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Document and Entity Information - USD ($)	12 Months Ended
Document and Entity Information - USD ($)	Dec. 31, 2011	Mar. 15, 2012	Jun. 30, 2011
Document Information [Line Items]
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	FY
Trading Symbol	LUNA
Entity Registrant Name	LUNA INNOVATIONS INC
Entity Central Index Key	0001239819
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		13,888,454
Entity Public Float			$ 13,700,000

CONSOLIDATED BALANCE SHEETS - USD ($)	Dec. 31, 2011	Dec. 31, 2010
Current assets
Cash and cash equivalents	$ 8,939,127	$ 7,216,580
Accounts receivable, net	5,958,086	7,669,625
Inventory, net	3,330,773	3,106,600
Prepaid expenses	1,071,438	665,210
Other current assets	35,717	45,348
Total current assets	19,335,141	18,703,363
Property and equipment, net	2,816,674	3,204,670
Intangible assets, net	539,563	664,418
Other assets	228,043	303,210
Total assets	22,919,421	22,875,661
Current Liabilities;
Current portion of long term debt obligation	1,625,000	1,195,784
Current portion of capital lease obligation	50,949	2,194
Line of credit		2,500,000
Accounts payable	1,656,602	2,008,183
Accrued liabilities	3,612,193	3,549,604
Deferred credits	1,462,603	1,392,602
Total current liabilities;	8,407,347	10,648,367
Long-term debt obligation	3,625,000	2,611,609
Long-term capital lease obligation	183,008
Total liabilities	12,215,355	13,259,976
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.001, 1,321,514 shares authorized, issued and outstanding at December 31, 2010 and 2011, respectively	1,322	1,322
Common stock, par value $0.001, 100,000,000 shares authorized, 13,449,345 and 13,812,490 shares issued and outstanding at December 31, 2010 and 2011, respectively	13,969	13,526
Additional paid-in capital	59,289,516	56,681,756
Accumulated deficit	(48,600,741)	(47,080,919)
Total stockholders' equity	10,704,066	9,615,685
Total liabilities and stockholders' equity	$ 22,919,421	$ 22,875,661

CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Dec. 31, 2011	Dec. 31, 2010
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	1,321,514	1,321,514
Preferred stock, issued	1,321,514	1,321,514
Preferred stock, outstanding	1,321,514	1,321,514
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	13,812,490	13,449,345
Common stock, shares outstanding	13,812,490	13,449,345

CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)	12 Months Ended
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Revenues:
Technology development revenues	$ 22,417,902	$ 22,404,931	$ 25,198,038
Product and license revenues	13,195,822	12,133,463	9,373,849
Total revenues	35,613,724	34,538,394	34,571,887
Cost of revenues:
Technology development costs	15,793,279	15,808,108	17,031,768
Product and license costs	6,589,943	5,786,567	4,783,586
Total cost of revenues	22,383,222	21,594,675	21,815,354
Gross profit	13,230,502	12,943,719	12,756,533
Operating expense:
Selling, general & administrative	11,788,866	13,297,705	16,345,578
Research, development, and engineering	2,674,730	1,694,643	2,874,666
Litigation settlement			9,669,728
Impairment of intangible assets			1,310,598
Total operating expense	14,463,596	14,992,348	30,200,570
Operating loss	(1,233,094)	(2,048,629)	(17,444,037)
Other income (expense):
Other income, net	227,565	77,299	735
Interest (expense), net	(376,524)	(474,408)	(503,699)
Total other income (expense)	(148,959)	(397,109)	(502,964)
Loss before reorganization costs and income tax expense	(1,382,053)	(2,445,738)	(17,947,001)
Reorganization costs		174,292	1,897,580
Loss before income tax expense	(1,382,053)	(2,620,030)	(19,844,581)
Income tax expense	10,307		600,000
Net loss	(1,392,360)	(2,620,030)	(20,444,581)
Preferred stock dividend	127,462	360,631
Net loss attributable to common stockholders	$ (1,519,822)	$ (2,980,661)	$ (20,444,581)
Net loss per share:
Basic	$ (0.11)	$ (0.23)	$ (1.82)
Diluted	$ (0.11)	$ (0.23)	$ (1.82)
Weighted average shares:
Basic and diluted	13,647,555	13,009,326	11,232,716

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) - USD ($)

Total

Preferred Stock

Common Stock

Additional Paid in Capital

Accumulated Deficit

Beginning Balance (in shares) at Jan. 01, 2009

11,137,882

Beginning Balance at Jan. 01, 2009

$ 14,316,389

$ 11,138

$ 37,960,928

$ (23,655,677)

Exercise of stock options and warrants (in shares)

144,865

Exercise of stock options and warrants

51,204

$ 145

51,059

Stock-based payments (in shares)

69,220

Stock-based payments

3,216,780

$ 69

3,216,711

Net loss

(20,444,581)

Ending Balance (in shares) at Dec. 31, 2009

11,351,967

Ending Balance at Dec. 31, 2009

(2,860,208)

$ 11,352

41,228,698

(44,100,258)

Issuance of Preferred Stock, in exchange of Carilion notes (in shares)

1,321,514

Issuance of Preferred Stock, in exchange of Carilion notes

4,836,742

$ 1,322

4,835,420

Issuance of Common Stock, Hansen Settlement (in shares)

1,247,330

Issuance of Common Stock, Hansen Settlement

4,565,228

$ 1,247

4,563,981

Issuance of Warrants, other

1,264,946

Exercise of stock options and warrants (in shares)

813,526

Exercise of stock options and warrants

865,177

$ 814

864,363

Stock-based payments (in shares)

11,522

Stock-based payments

$ 3,472,330

$ 12

3,472,318

Stock dividends

^[1]

$ 76

360,555

(360,631)

Issuance of Common Stock, Other (in shares)

25,000

^[2]

Issuance of Common Stock, Other

^[2]

$ 91,500

$ 25

91,475

Net loss

(2,620,030)

Ending Balance (in shares) at Dec. 31, 2010

1,321,514

13,449,345

Ending Balance at Dec. 31, 2010

9,615,685

$ 1,322

$ 13,526

56,681,756

(47,080,919)

Exercise of stock options and warrants (in shares)

249,388

Exercise of stock options and warrants

219,576

$ 249

219,327

Stock-based payments (in shares)

51,648

Stock-based payments

2,163,290

$ 52

2,163,238

Stock dividends

^[1]

$ 80

127,382

(127,462)

Issuance of Common Stock, Other (in shares)

^[3]

62,109

Issuance of Common Stock, Other

^[3]

97,875

$ 62

97,813

Net loss

(1,392,360)

Ending Balance (in shares) at Dec. 31, 2011

1,321,514

13,812,490

Ending Balance at Dec. 31, 2011

$ 10,704,066

$ 1,322

$ 13,969

$ 59,289,516

$ (48,600,741)

