fiscal 1998, Lam purchased a non-exclusive
license for Trikon's MxRI source technology. Lam recorded a charge of $12.1
million for the license and for the purchase of an R&D system from Trikon. The
technology is being used in a single discrete etch product development project
and has no future alternative use.

Other Income (Loss), net

Other income increased to $1.8 million during fiscal 1998 from a loss of
$0.1 million during fiscal 1997. During August 1997, the Company completed an
offering of $310.0 million of the Notes, which bear interest at five percent and
are due to mature on September 2, 2002. While interest expense increased due to
issuance of the Notes interest income increased significantly during fiscal
1998, as Lam's rate of return on the invested cash proceeds of the debenture
offering exceeded the interest rate it paid on the Notes. During fiscal 1998,
Lam recognized higher foreign currency exchange losses, primarily due to
exchange rate fluctuations in Korea, which partially offset the increase in
interest income.

Tax Benefit

The Company recorded a tax benefit of 19.3% of its pre-tax loss, compared
to 49.6% for the prior fiscal year. The decrease was primarily due to the
Company not currently benefiting from certain expenses associated the Company's
restructurings, which resulted in net operating loss carryovers and tax credit
carryforwards for tax purposes.

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<PAGE> 20

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 1999, the Company had $372.1 million in cash, cash
equivalents, short-term investments and restricted cash, compared with $448.5
million at June 30, 1998. The Company has a total of $100.0 million available
under a syndicated bank line of credit, which is due to expire in April 2001.
Borrowings are subject to the Company's compliance with financial and other
covenants set forth in the credit documents. During fiscal 1999, the Company
amended the syndicated bank line of credit with respect to certain applicable
covenant requirements and amended the line of credit borrowing rates to a range
of 0.55% to 1.25% over LIBOR.

The Company used $37.2 million of cash from operations in fiscal 1999. The
Company's asset management efforts and lower revenue levels resulted in
inventory reductions of $33.7 million. A decrease in taxes receivable and
prepaid rent contributed to the decline in prepaid expenses and other assets.
Accounts payable and accrued liabilities declined by $16.5 million and $36.2
million, respectively. Accounts payable decreased due to lower inventory
purchases and reduced spending. Accrued liabilities declined largely due to a
result of the decrease in accrued severance and benefits related to the fiscal
1998 and 1997 restructurings, and a reduction in installation and warranty
reserves.

Net cash provided by investing activities during fiscal 1999 was $70.0
million. Net sales of short-term investments generated $109.8 million of cash.
Net capital expenditures were $33.2 million. The Company has deposited $9.0
million as security for its obligations under certain put option obligations
(see Note I of the Consolidated Financial Statements), which is classified as a
long-term asset, from cash and cash equivalents and short-term investments. Cash
totaling $5.0 million was used to complete a purchase of technology for R&D (see
Note R of the Consolidated Financial Statements).

Net cash flows used by financing activities during fiscal 1999 was $8.3
million. During fiscal 1999, the Company entered into a stock repurchase program
which was designed to reduce dilution caused by the issuance of shares reserved
under the Company's stock option and employee stock purchase plan (see Note L to
the Consolidated Financial Statements). During fiscal 1999, the Company
purchased $18.9 million of its Common Stock and reissued $10.5 million of its
Common Stock. During the quarter ended September 30, 1998, the Company entered
into a new Yen-denominated credit facility for an approximately Y1.7 billion
yen-denominated loan ($14.1 million at June 30, 1999). This credit facility
replaces a term loan which was held with other financial institutions. Principal
payments on the new facility are due annually on September 30, through September
30, 2001. The new facility reflects terms which were more favorable than the
previous yen-denominated loan. In total, Lam made principal payments of
long-term debt and capital leases of $27.8 million and proceeds from issuance of
long-term debt of $20.7 million.

During fiscal 1999, the Company entered into certain independent third
party (the "Third Parties") option transactions for the purchase and sale of Lam
Common Stock. The Board of Directors of the Company has authorized the Company
to acquire from the Third Parties options to purchase up to 3.5 million shares
of Lam Common Stock. These call options are to be acquired to offset the
anticipated dilutive effect of a potential conversion into common stock of the
Notes previously issued by the Company, and due September 2, 2002. As part of
the program, the Board of Directors also authorized the Company to enter into
put options with the same Third Parties covering up to 5.25 million shares of
Lam Common Stock. The Board of Directors anticipated that the premiums the
Company would receive over the course of the program from the sale of the put
options to the Third Parties would offset in full the premium cost to the
Company of its purchase of the call options from those same Third Parties.
Consequently, the Company does not expect to exchange cash over the course of
the program with the Third Parties in conjunction with the Company's purchase of
the call options.

Pursuant to this authorization, described above, the Company has as of June
30, 1999 acquired call options to purchase 1.24 million shares of Lam Common
Stock; the weighted average exercise price of these options is $33.87. The call
options provide that the maximum benefit to the Company of the call options at
expiration is $53.90 per option share (the difference between $87.77, which is
the conversion price of the Notes, and the weighted average exercise price of
the call options). The Company has also entered put options

20
<PAGE> 21

with the same Third Parties covering 1.86 million shares of its common stock,
giving those Third Parties the right to sell to the Company shares of Lam Common
Stock at a weighted average price of $28.43 per share.

The call and put options are European style options exercisable upon
expiration; all of the options expire not later than September 3, 2002, which is
the business day following the date on which the Notes must either be converted
or retired. Upon option exercise, the Company has the ability, at its option, to
permit the options to be physically settled (i.e., shares would be delivered to
the Company against payment of the exercise price), settled in cash (i.e., by a
payment from one party to the other of the value of the option being exercised)
or "net settled" in shares (i.e., by delivery of a number of shares of common
stock having a value equal to the value of the option being exercised). The
Company can also terminate the options prior to expiration for a settlement
value determined from time to time by the appropriate Third Party. While the
options are only exercisable at expiration, the terms of the contracts with the
Third Parties provide for early termination and settlement of the options upon
the occurrence of certain events (in a form determined by the Company which
includes net settlement of shares), including without limitation the Company's
material breach of the agreement, default on certain indebtedness or covenants
relating to the Company's financial condition, reduction in the Company's S&P
credit rating below B or a drop in the price of the Company's Common Stock to
less than $5.00 per share.

If the average stock price is below $28.43 during any period, the required
number of shares to net settle the Company's obligation under the put option
agreement would be considered dilutive securities in the Company's dilutive
earnings per share calculation.

Given the cyclical nature of the semiconductor equipment industry, the
Company believes that maintenance of sufficient liquidity reserves is important
to ensure the Company's ability to maintain levels of investment in R&D and
capital infrastructure through ensuing business cycles. Based upon the Company's
current business outlook, its cash, cash equivalents, short-term investments,
restricted cash and available lines of credit at June 30, 1999 are expected to
be sufficient to support its currently anticipated levels of operations and
capital expenditures through at least December 2000.

RISK FACTORS

OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE UNPREDICTABLE

Our revenues and operating results may fluctuate significantly from quarter
to quarter due to a number of factors, not all of which are in our control.
These factors include:

- economic conditions in the semiconductor industry generally, and the
equipment industry specifically;

- customer capacity requirements;

- the size and timing of orders from customers;

- customer cancellations or delays in our shipments;

- our ability in a timely manner to develop, introduce and market new,
enhanced and competitive products;

- our competitors' introduction of new products;

- challenges to our products and technology;

- changes in average selling prices and product mix; and

- exchange rate fluctuations.

We base our expense levels in part on our expectations of future revenues.
If revenue levels in a particular quarter do not meet our expectations, our
operating results are adversely affected.

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<PAGE> 22

We derive our revenue primarily from the sale of a relatively small number
of high-priced systems. Our systems can range in price from approximately
$150,000 to over $4 million per unit. Our operating results for a quarter may
suffer substantially if:

- we sell fewer systems than we anticipate in any quarter;

- we do not receive anticipated orders in time to enable actual shipment
during that quarter;

- one or more customers delay or cancel anticipated shipments; or

- shipments are delayed by procurement shortages; logistical disruptions or
manufacturing difficulties.

Further, because of our continuing consolidation of manufacturing
operations and capacity at our Fremont, California facility, natural, physical,
logistical or other events or disruptions affecting this facility (including
labor disruptions) could adversely impact our financial performance.

THE SEMICONDUCTOR EQUIPMENT INDUSTRY IS VOLATILE, WHICH AFFECTS OUR
REVENUES AND FINANCIAL RESULTS

Our business depends on the capital equipment expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market demand
for integrated circuits and products using integrated circuits. The
semiconductor industry is cyclical in nature and historically experiences
periodic downturns. During the past twelve months the semiconductor industry has
experienced severe swings of product demand and volatility in product pricing.
In early fiscal 1999 and fiscal 1998, the semiconductor industry reduced or
delayed significantly purchases of semiconductor manufacturing equipment and
construction of new fabrication facilities because of the recent industry
downturn. We expect this volatility to continue throughout fiscal 2000, but we
have seen indications of a modest recovery which may extend into fiscal 2000.
Lower levels of investment by the semiconductor manufacturers and pricing
volatility will continue to affect materially our aggregate bookings, revenues
and operating results. Even during periods of reduced revenues, we must continue
to invest in research and development and to maintain extensive ongoing
worldwide customer service and support capabilities to remain competitive, which
may harm our financial results.

WE DEPEND ON NEW PRODUCTS AND PROCESSES FOR OUR SUCCESS. FOR THIS REASON,
WE ARE SUBJECT TO RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE

Rapid technological changes in semiconductor manufacturing processes
subject us to increased pressure to maintain technological parity with deep
submicron process technology. We believe that our future success depends in part
upon our ability to develop, manufacture and introduce successfully new products
and product lines with improved capabilities, and to continue to enhance our
existing products. Due to the risks inherent in transitioning to new products,
we must forecast accurately demand for new products while managing the
transition from older products. If new products have reliability or quality
problems, reduced orders, higher manufacturing costs, delays in acceptance of
and payment for new products and additional service and warranty expenses may
result. In the past, product introductions caused some delays and reliability
and quality problems. We may fail to develop and manufacture new products
successfully, or new products that we introduce may fail in the marketplace,
which would materially and adversely affect our results from operations.

We expect to continue to make significant investments in research and
development and to pursue joint development relationships with customers or
other members of the industry. We must manage product transitions or joint
development relationships successfully, as introduction of new products could
adversely affect our sales of existing products. Future technologies, processes
or product developments may render our current product offerings obsolete or we
may be unable in a timely manner to develop and introduce new products or
enhancements to our existing products which satisfy customer needs or achieve
market acceptance. Furthermore, if we are unsuccessful in the marketing and
selling of advanced processes or equipment to customers with whom we have
strategic alliances, we may be unsuccessful in selling existing products to
those customers. In addition, in connection with our developing new products, we
will invest in high levels of pre-production inventory, and our failure in a
timely manner to complete development and

22
<PAGE> 23

commercialization of these new products could result in inventory obsolescence,
which would adversely affect on our financial results.

WE ARE SUBJECT TO RISKS ASSOCIATED WITH THE INTRODUCTION OF A NEW PRODUCT

During the second quarter of fiscal 1999, we began shipping evaluation
units of our Teres(TM) chemical mechanical planarization system, for which we
recorded no revenue during fiscal 1999. We expect to face significant
competition from multiple current and future competitors. Among the companies
currently offering polishing systems are Applied Materials, Inc., Ebara Corp.,
SpeedFam-IPEC, Inc. and Strasbaugh. We believe that other companies are
developing polishing systems and are planning to introduce new products to this
market, which may affect our ability to sell this new product.

WE ARE SUBJECT TO RISKS RELATING TO PRODUCT CONCENTRATION AND LACK OF
PRODUCT REVENUE DIVERSIFICATION

We derive a substantial percentage of our revenues to date from a limited
number of products, and we expect these products to continue to account for a
large percentage of our revenues in the near term. Continued market acceptance
of our primary products is, therefore, critical to our future success. Our
business, operating results, financial condition and cash flows could therefore
be adversely affected by:

- a decline in demand for our products;

- a failure to achieve continued market acceptance of our products;

- an improved version of one of our products being produced by a
competitor;

- technological change which we are unable to match in our products; and

- a failure to release a new version of our product on a timely basis.

WE ARE DEPENDENT UPON A LIMITED NUMBER OF KEY SUPPLIERS

We obtain certain components and sub-assemblies included in our products
from a single supplier or a limited group of suppliers. Each of our key
suppliers has a one year blanket purchase contract under which we may issue
purchase orders. We may renew these contracts periodically. Each of these
suppliers sold us products during at least the last four years, and we expect
that we will continue to renew these contracts in the future or that we will
otherwise replace them with competent alternative source suppliers. We believe
that we could obtain alternative sources to supply these products. Nevertheless,
a prolonged inability to obtain certain components could adversely affect our
operating results and result in damage to our customer relationships.

ONCE A SEMICONDUCTOR MANUFACTURER COMMITS TO PURCHASE A COMPETITOR'S
SEMICONDUCTOR
MANUFACTURING EQUIPMENT IT TYPICALLY CONTINUES TO PURCHASE THAT EQUIPMENT,
MAKING IT
MORE DIFFICULT FOR LAM TO SELL ITS EQUIPMENT TO THAT MANUFACTURER

The semiconductor equipment industry is highly competitive. We expect to
continue to face substantial competition throughout the world. Semiconductor
manufacturers must make a substantial investment to install and integrate
capital equipment into a semiconductor production line. We believe that once a
semiconductor manufacturer selects a particular supplier's capital equipment,
the manufacturer generally relies upon that equipment for the entire specific
production line application. Accordingly, we expect to experience difficulty in
selling to a given customer if that customer initially selects a competitor's
equipment. We believe that to remain competitive, we require significant
financial resources to offer a broad range of products, to maintain customer
service and support centers worldwide and to invest in product and process
research and development.

