UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

		for the quarterly period ended June 30, 2010

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 Number: 000-30109

LUMINEX CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE		74-2747608
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
12212 TECHNOLOGY BLVD., AUSTIN, TEXAS		78727
(Address of principal executive offices)		(Zip Code)

(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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

There were 42,295,682 shares of the Company’s Common Stock, par value $0.001 per share, outstanding on August 2, 2010.

 

 

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009			1
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009			2
Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2010 and 2009			3
Notes to Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures About Market Risk			31
Item 4. Controls and Procedures			32
PART II. OTHER INFORMATION
Item 1A. Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 6. Exhibits			33
SIGNATURES and EXHIBITS			34
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LUMINEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

		June 30,				December 31,
		2010				2009
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	83,986			$	90,843
Restricted cash			1,000				—
Short-term investments			16,527				8,511
Accounts receivable, net			17,678				22,108
Inventories, net			21,001				17,524
Deferred income taxes			3,935				1,040
Prepaids and other			3,170				2,130
Total current assets			147,297				142,156
Property and equipment, net			19,521				17,255
Intangible assets, net			13,762				12,938
Deferred income taxes			10,610				14,732
Long-term investments			17,605				20,228
Goodwill			41,718				39,617
Other			3,902				1,087
Total assets		$	254,415			$	248,013
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	5,681			$	8,430
Accrued liabilities			5,361				7,493
Deferred revenue			3,889				2,967
Current portion of long term debt			382				868
Other			114				—
Total current liabilities			15,427				19,758
Long-term debt			3,437				3,591
Deferred revenue			4,461				4,614
Other			3,335				1,312
Total liabilities			26,660				29,275
Stockholders’ equity:
Common stock, $.001 par value, 200,000,000 shares authorized; issued and outstanding: 41,093,571 shares at June 30, 2010; 40,736,340 shares at December 31, 2009			41				41
Preferred stock, $.001 par value, 5,000,000 shares authorized; no shares issued and outstanding			—				—
Additional paid-in capital			291,779				285,648
Accumulated other comprehensive gain			155				28
Accumulated deficit			(64,220	)			(66,979	)
Total stockholders’ equity			227,755				218,738
Total liabilities and stockholders’ equity		$	254,415			$	248,013

See the accompanying notes which are an integral part of these
Condensed Consolidated Financial Statements.

LUMINEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(unaudited)								(unaudited)
Revenue		$	33,242			$	27,801			$	66,494			$	53,358
Cost of revenue			10,082				8,501				20,558				16,490
Gross profit			23,160				19,300				45,936				36,868
Operating expenses:
Research and development			5,879				4,977				10,858				9,603
Selling, general and administrative			15,016				13,294				29,065				24,652
Total operating expenses			20,895				18,271				39,923				34,255
Income from operations			2,265				1,029				6,013				2,613
Interest expense from long-term debt			(112	)			(124	)			(228	)			(242	)
Other income, net			114				178				241				449
Settlement of litigation			—				—				—				(4,350	)
Income (loss) before income taxes			2,267				1,083				6,026				(1,530	)
Income taxes			(1,383	)			29				(3,267	)			(148	)
Net income (loss)		$	884			$	1,112			$	2,759			$	(1,678	)
Net income (loss) per share, basic		$	0.02			$	0.03			$	0.07			$	(0.04	)
Shares used in computing net income (loss) per share, basic			41,001				40,533				40,893				40,441
Net income (loss) per share, diluted		$	0.02			$	0.03			$	0.07			$	(0.04	)
Shares used in computing net income (loss) per share, diluted			42,281				41,353				41,986				40,441

See the accompanying notes which are an integral part of these
Condensed Consolidated Financial Statements.

LUMINEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(unaudited)								(unaudited)
Cash flows from operating activities:
Net income (loss)		$	884			$	1,112			$	2,759			$	(1,678	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			2,121				1,916				4,284				3,879
Amortization of deferred stock, restricted stock and stock compensation expense			2,439				1,815				4,606				3,586
Deferred income tax benefit			911				—				2,505				2
Excess income tax benefit from employee stock-based awards			(1,524	)			—				(1,524	)			—
Loss on disposal of assets			—				15				—				25
Other			(72	)			712				263				581
Changes in operating assets and liabilities:
Accounts receivable, net			(1,042	)			(3,990	)			5,210				(7,090	)
Inventories, net			(547	)			(964	)			(2,113	)			(822	)
Other assets			(818	)			(990	)			(745	)			(433	)
Accounts payable			721				(4,542	)			(3,466	)			(1,061	)
Accrued liabilities			2,038				(1,009	)			(1,345	)			(4,318	)
Deferred revenue			(37	)			225				740				341
Net cash provided by (used in) operating activities			5,074				(5,700	)			11,174				(6,988	)
Cash flows from investing activities:
Purchases of available-for-sale securities			(9,054	)			(13,165	)			(21,667	)			(44,646	)
Maturities of available-for-sale securities			12,998				4,994				16,193				4,994
Maturities of held-to-maturity securities			—				13,441				—				36,140
Purchase of property and equipment			(3,985	)			(3,585	)			(5,449	)			(5,116	)
Business acquisition consideration, net of cash acquired			(5,036	)			—				(5,036	)			—
Increase in restricted cash			(1,000	)			—				(1,000	)			—
Purchase of cost method investment			(2,000	)			—				(2,000	)			—
Acquired technology rights			(1,200	)			(14	)			(1,200	)			(21	)
Net cash (used in) provided by investing activities			(9,277	)			1,671				(20,159	)			(8,649	)
Cash flows from financing activities:
Payment on debt			(895	)			(440	)			(895	)			(440	)
Proceeds from debt			—				—				—				454
Proceeds from issuance of common stock			301				146				1,440				285
Excess income tax benefit from employee stock-based awards			1,524				—				1,524				—
Net cash provided by (used in) financing activities			930				(294	)			2,069				299
Effect of foreign currency exchange rate on cash			86				(241	)			59				(130	)
Change in cash and cash equivalents			(3,187	)			(4,564	)			(6,857	)			(15,468	)
Cash and cash equivalents, beginning of period			87,173				70,715				90,843				81,619
Cash and cash equivalents, end of period		$	83,986			$	66,151			$	83,986			$	66,151

