UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

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 [ ]

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

     There were 31,140,603 shares of the Company’s Common Stock, par value $0.001 per share, outstanding on November 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 nine months ended September 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 nine months ended September 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 September 30, 2003, the Company had cash activity of $15,000 and an accrual adjustment of $20,000 under the restructuring plan. During the nine months ended September 30, 2003, the Company had cash expenditures of $1.7 million, non-cash expenditures of $100,000 and an accrual adjustment of $72,000 under the restructuring plan.

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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 2,406,274 and 1,640,614 for the three and nine months ended September 30, 2004, respectively, and 2,210,320 and 2,378,484 for the three and nine months ended September 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”).

     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 September 30:

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^[1] No stock options were issued to employees during this period.

     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 September 30, 2004 and 2003 was approximately $1.1 million and $786,000, respectively. Comprehensive loss for the nine months ended September 30, 2004 and 2003 was approximately $2.4 million and $3.7 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 manufacturing operations and manage operating expenses, gross margins and inventory levels, potential shortages of components, competition, the timing of regulatory approvals, modification of the Company’s operating plan in response to its ongoing evaluation of its business, our ability to timely satisfy regulatory requirements with respect to our internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), 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 Operations.” 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

     During the third quarter of 2004, there were several factors that affected our financial performance for the quarter as compared with the previous quarter. These factors were (i) a sequential decrease in revenues as compared to the second quarter of 2004, but a 17% increase over the comparable period of 2003; (ii) increased acceptance and utilization of our technology in the marketplace as evidenced by our continued increase in royalty revenue; (iii) gross margin improvement relative to both the third quarter of 2003 and the second quarter of 2004; (iv) increases in inventory; and (v) a sequential increase in operating expenses and a 31% increase in operating expenses over the third quarter of 2003.

     We experienced a sequential decrease in total revenue during the quarter as compared with the second quarter of 2004. As we have previously disclosed, we have yet to see a great deal of predictability in the buying patterns of our customers, which has resulted in variability in both revenue mix and volume. Although revenues were relatively flat from the first to the second quarters of this year, we experienced shifts in the mix. In absolute dollars, second quarter 2004 system revenues increased $464,000 while consumable revenues decreased by $380,000, as compared to the first quarter of 2004. In the third quarter of this year, we experienced a decrease in system revenue of $1.1 million, offset slightly by increases in royalty revenue, service revenue and other revenue compared to the second quarter. This revenue variability can be attributed to the timing of purchases as well as the effects of delays in product launches by our customers.

     Our royalty revenue increased to $870,000 representing over $57.1 million in annualized 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 increase 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 eighth consecutive quarter our 12-month moving average of consumable sales has increased. At September 30, 2004, our 12-month moving average of consumable sales was $2.1 million.

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     As a result of the variability of the revenue mix, we have experienced some related variability in both absolute gross profit and the corresponding gross margin percentage. For comparative purposes, we had gross profit in the first, second and third quarters of this year of $4.0 million, $3.4 million and $3.5 million, respectively. Additionally, gross margin percentage over the same periods was 43%, 37% and 42%, respectively. The fluctuations in both gross profit and gross margin percentage can be primarily attributed to the variability of the revenue mix and secondarily to the increases in the cost of our system during the second quarter of this year. Total consumable and royalty revenue, our highest margin items, accounted for 36% of total revenue for the third quarter. Furthermore, we recorded a contractual adjustment of $182,000 during the third quarter related to a purchase commitment that was unfulfilled by one of our partners. This factor, coupled with the mix changes, contributed to increased gross profit and gross margin percentage for the quarter on reduced revenue.

     Inventory balances increased by approximately $2.0 million from the June 30, 2004 balance. The increase in inventory can be attributed to the variability in system sales coupled with known purchases scheduled for the fourth quarter of this year. We do not currently believe that we have increased exposure to future excess and obsolete inventory charges and we believe that the allowance for excess and obsolete inventory is adequate although the allowance is down from the June 30, 2004 balance of $640,000. At September 30, 2004, the allowance represented approximately 5% of the gross inventory balance.

