Guidance for Remainder of 2009

Luna Innovations expects flat to modest revenue growth in 2009 with total revenues between about $37 million and $40 million, which is expected to consist of product and license revenue of about $7 to $9 million and technology development revenue of about $30 to $31 million. The company is currently expecting revenues in the second quarter of 2009 of about $9.0 to $9.5 million.

Kent Murphy, chairman and chief executive officer, provided this comment related to the recent verdict on the Hansen lawsuit and its effect on the first quarter’s earnings results: “We are disappointed with the decision of the jury and are directing all efforts towards opportunities to reduce the loss exposure. While we are preparing our post-trial motions, we are committed to continuing to serve our customers’ needs and develop industry leading products.

“Apart from the litigation, I am pleased with the continuing successes throughout the organization. Despite the severity of the weakened economy, we were able to deliver higher revenues in our Technology Development Division and total overall revenues that were down less than 5% as compared to the first quarter 2008. We have achieved significant efficiencies in our operating costs over the past two years. Excluding the impact of the estimated outcome of our litigation and the related impairment of certain intangible assets, our operating expenses of $42.8 million during the first quarter of 2009 would have been $5.2 million. That level of operating expenses is the same level that we realized in the first quarter of 2007, despite including approximately $0.9 million of legal fees in 2009 that we were not incurring back in 2007. In other words, since the first quarter of 2007, we grew our revenue base by approximately 20% while we also reduced our baseline expenses by approximately 17%, all of which increased the efficiency of our operations.”

First Quarter Financial Highlights

Product and license revenues decreased 30% to approximately $1.6 million in the first quarter of 2009 compared to $2.3 million in the first quarter of 2008.

Gross profit for the first quarter of 2009 decreased to $2.7 million, or 32% of total revenues, from $3.4 million, or 38% of total revenues, for the corresponding period of 2008.

Operating expenses increased to $42.8 million in the first quarter of 2009 due primarily to the impact of an estimated $36.3 million litigation loss accrual related to the Hansen lawsuit and a related impairment charge of $1.3 million on intangible assets related to the potential outcome of that litigation. Not including those items, operating expenses for the first quarter of 2009 would have been consistent with the levels experienced during the first quarter of 2008.

Income tax expense increased $0.6 million due to an increase in the valuation allowance provided against the company’s deferred tax asset.

Cash and cash equivalents decreased to $13.2 million at March 31, 2009, as compared to $15.5 million at December 31, 2008.

The current portion of long term debt increased in the first quarter, primarily due to non-compliance with certain financial covenants under the facility with Silicon Valley Bank driven by additional expenses recognized related to the Hansen lawsuit.

Luna Innovations is a company focusing on sensing & instrumentation and pharmaceutical nanomedicines.