See the accompanying notes which are an integral part of these
Condensed Consolidated Financial Statements.

LUMINEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by Luminex Corporation (the “Company” or “Luminex”) in accordance with United States generally accepted accounting principles 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 United States generally accepted accounting principles for complete financial statements. The condensed 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, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. 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, 2009.

The Company’s comprehensive income or loss is comprised of net income or loss, unrealized gains and losses on securities classified as available for sale, and foreign currency translation. Comprehensive income (loss), net of tax, for the three and six months ended June 30, 2010 was approximately $1.0 million and approximately $2.8 million, respectively, and comprehensive income (loss), net of tax, for the three and six months ended June 30, 2009 was approximately $1.3 million and $(1.6) million, respectively.

The Company has two segments for financial reporting purposes. During the second quarter of 2010, the technology segment changed its name to the technology and strategic partnerships (“TSP”) segment, and the assay segment changed its name to the assays and related products (“ARP”) segment. This was only a name change, and there have been no changes to the historical segment financial information or underlying operational activity other than the acquisition of Bizpac (Australia) Pty. Ltd. described below. See Note 8 — Segment Information.

No material subsequent events have occurred since June 30, 2010 that require recognition or disclosure in these financial statements.

NOTE 2 — BUSINESS COMBINATIONS

On May 24, 2010, the Company completed the acquisition of 100% of the outstanding shares of Bizpac (Australia) Pty. Ltd. (“BSD”), an Australia-based manufacturer and wholesaler of laboratory instruments. This acquisition was undertaken to provide the company access to new technology and products, an innovative development team, and an established presence in important strategic markets.

BSD specializes in automation and robotics in the field of dry sample handling. The privately held company, which was founded in 1991, is headquartered in Brisbane, Queensland, Australia. BSD has established positions in the worldwide newborn screening, forensics, human identification and several molecular diagnostics markets.

The results of operations for BSD have been included in the Company’s consolidated financial statements from the date of acquisition as part of the Company’s ARP segment. The Company has concluded that the acquisition of BSD does not represent a material business combination and therefore no pro forma financial information has been provided herein.

The aggregate purchase price of $5.3 million (subject to adjustment) in cash was comprised of the following components (in thousands):

Cash consideration		$	5,212
Contingent consideration			41
Total purchase price		$	5,253

The acquisition also provides for contingent consideration made up of earn-out payments not to exceed AUD $1.4 million ($1.2 million USD) based on BSD’s exceeding gross revenue targets between the acquisition date and December 31, 2015. The Company has considered the guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (ASC) 805, Business Combinations, and concluded that this contingent consideration will represent additional purchase price. The Company has recognized this contingent consideration at the acquisition date at its fair value of $41,000. This fair value was estimated using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in Note 3. The key assumptions in applying the income approach are the 21% discount rate and the probability adjusted revenues of BSD. Subsequent changes in the fair value of this contingent consideration will be recognized in the income statement. There is an additional payment to one of the previous shareholders of BSD of AUD $91,000 ($78,000 USD) that is payable over two years that will be considered compensation under ASC 805, and therefore, is not included in the purchase price. This payment could be accelerated if the 2011 earn-out gross revenue target is met.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):

Net tangible assets assumed as of May 24, 2010		$	1,417
Intangible assets subject to amortization			1,792
Goodwill			2,044
Total purchase price		$	5,253

The Company is in the process of obtaining third-party valuations of certain intangible assets; thus the provisional measurement of intangible assets and goodwill are subject to change. If information later becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation retrospectively through revisions to the fair values of the intangible assets and resulting goodwill recorded.

Restricted Cash

The Company had $1.0 million and $0 of restricted cash as of June 30, 2010 and December 31, 2009, respectively, representing funds placed in escrow in a Luminex account for the acquisition of BSD. The Company is holding these funds back from the cash consideration paid to the sellers of BSD for a term of two years. These funds will be available to compensate the Company for certain losses, damages and other costs as defined in the agreement related to the BSD acquisition. The Company has recorded a corresponding amount in other long-term liabilities.

NOTE 3 — INVESTMENTS

Marketable Securities

The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Cash and cash equivalents consist of cash deposits and highly liquid investments with original maturities of three months or less when purchased. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available for sale. Held-to-maturity securities are stated at amortized cost, which approximates fair value of these investments. Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings. Debt and marketable equity securities not classified as held-to-maturity or as trading are classified as available for sale, and are carried at fair market value on a recurring basis, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income and reported in stockholders’ equity. There are no withdrawal restrictions on these cash and cash equivalents or securities. Marketable securities are recorded as either short-term or long-term on the balance sheet based on contractual maturity date. The fair value of all securities is determined by quoted market prices and market interest rates as of the end of the reporting period. Declines in fair value below the Company’s carrying value deemed to be other than temporary are charged against net earnings.

