The following information should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included in Part I, Item 1 of this Report, and the "Risk Factors" included in Part II Item 1A of this Report and Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008 (the "2008 10-K").
SAFE HARBOR CAUTIONARY STATEMENT
This quarterly report on Form 10-Q contains statements that are forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations of forecasts of future events. All statements other than statements of current or historical fact contained in this report, including statements regarding our future financial position, business strategy, new products, assay sales, budgets, liquidity, cash flows, projected costs, litigation costs, including the costs or impact of any litigation settlements or orders, regulatory approvals or the impact of any laws or regulations applicable to us, and plans and objectives of management for future operations, are forward-looking statements. The words "anticipate," "believe," "continue," "should," "estimate," "expect," "intend," "may," "plan," "projects," "will," and similar expressions, as they relate to us, are intended to identify forward-looking statements. These statements are based on our current plans and actual future activities, and our financial condition and results of operations may be materially different from those set forth in the forward-looking statements as a result of known or unknown risks and uncertainties, including, among other things:
• risks and uncertainties relating to market demand and acceptance of our products and technology;

• dependence on strategic partners for development, commercialization and distribution of products;

• the impact of the ongoing uncertainty in global finance markets and changes in government funding, including its effects on the capital spending policies of our partners and end-users and their ability to finance purchases of our products;

• concentration of our revenue in a limited number of strategic partners, some of which may be experiencing decreased demand for their products utilizing or incorporating our technology and budget or finance constraints in the current economic environment or periodic variability in their purchasing patterns or practices;

• fluctuations in quarterly results due to a lengthy and unpredictable sales cycle, bulk purchases of consumables, fluctuations in product mix, and the seasonal nature of some of our assay products;

• our ability to scale manufacturing operations and manage operating expenses, gross margins and inventory levels;

• potential shortages, or increases in costs, of components;

• competition;

• our ability to successfully launch new products;

• the timing of regulatory approvals;

• the implementation, including any modification, of our strategic operating plans;

• the uncertainty regarding the outcome or expense of any litigation brought against or initiated by us;

• risks relating to our foreign operations; and

• risks and uncertainties associated with implementing our acquisition strategy including our ability to obtain financing, our ability to integrate acquired companies or selected assets into our consolidated business operations, and the ability to recognize the benefits of our acquisitions.

Many of these risks, uncertainties and other factors are beyond our control and are difficult to predict. Any or all of our forward-looking statements in this report may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. New factors could also emerge from time to time that could adversely affect our business. The forward-looking statements herein can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and assumptions, including the risks, uncertainties and assumptions outlined above and described in the section titled "Risk Factors" below and in the 2008 10-K. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. When you consider these forward-looking statements, you should keep in mind these risk factors and other cautionary statements in this report and our other annual and periodic reports.
Our forward-looking statements speak only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report.
Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to "Luminex," the "Company," "we," "us" and "our" refer to Luminex Corporation and its subsidiaries.
OVERVIEW
We develop, manufacture and sell proprietary biological testing technologies and products with applications throughout the life sciences and diagnostics industries. These industries depend on a broad range of tests, called bioassays, to perform diagnostic tests, discover and develop new drugs and identify genes. Our xMAP® (Multi-Analyte Profiling) technology, an open architecture, multiplexing technology, allows simultaneous analysis of up to 500 bioassays from a small sample volume, typically a single drop of fluid, by reading biological tests on the surface of microscopic polystyrene beads called microspheres. xMAP technology combines this miniaturized liquid array bioassay capability with small lasers, digital signal processors and proprietary software to create a system offering advantages in speed, precision, flexibility and cost. Our xMAP technology is currently being used within various segments of the life sciences industry which includes the fields of drug discovery and development, clinical diagnostics, genetic analysis, bio-defense, protein analysis and biomedical research.
Our end-user customers and partners, which include laboratory professionals performing research, clinical laboratories performing tests on patients as ordered by a physician and other laboratories, have a fundamental need to perform high quality testing as efficiently as possible. Luminex has adopted a business model built around strategic partnerships. We have licensed our xMAP technology to partner companies, which in turn develop products that incorporate the xMAP technology into products that the partners sell to end-users. Luminex develops and manufactures the proprietary xMAP laboratory instrumentation and the proprietary xMAP microspheres and sells these products to its partners. Our partners then sell xMAP instrumentation and xMAP-based reagent consumable products, which run on the instrumentation, to the end-user laboratory. Luminex was founded on this model, and our success to date has been due to this model. As of September 30, 2009, Luminex had approximately 62 strategic partners and these partners have purchased from Luminex over 6,500 xMAP-based systems. Of the 62 strategic partners, 39 have released commercialized reagent-based products utilizing our technology.
Beginning in 2006, we began developing proprietary assays. This development was supplemented in 2007 by our acquisition of Tm Bioscience, which we named Luminex Molecular Diagnostics, or LMD. Our Assay Segment focuses on the molecular diagnostics market and certain specialty markets.

