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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(MARK ONE)

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

OR

LAM RESEARCH CORPORATION
(Exact name of Registrant as Specified in its Charter)

 

Delaware	94-2634797
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

4650 Cushing Parkway
Fremont, California    94538
(Address of Principal Executive Offices including Zip Code)

(510) 572-0200
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $0.001 PAR VALUE PER SHARE
(Title of Class)

      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 3, 2002, as reported by the Nasdaq National Market, was approximately $994,648,978. 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 3, 2002, the Registrant had outstanding 125,192,565 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

      Parts of Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on November 7, 2002 are incorporated by reference into Part III of this Form 10-K Report. (The Report of the Audit Committee, Compensation Committee and the Comparative Stock Performance graph of the Registrant's Proxy Statement are expressly not incorporated by reference herein.)

LAM RESEARCH CORPORATION

2002 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

Part I.		Page
Item 1.	Business	2
Item 2.	Properties	10
Item 3.	Legal Proceedings	10
Item 4.	Submission of Matters to a Vote of Security Holders	11
Part II.
Item 5.	Market for the Registrant's Common Stock and Related Stockholder Matters	11
Item 6.	Selected Consolidated Financial Data	12
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 7a.	Quantitative and Qualitative Disclosures About Market Risks	42
Item 8.	Consolidated Financial Statements and Supplementary Data	45
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	45
Part III.
Item 10.	Directors and Executive Officers of the Registrant	45
Item 11.	Executive Compensation	45
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	45
Item 13.	Certain Relationships and Related Transactions	45
Part IV.
Item 14.	Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K	46

Signatures		80
Certifications		82
Exhibits Index		85

Lam Research Corporation ("Lam"), a Delaware corporation, was founded in 1980, and is headquartered in Fremont, California. The mailing address for our principal executive offices is 4650 Cushing Parkway, Fremont, California 94538 and our telephone number is (510) 572-0200. Additional information about Lam is available on our website at http://www.lamrc.com. Our Form 10-K is available online at the Securities and Exchange Commission's website at http://www.sec.gov.

We design, manufacture, market and service semiconductor processing equipment used in the fabrication of integrated circuits. We are recognized as a leading supplier of such equipment to the worldwide semiconductor industry. Semiconductor wafers are subjected to a complex series of process steps that result in the simultaneous creation of many individual integrated circuits. Etch and Chemical Mechanical Planarization ("CMP") products selectively remove portions of various films from the wafer 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. Our etch systems employ Lam's TCPÒ high density and Dual Frequency Confined^TM (DFC^TM) medium density plasma sources to etch device features as small as 100 nanometers (nm), or smaller, in size.

CMP is used to planarize the surface of the wafer to prepare it for further processing. CMP is currently the planarization technology of choice for manufacturing integrated circuits with features 130-nm and smaller with multiple metal layers. Our Teresâ CMP integrated systems provide fully integrated polishing and cleaning solutions.

The etch process defines linewidths and other microscopic 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 surface to remove dielectric, metal, or polysilicon material and produce the finely delineated features and patterns of an integrated circuit.

Current generation advanced integrated circuit manufacturing requires etch systems that create features of 0.13 micron (130-nm), and for future semiconductor products below 100-nm. The trend toward feature sizes in the 100-nm range accompanies a transition from aluminum to copper conductive lines for faster device processing speeds. Subsequent feature size reductions below 100-nm will begin to integrate more fragile dielectric materials (low k and porous low k). In addition to continually shrinking feature sizes, advanced manufacturing facilities are now producing integrated circuits on 200-mm (8-inch) silicon wafers and transitioning to wafer diameters of 300-mm (12 inch). To accommodate these decreasing linewidths and increasing wafer diameters, semiconductor manufacturers will increasingly require more precise control over the etch process.

Several of our etch products are available as standalone systems or as clusters used on the Allianceâ or 2300^TM Etch multichamber platforms.

4520 Series Systems. The 4520 system processes wafer sizes up to 200 mm and linewidths as small as 180-nm.

4520XLE^TM System. The 4520XLEä system introduced Lam's proprietary Dual Frequency Confined ("DFC") plasma technology, which reduces plasma volume and sidewall polymer accumulation for cleaner, low-cost operation. Additionally, it offers a wider process window than the 4520 system with capabilities below 180-nm geometries.

Exelanâ , Exelanâ High Performance, Exelanâ HPT, and 2300 Exelanâ Systems. The Exelan family of products extends DFC technology to create smaller feature sizes, as well as, to mix sequential etch processes in the same chamber, which improves productivity and lowers cost of ownership. Exelan was introduced in July 1999 to define the structures required for manufacturing copper conductive lines in semiconductors. Exelan High Performance, introduced in 2001, extends Exelan's capabilities for etching newer low k insulating films. Exelan HPT, introduced early in 2002, targets sub-130-nm geometries.

The 2300 Exelanâ system addresses sub-90-nm requirements for 200-mm and 300-mm wafer sizes. Process chambers are upgradable from 200-mm to 300-mm. This capability, combined with an overall system footprint comparable to 200-mm systems, has allowed semiconductor manufacturers to develop processes using 200-mm wafers instead of more expensive 300-mm wafers, which can later be scaled up.

TCPÒ 9400 and TCPÒ 9600 Series and 2300 Versys^TM Systems. The first TCP products were introduced in late 1992. They utilize Lam's patented Transformer Coupled Plasmaä source technology, a high-density, low-pressure plasma source that can etch features well below 100-nm. For 200-mm wafer sizes, we offer the TCPÒ 9400SE II, TCPÒ 9400PTX, and TCPÒ 9400DFM addressing silicon etch applications and the TCPÒ 9600SE II, TCPÒ 9600PTX, and TCPÒ 9600DFM for metal etch applications. These systems are used in the production of a broad range of advanced logic and memory devices with feature sizes below 130-nm.

The 2300 Versys system for silicon and metal films scale TCP technology to address leading-edge device structure requirements. The 2300 Versys systems have the capability to process 200 or 300-mm wafer sizes. The newly introduced 2300 Versys Star^TM silicon etch system, in production at several customer sites, enables sequential step tuning of gas flow and wafer temperature. This capability is targeted at sub-90-nm, next-generation, critical dimension uniformity requirements.

CMP is a relatively new process step that was adopted by the semiconductor industry a few years ago. With increasingly smaller geometries, more layers are required to connect the individual devices of an integrated circuit. Each additional layer exaggerates the uneven topography of the previous ones, creating a depth of focus problem for subsequent photolithographic steps, which diminishes the precision of the linewidth dimensions. The CMP process removes excess material from the wafer surface by a combination of chemical and abrasive actions to provide a flatter surface improving photolithography results. Additionally, CMP processes are required for the creation of copper conductive lines. Removing the residue of the abrasive and chemical materials used in CMP requires special cleaning techniques following processing.

Teres^®. We offer 200-mm Teres CMP systems integrated with our Synergy Integra^TM cleaning systems and 300-mm systems integrated with a proprietary vertical brush cleaner. These tools target advanced copper/low k and shallow trench isolation (STI) applications. Both systems incorporate our Linear Planarization Technology^TM (LPT^TM) which uses a high-speed belt combined with patented air-bearing platen capability. These features achieve uniformity control across the wafer surface by changing the shape of the belt (pad) using air pressure. Independent zones can be adjusted to change the pad pressure instead of bending the wafer backside so that fragile 300-mm wafers and multi-layer low k film stacks are not unnecessarily stressed during processing.

DSS-200^®. The DSS-200 Series of cleaning systems simultaneously scrub both sides of the wafer with top and bottom side brushes.

Synergy^TM. Synergy products combine DSS technology and Chemical Mechanical Cleaning^TM (CMC^TM) technology to perform mechanical and chemical cleaning in a single-step process. The Synergy Integra incorporates Synergy's cleaning technology with a platform that can be integrated with other suppliers' polishing systems. Certain integrated systems in the industry are the result of partnerships between Lam and other polishing vendors.

"Lam", "2300", "4520XLe", "Versys", "Dual Frequency Confined", "DFC", "Linear Planarization Technology", "LPT", "Optimized Productivity Services", "Rainbow," "Synergy", "Synergy Integra", "Transformer Coupled Plasma", "Versys Star", and "XD Platen" are trademarks of Lam Research Corporation. "2300 Exelan", "DSS", "DSS-200", "Exelan", "Exelan High Performance", "Exelan HPT", "Lam Research", "Alliance" "TCP", "TCP 9600SE II", "TCP 9600PTX", "TCP 9600DFM", "TCP 9400SE II", "TCP 9400PTX", "TCP 9400DFM", and "Teres", are registered trademarks of Lam Research Corporation.

The market for semiconductor capital equipment is characterized by rapid technological change and product innovation. Our ability to maintain competitive advantage depends in part on our continued and timely development of new products and enhancements to existing products. Accordingly, we devote a significant portion of our personnel and financial resources to R&D programs and seek to maintain close relationships with our customers and be responsive to their wafer processing needs.