WE MAY LACK THE FINANCIAL RESOURCES OR TECHNOLOGICAL CAPABILITIES OF
CERTAIN OF OUR COMPETITORS NEEDED TO CAPTURE INCREASED MARKET SHARE

Large semiconductor equipment manufacturers who have the resources to
support customers on a worldwide basis are increasingly dominating the
semiconductor equipment industry. Certain of our competi-
23
<PAGE> 24

tors have substantially greater financial resources and more extensive
engineering, manufacturing, marketing and customer service and support than we
do. In addition, there are smaller emerging semiconductor equipment companies
that may provide innovative technology which may have performance advantages
over systems we currently offer or expect to offer.

We expect our competitors to continue to improve the design and performance
of their current products and processes and to introduce new products and
processes with enhanced performance characteristics. If our competitors enter
into strategic relationships with leading semiconductor manufacturers covering
products similar to those we sell or may develop, it could adversely affect our
ability to sell products to those manufacturers. For these reasons, we may fail
to continue to compete successfully in the United States or worldwide.

Our present or future competitors may be able to develop products
comparable or superior to those we offer or that adapt more quickly to new
technologies or evolving customer requirements. In particular, while we
currently are developing additional product enhancements that we believe will
address customer requirements, we may fail in a timely manner to complete the
development or introduction of these additional product enhancements
successfully, or these product enhancements may not achieve market acceptance or
be competitive. Accordingly, we may be unable to continue to compete effectively
in our markets, competition may intensify or future competition may have a
material adverse effect on our revenues, operating results, financial condition
and cash flows.

THE ASIAN FINANCIAL CRISIS COULD CONTINUE TO HARM OUR BUSINESS BECAUSE A
LARGE PORTION OF THE SEMICONDUCTOR INDUSTRY AND OUR CUSTOMERS ARE BASED IN
THE FAR EAST

Historically, sales to the Asian regions have accounted for a substantial
portion of our international sales. Recent economic, banking and currency
problems in the Asian regions have had and will continue to have a significant
adverse impact on our revenue and operations.

We denominate our sales of products throughout the world primarily in
United States dollars. In Korea, devaluation of the Won and customers'
difficulties in obtaining credit curtailed semiconductor equipment investment
and led to our customers' reduction in orders or delay of orders during fiscal
1999.

In Japan, we denominate our sales in Japanese yen. A weakening of the value
of the Japanese yen as compared to the U.S. dollar may negatively impact our
operating margins.

OUR FUTURE SUCCESS DEPENDS ON INTERNATIONAL SALES

International sales accounted for approximately 54% of our total revenue in
fiscal 1999, 55% in fiscal 1998 and 57% in fiscal 1997. We expect that
international sales will continue to account for a significant portion of our
total revenue in future years. International sales are subject to risks,
including:

- foreign exchange risks; and

- economic, banking and currency problems in the relevant region.

We currently enter into foreign currency forward contracts to minimize the
impact of exchange rate fluctuations on yen-dominated assets, and will continue
to enter into hedging transactions in the future.

OUR FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS MAY ADVERSELY AFFECT
OUR OPERATING RESULTS

We are subject to a variety of governmental regulations related to the
discharge or disposal of toxic, volatile or otherwise hazardous chemicals used
in the manufacturing process. We believe that we are in general compliance with
these regulations and that we have obtained (or will obtain or are otherwise
addressing) all necessary environmental permits to conduct our business, which
permits generally relate to the disposal of hazardous wastes. Nevertheless, the
failure to comply with present or future regulations could result in fines being
imposed on us, suspension of production, cessation of our operations generally
or reduction in our customers' acceptance of our products. These regulations
could require us to alter our current operations, to acquire significant
equipment or to incur substantial other expenses to comply with environmen-
24
<PAGE> 25

tal regulations. Our failure to control the use, sale or transport, or
adequately to restrict our discharge or disposal, of hazardous substances could
subject us to future liabilities.

WE ARE DEPENDENT ON OUR KEY MANAGEMENT PERSONNEL, AS WELL AS OUR TECHNICAL
PERSONNEL

Our performance is substantially dependent on the performance of our
executive officers and key technical and engineering employees. The loss of the
services of any of our executive officers or other key employees could have a
material adverse effect on our business, operating results, financial condition,
cash flows, market perceptions and price of our Common Stock.

Our future success also depends on our continuing ability to identify,
hire, train and retain other highly qualified technical and managerial
personnel. Competition for such personnel, particularly in the San Francisco Bay
Area, is intense, and we have experienced difficulty in identifying and hiring
qualified engineering personnel. We may not be successful in the future in
attracting, assimilating or retaining highly qualified technical and managerial
personnel. Our inability to attract and retain the necessary technical and
managerial personnel could have a material adverse effect on our business,
operating results, financial condition, and cash flows, as well as the market
perceptions and price of our Common Stock.

OUR ABILITY TO MANAGE POTENTIAL GROWTH: INTEGRATION OF POTENTIAL
ACQUISITIONS AND POTENTIAL DISPOSITION OF PRODUCT LINES AND TECHNOLOGIES
CREATES RISKS FOR US

Our management may face significant challenges in improving financial and
business controls, management processes, information systems and procedures on a
timely basis, and expanding, training and managing our work force if we
experience additional growth. There can be no assurance that we will be able to
perform such actions successfully. In the future, we may make additional
acquisitions of complementary companies, products or technologies, or we may
reduce or dispose of certain product lines or technologies which no longer
complement our long-term strategy, such as our exiting of FPD and CVD
operations. Managing an acquired business or disposing of product technologies
entails numerous operational and financial risks, including difficulties in
assimilating acquired operations and new personnel or separating existing
business or product groups, diversion of management's attention to other
business concerns, amortization of acquired intangible assets and potential loss
of key employees or customers of acquired or disposed operations. Our success
will depend, to a significant extent, on the ability of our executive officers
and other members of our senior management to identify and respond to these
challenges effectively. There can be no assurance that we will be able to
achieve and manage effectively any such growth, integration of potential
acquisitions or disposition of product lines or technologies, or that our
management, personnel or systems will be adequate to support continued
operations. Any such inabilities or inadequacies would have a material adverse
effect on our business, operating results, financial condition and cash flows.

An important element of our management strategy is to review acquisition
prospects that would complement our existing products, augment our market
coverage and distribution ability, or enhance our technological capabilities. We
may acquire additional businesses, products or technologies in the future. Any
acquisitions could result in the potentially dilutive issuances of equity
securities, the incurrences of debt and contingent liabilities and the
amortization expense related to goodwill and other intangible assets acquired,
any of which could materially adversely affect our business, financial condition
and results of operations and/or the price of our Common Stock.

THE MARKET FOR OUR COMMON STOCK IS VOLATILE, WHICH MAY AFFECT OUR ABILITY
TO RAISE CAPITAL OR MAKE ACQUISITIONS

The market price for our Common Stock is volatile and has fluctuated
significantly over the prior years. The trading price of our Common Stock could
continue to be highly volatile and fluctuate widely in response to factors,
including the following:

- general market or semiconductor industry conditions;

- variations in our quarterly operating results;

25
<PAGE> 26

- shortfalls in our revenues or earnings from levels securities analysts
expect;

- announcements of restructurings, technological innovations, reductions in
force, departure of key employees, consolidations of operations or
introduction of new products;

- government regulations;

- developments in patent or other proprietary rights;

- disruptions with key customers; or

- political, economic or environmental events occurring globally or in our
key sales regions.

In addition, the stock market has in recent years experienced significant
price and volume fluctuations. Recent fluctuations affecting our Common Stock
were tied in part to the actual or anticipated fluctuations in interest rates,
and the price of and market for semiconductors generally. These broad market and
industry factors may adversely affect the market price of our Common Stock,
regardless of our actual operating performance. In the past, following volatile
periods in the market price of stock, many companies become the object of
securities class action litigation. If we are sued in a securities class action,
we could incur substantial costs and it could divert management's attention and
resources and have an effect on the market price for our Common Stock.

RISK ASSOCIATED WITH OUR CALL AND PUT OPTIONS

As noted in Note I to the Consolidated Financial Statements, we have
entered into certain third party option transactions for the purchase and sale
of our stock. The option positions will be of value to us if our stock price
exceeds the exercise price of the call options at the time the option is
exercised. Of course, our stock price could also decline. If our price on the
exercise date of the options were below the put option exercise price, we would
have to settle the put obligation by paying cash or the equivalent value of our
Common Stock obligation.

If settlement were to occur prior to option expiration because of the
occurrence of an event, such as material breach of the agreement, default on
certain indebtedness or covenants relating to our financial condition, reduction
in our credit rating or drop in price of our Common Stock to less than $5.00 per
share, the Third Parties have the right to terminate the transactions. We will
be required to pay to the Third Parties the value of their position in cash or
equivalent value of our Common Stock (which would depend on a number of factors,
including the time remaining to expiration and the volatility of our Common
Stock) which could be greater or lesser than the difference between the options'
exercise prices and the then market price of our stock, as well as any costs or
expenses incurred by the Third Parties as a result of unwinding the
transactions.

THE POTENTIAL ANTI-TAKEOVER EFFECTS OF OUR BYLAWS PROVISIONS AND THE RIGHTS
PLAN WE HAVE IN PLACE MAY AFFECT OUR STOCK PRICE AND INHIBIT A CHANGE OF
CONTROL DESIRED BY SOME OF OUR STOCKHOLDERS

On January 23, 1997, Lam adopted a Rights Plan (the "Rights Plan") in which
rights were distributed as a dividend at the rate of one right for each share of
our Common Stock, held by stockholders of record as of the close of business on
January 31, 1997, and thereafter. In connection with the adoption of the Rights
Plan, our Board of Directors also adopted a number of amendments to our Bylaws,
including amendments requiring advance notice of stockholder nominations of
directors and stockholder proposals.

The Rights Plan may have certain anti-takeover effects. The Rights Plan
will cause substantial dilution to a person or group that attempts to acquire
Lam in certain circumstances. Accordingly, the existence of the Rights Plan and
the issuance of the related rights may deter certain acquirers from making
takeover proposals or tender offers. The Rights Plan, however, is not intended
to prevent a takeover, but rather is designed to enhance the ability of our
Board of Directors to negotiate with a potential acquirer on behalf of all of
our stockholders.

In addition, our Certificate of Incorporation authorizes issuance of
5,000,000 shares of undesignated preferred stock. Our Board of Directors,
without further stockholder approval, may issue this preferred stock

26
<PAGE> 27

on such terms as the Board of Directors may determine, which also could have the
effect of delaying or preventing a change in control of Lam. The issuance of
preferred stock could also adversely affect the voting power of the holders of
our Common Stock, including causing the loss of voting control. Our Bylaws and
indemnity agreements with certain officers, directors and key employees provide
that we will indemnify officers and directors against losses that they may incur
in legal proceedings resulting from their service to Lam. Moreover, Section 203
of the Delaware General Corporation Law restricts certain business combinations
with "interested stockholders", as defined by that statute.

INTELLECTUAL PROPERTY AND OTHER CLAIMS AGAINST US CAN BE COSTLY AND COULD
RESULT IN THE LOSS OF SIGNIFICANT RIGHTS WHICH ARE NECESSARY TO OUR
CONTINUED BUSINESS AND PROFITABILITY

Other parties may assert infringement, unfair competition or other claims
against us. Additionally, from time to time, other parties send us notices
alleging that our products infringe their patent or other intellectual property
rights. In such cases, it is our policy either to defend the claims or to
negotiate licenses on commercially reasonable terms. However, we may be unable
in the future to negotiate necessary licenses on commercially reasonable terms,
or at all, and any litigation resulting from these claims by other parties may
materially adversely affect our business and financial results.

In October 1993, Varian sued us in the United States District Court for the
Northern District of California, seeking monetary damages and injunctive relief
based on our alleged infringement of certain patents Varian holds. We asserted
defenses that the subject patents are invalid and unenforceable, and that our
products do not infringe these patents. A trial date is currently scheduled for
March 2000. Litigation is inherently uncertain and we may fail to prevail in
this litigation. However, we believe that the Varian lawsuit will not materially
adversely affect our operating results or financial position. See Item 3 of this
Annual Report on Form 10-K for further details concerning the Varian lawsuit.

Additionally, in September, 1999, Tegal Corporation sued us in the United
States District Court for the Eastern District of Virginia, seeking monetary
damages and injunctive relief based on our alleged infringement of certain
patents Tegal holds. Specifically, Tegal identified our 4520XL and Exelan
products as infringing the patents Tegal is asserting. No trial date is
currently scheduled in the action. Litigation is inherently uncertain and we may
fail to prevail in this litigation. However, we believe that the Tegal lawsuit
will not materially adversely affect our operating results or financial
position. See Item 3 of this Annual Report on Form 10-K for further details
concerning the Tegal lawsuit.

WE MAY FAIL TO PROTECT OUR PROPRIETARY TECHNOLOGY RIGHTS, WHICH WOULD
AFFECT OUR BUSINESS

Our success depends in part on our proprietary technology. While we attempt
to protect our proprietary technology through patents, copyrights and trade
secret protection, we believe that our success depends on increasing our
technological expertise, continuing our development of new systems, increasing
market penetration and growth of our installed base and providing comprehensive
support and service to our customers. However, we may be unable to protect our
technology in all instances, or our competitors may develop similar or more
competitive technology independently. We currently hold a number of United
States and foreign patents and pending patent applications. However, other
parties may challenge or attempt to invalidate or circumvent any patents United
States or foreign governments issue to us or these governments may fail to issue
pending applications. In addition, the rights granted or anticipated under any
of these patents or pending patent applications may be narrower than we expect
or in fact provide no competitive advantages.

YEAR 2000 COMPLIANCE

See the discussion of the risks for Lam in connection with Year 2000
compliance in the section of this report entitled Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations".

27
<PAGE> 28

OUR RESTRUCTURINGS AND CONSOLIDATION OF OPERATIONS MAY NOT BE SUCCESSFUL

We substantially restructured and consolidated our operations during the
quarters ended March 31, 1998, June 30, 1998 and December 31, 1998.
Implementation of these restructurings and consolidations involves the risk that
we will not be successful in simplifying and modifying our product line
offerings. Additionally, if we are successful in simplifying and modifying our
product line offerings as we intended, within the timeframe we planned or within
the cost we expected and the amount of reserves we set aside, there is also risk
that we will then be more dependent on fewer products which could potentially
reduce our overall sales.

