The Lady Lake was a spiritual entity and was not incarnate at the time she met Merlin. She was someone who had been murdered and thrown into the lake. Her spirit then arose as the Lady of the Lake. Merlin, being psychic, became enraptured with the Lady of the Lake after he encountered her in her spirit form.
Merlin had been riding hard and fast. He became tired, rested, and gave the horse water. From the waters of the lake, he washed himself and drank; then lay down beside the lake. The lady came and caressed him and held him in her arms as he rested by the lake. When he opened his eyes and saw this beautiful, spiritual being, he fell in love with her. They met on many occasions: anything he had to talk over with someone, he discussed with her. She guided him through a lot of agony and pain, and he became reliant on her.
In her own words, the Lady of the Lake said:
"I was on a farm when the soldiers came and they collected me. They raped me and killed me. They threw my body into the lake. They weighed me down. My life did not begin until I met Merlin and he revived my spirit. The stories that have been told have been all around in circles, but are not the stories as I a give to you. I was the one meant for Merlin, to give him the strength. The magical powers that we had together became a uniting magic, with the stones and the earth and the water that breathes. All these things have a living energy and we use the magic of their energy to work. Place the soil and stone and water together, and they are a living vacuum. By throwing the pebble into the water: Merlin would throw three pebbles - 1, 2, 3 - the ripples; and I would obey, as this was our command. We were one."