UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
June 30, 2004

OR

o Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from ________________ to _______________.

Commission File No. 000-30109

LUMINEX CORPORATION

(Exact name of Registrant as specified in its charter)

(512) 219-8020
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act). Yes x No o

     There were 31,113,922 shares of the Company’s Common Stock, par value $.001 per share, outstanding on August 4, 2004.

INDEX

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PART I

ITEM 1. FINANCIAL STATEMENTS

LUMINEX CORPORATION

The accompanying notes are an integral part of these condensed consolidated financial statements.

LUMINEX CORPORATION

The accompanying notes are an integral part of these condensed consolidated financial statements.

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LUMINEX CORPORATION

The accompanying notes are an integral part of these condensed consolidated financial statements.

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LUMINEX CORPORATION

NOTE 1 - BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have been prepared by Luminex Corporation (the “Company”) in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

NOTE 2 - INVENTORY, NET

     Inventory consisted of the following (in thousands):

NOTE 3 - ACCRUED WARRANTY COSTS

     Sales of the Company’s systems are subject to a warranty. System warranties typically extend for a period of twelve months from the date of installation. The Company estimates the amount of warranty claims on sold product that may be incurred based on current and historical data. The actual warranty expense could differ from the estimates made by the Company based on product performance. Warranty expenses are evaluated and adjusted periodically. Warranty expenses and accruals for the six months ended June 30, 2004 were as follows (in thousands):

NOTE 4 - BUSINESS RESTRUCTURING COSTS

     In November 2002, the Company’s management approved a business restructuring plan to reduce headcount and infrastructure. As of September 30, 2003, the Company had completed the business restructuring plan and no other expenditures are expected. During the three months ended June 30, 2003, the Company had an accrual

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adjustment of $52,000 under the restructuring plan. During the six months ended June 30, 2003, the Company had cash expenditures of $1.6 million, non-cash expenditures of $100,000 and an accrual adjustment of $52,000 under the restructuring plan.

NOTE 5 - SETTLEMENT OF LITIGATION

     As a result of a procedural omission, the Company is unable to pursue a patent in Japan, which corresponds to some of the Company’s issued U.S. patents related to the Company’s method of “real time” detection and quantification of multiple analytes from a single sample. On January 31, 2000, the Company filed a lawsuit in Travis County, Texas state district court alleging negligence and breach of contract on the part of the defendants in this matter. On March 7, 2003, the parties executed a full, final and complete release regarding such action, without an admission of liability or wrongdoing on the part of the defendants. As consideration in connection with the settlement and release, the Company received approximately $1.8 million, net of legal and related costs and expenses.

NOTE 6 - NET LOSS PER SHARE

     In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share”, basic and diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period.

     The Company has excluded all potentially dilutive securities such as restricted stock, outstanding stock options and outstanding warrants to purchase common stock from the calculation of diluted loss per common share because such securities are anti-dilutive due to the Company’s net loss for all periods presented. The total shares excluded from the calculations of diluted net loss per share, prior to application of the treasury stock method for options and warrants, were 1,651,000 and 1,524,831 for the three and six months ended June 30, 2004, respectively, and 2,315,773 and 2,388,976 for the three and six months ended June 30, 2003, respectively.

NOTE 7 - STOCK-BASED COMPENSATION

     The Company granted shares of restricted stock and options to purchase shares of common stock, and recorded stock compensation expense related to these issuances as follows:

     The Company is expensing the cost of restricted stock on a straight-line basis over the vesting period of the stock.

     SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options. As allowed by SFAS No. 123, the Company has elected to continue to account for its employee stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).

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     SFAS No. 123 allows companies to estimate the pro forma fair value of their stock-based compensation using a generally recognized option pricing model and provide those results in the form of footnote disclosure. The fair value of each option grant was estimated using the Black-Scholes Option-Pricing model based on the date of grant and the following weighted average assumptions at June 30:

     For purposes of pro forma disclosures, the estimated fair value of the options is expensed over the options’ vesting periods. Because, for pro forma purposes, the estimated fair value of the Company’s employee stock options is treated as if amortized to expense over the options’ vesting period, the effects of applying SFAS No. 123 for pro forma disclosure are not necessarily indicative of future amounts (in thousands, except per share amounts):

     The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, this option valuation model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the Black-Scholes model does not necessarily provide a reliable single measure of the fair value of its employee stock options.