Available-for-sale securities consisted of the following as of June 30, 2010 (in thousands):

						Gains in				Losses in
						Accumulated				Accumulated
						Other				Other
						Comprehensive				Comprehensive				Estimated
		Cost				Gain				Gain				Fair Value
Current:
Money Market funds		$	48,711			$	—			$	—			$	48,711
Non-government sponsored debt securities			39,418				68				—				39,486
Total current securities			88,129				68				—				88,197
Noncurrent:
Non-government sponsored debt securities			17,543				63				—				17,606
Government sponsored debt securities			2,022				15				—				2,037
Total noncurrent securities			19,565				78				—				19,643
Total available-for-sale securities		$	107,694			$	146			$	—			$	107,840

Available-for-sale securities consisted of the following as of December 31, 2009 (in thousands):

						Gains in				Losses in
						Accumulated				Accumulated
						Other				Other
						Comprehensive				Comprehensive				Estimated
		Cost				Gain				Gain				Fair Value
Current:
Money Market funds		$	60,299			$	—			$	—			$	60,299
Non-government sponsored debt securities			33,495				19				(5	)			33,509
Total current securities			93,794				19				(5	)			93,808
Noncurrent:
Non-government sponsored debt securities			18,144				72				(35	)			18,181
Government sponsored debt securities			2,035				12				—				2,047
Total noncurrent securities			20,179				84				(35	)			20,228
Total available-for-sale securities		$	113,973			$	103			$	(40	)		$	114,036

There were no proceeds from the sales of available-for-sale securities during the three months ended June 30, 2010 or 2009. Net unrealized holding gains on available-for-sale securities in the amount of $145,000 have been included in accumulated other comprehensive gain as of June 30, 2010. All of the Company’s available-for-sale securities with gross unrealized losses as of June 30, 2010 and December 31, 2009 had been in a loss position for less than 12 months.

The estimated fair value of available-for-sale debt securities at June 30, 2010 and December 31, 2009, by contractual maturity, was as follows (in thousands):

		Estimated Fair Value
		June 30,				December 31,
		2010				2009
Due in one year or less		$	39,486			$	33,509
Due after one year through two years			19,643				20,228
		$	59,129			$	53,737

Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

The Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification (“ASC”) defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The ASC describes a fair value hierarchy based on the following three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of June 30, 2010 (in thousands):

		Fair Value Measurements at Reporting Date Using
		Level 1				Level 2				Level 3				Total
Money Market funds		$	48,711				—				—			$	48,711
Non-government sponsored debt securities			57,092				—				—				57,092
Government sponsored debt securities			2,037				—				—				2,037
Total		$	107,840				—				—			$	107,840
Amounts included in:
Cash and cash equivalents		$	73,708				—				—			$	73,708
Short-term investments			16,527				—				—				16,527
Long-term investments			17,605				—				—				17,605
Total		$	107,840				—				—			$	107,840

Non-Marketable Securities and Other-Than-Temporary Impairment

In the second quarter of 2010, the Company invested $2.0 million in a private company based in the U.S. This minority investment in the private company is included at cost in other long-term assets on the Company’s Consolidated Balance Sheets as the Company does not have significant influence over the investee and the investee is not publicly traded.

NOTE 4 — INVENTORY, NET

Inventory is stated at the lower of cost or market, with cost determined according to the standard cost method. Inventory consisted of the following (in thousands):

		June 30,				December 31,
		2010				2009
Parts and supplies		$	11,835			$	9,499
Work-in-progress			4,901				4,064
Finished goods			4,265				3,961
		$	21,001			$	17,524

NOTE 5 — GOODWILL AND OTHER INTANGIBLE ASSETS

On May 24, 2010, the Company completed the acquisition of BSD. As a result, the Company recorded approximately $2.1 million of goodwill and $1.8 million of other identifiable intangible assets. The purchase price allocation is preliminary as the Company’s determination of the fair values of the assets acquired and liabilities assumed is still in progress. For impairment testing purposes, the Company has assigned all of the BSD goodwill to the ARP segment. This goodwill is not expected to be deductible for tax purposes.

The changes in the carrying amount of goodwill during the period are as follows (in thousands):

		June 30,				December 31,
		2010				2009
Balance at beginning of year		$	39,617			$	39,617
Acquisition of BSD			2,044				—
Foreign currency translation adjustments			57				—
Balance at end of period		$	41,718			$	39,617

Also as a result of the acquisition of BSD, the Company acquired amortizable identifiable intangible assets consisting of developed technology of $825,000, in-process research and development of $583,000, customer relationships and contracts of $152,000, trade name of $193,000, and a non-compete agreement of $39,000. These will be amortized over their estimated lives of five years for the developed technology, four years for the customer relationships and contracts, two years for the trade name, and 7 years for the non-compete agreement. The in-process research and development will be an indefinite-lived intangible asset until completion or abandonment at which point it will be accounted for as a finite-lived intangible asset or written off if abandoned. These newly acquired intangible assets are reflected with the Company’s previously acquired intangible assets in the table below (in thousands, except weighted average lives):

