Commitments and Contingencies:

Intellectual Property Indemnification Obligations

The Company has entered into agreements with customers that include limited intellectual property indemnification obligations that are customary in the industry. These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions. The nature of the intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers. Historically, the Company has not made any indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees.

Warranty Reserves

The Company generally provides a warranty on its products for a period of twelve to fifteen months against defects in material and workmanship. The Company estimates the costs that may be incurred during the warranty period and records a liability in the amount of such costs at the time revenue is recognized. The Company’s estimate is based primarily on historical experience. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Settlements of warranty reserves are generally associated with sales that occurred during the 12 to 15 months prior to the year-end and warranty accruals are related to sales during the year.

Changes in the Company’s warranty reserves are as follows:



	Year Ended December 31,
	2009			2010			2011
Balance, beginning of the year	$	1,813		$	700		$	1,654
Accruals	894			2,363			1,987
Usage	(2,007		)	(1,409		)	(2,235		)
Balance, end of the year	$	700		$	1,654		$	1,406

Legal Matters

From time to time the Company is subject to legal proceedings and claims in the ordinary course of business. As previously disclosed, in December 2007, the Company completed the acquisition of specific assets and liabilities of the semiconductor division of Applied Precision LLC (“Applied”). As a result of the acquisition, the Company assumed certain liabilities of Applied including a lawsuit filed by Integrated Technology Corporation (“ITC”) which alleged Applied’s PrecisionPoint™ and PrecisionWoRx® products infringed an ITC patent. Prior to trial, the judge found that our products made prior to August of 2007 infringed the ITC patent. In December 2011, a trial verdict was rendered in the United States District Court, District of Arizona in which the jury found that while the Company’s products manufactured after August of 2007 did not literally infringe ITC’s patent, the products were found to infringe under a rule known as the doctrine of equivalents, a legal principle which expands the language of patent claims to encompass products or processes which may otherwise be found not to literally infringe the patent. The jury awarded $15,475 to ITC in damages for the years 2000-2011. The jury also found that for sales made after August of 2007, the infringement was willful. The verdict and damages assessment are subject to post-trial motions and filings and further court review and rulings, which could potentially result in an increase or decrease in the damages award. Depending upon the outcome of these matters, the Company will consider further legal pursuit. As this litigation is still ongoing, the Company believes that it has meritorious defenses and shall continue to vigorously defend the action. With that, it is reasonably possible that the Company could realize a loss in this matter related to products made after August of 2007 such that in the event that the Company is ultimately found liable, damage estimates related to this case, which have not been accrued for as of December 31, 2011, range from approximately $25 to $23,374, depending on multiple factors presented by the parties. With regard to products made before August of 2007, it is probable that the Company could realize a loss in this matter for which the Company has estimated its potential liability to be, approximately $4,293, which the Company accrued as of December 31, 2011. While the Company continues to believe that its current PrecisionPoint and ProbeWoRx systems do not infringe ITC’s patent, the Company has removed from all of its future tools the predictive scrub feature that was found to be at issue in the litigation.

In the Company’s patent infringement suit against Camtek, Ltd., of Migdal Hamek, Israel, concerning the Company’s proprietary continuous scan wafer inspection technology, the U.S. Federal Court of Appeals issued a ruling on August 22, 2011. In its opinion, the Appellate Court affirmed multiple rulings from trial at the District Court level including (i) finding the Company’s U.S. Patent No. 6,826,298 valid, (ii) the part of the infringement ruling based on the finding that Camtek’s Falcon product strobes “based on velocity,” and (iii) the dismissal of Camtek’s claim against the Company for inequitable conduct against the U.S. Patent and Trademark Office. The court did, however, revise one claim construction ruling made by the District Court in the original case. As a result, the Appellate Court set aside the verdict delivered by the jury for damages and the District Court’s decision to enter an injunction against Camtek’s selling Falcon tools in the U.S. and remanded the case back to the trial court for a limited trial on this the single infringement issue. No trial date has been set for this limited trial. This lawsuit was initially brought in 2005 by August Technology prior to its merger with the Company.

Lease Agreements

The Company rents space for its manufacturing and service operations and sales offices, which expire through 2019. Total rent expense for these facilities amounted to $2,720, $2,916 and $3,139 for the years ended December 31, 2009, 2010 and 2011, respectively.

The Company also leases certain equipment pursuant to operating leases, which expire through 2014. Rent expense related to these leases amounted to $122, $118 and $111 for the years ended December 31, 2009, 2010 and 2011, respectively.

Total future minimum lease payments under noncancelable operating leases as of December 31, 2011 amounted to $2,877 for 2012, $2,543 for 2013, $2,557 for 2014, $2,574 for 2015, $1,648 for 2016 and $3,593 for all periods thereafter.

Royalty Agreements

Under various licensing agreements, the Company is obligated to pay royalties based on net sales of products sold. There are no minimum annual royalty payments. Royalty expense amounted to $279, $871 and $1,086 for the years ended December 31, 2009, 2010 and 2011, respectively.

Open and Committed Purchase Orders

The Company has open and committed purchase orders of $19,917 as of December 31, 2011.