Our R&D expenses during fiscal 2002, 2001, and 2000 were $179.2 million, $227.2 million, and $176.9 million, respectively, and represented 19.0%, 15.0%, and 14.4% of total revenue, respectively. Expenditures are targeted at continued development of advanced etch, CMP and post-CMP Clean applications and enhancements to our existing products, including developing the technology necessary to support our customers' transition to smaller feature sizes, (90-nm, 65-nm), new materials, copper-based devices and 300-mm wafers.

We expect to continue to make substantial investments in R&D to meet our customers' product needs and enhance our competitive position.

Our marketing and sales efforts are focused on building long-term relationships with our customers. These efforts are supported by a team of product marketing professionals, sales personnel as well as equipment and process engineers that work closely with individual customers to develop solutions to their processing needs. After-sales support is an essential element of our marketing and sales programs. We maintain ongoing support relationships with our customers and have an extensive network of field service personnel in place throughout the United States, Europe, Japan, and Asia Pacific. We believe that comprehensive support programs and close working relationships with customers are essential to maintaining our competitiveness in the marketplace.

We have approximately 40 sales and support centers around the world, through which technical personnel sell and/or service our products. We provide our customers comprehensive warranty packages on all released products.

Export sales accounted for approximately 44%, 50%, and 52% of our net sales in fiscal 2002, 2001, and 2000, respectively. Export sales consist of sales from any of our U.S. operating subsidiaries to non-affiliated customers outside the U.S. As a result, a significant portion of our sales and operations will be subject to certain risks, including tariffs and other barriers, difficulties in staffing and managing non-U.S. subsidiary and branch operations, potentially adverse tax consequences, exchange rate fluctuations, and the potential for difficulty in accounts receivable collection. There can be no assurance that any of these factors will not have a material adverse effect on our business, financial position, and results of operations and cash flows. Refer to Note Q of our Consolidated Financial Statements, included in Item 8 herein, for further information concerning export sales.

Our customers include many of the world's leading semiconductor manufacturers. No individual customer accounted for more than 10% of our total revenue in fiscal 2002. In fiscal years 2001 and 2000, revenue from STMicroelectronics accounted for approximately 15% of total revenue.

A material reduction in orders from several of our larger customers, due to market or business conditions in the semiconductor industry could adversely affect our results of operations and projected financial conditions. Our 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. In fiscal 2000 and the first half of fiscal 2001, we experienced strong demand for our systems, driven by semiconductor manufacturers needs for additional capacity and new technology. Beginning in the second half of fiscal 2001, a slowing U.S. economy and worldwide decline in demand for integrated circuits resulted in excess capacity in the semiconductor industry and a severe contraction of the manufacturing equipment market. Our customers reduced their level of capital expenditures, which caused a steep decline in demand for our products in fiscal 2002. A modest recovery in our served market during the last half of fiscal 2002 supports our current outlook for slightly higher revenues in the first fiscal quarter of 2003, compared to the prior quarter.

Company backlog includes orders for systems, spares and services where written customer requests have been accepted and the delivery of products or provision of services is anticipated within the next 12 months. Our policy is to make adjustments to our backlog to reflect customer delivery date changes, as well as order cancellations. We schedule production of our systems based upon purchase orders in backlog and our customers' delivery requirements. Included in our systems backlog are orders for which written requests have been accepted, prices agreed and shipment dates assigned. The spares and services backlog includes customer orders for products that have not yet shipped and for services that have not yet been provided. Where specific customer service and spares contracts do not contain specific delivery dates, we use volume estimates at the contract price and over the contract period, not exceeding 12 months, in calculating backlog amounts.

As of June 30, 2002 and June 24, 2001, our backlog was approximately $287 million and $231 million, respectively. All orders for our products and services are subject to cancellation by our customers, generally, with limited penalties. Because some orders are received for shipments in the same quarter and because of possible customer changes in delivery dates and cancellations of orders, our backlog at any particular date is not necessarily indicative of actual revenues for succeeding periods.

Our manufacturing operations consist mainly of assembling and testing components and subassemblies that are then integrated into finished systems. Most of the assembly and testing of our products is conducted in cleanroom environments. Prior to shipping a completed system, customer representatives may perform acceptance tests at our facility. After passing these acceptance tests, the system is vacuum-bagged in a cleanroom environment and prepared for shipment.

During fiscal 2002, we entered into agreements with third parties to outsource certain elements of our manufacturing, production warehousing and logistics functions. We believe that entering into these outsourcing contracts will provide us more flexibility to scale our operations up and down in a more timely and cost effective manner, to respond to the cyclical nature of our business. We believe that we have selected reputable providers and are securing their performance on terms documented in written contracts. However, it is possible that one or more of these providers could fail to perform as we expect and such failure could have an adverse impact on our business. In addition, the expanded role of outsource providers has required us to implement changes to our existing operations and to adopt new procedures to effectively manage the performance of those outsource providers. We believe that we have implemented adequate supervision procedures. Even so, any delay or failure in the implementation of our operational changes and new procedures could adversely affect our customer relationships and have a negative effect on our operating results. Refer to Note U of our Consolidated Financial Statements, included in Item 8 herein, for further information concerning our outsourcing commitments.

Certain of the components and subassemblies included in our products are obtained from a single supplier or a limited group of suppliers. We believe that alternative sources could be obtained and qualified to supply these products. Nevertheless, a prolonged inability to obtain certain components could have an adverse short-term effect on our operating results and could unfavorably impact our customer relationships.

We are currently not aware of any pending notices of violation, fines, lawsuits or investigations arising from environmental matters that would have any material effect on our business. We are subject to a variety of governmental regulations related to the management of hazardous materials. 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. 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 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 environmental regulations. Our failure to control the use, sale, transport or disposal of hazardous substances could subject us to future liabilities.

As of September 3, 2002, we had approximately 2,500 regular full-time employees.

Each of our employees signs an agreement to maintain the confidentiality of our proprietary information, and most of our employees have stock or stock option arrangements with us that provide for the vesting of their options over several years.

In the semiconductor and semiconductor equipment industries, competition for highly skilled employees is intense. Our future success depends to a significant extent upon our continued ability to attract and retain qualified employees, particularly in R&D and customer support functions.

The semiconductor equipment industry is highly competitive throughout the world. Our management believes that to compete effectively, we must invest significant financial resources to offer a broad range of products, to maintain customer service and support centers worldwide, and to develop enhanced product capabilities. Certain of our existing and potential competitors have substantially greater financial resources and more extensive engineering, manufacturing, marketing, and customer service and support organizations. 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 price performance characteristics. If our competitors make acquisitions or enter into strategic relationships with leading semiconductor manufacturers covering etch, CMP or post-CMP clean products similar to those we sell, our ability to sell our products to those customers could be adversely affected. In addition, semiconductor manufacturers must make a substantial investment to qualify and integrate processing equipment into a semiconductor production line. As a result, once a semiconductor manufacturer has selected a particular supplier's tool set, the manufacturer generally maintains that selection for that specific production application. Accordingly, we may experience difficulty in selling to a given customer if that customer initially selects a competitor's system. There can be no assurance that in the future we will be able to compete successfully on a worldwide basis.

We face significant competitive factors in the equipment market, including quality, repeatability, process capability and flexibility, and overall cost of ownership, which may be affected by factors such as reliability, software automation, throughput, customer support and system price. Although we believe that we compete favorably with respect to many of these factors, our ability to succeed in the marketplace will depend upon our ability to introduce product enhancements and new products on a timely basis. There can be no assurance that we will continue to compete successfully in the future. Our primary competitors in the etch market are Applied Materials, Inc. and Tokyo Electron Limited. Our Teres CMP integrated polishing system faces significant competition from Applied Materials, Inc., Ebara Corp., and SpeedFam-IPEC, Inc. In CMP slurry removal and cleaning applications, our competitors include DaiNippon Screen Manufacturing Co. Ltd. and VERTEQ Inc.

Our policy is to seek patents on inventions relating to new or enhanced products and processes developed as part of our ongoing research, engineering, manufacturing, and support activities. We hold United States patents and non-U.S. patents covering various aspects of our products and processes. We believe that the duration of our patents generally exceeds the useful life of the technologies and processes disclosed and claimed therein. Our patents, which cover material aspects of our past and present core products, have current durations ranging from approximately seven to seventeen years. We believe that although the patents we own and may obtain in the future will be of value, they will not alone determine our success, which depends principally upon our engineering, marketing, service and manufacturing skills. However, in the absence of patent protection, we may be vulnerable to competitors who attempt to imitate our products, manufacturing techniques, and processes. In addition, other companies and inventors may receive patents that contain claims applicable or similar to our products and processes. The sale of products covered by patents of others could require licenses that may not be available on acceptable terms, or at all.

From time to time, we have received notices from third parties alleging infringement of such parties' patent or other intellectual property rights by our products. In such cases it is our policy to defend the claims, or if considered appropriate, negotiate licenses on commercially reasonable terms. However, no assurance can be given that we 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 our business and financial results. For further discussion of legal matters see Item 3 "Legal Proceedings" of this Form 10-K.

See the discussion of risks in the section of this report entitled Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations".