		Finite-lived												Indefinite-lived
										Other
		Technology,				Customer				identifiable
		trade secrets				lists and				intangible
		and know-how				contracts				assets				IP R&D				Total
2009
Balance at December 31, 2008		$	17,400			$	1,100			$	—			$	—			$	18,500
Additions due to acquisition of BSD			—				—				—				—				—
Foreign currency translation adjustments			—				—				—				—				—
Balance at December 31, 2009			17,400				1,100				—				—				18,500
Less: accumulated amortization:
Accumulated amortization balance at December 31, 2008			(3,465	)			(134	)			—				—				(3,599	)
Amortization expense			(1,890	)			(73	)			—				—				(1,963	)
Foreign currency translation adjustments			—				—				—				—				—
Accumulated amortization balance at December 31, 2009			(5,355	)			(207	)			—				—				(5,562	)
Net balance at December 31, 2009		$	12,045			$	893			$	—			$	—			$	12,938
Weighted average life (in years)			9				15
2010
Balance at December 31, 2009		$	17,400			$	1,100			$	—			$	—			$	18,500
Additions due to acquisition of BSD			825				152				232				583				1,792
Foreign currency translation adjustments			24				4				7				17				52
Balance at June 30, 2010			18,249				1,256				239				600				20,344
Less: accumulated amortization:
Accumulated amortization balance at December 31, 2009			(5,355	)			(207	)			—				—				(5,562	)
Amortization expense			(964	)			(41	)			(15	)			—				(1,020	)
Foreign currency translation adjustments			—				—				—				—				—
Accumulated amortization balance at June 30, 2010			(6,319	)			(248	)			(15	)			—				(6,582	)
Net balance at June 30, 2010		$	11,930			$	1,008			$	224			$	600			$	13,762
Weighted average life (in years)			9				15				4

The estimated aggregate amortization expense for the next five years and thereafter is as follows (in thousands):

2010 (six months)		$	1,134
2011			2,268
2012			2,220
2013			2,172
2014			2,153
Thereafter			3,215
			13,162
IP R&D			600
		$	13,762

NOTE 6 — EARNINGS PER SHARE

A reconciliation of the denominators used in computing per share net income, or EPS, is as follows (in thousands, except per share amounts):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Numerator:
Net income (loss)		$	884			$	1,112			$	2,759			$	(1,678	)
Denominator:
Denominator for basic net income (loss) per share — weighted average common stock outstanding			41,001				40,533				40,893				40,441
Effect of dilutive securities: stock options and awards			1,280				820				1,093				—
Denominator for diluted net income (loss) per share — weighted average shares outstanding — diluted			42,281				41,353				41,986				40,441
Basic net income (loss) per share		$	0.02			$	0.03			$	0.07			$	(0.04	)
Diluted net income (loss) per share		$	0.02			$	0.03			$	0.07			$	(0.04	)

Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period. Restricted stock (consisting of restricted stock awards, or RSAs, and restricted stock units, or RSUs) and stock options to acquire approximately 0.7 million and 0.5 million shares for the three months ended June 30, 2010 and 2009, respectively, and 0.7 million and 1.4 million shares, respectively, for the six months ended June 30, 2010 and 2009 were excluded from the computations of diluted EPS because the effect of including the RSAs, RSUs, and stock options would have been anti-dilutive.

NOTE 7 — STOCK-BASED COMPENSATION

The Company’s stock option activity for the six months ended June 30, 2010 was as follows:

						Weighted
						Average
		Shares				Exercise
Stock Options		(in thousands)				Price
Outstanding at December 31, 2009			2,796			$	12.18
Granted			128				16.55
Exercised			(160	)			11.38
Cancelled or expired			(65	)			18.58
Outstanding at June 30, 2010			2,699			$	12.28

The Company had $2.2 million of total unrecognized compensation costs related to stock options at June 30, 2010 that are expected to be recognized over a weighted average period of 2.4 years.

The Company’s restricted share activity for the six months ended June 30, 2010 was as follows:

						Weighted
						Average
		Shares				Grant-Date
Restricted Stock Awards		(in thousands)				Fair Value
Non-vested at December 31, 2009			1,101			$	15.90
Granted			405				16.54
Vested			(271	)			15.37
Cancelled or expired			(20	)			16.42
Non-vested at June 30, 2010			1,215			$	16.22

		Shares
Restricted Stock Units		(in thousands)
Non-vested at December 31, 2009			545
Granted			330
Vested			(32	)
Cancelled or expired			(13	)
Non-vested at June 30, 2010			830

As of June 30, 2010, there was $19.6 million and $7.2 million of unrecognized compensation cost related to RSAs and RSUs, respectively. That cost is expected to be recognized over a weighted average period of 3.4 years for the RSAs and 2.4 years for the RSUs.

The following are the stock-based compensation costs recognized in the Company’s condensed consolidated statements of income (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Cost of revenue		$	246			$	162			$	424			$	289
Research and development			422				240				698				542
Selling, general and administrative			1,771				1,413				3,484				2,755
Stock-based compensation costs reflected in net income (loss)		$	2,439			$	1,815			$	4,606			$	3,586

NOTE 8 — SEGMENT INFORMATION

Management has determined that the Company has two segments for financial reporting purposes. During the second quarter of 2010, the technology segment changed its name to the technology and strategic partnerships (“TSP”) segment, and the assay segment changed its name to the assays and related products (“ARP”) segment. This was only a name change, and there have been no changes to the historical segment financial information or underlying operational activity other than the acquisition of BSD. The accounting principles of the segments are the same as those described in the Summary of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Intersegment sales are recorded at fixed prices which approximate the prices charged to third party strategic partners and are not a measure of segment operating earnings. Intersegment sales of approximately $2.1 million and $1.4 million for the quarters ending June 30, 2010 and 2009, respectively and $3.2 million and $2.4 million for the six months ended June 30, 2010 and 2009, respectively have been eliminated upon consolidation, respectively. Following is selected segment information for and as of the periods indicated (in thousands).