[1]	The stock dividends payable in connection with the Series A Convertible Preferred Stock are issuable upon the request of Carilion.
[2]	In January 2010 we settled a complaint filed by a former employee in exchange for the payment of $13,000 in cash and the issuance of 25,000 shares of our common stock. The settlement was included as an accrued liability on our December 31, 2009 consolidated balance sheet.
[3]	Fees paid to our board of directors by issuance of our common stock.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Parenthetical)	12 Months Ended
	Dec. 31, 2010 USD ($) shares
Cash paid for settlement of complaint filed by former employee \| $	$ 13,000
Issuance of Common Stock for settlement of complaint by former employee (in shares) \| shares	25,000

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)	12 Months Ended
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Cash flows (used in)/provided by operating activities:
Net loss	$ (1,392,360)	$ (2,620,030)	$ (20,444,581)
Adjustments to reconcile net loss to net cash (used in)/provided by operating activities:
Depreciation and amortization	1,462,511	1,331,809	1,853,188
Stock-based compensation	2,163,290	3,472,330	3,216,780
Deferred tax expense			600,000
Bad debt expense			135,162
Reorganization costs			826,234
Impairment of intangible assets			1,310,598
Changes in operating assets and liabilities:
Accounts receivable	1,711,539	(466,422)	(6,332)
Inventory	(224,173)	(261,972)	(61,373)
Refundable income taxes			98,092
Other assets	(321,430)	669,759	(1,264,865)
Accounts payable and accrued expenses	(288,989)	7,091,386	259,145
Accrued litigation settlement		(9,669,728)	9,669,728
Deferred credits	(119,999)	365,586	(827,266)
Net cash (used in)/provided by operating activities	2,990,389	(87,282)	(4,635,490)
Cash flows used in investing activities:
Acquisition of property and equipment	(327,704)	(85,149)	(53,111)
Intangible property costs	(347,813)	(365,533)	(642,875)
Net cash used in investing activities	(675,517)	(450,682)	(695,986)
Cash flows from financing activities:
Proceeds from debt obligations	6,000,000	2,500,000
Payments on debt obligations	(6,867,393)	(834,119)	(5,000,000)
Payments on capital lease obligation	(42,383)	(5,316)	(9,886)
Proceeds from the exercise of options and warrants	317,451	865,177	51,204
Net cash provided by (used in) financing activities	(592,325)	2,525,742	(4,958,682)
Net change in cash	1,722,547	1,987,778	(10,290,158)
Cash and cash equivalents-beginning of period	7,216,580	5,228,802	15,518,960
Cash and cash equivalents-end of period	8,939,127	7,216,580	5,228,802
Supplemental disclosure of cash flow information
Cash paid for interest	239,521	397,020	177,973
Cash received from income tax refunds			$ 107,581
Common stock issued in litigation settlement (1,247,330 shares)		4,565,228
Installment note issued in litigation settlement		5,000,000
Common stock issued in settlement of other claims (25,000 shares)		91,500
Dividend on preferred stock, 76,649 and 79,292 shares of common stock issuable at 12/31/2010 and 2011, respectively	127,462	360,631
Reduction to principal of Hansen Note in exchange for development services		358,488
Property and equipment financed by capital leases	274,145
Cash paid for income taxes	$ 10,307
Preferred Stock
Supplemental disclosure of cash flow information
Preferred stock issued in exchange of notes (1,321,514 shares)		4,836,742
Warrants
Supplemental disclosure of cash flow information
Warrants issued in exchange of notes payable (356,000 warrants)		$ 1,261,879

CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) - shares	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010
Common stock issued in litigation settlement, shares		1,247,330
Common stock issued in settlement of other claims, shares		25,000
Dividend on preferred stock, shares of common stock issuable	79,292	76,649
Preferred Stock
Preferred stock issued in exchange of notes, shares		1,321,514
Warrants
Warrants issued in exchange of notes payable, shares		356,000

Organization and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2011

Organization and Summary of Significant Accounting Policies

1.	Organization and Summary of Significant Accounting Policies

Luna Innovations Incorporated (“We” or “the Company”), headquartered in Roanoke, Virginia was incorporated in the Commonwealth of Virginia in 1990 and reincorporated in the State of Delaware in April 2003.

We research, develop and commercialize innovative technologies in three primary areas of focus: fiber optic shape sensing technology for robotic and minimally invasive surgical systems, fiber optic sensing systems and standard test methods for composite materials, and ensuring the integrity of integrated circuits used in defense systems. Our business model is designed to accelerate the process of bringing new and innovative products to market. We use our in-house technical expertise to perform applied research services on government-funded projects across a range of technologies and also for corporate customers in the fiber optic sensing area. We are organized into two business segments: our Technology Development segment and our Products and Licensing segment. Our Technology Development segment performs applied research on government-funded projects and includes our secure computing and communications group, or SCC. Most of the government funding in our Technology Development segment other than SCC is derived from the U.S. Government’s Small Business Innovation Research, or SBIR, program coordinated by the U.S. Small Business Administration, or SBA. Our Products and Licensing segment focuses on fiber optic test and measurement, sensing, and instrumentation products and also conducts applied research in the fiber optic sensing area to corporate and government customers. The Products and Licensing segment also includes healthcare products.

We have a history of net losses and, and prior to 2011, negative cash flow from operations. We have historically managed our liquidity through cost reduction initiatives, debt financings and capital markets transactions.

Since the second half of 2008, the increased turmoil in the U.S. and global capital markets and a global slowdown of economic growth created a substantially more difficult business environment. Our ability to access the capital markets is expected to be extremely limited. Economic and market conditions may not improve significantly during 2012 and could get worse.

Although there can be no guarantees, we believe that our current cash balance, our cash flow from operations, and the funds available to us under the Credit Facility described in Note 3 below, provide adequate liquidity for us to meet our working capital needs through 2012.

Consolidation Policy

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and include the accounts of the Company, its wholly owned subsidiaries and other entities in which the Company has a controlling financial interest. We eliminate from our financial results all significant intercompany transactions. We do not have any investments in entities we believe are variable interest entities for which the Company is the primary beneficiary.

Emergence from Chapter 11 Reorganization

On July 17, 2009, we and our wholly owned subsidiary Luna Technologies, Inc. filed a voluntary petition for relief in order to reorganize under Chapter 11 of the United States Bankruptcy Code, including a proposed plan of reorganization, in the United States Bankruptcy Court for the Western District of Virginia (the “Bankruptcy Court”). During the period from July 17, 2009 through January 12, 2010, the Company continued to operate its business in the ordinary course as a Debtor-in-Possession. On January 12, 2010, the Bankruptcy Court approved our plan of reorganization, and the Company successfully emerged from bankruptcy.

Upon our emergence from bankruptcy and in connection with our litigation settlement, we issued approximately 1.2 million shares of common stock to Hansen Medical, Inc., or Hansen, as described below. Other outstanding shares of common stock were not directly affected by our plan of reorganization. Because the shareholders immediately prior to our emergence from bankruptcy continued to own more than 50% of the total outstanding common stock immediately following our emergence from bankruptcy, we did not adopt the fresh-start reporting principles of Accounting Standards Codification (“ASC”) 852-10-45, Financial Reporting during Reorganization.

