The problem with a company's stock going up 45% since the beginning of the year is that its employees tend to cash in their stock options. Illumina (NASDAQ:ILMN) faced that problem in the third quarter as its bottom line was eroded by $8.7 million in non-cash stock compensation.

The company experienced a stellar 82% year-over-year increase in revenue, but gross margins excluding non-cash charges slipped a whopping 700 basis points from the year-ago quarter to 63.1%, cutting into the bottom-line growth.

The change in gross margin was mostly due to the 206% year-over-year growth in sales of lower-margin instruments, including the new Genome Analyzer. Half of the 100 Analyzers that Illumina has so far sold were sold outside genome centers, and that bodes well for continued growth of instrument sales since there aren't that many large genome centers in the world. The placement of all those extra machines should drive sales of higher-margin consumable products used by the machines in the years to come.

Meanwhile, in the chip-making equivalent of "keeping up with the Joneses," Illumina is losing the battle of house size, but has a nice pool out back. The company's Human1M DNA Analysis BeadChip - which it began shipping at the end of last quarter -- contains considerably fewer markers than Affymetrix's (NASDAQ:AFFX) SNP Array 6.0 chip, but it gives the scientists information about duplications in the sample. This angle -- developed in collaboration with deCODE genetics (NASDAQ:DCGN) -- may not be as robust on Affymetrix's chip.

Illumina doesn't break down sales numbers for individual products, but it did mention that the Human1M DNA Analysis BeadChip is "rapidly become one of [its] best selling arrays ..."

Management remained fairly tight-lipped about its collaboration with 23andMe, which received a major investment from Google (NASDAQ:GOOG) last spring, but said that they would be able to talk about it more once 23andMe's product launches this quarter.

Illumina doesn't expect this quarter to be a fluke. The company guided for about 5% sequential increase for fourth-quarter revenues, even in the face of holiday slowdowns in laboratories. Illumina needs to sustain that growth into 2008 if it wants to maintain the lofty valuation that investors have bestowed upon it.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.