		Three Months Ended												Three Months Ended
		June 30, 2010												June 30, 2009
		TSP				ARP								TSP				ARP
		Segment				Segment				Consolidated				Segment				Segment				Consolidated
Revenues from external customers		$	25,227			$	8,015			$	33,242			$	19,466			$	8,335			$	27,801
Depreciation and amortization			1,232				889			$	2,121				1,057				859			$	1,916
Segment profit (loss)			1,999				(1,115	)		$	884				1,448				(336	)		$	1,112
Segment assets			175,721				78,694			$	254,415				141,126				73,947			$	215,073
		Six Months Ended												Six Months Ended
		June 30, 2010												June 30, 2009
		TSP				ARP								TSP				ARP
		Segment				Segment				Consolidated				Segment				Segment				Consolidated
Revenues from external customers		$	50,443			$	16,051			$	66,494			$	40,564			$	12,794			$	53,358
Depreciation and amortization			2,534				1,750			$	4,284				2,028				1,851			$	3,879
Segment profit (loss)			4,523				(1,764	)		$	2,759				3,357				(5,035	)		$	(1,678	)
Segment assets			175,721				78,694			$	254,415				141,126				73,947			$	215,073

NOTE 9 — ACCRUED WARRANTY COSTS

Sales of certain 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 or no more than 15 months from the date of shipment. The Company estimates the amount of warranty claims on sold products 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.

The following table summarizes the changes in the warranty accrual (in thousands):

Accrued warranty costs at December 31, 2009		$	581
Warranty expenses			(1,128	)
Accrual for warranty costs			1,151
Accrued warranty costs at June 30, 2010		$	604

NOTE 10 — INCOME TAXES

At the end of each interim reporting period, an estimate is made of the effective tax rate expected to be applicable for the full year. The estimated full year’s effective tax rate is used to determine the income tax rate for each applicable interim reporting period. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period of the enactment date. The effective tax rate for the six months ended June 30, 2010 was 57.47%, excluding amounts recorded for discrete events. This differs from the statutory rate of 35% primarily because of the worldwide mix of consolidated earnings before taxes and an assessment regarding the realizability of our deferred tax assets. The Company’s tax expense reflects the full Federal, various state, and foreign blended statutory rates. The Company is utilizing its net operating losses in the US; therefore cash taxes to be paid are expected to be in the range of 6-10% of pre-tax book income.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, Australia, Canada, China, Japan, the Netherlands, and various states. Due to net operating losses, the U.S. tax returns dating back to 1996 can still be reviewed by the taxing authorities. With respect to Canada, tax returns dating back to 2003 can still be reviewed by the authorities. The Company has recorded an increase of $0.3 million to the estimated amount of liability associated with its uncertain tax position in the second quarter. No other material changes to this liability are expected within the next twelve months. The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes.

NOTE 11 — RECENT ACCOUNTING PRONOUNCEMENTS

The FASB recently amended its guidance on the information that a reporting entity must provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. Specifically, among other aspects, the new guidance amends previous guidance related to the concept of a qualifying special-purpose entity, variable interest entities that are qualifying special-purpose entities and the financial-components approach. The new guidance is effective for transfers of financial assets occurring on or after January 1, 2010. Historically, the Company has not had any material transfers of financial assets. Additionally, the FASB recently amended its guidance surrounding a company’s analysis to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. This new guidance also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. The guidance is effective for all variable interest entities and relationships with variable interest entities existing as of January 1, 2010. The impact of the adoption of this standard to the Company’s non-financial assets and liabilities was not material.

In October 2009, the FASB updated its revenue recognition guidance, amending the criteria for separating consideration in multiple-deliverable arrangements. The amendments establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The amendments will eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price. This update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the requirements of this update and has not yet determined the impact on the Company’s consolidated financial statements.

In October 2009, the FASB updated its software guidance, changing the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of the software revenue guidance. In addition, the amendments require that hardware components of a tangible product containing software components always be excluded from the software revenue guidance. This update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the requirements of this update and has not yet determined the impact on the Company’s consolidated financial statements.

In January 2010, the FASB updated it guidance related to fair value measurements and disclosures. This guidance requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement in order to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, guidance requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs. In addition, the FASB clarified the disclosure requirements related to the use of judgment in determining the appropriate classes of assets and liabilities when reporting fair value measurement for each class and about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The update is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. As the Company only held Level 1 assets, the impact of the adoption of this standard to the Company’s financial position and results of operations was not material.

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 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, 2009 (the “2009 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 annual 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 U.S. and global finance markets and changes in government funding (including pursuant to the recent health reform legislation), 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 and financial position due to a lengthy and unpredictable sales cycle, fluctuations in foreign exchange rates, bulk purchases of consumables, fluctuations in product mix, and the seasonal nature of some of our assay products;

•

our ability to obtain and enforce intellectual property protections on our products and technologies;

•

reliance on third party distributors for distribution of specific 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 or other disruptions to our manufacturing operations;

•

competition;

•

our ability to successfully launch new products and their impact on sales of our legacy 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 quarterly 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 Part II, Item 1A “Risk Factors” below and in our 2009 10-K. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this quarterly 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 quarterly report including in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Part II, Item 1A “Risk Factors” 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.