Luminex has several forms of revenue that result from our business model:
• System revenue is generated from the sale of our xMAP systems and peripherals. Currently, system revenue is derived from the sale of the Luminex 100™ and 200™ analyzers, our FLEXMAP 3D™ system, optional XY Platform and Sheath Delivery Systems.

• Consumable revenue is generated from the sale of our dyed polystyrene microspheres and sheath fluid. Our larger commercial and development partners often purchase these consumables in bulk to minimize the number of incoming qualification events and to allow for longer development and production runs.

• Royalty revenue is generated when a partner sells a kit incorporating our proprietary microspheres to an end user or when a partner utilizes a kit to provide a testing result to a user. End users can be facilities such as testing labs, development facilities and research facilities that purchase prepared kits and have specific testing needs, or testing service companies that provide assay results to pharmaceutical research companies or physicians.

• Assay revenue is generated from the sale of our kits which are a combination of chemical and biological reagents and our proprietary bead technology used to perform diagnostic and research assays on samples.

• Service revenue is generated when a partner or other owner of a system purchases a service contract from us after the standard warranty has expired. Service contract revenue is amortized over the life of the contract and the costs associated with those contracts are recognized as incurred.

• Other revenue consists of items such as training, shipping, parts sales, license revenue, grant revenue, contract research and development fees, milestone revenue and other items that individually amount to less than 5% of total revenue.

Third Quarter 2009 Highlights
• Consolidated revenue of $29.1 million for the quarter ended September 30, 2009, representing a 1% increase over revenue for the third quarter of 2008

• Consolidated gross profit margin of 64% compared with third quarter 2008 gross profit margin of 68%

• System shipments of 259 including 11 shipments of FLEXMAP 3D, resulting in cumulative life-to-date shipments of 6,514; this represents an 8% increase in the number of system shipments and an 18% increase in system sales over the third quarter of 2008

• Higher margin items (assays, consumables and royalty revenues) of $17.0 million or 58% of third quarter 2009 revenue

• Received 510(k) clearance from the FDA for a new cystic fibrosis test: the xTAG Cystic Fibrosis 39 Kit v2

• Establishment of an office in Tokyo, Japan to provide commercial support and service to customers and partners in the area

• Received FDA clearance for an update to the xTAG(R) Respiratory Viral Panel package insert

• Our partners reported over $74 million of royalty bearing end user sales on xMAP technology for the quarter, a 17% increase over the third quarter of 2008

We have experienced the fifth sequential quarter of consumable revenue decline since the third quarter of 2008. After thorough analysis of the decline, we have identified several factors contributing to the decline, none of which individually appear to be systemic in nature or indicative of future results. Overall, the decline manifested itself through a decline in activity at varying times from our largest, bulk purchasing partners. In the third quarter of 2008, fourth quarter of 2008, first quarter of 2009, second quarter of 2009, and third quarter of 2009 we had bulk purchases totaling $7.0 million, $6.8 million, $6.1 million, $5.5 million and $4.3 million in consumables, respectively. Alternatively, non bulk consumable sales varied within a much smaller range between $1.2 million and $1.8 million with the largest amount of non bulk sales taking place in the third quarter of 2009 with $1.8 million of consumables. We believe the decrease in bulk purchases can be attributed to several factors including (1) purchases in prior periods of significant volumes of consumables related to the conversion of our partners' assay product portfolios from carboxyl beads to magnetic beads primarily in anticipation of the release of our new MagPix™ system in 2010; (2) volume reductions in bulk purchases from several of our partners as a result of a reduction in total consumable needs subsequent to the regulatory clearance and commercialization phases of development of new products and transitioning product lines; (3) increased attention on inventory management by our partners during 2009 as a result of the macro economic climate and (4) an increase in our partners' focus on generating current revenue from commercialized products. The success of our partners' commercialization efforts is reflected in the rising level of royalties and reported royalty bearing sales during the period over which the consumable revenue has declined. Reported royalty bearing sales have increased by 17% from $63.6 million in the third quarter of 2008 to $74.6 million in the third quarter of 2009. Segment Information
Luminex has two reportable segments: the Technology Segment and the Assay Segment. The Technology Segment, which is our base business, consists of system sales to partners, raw bead sales, royalties, service and support of the technology, and other miscellaneous items. The Assay Segment is primarily involved in the development and sale of assays on xMAP technology for use on Luminex's installed base of systems.
Future Operations
We expect continued revenue growth to be driven by continued adoption of our core technology coupled with assay introduction and commercialization by the Assay Segment and our partners. We anticipate continued revenue concentration in our high margin items (assays, consumables and royalties) contributing to favorable, but variable gross margin percentages. Additionally, we believe that a sustained investment in R&D is necessary in order to meet the needs of our marketplace and provide a sustainable new product pipeline. Therefore, we estimate that R&D expenditures will increase in absolute dollars over time, but decrease as a percentage of total revenue towards our long term target of 15% of revenue. We could experience volatility in R&D expenses as a percentage of revenue on a quarterly basis.
We expect our primary challenges throughout the remainder of 2009 to be:
• the timing effect of the ongoing uncertainty in global finance markets and changes in government funding on planned purchases by end users;