Settlement of Hansen Litigation

In June 2007, Hansen, a company for which we had conducted certain research and performed certain services, filed a lawsuit against us for using allegedly misappropriated trade secrets from Hansen in connection with our work with Intuitive Surgical, Inc., or Intuitive, or otherwise. On April 21, 2009, a jury found in favor of Hansen and awarded a verdict for $36.3 million against us. As a result of this jury verdict, we filed for Chapter 11 reorganization in July 2009, as described above under “Emergence from Chapter 11 Reorganization.”

On December 11, 2009, we and our wholly owned subsidiary Luna Technologies, Inc. entered into a settlement agreement with Hansen to settle all claims arising out of the litigation. As a result of the settlement, our accrual of $36.3 million recorded during the quarter ended March 31, 2009 was adjusted to $9.7 million at December 31, 2009.

Preferred Stock Issued to Carilion Clinic

In January 2010, we entered into a transaction with Carilion Clinic (“Carilion”), in which Carilion agreed to exchange all of its Senior Convertible Promissory Notes in the principal amount of $5.0 million plus all accrued but unpaid interest, totaling $1.2 million, for (i) 1,321,514 shares of our newly designated Series A Convertible Preferred Stock and (ii) an additional warrant to purchase 356,000 shares of our common stock at an exercise price of $2.50 per share. This warrant is exercisable beginning February 1, 2013, and continuing until December 31, 2020. We also agreed to reduce the exercise price of Carilion’s prior common stock warrant from $7.98 to $2.50 per share and to extend its expiration date to December 31, 2020. The Series A Convertible Preferred Stock carries a dividend of 6% payable in shares of common stock and maintains a liquidation preference up to $6.2 million. As of December 31, 2010 and 2011, 76,649 and 79,292, respectively, for a cumulative total of 155,941 shares of common stock were issuable to Carilion, on their demand, as dividends and have been recorded in the statement of stockholders’ equity. Each share of Series A Convertible Preferred Stock may be converted into one share of our common stock at the option of the holder. We recorded the fair value of the Series A Convertible Preferred Stock, determined based upon the conversion value immediately prior to the exchange, the fair value of the new warrant issued, determined using the Black-Scholes valuation model, and the incremental fair value of the prior warrant due to the re-pricing and extension of maturity to stockholders’ equity.

Use of Estimates

The preparation of our consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements and accompanying notes.

Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may differ from such estimates and assumptions.

Technology Development Revenues

We perform research and development for U.S. government agencies, educational institutions and commercial organizations. We recognize revenues under research contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred and collection of the contract price is considered reasonably assured. Revenue is earned under cost reimbursable, time and materials and fixed price contracts. Direct contract costs are expensed as incurred.

Under cost reimbursable contracts, we are reimbursed for costs that are determined to be reasonable, allowable and allocable to the contract and are paid a fixed fee representing the profit negotiated between us and the contracting agency. Revenue from cost reimbursable contracts is recognized as costs are incurred plus a portion of the fee earned. Revenue from time and materials contracts is recognized based on direct labor hours expended at contract billing rates plus other billable direct costs.

Revenue from fixed price research contracts that involve the delivery of services and a prototype model is recognized under the percentage of completion method. Fixed price arrangements that involve the delivery of research reports are recognized under the proportional performance method based upon the ratio of costs incurred to achieve contract milestones to total estimated cost as this method more accurately measures performance under these arrangements. Losses on contracts, if any, are recognized in the period in which they become known.

Intellectual Property License Revenues

Amounts received from third parties for licenses to our intellectual property are recognized when earned under the terms of the agreements. Revenues are recognized upon transfer of the license unless we have continuing obligations for which fair value cannot be established, in which case the revenues are recognized over the period of the obligation. If there are extended payment terms, license fee revenues are recognized as these payments become due and collection is reasonably assured. We consider all arrangements with payment terms extending beyond 12 months not to be fixed and determinable.

Certain of our license arrangements have also required us to enter into research and development agreements. Accordingly, we allocate our arrangement fees to the various elements based upon objective reliable evidence of fair value, if available. For those arrangements in which evidence of fair value is not available, we defer revenues from any up-front payments and recognize them over the service period in the arrangement. Certain of these arrangements also include the payment of performance bonuses based upon the achievement of specific milestones. Generally, there are no assurances at the onset of these arrangements that the milestones will be achieved. As such, fees related to such milestones are excluded from the initial allocation of the arrangement fee and are recognized upon achievement of the milestone provided that all other revenue recognition criteria are met.

Product Sales Revenues

Revenues from product sales are generated by the sale of commercial products and services under various sales programs to the end user and through distribution channels. We sell fiber optic sensing systems to end users for use in numerous fiber optic based measurement applications. Revenues are recorded net of applicable sales taxes collected from customers and payable to state or local governmental entities.

We recognize revenue relating to our products when persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collectability of the resulting receivable is reasonably assured.

For multi-element arrangements that include tangible products that contain software that is essential to the tangible product’s functionality, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value or VSOE, (ii) third-party evidence of selling price or TPE, and (iii) best estimate of the selling price or ESP. VSOE generally exists only when we sell the deliverable separately and is the price actually charged by us for that deliverable. ESPs reflect our best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis.

Our process for determining our ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors considered in developing the ESPs include prices charged by us for similar offerings, our historical pricing practices, the nature of the deliverables, and the relative ESP of all of the deliverables as compared to the total selling price of the product. We may also consider, when appropriate, the impact of other products and services on selling price assumptions when developing and reviewing our ESPs.

Revenues from product sales that require no ongoing obligations are recognized as revenues when shipped to the customer, title has passed and collection is reasonably assured. In transactions in which a right-of-return exists, revenues are deferred until acceptance has occurred and the period for the right-of-return has lapsed.

Allowance for Uncollectible Receivables

Accounts receivable are recorded at their face amount, less an allowance for doubtful accounts. We review the status of our uncollected receivables on a regular basis. In determining the need for an allowance for uncollectible receivables, we consider our customers’ financial stability, past payment history and other factors that bear on the ultimate collection of such amounts. The allowance was unchanged at approximately $22,000 at December 31, 2010 and 2011, respectively.

Cash Equivalents

We consider all highly liquid investments purchased with maturities of three months or less to be cash equivalents. To date, we have not incurred losses related to cash and cash equivalents.

Fair Value Measurements

The Company’s financial assets and liabilities are measured at fair value, which is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. Valuation techniques are based on observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy:

•

Level 1—Quoted prices for identical instruments in active markets.

•

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant value drivers are observable.

•

Level 3—Valuations derived from valuation techniques in which significant value drivers are unobservable.

The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term nature of these instruments. The carrying value of the promissory notes approximate fair value as the interest rate is comparable to the interest rate on our credit facility with Silicon Valley Bank, which we consider to be at market.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. We record depreciation using the straight-line method over the following estimated useful lives:


Equipment		3 – 7 years
Furniture and fixtures		7 years
Software		3 years
Leasehold improvements		Lesser of lease term or life of improvements

Intangible Assets

Intangible assets consist of patents related to certain intellectual property that we have developed or acquired. We amortize our patents over their estimated useful life of five years, and analyze them whenever events or circumstances indicate that the carrying amount may not be recoverable to determine whether their carrying value has been impaired.