Segment Information

Luminex has two reportable segments. During the second quarter of 2010, the technology segment changed its name to the technology and strategic partnerships (“TSP”) segment, and the assay segment changed its name to the assays and related products (“ARP”) segment. This was only a name change, and there have been no changes to the historical segment financial information or underlying operational activity other than the acquisition of BSD. The TSP 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 ARP segment is primarily involved in the development and sale of assays on xMAP technology for use on Luminex’s installed base of systems.

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^® 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 or magnetic 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, in part, 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 they sell to end users. Luminex develops and manufactures the proprietary xMAP laboratory instrumentation and the proprietary xMAP microspheres and sells these products to our partners. Our partners then sell xMAP instrumentation and xMAP-based reagent consumable products, which run on the instrumentation, to the end user laboratories. As of June 30, 2010, Luminex had approximately 65 strategic partners and these partners have purchased and placed the majority of the cumulative 7,183 xMAP-based systems shipped. Of the 65 strategic partners, 41 have released commercialized reagent-based products utilizing our technology.

Beginning in 2006, we began developing proprietary xMAP-based assays. This development was supplemented in 2007 by our acquisition of Tm Bioscience, which we now refer to as LMD and which is included in our ARP segment. Our ARP 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 and BSD laboratory instruments. Currently, system revenue is derived from the sale of the Luminex® 100™ and 200™ analyzers, our FLEXMAP 3D® system, our optional XY Platform and Sheath Delivery Systems, and the various BSD systems.

•

Consumable revenue is generated from the sale of our dyed polystyrene and magnetic 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 our proprietary microspheres to an end user, 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 buy 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 xMAP 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.

Second Quarter 2010 Highlights

•

Consolidated revenue of $33.2 million for the quarter ended June 30, 2010, representing a 20% increase over revenue for the second quarter of 2009

•

System shipments of 219, up 15% from a year ago, resulting in cumulative life-to-date shipments of 7,183

•

Our partners reported over $72 million of royalty bearing end user sales on xMAP technology for the quarter, an 8% increase over the second quarter of 2009

•

Signed an agreement with High Throughput Genomics, Inc. to co-develop a new research gene expression product, the qBead Gene Expression Assay

•

Completed our acquisition of BSD Robotics, an Australian-based private company with advanced robotics technology for newborn screening and forensics

We have experienced significant fluctuations in consumable revenue since the third quarter of 2008. After thorough analysis, we have identified several factors contributing to the fluctuations. Overall, the fluctuations manifested themselves through changes in activity at varying times from our largest bulk purchasing partners. From the second quarter of 2009 through the second quarter of 2010, we had quarterly bulk purchases totaling $5.5 million, $4.3 million, $6.4 million, $7.6 million, and $7.9 million in consumables, respectively. We believe the fluctuations in bulk purchases can be attributed to several factors including (1) the timing of purchases 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 fluctuations in bulk purchases from several of our partners as a result of a changes in total consumable needs prior 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 resulting from changes in the macroeconomic climate and (4) recent revenue increases from improvement in the macroeconomic climate coupled with increased commercialization efforts driving re-stocking by our partners following periods of tightened inventory management. Even though we experience variability as a result of the factors listed above, the trend of our long-term average of consumable sales, one of our key indicators of performance, indicates a continued growth pattern. Another indicator of the success of our partners’ commercialization efforts is the rising level of royalties and reported royalty bearing sales during the past several years.

We experienced a decrease in royalty revenue from the first quarter of 2010 resulting from variability in our partners’ end user sales which is reflected in reported royalty revenues on a quarterly basis. Our first quarter of 2010 included approximately $0.6 million of annual minimum royalty payments reflected in royalty revenue. Finally, two of our significant partners reported sequential declines in end user sales. Our current quarter royalty revenue typically reflects prior quarter sales as reported by our partners.

Future Operations

We anticipate 2010 revenue growth to be driven by continued adoption of our core technology coupled with system and assay introductions and commercialization by Luminex and our partners in both existing and new geographic locations. 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. Consistent with this trend our R&D expenses increased by $0.9 million or 18% from the second quarter of 2009 to the second quarter of 2010, but remained consistent as a percentage of total revenue at 18% in the second quarter of 2010 and 2009. While we currently expect modest increases in absolute dollars of selling, general, and administrative expenses in 2010, excluding the impact of foreign exchange rates on foreign denominated balances, we expect selling, general, and administrative expenses to decrease as a percentage of total revenue in 2010.

We expect our primary challenges throughout the remainder of 2010 to be the continued adoption and development of partner products incorporating Luminex technology, the timing effect of the ongoing uncertainty in global finance markets and changes in government funding on planned purchases by end users, commercialization, regulatory acceptance and market adoption of output from the ARP 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 June 30, 2010 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 2009 10-K other than the addition of our policy on cost method investments below.