Although we believe that the actions we have taken and are taking in
connection with the restructurings and consolidations, including the reduction
in workforce, the consolidation of manufacturing operations and our exit of FPD
and CVD operations, should help more closely align our operations with our
business outlook, we cannot assure you that these actions will enable us to
achieve our objectives of reducing costs, or can be accomplished at specific or
optimum values or on time or as intended. In addition, we cannot assure you that
the restructuring activities will be sufficient. Our future consolidated
operating results and financial condition could be adversely affected should we
encounter difficulty in effectively managing the restructurings and
consolidations.

28
<PAGE> 29

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio and long-term debt obligations. We maintain a strict
investment policy, which ensures the safety and preservation of our invested
funds by limiting default risk, market risk, and reinvestment risk. The table
below presents notional amounts and related weighted-average interest rates by
year of maturity for our investment portfolio and long-term debt obligations at
June 30:

<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------- --------
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE TOTAL
-------- ------- ------ -------- ----- ---------- -------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents
Fixed rate.......... $ 10,900 -- -- -- -- -- $ 10,900 $ 10,900 $ 7,400
Average rate........ 4.85% -- -- -- -- -- 4.85% -- 5.57%
Short-term Investments
Fixed rate.......... $146,634 $64,821 -- -- -- -- $211,455 $211,455 $298,848
Average rate........ 5.43% 5.43% -- -- -- -- 5.43% -- 5.97%
Auction rate
preferreds
Variable rate....... $ 62,381 -- -- -- -- -- $ 62,381 $ 62,381 $ 84,799
Average rate........ 5.10% -- -- -- -- -- 5.10% -- 5.80%
Restricted Cash
Fixed Rate ($)...... $ 51,357 $ 8,991 -- -- -- -- $ 60,348 $ 60,348 $ 51,357
Average Rate........ 5.33% 5.29% -- -- -- -- 5.32% -- 5.69%
-------- ------- ------ -------- ----- ----- -------- -------- --------
Total Investment
Securities.......... $271,272 $73,812 -- -- -- -- $345,084 $345,084 $442,404
-------- ------- ------ -------- ----- ----- -------- -------- --------
Average Rate........ 5.31% 5.41% -- -- -- -- 5.33% -- 5.90%
-------- ------- ------ -------- ----- ----- -------- -------- --------
Long-Term Debt
Fixed Rate.......... $ 11,755 $ 5,524 $7,609 $310,579 $ 69 $ 74 $335,610 $309,167 $328,551
Average Rate........ 2.32% 2.18% 2.23% 5.00% 3.30% 3.30% 4.79% -- 4.92%
-------- ------- ------ -------- ----- ----- -------- -------- --------
</TABLE>

We try to mitigate default risk by attempting to invest in high credit
quality securities and by constantly positioning our portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity and maintain a
prudent amount of diversification.

We have no cash flow exposure related to our fixed rate $310.0 million
Convertible Subordinated Notes, Japanese yen-denominated bank loans or on our
current capital lease obligations. However, we do have cash flow exposure on the
interest expense related to our existing $100.0 million line of credit because
the lending rates we receive under that line of credit vary with LIBOR. At June
30, 1999, we had no borrowings against this line of credit.

We conduct business on a global basis in several major international
currencies. As such, we are potentially exposed to adverse as well as beneficial
movements in foreign currency exchange rates. For this reason, we enter into
foreign currency forward contracts to minimize the impact of exchange rate
fluctuations on the value of our yen-denominated assets and liabilities. We
defer realized gains and losses on these contracts and offset them against
realized and unrealized gains and losses from the settlement of the related
yen-denominated receivables. At June 30, 1999, the notional amount of
outstanding foreign currency exchange contracts was $71.7 million. The
unrealized gain on the contracts at June 30, 1999, was $1.7 million. An adverse
change in the exchange rate of the yen of approximately 15% would result in an
unrealized loss of $10.7 million.

29
<PAGE> 30

During fiscal 1999, the Company entered into certain Third Party option
transactions for the purchase and sale of Lam Common Stock, in order to offset
the anticipated dilutive effect of a potential conversion into common stock of
the Notes previously issued by the Company, and due September 2, 2002. The
Company has as of June 30, 1999 acquired call options to purchase 1.24 million
shares of Lam Common Stock; the weighted average exercise price of these options
is $33.87. The call options provide that the maximum benefit to the Company of
the call options at expiration is $53.90 per option share (the difference
between $87.77, which is the conversion price of the Notes, and the weighted
average exercise price of the call options). The Company has also entered put
options with the same Third Parties covering 1.86 million shares of its common
stock, giving those Third Parties the right to sell to the Company shares of Lam
Common Stock at a weighted average price of $28.43 per share.

Below is a table showing, at assumed exercise prices for the put and call
options and market prices for Lam Common Stock, the gain or loss to the Company
under the put and call options upon exercise or upon maturity of the options
transaction.

<TABLE>
<CAPTION>
AT JUNE 30, 1999 AT MATURITY
---------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Stock Value
$ 5.00 $(34,537) $(43,605)
$25.00 $(10,282) $ (6,390)
$45.00 $ 4,376 $ 13,808
$65.00 $ 14,251 $ 38,618
$85.00 $ 21,334 $ 63,428
</TABLE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements required by this Item are set forth
on the pages indicated at Item 14(a). The unaudited quarterly results of our
operations for our two most recent fiscal years are incorporated herein by
reference under Item 6 "Selected Financial Data."

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

We have omitted from this Report certain information required by Part III
because we, as the Registrant, will file a definitive proxy statement with the
Securities and Exchange Commission (the "Commission") within 120 days after the
end of our fiscal year, pursuant to Regulation 14A, as promulgated by the
Commission, for our Annual Meeting of Stockholders to be held November 4, 1999
(the "Proxy Statement"), and certain information included therein is
incorporated herein by reference. (However, the Report of the Compensation
Committee and the Comparative Stock Performance graph of the Registrant's Proxy
Statement are expressly not incorporated by reference herein.) For information
regarding our executive officers, see Part I of this Form 10-K under the caption
"Executive Officers of the Company," which information is incorporated herein by
this reference.

The information concerning our directors required by this Item is
incorporated by reference to our Proxy Statement under the heading "Proposal No.
1 Election of Directors."

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to our
Proxy Statement under the heading "Executive Compensation and Other
Information."

30
<PAGE> 31

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to our
Proxy Statement under the headings "Proposal No. 1 Election of Directors" and
"Security Ownership of Certain Beneficial Owners and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference to our
Proxy Statement under the heading "Certain Relationships and Related
Transactions."

31
<PAGE> 32

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Consolidated Balance Sheets -- June 30, 1999 and 1998....... 33
Consolidated Statements of Operations -- Years Ended June
30, 1999, 1998 and 1997................................... 34
Consolidated Statements of Cash Flows -- Years Ended June
30, 1999, 1998 and 1997................................... 35
Consolidated Statements of Stockholders' Equity -- Years
Ended June 30, 1999, 1998 and 1997........................ 36
Notes to Consolidated Financial Statements.................. 37
Report of Independent Auditors.............................. 57
Report of Independent Accountants........................... 58
</TABLE>

2. INDEX TO FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Schedule II Valuation and Qualifying Accounts............... 61
</TABLE>

Schedules, other than those listed above, have been omitted since they are
either not applicable not required, or the information is included elsewhere
herein.

3. See (c) of this Item 14, which is incorporated herein by reference.

(b) Reports on Form 8-K

We filed a Form 8-K on June 11, 1999 making an Item 5 disclosure to disclose
that the Board of Directors authorized us to acquire options to purchase up to
3.5 million shares of Lam Common Stock from third parties and to enter into put
options with the same third parties covering up to 5.25 million shares of our
Common Stock. See Note I to the Consolidated Financial Statements.

32
<PAGE> 33

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
JUNE 30,
----------------------
1999 1998
-------- ----------
<S> <C> <C>
Cash and cash equivalents................................... $ 37,965 $ 13,509
Short-term investments...................................... 273,836 383,647
Accounts receivable, less of allowance for doubtful accounts
of $4,580 in 1999 and $5,103 in 1998...................... 170,531 176,029
Inventories................................................. 183,716 220,610
Prepaid expenses and other assets........................... 17,177 25,809
Deferred income taxes....................................... 55,645 77,485
-------- ----------
Total current assets.............................. 738,870 897,089
Equipment and leasehold improvements, net................... 103,337 144,252
Restricted cash............................................. 60,348 51,357
Deferred income taxes....................................... 51,745 26,397
Other assets................................................ 25,151 31,677
-------- ----------
Total assets...................................... $979,451 $1,150,772
======== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Trade accounts payable...................................... $ 51,216 $ 67,703
Accrued expenses and other liabilities...................... 172,213 208,442
Current portion of long-term debt and capital lease
obligations............................................... 20,566 17,364
-------- ----------
Total current liabilities......................... 243,995 293,509
Long-term debt and capital lease obligations, less current
portion................................................... 326,500 334,174
Commitments and contingencies
Preferred stock; 5,000 shares authorized, none
outstanding............................................... -- --
Common stock at par value of $0.001 per share
Authorized -- 90,000 shares; issued -- 38,845 shares at
June 30, 1999 and 38,267 shares at June 30, 1998.......... 39 38
Additional paid-in capital.................................. 388,946 381,011
Treasury stock -- 287 shares at June 30, 1999 at cost....... (8,429) --
Accumulated other comprehensive income (loss)............... (432) 295
Retained earnings........................................... 28,832 141,745
-------- ----------
Total stockholders' equity........................ 408,956 523,089
-------- ----------
Total liabilities and stockholders' equity........ $979,451 $1,150,772
======== ==========
</TABLE>

See Notes to Consolidated Financial Statements.
33
<PAGE> 34

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1999 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
Total revenue.......................................... $ 647,955 $1,052,586 $1,073,197
Costs and expenses:
Cost of goods sold -- on net sales................... 414,591 646,511 723,404
Cost of goods sold -- restructuring charges.......... -- 31,933 --
--------- ---------- ----------
Gross margin...................................... 233,364 374,142 349,793
Research and development............................. 142,495 206,456 192,254
Selling, general and administrative.................. 145,698 201,900 209,294
Restructuring charges................................ 53,372 116,925 9,021
Purchased technology for research and development.... 5,000 12,100 --
Merger costs......................................... -- 17,685 --
--------- ---------- ----------
346,565 555,066 410,569
--------- ---------- ----------
Operating loss.................................... (113,201) (180,924) (60,776)
--------- ---------- ----------
Other income (expense):
Interest income...................................... 22,810 22,670 5,775
Interest expense..................................... (20,168) (18,602) (5,222)
Other, net........................................... (2,354) (2,269) (636)
--------- ---------- ----------
288 1,799 (83)
--------- ---------- ----------
Loss before income taxes.......................... (112,913) (179,125) (60,859)
Income tax benefit..................................... -- (34,526) (30,183)
--------- ---------- ----------
Net loss.......................................... $(112,913) $ (144,599) $ (30,676)
========= ========== ==========
Net loss per share
Basic................................................ $ (2.93) $ (3.80) $ (0.83)
========= ========== ==========
Diluted.............................................. $ (2.93) $ (3.80) $ (0.83)
========= ========== ==========
Number of shares used in per share calculations
Basic................................................ 38,492 38,057 36,919
========= ========== ==========
Diluted.............................................. 38,492 38,057 36,919
========= ========== ==========
</TABLE>

See Notes to Consolidated Financial Statements.
34
<PAGE> 35

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $ (112,913) $ (144,599) $ (30,676)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 50,924 62,265 55,694
Deferred income taxes............................. (3,508) (25,686) (25,032)
Restructurings.................................... 34,141 91,543 --
Purchased technology for research and
development..................................... 5,000 12,100 --
Changes in certain working capital accounts:
Accounts receivable, net of allowance........... (502) 51,795 33,547
Inventories..................................... 33,727 4,467 59,707
Prepaid expenses and other assets............... 8,632 11,898 (19,767)
Trade accounts payable.......................... (16,487) (49,460) 1,156
Accrued expenses and other liabilities.......... (36,229) 36,922 6,349
----------- ----------- ---------
Total adjustments............................ 75,698 195,844 111,654
----------- ----------- ---------
Net cash provided by (used in) operating
activities................................. (37,215) 51,245 80,978
CASH FLOWS FROM INVESTING ACTIVITIES:
Net capital expenditures............................. (33,183) (50,207) (47,332)
Purchase of available-for-sale securities............ (3,771,267) (8,248,736) (602,474)
Sale of available-for-sale securities................ 3,881,078 7,919,910 627,630
Purchase of investments for restricted cash.......... (8,991) (51,357) --
Purchase of technology for research and
development....................................... (5,000) (12,100) --
Proceeds from the sale of securities................. -- -- --
Other................................................ 7,324 3,857 (11,002)
----------- ----------- ---------
Net cash provided by (used in) investing
activities................................. 69,961 (438,633) (33,178)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt......... 20,746 301,430 2,956
Principal payments on long-term debt and capital
lease obligations................................. (27,816) (26,611) (21,848)
Proceeds from borrowings under line of credit........ -- -- 95,000
Repayment of borrowings under line of credit......... -- (35,000) (85,000)
Treasury stock purchases............................. (18,896) -- --
Reissuances of treasury stock........................ 10,467 -- --
Proceeds from issuance of common stock............... 7,936 19,735 14,995
Foreign currency translation adjustment.............. (727) 471 (127)
----------- ----------- ---------
Net cash provided by (used in) financing
activities................................. (8,290) 260,025 5,976
----------- ----------- ---------
Net increase (decrease) in cash and cash equivalents... 24,456 (127,363) 53,776
Cash and cash equivalents at beginning of year......... 13,509 140,872 87,096
----------- ----------- ---------
Cash and cash equivalents at end of year............... $ 37,965 $ 13,509 $ 140,872
=========== =========== =========
Cash payments for interest............................. $ 16,840 $ 13,507 $ 5,310
=========== =========== =========
Cash payments for income taxes......................... $ 13,300 $ 18,351 $ 32,377
=========== =========== =========
</TABLE>

