NOTE 8. MAJOR CUSTOMERS

Information with respect to two customers, both accounting for sales in excess of 10% of our total sales in each of the three and six-month periods ended December 31, 2011 and 2010 is as follows:


	As of and for the three months ended December 31,
	2011										2010
	Sales		Percent of Total			Accounts Receivable		Percent of Total			Sales		Percent of Total			Accounts Receivable		Percent of Total
Customer 1	$	880,000		7	%	$	240,000		9	%	$	505,000		4	%	$	159,000		6	%
Customer 2	$	1,906,000		16	%	$	778,000		30	%	$	2,689,000		22	%	$	1,045,000		41	%

	As of and for the six months ended December 31,
	2011										2010
	Sales		Percent of Total			Accounts Receivable		Percent of Total			Sales		Percent of Total			Accounts Receivable		Percent of Total
Customer 1	$	2,541,000		21	%	$	240,000		9	%	$	1,255,000		10	%	$	159,000		6	%
Customer 2	$	4,294,000		36	%	$	778,000		30	%	$	5,472,000		46	%	$	1,045,000		41	%

In December 2009, our largest customer informed us that it was in the process of developing, and planned to eventually manufacture, its own surgical devices which are functionally comparable to the products we currently provide to the customer. We have been the exclusive manufacturer of these products since they were developed.

We currently provide this Customer with two products ("Product A" and "Product B") and repair services for such products. Sales for each of these categories for the three and six months ended December 31, 2011 and 2010 were as follows:


	Three months ended December 31, 2011		Six months ended December 31, 2011		Average % of total			Three months ended December 31, 2010		Six months ended December 31, 2010		Average % of total
Product A	$	157,000	$	950,000		18	%	$	806,000	$	2,447,000		40	%
Product B		1,340,000		2,531,000		62	%		1,489,000		2,383,000		47	%
Repairs and components		409,000		813,000		20	%		394,000		642,000		13	%

Total	$	1,906,000	$	4,294,000		100	%	$	2,689,000	$	5,472,000		100	%

As of January 2, 2012, the Customer had orders of (i) $784,000 for Product A scheduled for delivery through April 2012 (ii) $745,000 for Product B scheduled for delivery through February 2012, and (iii) $400,000 of components scheduled for delivery through April 2012, all of which the Customer has indicated it plans to purchase. However, the Customer has indicated that it does not plan to place further orders with us for these products.

The Customer has indicated that its plan is contingent on several factors, including the registration of the Customer's product in a foreign jurisdiction and the successful completion of its field testing for the product that will replace Product B.

In addition, the Customer indicated that it plans to limit repair requests from us to those Products A and B that are covered by our product warranty, likely reducing, possibly to zero, future repair revenue for out-of-warranty products.

Resulting from the foregoing, revenue attributable to the Customer could decline to zero or a negligible amount by the end of fiscal year 2012.

However, the Customer is not obligated either to abide by the timetables it has communicated to us or to update us as to the status of its current plan. Accordingly, we are unable to know or predict the status of the Customer's plan or initiatives on an ongoing basis. The Customer could accelerate, delay or terminate its transition to its own products at any time and without notice to us, which could have a material impact on our revenues. The identity of the Customer is protected by a confidentiality agreement.

We are continuing to implement steps to identify and capture additional revenue opportunities. There can be no assurance, however, as to either the timing or success of achieving this objective, and it would be our intent to reduce operating costs, if and as necessary, to minimize the impact of a revenue reduction, should it occur. In the event that the Customer's future purchases are reduced beyond the realization of such opportunities or cost reductions, we are likely to experience a material and adverse impact on our business.