As of September 3, 2002, the executive officers of the Company, who are elected by and serve at the discretion of the Board of Directors, were as follows:

James W. Bagley became Chief Executive Officer and a Director of Lam upon consummation of the Merger with OnTrak Systems, Inc. in 1997. Effective September 1, 1998, Mr. Bagley was appointed Chairman of the Board of Lam. Mr. Bagley currently is a director of Teradyne, Inc., Micron Technology, Inc. and Wind River Systems, Inc. From June 1996 to August 1997, Mr. Bagley served as Chairman of the Board and Chief Executive Officer of OnTrak. He was formerly Chief Operating Officer and Vice Chairman of the Board of Applied Materials, Inc., where he also served in other senior executive positions during his 15 year tenure. 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 activities in that region. 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 and was appointed Chief Financial Officer in May 1997. She was formerly Vice President and Worldwide Operations Controller of Applied Materials, Inc., where she also served in several senior financial management positions since 1986. Prior to joining Applied Materials, Inc., Ms. Johnson held managerial and controller positions at Nanometrics, Inc., NCR Corporation, and Hewlett-Packard Company.

Nicolas J. Bright joined the Company in May 1998 as Vice President of Technology and Engineering. He currently holds the position of Senior Vice President, Global Products. Prior to joining Lam, Mr. Bright was employed by Applied Materials, Inc., most recently as Engineering Vice President. During his 16-year tenure at that firm, Mr. Bright held senior management engineering and technology positions in etch, ion implant and automation business units. He has also held positions at General Electric Co. in the United Kingdom and ASEA Brown Boveri in Sweden. Mr. Bright holds numerous patents in semiconductor manufacturing disciplines.

Steven A. Lindsay, Vice President of Global Field Operations and Corporate Marketing since November 2001, joined the Company in September 1999 as Vice President of Corporate Marketing. Previously, Mr. Lindsay was employed by Applied Materials, Inc. where during his 22-year tenure, he held numerous senior management positions in sales and marketing. Most recently, he held the position of President, Applied Materials North America and Group Vice President, Applied Materials, Inc. He has also held sales management positions at Fairchild Semiconductor and ITT Semiconductor.

Ernest Maddock, Vice President of the Customer Support Business Group, joined the Company in November 1997. Mr. Maddock's previously held positions include Managing Director, Global Logistics and Repair Services Operations, and Chief Financial Officer, Software Products Division, of NCR Corporation. He has also held a variety of executive roles in finance and operations in several industries ranging from commercial real estate to telecommunications.

Our executive offices and principal manufacturing and R&D facilities are located in Fremont, California, and are under operating leases expiring from 2002 to 2007. As a result of the restructuring of our operations, we have subleased some of our idle facilities. In addition, we lease facilities for our service, technical support and sales personnel throughout the United States, Europe, Japan, and Asia Pacific. Our fiscal 2002 rental payments for the space occupied during that period, aggregated approximately $16.8 million, net of sublease income of $3.9 million. Our facilities lease obligations are subject to periodic increases and we believe that our existing facilities are well maintained and in good operating condition.

On December 19, 2001, we signed a final settlement agreement with Varian Semiconductor Equipment Associates, Inc. ("Varian") in connection with the patent infringement litigation filed by Varian in October 1993. Under the terms of the settlement agreement, Varian granted us a nonexclusive license to the patents involved in the litigation. We agreed to pay Varian $20.0 million in cash and issued a warrant that entitles Varian to purchase 2,000,000 shares of Lam Common Stock at an exercise price of $21.30 per share. As part of the full and final settlement, Lam and Varian agreed to dismiss all pending claims and counterclaims relating to the litigation.

In September 1999, Tegal Corporation ("Tegal") brought suit against us seeking monetary damages and injunctive relief based on our alleged infringement of certain patents held by Tegal. Specifically, Tegal identified our 4520XLeä and Exelanâ products as infringing the patents Tegal is asserting. On our motion, this case was transferred to California and is now pending in the United States District Court for the Northern District of California. To date, however, there has been no determination as to the actual scope of those claims, or whether our 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 us reasonably to believe that any infringement, if found, or any damages, if awarded, could have a material adverse effect on our operating results or our financial position.

From time to time, we have received notices from third parties alleging infringement of such parties' patent or other intellectual property rights by our products. In such cases it is our policy to defend the claims, or if considered appropriate, negotiate licenses on commercially reasonable terms. However, no assurance can be given that in the future we will be able 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 our consolidated financial position or operating results.

Not applicable.

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

Item 6. Selected Consolidated Financial Data

                                                                       Year ended
                                               -----------------------------------------------------------
                                                June 30,    June 24,    June 25,    June 30,    June 30,
                                                  2002        2001        2000        1999        1998
                                               ----------- ----------- ----------- ----------- -----------
OPERATIONS:                                                 (in thousands, except per share data)
Total revenue (1)............................    $943,114  $1,519,789  $1,230,767    $647,955  $1,052,586
Gross margin.................................     266,089     653,479     541,855     233,364     374,142
Restructuring charge (recovery)  (2).........      44,850      12,780     (33,691)     53,372     116,925
Purchased technology for
  research and development...................          --       8,000       7,460       5,000      12,100
Merger costs.................................          --          --          --          --      17,685
Operating income (loss) .....................    (119,838)    186,532     229,842    (113,201)   (180,924)
Loss on equity derivative in ................
  Company stock (EITF 00-19).................      (8,236)         --          --          --          --
Income (loss) before cumulative effect
  of changes in accounting principles........     (90,051)    141,137     204,756    (112,913)   (144,599)
Cumulative effect of EITF 00-19 (3)............        --      33,074          --          --          --
Cumulative effect of SAB 101,
  net of tax  (4)............................          --    (122,105)         --          --          --
Net income (loss)............................     (90,051)     52,106     204,756    (112,913)   (144,599)

Net income (loss) per share:
Income (loss) before cumulative effect
 of changes in accounting principles
  Basic......................................      ($0.71)      $1.14       $1.69      ($0.98)     ($1.27)
  Diluted....................................      ($0.71)      $1.07       $1.53      ($0.98)     ($1.27)
Cumulative effect of EITF 00-19 (3)
  Basic......................................          --       $0.27          --          --          --
  Diluted....................................          --       $0.25          --          --          --
Cumulative effect of SAB 101,
  net of tax (4)
  Basic......................................          --      ($0.99)         --          --          --
  Diluted....................................          --      ($0.92)         --          --          --
Net Income (loss)
  Basic......................................      ($0.71)      $0.42       $1.69      ($0.98)     ($1.27)
  Diluted....................................      ($0.71)      $0.39       $1.53      ($0.98)     ($1.27)
Pro forma amounts with the change in
 accounting principle related to revenue
 recognition applied retroactively
 (unaudited):
          Total revenues (5).................          n/a  1,519,789   1,009,006     761,000           **
          Net income (loss) (5)..............          n/a    174,211     108,133     (66,277)          **
          Net income (loss) per share:
             Basic (5).......................          n/a      $1.41       $0.89      ($0.57)          **
             Diluted (5).....................          n/a      $1.32       $0.81      ($0.57)          **


BALANCE SHEET:
Working capital..............................    $757,880  $1,076,922    $733,579    $494,875    $603,580
Total assets.................................   1,632,291   1,871,775   1,244,837     979,451   1,150,772
Long-term obligations, less
  current portion............................     359,691     659,718     321,657     326,500     334,174

UNAUDITED SELECTED QUARTERLY FINANCIAL DATA

                                                      1ST             2ND             3RD             4TH
                                                --------------- --------------- --------------- ---------------
                                                                (in thousands, except per share data)
QUARTERLY FISCAL 2002
Total revenue................................         $339,580        $259,173        $164,105        $180,256
Gross margin.................................          118,111          26,648          54,987          66,343
Restructuring charges/(recoveries)(1)........           13,448          33,773              --          (2,371)
Operating income (loss)......................           10,268        (100,383)        (22,414)         (7,309)
Gain (loss) on equity derivative
  in Company stock...........................          (17,994)         18,884          16,828         (25,954)
Net income (loss)............................           (8,920)        (51,655)          1,569         (31,045)
Net income (loss) per share
  Basic......................................           ($0.07)         ($0.41)          $0.01          ($0.24)
  Diluted....................................           ($0.07)         ($0.41)          $0.01          ($0.24)
Price range per share........................     $14.73-$30.80   $15.37-$25.82   $20.52-$29.74   $16.63-$29.98


                                                      1ST             2ND             3RD             4TH
                                                --------------- --------------- --------------- ---------------
                                                 Restated (2)    Restated (2)    Restated (2)
QUARTERLY FISCAL 2001                                           (in thousands, except per share data)
Total revenue................................         $305,031        $384,097        $465,125        $365,536
Gross margin.................................          132,668         170,031         203,023         147,757
Restructuring charge (1).....................               --              --              --          12,780
Purchased technology for
  research and development...................               --           8,000              --              --
Operating Income.............................           23,701          41,313          88,617          32,901
Income before cumulative effect of
  changes in accounting principles...........           19,840          30,969          65,122          25,206
 Cumulative effect of EITF 00-19.............               --              --              --          33,074
 Cumulative effect of SAB 101, net of tax....         (122,105)             --              --              --
Net income (loss)............................         (102,265)         30,969          65,122          58,280
Net income (loss) per share:
Income before cumulative effect of
 changes in accounting principles
  Basic......................................            $0.16           $0.25           $0.53           $0.20
  Diluted....................................            $0.15           $0.24           $0.48           $0.19
Cumulative effect of EITF 00-19
  Basic......................................               --              --              --           $0.27
  Diluted....................................               --              --              --           $0.25
Cumulative effect of SAB 101, net of tax
  Basic......................................           ($0.98)             --              --              --
  Diluted....................................           ($0.91)             --              --              --
Net Income (loss)
  Basic......................................           ($0.82)          $0.25           $0.53           $0.47
  Diluted....................................           ($0.76)          $0.24           $0.48           $0.44
Price range per share........................    $19.63 - $41.69 $13.00 - $24.00 $14.06 - $30.13 $19.38 - $33.76

Our Common Stock is traded on the Nasdaq National Market under the 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 September 3, 2002, we had 605 stockholders of record.