See Notes to Consolidated Financial Statements.
35
<PAGE> 36

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON COMMON ADDITIONAL TREASURY ACCUMULATED
STOCK STOCK PAID-IN STOCK COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL AMOUNT INCOME/(LOSS) EARNINGS TOTAL
------ ------ ---------- -------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996............... 36,506 $36 $344,869 $ -- $ (49) $ 317,020 $ 661,876
Sale of Common Stock................... 828 1 14,676 -- -- -- 14,677
Income tax benefit from stock option
transactions......................... -- -- 1,732 -- -- -- 1,732
Components of comprehensive loss:
Net loss........................... -- -- -- -- -- (30,676) (30,676)
Foreign currency translation
adjustment...................... -- -- -- -- (127) -- (127)
---------
Total comprehensive loss...... (30,803)
------ --- -------- -------- ----- --------- ---------
Balance at June 30, 1997............... 37,334 37 361,277 -- (176) 286,344 647,482
------ --- -------- -------- ----- --------- ---------
Sale of Common Stock................... 933 1 19,734 -- -- -- 19,735
Components of comprehensive loss:
Net loss........................... -- -- -- -- -- (144,599) (144,599)
Foreign currency translation
adjustment...................... -- -- -- -- 471 -- 471
---------
Total comprehensive loss...... (144,128)
------ --- -------- -------- ----- --------- ---------
Balance at June 30, 1998............... 38,267 38 381,011 -- 295 141,745 523,089
------ --- -------- -------- ----- --------- ---------
Sale of Common Stock................... 578 1 7,935 -- -- -- 7,936
Purchase of Treasury Stock............. -- -- -- (18,896) -- -- (18,896)
Reissuance of Treasury Stock........... -- -- -- 10,467 -- -- 10,467
Components of comprehensive loss:
Net loss........................... -- -- -- -- -- (112,913) (112,913)
Foreign currency translation
adjustment...................... -- -- -- -- (727) -- (727)
---------
Total comprehensive loss...... (113,640)
------ --- -------- -------- ----- --------- ---------
Balance at June 30, 1999............... 38,845 $39 $388,946 $ (8,429) $(432) $ 28,832 $ 408,956
====== === ======== ======== ===== ========= =========
</TABLE>

See Notes to Consolidated Financial Statements.
36
<PAGE> 37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999

NOTE A: MERGER WITH ONTRAK SYSTEMS, INC.

On August 5, 1997, the stockholders of each Lam Research Corporation ("Lam"
or the "Company") and OnTrak Systems, Inc. ("OnTrak") approved the Merger and
the issuance of Lam Common Stock under the Agreement and Plan of Merger with
OnTrak. The transaction has been accounted for as a pooling of interests and was
structured to qualify as a tax-free reorganization. On August 5, 1997, the value
of the Lam Common Stock issued in connection with the Merger was approximately
$396 million. Costs associated with the Merger were approximately $17.7 million.
Such expenses included investment advisory fees, legal and accounting fees,
financial printing costs and other direct Merger-related costs.

The following table shows revenues and net income of the separate companies
through the fiscal year period preceding the Merger:

<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
---------------
1997
---------------
(IN THOUSANDS)
<S> <C>
Total revenue:
Lam........................................ $1,002,404
OnTrak..................................... 70,793
----------
Combined................................... $1,073,197
==========
Net income (loss):
Lam........................................ $ (33,634)
OnTrak..................................... 2,958
----------
Combined................................... $ (30,676)
==========
</TABLE>

NOTE B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All inter-company
accounts and transactions have been eliminated in consolidation.

Cash Equivalents: All highly-liquid investments purchased with an original
maturity of three months or less are considered to be cash equivalents.

Inventories: The Company evaluates the need to record adjustments for
impairment of inventory on a quarterly basis. The Company's policy is to
evaluate all inventory, including manufacturing raw materials, work-in-process,
finished goods and spare parts. Obsolete inventory or inventory in excess of the
Company's estimated usage for the next 12 to 24 months' requirements is written
down to its estimated net realizable value. Inherent in the estimates of net
realizable value are management's estimates related to the Company's future
manufacturing schedules, customer demand, obsolescence, possible alternative
uses and ultimate realization of potential excess inventory.

Equipment and Leasehold Improvements: Equipment and leasehold improvements
are stated at cost. Equipment is depreciated by the straight-line method over
the estimated useful lives of the assets, generally three to seven years.
Leasehold improvements are amortized by the straight-line method over the
shorter of the life of the related asset or the term of the underlying lease.
Amortization of equipment under capital leases is included with depreciation.

Revenue Recognition: Sales of the Company's products are generally recorded
upon shipment. Estimated costs to be incurred by the Company related to product
installation and warranty fulfillment are accrued at the date of shipment.

37
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

Foreign Currency: The Company has foreign sales, service and manufacturing
operations. With respect to all foreign subsidiaries, excluding Japan, the
functional currency is the U.S. dollar and transaction and remeasurement gains
and losses are included in net income (loss). The functional currency of the
Company's Japanese subsidiary is the Japanese yen. Translation gains and losses
related to the Japan subsidiary are included as a component of stockholders'
equity.

Foreign Exchange Forward Contracts: The Company may enter into foreign
currency forward exchange contracts to manage exposure related to certain
foreign currency commitments and balance sheet positions. The Company does not
enter into derivative financial instruments for trading purposes. Foreign
currency forward exchange contracts designated as effective hedges of firm
commitments are treated as hedges for accounting purposes. Gains and losses
related to qualified accounting hedges of firm commitments are deferred and are
recognized in income when the hedged transaction occurs.

Income (Loss) Per Share: In February 1997, the Financial Accounting
Standards Board ("FASB") released Statement of Financial Accounting Standards
No. 128 "Earnings Per Share" ("FAS 128"), which was adopted during the quarter
ended December 31, 1997. FAS 128 replaced the calculation of 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 and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share. Net
loss per share was computed using only the weighted average number of shares of
Lam Common Stock outstanding during the period. All net loss amounts for prior
periods have been presented and, where necessary, restated to conform to FAS 128
requirements. See Note J below.

Employee Stock Plans: The Company accounts for its stock option plans and
its employee stock purchase plans in accordance with the provisions of the
Accounting Principles Board's Opinion No. 25 "Accounting For Stock Issued to
Employees" ("APB 25"). In October 1995, the FASB released Statement of Financial
Accounting Standard No. 123, "Accounting For Stock-Based Compensation" ("FAS
123"), which provides an alternative to APB 25. As allowed under FAS 123, the
Company continues to account for its employee stock plans in accordance with the
provisions of APB 25. See Note L below.

Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that could affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.

Comprehensive Income: In June 1997, the FASB released Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"). FAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. See Note K below.

Segment Information: In June 1997, the FASB released Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("FAS 131"). FAS 131 changes the way companies report
selected segment information in annual and interim financial reports to
stockholders. The Company has adopted the provisions of FAS No. 131 for the year
ended June 30, 1999. Adoption of FAS No. 131 did not have a material impact on
the Company's Consolidated Financial Statements. The Company operates in one
business segment, the manufacturing and servicing of front-end wafer processing
semiconductor manufacturing equipment.

Derivative Instruments and Hedging: In June 1998, the FASB released
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for derivatives used for hedging
activities. It requires that all derivatives be recognized either as an asset or
liability, and measures them at fair value. FAS

38
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

133 is effective for all fiscal quarters for fiscal years beginning after June
15, 2000. The Company believes that the application of FAS 133 will not have a
material impact on the Company's consolidated financial statements.

NOTE C: COMPANY AND INDUSTRY INFORMATION

Lam is a supplier of technically complex thin film processing equipment
used at the front-end of semiconductor manufacturing. The Company's product
offerings include single wafer plasma etch systems with a wide range of
applications, CMP and post-CMP wafer cleaning systems. The Company sells its
products primarily to companies involved in the production of semiconductors in
the United States, Europe, Japan and Asia Pacific. Credit evaluations are
performed on all customers, and the Company does not usually require collateral
on sales.

The semiconductor industry has historically been cyclical and has
experienced periodic downturns, which have had a material adverse effect on the
semiconductor industry's demand for semiconductor processing equipment,
including equipment manufactured and marketed by the Company. Certain of the
components and subassemblies included in the Company's products are obtained
from a single supplier or a limited group of suppliers. The Company believes
that alternative sources could be obtained and qualified to supply these
products. Nevertheless, a prolonged inability to obtain certain components could
have a severe near-term effect on the Company's operating results and could
result in damage to customer relationships.

During fiscal 1999, the Company amended its bank agreement to sell specific
Japanese yen-denominated receivables, subject to recourse provisions, by
reducing the amount to Y4.0 billion from Y6.0 billion. At June 30, 1999 and
1998, $13,006,000 and $16,514,000 of these receivables, respectively, had been
sold to the bank, of which $7,463,000 and $11,581,000 at June 30, 1999 and 1998,
respectively, remained uncollected by the bank and subject to recourse
provisions.

During fiscal 1999 and 1997, no individual customer accounted for greater
than 10% of total sales. During fiscal 1998, a single customer accounted for 12%
of total sales.

The Company operates in one business segment, the manufacturing and
servicing of front-end wafer processing semiconductor manufacturing equipment.
All products and services are marketed within the geographic regions in which
the Company operates. The Company's current product offerings qualify for
aggregation under FAS 131 as its products are manufactured and distributed in
the same manner, have similar long-term gross margins and are sold to the same
customer base.

39
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

The Company operates in four geographic regions: the United States, Europe,
Japan and Asia Pacific. The following is a summary of local operations by
geographic region at June 30:

<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales to unaffiliated customers:
United States................................. $ 511,372 $ 889,604 $ 903,222
Europe........................................ 56,259 58,891 42,942
Japan......................................... 49,579 56,155 69,427
Asia Pacific.................................. 30,745 47,936 57,606
--------- ---------- ----------
Total sales to unaffiliated
customers........................... $ 647,955 $1,052,586 $1,073,197
========= ========== ==========
Operating income (loss):
United States................................. $(120,273) $ (177,882) $ (58,078)
Europe........................................ 5,155 3,112 (8,730)
Japan......................................... 2,024 (2,849) 2,342
Asia Pacific.................................. (107) (3,305) 3,690
--------- ---------- ----------
Total operating loss.................. $(113,201) $ (180,924) $ (60,776)
========= ========== ==========
Long-lived assets:
United States................................. $ 79,411 $ 112,542 $ 158,197
Europe........................................ 1,544 2,980 2,518
Japan......................................... 11,546 16,041 17,185
Asia Pacific.................................. 10,836 12,689 19,092
--------- ---------- ----------
Total long-lived assets............... 103,337 144,252 196,992
All other identifiable assets:
United States................................. 806,199 909,076 714,460
Europe........................................ 3,827 11,724 29,020
Japan......................................... 52,172 58,220 54,662
Asia Pacific.................................. 13,916 27,500 39,915
--------- ---------- ----------
Total all other identifiable assets... 876,114 1,006,520 838,057
--------- ---------- ----------
Total identifiable assets............. $ 979,451 $1,150,772 $1,035,049
========= ========== ==========
</TABLE>

Sales between geographic areas are accounted for at prices that provide a
profit, and are in accordance with the rules and regulations of the respective
governing authorities. Revenue in each geographic area is recognized upon
shipment from locations within a designated geographic region. Total export
revenue consisting of sales from the Company's U.S. operating subsidiaries to
non-affiliated customers by geographic region for the three years ended June 30,
are as follows:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Asia Pacific....................................... $133,667 $266,058 $293,488
Europe............................................. 78,614 134,970 131,342
Japan.............................................. 3,160 12,940 23,019
-------- -------- --------
$215,441 $413,968 $447,849
======== ======== ========
</TABLE>

40
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

NOTE D: FINANCIAL INSTRUMENTS

Investments at June 30, consist of the following:

<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-Sale:
Institutional Money Market Funds................ $ 10,900 $ 10,900 $ 7,400 $ 7,400
-------- -------- -------- --------
Amounts included in cash and cash equivalents... 10,900 10,900 7,400 7,400
Bank and Corporate Notes........................ 86,682 86,682 142,184 142,184
Yankee and Euro Certificates of Deposit......... 64,475 64,475 72,433 72,433
Auction Rate Preferreds......................... 62,381 62,381 84,799 84,799
Agency Notes.................................... 31,000 31,000 29,024 29,024
Commercial Paper................................ 22,263 22,263 13,122 13,122
Municipal Bonds and Notes....................... 7,035 7,035 42,085 42,085
-------- -------- -------- --------
Amounts included in short-term investments...... 273,836 273,836 383,647 383,647
Institutional Money Market Funds................ 51,357 51,357 51,357 51,357
Agency Notes.................................... 8,991 8,991 -- --
-------- -------- -------- --------
Amounts included in restricted cash............. 60,348 60,348 51,357 51,357
-------- -------- -------- --------
Total Available-for-Sale.............. $345,084 $345,084 $442,404 $442,404
======== ======== ======== ========
</TABLE>

The difference between cost and fair value of available-for-sale securities
was not significant at June 30, 1999 and 1998. The Company's available-for-sale
securities are invested in financial instruments with a minimum rating of A or
A2, as rated by Moody's or Standard & Poor's ("S&P"), respectively.

The amortized cost and estimated fair value of investments in debt
securities at June 30, by contractual maturities, are as follows:

<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in less than one year....................... $208,891 $208,891 $169,858 $169,858
Due after one year through five years........... 73,812 73,812 187,747 187,747
-------- -------- -------- --------
Total investments in debt
securities.......................... $282,703 $282,703 $357,605 $357,605
======== ======== ======== ========
</TABLE>

The carrying and fair values of the Company's financial instruments at June
30, are as follows:

<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 37,965 $ 37,965 $ 13,509 $ 13,509
Restricted cash................................. $ 60,348 $ 60,348 $ 51,357 $ 51,357
Convertible subordinated debentures............. $310,000 $283,557 $310,000 $253,239
Foreign currency forward contracts.............. $ 1,203 $ 1,658 $ -- $ 510
Other long-term debt............................ $ 37,066 $ 35,542 $ 41,538 $ 40,872
</TABLE>

The fair values of the Company's investments in debt securities and
restricted cash are based on quoted market prices at June 30, 1999 and 1998,
respectively. The fair value of the Company's auction rate preferreds is based
upon par value. The fair value of the Company's foreign currency forward
contracts is estimated based

41
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

upon the yen exchange rate at June 30, 1999 and 1998, respectively. The fair
value of the Company's convertible subordinated debentures and the Company's
other long-term debt is estimated based on the current rates offered to the
Company for similar debt instruments of the same remaining maturities.