Research, Development and Engineering

Research, development and engineering expenses not related to contract performance are expensed as incurred. We expensed $2.9 million, $1.7 million and $2.7 million of non-contract related research, development and engineering expenses for the years ended December 31, 2009, 2010 and 2011, respectively.

Valuation of Long-Lived Assets

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Assets to be disposed of by sale are reflected at the lower of their carrying amount or fair value less cost to sell.

Inventory

Inventory consists of finished goods and parts valued at the lower of cost (determined on the first-in, first-out basis) or market. We provide reserves for estimated obsolescence or unmarketable inventory equal to the difference between the carrying value of the inventory and the estimated market value based upon assumptions about future demand and market conditions. Inventory reserves at December 31, 2010 and 2011 were $83,820 and $172,902, respectively.

Net Loss per Share

Basic per share data is computed by dividing loss available to common stockholders by the weighted average number of shares outstanding during the period. Diluted per share data is computed by dividing loss available to common stockholders by the weighted average shares outstanding during the period increased to include, if dilutive, the number of additional common share equivalents that would have been outstanding if potential common shares had been issued using the treasury stock method. Diluted per share data would also include the potential common share equivalents relating to convertible securities by application of the if-converted method.

The effect of 4.6 million, 6.5 million and 2.5 million common stock equivalents (which include outstanding warrants and stock options) are not included for the years ended December 31, 2009, 2010 and 2011 respectively, as they are antidilutive to earnings per share. In addition, the conversion of the $5.0 million in convertible promissory notes outstanding at December 31, 2008 and 2009 would have been antidilutive.

Stock-Based Compensation

We have a stock-based compensation plan, which is described further in Note 8. We recognize compensation expense based upon the fair value of the underlying equity award as of the date of grant. The Company has elected to use the Black-Scholes option pricing model to value any awards granted. We amortize stock-based compensation for such awards on a straight-line method over the related service period of the awards taking into account the effects of the employees’ expected exercise and post-vesting employment termination behavior.

The Company recognizes expense for equity instruments issued to non-employees based upon the fair value of the equity instruments issued.

The fair value of each option granted is estimated as of the grant date using the Black-Scholes option pricing model with the following assumptions:


	2009	2010	2011
Risk-free interest rate range	2.80% – 3.17%	2.09% – 3.22%	1.48% – 2.81%
Expected life of option-years	7.5	7.5	7.5
Expected stock price volatility	83% – 117%	117%	111%
Expected dividend yield	—	—	—

The risk-free interest rate is based on U.S. Treasury interest rates, the terms of which are consistent with the expected life of the stock options. Expected volatility is based upon the average volatility of our common stock. The expected life and estimated post-employment termination behavior is based upon historical experience of homogeneous groups within our company.

Advertising

We expense the cost of advertising as incurred. Historically such amounts have not been significant to our operations.

Income Taxes

We account for income taxes using the liability method. Deferred tax assets or liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when the differences reverse. A valuation allowance against net deferred tax assets is provided unless we conclude it is more likely than not that the deferred tax assets will be realized.

We recognize tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities.

Recent Accounting Pronouncements

May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. The ASU attempts to clarify the FASB’s intent about the application of existing fair value measurement requirements and changes certain principles or requirements for measuring fair value or for disclosing information about fair value measurements. The ASU’s amendments will result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs and are effective for the first interim or annual period beginning on or after December 15, 2011. Our adoption of this ASU, effective January 1, 2012, is presentation and disclosure related and therefore will not have an effect on our consolidated financial position or results of operations.

In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350) – Testing Goodwill for Impairment was issued. ASU 2011-08 provides companies with a new option to determine whether or not it is necessary to apply the traditional two-step quantitative goodwill impairment test in ASC 350, Intangibles – Goodwill and Other. Under ASU 2011-08 companies are no longer required to calculate the fair value of a reporting unit unless it determines, on the basis of qualitative information, that it is more likely than not (i.e., greater than 50%) that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 is effective for periods ending after December 15, 2011; however, early adoption is permitted for periods ending after September 15, 2011. We do not anticipate the adoption to have a material impact on our consolidated financial statements.

Reclassifications

Certain prior year amounts have been reclassified to conform to current presentation.

- Definition

The entire disclosure for the organization, consolidation and basis of presentation of financial statements disclosure, and significant accounting policies of the reporting entity. May be provided in more than one note to the financial statements, as long as users are provided with an understanding of (1) the significant judgments and assumptions made by an enterprise in determining whether it must consolidate a VIE and/or disclose information about its involvement with a VIE, (2) the nature of restrictions on a consolidated VIE's assets reported by an enterprise in its statement of financial position, including the carrying amounts of such assets, (3) the nature of, and changes in, the risks associated with an enterprise's involvement with the VIE, and (4) how an enterprise's involvement with the VIE affects the enterprise's financial position, financial performance, and cash flows. Describes procedure if disclosures are provided in more than one note to the financial statements.

+ References + Details

Inventory

12 Months Ended

Dec. 31, 2011

Inventory

2.	Inventory

Inventory consists of finished goods, work-in-process and parts valued at the lower of cost (determined on the first-in, first-out basis) or market. We provide reserves for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions.

Components of inventory are as follows:


	December 31, 2010		December 31, 2011
Finished goods	$	476,375	$	531,418
Work-in-process		222,623		210,459
Parts		2,468,958		2,739,335

		3,167,956		3,481,212
Less: Inventory reserves		61,356		150,439

Total inventory, net	$	3,106,600	$	3,330,773

Debt

12 Months Ended

Dec. 31, 2011

Debt

Debt

Silicon Valley Bank Facility

On February 18, 2010, we entered into a Loan and Security Agreement with Silicon Valley Bank or SVB to provide us with a revolving credit facility that provided us with borrowing capacity of up to $5.0 million, subject to a percentage of our outstanding eligible accounts receivable, at a floating annual interest rate equal to the greater of (a) 6% or (b) SVB’s prime rate then in effect plus 2%. The credit facility was originally scheduled to mature on February 17, 2011, but it was amended to extend the maturity date until May 18, 2011 and to revise the calculation of eligible borrowing base and add certain financial covenants relating to our adjusted EBITDA.

On May 18, 2011, we entered into a Second Loan Modification Agreement with SVB. Under the Second Loan Modification Agreement, SVB made a term loan to us in the amount of $6.0 million (the “Term Loan”). The Term Loan is to be repaid by us in 48 monthly installments, plus accrued interest payable monthly in arrears, and unless earlier terminated, matures on the earlier of either May 1, 2015 or an event of a default under the loan agreement. The Term Loan carries a floating annual interest rate equal to SVB’s prime rate then in effect plus 2%.

We may prepay amounts due under the Term Loan for a fee equal to (i) $120,000, if such prepayment is made on or before May 18, 2012; (ii) $60,000, if such prepayment is made after May 18, 2012, but on or before May 18, 2013; or (iii) zero, if such prepayment is made after May 18, 2013.

