Luna Innovations Reports Second Quarter 2008 Financial Results

Company Achieves 26% Revenue Growth for the Second Quarter 2008;

Product and License Revenue Growth of 46%;

Gross Profit Margins Expand to 41%;

Reiterates Guidance for 2008
ROANOKE, Va.--(Business Wire)--
Luna Innovations Incorporated (NASDAQ:LUNA) today announced its
financial results for the second quarter ended June 30, 2008.

As compared to the same quarter last year, revenues grew by 26%,
from $7.9 million to $9.9 million, gross profit increased from $2.9
million to $4.1 million, and loss per share declined from $0.21 to
$0.16.

Kent Murphy, Chairman and Chief Executive Officer, provided this
overview of Luna's results: "We continue to move forward in our growth
strategy at a significant pace, which is evident from our financial
results and in our operational achievements during the second quarter.
I'm particularly pleased with the growth of the product and license
side of our business, up 46% from the same quarter of last year. As a
result of that strong growth, our gross profit margins have continued
to expand, from 37% in the second quarter of 2007 to 41% in our most
recent quarter. We also strengthened our cash position with a credit
facility, which is expected to support our working capital needs as we
execute our business model of developing and commercializing our
market-driven technologies into viable products and businesses."

In reviewing Luna's operational achievements, Murphy said, "We
have made strides across all of our business areas. Product and
license growth was largely driven by an expanding market acceptance of
the Luna Technologies' brand of fiber optic test and measurement
products. Additionally, our Technology Development Division continued
to sign several large multi-year contracts that support our research
and development infrastructure and are a source of innovations for
potential commercial products.

"A key project that we announced during the second quarter is the
$3.9 million subcontract to continue to improve the performance of
nanomaterials for military applications in support of the Air Force
Research Laboratory. Under this program, Luna expects to demonstrate
various potential commercial applications of carbon nanotechnologies
for diagnostics and therapeutics for military medicine and alternative
energy solutions using organic solar cells.

"More recently in the Pharmaceuticals / Nanomedicine area, we
announced a $1.6 million funded development project from the National
Institutes of Health (NIH). Allergic conditions and other autoimmune
diseases affect millions of people worldwide, and we believe that this
research program may one day generate a new therapeutic option for
treating allergies and other conditions that play a central role in
inflammatory reactions, such as arthritis and multiple sclerosis.

"We were also awarded another multi-year contract by the NIH to
develop a novel therapeutic for infectious diseases. Anti-infective
therapeutics have become increasingly critical as possible biodefense
agents because of the potential to weaponize pathogens in biowarfare.
Furthermore, anti-infective therapeutics have also shown promise for
the treatment of other conditions such as cancer and arthritis,"
Murphy concluded.

Second Quarter Financial Highlights

-- Total revenues for the second quarter of 2008 increased 26%
compared to the second quarter of 2007.

-- Product and license revenues grew 46% to approximately $2.9
million in the second quarter of 2008, compared to $2.0 million in the
second quarter of 2007.

-- Gross profit for the second quarter of 2008 increased to $4.1
million, or 41% of total revenues, from $2.9 million, or 37% of total
revenues, for the corresponding period of 2007.

-- Operating expenses increased 12% to $5.8 million, or 59% of
total revenues, from $5.2 million, or 66% of total revenues in the
second quarter of 2007. The overall increase in operating expenses is
primarily attributed to increased legal fees associated with
outstanding litigation matters as of June 30, 2008.

-- Net loss per share for the second quarter of 2008 was $0.16 per
share, which is an improvement on a loss per share of $0.21 for the
second quarter of 2007.

-- Entered into a $10 million credit facility with Silicon Valley
Bank, including a four-year term debt of $5 million outstanding as of
June 30, 2008 and a remaining facility available under a four-year
revolving line of credit. No cash amounts were drawn under the
revolving line of credit during the second quarter.

-- Cash and cash equivalents totaled $15.3 million at June 30,
2008, as compared to $12.0 million at December 31, 2007.