No cash dividends have been declared, or are anticipated to be paid by us, as all available funds are maintained for employment in operations of the business and for capital expenditures. Additionally, certain of our bank agreements restrict the payment of dividends.

See Notes to Consolidated Financial Statements.

Lam Research Corporation is a leading supplier of technically complex thin film selective removal equipment used in the fabrication of integrated circuits. Our product offerings include single wafer plasma etch systems with a wide range of applications, CMP and post-CMP wafer cleaning systems and an array of services designed to optimize the utilization of these systems by our customers.

The semiconductor industry is cyclical in nature and has historically experienced periodic downturns and upturns. Over the past three business cycles, the severity of the semiconductor business cycle has increased. Demand for our equipment can fluctuate significantly from period to period as a result of various factors, including but not limited to, economic conditions, supply and demand for semiconductors, customer capacity requirements, and our ability to develop and market competitive new products. For these and other reasons, our results of operations for fiscal 2002, 2001, and 2000 may not necessarily be indicative of future operating results.

Our total revenues were $943.1 million, $1,519.8 million and $1,230.8 million for fiscal year 2002, 2001, and 2000, respectively. Total revenue of $1,519.8 million in fiscal 2001 reflected the adoption of SAB 101 as of the beginning of that year. The decrease in revenue for fiscal 2002 compared to fiscal 2001 is due to a worldwide decline in demand for integrated circuits which resulted in excess capacity in the semiconductor industry and a severe contraction in the semiconductor manufacturing equipment market. During the third quarter of fiscal 2001, we began to see signs of a downturn. Excess inventory of telecommunication products, diminished personal computer sales and a slowing economy caused semiconductor companies to sharply reduce capital expenditures and delay or cancel equipment orders. These order reductions had a negative impact on the level of our systems shipments starting in the June 2001 quarter. Revenues decreased across nearly all product lines in fiscal 2002. While the overall industry slowed, our customers continued to make selective purchases to support development of processes needed for smaller device feature sizes and for copper and new materials integration, as well as the transition to 300-mm size wafers.

Revenue in fiscal 2001 and fiscal 2000 reflected a period of expansion in our served markets driven by semiconductor manufacturers needs for increased capacity. In addition, our customers were transitioning to smaller geometries and new materials such as copper. Proportionally, more of our revenue growth can be attributed to our etch family of products.

We changed our revenue recognition policy in the fourth quarter of fiscal 2001, effective June 26, 2000, based on guidance provided in SEC Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." Refer to our discussion of "Critical Accounting Policies" for additional information about our revenue recognition policy.

Based on the guidance provided by SAB 101, we generally recognize new systems revenue upon customer acceptance. As a result, the fiscal period in which we are able to recognize systems revenue is subject to the length of time that our customers require to evaluate the performance of our equipment after shipment and installation. Systems revenue recognition generally occurs from two to seven months after the date of shipment.

Regional geographic breakdown of revenue is as follows:

                                               Year Ended
                                    --------------------------
                                    June 30, June 24, June 25,
                                      2002     2001     2000
                                    -------- -------- --------
North America......................      29%      30%      29%
Europe.............................      21%      28%      28%
Asia Pacific.......................      35%      33%      31%
Japan..............................      15%       9%      12%

A modest recovery in demand for wafer fabrication equipment during the last half of fiscal 2002 supports our current outlook for slightly higher revenues in the first fiscal quarter, 2003, compared to the prior quarter, as current manufacturing activity by our customers has improved.

Gross margin was $266.1 million, $653.5 million and $541.9 million in fiscal year 2002, 2001, and 2000, respectively. As a percentage of total revenue, gross margins were 28.2%, 43.0% and 44.0% in fiscal year 2002, 2001, and 2000, respectively. The decrease in gross margin percentage in fiscal 2002 compared to fiscal 2001 stems from unabsorbed manufacturing overhead costs due to lower production volumes. Additionally inventory write-downs of approximately $24.1 million and a patent litigation settlement charge of $38.8 million, in the second fiscal quarter of 2002, and inventory related net restructuring charges, after recoveries, of $5.9 million unfavorably impacted gross margins in fiscal 2002. The decrease in our gross margin percentage in fiscal 2001 compared to fiscal 2000 resulted primarily from unabsorbed manufacturing overhead costs in the second half of fiscal 2001, due to the industry slowdown.

During the last quarter of fiscal 2002, we experienced a favorable gross margin progression due to better capacity utilization of both our factory and field service resources and from the impact of cost reduction programs. Excluding restructuring reserve recovery, gross margin for the June 2002 quarter was 35.9% of total revenue, compared to 33.5% of total revenue in the March 2002 quarter. Our current outlook is for gross margin as a percent of revenue to rise sequentially in the first fiscal quarter, 2003, due to higher revenues and increased production efficiencies.

 R&D expenses were $179.2 million, $227.2 million and $176.9 million in fiscal year 2002, 2001, and 2000, respectively. As a percentage of total revenue, R&D expenses were 19.0%, 15.0% and 14.4% for fiscal year 2002, 2001 and 2000, respectively. The increase in R&D expenses as a percentage of revenues in fiscal 2002 compared to fiscal 2001 is primarily the result of lower sales volume. The decrease in R&D expenses in absolute dollars in fiscal 2002 compared to fiscal 2001 results from controlled spending on general R&D programs, consistent with the downturn in the business cycle.

The increase in R&D expenses in fiscal 2001 compared to fiscal 2000 was driven by expanded levels of investment in advanced etch and CMP/Clean applications, including developing the technology necessary to support smaller geometries, new insulating materials, copper-based devices and 300 mm size wafers.

We believe that in order to remain competitive, we must continue to invest substantially in R&D. Accordingly, we devote a significant portion of our personnel and financial resources to these programs. We expect to continue making sizeable investments in advanced etch and CMP/Clean applications and in enhancing our existing products during fiscal 2003.

Selling, general and administrative ("SG&A") expenses (excluding restructuring charges/recoveries) were $161.9 million, $218.9 million and $161.3 million in fiscal year 2002, 2001, and 2000, respectively. As a percentage of total revenue, SG&A expenses (excluding restructuring charges/recoveries) were 17.2%, 14.4% and 13.1% in fiscal 2002, 2001, and 2000, respectively. The decrease in absolute dollars in fiscal 2002 compared to fiscal 2001 is largely due to manpower reductions, lower incentive payments to employees, shutdown days and other cost reduction programs. The increase in SG&A expenses as a percentage of revenue in fiscal 2002, is primarily the result of lower sales volume. The increase in absolute dollars for fiscal 2001 compared to fiscal 2000 was driven by infrastructure expansion needed to sustain higher sales, marketing, and administrative support for our expanding business in the first half of fiscal 2001. SG&A increased as a percent of revenue in fiscal 2001, largely due to the decline in sequential quarterly revenue starting in the fourth quarter of fiscal 2001.

We have developed restructuring plans in response to changes in business outlook with the intent to align our cost structure with anticipated revenue levels. Expenses have been incurred associated with cost containment activities including downsizing and reorganizations and business exit activities related to discontinued product lines. Accounting for restructuring activities requires an evaluation of formally agreed upon and approved plans. Although management makes every attempt to consolidate all known restructuring activities into one plan, the nature of our extreme cycles and rapidly changing forecasting environment places practical limitations on achieving this objective. The recognition of a restructuring event does not necessarily exclude similar but unrelated actions in future periods.

In April 2001, we announced plans to reduce our global workforce up to 15% during the fourth quarter of fiscal 2001 ("the June 2001 Plan"). The reduction in force was driven by the then anticipated level of decline in our revenues due to the forecasted contraction of our served market from calendar year 2000 levels. During the fourth quarter of fiscal 2001, the June 2001 Plan was approved by the appropriate level of management necessary to commit to the specific actions of the plan. We began implementing the announced restructuring plan and reduced our workforce by approximately 11% prior to June 24, 2001. We recorded a restructuring charge of $16.8 million which included severance and benefits for involuntarily terminated employees, charges for remaining lease payments and leasehold improvements on vacated facilities, and charges for inventories of an etch product line that has been discontinued. In addition, we consolidated our Fremont manufacturing facilities and wrote-off the carrying cost of abandoned facility assets. During the fourth quarter of fiscal 2002, we determined that outplacement services guaranteed by us for terminated employees and other employee benefit costs were not going to be fully utilized and therefore recovered $1.4 million of restructuring charges recorded in the fourth quarter of fiscal 2001. We also recovered $0.9 million from certain of our etch product line inventory, previously segregated and written-off.