In addition to the terms and conditions of the Term Loan, the Second Loan Modification Agreement reduced our maximum borrowing capacity under a separate revolving credit facility (the “Line of Credit” and together with the Term Loan, the “Credit Facilities”) from $5.0 million to $1.0 million and extended its maturity date until May 18, 2012.

As modified by the Second Loan Modification Agreement, the annual interest rate on the Line of Credit has been reduced to SVB’s prime rate plus 1.25%, payable monthly in arrears, and we are required to pay an unused Line of Credit fee of one-quarter of one percent (0.25%), payable monthly. We may terminate the Line of Credit for a termination fee of $10,000, which fee would not be payable in the event that the Line of Credit is replaced by another loan facility with SVB.

Amounts due under the Credit Facilities are secured by substantially all of our assets, including intellectual property, personal property and bank accounts.

The Credit Facilities require us to observe a number of financial and operational covenants, including maintenance of a specified liquidity ratio, achievement of certain adjusted EBITDA targets, protection and registration of intellectual property rights, and certain customary negative covenants. As of December 31, 2011, we were in compliance with all covenants.

In addition, the Credit Facilities contain customary events of default, including nonpayment of principal, interest or other amounts, violation of covenants, material adverse change, an event of default under any subordinated debt documents, incorrectness of representations and warranties in any material respect, bankruptcy, judgments in excess of a threshold amount, and violations of other agreements in excess of a threshold amount. If any event of default occurs SVB may declare due immediately all borrowings under the Credit Facilities and foreclose on the collateral. Furthermore, an event of default under the Credit Facilities would result in an increase in the interest rate on any amounts outstanding.

The balance under the Term Loan at December 31, 2011 was $5,250,000, of which $3,625,000 was classified as long-term and $1,625,000 was classified as short-term. No amounts were outstanding under the Line of Credit at December 31, 2011.

Note Payable to Hansen (the “Hansen Note”)

In January 2010, we issued a promissory note to Hansen in the principal amount of $5.0 million, payable in 16 quarterly installments beginning in April 2010. The Hansen Note bore interest at a fixed rate of 8.5% and was secured by substantially all of our assets. The Hansen Note was subordinated to our primary bank credit facility. As part of our Second Loan Modification Agreement with SVB, we and Hansen entered into an Amendment to Secured Promissory Note and Payoff Letter (the “Payoff Letter”).

Under the terms of the Payoff Letter, we and Hansen agreed upon a final payoff in the amount of approximately $3.0 million as payment in full for all principal and accrued interest under the Hansen Note, which represented a $190,000 discount from the then outstanding balance, which discount will be amortized into income over the remaining life of the Company’s Development and Supply Agreement with Hansen. At December 31, 2011, there was approximately $132,000 remaining in deferred credits to be amortized. On May 23, 2011, we repaid the Hansen Note in full. Upon receipt of this final payment, all security interests in our assets held by Hansen as collateral for our obligations under the Hansen Note were terminated and released.

The following table presents a summary of debt outstanding as of December 31, 2010 and 2011:


	December 31,
	2010		2011
Silicon Valley Bank Term Loan	$	—	$	5,250,000
Silicon Valley Bank Line of Credit		2,500,000		—
Hansen Note		3,807,393		—

	$	6,307,393	$	5,250,000
Less: current portion		3,695,784		1,625,000

Total long-term debt	$	2,611,609	$	3,625,000

Maturities on long-term debt are as follows:


Year	Amount
2012	$	1,625,000
2013		1,500,000
2014		1,500,000
2015		625,000

Total	$	5,250,000

Costs associated with loans outstanding were as follows:


	Years Ended December 31,
	2009		2010		2011
Interest expense	$	439,233	$	480,469	$	377,096
Amortization of transaction costs		78,248		—		10,491

Total interest expense	$	517,481	$	480,469	$	387,587

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

+ References + Details

Accounts Receivable-Trade

12 Months Ended

Dec. 31, 2011

Accounts Receivable-Trade

4.	Accounts Receivable—Trade

Accounts receivable consist of the following:


	December 31,
	2010			2011
Billed	$	5,516,642		$	4,349,750
Unbilled		2,164,491			1,619,844
Other		10,864			10,864

	$	7,691,997		$	5,980,458

Less: allowance for doubtful accounts		(22,372	)		(22,372	)

	$	7,669,625		$	5,958,086

Unbilled receivables result from contract retainages and revenues that have been earned in advance of billing and can be invoiced at contractually defined intervals, milestones, or at completion of the contract.

Unbilled amounts are expected to be billed in future periods and are classified as current assets in accordance with industry practice.

- Definition

The entire disclosure for claims held for amounts due a company. Examples include trade accounts receivables, notes receivables, loans receivables.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Regulation S-X (SX)
-Number 210
-Section 02
-Paragraph 3, 4
-Article 5

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Regulation S-X (SX)
-Number 210
-Section 03
-Paragraph 7
-Article 9

Reference 3: http://www.xbrl.org/2003/role/presentationRef
-Publisher AICPA
-Name Statement of Position (SOP)
-Number 01-6
-Paragraph 13
-Subparagraph d
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 4: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Regulation S-X (SX)
-Number 210
-Article 4
-Section 08
-Paragraph k

Reference 5: http://www.xbrl.org/2003/role/presentationRef
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-Name Accounting Standards Codification
-Topic 210
-SubTopic 10
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-Subparagraph (SX 210.5-02.3,4)
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-Section 50
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Reference 8: http://www.xbrl.org/2003/role/presentationRef
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+ Details

Property and Equipment

12 Months Ended

Dec. 31, 2011

Property and Equipment

5.	Property and Equipment

Property and equipment, net, consists of the following at:


	December 31,
	2010			2011
Building	$	69,556		$	69,556
Equipment		6,256,811			6,853,589
Furniture and fixtures		621,776			622,944
Software		1,179,267			1,181,156
Leasehold improvements		3,191,597			3,193,613

		11,319,007			11,920,858
Less—accumulated depreciation		(8,114,337	)		(9,104,184	)

	$	3,204,670		$	2,816,674

Depreciation for the years ended December 31, 2009, 2010 and 2011 was approximately $1.2 million, $1.1 million and $1.0 million, respectively.

- Definition

The entire disclosure for long-lived, physical assets that are used in the normal conduct of business to produce goods and services and not intended for resale. Examples include land, buildings, machinery and equipment, and other types of furniture and equipment including, but not limited to, office equipment, furniture and fixtures, and computer equipment and software. This disclosure may include property plant and equipment accounting policies and methodology, a schedule of property, plant and equipment gross, additions, deletions, transfers and other changes, depreciation, depletion and amortization expense, net, accumulated depreciation, depletion and amortization expense and useful lives, income statement disclosures, assets held for sale and public utility disclosures.