All of the Company’s available-for-sale investments and non-marketable securities are subject to a periodic impairment review at least annually. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Marketable securities are evaluated for impairment if the decline in fair value below cost basis is significant and/or has lasted for an extended period of time. Non-marketable securities are considered to be impaired when a decline in fair value is judged to be other-than-temporary. As the inputs utilized for the Company’s periodic impairment review of the non-marketable securities are not based on observable market data, this cost-method investment is classified within Level 3 of the fair value hierarchy on a non-recurring basis. To determine the fair value of such as investment, the Company uses all available financial information related to the private company, including information based on recent or pending third-party equity investments in the private company. Factors indicative of an other-than-temporary decline include recurring operating losses, credit defaults and subsequent rounds of financings at an amount below the cost basis of the investment. When a decline in value is deemed to be other-than-temporary, the Company recognizes an impairment loss in the current period’s operating results to the extent of the decline. In certain circumstances, the Company’s cost-method investment’s fair value is not estimated as there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment and to do so would be impractical. Dividends and other distributions of earnings from this investment accounted for at cost are included in income when declared. Any gain will be recorded at the time of liquidation of the non-marketable security or other investment.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2010 COMPARED TO THREE MONTHS ENDED JUNE 30, 2009

Selected consolidated financial data for the three months ended June 30, 2010 and 2009 is as follows (dollars in thousands):

		Three Months Ended
		June 30,
		2010				2009
Revenue		$	33,242			$	27,801
Gross profit		$	23,160			$	19,300
Gross profit margin percentage			70	%			69	%
Operating expenses		$	20,895			$	18,271
Income from operations		$	2,265			$	1,029

Total revenue increased by 20% to $33.2 million for the three months ended June 30, 2010 from $27.8 million for the comparable period in 2009. The increase in revenue was primarily attributable to an increase of $3.6 million in consumable and royalty revenue resulting from continued menu expansion and the corresponding increased consumption and increased consumable sales and depressed second quarter 2009 consumable sales that resulted from increased attention on consumable inventory management by our partners stimulated by economic conditions existing at that time, and an increase of $1.8 million in system sales. We sold 219 systems in the second quarter of 2010 compared to 158 systems for the corresponding prior year period bringing total system sales since inception to 7,183 as of June 30, 2010.

A breakdown of revenue for the three months ended June 30, 2010 and 2009 is as follows (in thousands):

		Three Months Ended
		June 30,
		2010				2009				Variance				Variance (%)
System sales		$	7,896			$	6,111			$	1,785				29	%
Consumable sales			9,698				6,682				3,016				45	%
Royalty revenue			4,861				4,298				563				13	%
Assay revenue			7,439				7,769				(330	)			-4	%
Service revenue			1,620				1,424				196				14	%
Other revenue			1,728				1,517				211				14	%
		$	33,242			$	27,801			$	5,441				20	%

We continue to experience revenue concentration in a limited number of strategic partners. Two customers accounted for 25% of consolidated total revenue in the second quarter of 2010 (14% and 11%, respectively). For comparative purposes, these same two customers accounted for 30% of total revenue (19% and 11%, respectively) in the second quarter of 2009. No other customer accounted for more than 10% of total revenue in this quarter.

Gross profit margin percentage for the three months ended June 30, 2010 was consistent with the gross profit margin percentage for the comparable period in 2009. The increase in total operating expense dollars from $18.3 million to $20.9 million, but decrease in total operating expenses as a percentage of total revenue from 66% for the second quarter of 2009 to 63% for the second quarter of 2010, illustrates the effect of the leverage inherent in our partnership and distribution business model. Net operating income increased due to the increase in revenue, the maintenance of favorable gross margins, and our success in leveraging our operating expenses. See additional discussions by segment below.

Technology and Strategic Partnerships (“TSP”) Segment

Selected financial data for our TSP segment for the three months ended June 30, 2010 and 2009 is as follows (dollars in thousands):

		Three Months Ended
		June 30,
		2010				2009
Revenue		$	25,227			$	19,466
Gross profit		$	17,680			$	12,958
Gross profit margin percentage			70	%			67	%
Operating expenses		$	14,064			$	11,572
Income from operations		$	3,616			$	1,386

Revenue. Total revenue for our TSP segment increased by 33% to $25.2 million for the three months ended June 30, 2010 from $19.5 million for the comparable period in 2009. The increase in revenue was primarily attributable to an increase in consumable and royalty revenue resulting from continued menu expansion and the corresponding increased consumption and depressed second quarter 2009 consumable sales that resulted from increased attention on consumable inventory management by our partners stimulated by economic conditions existing at that time, and an increase of $1.9 million in system sales in the TSP segment. We remain confident in our long term guidance of 175 to 225 systems per quarter, recognizing that volatility in the number of systems sold per quarter can be expected in the short term.

Three customers accounted for 43% of total TSP segment revenue in the second quarter of 2010 (18%, 14%, and 11%, respectively). For comparative purposes, these same three customers accounted for 44% of total TSP segment revenue (24%, 13%, and less than 10%, respectively) in the second quarter of 2009.

A breakdown of revenue in the TSP segment for the three months ended June 30, 2010 and 2009 is as follows (in thousands):

		Three Months Ended
		June 30,
		2010				2009				Variance				Variance (%)
System sales		$	7,614			$	5,719			$	1,895				33	%
Consumable sales			9,668				6,660				3,008				45	%
Royalty revenue			4,861				4,298				563				13	%
Service revenue			1,506				1,353				153				11	%
Other revenue			1,578				1,436				142				10	%
		$	25,227			$	19,466			$	5,761				30	%

System and peripheral component sales increased by 33% to $7.6 million for the three months ended June 30, 2010 from $5.7 million for the comparable period of 2009. The TSP segment sold 216 of the 219 total system sales in the three months ended June 30, 2010. For the three months ended June 30, 2010, five of our partners accounted for 153, or 67%. of total TSP segment system sales for the period. The top five partners accounted for 106, or 60%, of total TSP segment system sales in the three months ended June 30, 2009.