Below is a table summarizing activity relating to the June 2001 Plan:

                                              LEASE
                                 SEVERANCE   PAYMENTS   ABANDONED                OTHER
                                    AND     ON VACATED    FIXED    DISCONTINUED   EXIT
                                  BENEFITS  FACILITIES    ASSETS   INVENTORY     COSTS      TOTAL
                                 ---------- ----------  ---------- ----------  ---------- ---------
                                                                 (in thousands)
Fiscal year 2001 provision......$    8,282 $    1,312 $     3,036 $    3,732  $      407 $  16,769
Cash payments...................    (4,067)        --          --         --          --    (4,067)
Non-cash charges................        --         --      (3,036)    (3,732)        (10)   (6,778)
                                 ---------- ----------  ---------- ----------  ---------- ---------
Balance at June 24, 2001........     4,215      1,312          --         --         397     5,924
                                 ---------- ----------  ---------- ----------  ---------- ---------
Recovery of assets...............       --         --          --        889          --       889
Cash payments....................   (1,507)      (706)         --         --         (27)   (2,240)
Non-cash charges.................     (819)        --          --         --        (322)   (1,141)
Reversal of restructuring charge.   (1,359)        --          --       (889)         --    (2,248)
                                 ---------- ----------  ---------- ----------  ---------- ---------
Balance at June 30, 2002........$      530 $      606  $       -- $       --  $       48 $   1,184
                                 ========== ========== ======================  ========== =========

Severance and Benefits relates to the salary and fringe benefit expense for involuntarily terminated employees. Prior to the date of the financial statements, management, with the proper level of authority, approved and committed to the plan of termination and determined the benefits the employees being terminated would receive and communicated the severance package to employees in enough detail that they could determine their type and amount of benefit. The termination of the impacted employees occurred as soon as practical after the plan of restructuring was announced. The majority of the Severance and Benefits reserve balance of $0.5 million as of June 30, 2002 is anticipated to be utilized by December 2002.

Lease Payments on Vacated Facilities relates to the remainder of the lease term after the abandonment of certain facilities currently under long-term operating lease agreements. We estimated, given the prevailing real estate market conditions, that it would take approximately 24 months to sub-lease our vacated buildings in Fremont, California. When applicable, anticipated future sublease income relating to vacated buildings has been offset against the charge for the remaining lease payments.

We wrote-off all leasehold improvements relating to the vacated buildings of approximately $1.5 million, as these items will have no future economic benefit and have been abandoned. In addition, certain demonstration equipment and etch product line inventory were abandoned and written-off.

Other exit costs relate to customer accommodations for the discontinued product line and expenses associated with capital improvements to the vacated facilities.

Our business outlook in mid to late summer of 2001, indicated further deterioration in semiconductor sales from the fourth quarter of fiscal 2001, resulting in a lower outlook for the wafer fabrication equipment market and therefore in our revenues. Consequently, in August 2001, we announced a new plan ("the September 2001 Plan") to further reduce our fixed cost infrastructure, including an approximate 10% reduction-in-force. During the first quarter of fiscal 2002, the September 2001 Plan was approved by the appropriate level of management necessary to commit to the specific actions of the plan. We began implementing the announced restructuring activities and reduced our workforce by approximately 550 employees, worldwide prior to September 23, 2001. We recorded a restructuring charge of $21.0 million which included severance and benefits for involuntarily terminated employees, write-offs for remaining lease payments and leasehold improvements on vacated facilities, and charges for inventories of selected, older etch product lines that were discontinued. During the fourth quarter of fiscal 2002, we determined that outplacement services guaranteed by us for terminated employees and other employee benefit costs were not going to be fully utilized and therefore recovered $0.7 million of restructuring charges recorded in the first quarter of fiscal 2002. We also recovered $0.8 million from certain of our older etch inventories, previously segregated and written-off and $0.3 million from facilities leases.

Below is a table summarizing activity relating to the September 2001 Plan:

                                              LEASE
                                 SEVERANCE   PAYMENTS   ABANDONED
                                    AND     ON VACATED    FIXED    DISCONTINUED
                                  BENEFITS  FACILITIES    ASSETS   INVENTORY     TOTAL
                                 ---------- ----------  ---------- ----------  ----------
                                                     (in thousands)
Fiscal year 2002 provision......$   10,767 $    1,746 $       935 $    7,600  $   21,048
Recovery of assets...............       --         --          --        785         785
Cash payments....................   (8,135)      (762)         --         --      (8,897)
Non-cash charges................    (1,035)        --        (935)    (7,600)     (9,570)
Reversal of restructuring charges     (695)      (317)                  (785)     (1,797)
                                 ---------- ----------  ---------- ----------  ----------
Balance at June 30, 2002........$      902 $      667  $       -- $       --  $    1,569
                                 ========== ========== =========== ==========  ==========

Severance and Benefits relates to the salary and fringe benefit expense for involuntarily terminated employees. Prior to September 23, 2001, management, with the proper level of authority, approved and committed to the plan of termination, determined the benefits the terminated employees would receive and communicated the severance package to employees in enough detail that they could determine their type and amount of benefit. The termination of the impacted employees occurred as soon as practical after the plan of restructuring was announced. The majority of the Severance and Benefits reserve balance of $0.9 million as of June 30, 2002 is anticipated to be utilized by December 2002.

Lease Payments on Vacated Facilities relates to 24 months of rent (or the remainder of the lease term, if less) after the abandonment of certain facilities currently under long-term operating lease agreements. We estimated, given prevailing real estate market conditions, that it would take approximately 24 months to sublease the vacated facilities in Fremont, California.

We wrote-off leasehold improvements relating to the vacated buildings of approximately $0.9 million, as these items will have no future economic benefit and have been abandoned. Additionally, we exited selected, older etch product lines and wrote-off the related discontinued manufacturing inventory.

The continued and severe degradation in the wafer fabrication equipment market in late calendar year 2001 and its impact on our near-term financial forecast necessitated another restructuring plan ("the December 2001 Plan"). In December 2001, we publicly announced our intention to reduce global employment by approximately 12% and further consolidate our facilities. During the second fiscal quarter, the December 2001 Plan was approved by the appropriate level of management necessary to commit to the specific actions of the plan. We began implementing the announced restructuring activities and reduction of our workforce by approximately 470 employees, worldwide prior to December 30, 2001. We recorded a restructuring charge of $33.8 million relating to severance and benefits for involuntarily terminated employees, charges for remaining lease payments on vacated facilities and the write-off of related leasehold improvements and fixed assets.

Below is a table summarizing activity relating to the December 2001 Plan:

                                              LEASE
                                 SEVERANCE   PAYMENTS   ABANDONED
                                    AND     ON VACATED    FIXED
                                  BENEFITS  FACILITIES    ASSETS     TOTAL
                                 ---------- ----------  ---------- ----------
                                              (in thousands)
Fiscal year 2002 provision......$   14,208 $    9,637  $    9,928 $   33,773
Cash payments...................    (9,122)      (386)         --     (9,508)
Non-cash charges................    (1,529)      (127)     (9,928)   (11,584)
                                 ---------- ----------  ---------- ----------
Balance at June 30, 2002........$    3,557 $    9,124  $       -- $   12,681
                                 ========== ========== =========== ==========

Severance and Benefits relates to the salary and fringe benefit expense for involuntarily terminated employees. Prior to December 30, 2001, management, with the proper level of authority, approved and committed to the plan of termination, determined the benefits the terminated employees would receive and communicated the severance package to employees in enough detail that they could determine their type and amount of benefit. The termination of the impacted employees occurred as soon as practical after the plan of restructuring was announced. The majority of the Severance and Benefits reserve balance of $3.6 million as of June 30, 2002 is anticipated to be utilized by December 2002.

Lease Payments on Vacated Facilities relates to 24 months of rent (or the remainder of the lease term, if less) after the abandonment of certain facilities currently under long-term operating lease agreements. We estimated, given prevailing real estate market conditions, that it would take approximately 24 months to sublease the vacated facilities in Fremont, California.

We wrote off leasehold improvements relating to the vacated buildings of approximately $8.8 million, as these items will have no future economic benefit and have been abandoned. Additionally, certain fixed assets of approximately $1.1 million associated with these facilities had no future economic benefit and have been abandoned and written-off.

As summarized above, restructuring activities have had a significant impact on our operating results. As discussed under "Recent Accounting Pronouncements" below, the Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" (FAS 146). Had FAS 146 been applicable when we undertook our restructuring activities, the timing and amount of the charges recognized may have been different than those reported. FAS 146 is applicable to restructuring activities initiated on or after December 31, 2002 with early adoption encouraged. FAS 146 does not apply to our previous restructuring activities.