+ References + Details

Intangible Assets

12 Months Ended

Dec. 31, 2011

Intangible Assets

6.	Intangible Assets

The following is a summary of intangible assets:


	December 31,
	2010			2011
Patent costs	$	2,140,404		$	2,034,573
Accumulated amortization		(1,475,986	)		(1,495,010	)

	$	664,418		$	539,563

Amortization for the years ended December 31, 2009, 2010 and 2011 was approximately $0.6 million, $0.3 million and $0.5 million, respectively. Estimated aggregate amortization for each of the next five years is as follows:


Year Ending December 31,
2012	$	218,749
2013		179,047
2014		129,354
2015		10,738
2016		1,675

	$	539,563

Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes

7.	Income Taxes

Deferred tax assets and liabilities consist of the following components:


	2010						2011
	Current			Long-Term			Current			Long-Term
Bad debt and inventory reserve	$	40,311					$	74,126
Depreciation and amortization				$	842,966					$	915,560
Net operating loss carryforwards					11,886,534						11,748,302
Research and development credits					386,161						386,161
Accrued liabilities		885,608						605,513
Deferred compensation					65,861						85,837
Stock-based compensation					757,109						1,000,192
AMT credit					9,208						9,208

Total		925,919			13,947,839			679,639			14,145,260
Valuation allowance		(925,919	)		(13,947,839	)		(679,639	)		(14,145,260	)

Net deferred tax asset	$	—		$	—		$	—		$	—

The reconciliation of expected income tax benefit (expense) to actual income tax expense benefit (expense) was as follows:


Statutory federal rate	34.00	%	34.00	%	34.00	%
State tax net of federal benefit	3.96	%	3.96	%	3.96	%
Change in valuation allowance	(31.12	%)	15.60	%	2.79	%
Incentive stock options	(4.85	%)	(45.00	%)	(35.85	%)
Provision to return adjustments	(0.19	%)	(1.48	%)	(3.44	%)
Other Permanent differences	(4.81	%)	(7.08	%)	(2.21	%)

Income tax (expense)	(3.01	%)	0.00	%	(0.75	%)

The income tax expense consists of the following for:


	2009		2010		2011
Current:
Federal	$	—	$	—	$	10,307
State		—		—		—
Deferred Federal		600,000		—		—
Deferred State		—		—		—

Income tax expense	$	600,000	$	—	$	10,307

The realization of our deferred income tax assets is dependent upon sufficient taxable income in future periods. In assessing whether deferred tax assets may be realized, we consider whether it is more likely than not that some portion, or all, of the deferred tax asset will be realized. We consider scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies that we can implement in making our assessment. We have net operating loss carryforwards at December 31, 2011 of approximately $30.9 million expiring at varying dates through 2025. We have research & development tax credit carryforwards at December 31, 2011 of approximately $0.4 million, which expire at varying dates through 2025.

We have not undertaken a formal section 382 study to determine the exact amount of net operating loss available to offset income. Our estimate of our available net operating losses that can be utilized in future years may change.

We are regularly examined by federal and various state tax authorities. The U.S. federal statute of limitations remains open for the year 2005 and onward. We currently have no federal income tax returns under examination. U.S. state jurisdictions have statutes of limitation generally ranging from three to seven years. We currently have no state income or franchise tax returns under examination. We currently do not file tax returns in any foreign tax jurisdiction.

We currently have no positions for which we expect that the amount of unrecognized tax benefit will increase or decrease significantly within twelve months of the reporting date. We have no tax interest or penalties reported in either our statement of operations or statement of financial position for any year reported herein. Management believes it is not more likely than not that the deferred tax assets will be realized at December 31, 2010 or December 31, 2011, therefore a valuation allowance was established against all deferred tax assets.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Regulation S-X (SX)
-Number 210
-Section 08
-Paragraph h
-Article 4

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 109
-Paragraph 136, 172
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 3: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 109
-Paragraph 43, 44, 45, 46, 47, 48, 49
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 4: http://www.xbrl.org/2003/role/presentationRef
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-Topic 740
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Reference 6: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
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-Topic 235
-SubTopic 10
-Section S99
-Paragraph 1
-Subparagraph (SX 210.4-08.(h))
-URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690

Reference 7: http://www.xbrl.org/2003/role/presentationRef
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-URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319

Reference 8: http://www.xbrl.org/2003/role/presentationRef
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-Topic 740
-SubTopic 10
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-Paragraph 3
-URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319

+ Details

Stockholders' Equity

12 Months Ended

Dec. 31, 2011

Stockholders' Equity

8.	Stockholders’ Equity

Series A Convertible Preferred Stock

In January 2010, we entered into a transaction with Carilion Clinic, or Carilion, in which Carilion agreed to exchange all of its Senior Convertible Promissory Notes in the principal amount of $5.0 million plus all accrued but unpaid interest, totaling $1.2 million, for 1,321,514 shares of our newly designated Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock is non-voting, carries a dividend of 6% payable in shares of common stock and maintains a liquidation preference up to $6.2 million. As of December 31, 2011, 155,941 shares of common stock were issuable to Carilion as dividends and have been recorded in the statement of stockholders’ equity. These dividends are issuable on demand. Each share of Series A Convertible Preferred Stock may be converted into one share of our common stock at the option of the holder. We recorded the fair value of the Series A Convertible Preferred Stock, determined based upon the conversion value immediately prior to the exchange, the fair value of the new warrant issued, determined using the Black-Scholes valuation model, and the incremental fair value of the prior warrant due to the re-pricing and extension of maturity to stockholders’ equity.

Carilion Warrants

In May 2008, we issued 10,000 warrants for the purchase of our Common Stock at an exercise price of $7.98 per share to Carilion Clinic (“Carilion”), in exchange for Carilion agreeing to subordinate their convertible debt to the Silicon Valley Bank debt facility, and to extend the payment of their convertible debt from December 31, 2009 to December 31, 2012. The warrants were valued using the Black-Scholes option pricing model with the following assumptions: risk-free rate of 3.81%, expected volatility of 63% and an expected life of 9.63 years, which equaled the contractual term. The aggregate fair value of the warrant was $58,194, and this amount was capitalized as a prepaid financing charge and was being amortized over the life of the debt. In connection with the conversion of the Carilion notes to Series A Convertible Preferred Stock in January 2010 described above, the strike price of these warrants was reduced to $2.50 per share, and an additional warrant to purchase 356,000 shares of our common stock at an exercise price of $2.50 per share was also issued to Carilion. We recorded a charge of $3,071 to other income and expense in 2010 for the difference between the fair value of the warrant immediately before modification and the fair value of the warrant immediately after modification.

Hansen Warrant

In January 2010, we issued 1,247,330 shares of common stock to Hansen, representing 9.9% of our common stock then outstanding. In addition, we issued to Hansen a warrant entitling Hansen to purchase, until January 12, 2013, a number of shares of our common stock as necessary for Hansen to maintain a 9.9% ownership interest in our common stock, at an exercise price of $0.01 per share. During 2010 and 2011, Hansen exercised warrants acquiring 68,832 and 41,538, respectively, shares of our common stock. Based upon our outstanding shares of common stock as of December 31, 2011, Hansen has the ability to exercise its warrant for an additional 10,806 shares. For the years ended December 31, 2010 and 2011, we recognized expense of $178,000 and $60,338, respectively, which is included in operating expenses associated with this warrant. We recognize expense based upon the fair market value of our stock at the date the shares are issuable to Hansen.