NOTE E: DERIVATIVE FINANCIAL INSTRUMENTS

The Company enters into foreign currency forward contracts to minimize the
impact of exchange rate fluctuations on the value of yen-denominated assets and
liabilities. A substantial portion of the forward contracts entered into have a
maturity of 90 days or less. The unrealized gains and losses on these contracts
are deferred and offset against unrealized gains and losses from the related
yen-denominated assets and liabilities. The realized gains on yen-forward
contracts during fiscal 1999 were offset by losses on underlying receivables.

At June 30, 1999 and 1998, the notional amount of outstanding foreign
currency forward contracts were $71,672,000 and $35,967,000, respectively. Of
the total outstanding contracts at June 30, 1999 and 1998, $33,885,000 and
$26,858,000, respectively, were to hedge yen-denominated inter-company
receivables, and $36,129,000 and $8,599,000, respectively, were to hedge firm
commitments from customers in Japan. The unrealized gain on these forward
contracts at June 30, 1999 and 1998 was $1,658,000 and $510,000, respectively.

NOTE F: INVENTORIES

Inventories consist of the following at June 30:

<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.......................................... $123,311 $147,794
Work-in-process........................................ 44,181 52,374
Finished goods......................................... 16,224 20,442
-------- --------
$183,716 $220,610
======== ========
</TABLE>

NOTE G: EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following at June 30:

<TABLE>
<CAPTION>
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Equipment............................................ $ 93,112 $ 139,358
Leasehold improvements............................... 90,902 95,075
Furniture and fixtures............................... 45,427 60,353
--------- ---------
229,441 294,786
Less allowance for depreciation and amortization..... (126,104) (150,534)
--------- ---------
$ 103,337 $ 144,252
========= =========
</TABLE>

42
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

NOTE H: ACCRUED EXPENSES AND OTHER LIABILITIES

The significant components of accrued expenses and other liabilities
consist of the following at June 30:

<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accrued compensation........................................ $ 40,954 $ 36,085
Warranty and installation reserves.......................... 34,172 62,826
Income and other taxes payable.............................. 27,947 14,114
Restructuring............................................... 27,909 48,443
Other....................................................... 41,231 46,974
-------- --------
$172,213 $208,442
======== ========
</TABLE>

NOTE I: LINE OF CREDIT, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt and capital lease obligations at June 30, consist of the
following:

<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
5% Convertible subordinated notes, due September 2002....... $310,000 $310,000
Capitalized lease obligations, with varying interest rates
from 4.6% to 9.5%......................................... 11,456 22,987
Japanese yen-denominated bank loans with fixed interest
rates from 2.08% to 4.9%, principal payable in quarterly
and semi-annual installments from July 1998 to April
2003...................................................... 17,798 16,881
Other....................................................... 7,812 1,670
-------- --------
347,066 351,538
Less current portion........................................ (20,566) (17,364)
-------- --------
$326,500 $334,174
======== ========
</TABLE>

During August 1997, Lam completed an offering of $310.0 million of
Convertible Subordinated Notes (the "Notes"), which mature on September 2, 2002.
Interest on the five percent Notes is payable on September 1 and March 1 of each
year, commencing March 1, 1998. The Notes are convertible into shares of Lam
Common Stock at any time prior to the close of business on the maturity date,
unless previously redeemed, at a conversion price of $87.77 per share, subject
to anti-dilution adjustments. The Notes are redeemable, in whole or in part, at
the option of the Company and upon at least 20 days notice, at redemption prices
starting at 102.0% and at diminishing prices thereafter, plus accrued interest,
except that the Notes may not be redeemed prior to September 6, 2000. On or
after September 6, 2000, the Notes may be redeemed if the closing price of Lam
Common Stock is at least 130% of the conversion price for at least 20 trading
days within a period of 30 consecutive trading days ending within five trading
days prior to the notice of redemption. The Notes are unsecured and subordinated
in right of payment in full to all existing and future Senior Indebtedness of
the Company. Expenses associated with the offering of approximately $9.0 million
were deferred in other assets and are being ratably amortized over the term of
the Notes.

During fiscal 1998, the Company entered into a new Synthetic Lease
Agreement (the "Synthetic Lease Agreement"), relating to certain buildings at
its Fremont campus which provided more favorable terms and reduced the amount of
the Company's obligation. As part of the collateral restrictions of the
Synthetic Lease Agreement, the Company is required to maintain a certain amount
of cash, $51,357,000 at June 30, 1999 and 1998, respectively, in restricted
specified interest-bearing accounts through March 2003 (unless the Synthetic
Lease Agreement is otherwise terminated or the amount of maintained cash is
reduced), as the underlying obligation is paid down.

43
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

During the quarter ended September 30, 1998, the Company entered into a new
Yen-denominated credit facility for an approximately Y1.7 billion
yen-denominated loan ($14.1 million at June 30, 1999). This credit facility
replaces a term loan which was held with other financial institutions. Principal
payments on the new facility are due annually on September 30, through September
30, 2001. The new facility reflects terms which were more favorable than the
previous yen-denominated loan.

The Board of Directors of the Company has authorized the Company to acquire
from independent third parties (the "Third Parties") options to purchase up to
3.5 million shares of Lam Common Stock. These call options are to be acquired to
offset the anticipated dilutive effect of a potential conversion into common
stock of the Notes previously issued by the Company, and due September 2, 2002.
As part of the program, the Board of Directors also authorized the Company to
enter into put options with the same Third Parties covering up to 5.25 million
shares of Lam Common Stock. The Board of Directors anticipated that the premiums
the Company would receive over the course of the program from the sale of the
put options to the Third Parties would offset in full the premium cost to the
Company of its purchase of the call options from those same Third Parties.
Consequently, the Company does not expect to exchange cash over the course of
the program with the Third Parties in conjunction with the Company's purchase of
the call options.

As of June 30, 1999, the Company has deposited $9.0 million as security for
its obligations under the put options. The Company is required to increase this
amount if the Company enters additional option transactions with the Third
Parties. The Company will also have to increase the amount of this security
deposit by the amount from time to time that the put options are actually in the
money.

At June 30, 1999, the Company had a total of $100.0 million available under
a syndicated bank line of credit. The line of credit was renegotiated in April
1998 and subsequently amended in December 1998, and is due to expire in April
2001. Borrowings under the syndicated bank line of credit bear interest at 0.55%
to

44
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

1.25% over LIBOR, and are subject to Lam's compliance with financial and other
covenants. The credit agreement includes terms requiring satisfaction of certain
financial ratios, interest coverage, maximum debt to equity leverage, senior
indebtedness, tangible net worth, minimum profitability, and also restricts the
Company from paying dividends. At June 30, 1999, future maturities of long-term
debt and minimum payments for capital lease obligations are as follows:

<TABLE>
<CAPTION>
CAPITAL LEASE
OBLIGATIONS LONG-TERM DEBT TOTAL
------------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
FISCAL YEAR ENDING JUNE 30,
2000.................................... $ 9,351 $ 11,755 $ 21,106
2001.................................... 2,304 5,524 7,828
2002.................................... 473 7,609 8,082
2003.................................... -- 310,579 310,579
2004.................................... -- 69 69
Thereafter.............................. -- 74 74
Less amounts representing interest........... (672) -- (672)
------- -------- --------
$11,456 $335,610 $347,066
======= ======== ========
</TABLE>

Long-term debt and capital lease obligations are collateralized by
equipment with a cost and accumulated depreciation and amortization of
$5,707,000 and $(3,337,000), respectively, at June 30, 1999, and of $13,872,000
and $(9,674,000), respectively, at June 30, 1998.

NOTE J: NET LOSS PER SHARE

The Company's basic and diluted net loss per share for the years ended June
30, as calculated according to FAS 128, are as follows:

<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Numerator for basic net loss per share......... $(112,913) $(144,599) $(30,676)
Numerator for diluted net loss per share....... $(112,913) $(144,599) $(30,676)
Denominator:
Basic net loss per share -- average shares
outstanding................................. 38,492 38,057 36,919
Diluted net loss per share -- average shares
outstanding and assumed conversions......... 38,492 38,057 36,919
Basic net loss per share......................... $ (2.93) $ (3.80) $ (0.83)
========= ========= ========
Diluted net loss per share....................... $ (2.93) $ (3.80) $ (0.83)
========= ========= ========
</TABLE>

Options and convertible securities were outstanding during 1999, 1998, and
1997, but were excluded from the computation of diluted net loss per common
share because the effect in years with a net loss would have been antidilutive.
The shares potentially issuable under the put option agreement have been
excluded from the computation of dilutive net loss per share because the effect
would have been antidilutive.

NOTE K: COMPREHENSIVE INCOME (LOSS)

As of July 1, 1998, the Company adopted FAS 130, which establishes new
rules for the reporting and display of comprehensive income (loss) and its
components; however, the adoption of this Statement had no impact on the
Company's net loss or stockholders' equity. FAS 130 requires that unrealized
gains or losses on available-for-sale securities and foreign currency
translation adjustments are to be included in other

45
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

comprehensive loss. The Company's unrealized gains and losses on
available-for-sale securities were not material for the fiscal years ended June
30, 1999, 1998 and 1997. Prior to adoption, foreign currency translation
adjustments were reported by the Company as a component of stockholders' equity.

The components of comprehensive loss, net of tax, are as follows for fiscal
years ended June 30:

<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss......................................... $(112,913) $(144,599) $(30,676)
Foreign currency translation adjustment.......... (727) 471 (127)
--------- --------- --------
Comprehensive loss............................... $(113,640) $(144,128) $(30,803)
========= ========= ========
</TABLE>

Accumulated other comprehensive income (loss), net of related tax consists
of the following at June 30:

<TABLE>
<CAPTION>
1999 1998 1997
----- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Accumulated foreign currency translation adjustment......... $(432) $295 $(176)
</TABLE>

NOTE L: STOCK OPTION PLANS AND STOCK PURCHASE PLAN

The Company has adopted incentive stock option plans that provide for the
granting to qualified employees of incentive stock options to purchase shares of
Lam Common Stock. In addition, the plans permit the granting of nonstatutory
stock options to paid consultants and employees, and provide for the automatic
grant of nonstatutory stock options to outside directors. The option price is
determined by the Board of Directors, but in no event will it be less than the
fair market value of Lam Common Stock on the date of grant (no less than 85% of
the fair market value at the date of grant in the case of nonstatutory options).
Options granted under the plans vest over a period determined by the Board of
Directors. Under the automatic grant program, each outside director receives an
option immediately exercisable for 6,000 shares of Lam Common Stock during
December of each year during which the outside director serves, with the
exercise price equal to the fair market value on the date of grant.

46
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

A summary of incentive stock option plan transactions follows:

<TABLE>
<CAPTION>
AUTHORIZED OUTSTANDING OPTION PRICE WTD. AVERAGE
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
June 30, 1996............................ 1,119,679 3,791,565 $0.28-62.88 $23.71
Additional amount authorized............. 1,660,000 -- --
Granted.................................. (1,860,555) 1,860,555 16.57-40.31 23.57
Exercised................................ -- (351,387) 0.28-35.75 16.53
Canceled................................. 365,662 (365,662) 2.26-44.88 26.72
Expired.................................. (1,319) -- --
---------- ---------- ----------- ------
June 30, 1997............................ 1,283,467 4,935,071 $0.28-62.88 $23.82
Additional amount authorized............. 3,000,000 -- --
Granted.................................. (3,380,678) 3,380,678 19.13-56.53 38.32
Exercised................................ -- (588,264) 0.54-42.63 20.19
Canceled................................. 1,071,268 (1,071,268) 3.01-56.53 38.16
Expired.................................. (1,141,009) -- --
---------- ---------- ----------- ------
June 30, 1998............................ 833,048 6,656,217 $0.28-62.88 $29.31
Additional amount authorized............. 3,000,000 -- --
Granted.................................. (5,482,352) 5,482,352 10.00-42.38 18.55
Exercised................................ -- (514,340) 0.54-35.75 22.14
Canceled................................. 2,410,477 (2,410,477) 2.41-62.88 30.06
Expired.................................. (248,879) -- --
---------- ---------- ----------- ------
June 30, 1999............................ 512,294 9,213,752 $0.28-55.44 $23.09
---------- ---------- ----------- ------
</TABLE>

At June 30, 1999, 9,726,046 shares of Lam Common Stock were reserved for
future issuance under the various stock option plans and options to purchase
2,814,715 shares were exercisable at a range of $0.28-55.44. Outstanding and
exercisable options presented by price range at June 30, 1999 are as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -----------------------------
NUMBER OF NUMBER OF
OPTIONS WEIGHTED OPTIONS
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF AT JUNE 30, REMAINING AVERAGE AT JUNE 30, AVERAGE
EXERCISE PRICES 1999 LIFE (YEARS) EXERCISE PRICE 1999 EXERCISE PRICE
- --------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.28 - 10.94 595,357 4.18 $ 6.40 450,288 $ 5.15
12.29 - 14.47 1,248,931 9.07 14.40 241,331 14.11
16.57 - 19.00 2,379,471 9.39 18.92 62,699 17.93
19.13 - 20.78 1,025,037 5.10 20.53 819,644 20.71
20.88 - 20.88 1,499,479 9.42 20.88 491,709 20.88
21.63 - 29.50 930,496 7.53 26.02 383,766 27.91
29.82 - 50.81 759,981 7.82 34.74 365,278 35.80
55.42 - 55.44 775,000 8.11 55.43 -- --
- -------------- --------- ---- ------ --------- ------
$ 0.28 - 55.44 9,213,752 8.12 $23.09 2,814,715 $20.56
============== ========= ==== ====== ========= ======
</TABLE>

During fiscal 1998, the stockholders of the Company approved the 1997 Stock
Incentive Plan, which provides for the grant of stock options, restricted stock,
deferred stock and performance share awards to participating officers,
directors, employees, consultants and advisors of the Company and its
subsidiaries. Initially, 3,000,000 shares were reserved for issuance. The number
of shares to be issued will automatically be increased each calendar quarter
subject to certain provisions and restrictions, but will in no event exceed
5,000,000 shares. During fiscal 1999, the Board of Directors of the Company
amended the 1997 Stock

47
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

Incentive Plan to provide for annual non-employee director options to be granted
in December, as opposed to January, of each calendar year, and to allow for
re-pricing of stock options held by eligible employees who, at the time of any
such re-pricing, are not a member of the Board of Directors, a member of the
Company's senior management or a principal stockholder of the Company.