During the second quarter of fiscal 2002, we determined that the carrying value of certain laboratory and demonstration equipment to be disposed of exceeded its fair value less cost to sell. Fair value was assessed using the market values of similar used laboratory and demonstration equipment. Impairment occurred due to rapid technological changes brought about by the semiconductor industry's move to copper and 300-mm applications. In accordance with FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", we recorded a pre-tax impairment charge of $9.5 million. A $5.3 million write-down to fair value of certain laboratory tools is included in R&D expenses and $4.2 million of write-downs to fair value of demonstration equipment are included in SG&A expenses. Remaining equipment with carrying values totaling $1.1 million is reviewed quarterly for incremental impairment and is anticipated to be disposed of within the next 12 months.

On December 19, 2001, we signed a final settlement agreement with Varian Semiconductor Equipment Associates, Inc. in connection with the patent infringement litigation filed by Varian in October 1993. Under the terms of the settlement agreement, Varian granted us a nonexclusive license to the patents involved in the litigation. We agreed to pay Varian $20.0 million in cash ($5.0 million in December 2001 and the balance of $15.0 million to be paid quarterly over the next 3 years) and issued a warrant with a fair value of $21.5 million that entitled Varian to purchase 2,000,000 shares of our Common Stock at an exercise price of $21.30 per share. As part of the full and final settlement, Varian and Lam agreed to dismiss all pending claims and counterclaims relating to the litigation.

In connection with the settlement, we recorded a charge of $38.8 million in the quarter ended December 30, 2001, which represents approximately 93% of the total value of the settlement. The remaining portion of the total value of the settlement relating to the future licensed use of the patents, $2.7 million, is being amortized ratably over 10 quarters.

The imputed value of the warrant was determined using the Black-Scholes valuation model. The key assumptions used in the valuation model were an expected life of 4 years, anticipated stock price volatility of 61% and a risk-free interest rate of 4.5%.

During the second quarter of fiscal 2001, we made an equity investment in, and purchased a portfolio of CMP intellectual property rights and research and development technology from Strasbaugh. We recognized a one-time charge to income of $8.0 million for the purchase of in-process research and development technology and recorded a $6.0 million investment in preferred stock and intangible assets. Our equity interest in Strasbaugh, representing approximately 20% of Strasbaugh's total capital stock, is accounted for under the equity method and the intellectual property rights are being amortized ratably over five years.

Based on our analysis of Strasbaugh's current and expected financial performance, we determined in the third quarter of fiscal 2002 that the carrying value of our equity investment had experienced an other-than-temporary impairment and recorded a $2.0 million charge in other expense to write down the investment to its estimated fair value.

Our equity in the income (loss) from Strasbaugh as of the end of fiscal 2002 and fiscal 2001 was ($0.8) million and $0.7 million, respectively. The income (loss) has not been material, and, therefore, has not been itemized in other income, net, on the accompanying statements of operations.

During the second quarter of fiscal 2000, we purchased intellectual property rights related to the semiconductor equipment industry from Oliver Design, Inc ("Oliver"). We recognized an expense for the purchase of research and development technology of approximately $7.5 million and capitalized $1.5 million related to acquired patents, which are being amortized ratably over their estimated useful life of five years. The technology is being used in a next generation product development project and has no future alternative use.

Other income (expense), net, was ($8.2) million, $15.1 million and $7.0 million in fiscal year 2002, 2001, and 2000, respectively. The increase in net other expense in fiscal 2002 compared to fiscal 2001 was driven by lower yields on investments due to declining interest rates in fiscal 2002, the non-taxable loss on our equity derivatives indexed to Lam stock, and the decrease in foreign currency exchange gains due to lower foreign currency balances. The increase in fiscal 2001 compared to fiscal 2000 was driven by higher interest income on a substantially larger average investment portfolio.

During the fourth quarter of fiscal 2001, we applied Emerging Issues Task Force ("EITF") Issue No. 00-19, in accounting for our equity derivatives indexed to our own stock. In accordance with EITF 00-19, we recorded a cumulative effect adjustment for the change in accounting principle to recognize the fair value of certain put and call options indexed to our own stock as an asset. The cumulative change was not recorded net of tax because the option settlement, if any, will be non-taxable. We adjust the carrying value of these derivative instruments to their fair value at the end of each reporting period, with the change in fair value being recorded as a gain or lose in our statement of operations. For additional information about our accounting for these equity derivatives, refer to our discussion of Investments in Derivative Financial Instruments Indexed to Lam Research Corporation Stock, included in Critical Accounting Polices in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

Based on a June 28, 2002 stock price of $17.98, the fair value of the equity derivatives was $24.8 million, which resulted in a non-taxable loss of $8.2 million for fiscal 2002.

Our effective annual income tax rate was 31.7%, excluding the loss on equity derivative contracts indexed to our stock in fiscal year 2002, and 30.0% and 13.5% in fiscal years 2001 and 2000, respectively. The cumulative loss from the change in fair value of our equity derivatives indexed to our stock is non-taxable. The fiscal year 2000 rate reflected the benefit of net operating losses and research and development tax credits carried over from prior periods. During the first quarter of fiscal 2002, income tax benefit was recorded using a 10.0% tax rate estimate; income tax benefit in subsequent fiscal 2002 quarters was recorded using a 30.0% tax benefit rate estimate. The increase in the tax benefit rate results from the tax benefit of the R&D credit being proportionately greater in subsequent quarters due to lower projected pretax income and our continued and substantial investment in engineering and development programs qualifying for R&D tax benefits.

We had gross deferred tax assets arising from non-deductible temporary differences and tax credit carryforwards of $290.4 million, $244.1 million and $202.5 million in fiscal year 2002, 2001 and 2000, respectively. The gross deferred tax assets are offset by valuation allowances of $52.2 million, $31.2 million and $94.7 million and deferred tax liabilities of $26.7 million, $35.6 million and $19.0 million in fiscal year 2002, 2001 and 2000, respectively. Realization of the majority of the net deferred tax assets is dependent on our ability to generate future taxable income and we believe that it is more likely than not that the assets will be realized based on forecasted profitability. However, there can be no assurance that we will meet our expectations of future income. We evaluate the realizability of the deferred tax assets quarterly and assess the need for additional valuation allowances, if any.

We define aspects of our business as either core or critical capabilities and those that are in support of these capabilities. We have identified as critical for success in the marketplace our ability to develop leading edge products, to market and sell what we develop and to service and support directly with our customers, what we sell. Most other activities in the company are in support of product development, marketing and selling and customer service. Consequently, over the last 15 months, we began implementation of an outsourcing strategy to obtain certain support services from third parties. Accordingly, during fiscal 2002, we entered into agreements to outsource elements of our manufacturing, warehousing, facilities management and information technology functions. We believe that entering into these outsourcing programs may provide us more flexibility to scale our operations up and down, in a more timely and cost effective manner to respond to requirements generated by the cyclical nature of our business. Implementing this outsourcing strategy is intended to lead to proportionally more of our employees supporting core activities and decrease our reliance on temporary workforce during peak business cycles as well as reduce the fluctuation in employment that occurs due to the cyclical nature of our business.

During fiscal year 2001, our President and Chief Operating Officer signed a promissory note with Lam entitling him to borrow up to $1.0 million dollars at 6.75% simple interest. At June 30, 2002, the entire principal amount, $1.0 million, and accrued interest was outstanding. The loan is secured by a mortgage on his personal residence and is repayable, in full, together with accrued interest, at any time, but no later than May 8, 2005.

The 5% Convertible Subordinated Notes, ("5% Notes"), matured on September 2, 2002 and were repaid in full. This resulted in a cash outlay of approximately $309.8 million.

At the end of August 2002, we repurchased approximately 3.5 million shares of our common stock with a market value of $47.6 million ($13.60 per share) by physically settling certain put and call option contracts (equity derivative contracts), which gave us the right to repurchase the shares for $39.1 million ($11.19 per share) from independent third parties. By settling the equity derivative contracts, we were able to repurchase the shares at a discount of $8.4 million ($2.41 per share) from their fair market value. As a result of this transaction, we recognized an increase in treasury stock of $47.6 million. From June 30, 2002 through the settlement date, the fair value of the equity derivative contracts declined by $16.4 million to $8.4 million as a result of changes in the fair value of our common stock over the same period. This reduction in the equity derivative contracts fair value will be included in our earnings for the quarter ending September 29, 2002.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States, 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.

Revenue Recognition: We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, collectibility is reasonably assured, and we have completed our system installation obligations and received customer acceptance, or are otherwise released from our installation or customer acceptance obligations. In the event terms of the sale provide for a lapsing customer acceptance period, we recognize revenue upon the expiration of the lapsing acceptance period or customer acceptance whichever occurs first. In circumstances where the practices of a customer do not provide for a written acceptance and in addition, the terms of sale do not include a lapsing acceptance provision, we will recognize revenue where it can be reliably demonstrated that the delivered system meets all of the customer specifications. Revenue related to spare parts sales, system upgrade kits and remanufactured systems is generally recognized upon shipment. Revenue related to services is generally recognized upon performance of the services requested by a customer order. Revenue for extended maintenance service contracts with a term more than one month is recognized on a straight-line basis over the term of the contract.