Second Quarter Business Highlights

Pharmaceuticals / Nanomedicine

-- Delivered the MRI contrast agent sample materials for the
National Characterization Lab's (NCL) preclinical studies. In
partnership with the U.S. Food and Drug Administration and the
National Institute of Standards and Technology, the NCL, a newly
formed group under the National Cancer Institute, is intent on
accelerating the transition of basic nanomedicine research into
clinical applications. The preliminary characterization data Luna
expects to obtain through its collaboration with the NCL should be
useful to the expected regulatory approval process necessary prior to
any commercialization of a contrast agent.

-- Announced the award of a $1.6 million Research Project Grant
from the NIH to investigate the use of fullerene-based nanomedicines
as a pathway to treat allergies and other inflammatory diseases. The
study will include evaluating Luna's exclusive nanomedicine
prototypes.

-- Published Luna's next-generation MRI contrast agent
breakthrough in the Journal of Medicinal Chemistry. The paper,
co-authored with the Washington University School of Medicine,
describes how Luna's contrast agent, in which gadolinium is
encapsulated within an extremely stable carbon nanosphere, allows for
safer, extended presence within the body than contrast agents
currently in widespread use.

Instrumentation, Test & Measurement

-- Increased revenues from Luna Technologies branded fiber optic
products from $1.2 million in the second quarter of 2007, to $1.8
million in the second quarter of 2008, an increase of 49%.

-- Continued to meet expectations under the development and supply
agreement with Intuitive Surgical, Inc.

-- Provided electronics used in the Missile Defense Agency's
successful demonstration flight test of missile defense interceptors.
This exercise, identified as the Next Generation Sensor Producibility
flight test (NGSP-01), successfully demonstrated the performance of
emerging sensor technologies, materials, and designs that offer
improvements for next-generation missile defense interceptors, or
"kill vehicles".

Technology Development

-- Increased Technology Development Division revenues almost 19%
from $5.9 million in the second quarter of 2007 to $6.9 in second
quarter of 2008.

-- Awarded a $3.9 million subcontract in support of the Air Force
Research Laboratory to continue work improving the performance of
nanomaterials for military applications.

-- Selected by the NIH to develop a biodefense agent to treat
infectious diseases. Under the $2.1 million program, Luna expects to
advance a new class of anti-infective therapeutics designed to
interfere with the ability of a pathogen to establish infection and
survive inside a host organism.

Outlook for Remainder of 2008

For the second half of 2008, the company anticipates continued
strong growth in both its product and license segment and its
Technology Development Division. The company continues to expect total
revenue to be in the range of $40.0 million to $42.0 million for 2008,
consisting of product and license revenue of $14.0 to $15.0 million
and technology development revenue of $26.0 to $27.0 million. Also for
2008, the company anticipates a net loss in the range of $6.5 to $7.0
million. For the third quarter of 2008, the company expects revenue of
approximately $10.3 million to $10.5 million and a net loss of
approximately $1.8 million to $2.0 million.

Conference Call Information

As previously announced, Luna Innovations will conduct an investor
conference call at 5:00 p.m. (EDT) today to discuss its financial
results, business developments and expectations for 2008. The call can
be accessed by dialing 1.800.901.5226 domestically or 1.617.786.4513
internationally prior to the start of the call. The access code is
33586989. The conference call will also be webcast live over the
Internet. The webcast can be accessed by logging on to the "Investor
Relations" section of the Luna Innovations website,
http://www.lunainnovations.com, prior to the event. The webcast will
be archived under the "Webcasts and Presentations" section of the Luna
Innovations website for at least 30 days following the conference
call.

About Luna Innovations:

Luna Innovations Incorporated (www.lunainnovations.com) develops
and manufactures new-generation products for the healthcare,
telecommunications, energy and defense markets. Its products are used
to measure, monitor, protect and improve critical processes in the
markets we serve. Through its disciplined commercialization business
model, Luna has become a recognized leader in transitioning science to
solutions. Luna is headquartered in Roanoke, Virginia.

Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995

This press release includes information that constitutes
"forward-looking statements" made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995,
including but not limited to: (i) the company's ability to
successfully develop and offer new therapeutic solutions for treating
allergies, infectious diseases and other conditions, (ii) the
company's ability to obtain regulatory approval for its nanomedicine
prototypes and MRI contrast agent, (iii) the company's ability to
improve the performance of nanomaterials for military applications,
(iv) the company's anticipated growth in its product and license and
technology development divisions in 2008 and increased revenues in
those areas, (v) the company's ability to meet its working capital
needs using its credit facility and (vi) the company's financial
outlook for its third quarter 2008 and full fiscal year 2008,
including expected revenues and net loss. The company attempts,
whenever possible, to identify forward-looking statements by words
such as "intends," "will," "plans," "anticipates," "expects," "may,"
"estimates," "believes," "should," "projects," or "continue," or the
negative of those words and other comparable words. Similarly,
statements that describe the company's business strategy, goals,
prospects, opportunities, outlook, objectives, plans or intentions are
also forward-looking statements. Actual events or results may differ
materially from the expectations expressed in such forward-looking
statements as a result of various factors, including risks and
uncertainties, many of which are beyond the company's control. Factors
that could cause actual results to differ materially from the
expectations expressed in such forward-looking statements include, but
are not limited to: the company's ability to manage its growth
effectively; the company's ability to transition its revenue mix to
product revenues and the company's limited experience in manufacturing
products on a commercial scale; the company's ability to successfully
identify market needs for new products; the company's ability to
attract skilled employees; the company's continued reliance on
contract research, including government grants and contracts available
only to small businesses, for a significant portion of its revenue;
the company's ability to remain eligible for small business government
grants and contracts in the future; the company's ability to maintain
sufficient proprietary rights to protect its technologies; the
potential adverse effects of nanotechnology, whether real or
perceived; the potential limitations of regulatory requirements in
obtaining clearance by the U.S. Food and Drug Administration or other
regulatory agencies for the company's products; and risks inherent in
current or future litigation proceedings. Additional factors that may
affect the future results of the company are set forth in the
Company's quarterly and annual reports on Form 10-Q and Form 10-K,
respectively, and other filings with the Securities and Exchange
Commission ("SEC"), which are available at the SEC's website at
http://www.sec.gov, and at the Company's website at
http://www.lunainnovations.com. These risk factors are updated from
time to time through the filing of periodic reports with the SEC. The
statements made in this press release are based on information
available to the company as of the date of this release and Luna
Innovations undertakes no obligation to update any of the
forward-looking statements herein after the date of this press
release.

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Luna Innovations Incorporated
Consolidated Statements of Operations

Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Contract
research
revenues $ 6,947,276 $ 5,852,109 $13,549,023 $11,138,706
Product and
license
revenues 2,931,027 2,003,171 5,249,203 3,786,747
------------ ------------ ------------ ------------
Total revenues 9,878,303 7,855,280 18,798,226 14,925,453
Cost of revenues:
Contract
research costs 4,382,001 4,048,424 8,575,648 7,898,039
Product and
license costs 1,427,553 911,768 2,769,232 1,712,189
------------ ------------ ------------ ------------
Total cost of
revenues 5,809,554 4,960,192 11,344,880 9,610,228
------------ ------------ ------------ ------------
Gross profit 4,068,749 2,895,088 7,453,346 5,315,225
Operating expense 5,833,670 5,185,965 11,094,102 10,400,984
------------ ------------ ------------ ------------
Operating loss (1,764,921) (2,290,877) (3,640,756) (5,085,759)
------------ ------------ ------------ ------------
Other income
(expense)
Other income - - - 519
Interest income,
net (33,576) 113,107 (9,689) 225,375
------------ ------------ ------------ ------------
Total other income (33,576) 113,107 (9,689) 225,894
------------ ------------ ------------ ------------
Loss before income
taxes (1,798,497) (2,177,770) (3,650,445) (4,859,865)
Income tax expense - - - -
------------ ------------ ------------ ------------
Net loss $(1,798,497) $(2,177,770) $(3,650,445) $(4,859,865)
============ ============ ============ ============
Net loss per
share:
Basic $ (0.16) $ (0.21) $ (0.34) $ (0.48)
============ ============ ============ ============
Diluted $ (0.16) $ (0.21) $ (0.34) $ (0.48)
============ ============ ============ ============
Weighted average
shares:
Basic 10,935,370 10,136,446 10,858,367 10,053,371
============ ============ ============ ============
Diluted 10,935,370 10,136,446 10,858,367 10,053,371
============ ============ ============ ============