• continued adoption and development of partner products incorporating Luminex technology;

• commercialization, regulatory acceptance and market adoption of output from the Assay Segment; and

• the expansion and enhancement of our installed base and leadership position within our identified target market segments.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles for interim financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and assumptions are reviewed periodically. Actual results may differ from these estimates under different assumptions or conditions.
Management believes there have been no significant changes during the quarter ended September 30, 2009 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2008 10-K.

RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2008
   Selected consolidated financial data for the three months ended September 30,
2009 and 2008 is as follows (dollars in thousands):

                                                   Three Months Ended
                                                     September 30,
                                                   2009          2008
               Revenue                           $ 29,118     $ 28,897
               Gross profit                      $ 18,771     $ 19,554
               Gross profit margin percentage          64 %         68 %
               Operating expenses                $ 19,283     $ 16,573
               Income (loss) from operations     $   (512 )   $  2,981

Total revenue increased to $29.1 million for the three months ended September 30, 2009 from $28.9 million for the comparable period in 2008. We experienced revenue growth in system placements, due to the return of demand for our LX 200 instrument as capital budgets became available and the introduction of our 3D product in the second quarter of 2009 and an increase in assay and royalty revenue as a result of the success of our Cystic Fibrosis (CF) and Respiratory Viral Panel (RVP) product lines. This revenue growth was largely offset by a decrease in consumable sales. System sales for the third quarter of 2009 increased to 259 systems from 239 systems for the corresponding prior year period bringing total system sales since inception to 6,514 as of September 30, 2009.
A breakdown of revenue for the three months ended September 30, 2009 and 2008 is as follows (in thousands):

                                           Three Months Ended
                                              September 30,
                                            2009          2008
                     System sales        $    9,166     $  7,788
                     Consumable sales         6,062        8,340
                     Assay revenue            6,199        5,897
                     Royalty revenue          4,699        3,865
                     Service contracts        1,491        1,429
                     Other revenue            1,501        1,578

                                         $   29,118     $ 28,897

We continue to experience revenue concentration in a limited number of strategic partners. Two customers accounted for 27% of consolidated total revenue in the third quarter of 2009 (14% and 13%, respectively). For comparative purposes, these same two customers accounted for 35% of total revenue (17% and 18%, respectively) in the third quarter of 2008. The decrease in percentage of total revenue represented by our two largest customers is due to the decrease in the dollar amount of bulk purchases by these two customers due to the varying consumable needs during the regulatory clearance and commercialization phases of development of our partners' products in a new market and the economic environment as discussed in the Overview section above. No other customer accounted for more than 10% of total revenue in this quarter.

Gross profit margin percentage decreased to 64% for the three months ended September 30, 2009 from 68% for the comparable period in 2008 due to the increase in system sales, a lower margin item, in the three months ended September 30, 2009. The increase in operating expenses from $16.6 million for the third quarter of 2008 to $19.3 million for the third quarter of 2009 is primarily a result of additional personnel costs and the related stock compensation and travel costs associated with the increase in employees and contract employees as headcount has increased from 381 to 423 from September 30, 2008 to September 30, 2009. Net operating income decreased due to the decrease in gross profit margin percentage and the increase in operating expenses. See additional discussions by segment below. Technology Segment
Selected financial data for our Technology Segment for the three months ended September 30, 2009 and 2008 is as follows (dollars in thousands):

                                                   Three Months Ended
                                                     September 30,
                                                   2009          2008
               Revenue                           $ 22,031     $ 22,582
               Gross profit                      $ 13,767     $ 14,541
               Gross profit margin percentage          62 %         64 %
               Operating expenses                $ 13,218     $ 11,313
               Income from operations            $    549     $  3,228