NOTE 8 - COMPREHENSIVE LOSS

     In accordance with the disclosure requirements of SFAS No. 130, “Reporting Comprehensive Income,” the Company’s comprehensive loss is comprised of net loss and foreign currency translation. Comprehensive loss for the three months ended June 30, 2004 and 2003 was approximately $1.1 million and $2.0 million, respectively. Comprehensive loss for the six months ended June 30, 2004 and 2003 was approximately $1.3 million and $2.9 million, respectively.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following information should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included in Item 1 of this Report, our Annual Report on Form 10-K for the year ended December 31, 2003 and “Risk Factors” included in this Report.

SAFE HARBOR CAUTIONARY STATEMENT

     All statements in this Report that do not discuss current or historical results are forward-looking statements. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will” and similar expressions identify forward-looking statements. All statements which address our outlook for our business and markets, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends and other matters are forward-looking statements. It is important to note that our actual results or performance could differ materially from those projected in such forward-looking statements. These forward-looking statements are based on management’s current expectations and are therefore subject to certain risks and uncertainties, including those discussed under the section titled “Risk Factors” included in this Report. Specific uncertainties which could cause our actual results to differ materially from those projected include risks and uncertainties relating to market demand and acceptance of our products and technology, the dependence on strategic partners for development, commercialization and distribution of products, fluctuations in quarterly results due to a lengthy and unpredictable sales cycle, our ability to scale up manufacturing operations and manage operating expenses, gross margins and inventory levels, potential shortages of components, competition, the timing of regulatory approvals, any modification of the Company’s operating plan in response to its ongoing evaluation of its business and other risk factors detailed in the Company’s Annual Report on Form 10-K. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operation.” We expressly disclaim any intent, obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this Report to reflect any change in our expectations with regard to such statements or any change in events, conditions or circumstances on which any such statements are based.

OVERVIEW

     Several matters took place during the second quarter of 2004 that affected the company’s financial and operational performance and goals and which we believe will affect our future operating results and plans. These matters include: (i) the hiring of a permanent Chief Executive Officer; (ii) continued operational focus based on the results of our strategic study concluded in the spring of 2003; (iii) increased acceptance and utilization of our technology in the marketplace as evidenced by our increased royalty revenue; and (iv) gross margin compression relative to the first quarter of 2004.

     On May 15, 2004, the Company hired Patrick Balthrop as the permanent Chief Executive Officer. On May 20, 2004, Tom Erickson, who served as the Company’s Interim President and Chief Executive Officer since September 2002, was elected to serve as a member of the Board of Directors at the Company’s annual meeting of stockholders. Mr. Erickson has also been appointed as Chairman of the Executive Committee of the Company’s Board of Directors. Mr. Balthrop comes to Luminex from Fisher Scientific International Inc. (“Fisher Scientific”) where, since 2002, he served as President of Fisher Healthcare, a Fisher Scientific company. Prior to Fisher Scientific, Balthrop served in a number of leadership positions for over 20 years with Abbott Laboratories (“Abbott”), primarily in Abbott’s Diagnostics Division. Balthrop’s most recent positions at Abbott were as head of worldwide commercial diagnostics operations and as head of Abbott Vascular. Among his accomplishments at Abbott were the development and launch of the AxSYM analyzer and the commercial launch of the IMx analyzer. His career experience has included sales, marketing, manufacturing operations, international experience, research and development and senior management.

     Upon the completion of our strategic study, we focused our resources and adjusted our strategies and tactics towards the identified segments, which has provided growth opportunities for the Company. One element of our resource focus was a commitment to assisting our partners in their commercial development efforts. Our strategy of increasing the assistance we provided to our partners coupled with the discontinuation of our direct sales efforts

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enables our partners to focus on commercialization and avert concerns that we are going to compete directly with them. We are expanding our support staff to better serve our customer base and to offer a more diverse menu of service options. We believe the additional service offerings should facilitate the penetration of our technology into the mainstream diagnostic market. We also believe that these adjustments, coupled with the adoption of our technology in the marketplace, contributed to the growth that we are experiencing. Although we have productively executed against the results of the study, the focus of our efforts may be adjusted or altered by our new CEO to better meet the demands of the marketplace.

     The focus provided from the results of our strategic study has directed our efforts towards the markets in which we believe we have the highest level of sustainable competitive advantage. The market concentration and resulting direction of efforts has contributed to the relative flatness of our operating expenses over the past five quarters. Over the course of the past 15 months, we have sustained our core research and development efforts with a concentration on continued improvements to our technology and product offerings. Additionally, we have focused our business development efforts on our identified strengths in order to keep our partner and content pipeline active. All of these additional efforts have taken place with relatively constant use of resources and have resulted in 72% revenue growth year over year, gross margin growth and improvement to the bottom line that brings us close to profitability. Any changes to our strategic focus or modification of our operations could result in costs not currently included in our financial results and affect our expectations, including our ability to reach profitability.