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Luna Innovations Incorporated
Consolidated Balance Sheets

June 30, December 31,
2008 2007
------------- -------------

Assets (unaudited)
Current assets
Cash and cash equivalents $ 15,252,639 $ 12,046,945
Accounts receivable, net 8,496,352 9,716,610
Refundable income taxes 390,661 396,062
Inventory 2,280,710 1,675,239
Other current assets 498,091 333,105
------------- -------------
Total current assets 26,918,453 24,167,961
Property and equipment, net 5,771,855 5,859,515
Intangible assets, net 1,883,646 1,911,132
Deferred tax asset 600,000 600,000
Other assets 135,690 10,270
------------- -------------
Total assets $ 35,309,644 $ 32,548,878
============= =============
Liabilities and stockholders' equity
Current liabilities
Current portion of capital lease
obligation $ 12,039 $ 23,885
Current portion of long-term debt
obligation 714,286 -
Accounts payable 3,083,539 3,024,973
Accrued liabilities 5,041,519 5,331,798
Deferred credits 1,374,705 1,672,400
------------- -------------
Total current liabilities 10,226,088 10,053,056
Long-term capital lease obligation - 4,671
Long-term debt obligation 9,285,714 5,000,000
Deferred credits and other long term
liabilities 354,418 354,418
------------- -------------
Total liabilities 19,866,220 15,412,145
------------- -------------
Stockholders' equity:
Preferred stock, par value $0.001,
5,000,000 shares authorized, no shares
issued and outstanding - -
Common stock, par value $0.001,
100,000,000 shares authorized,
10,999,177 and 10,704,456 shares issued
and outstanding 10,999 10,704
Additional paid-in capital 36,452,904 34,496,063
Accumulated deficit (21,020,479) (17,370,034)
------------- -------------
Total stockholders' equity 15,443,424 17,136,733
------------- -------------
Total liabilities and stockholders'
equity $ 35,309,644 $ 32,548,878
============= =============

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Luna Innovations Incorporated
Consolidated Statements of Cash Flows

Six months ended
June 30,
-------------------------
2008 2007
------------ ------------
(unaudited) (unaudited)
Cash flows used in operating activities
Net loss $(3,650,445) $(4,859,865)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 958,953 892,838
Share-based compensation 1,422,902 1,096,555
Change in assets and liabilities:
Accounts receivable 1,220,259 (766,573)
Inventory (605,471) (491,325)
Other assets (154,961) 56,721
Accounts payable and accrued expenses 138,964 76,216
Deferred credits (297,695) 1,443,585
------------ ------------
Net cash used in operating activities (967,494) (2,551,848)
------------ ------------
Cash flows used in investing activities
Acquisition of property and equipment (552,355) (1,171,747)
Intangible property costs (291,452) (196,790)
------------ ------------
Net cash used in investing activities (843,807) (1,368,537)
------------ ------------
Cash flows from financing activities
Proceeds from / (Payments on) debt
obligations 4,928,150 (214,955)
Payments on capital lease obligations (16,517) (42,504)
Proceeds from the exercise of options and
warrants 105,362 244,206
------------ ------------
Net cash used in financing activities 5,016,995 (13,253)
------------ ------------
Net change in cash 3,205,694 (3,933,638)
Cash - beginning of period 12,046,945 17,866,753
------------ ------------
Cash - end of period $15,252,639 $13,933,115
============ ============

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Media Contact:
Luna Innovations Incorporated
Karin Clark, 1-540-769-8400
kclark@lunainnovations.com
or
Investor Contact:
Qorvis Communications
Sally Beerbower, 1-703-744-7800
ir@lunainnovations.com

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