Stock Option Plans

In April 2003, we adopted the Luna Innovations Incorporated 2003 Stock Plan, or the 2003 Plan. Under the 2003 Plan, our Board of Directors was authorized to grant both incentive and non-statutory stock options to our employees, directors and consultants to purchase Class B shares of Common Stock. Options generally had a life of 10 years and exercise price equal to or greater than the fair market value of the Class B Common Stock as determined by the Board of Directors. On February 4, 2006, our Board of Directors increased the number of shares reserved under the 2003 Plan to 9,715,000. There were options outstanding under the 2003 Plan to purchase an aggregate of 1,346,238 shares as of December 31, 2011. Following the adoption of the 2006 Equity Incentive Plan in January 2006, no shares or options are available for future grant under the 2003 Plan, except to satisfy grants outstanding as of June 5, 2006.

In January 2006, we adopted our 2006 Equity Incentive Plan or the 2006 Plan. Under the 2006 Plan, our Board of Directors is authorized to grant both incentive and non-statutory stock options to purchase common stock and restricted stock awards to our employees, directors, and consultants. Stock option awards generally have a life of 10 years and exercise prices equal to the closing price of our common stock on the date of the option grant. On January 1 of each year, the number of shares available for issuance increases by the lesser of (a) 10% of the outstanding shares of our common stock on the last day of the preceding fiscal year; (b) 1,695,690 shares; or (c) such other amount as our Board of Directors may determine. A total of 7,004,171 and 8,252,703 shares were available for future grant under the 2006 Plan as of December 31, 2010 and 2011, respectively.

Vesting for employees typically occurs over a five-year period.

Total non-cash stock option expense for the years ended December 31, 2009, 2010 and 2011 was $3.2 million, $3.4 million and $2.2 million, respectively.

Stock Option Exchange Offer

In September 2010, we initiated an offer to exchange certain outstanding “out-of-the-money” stock options held by eligible employees (which excluded executive officers and directors) for a lesser number of stock options having a lower exercise price. In accordance with the terms of the exchange offer, in October 2010 we completed the offer, under which eligible participants exchanged an aggregate of 616,531 stock options having exercise prices ranging from $3.16 to $8.20 per share for an aggregate of 571,580 new stock options with an exercise price of $2.46, which represented 125% of the average closing price of our common stock as reported on NASDAQ for the 60-day period ending on the expiration date of the exchange offer. All other terms of the options exchanged in the offer remain unchanged with respect to the replacement options granted. The difference between the fair value of the newly issued options and the fair value of the options exchanged was not material at the time of the exchange. As such, we recognized no expense as a result of this transaction.

The following table sets forth the activity of the options to purchase common stock under the 2003 Plan and the 2006 Plan:


	Options Outstanding									Options Exercisable
	Number of Shares			Price per Share Range		Weighted Average Exercise Price		Aggregate Intrinsic Value (1)		Number of Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value (1)
Balance at January 1, 2009		4,800,446			0.35–8.20		2.53	$	2,853,667		2,967,610	$	1.28	$	2,665,403
Forfeited		(733,519	)		0.35–8.20		5.45
Exercised		(144,717	)		0.35		1.36
Granted		805,150			2.11–8.04		6.14
Balance at December 31, 2009		4,727,360			0.35–8.20		2.43	$	3,545,705		2,987,955	$	1.72	$	2,734,841
Forfeited		(90,782	)		0.35–6.00		4.45
Exercised		(744,938	)		0.35–2.11		0.96
Granted		918,597			0.82–4.43		3.45
Exchanged in Tender Offer		(93,798	)
Balance at December 31, 2010		4,716,439			0.35–7.08		2.35	$	1,632,396		2,904,435	$	2.20	$	1,233,778
Forfeited		(514,883	)		0.35–7.08		3.48
Exercised		(208,117	)		0.35–1.77		0.72
Granted		647,600			1.18–2.17		1.83
Balance at December 31, 2011		4,641,039		$	0.35–6.74		2.23	$	1,509,270		3,206,994	$	2.23	$	1,258,740

(1)

The intrinsic value of an option represents the amount by which the market value of the stock exceeds the exercise price of the option of in-money options only. The prices represent the closing price of our Common Stock on the NASDAQ Global Market or NASDAQ Capital Market, as applicable, on the respective dates.


			Options Outstanding						Options Exercisable
	Range of Exercise Prices		Options Outstanding		Weighted Average Remaining Life in Years		Weighted Average Exercise Price		Options Exercisable		Weighted Average Exercise Price of Options Exercisable
Year ended December 31, 2009	$	0.35–8.20		4,727,360		6.80	$	2.43		2,987,955	$	1.72
Year ended December 31, 2010	$	0.35–7.08		4,716,439		7.05	$	2.35		2,904,435	$	2.20
Year ended December 31, 2011	$	0.35–6.74		4,641,039		6.60	$	2.23		3,206,994	$	2.23

The following table sets forth information regarding the total intrinsic value of options exercised, and the total fair value of options vesting:


	Total intrinsic value of options exercised		Total fair value of options vested
Year ended December 31, 2009		145,119		2,550,070
Year ended December 31, 2010		1,049,489		1,648,292
Year ended December 31, 2011		216,576		1,435,186

For the years ended December 31, 2009, 2010 and 2011, the weighted average grant date fair value of options granted was $0.74, $1.85 and $1.62, respectively. We estimate the fair value of options at the grant date using the Black-Scholes model.

We recognized $2.2 million in share-based payment expense which is recorded in selling, general and administrative expenses on the Statement of Operations for the year ended December 31, 2011, and we will recognize $2.5 million over the remaining requisite service period. For all options granted through December 31, 2011, the weighted average remaining service period is 2.1 years.

- Definition

The entire disclosure for shareholders' equity, comprised of portions attributable to the parent entity and noncontrolling interest, if any, including other comprehensive income (as applicable). Including, but not limited to: (1) balances of common stock, preferred stock, additional paid-in capital, other capital and retained earnings; (2) accumulated balance for each classification of other comprehensive income and total amount of comprehensive income; (3) amount and nature of changes in separate accounts, including the number of shares authorized and outstanding, number of shares issued upon exercise and conversion, and for other comprehensive income, the adjustments for reclassifications to net income; (4) rights and privileges of each class of stock authorized; (5) basis of treasury stock, if other than cost, and amounts paid and accounting treatment for treasury stock purchased significantly in excess of market; (6) dividends paid or payable per share and in the aggregate for each class of stock for each period presented; (7) dividend restrictions and accumulated preferred dividends in arrears (in aggregate and per share amount); (8) retained earnings appropriations or restrictions, such as dividend restrictions; (9) impact of change in accounting principle, initial adoption of new accounting principle and correction of an error in previously issued financial statements; (10) shares held in trust for Employee Stock Ownership Plan (ESOP); (11) deferred compensation related to issuance of capital stock; (12) note received for issuance of stock; (13) unamortized discount on shares; (14) description, terms, and number of warrants or rights outstanding; (15) shares under subscription and subscription receivables, effective date of new retained earnings after quasi-reorganization and deficit eliminated by quasi-reorganization and, for a period of at least ten years after the effective date, the point in time from which the new retained dates; and (16) retroactive effective of subsequent change in capital structure.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher AICPA
-Name Accounting Principles Board Opinion (APB)
-Number 12
-Paragraph 10
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Regulation S-X (SX)
-Number 210
-Section 04
-Article 3