     During the quarter, our royalty revenue increased to $705,000 representing over $11 million in royalty bearing sales by our partners. As additional partners commercialize and expand their menu offerings, we would expect royalty revenues to continue to grow. We believe that this is an indication of the acceptance and utilization of our technology over a broader base. In addition, another key indicator of technology acceptance is long-term consumable purchases. For the seventh quarter in a row our 12-month moving average of consumable sales has increased. For the second quarter of 2004 our 12-month moving average of consumable sales was $2.1 million.

     During the current quarter we experienced some gross margin compression compared to the first quarter of 2004. This compression can be primarily attributed to two factors. The first factor was an increase in the standard cost of our LX 100 system. During the quarter, approximately 185 of the 214 LX 100 systems placed included the new, higher cost configuration. This factor contributed approximately three percent of the margin compression relative to the first quarter. The second factor was a decrease in the average price of LX 100 systems relative to the prior quarter. The shift is attributable to changes in partner mix and corresponding price differential of the related configurations. The shift in average price per system resulted in additional gross margin compression relative to the first quarter of approximately one percent. Variability in the average LX 100 system price within a relevant range is expected on an ongoing basis.

     Our ability to achieve sustained profitability continues to depend upon our ability to establish and to maintain successful strategic partnership arrangements with companies that will develop and market products incorporating our technology and market and distribute our systems and consumables. Strategic partners will develop application-specific bioassay kits for use on our systems that they will sell to their customers generating royalties for us. Strategic partners may also perform testing services for third parties using our technology that will result in royalties for us. Some strategic partners will also buy our products and then resell those products to their customers. At June 30, 2004, we had 20 strategic partners who had either released commercialized products based on the Luminex platform or were redistributing our products and were reporting royalties. These 20 strategic partners constituted 65% of total revenues for the second quarter of 2004.

     As we continue to strive towards making xMAP technology a standard for performing bioassays within our key segments, we believe that we need to concentrate on the following objectives: (i) enhancing our focus on specific, large and fast-growing segments of the life science and diagnostics markets, (ii) forging key partnerships to broaden and accelerate market acceptance of our technology, (iii) further enabling our partners to design and develop tests using our technology, and (iv) expanding the functionality of our xMAP technology based product line, including hardware, software and consumables. A critical component of these objectives will be to continually enhance our position via a customer-focused development process and a customer-focused service strategy.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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.

     Revenue on sales of our products is recognized when persuasive evidence of an agreement exists, delivery has occurred, the fee is fixed and determinable and collectibility is probable. Generally, these criteria are met at the time our product is shipped. If the criteria for revenue recognition are not met at the time of shipment, the revenue is deferred until all criteria are met. Royalty revenue is generated when a partner sells products incorporating our technology, provides testing services to third parties using our technology or resells our consumables. Royalty revenue is recognized as it is reported to us by our partners. We also sell extended service contracts for maintenance and support of our products. Revenue for service contracts is recognized ratably over the term of the agreement.

     Total deferred revenue as of June 30, 2004 was $4.6 million and primarily consisted of (i) unamortized license fees for non-exclusive licenses and patent rights to certain Luminex technologies in the amount of $2.5 million, (ii) unamortized revenue related to extended service contracts in the amount of $899,000 and (iii) upfront payments from strategic partners to be used for the purchase of products or to be applied towards future royalty payments in the amount of $793,000. Upfront payments from our strategic partners are nonrefundable and will be recognized as revenue as our strategic partners purchase products or apply such amounts against royalty payments. Nonrefundable license fees are amortized into revenue over the estimated life of the license agreements.

     Inventories are valued at the lower of cost or market value and have been reduced by an allowance for excess and obsolete inventories. At June 30, 2004, there were two major components of the allowance for excess and obsolete inventory. First, the Company has a specific reserve for inventory components that we no longer use in the manufacture of our systems. Second, we have a reserve against slow moving items for potential obsolescence. The total estimated allowance is reviewed on a regular basis and adjusted based on management’s review of inventories on hand compared to estimated future usage and sales. The Company believes that its inventory is properly valued based on current market conditions.