     Operating expenses have increased over both the prior quarter and the comparable period in the prior year. This increase is primarily attributable to specific personnel additions to fill certain gaps in our corporate infrastructure, coupled with increases in stock compensation charges related to equity issuances to our employees and expenses associated with Section 404 compliance. We have added 12 full time personnel since September 30, 2003 and at September 30, 2004, we had a total operating headcount of 85. In addition, effective October 25, 2004, we hired Gregory J. Gosch as Vice President of Marketing. Total stock compensation charges have increased over the third quarter of 2003 and the second quarter of 2004 by $223,000 and $62,000, respectively. During the second quarter of 2004, we issued restricted stock to our employees in the place of stock options in order to lessen near-term dilution and extend the life of existing equity plans. Additionally, as we have added new employees, initial equity grants have contained a restricted stock component for the same reasons. Direct third party costs associated with Section 404 compliance are approximately $115,000 year to date. We currently expect to incur at least an additional $150,000 during the fourth quarter of 2004. By comparison, we incurred no third party costs associated with Section 404 compliance during 2003.

     Our ability to achieve sustained profitability continues to depend upon our ability to establish and 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 September 30, 2004, we had 21 strategic partners who had either released commercialized products based on the Luminex platform or were redistributing our products and were reporting royalties. These 21 strategic partners provided 73% of total revenues for the third 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 continue 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.

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

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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 September 30, 2004 was $4.2 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 $1.0 million, 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 $619,000. 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 September 30, 2004, the two major components of the allowance for excess and obsolete inventory were (i) a specific reserve for inventory components that we no longer use in the manufacture of our systems and (ii) 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 SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2003

     Revenue. Total revenue increased to $8.4 million for the three months ended September 30, 2004 from $7.1 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 royalty revenue and corresponding increases in all other revenue line items. As previously disclosed in our Annual Report on Form 10-K, we continue to have revenue concentration in a limited number of strategic partners, as two customers accounted for 30.2% of total revenue in the third quarter (18.2% and 11.9%, respectively). No other customer accounted for more than 10% of total revenue.

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

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     System and peripheral component sales increased to $4.3 million for the three months ended September 30, 2004 from $4.0 million for the third quarter of 2003. System placements for the third quarter of 2004 increased to 177 from 170 for the corresponding prior year period bringing total system placements to 2,516 as of September 30, 2004. During the current quarter, four of our partners accounted for 134, or 76%, of the total system placements. These four partners purchased 84, or 49%, of the total system placements in the comparable period of 2003. Of the total 2,516 systems placed through September 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, were relatively flat at $2.1 million during the third quarter of 2004 compared with $2.0 million for the third quarter of 2003. Partners with commercial applications available accounted for $1.0 million, or 49%, of total consumable sales for the quarter ended September 30, 2004. In addition, during the quarter we had four bulk purchases of consumables totaling approximately $1.1 million as compared with six bulk purchases totaling approximately $1.4 million 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 would expect to see the overall level of consumable sales continue to rise.

     Royalty revenue increased to $870,000 during the three months ended September 30, 2004 from $400,000 for the three months ended September 30, 2003. We believe the increase is primarily the result of the increased use and acceptance of our technology. For the three months ended September 30, 2004, we had 21 commercial partners submit royalties as compared with 19 for the three months ended September 30, 2003. Additionally, the 19 partners from whom we recognized $400,000 in royalties for the third quarter of 2003 represented approximately $819,000 of the third quarter 2004 total, an increase of approximately 105% over their prior year payments. Four of our partners reported royalties totaling an aggregate of approximately $568,000, or 65%, of the total royalties for the current period. Total royalty bearing sales by our partners were over $14.2 million for the quarter ended September 30, 2004 and over $57.1 million on an annualized basis.

     Service contracts, comprised of extended warranty contracts earned ratably over the term of the agreement, increased to $423,000 during the third quarter of 2004 from $262,000 for the third 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 September 30, 2004, we had 329 Luminex Systems covered under an extended service agreement and $997,000 in deferred revenue related to those contracts. At September 30, 2003, we had 191 Luminex Systems covered under an extended service agreement and $430,000 in deferred revenue related to those contracts.

     Other revenue, comprised of training revenue, shipping revenue, miscellaneous part sales, amortized license fees and special project revenue, increased to $698,000 for the three months ended September 30, 2004 from $461,000 for the three months ended September 30, 2003. This increase is primarily the result of a contractual adjustment of $182,000 related to unfulfilled purchase commitments by one of our partners. For the quarter ended September 30, 2004, we had $307,000 of parts sales, $182,000 for the contractual adjustment and $209,000 of other miscellaneous revenue.