During fiscal 1999, the Board of Directors of the Company also approved the
1999 Stock Option Plan, which provides for the grant of non-qualified stock
option awards to eligible employees, consultants and advisors of the Company and
its subsidiaries. However, employees who are also members of the Board of
Directors or of the Company's senior management, or who are a principal
stockholder of the Company, are not eligible to receive stock option awards
under this plan. Initially, 3,000,000 shares were reserved for issuance.

During fiscal 1996, the Company adopted a Performance-Based Restricted
Stock Plan designed to reward executives based upon the achievement of certain
predetermined goals. The grant is based on the fair market value of the Lam's
Common Stock at the end of the quarter, provided the predetermined goals are
met. The Company authorized 150,000 shares to be reserved for issuance under the
Performance-Based Stock Plan. At June 30, 1999, 133,624 shares remain available
for issuance under this plan. However, no shares have been issued under this
plan since June 1996.

During fiscal 1999, the Company adopted the 1999 Employee Stock Purchase
Plan (the "1999 ESPP"). The 1999 ESPP allows employees to designate a portion of
their base compensation to be used to purchase Lam Common Stock at a purchase
price per share of the lower of 85% of the fair market value of Lam Common Stock
on the first or last day of the applicable offering period. Typically, each
offering period lasts twelve months and comprises three interim purchase dates.
The 1999 ESPP, approved by the Company's stockholders at the Annual Meeting of
Stockholders on November 5, 1998, replaced the existing 1984 Employee Stock
Purchase Plan (the "1984 ESPP"). The Company has 3,000,000 shares of Lam Common
Stock reserved for issuance under the 1999 ESPP: 1,000,000 shares may be issued
at any time and additional shares (up to 2,000,000 total additional shares) may
be issued for each share of Lam Common Stock which the Company redeems in
public-market at private purchases and designated for this purpose.

During fiscal 1999, Lam Common Stock was sold to employees under the both
the 1999 ESPP and 1984 ESPP. Shares were also sold to employees under an OnTrak
purchase plan (the "OnTrak ESPP") which predated the Merger. Under the OnTrak
ESPP, the purchase price per share is the lower of 85% of the fair market value
of the Lam Common Stock on the first or last day of a six-month offering period.
A total of 2,712,122 shares of the Lam's Common Stock were issued under the
1999, 1984 and OnTrak ESPP Plans through June 30, 1999, at prices ranging from
$2.65 to $43.03 per share. During fiscal 1999, the 1984 ESPP and OnTrak ESPP
were terminated and no longer available for employee stock purchases. At June
30, 1999, 935,446 shares remain available for purchase under all employee stock
purchase plans.

During the first quarter of fiscal 1999, the Company announced that its
Board of Directors had authorized the repurchase, at management's discretion, of
up to 368,000 shares of Lam Common Stock from the public market or in private
purchases. The shares were used to offset dilution caused by issuance in the
near-term of shares under the Company's employee stock purchase and stock option
plans. During the third quarter of fiscal 1999, the Company announced a share
repurchase program of up to 2,000,000 shares of Lam Common Stock. The shares
repurchased under this authorization will be used to reduce dilution caused by
the issuance of shares reserved under the Company's stock option and employee
stock purchase plans. During fiscal 1999, the Company repurchased 858,000 shares
for $18.9 million of Lam Common Stock. At June 30, 1999, the Company has
1,510,000 shares available for repurchase. These share repurchases had no
material impact on the net loss per share amounts for the period.

As permitted by FAS 123, the Company has elected to follow APB 25, and
related Interpretations, in accounting for stock-based awards to employees.
Under APB 25, the Company generally recorded nominal

48
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

compensation expense with respect to such awards which are generally granted at
market value on the date of grant.

Pro forma information regarding net loss and net loss per share is required
by FAS 123 for awards granted after June 30, 1995, as if the Company had
accounted for its stock-based awards to employees under the fair value method of
FAS 123. The fair value of the Company's stock-based awards to employees was
estimated using a Black-Scholes option valuation model. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and which are fully transferable. In
addition, the Black-Scholes model requires the input of highly subjective
assumptions, including the expected stock price volatility. Because the
Company's stock-based awards to employees have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of the Company's stock-based awards to employees. The fair
value of the Company's stock-based awards to employees was estimated assuming no
expected dividends and the following weighted-average assumptions:

<TABLE>
<CAPTION>
OPTIONS ESPP
-------------------- --------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (years)..................... 3.2 3.9 3.3 1.0 0.5 0.5
Expected stock price volatility........... 70% 64% 60% 70% 64% 58%
Risk-free interest rate................... 4.9% 5.7% 6.1% 4.9% 5.7% 5.3%
</TABLE>

The weighted average fair value of options granted during 1999, 1998 and
1997 was $9.25, $20.59 and $10.55 per share, respectively. The weighted average
fair value of shares granted under the 1999, 1984 and OnTrak ESPP plans during
fiscal 1999, 1998 and 1997 was $5.39, $12.85 and $7.62 per share, respectively.

For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the option's vesting period
(for options) and the respective six or twelve-month purchase periods (for stock
purchases under the respective employee stock purchase plans). The Company's pro
forma information follows:

<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net loss -- as reported.......................... $(112,913) $(144,599) $(30,676)
Net loss -- pro forma............................ $(146,903) $(169,974) $(41,194)
Basic loss per share -- as reported.............. $ (2.93) $ (3.80) $ (0.83)
Basic net loss per share -- pro forma............ $ (3.82) $ (4.47) $ (1.12)
Diluted net loss per share -- as reported........ $ (2.93) $ (3.80) $ (0.83)
Diluted net loss per share -- pro forma.......... $ (3.82) $ (4.47) $ (1.12)
</TABLE>

FAS 123 is applicable only to awards granted subsequent to June 30, 1995. As a
result, its pro forma effect is fully reflected only in fiscal 1999.

NOTE M: PROFIT SHARING PLAN AND BENEFIT PLAN

During fiscal 1998, the Company revised the profit sharing plan for its
employees in North America. Distributions to employees by the Company are made
bi-annually based upon a percentage of base salary, provided that a threshold
level of the Company's financial and performance goals are met. Upon achievement
of the threshold, the profit sharing is awarded based upon performance against
certain corporate financial and operating goals. During fiscal 1999, the Company
incurred an expense of $2,121,000 based upon the Company achieving certain
business process improvements. During 1998, the Company did not incur any profit
sharing plan expense. Profit sharing plan expense for fiscal 1997 was $176,000.

49
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

The Company maintains a 401(k) retirement savings plan for its full-time
employees in North America. Each participant in the plan may elect to contribute
2% to 15% of his or her annual salary to the plan, subject to statutory
limitations. The Company matches employee contributions to the plan at the rate
of 50% of the first 6% of salary contributed. Prior to the Merger, OnTrak
maintained an employee savings and retirement plan qualified under Section
401(k) of the Internal Revenue Code. The OnTrak plan allowed participants to
contribute up to 14% of the total compensation that would otherwise be paid to
them by OnTrak, not to exceed the maximum allowed by the applicable Internal
Revenue Service guidelines. OnTrak matched 100% of the salary deferral
contributions made by each participating employee, up to a maximum of 6% of
total employee compensation. OnTrak's contributions were 25%, 50% and 100%
vested after an employee's second, third and fourth years of service,
respectively. The Company's match expense for fiscal 1999, 1998 and 1997 was
$3,610,000, $4,964,000 and $5,205,000, respectively.

NOTE N: COMMITMENTS

The Company leases its administrative, R&D and manufacturing facilities,
regional sales/service offices and certain equipment under non-cancelable
operating leases, which expire at various dates through 2014. All of the
Company's facility leases for buildings located at its Fremont, California
headquarters and certain operating leases provide the Company an option to
extend the leases for additional periods. Certain of the Company's other
facility leases provide for periodic rent increases based on the general rate of
inflation.

Future minimum lease payments for the years ended June 30, and in the
aggregate under operating leases, consist of the following:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000............................................. $ 28,501
2001............................................. 20,029
2002............................................. 58,278
2003............................................. 8,963
2004............................................. 6,501
Thereafter....................................... 27,610
--------
$149,882
========
</TABLE>

During fiscal 1998, Company entered into its Synthetic Lease Agreement,
relating to certain buildings at its Fremont campus, to obtain more favorable
terms and to reduce the amount of the obligation. As part of the collateral
restrictions of the Agreement, the Company is required to provide a guaranteed
residual value of $44,402,000 at the end of the lease term.

Total rental expense for all leases amounted to approximately $33,144,000,
$44,737,000 and $46,728,000, for the years ended June 30, 1999, 1998 and 1997,
respectively.

The Company has subleased some of its buildings and is exploring subleasing
others, and currently is entitled to receive income of approximately $5,383,000,
$5,851,000, $5,535,000, $4,650,000 $3,333,000 and $4,444,000 for the fiscal
years 2000, 2001, 2002, 2003, 2004 and thereafter, respectively.

For the fiscal years ended June 30, 1999, 1998 and 1997, the Company
received income totaling $3,226,000, $1,752,000 and $405,000, respectively, on
its subleased facilities.

50
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

NOTE O: INCOME TAXES

Income tax benefit consists of the following:

<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current............................................ $ -- $(18,153) $(20,064)
Deferred........................................... -- (21,187) (15,521)
------- -------- --------
-- (39,340) (35,585)
State:
Current............................................ 286 362 2,474
Deferred........................................... (3,508) (6,049) (9,511)
------- -------- --------
(3,222) (5,687) (7,037)
Foreign:
Current............................................ 3,222 8,951 12,439
Deferred........................................... -- 1,550 --
------- -------- --------
3,222 10,501 12,439
------- -------- --------
$ -- $(34,526) $(30,183)
======= ======== ========
</TABLE>

Actual current tax liabilities are lower than reflected above for fiscal
year 1997 by $1,732,000 for the stock option deduction benefits recorded as a
credit to stockholders' equity.

Under FAS 109, deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax assets as of June 30,
are as follows:

<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Tax benefit carryforwards................................. $103,159 $ 39,268
Accounting reserves and accruals deductible in different
periods................................................ 45,136 63,937
Inventory valuation differences........................... 31,787 37,240
Capitalized R&D expenses.................................. 13,774 --
Net undistributed profits of foreign subsidiaries......... 8,167 9,239
-------- --------
Gross deferred tax assets................................... 202,023 149,684
-------- --------
Deferred tax liabilities:
Temporary differences for capital assets.................. (4,744) (8,594)
Other..................................................... (5,209) (2,157)
-------- --------
Gross deferred tax liabilities.............................. (9,953) (10,751)
-------- --------
Valuation allowance for deferred tax assets................. (84,680) (35,051)
-------- --------
Net deferred tax assets..................................... $107,390 $103,882
======== ========
</TABLE>

Approximately $1,500,000 and $5,900,000 of the valuation allowance for
deferred taxes, for fiscal 1999 and 1998, respectively, is attributable to stock
option deductions, the benefit of which will be credited to equity when
realized.

Realization of the Company's net deferred tax assets is dependent on future
taxable income. The Company believes that it is more likely than not such assets
will be realized; however, ultimate realization could be negatively impacted by
market conditions and other variables not known or anticipated at this time.

51
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

At June 30, 1999, the Company has federal tax loss carryforward of
approximately $153,000,000 which expire in 2019. The Company also has federal
and state tax credit carryforwards of approximately $48,300,000, of which
approximately $27,200,000 will expire in varying amounts between 2000 and 2019.
The remaining balance of $21,100,000 of tax carryforwards may be carried forward
indefinitely. A valuation allowance has been provided for a portion of the
deferred tax assets related to the carryforwards.

A reconciliation of income tax benefit provided at the federal statutory
rate (35% in 1999, 1998 and 1997) to income tax benefit follows:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax benefit computed at federal statutory
rate.............................................. $(39,520) $(62,694) $(21,345)
Losses not benefited................................ 48,124 35,051 --
Tax credits......................................... (5,727) (5,459) (5,316)
State income taxes, net of federal tax provision.... (2,094) (3,697) (4,422)
Other............................................... (783) 2,273 900
-------- -------- --------
$ -- $(34,526) $(30,183)
======== ======== ========
</TABLE>

Income before income taxes from foreign operations for fiscal years 1999,
1998 and 1997 was $13,829,000, $11,462,000 and $31,621,000, respectively. In
addition, the Company received royalty and other income from foreign sources of
$410,000, $2,059,000 and $12,662,000, in fiscal years 1999, 1998 and 1997,
respectively, which is subject to foreign tax withholding.

NOTE P: RESTRUCTURINGS

During the Company's first fiscal 1997 quarter ended September 30, 1996,
the Company projected and announced that revenues would be lower than previous
quarters due to a projected 20% general market decline. The Company's revenues
during that quarter fell to $299.2 million, a decrease of 24% from the prior
quarter. The Company assessed that market conditions would remain depressed and,
therefore, that its revenues would continue to be adversely affected.
Accordingly, and as announced on August 26, 1996, the Company organizationally
restructured its business units into a more centralized structure and cut its
workforce by approximately 11%.