     We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

     We continuously monitor collections and payments from our customers and maintain allowances for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses historically have been within our expectations, there can be no assurance that we will continue to experience the same level of credit losses that we have in the past. A significant change in the liquidity or financial position of any one of our significant customers, or a deterioration in the economic environment, in general, could have a material adverse impact on the collectibility of our accounts receivable and our future operating results, including a reduction in future revenues and additional allowances for doubtful accounts.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003

     Revenue. Total revenue increased to $9.2 million for the three months ended June 30, 2004 from $5.6 million for the comparable period in 2003. The increase in revenue was primarily attributable to increased acceptance and utilization of our technology in the marketplace as evidenced by increased system placements and corresponding increases in all other revenue line items. As previously disclosed in our Annual Report on Form 10-K, we continue

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with revenue concentration in a limited number of strategic partners, as two customers accounted for 35.1% of total revenue in the second quarter (22.6% and 12.5%, respectively). No other customer accounted for more than 10% of total revenue.

     A breakdown of revenue for the three months ended June 30, 2004 and 2003 is as follows (in thousands):

     System and peripheral component sales increased to $5.3 million for the three months ended June 30, 2004 from $3.5 million for the second quarter of 2003. System placements for the second quarter of 2004 increased to 218 from 141 for the corresponding prior year period bringing total system placements to 2,339 as of June 30, 2004. During the current quarter, five of our partners accounted for 175 system placements or 80% of the total system placements. These five partners purchased 46 systems or 33% of the total system placements in the comparable period of 2003. Of the total 2,339 systems placed through June 30, 2004, we estimate that 45% have been sold in the clinical diagnostics market and 55% in the life sciences market.

     Consumable sales, comprised of microspheres and sheath fluid, increased to $2.1 million during the second quarter of 2004 from $1.2 million for the second quarter of 2003. We believe the increase is primarily the result of the increased use and acceptance of our technology. Partners with commercial applications available accounted for $1.2 million or 55% of total consumable sales for the quarter ended June 30, 2004. In addition, during the quarter we had five bulk purchases of consumables totaling approximately $1.4 million as compared with six bulk purchases of approximately $667,000 in the corresponding prior year period. Bulk purchases are purchases of consumables by a single customer that in the aggregate are more than $100,000. As the number of applications available on our platform expands, we expect to see the overall level of consumable sales continue to rise.

     Royalty revenue increased to $705,000 during the three months ended June 30, 2004 from $285,000 for the three months ended June 30, 2003. This increase is attributable to increased sales of royalty bearing commercial products by our partners and an increase in the commercial base of Luminex Systems as compared to the prior year. For the three months ended June 30, 2004, we had 20 commercial partners submit royalties as compared with 15 for the three months ended June 30, 2003. Additionally, the 15 partners for whom we recognized $285,000 in royalties for the second quarter of 2003 represented approximately $655,000 of the second quarter 2004 total, an increase of approximately 130% over their prior year payments. Four of our partners reported royalties totaling approximately $418,000 or 59% of the total royalties for the current period. Total royalty bearing sales by our partners were approximately $11.3 million for the quarter ended June 30, 2004.

     Service contracts, comprised of extended warranty contracts earned ratably over the term of the agreement, increased to $372,000 during the second quarter of 2004 from $265,000 for the second quarter of 2003. This increase is attributable to increased sales of extended service agreements, which is a direct result of the increase in the commercial base of Luminex Systems as compared to the prior year period. At June 30, 2004, we had 283 Luminex Systems covered under an extended service agreement and $899,000 in deferred revenue related to those contracts. At June 30, 2003, we had 171 Luminex Systems covered under an extended service agreement and $410,000 in deferred revenue related to those contracts.

     Other revenues, comprised of training revenue, shipping revenue, miscellaneous parts sales, amortized license fees and special project revenues, increased to $628,000 for the three months ended June 30, 2004 from $375,000 for the three months ended June 30, 2003. This increase is primarily the result of an increase in parts sales to our partners who have assumed the field service obligation on our systems coupled with increases in shipping revenue as

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the volumes of shipments has increased. For the quarter ended June 30, 2004, we had $354,000 of parts sales, $121,000 of shipping and $153,000 of other miscellaneous revenue.

     Gross Profit. Gross profit increased to $3.4 million for the three months ended June 30, 2004, as compared to $1.9 million for the three months ended June 30, 2003. The gross margin rate (gross profit as a percentage of total revenue) increased to 37% for the three months ended June 30, 2004 from 34% for the three months ended June 30, 2003. The rate increase in gross margin was primarily attributable to the allocation of our fixed costs over a higher revenue base and an increase in the high margin items (consumables and royalties) as a percentage of total revenue. However, these factors were offset by margin compression from the higher cost of the new laser configuration. For the current period, consumables and royalties represented 31% of total revenue as compared with 27% for the comparable prior year period. Additionally, approximately 185 of the 214 LX 100 systems placed during the current quarter included the new, more expensive configuration.