We changed our revenue recognition policy in the fourth quarter of fiscal 2001, effective June 26, 2000, based on guidance provided in Securities and Exchange Commission ("SEC"), Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." Prior to fiscal year 2001, the Company's revenue recognition policy was generally to recognize revenue for sales of equipment at the time of shipment.

As a result of our change in revenue recognition policy in the fourth quarter of fiscal 2001, and the cumulative effect of the change on our financial statements, the deferred revenue balance upon adopton of SAB 101, as of June 26, 2000, was $433.0 million, consisting of equipment that was shipped but had not yet been accepted as of June 25, 2000. Of this amount, we recognized revenue of $29.1 million and $401.0 million during fiscal 2002 and 2001, respectively. At June 30, 2002, the deferred revenue balance, including $2.9 million attributable to the cumulative effect adjustment, was approximately $121.2 million.

Investments in Derivative Financial Instruments Indexed to Lam Research Corporation Stock: In November 2000, the FASB's Emerging Issues Task Force ("EITF") reached final consensus on EITF Issue No. 00-19, "Determination of Whether Share Settlement is Within the Control of the Issuer", for the purposes of applying EITF Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" ("EITF 00-19"). EITF 96-13 addresses accounting for equity derivative contracts indexed to, and potentially settled in, a company's own stock ("equity derivatives") by providing guidance for distinguishing between permanent equity, temporary equity and assets and liabilities. Under EITF 00-19, equity derivatives that were issued prior to September 20, 2000, and classified as permanent equity must meet certain criteria or be re-classified as assets or liabilities. To qualify as permanent equity, all the following criteria must be met: the equity derivative contract must permit the company to settle in unregistered shares, the company must have sufficient authorized but unissued shares available to settle the contract, the contract must contain an explicit limit on the number of shares to be delivered in a share settlement, there can be no requirement in the contract to post collateral, there can be no "make whole" provisions in the contract that require cash settlement and there can be no provisions in the contract that indicate the counterparty has rights that rank higher than those of a common shareholder. Equity derivative contracts accounted for as permanent equity are recorded at their initial fair value, and subsequent changes in fair value are not recognized unless a change in the contract classification occurs. Equity derivative contracts not qualifying for permanent equity accounting are recorded at fair value as an asset or liability with subsequent changes in fair value recognized through the statement of operations.

Lam equity derivatives include certain put and call options indexed to our own stock. Application of EITF 00-19 requires these instruments be recorded at their fair value at the end of each reporting period, the change in fair value being recorded as a gain or loss on our statement of operations. Our equity derivatives are collateralized by restricted cash of $9.1 million and may not be settled in unregistered shares.

In accordance with EITF 00-19, in the fourth quarter of fiscal 2001, we recorded a cumulative effect adjustment for the change in accounting principle to recognize the fair value of these put and call options indexed to our own stock as an asset. The June 24, 2001 cumulative effect adjustment, a gain of $33.1 million ($0.25 per diluted share), was based on a June 24, 2001 stock price of $28.50. The cumulative change in fair value was not recorded net of tax because the option settlement will be non-taxable.

Based on a June 28, 2002, stock price of $17.98, the $24.8 million fair value of the equity derivatives resulted in a non-taxable loss of $8.2 million for the year ended June 30, 2002. The loss is recorded in Other Income (Expense)in the June 2002 Condensed Consolidated Statement of Operations. The fair value of the options is recorded in Other Current Assets.

See "Subsequent Events" included herein Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations"for information concerning the settlement of our equity derivatives.

Refer to Item 7A, "Qualitative and Quantitative Disclosures about Market Risk" for additional information about our investments in equity derivative financial instruments.

Inventory Valuation: Inventories are stated at the lower of cost (first-in, first-out method) or market using standard costs, which approximate actual cost. We maintain a perpetual inventory system and continuously record the quantity on-hand and standard cost for each product, including purchased components, subassemblies and finished goods. We maintain the integrity of perpetual inventory records through periodic physical counts of quantities on hand. Finished goods are reported as inventories until the point of title transfer to the customer. Generally, title transfer is documented in the terms of sale. When the terms of sale do not specify when title transfers, we assume title transfers when we complete physical delivery of the products.

Standard costs are generally re-assessed at least annually and reflect achievable acquisition costs, generally the most recent vendor contract prices for purchased parts and currently achievable assembly and test labor and overhead for manufactured products. Manufacturing labor and overhead costs are attributed to individual product standard costs at a level planned to fully absorb spending at average utilization volumes. All intercompany profits related to the sale and purchase of inventory between our legal entities are eliminated from our consolidated financial statements.

The assembly outsourcing initiative has and will continue to alter the composition of reported cost of sales. Over time, proportionately more costs will comprise purchased materials and less will represent manufacturing labor and overhead, reflecting the substitution of our assembly activities with the purchase of completed modules and integrated units from new outsource assembly vendors.

Management evaluates the need to record adjustments for impairment of inventory at least quarterly. Our policy is to assess the valuation of all inventories, including manufacturing raw materials, work-in-process, finished goods and spare parts in each reporting period. Obsolete inventory or inventory in excess of management's estimated usage requirements over the next 12 to 36 months based on estimated customer product orders is written-down to its estimated market value, if less than cost. Inherent in the estimates of market value are management's estimates related to our future manufacturing schedules, customer demand, technological and or market obsolescence, general semiconductor market conditions, possible alternative uses and ultimate realization of excess inventory. If future customer demand or market conditions are less favorable than our projections, additional inventory write-downs may be required, and would be reflected in cost of sales in the period the revision is made.

Installation and Warranty: Typically, part of marketing and selling semiconductor capital equipment includes installing and providing parts and service warranty to customers as part of the overall price of the system. We generally record actual labor and material expenses for installation activities to cost of sales upon equipment acceptance and revenue recognition. We also provide a contractual performance warranty on our systems, the period of which runs concurrent with the system installation process, generally 12 months from system acceptance, not to exceed 14 months from the date of shipment of the system to the customer. We record a provision for estimated warranty expenses to cost of sales for each system upon revenue recognition. The amount recorded is based on actual historical warranty spending activity by type of system, customer, and geographic region, modified for any known differences such as a new, simpler installation process or the impact of system reliability improvements. Where customer and system specific installation and warranty reserves are established, all actual parts and labor costs incurred in subsequent periods are charged to those established reserves through the application of detailed project record keeping.

Actual warranty expenses incurred on a system-by-system basis, and overall, may differ from our original estimates. While we consistently monitor the performance and cost of warranty activities, if actual costs incurred are different than our estimates, we may recognize adjustments to provisions in the period in which those differences arise or are identified. Accordingly, actual costs that exceed the estimates are expensed as incurred and at the same time, additional probable and estimable liabilities recorded.

We do not maintain general or unspecified provisions or reserves; all warranty reserves are related to specific systems. Historically, including the most recent 12 months ended June 30 2002, all warranty obligations have been determined with reasonable estimates.

In addition to the provision of standard warranties, the company provides customer paid extended warranty services. Revenues for extended maintenance and warranty services, with a term of more than one month, are recognized on a prorated straight-line basis over the term of the contract. Related costs are recorded either as incurred or when related liabilities are determined to be probable and estimable.

At June 30, 2002, warranty reserves were $15.5 million, compared to $28.3 million at June 24, 2001.

Employee Stock Purchase Plan and Employee Stock Option Plans: We account for our stock purchase plan and stock option plans under the provisions of Accounting Principles Board Opinion No. 25 "Accounting For Stock Issued to Employees" ("APB 25") and make pro forma footnote disclosures as though the fair value method under Statement of Financial Accounting Standard No. 123, "Accounting For Stock-Based Compensation" ("FAS 123"), were followed. Our employee stock purchase plan is a non-compensatory plan and our stock option plans are accounted for using the intrinsic value method under the provisions of APB 25.

Pro forma net income (loss) and net income (loss) per share disclosed in the footnotes to our consolidated financial statements are 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 expected stock price volatility and the estimated life of each option. Because our 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 measure of the fair value of our stock-based awards to employees.

Deferred Income Taxes: We record a valuation allowance to reduce our deferred taxes to the amount that is more likely than not to be realized. We have considered future estimated taxable income and feasible tax planning strategies in determining the need for a valuation allowance. In the event that we determine that we would not be able to realize all or part of our net deferred tax assets, an adjustment to the deferred tax assets would be charged to earnings in the period such determination is made. Likewise, if we later determine that it is more likely than not that the deferred tax assets would be realized, then the previously provided valuation allowance would be reversed. Our current valuation allowance covers the tax benefit from the exercise of employee stock options. When these tax benefits are realized, the valuation allowance will be reversed and credited to capital in excess of par value.

Impairment or Disposals of Long-Lived Assets: In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("FAS 144"), "Accounting for the Impairment or Disposal of Long- Lived Assets". FAS 144 supersedes FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and applies to all long-lived assets (including discontinued operations). We are required to adopt FAS 144 at the beginning of fiscal 2003. FAS 144 is applied prospectively upon adoption and is not anticipated to have a material impact on our consolidated financial position or operating results.