The Company's quarterly revenue would eventually decline to $233.3 million
in the March 1997 quarter, 40% lower than the peak reached in the quarter ended
June 1996. Subsequently, in the latter part of calendar 1997, the industry
rebounded quickly and entered into what eventually became a short-lived upturn
cycle. During the June 1997 quarter, the Company's revenues grew back to $282.6
million and reached $292.1 million by the December 1997 quarter. However, the
Company's outlook in late January 1998 was that the industry was again entering
into a steep downturn brought on by depressed DRAM pricing and the Asia
financial crisis. The Company therefore announced a further set of restructuring
activities in a news release on February 12, 1998. At that time, the Company's
assessment related to industry conditions was that its revenues for the March
and June 1998 quarters would decline by approximately 20%. The Company's
restructuring plans aligned its cost structure to this level of revenues by
exiting part of its CVD business and all of its FPD businesses, consolidating
its manufacturing facilities and substantially reducing its remaining
infrastructure and workforce. The Company's actual June 1998 revenues were in
line with those expectations; however, by the mid-June 1998 time-frame the
industry conditions further deteriorated and the outlook for future quarters
significantly worsened. The Company projected revenues to drop to a run rate of
approximately $180 million per quarter and determined it needed once more to
reduce its cost structure in line with the projected reductions in revenue.
Accordingly, another separate restructuring plan was developed and announced in
June 1998 and the Company exited the remainder of its CVD operations. As a
result of the restructurings in fiscal 1998, the Company reduced its global
workforce by approximately 28%.

52
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

The Company's revenue outlook in June 1998 was based on the Company's
projection that the worldwide wafer fabrication industry would deteriorate from
a quarterly revenue amount of $4.2 billion to $3.2 billion, or a 25% decline.

The semiconductor equipment market contracted beyond what was anticipated,
to quarterly revenues of $2.6 billion as reported by Dataquest, an independent
industry analysis firm. The Company's shortfall of revenues during the September
1998 quarter declined in line with the industry as a whole, and resulted in
lower than anticipated revenues, falling to $142.2 million. At that point in
time, the Company projected that its quarterly revenues would remain closer to
the $140-$150 million level for at least the next several quarters. This
necessitated another restructuring plan and further cost reductions via employee
terminations, facilities consolidation and a contraction of operating
activities, all of which resulted in the additional write-down of plant-related
assets. This plan was announced and publicly communicated on November 12, 1998.
As a result of the fiscal 1999 restructuring, the Company further reduced its
global workforce by approximately 15%.

Below is a table summarizing restructuring activity relating to the fiscal
1999 restructuring:

<TABLE>
<CAPTION>
LEASE
PAYMENTS
SEVERANCE ON ABANDONED CREDITS ON
AND VACATED FIXED RETURNED
BENEFITS FACILITIES ASSETS EQUIPMENT TOTAL
--------- ---------- --------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fiscal year 1999 provision............ $16,521 $1,125 $28,141 $7,585 $53,372
Cash payments......................... (11,663) (440) -- (258) (12,361)
Non-cash charges...................... -- -- (28,141) (1,959) (30,100)
------- ------ ------- ------ -------
Balance at June 30, 1999.............. $ 4,858 $ 685 $ -- $5,368 $10,911
======= ====== ======= ====== =======
</TABLE>

Severance and Benefits relates to the salary and fringe benefit expense for
involuntarily terminated employees representing approximately 15% of the global
workforce. Prior to the date of the financial statements, management, with the
proper level of authority, approved and committed the Company to a plan of
termination and determined the benefits the employees being terminated would
receive. Prior to the financial statement date, the expected termination
benefits were communicated to employees in enough detail that they could
determine their type and amount of benefit. The termination of employees
occurred shortly after the plan of restructuring was finalized.

Lease Payments on Vacated Facilities relates to 24 months of rent and
common area maintenance expense for the vacated facilities. The Company also
estimated, given the then-current real estate market conditions, that it would
take approximately 24 months to sub-lease its excess facilities in Fremont,
California.

The Company wrote-off all leasehold improvements for the excess facilities,
computer equipment, furniture and fixtures related to the involuntarily
terminated employees, and other assets deemed to have no future use as a result
of the restructuring.

Credits on Returned Equipment relates to the charge associated with the
requirement by certain of the Company's customers to return their previously
purchased CVD systems and spare parts.

53
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

Below is a table summarizing restructuring activity relating to the fiscal
1998 restructuring:

<TABLE>
<CAPTION>
LEASE
PAYMENTS ON EXCESS AND CREDITS ON
SEVERANCE AND VACATED ABANDONED OBSOLETE RETURNED OTHER EXIT
BENEFITS FACILITIES FIXED ASSETS INVENTORY EQUIPMENT COSTS TOTAL
------------- ----------- ------------ ---------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Fiscal year 1998 provision...... $40,317 $16,998 $47,341 $31,933 $6,547 $5,722 $148,858
Cash payments................... (9,766) (1,518) -- -- -- -- (11,284)
Non-cash charges................ -- -- (47,341) (31,933) (4,135) (5,722) (89,131)
------- ------- ------- ------- ------ ------ --------
Balance at June 30, 1998........ 30,551 15,480 -- -- 2,412 -- 48,443
Adjustment...................... -- -- -- -- 1,528 -- 1,528
Cash payments................... (19,777) (3,039) -- -- (2,150) -- (24,966)
------- ------- ------- ------- ------ ------ --------
Balance at June 30, 1999........ $10,774 $12,441 $ -- $ -- $1,790 $ -- $ 25,005
======= ======= ======= ======= ====== ====== ========
</TABLE>

Severance and Benefits relates to the salary and fringe benefit expense of
the involuntarily terminated employees of the CVD and FPD operations which were
exited, the shutdown of the Wilmington, Massachusetts manufacturing facility,
and the employees impacted by the overall across the board reduction of the
employee base. Prior to the date of the financial statements, management, with
the proper level of authority, approved and committed the Company to a plan of
termination and determined the benefits the employees being terminated would
receive. Prior to the financial statement date, the expected termination
benefits were communicated to employees in enough detail that they could
determine their type and amount of benefit. The restructuring plans resulted in
the Company reducing its global workforce by approximately 28%. The termination
of employees occurred shortly after the plan of restructuring was finalized.

Lease Payments on Vacated Facilities which was included in the
restructuring charge related to remaining rent and common area maintenance on
the closed Wilmington, Massachusetts manufacturing facility. The Company also
estimated, given the then-current real estate market conditions, that it would
take approximately 24 months to sub-lease its excess facilities in Fremont,
California. The Company, therefore, included 24 months of rent and common area
maintenance expense related to excess facilities in its restructuring charge.

The Company wrote-off all fixed assets relating to the operations which
were exited, leasehold improvements for the excess facilities, computer
equipment, furniture and fixtures related to the involuntarily terminated
employees and other assets deemed to have no future use as a result of the
restructuring.

The inventory write-off which was included in the restructuring charge
related to inventory from the operations which were exited. The inventory
write-off included raw material on hand and inventory purchased under
non-cancelable commitments from suppliers, spare parts, work-in-process and
finished goods related to the products from the exited operations.

Credits on Returned Equipment relates to the charge associated with the
requirement by certain of the Company's customers to return their previously
purchased CVD systems and spare parts. During fiscal 1999, the Company recorded
an adjustment to the restructuring reserve of $1.5 million for the recovery of a
previously written-off machine.

Other Exit Costs of $5.7 million relates to the net book value of licensing
and manufacturing agreements related to the restructured operations.

54
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

Below is a table summarizing restructuring activity relating to the fiscal
1997 restructuring:

<TABLE>
<CAPTION>
LEASE
SEVERANCE PAYMENTS
AND ON VACATED ABANDONED
BENEFITS FACILITIES FIXED ASSETS TOTAL
--------- ---------- ------------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fiscal year 1997 provision........................ $6,170 $1,789 $1,062 $9,021
Cash payments..................................... (5,592) (703) -- (6,295)
Non-cash charges.................................. -- -- (1,062) (1,062)
------ ------ ------ ------
Balance at June 30, 1997.......................... 578 1,086 -- 1,664
Adjustment........................................ 1,086 (1,086) -- --
Cash payments..................................... (406) -- -- (406)
------ ------ ------ ------
Balance at June 30, 1998.......................... 1,258 -- -- 1,258
Cash payments..................................... (409) -- -- (409)
------ ------ ------ ------
Balance at June 30, 1999.......................... $ 849 $ -- $ -- $ 849
====== ====== ====== ======
</TABLE>

Severance and Benefits relates to the salary and fringe benefit expense for
the involuntarily terminated employees which represented approximately 11% of
the global workforce. Prior to the date of the financial statements, management,
with the proper level of authority, approved and committed the Company to a plan
of termination and determined the benefits the employees being terminated would
receive. Prior to the financial statement date, the expected termination
benefits were communicated to employees in enough detail that they could
determine their type and amount of benefit. The termination of employees
occurred shortly after the plan of restructuring was finalized. During fiscal
1998, the Company revised its estimate relating to severance and benefits and
transferred the excess balance of remaining lease payments on vacated facilities
to severance and benefits.

Lease Payments on Vacated Facilities relates to remaining rent and common
area maintenance expense for the vacated facilities.

NOTE Q: RELATED PARTY TRANSACTIONS

During the first quarter of fiscal 1999, the Company withdrew from a
limited partnership (the "Partnership") and received a payment of $2,800,000 for
its portion of uninvested capital and retained by assignment an indirect
interest in the Partnership investments as of the date of the Company's
withdrawal. During fiscal 1997, the Company invested $4,000,000 for a 32%
interest in the Partnership. The Partnership was organized for the purpose of
investing in emerging technology companies to seek income and gains to the
Partnership. Three of the Company's directors were, prior to the Company's
withdrawal, members of the limited liability company that is the general partner
of the Partnership. The Company has accounted for its investment in the
partnership under the equity method. Accordingly, the Company adjusted the
recorded value of its investment for its share (32%) of the Partnership's net
income or loss. The Company's portion of the Partnership's net income was not
material for the fiscal years ended June 30, 1998 or 1997.

NOTE R: PURCHASED TECHNOLOGY FOR R&D

During fiscal 1998, the Company purchased a non-exclusive, worldwide
license from Trikon Technologies, Inc. ("Trikon") for its MORI source
technology. During fiscal 1998, the Company recorded a charge for the purchase
of technology of $12,100,000 for the initial payment on the license and for the
purchase of a

55
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

Trikon system to be utilized for R&D. The technology is being used in a single
discrete etch product development project and has no future alternative use. An
additional $5,000,000 for the license became payable and was paid in fiscal
1999.

NOTE S: LITIGATION

In October, 1993 Varian Associates, Inc. ("Varian") brought suit against
the Company in the United States District Court, for the Northern District of
California, seeking monetary damages and injunctive relief based on the
Company's alleged infringement of certain patents held by Varian. By order of
the Court, those proceedings were bifurcated into an initial phase to determine
the validity of the Varian patents and Lam's infringement (if any), and a
secondary phase to determine damages to Varian (if any) and whether Lam's
infringement (if shown) was willful. On April 13, 1999, the Court issued an
interlocutory order construing the meaning of the terms of the patent claims at
issue in the action. To date, however, there has been no determination as to the
actual scope of those claims, or whether Lam's products have infringed or are
infringing Varian's patents. A trial date is currently scheduled for March 2000.
Furthermore, there have been no findings in the action which have caused the
Company reasonably to believe that any infringement, if found, or any damages,
if awarded, would have a material adverse effect on the Company's operating
results or the Company's financial position.

In addition, the Company is from time to time notified by various parties
that intention to seek negotiated licenses where it is considered appropriate.
The outcome of these matters will not, in management's opinion, have a material
impact on the Company's consolidated financial position or operating results.

NOTE T: SUBSEQUENT EVENT (UNAUDITED)

In September, 1999 Tegal Corporation ("Tegal") brought suit against the
Company in the United States District Court, for the Eastern District of
Virginia, seeking monetary damages and injunctive relief based on the Company's
alleged infringement of certain patents held by Tegal. Specifically, Tegal
identified the Company's 4520XL and Exelan products as infringing the patents
Tegal is asserting. To date, however, there has been no determination as to the
actual scope of those claims, or whether Lam's products have infringed or are
infringing Tegal's patents. No trial date is scheduled in the action.
Furthermore, there have been no findings in the action which have caused the
Company reasonably to believe that any infringement, if found, or any damages,
if awarded, would have a material adverse effect on the Company's operating
results or the Company's financial position.

56
<PAGE> 57

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
Lam Research Corporation
Fremont, California

We have audited the accompanying consolidated balance sheets of Lam
Research Corporation as of June 30, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1999. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. We did not audit the financial statements of
OnTrak Systems, Inc. which reflects net income of approximately 9.6% of the
related consolidated financial statement totals for the year ended June 30,
1997. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to data included for
OnTrak Systems, Inc., is based solely on the report of the other auditors.

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

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Lam Research Corporation at June 30, 1999
and 1998, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

/s/ ERNST & YOUNG LLP

San Jose, California
July 26, 1999

57
<PAGE> 58

REPORT OF INDEPENDENT ACCOUNTANTS
FOR ONTRAK SYSTEMS, INC.

To the Board of Directors and Stockholders
of OnTrak Systems, Inc.

In our opinion, the consolidated balance sheet and related consolidated
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of OnTrak Systems, Inc.
and its subsidiaries (not presented separately herein) at June 30, 1997 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles. These consolidated
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/ PRICEWATERHOUSECOOPERS LLP

San Jose, California
July 24, 1997 except for Note 2,
which is as of August 5, 1997

58
<PAGE> 59

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.

LAM RESEARCH CORPORATION

By /s/ JAMES W. BAGLEY

--------------------------------------
James W. Bagley,
Chairman, Chief Executive Officer

Dated: September 24, 1999

59
<PAGE> 60

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James W. Bagley and Mercedes Johnson,
jointly and severally, his or her attorney-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report of Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorney-in-fact, or his or her substitute or substitutes, may do or cause to be
done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the date indicated.