Consumable sales, comprised of microspheres and sheath fluid, increased 45% to $9.7 million for the three months ended June 30, 2010 from $6.7 million for the three months ended June 30, 2009. This is primarily the result of an increase in bulk purchases due to increased commercial activity by our partners. A bulk purchase is defined as the purchase of $100,000 or more of consumables in a quarter. During the three months ended June 30, 2010, we had 19 bulk purchases of consumables totaling approximately $7.9 million as compared with 13 bulk purchases totaling approximately $5.5 million in the three months ended June 30, 2009. Partners who reported royalty bearing sales accounted for $6.8 million, or 70%, of total consumable sales for the three months ended June 30, 2010.

Royalty revenue, which results when our partners sell products or services incorporating our technology, increased by 13% to $4.9 million for the three months ended June 30, 2010 compared with $4.3 million for the three months ended June 30, 2009. We believe this is primarily the result of menu expansion and increased utilization of our partners’ assays on our technology. Our partners’ end user sales may reflect volatility from quarter to quarter and therefore, that same volatility is reflected in our reported royalty revenues on a quarterly basis. Additionally, 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 June 30, 2010, we had 37 commercial partners submitting royalties as compared to 33 for the three months ended June 30, 2009. One of our partners reported royalties totaling approximately $1.6 million or 34% of total royalties for the current quarter compared to $1.4 million or 34% for the quarter ended June 30, 2009. Three other customers reported royalties totaling approximately $1.9 million or 39% of total TSP segment revenue (14%, 13%, and 12%, respectively) for the current quarter. No other customer accounted for more than 10% of total royalty revenue for the current quarter. For comparative purposes, these same three customers accounted for approximately $1.5 million or 35% (13%, 11%, and 11%, respectively) of total TSP royalty revenue in the second quarter of 2009. Total royalty bearing sales reported to us by our partners were over $72 million for the quarter ended June 30, 2010 compared with over $67 million for the quarter ended June 30, 2009.

Service revenue, comprised of extended warranty contracts earned ratably over the term of a contract and fees for service revenue, increased by 11% to $1.5 million for the second quarter of 2010 from $1.4 million for the second quarter of 2009. This increase is attributable to both an expansion of units available for service and additional resources allocated to the sale of extended service agreements resulting in increased penetration of the expanded installed base. At June 30, 2010 and 2009, we had 1,169 and 1,008 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, increased by 10% to $1.6 million for the three months ended June 30, 2010 from $1.4 million for the three months ended June 30, 2009. This increase is primarily the result of an increase in miscellaneous part sales of $291,000, offset by a decrease in grant revenue of $102,000.

Gross profit. The gross profit margin percentage (gross profit as a percentage of total revenue) for the TSP segment increased to 70% for the three months ended June 30, 2010 compared to 67% for the three months ended June 30, 2009. Gross profit for the TSP segment increased to $17.7 million for the three months ended June 30, 2010, as compared to $13.0 million for the three months ended June 30, 2009. The increase in gross profit was attributable to the overall increase in revenue, an increase in average system price, and an increase in gross profit margins. Consumables and royalties, two of our higher margin items, comprised $14.5 million, or 58%, of TSP segment revenue for the current quarter and $11.0 million, or 56%, of TSP segment revenue for the quarter ended June 30, 2009.

Research and development expense. Research and development expenses for the TSP segment increased to $2.9 million, or 11% of TSP segment revenue for the three months ended June 30, 2010 from $2.4 million, or 12%, for the comparable period in 2009. The increase was primarily attributable to increases in materials and supplies for the expansion and development of our systems and applications for use on our platforms as well as additional personnel costs related to the appointment of our Vice President of Systems R&D in the third quarter of 2009.

Selling, general and administrative expense. Selling, general and administrative expense for the TSP segment increased to $11.2 million for the three months ended June 30, 2010 from $9.2 million for the comparable period in 2009. The increase was primarily related to additional personnel costs and the related stock compensation and travel costs associated with the increase in selling, general, and administrative employees and contract employees of the TSP segment to 139 at June 30, 2010 from 108 at June 30, 2009. The additional employees include employees added in our recent expansions into the People’s Republic of China and Japan which increase our international support, service and marketing capabilities. As a percentage of revenue, selling, general, and administrative expenses were 44% for the three months ended June 30, 2010 compared to 47% for the three months ended June 30, 2009.

Other income, net. Other income decreased to $97,000 for the three months ended June 30, 2010 from $178,000 for the comparable period in 2009. The decrease is due to the decrease in the average rate earned on current invested balances which decreased to 0.3% at June 30, 2010 from 0.6% at June 30, 2009. This decrease in the average rate earned is the result of an overall decrease in market rates compared to the prior year period.

Assays and Related Products (“ARP”) Segment

Selected financial data for our ARP segment for the three months ended June 30, 2010 and 2009 is as follows (dollars in thousands):

		Three Months Ended
		June 30,
		2010				2009
Revenue		$	8,015			$	8,335
Gross profit		$	5,480			$	6,342
Gross profit margin percentage			68	%			76	%
Operating expenses		$	6,831			$	6,699
Loss from operations		$	(1,351	)		$	(357	)