Revenue. Total revenue for our Technology Segment decreased by 2% to $22.0 million for the three months ended September 30, 2009 from $22.6 million for the comparable period in 2008. The decrease in revenue was primarily attributable to a decrease in consumable sales offset by an increase in system sales and royalty revenue. Two customers accounted for 35% of total Technology Segment revenue in the third quarter of 2009 (19% and 16%, respectively). For comparative purposes, these same two customers accounted for 44% of total Technology Segment revenue 21% and 23%, respectively) in the third quarter of 2008. The decrease in percentage of total revenue represented by our two largest customers is due to a decrease in the dollar amount of bulk purchases by our two largest customers as discussed in the Overview section above.
A breakdown of revenue in the Technology Segment for the three months ended September 30, 2009 and 2008 is as follows (in thousands):

                                           Three Months Ended
                                              September 30,
                                            2009          2008
                     System sales        $    8,501     $  7,483
                     Consumable sales         6,052        8,328
                     Royalty revenue          4,699        3,865
                     Service contracts        1,419        1,403
                     Other revenue            1,360        1,503

                                         $   22,031     $ 22,582

System and peripheral component sales increased by 14% to $8.5 million for the three months ended September 30, 2009 from $7.5 million for the comparable period of 2008. The Technology Segment sold 243 of the 259 total system sales in the three months ended September 30, 2009. For the three months ended September 30, 2009, five of our partners accounted for 194, or 80%, of total Technology Segment systems sold for the period. In the three months ended September 30, 2008, the top five partners purchased 178, or 77%, of total Technology Segment system sales.

Consumable sales, comprised of microspheres and sheath fluid, decreased 27% to $6.1 million for the three months ended September 30, 2009 from $8.3 million for the three months ended September 30, 2008. This is primarily the result of a decrease in bulk purchases as described in the Overview above. A bulk purchase is defined as the purchase of $100,000 or more of consumables in a quarter. During the three months ended September 30, 2009, we had 13 bulk purchases of consumables totaling approximately $4.3 million as compared with 14 bulk purchases totaling approximately $7.0 million in the three months ended September 30, 2008. Partners who reported royalty bearing sales accounted for $4.2 million, or 69%, of total consumable sales for the three months ended September 30, 2009 compared to $7.7 million, or 92%, of total consumable sales for the three months ended September 30, 2008.
Royalty revenue, which results when our partners sell products or services incorporating our technology, increased by 22% to $4.7 million for the three months ended September 30, 2009 compared with $3.9 million for the three months ended September 30, 2008. We believe this is primarily the result of our increased cumulative instrument placements, menu expansion, and utilization of our partners' assays on our technology. We expect modest fluctuations in the number of commercial partners submitting royalties quarter to quarter based upon the varying contractual terms, consolidations among partners, differing reporting and payment requirements, and the addition of new partners. For the three months ended September 30, 2009, we had 30 commercial partners submitting royalties as compared to 32 for the three months ended September 30, 2008. One of our partners reported royalties totaling approximately $1.7 million or 36% of total royalties for the quarter ended September 30, 2009 compared to $1.4 million or 36% for the quarter ended September 30, 2008. Two other customers reported royalties totaling approximately $1.2 million or 25% (14% and 11%, respectively) of total royalties for the quarter ended September 30, 2009. No other customer accounted for more than 10% of total royalty revenue for the quarter ended September 30, 2009. Total royalty bearing sales reported to us by our partners were over $74 million for the quarter ended September 30, 2009 compared with over $63 million for the quarter ended September 30, 2008.
Service contracts revenue, comprised of extended warranty contracts earned ratably over the term of a contract, remained flat at $1.4 million for the third quarter of 2009 compared to $1.4 million for the third quarter of 2008. At September 30, 2009 and 2008, we had 1,053 and 981 Luminex systems, respectively, covered under extended service agreements.
Other revenues, comprised of training revenue, shipping revenue, miscellaneous part sales, amortized license fees, reagent sales, and grant revenue, decreased by 9% to $1.4 million for the three months ended September 30, 2009 from $1.5 million for the three months ended September 30, 2008. This decrease is primarily the result of a decrease in shipping revenue and miscellaneous part sales.
Gross profit. The gross profit margin percentage (gross profit as a percentage of total revenue) for the Technology Segment decreased to 62% for the three months ended September 30, 2009 from 64% for the three months ended September 30, 2008. Gross profit for the Technology Segment decreased to $13.8 million for the three months ended September 30, 2009, as compared to $14.5 million for the three months ended September 30, 2008. The decrease in gross profit margin percentage was primarily attributable to changes in revenue mix between our higher and lower gross margin items. System sales, a lower margin item, comprised 39% of total Technology Segment revenue for the three months ended September 30, 2009 compared to 33% for the three months ended September 30, 2008. Consumables, one of our higher margin items, comprised . . .