Costs associated with Exit or Disposal Activities: In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("FAS 146"). FAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). The principal difference between FAS 146 and EITF 94-3 relates to FAS 146's requirements for the timing of recognizing a liability for a cost associated with an exit or disposal activity. FAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3 a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. FAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption encouraged. FAS 146 is applied prospectively upon adoption and is not anticipated to have a material impact on our current financial position or results of operations.

Consolidation of Certain Special-Purpose Entities: In June 2002, the FASB issued an Exposure Draft of a proposed Interpretation of Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements "Consolidation of Certain Special-Purpose Entities"(the proposed Interpretation or Exposure Draft) that establishes accounting guidance for consolidation of special-purpose entities ("SPE"). The proposed Interpretation will apply to any business enterprise, both public and private, that has a controlling interest, contractual relationship or other business relationship with an SPE. The Exposure Draft provides guidance for determining when an entity, the Primary Beneficiary, should consolidate another entity, a SPE, that functions to support the activities of the Primary Beneficiary. The proposed Interpretation may result in our having to consolidate the operating results of a SPE or similar entity, which is a lessor under one of our operating lease agreements. The FASB expects to issue the Interpretation in the fourth quarter of calendar year 2002. The effective date of these proposed new rules on our current operating leases could be as early as the beginning of our fiscal quarter ending June 2003, and sooner on any new leases entered into after the new rules' effective date which utilize SPEs or equivalent lease structures. Implementation of this Exposure Draft, when and if it becomes a final accounting rule, could require us to consolidate the activities of the SPE and recognize the asset and related liability.

Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others: In May 2002, the FASB issued an Exposure Draft of a proposed Interpretation that would require a company that is a guarantor to make specific disclosures about its obligations under certain guarantees that it has issued. The proposed Interpretation would also require a company ("the guarantor") to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee. The proposed Interpretation does not provide guidance on the subsequent measurement of the guarantor's recognized liability over the term of the related guarantee. The proposed Interpretaton would also incorporate, without change, the guidance in FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others " which is being superseded. Implementation of this Exposure Draft, when and if it becomes a final accounting rule would be effective for financial statements for periods ending after December 25, 2002 and would be applied only on a prospective basis to guarantees issued after December 31, 2002. The proposed Interpretation is not anticipated to have a material impact on our current financial position or results of operations.

As of June 30, 2002, we had $945.2 million in cash, cash equivalents, short-term investments, and restricted cash compared with $925.4 million at June 24, 2001.

Subsequent event: The 5% Notes, principal amount of $309.8 million, matured on September 2, 2002, and were redeemed in cash. The proceeds we used to redeem the 5% Notes came primarily from short-term investments that had matured subsequent to June 30, 2002.

Net cash provided by operating activities was $21.8 million in fiscal 2002. Net loss for the year of $90.1 million adjusted for non-cash charges of $138.5 million, resulted in positive cash flow of $48.4 million, which was partially offset by uses of working capital totaling $26.6 million. Non-cash charges include items such as depreciation and amortization, patent litigation settlement, restructuring charges, deferred income taxes, impairment charges and the adjustment for the loss on equity derivative contracts in company stock.

Significant changes in current assets and liabilities resulted from improved accounts receivable turnover and the continued use of programs to selectively sell accounts receivables, which resulted in a $118.2 million improvement. Additionally, highly controlled purchasing processes combined with lower shipments and inventory write-downs for excess, obsolete, and older- generation products reduced inventory by approximately $96.5 million. Accrued liabilities declined by $65.4 million due to reduced compensation and warranty liabilities. Deferred profits for shipments not yet recognized as revenue fell $187.4 million, in line with equipment delivery trends.

Net cash used in investing activities during fiscal 2002 was $88.1 million, down from $427.5 million in 2001. Significant uses of cash in fiscal 2002 included net purchases of short-term investments of $65.4 million and limited capital expenditure projects of $10.6 million. Additionally, restricted cash increased $10.5 million, mostly due to collateral requirements of our interest rate swap agreement.

Net cash provided by financing activities during fiscal 2002 was $16.3 million. Net proceeds from the issuance of our common stock generated $19.4 million. We repurchased $10.7 million of common stock and reissued $16.3 million of treasury stock through the employee stock purchase program. Principal payments on debt and capital lease obligations were $8.7 million.

Property and equipment was $67.5 million at June 30, 2002, compared to $126.5 million at June 24, 2001. The decrease in property and equipment in fiscal 2002 compared to fiscal 2001 is primarily due to minimum expenditures for capital projects during fiscal 2002, write-offs of leasehold improvements and certain fixed assets related to buildings that we have vacated due to restructuring activities, and impairments of certain laboratory and demonstration equipment.

At June 30, 2002, our contractual cash obligations and commitments relating to our debt retirements, lease payments, other long-term liabilities, and outsourced functions are as follow:

                                    Debt and other               Outsourcing
                                     long-term     Operating    and Consignment
                                    liabilities      Leases      Contracts
                                    ------------   ----------  --------------
                                                (in thousands)
Through June 29, 2003 (1)........  $    315,291   $   63,553  $       34,321
2004 through 2006................       359,691       86,909           9,586
2007 and thereafter..............            --        7,687
                                    ------------   ----------  --------------
  Total .........................  $    674,982   $  158,149  $       43,907
                                    ============   ==========  ==============

(1) The 5% Notes, principal amount of $309.8 million, mature on September 2, 2002 and are included in the Current Liabilities section of the Balance Sheet as of June 30, 2002.

Debt financing includes two Convertible Subordinated Notes and a Yen-denominated term loan. Details of the Convertible notes are:

Description	4% Convertible Subordinated Notes, "4% Notes"	5% Convertible Subordinated Notes, "5% Notes"
Offering Date	May 2001	August 1997
Offering Amount	$300.0 million	$310.0 million
Maturity Date	June 1, 2006	September 2, 2002
Offering Expenses	$8.5 million incurred at the time of offering, ratably amortized to other expense over the term of the 4% Notes. Remaining unamortized balance of $6.7 million and $8.4 million at June 30, 2002 and June 24, 2001, respectively.	$9.0 million incurred at the time of offering ratably amortized to other expense over the term of the 5% Notes. Remaining unamortized balance of $0.3 million and $2.1 million at June 30, 2002 and June 24, 2001, respectively.
Interest Rate terms	4% payable on June 1 and December 1 of each year, commencing December 1 2001	5% payable on September 1 and March 1 of each year, commencing March 1 1998
Conversion Rights	Convertible into Lam Common Stock at any time prior to close of business on the maturity date, unless previously redeemed, at a conversion price of $44.93 per share subject to anti-dilution adjustments	Convertible into Lam Common Stock at any time prior to close of business on the maturity date, unless previously redeemed, at a conversion price of $29.26 per share subject to anti-dilution adjustments
Redemption terms	Redeemable at Lam option, beginning June 5, 2004 with at least 20 days and no more than 60 days notice, at redemption prices starting at 101.0% and at diminishing prices thereafter, plus accrued interest.	Redeemable at Lam option, beginning September 6, 2000 with at least 20 days notice, at redemption prices starting at 102.0% and at diminishing prices thereafter, plus accrued interest, if the closing price of Lam Common Stock is at least 130% of the conversion price for at least 20 trading days ending within a period of 30 consecutive trading days ending within 5 trading days prior to the notice of redemption
Security	4% Notes are unsecured and subordinated in right of payment in full to all existing and future senior indebtedness of the company	5% Notes are unsecured and subordinated in right of payment in full to all existing and future senior indebtedness of the company

During the fourth quarter of fiscal 2001, we entered into a three-year Yen-denominated term loan for approximately ¥6.0 billion ($48.5 million at June 30, 2002) with a syndicate of financial institutions, in order to fund our Japanese subsidiary operations. The entire principal amount under the new term loan is due at maturity, June 11, 2004, and has a floating interest rate based on the Tokyo Interbank Offered Rate ("TIBOR"), which at June 30, 2002, was 2.6% per annum.

During the third quarter of fiscal 2002, we entered into an interest rate swap agreement with a notional amount of $300 million in order to hedge changes in the fair value of the Company's 4% Notes, attributable to changes in the benchmark interest rate. The transaction swapped 4% fixed interest payments for variable interest payments based on the London Interbank Offered Rate ("LIBOR") based interest rate, resulting in interest expense savings of approximately $3.5 million for the fiscal year ended June 30, 2002. Should 6-month LIBOR interest rates rise above approximately 5% per annum in future periods, incremental interest expense to the Company may be incurred. Under the terms of the transaction, we must provide collateral to match any mark-to-market exposure on the swap. The amount of collateral required totals a minimum of $6.0 million plus an amount equal to the mark-to-market exposure on the swap. Therefore, the amount of cash collateral we will have to post in the future will fluctuate from quarter to quarter commensurate with the mark-to-market exposure on the swap instrument. Generally the required collateral will rise as interest rates rise. At the end of fiscal 2002 we have $10.5 million in restricted cash on our balance sheet (classified as a long-term asset) related to this transaction.

The swap is accounted for as a fair value hedge under the provisions of FAS 133. This discussion should be read