Eligibility Criteria:
DISEASE CHARACTERISTICS:
* Histologically confirmed invasive breast cancer meeting the following criteria:
* Phase I
* Locally advanced or inflammatory disease, or specified subgroup of large operable disease for whom neoadjuvant chemotherapy is appropriate, defined as any 1 of the following:
* Clinical stage T4a-d, any N (inflammatory breast carcinoma: tumor mass, breast enlargement, oedema and warmth of the skin are often present but not mandatory for the diagnosis)
* Any clinical T, N2 or N3 (ipsilateral supraclavicular nodes)
* cT3cN0,1 any estrogen receptor (ER)
* cT2cN1 any ER
* cT2cN0 ER negative
* Presence of bilateral breast cancer is allowed
* No bone, liver, or other extensive metastases
* Minimal lung, skin, or nodal metastases may be allowed at the discretion of the investigator (phase I only)
* Phase II
* Locally advanced or inflammatory breast cancer, defined as any 1 of the following:
* Clinical T4a-d, any N (inflammatory breast carcinoma: tumor mass, breast enlargement, oedema and warmth of the skin are often present but not mandatory for the diagnosis)
* Any clinical T, N2 or N3 (ipsilateral supraclavicular nodes)
* And M0
* Bilateral breast cancer is allowed provided only 1 side is HER2-positive
* Any large resectable T2 or T3 breast cancers, M0
* HER2-positive disease by immunohistochemistry, fluorescent in situ hybridization, and/or chromogenic in situ hybridization
* No CNS involvement
* Two frozen trucuts for every core biopsy indicated by the translational research study
* Hormone receptor status:
* Estrogen receptor- and/or progesterone receptor-positive or negative tumor
PATIENT CHARACTERISTICS:
* Female
* WHO performance status 0-2
* Hemoglobin \> 10.0 g/dL
* Absolute neutrophil count \> 1,500/mm\^3
* Platelet count \> 100,000/mm\^3
* Bilirubin \< 1.5 times upper limit of normal (ULN)
* AST and ALT \< 3 times ULN
* Creatinine \< 1.5 times ULN
* No other malignancies within the past 3 years except basal cell or squamous cell carcinoma of the skin or carcinoma in situ of the cervix (phase II)
* LVEF normal by MUGA or ECHO
* ECG normal
* Not pregnant or nursing
* Negative pregnancy test
* Fertile patients must use effective contraception 2 weeks prior to, during, and for 1 month after completion of study treatment
* No current active hepatic or biliary disease (with exception of patients with Gilbert's syndrome, asymptomatic gallstones, or stable chronic liver disease not requiring therapy as per investigator assessment)
* No serious cardiac illness or medical condition within the past 6 months including, but not limited to, any of the following:
* History of documented congestive heart failure
* High-risk uncontrolled arrhythmias
* Angina pectoris requiring antianginal medication
* Clinically significant valvular heart disease
* Evidence of transmural infarction on ECG
* Poorly controlled hypertension, defined as systolic blood pressure (BP) \> 180 mm Hg or diastolic BP \> 100 mm Hg
* Able to swallow and retain oral medication
* Accessible for repeat dosing and follow up
* No concurrent grapefruit juice
* No active or uncontrolled infection
* No other serious illness
* No malabsorption syndrome
* No other medical condition (i.e., history of chronic alcohol abuse, hepatitis, HIV, and/or cirrhosis)
* No psychological, familial, sociological, or geographical condition that would preclude study participation
PRIOR CONCURRENT THERAPY:
* No prior therapy for any cancer, including chemotherapy, radiotherapy, or hormonal therapy for breast cancer (phase I)
* No prior epidermal growth factor receptor- or HER2-targeted therapy or antibody therapy (phase I)
* More than 10 days since prior and no concurrent CYP3A4 inducers or inhibitors
* More than 14 days since prior and no concurrent herbal infusions or dietary supplements
* No antacids 1 hour before or after lapatinib ditosylate administration
* No other concurrent investigational therapy or anticancer therapy
* No concurrent prophylactic antibiotics