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>

/s/ JAMES W. BAGLEY Chairman, Chief Executive September 24, 1999
- --------------------------------------------------- Officer
James W. Bagley

/s/ MERCEDES JOHNSON Vice President, Finance and September 24, 1999
- --------------------------------------------------- Chief Financial Officer
Mercedes Johnson (Principal Financial Officer
and Principal Accounting
Officer)

/s/ DAVID G. ARSCOTT Director September 24, 1999
- ---------------------------------------------------
David G. Arscott

/s/ RICHARD J. ELKUS, JR. Director September 24, 1999
- ---------------------------------------------------
Richard J. Elkus, Jr.

/s/ ROGER D. EMERICK Director September 24, 1999
- ---------------------------------------------------
Roger D. Emerick

/s/ JACK R. HARRIS Director September 24, 1999
- ---------------------------------------------------
Jack R. Harris

/s/ GRANT M. INMAN Director September 24, 1999
- ---------------------------------------------------
Grant M. Inman

/s/ KENNETH M. THOMPSON Director September 24, 1999
- ---------------------------------------------------
Kenneth M. Thompson
</TABLE>

60
<PAGE> 61

SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

LAM RESEARCH CORPORATION

<TABLE>
<CAPTION>
ADDITIONS
--------------------------------------------------
BALANCE AT CHARGED TO OTHER
BEGINNING OF CHARGED TO COSTS ACCOUNTS BALANCE AT
DESCRIPTION PERIOD AND EXPENSES DESCRIBE DEDUCTIONS DESCRIBE END OF PERIOD
----------- ------------ ---------------- ---------------- ------------------- -------------
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1999
Deducted from asset accounts:
Allowance for doubtful accounts... $5,103,000 -- -- $523,000(1) $4,580,000
YEAR ENDED JUNE 30, 1998
Deducted from asset accounts:
Allowance for doubtful accounts... $2,377,000 $2,900,000 $174,000(1) $5,103,000
YEAR ENDED JUNE 30, 1997
Deducted from asset accounts:
Allowance for doubtful accounts... $2,063,000 $ 738,000 -- $424,000(1) $2,377,000
</TABLE>

- ---------------
(1) Represents specific customer accounts written-off.

61
<PAGE> 62

LAM RESEARCH CORPORATION

ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1999

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
3.1(7) Certificate of Incorporation of the Registrant, as amended.
3.2(13) Amended and Restated By Laws of the Registrant, dated March
24, 1997.
4.1(1) Amended 1981 Incentive Stock Option Plan and Forms of Stock
Option Agreements.
4.2(1) Amended 1984 Incentive Stock Option Plan and Forms of Stock
Option Agreements.
4.3(21) Amended 1984 Employee Stock Purchase Plan and Form of
Subscription Agreement.
4.4(8) Amended 1991 Stock Option Plan and Forms of Stock Option
Agreements.
4.5(10) 1996 Performance-Based Restricted Stock Plan.
4.7(1) Rights Agreement, dated as of January 23, 1997, between the
Registrant and ChaseMellon Shareholder Service, L.L.C.,
which includes Exhibit B thereto the Form of Right
Certificate.
4.8(24) Amended and restated 1997 Stock Incentive Plan.
4.9(24) 1999 Stock Option Plan.
4.10(28) Lam Research Corporation 1999 Employee Stock Purchase Plan.
10.3(2) Form of Indemnification Agreement.
10.7(3) Roger D. Emerick Promissory Note and Deed of Trust.
10.12(4) ECR Technology License Agreement and Rainbow Technology
License Agreement by and between Registrant and Sumitomo
Metal Industries, Ltd.
10.16(5) License Agreement effective January 1, 1992 between the
Registrant and Tokyo Electron Limited.
10.19(6) Deferred Compensation Agreement with Roger D. Emerick.
10.27(7) Receivables Purchase Agreement between Lam Research
Corporation and ABN AMRO Bank N.V., Tokyo Branch.
10.28(7) Guaranty of Supplemental Receivables Purchase Agreement
between Lam Research Corporation and ABN AMRO Bank N.V.,
Tokyo Branch dated June 28, 1995.
10.29(8) Credit Agreement Between Lam Research Corporation and ABN
AMRO Bank N. V., as agent for a syndicate of banks, dated
December 20, 1995.
10.30(9) Lease Agreement Between Lam Research Corporation and the
Industrial Bank of Japan, Limited dated March 27, 1996.
10.31(10) Term Loan Agreement between The Sakura Bank Limited and Lam
Research Co., Ltd. dated June 26, 1996.
10.32(10) The Continuing Guaranty between The Sakura Bank Limited and
Lam Research Corporation dated June 26, 1996.
10.33(11) Employment contract for Roger D. Emerick, effective July 1,
1996.
10.34(12) Agreement between Registrant and Henk J. Evenhuis, dated
January 21, 1997.
10.35(14) Agreement and Plan of Merger by and among Lam Research
Corporation, Omega Acquisition Corporation and OnTrak
Systems, Inc. dated as of March 24, 1997.
10.37(15) Second Amendment to Credit Agreement between Lam Research
Corporation and ABN AMRO Bank N.V., San Francisco
International Branch dated March 30, 1997.
</TABLE>

62
<PAGE> 63

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
10.38(15) Consent and Waiver Agreement between Lam Research
Corporation and IBJTC Leasing Corporation-BSC, The
Industrial Bank of Japan, Limited, Wells Fargo Bank, N.A.,
The Bank of Nova Scotia and the Nippon Credit Bank, LTD.
dated March 28, 1997.
10.39(15) Waiver Agreement between Lam Research Co., Ltd. and The
Sakura Bank Limited dated March 30, 1997.
10.40(15) Amendment to Continuing Guaranty between Lam Research
Corporation and The Sakura Bank Limited dated March 30,
1997.
10.41(17) Employment Agreement for James W. Bagley, dated July 1,
1997.
10.42(16) Employment agreement for Stephen G. Newberry, dated August
5, 1997.
10.43(16) Addendum to Roger D. Emerick Employment contract, dated June
26, 1997.
10.44(18) Consent and Waiver Agreement among Lam Research Corporation,
IBJTC Leasing Corporation-BSC and Participants dated October
7, 1997.
10.45(18) Third Amendment to Credit Agreement among Lam Research
Corporation, ABN AMRO Bank, as agent, and a syndicate of
lenders, dated October 7, 1997.
10.46(20) Receivables Purchase Agreement between Lam Research Co.,
LTD. and ABN AMRO Bank N.V., Tokyo Branch, dated December
26, 1997.
10.47(20) Third Amendment to Term Loan between Lam Research Co., Ltd.,
and The Sakura Bank Limited, dated December 19, 1997.
10.48(20) Second Amendment to Continuing Guaranty between Lam Research
Corporation and The Sakura Bank Limited, dated December 19,
1997.
10.49(20) Guaranty to the Receivables Purchase Agreement between Lam
Research Co., LTD. and ABN AMRO Bank N.V., Tokyo Branch,
dated December 26, 1997.
10.50(22) License Agreement between Lam Research Corporation and
Trikon Technologies, Inc., dated March 18, 1998.
10.51(22) Loan Agreement between Lam Research Corporation and The
Industrial Bank of Japan, Limited, dated March 30, 1998.
10.52(23) Credit Agreement between Lam Research Corporation and
Deutsche Bank AG, New York Branch and ABN AMRO Bank N.V.,
San Francisco Branch, dated April 13, 1998.
10.53(23) First Amendment to Credit Agreement between Lam Research
Corporation and ABN AMRO Bank N.V., San Francisco Branch,
dated August 10, 1998.
10.54(19) Indenture by and between the Company and LaSalle National
Bank dated as of August 15, 1997.
10.55(19) Registration Rights Agreement by and between the Company and
Deutsche Morgan Grenfeld Inc., ABN AMRO Rothschild, and
Lombard Odier International Underwriters Limited, dated as
of August 15, 1997.
10.56(23) Amended and restated Roger D. Emerick Promissory Note and
Deed of Trust dated April 8, 1998.
10.57(23) Waiver Agreement between Lam Research Co., Ltd. And Sakura
Bank Limited, dated July 20, 1998.
10.58(24) Loan Agreement between Lam Research Co., LTD and ABN AMRO
Bank N.V., dated September 30, 1998.
10.59(24) Guaranty to Loan Agreement between Lam Research Co., LTD and
ABN AMRO Bank N.V., dated September 30, 1998.
10.60(24) Second Addendum to Employment Agreement between Lam Research
Corporation and Roger D. Emerick, effective September 1,
1998.
</TABLE>

63
<PAGE> 64

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
10.61(25) Second Amendment to Credit Agreement between ABN AMRO BANK,
N.V. and Lam Research Corporation, dated December 18, 1998.
10.62(25) First Amendment to Guaranty between ABN AMRO BANK, N.V. and
Lam Research Corporation, dated December 25, 1998.
10.63(25) Supplemental Agreement of Receivables Purchase Agreement
dated December 26, 1997 between ABN AMRO BANK, N.V. and Lam
Research Corporation, dated December 25, 1998.
10.64(25) Supplemental Agreement of Loan Agreement dated September 30,
1998 between ABN AMRO BANK, N.V. and Lam Research
Corporation, dated December 25, 1998.
10.66(26) Substitution Certificate for Loan Agreement dated September
30, 1998 between ABN AMRO BANK, N.V. and Lam Research
Corporation, dated March 19, 1999.
10.67(27) OTS Issuer Stock Option Master Agreement between Lam
Research Corporation and Goldman Sachs & Co. and Collateral
Appendix thereto, dated June 1999.
10.68(27) Form of ISDA Master Agreement and related documents between
Lam Research Corporation and Credit Suisse Financial
Products, dated June 1999.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP Independent
Accountants.
24 Power of Attorney.
27 Financial Data Schedule.
</TABLE>

- ---------------
(1) Incorporated by reference to Post Effective Amendment No. 1 to the
Registrant's Registration Statement on Form S-8 (No. 33-32160) filed with
the Securities and Exchange Commission on May 10, 1990.

(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended April 3, 1988.

(3) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1988.

(4) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1989.

(5) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1991.

(6) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993.

(7) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1995.

(8) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1995.

(9) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996.

(10) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1996.

(11) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996

(12) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1996.

64
<PAGE> 65

(13) Incorporated by reference to Registrant's Report on Form 8-K dated February
4, 1997.

(14) Incorporated by reference to Registrant's Report on Form 8-K dated March
31, 1997.

(15) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997.

(16) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1997.

(17) Incorporated by reference to Registrant's Report on Form S-4 dated July 1,
1997.

(18) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997.

(19) Incorporated by reference to Registrant's Report on Form S-3 dated October
31, 1997.

(20) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1997.

(21) Incorporated by reference to Registrant's Report on Form S-8 dated January
30, 1998.

(22) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998.

(23) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998.

(24) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998.

(25) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998.

(26) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q/A
for the quarter ended March 31, 1999.

(27) Incorporated by reference to Registrant's Report on Form 8-K dated June 22,
1999.

(28) Incorporated by reference to Registrant's Report on Form S-8 dated November
5, 1998.

<PAGE> 1

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

<TABLE>
<CAPTION>
STATE OR OTHER
SUBSIDIARY JURISDICTION OF OPERATION
---------- -------------------------
<S> <C>
LAM RESEARCH GMBH GERMANY
LAM RESEARCH CO., LTD. JAPAN (KANAGAWA)
LAM RESEARCH CO., LTD. JAPAN (SAITAMA)
LAM RESEARCH (SHANGHAI) CO., LTD CHINA
LAM RESEARCH LTD UNITED KINGDOM
LAM RESEARCH SARL FRANCE
LAM RESEARCH SINGAPORE PTE LTD SINGAPORE
LRC INTERNATIONAL FSC CORPORATION BARBADOS
LAM RESEARCH KOREA LIMITED KOREA
LAM RESEARCH S.R.L. ITALY
LAM RESEARCH (ISRAEL) LTD. ISRAEL
LAM RESEARCH CO., LTD. TAIWAN
LAM RESEARCH BV NETHERLANDS
MONKOWSKI-RHINE, INCORPORATED CALIFORNIA
LAM RESEARCH CO., LTD. THAILAND
ONTRAK SYSTEMS, INC. DELAWARE
</TABLE>

<PAGE> 1

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-39167 and Form S-4 No. 333-30545) and related Prospectus and
Registration Statements (Form S-8 Nos. 333-72751, 333-66833, 333-45265,
333-01011, 333-18115 and 333-32981) pertaining to the amended and restated 1996
Performance-Based Restricted Stock Plan, 1997 Incentive Stock Plan, 1984
Employee Stock Purchase Plan and 1999 Employee Stock Purchase Plan of Lam
Research Corporation of our report dated July 26, 1999, with respect to the
consolidated financial statements and schedule of Lam Research Corporation
included in the Annual Report (Form 10-K) for the year ended June 30, 1999.

/s/ ERNST & YOUNG LLP

San Jose, California
September 21, 1999

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-39167), Form S-8 (Nos. 333-72751, 333-66833,
333-45265, 333-01011, 333-18115 and 333-32981) and Form S-4 (No. 333-30545) of
Lam Research Corporation of our report dated July 24, 1997, except for Note 2,
which is dated as of August 5, 1997 relating to the consolidated financial
statements of OnTrak Systems, Inc., incorporated by reference in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

San Jose, California
September 21, 1999

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS, THE CONSOLIDATED BALANCE SHEET AND THE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 37,965
<SECURITIES> 273,836
<RECEIVABLES> 175,111
<ALLOWANCES> 4,580
<INVENTORY> 183,716
<CURRENT-ASSETS> 738,870
<PP&E> 229,441
<DEPRECIATION> 126,104
<TOTAL-ASSETS> 979,451
<CURRENT-LIABILITIES> 243,995
<BONDS> 310,000
0
0
<COMMON> 39
<OTHER-SE> 408,917
<TOTAL-LIABILITY-AND-EQUITY> 979,451
<SALES> 647,955
<TOTAL-REVENUES> 647,955
<CGS> 414,591
<TOTAL-COSTS> 761,156
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,168
<INCOME-PRETAX> (112,913)
<INCOME-TAX> 0
<INCOME-CONTINUING> (112,913)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (112,913)
<EPS-BASIC> (2.93)
<EPS-DILUTED> (2.93)

</TABLE>