     Gross Profit. Gross profit increased to $3.5 million for the three months ended September 30, 2004, as compared to $2.8 million for the three months ended September 30, 2003. The gross margin rate (gross profit as a percentage of total revenue) increased to 42% for the three months ended September 30, 2004 from 40% for the three months ended September 30, 2003. The rate increase in gross margin was primarily attributable to an increase in the average

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price of our LX100 system coupled with a change in revenue mix in favor of our higher margin items, consumables and royalties. The average price of an LX100 system was approximately $24,100 for the third quarter of 2004 and $23,500 in the third quarter of 2003. The increase in average system price is attributable to changes in partner mix and corresponding price differential of the related configurations. Consumables and royalties represented 36% of total revenues in the third quarter of 2004 compared with 34% in the comparable quarter of 2003.

     Research and Development Expense. Research and development expenses increased to $949,000 for the three months ended September 30, 2004 from $688,000 for the comparable period in 2003. The increase was primarily attributable to an increase in personnel costs associated with the net addition of seven employees over our September 30, 2003 research and development headcount of 28 and an increase in material and supply cost associated with expendable items used in research and development efforts.

     Selling, General and Administrative Expense. Selling, general and administrative expenses increased to $3.9 million for the three months ended September 30, 2004 from $3.0 million for the comparable period in 2003. The increase was primarily attributable to incremental stock compensation charges related to equity issuances to employees, an increase in personnel costs related to the net addition of five employees over our September 30, 2003 selling, general and administrative headcount of 45 and expenses associated with Section 404 compliance. 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 increased to $162,000 for the three months ended September 30, 2004 from $93,000 for the comparable period in 2003. The average rate on current invested balances was 1.6% as of September 30, 2004 compared to 1.0% as of September 30, 2003.

NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003

     Revenue. Total revenue increased to $26.8 million for the nine months ended September 30, 2004 from $17.9 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 increases in all revenue line items. As previously disclosed in our Annual Report on Form 10-K, we continue to have revenue concentration in a limited number of strategic partners, as two customers accounted for 33.0% of total revenue in the first nine months of 2004 (22.0% and 11.0%, respectively). No other customer accounted for more than 10% of total revenue.

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

     System and peripheral component sales increased to $14.5 million for the nine months ended September 30, 2004 from $10.5 million for the first nine months of 2003. System placements increased to 597 for the first nine months of 2004 as compared to 441 placements for the corresponding prior year period, bringing total system placements to 2,516 as of September 30, 2004. During the first nine months of 2004, four of our partners accounted for 422, or 71%, of the total system placements for the period. These four partners purchased 233, or 53%, of the total system placements in the comparable period of 2003.

     Consumable sales, comprised of microspheres and sheath fluid, increased to $6.7 million during the first nine months of 2004 from $4.4 million for the first nine months of 2003. We believe the increase is primarily the result of the increased use and acceptance of our technology and the increased installed base of our systems. Partners with commercial applications available accounted

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for $4.3 million, or 64%, of total consumable sales for the nine months ended September 30, 2004. In addition, during the first nine months of 2004 we had 16 bulk purchases of consumables totaling approximately $4.2 million as compared with 13 bulk purchase of approximately $2.2 million 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 $2.2 million during the nine months ended September 30, 2004 from $904,000 for the nine months ended September 30, 2003. We believe this increase is also primarily the result of the increased use and acceptance of our technology. For the nine months ended September 30, 2004, we had 22 commercial partners submit royalties as compared with 19 for the nine months ended September 30, 2003. Additionally, the 19 partners from whom we recognized $904,000 in royalties for the first nine months of 2003 represented approximately $2.1 million of the total royalties for the first nine months of 2004, an increase of approximately 127% over their prior year payments. Four of our partners reported royalties totaling an aggregate of approximately $1.3 million, or 62%, of the total royalties for the current period. Total royalty bearing sales by our partners were over $35.2 million for the nine months ended September 30, 2004.

     Service contracts, comprised of extended warranty contracts earned ratably over the term of the agreement, increased to $1.1 million during the first nine months of 2004 from $780,000 for the first nine months 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 revenue, comprised of training revenue, shipping revenue, miscellaneous part sales, amortized license fees and special project revenue, increased to $2.3 million for the nine months ended September 30, 2004 from $1.2 million for the nine months ended September 30, 2003. The contributors to the increase in other revenue over the prior year to date period were spread over the range of items in other revenue, including increases in part sales to our partners who have assumed the field service obligation on our systems of $237,000 and increases in special project revenue of approximately $254,000. For the nine months ended September 30, 2004, we had $1.0 million of part sales, $343,000 of special pr