     Research and Development Expense. Research and development expenses increased to $987,000 for the three months ended June 30, 2004 from $881,000 for the comparable period in 2003. The increase was primarily attributable to increases of personnel costs of $122,000 associated with the net addition of five employees over our June 30, 2003 headcount of 28.

     Selling, General and Administrative Expense. Selling, general and administrative expenses increased to $3.6 million for the three months ended June 30, 2004 from $3.1 million for the comparable period in 2003. The increase was primarily attributable to incremental stock compensation charges related to equity issuances to employees; stock compensation charges related to the employment of a new CEO; and recruiting fees associated with finding and placing the new CEO. We believe that our selling, general and administrative expenses are highly leverageable and can support additional revenue with minimal additions.

     Other Income, net. Other income was essentially flat at $94,000 for the three months ended June 30, 2004 and $96,000 for the comparable period in 2003. The average rate on current invested balances was flat at 1.0% as of June 30, 2004 and 2003.

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003

     Revenue. Total revenue increased to $18.5 million for the six months ended June 30, 2004 from $10.7 million for the comparable period in 2003. The increase in revenue was primarily attributable to increased acceptance and utilization of our technology in the marketplace as evidenced by increased system placements and corresponding increases in all other revenue line items. As previously disclosed in our Annual Report on Form 10-K, we continue with revenue concentration in a limited number of strategic partners, as two customers accounted for 34.2% of total revenue in the first half of 2004 (23.6% and 10.6%, respectively). No other customer accounted for more than 10% of total revenue.

     A breakdown of revenue for the six months ended June 30, 2004 and 2003 is as follows (in thousands):

     System and peripheral component sales increased to $10.2 million for the six months ended June 30, 2004 from $6.5 million for the first half of 2003. Instrument placements increased to 424 for the first half of 2004 as compared to 272 placements for the corresponding prior year period bringing total system placements to 2,339 as of June 30,

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2004. During the first half of 2004, five of our partners accounted for 288 system placements or 68% of the total system placements for the period. These five partners purchased 149 systems or 55% of the total system placements in the comparable period of 2003.

     Consumable sales, comprised of microspheres and sheath fluid, increased to $4.6 million during the first half of 2004 from $2.4 million for the first half of 2003. We believe the increase is primarily the result of the increased use and acceptance of our technology. Partners with commercial applications available accounted for $3.3 million or 71% of total consumable sales for the six months ended June 30, 2004. In addition, during the first half of 2004 we had 12 bulk purchases of consumables totaling approximately $3.1 million as compared with seven bulk purchase of approximately $844,000 in the corresponding prior year period. As the number of applications available on our platform expands, we expect to see the overall level of consumable sales continue to rise.

     Royalty revenue increased to $1.3 million during the six months ended June 30, 2004 from $504,000 for the six months ended June 30, 2003. This increase is attributable to increased sales of royalty bearing commercial products by our partners and an increase in the commercial base of Luminex Systems as compared to the prior year. For the six months ended June 30, 2004, we had 21 commercial partners submit royalties as compared with 17 for the six months ended June 30, 2003. Additionally, the 17 partners for whom we recognized $504,000 in royalties for the first half of 2003 represented approximately $1.2 million of the first half 2004 total, an increase of approximately 142% over their prior year payments. Four of our partners reported royalties totaling approximately $776,000 or 59% of the total royalties for the current period. Total royalty bearing sales by our partners were approximately $21.0 million for the six months ended June 30, 2004.

     Service contracts, comprised of extended warranty contracts earned ratably over the term of the agreement, increased to $691,000 during the first half of 2004 from $519,000 for the first half of 2003. This increase is attributable to increased sales of extended service agreements, which is a direct result of the increase in the commercial base of Luminex Systems as compared to the prior year period.

     Other revenues, comprised of training revenue, shipping revenue, miscellaneous parts sales, amortized license fees and special project revenues, increased to $1.6 million for the six months ended June 30, 2004 from $786,000 for the six months ended June 30, 2003. This increase is primarily the result of increases in parts sales to our partners who have assumed the field service obligation on our systems, increases in special projects for our partners and increases in shipping revenue as the volume of shipments has increased. For the six months ended June 30, 2004, we had $725,000 of parts sales, $343,000 of special projects, $232,000 of shipping and $315,000 of other miscellaneous revenue.

     Gross Profit. Gross profit increased to $7.4 million for the six months ended June 30, 2004, as compared to $3.4 million for the six months ended J