Reference 3: http://www.xbrl.org/2003/role/presentationRef
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-Name Regulation S-X (SX)
-Number 210
-Article 4
-Section 08
-Paragraph d

Reference 4: http://www.xbrl.org/2003/role/presentationRef
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-Name Accounting Research Bulletin (ARB)
-Number 43
-Chapter 1
-Section B
-Paragraph 7, 11A
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 5: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
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-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 6: http://www.xbrl.org/2003/role/presentationRef
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-Section 08
-Article 4

Reference 7: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
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Reference 8: http://www.xbrl.org/2003/role/presentationRef
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-Section 02
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-Article 5

Reference 9: http://www.xbrl.org/2003/role/presentationRef
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-Name Staff Accounting Bulletin (SAB)
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Reference 10: http://www.xbrl.org/2003/role/presentationRef
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-Name Staff Accounting Bulletin (SAB)
-Number Topic 4
-Section C

Reference 11: http://www.xbrl.org/2003/role/presentationRef
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-Glossary Preferred Stock
-URI http://asc.fasb.org/extlink&oid=6521494

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+ Details

Commitments and Contingencies

12 Months Ended

Dec. 31, 2011

Commitments and Contingencies

9.	Commitments and Contingencies

Obligation under Operating Leases

We lease facilities in Blacksburg, Charlottesville and Roanoke, Virginia under operating leases that expire between September 2012 and December 2015. Certain of the leases are subject to fixed escalations and provide for possible termination prior to their expiration dates. We recognize rent expense on such leases on a straight-line basis over the lease term. Rent expense under these leases was approximately $1.2 million for each of the years ended December 31, 2009, 2010 and 2011 respectively.

We are obligated under operating leases covering certain equipment that expire at various dates during the next two years.

Minimum future rentals, as of December 31, 2011, under the aforementioned operating leases for each of the next five years are:


2012		1,288,862
2013		1,106,961
2014		1,080,585
2015		663,214
2016		—

	$	4,139,622

Governor’s Opportunity Fund

In March 2004, we received a $900,000 grant (the “Grant”) from the City of Danville, Virginia (the “City”) to be used for the expansion of economic and commercial growth within the City of Danville. Specifically, $450,000 of the grant was to be used to offset certain capital expenditures for leasehold improvements being made at our Danville facility. The remaining $450,000 was granted for the creation of new jobs upon satisfaction of the conditions described below.

The grant stipulated that we must make estimated capital expenditures of at least $6,409,000 and create 54 new full time jobs at our Danville facility, at an average wage of at least $39,000 plus benefits within 30 months of the award, and then maintain such employment levels for an additional 30 months.

In December 2008 we received a determination letter from the City of Danville indicating that we had met 100% of the conditions of the grant relating to job creation and 29% of the conditions of the grant relating to capital expenditures. As a result, we recognized $668,000 of the grant proceeds as other income for the year ended December 31, 2008 and correspondingly reduced the deferred liability of $900,000 on our balance sheet.

During 2009 we earned an additional approximately $35,000 under the grant. In January 2010, we agreed to pay back approximately $108,000 of the grant in quarterly installments over the next five years, ending in November 2014. At December 31, 2011 the remaining balance payable by us to the City of Danville under the grant was approximately $65,000.

Purchase Commitment

In August 2010, we executed a non-cancelable $1.8 million purchase order for multiple shipments of tunable lasers to be delivered over an 18-month period beginning in October 2010. At December 31, 2011, approximately $40,000 of this commitment remained. In September 2011 we executed a non-cancelable $1.2 million purchase order for multiple shipments of tunable lasers to be delivered over a 12-month period subsequent to the completion of the purchase order executed in August 2010, which is expected to be completed by the end of 2012.

Royalty Agreement

We have licensed certain third-party technologies from vendors for which we owe minimum royalties aggregating $3.1 million payable over the remaining patent terms of the underlying technology.

- Definition

The entire disclosure for commitments and contingencies.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name FASB Interpretation (FIN)
-Number 14
-Paragraph 3
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 5
-Paragraph 9, 10, 11, 12
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 3: http://www.xbrl.org/2003/role/presentationRef
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-Name Accounting Standards Codification
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Reference 6: http://www.xbrl.org/2003/role/presentationRef
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Reference 7: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 825
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+ Details

Employee Profit Sharing Plan

12 Months Ended

Dec. 31, 2011

Employee Profit Sharing Plan

10.

Employee Profit Sharing Plan

We maintain a salary reduction/profit-sharing plan under provisions of Section 401(k) of the Internal Revenue Code. The plan is offered to employees who have completed three months of service with us. We contribute 25% of the salary deferral elected by each employee up to a maximum deferral of 10% of annual salary.

We contributed approximately $300,000, $240,000 and $240,000 to the plan for the years ended December 31, 2009, 2010 and 2011 respectively.

Litigation and Other Contingencies

12 Months Ended

Dec. 31, 2011

Litigation and Other Contingencies

11.

Litigation and Other Contingencies

From time to time, we may become involved in litigation in relation to claims arising out of our operations in the normal course of business. While management currently believes the amount of ultimate liability, if any, with respect to these actions will not materially affect our financial position, results of operations or liquidity, the ultimate outcome of any litigation is uncertain.

A description of our litigation with Hansen that we settled in December 2009 is included in Note 1 above.

We have made, and will continue to make, efforts to comply with current and future environmental laws. We anticipate that we could incur additional capital and operating costs in the future to comply with existing environmental laws and new requirements arising from new or amended statutes and regulations. In addition, because the applicable regulatory agencies have not yet promulgated final standards for some existing environmental programs, we cannot at this time reasonably estimate the cost for compliance with these additional requirements. The amount of any such compliance costs could be material. We cannot predict the impact that future regulations will impose upon our business.

Relationship with Major Customers

12 Months Ended

Dec. 31, 2011

Relationship with Major Customers

12.

Relationship with Major Customers

During the years ended December 31, 2009, 2010 and 2011, approximately 76%, 65% and 64%, respectively, of our consolidated revenues were attributable to contracts with the U.S. government.

At December 31, 2009, 2010 and 2011, receivables with respect to contracts with the U.S. government represented 71%, 63% and 40% of total billed trade receivables, respectively.

Financial Information About Segments

12 Months Ended

Dec. 31, 2011

Financial Information About Segments

13.

Financial Information About Segments

Our operations are divided into two operating segments: Technology Development and Products and Licensing. The Technology Development segment provides applied research to customers in our areas of focus.

Our engineers and scientists collaborate with our network of government, academic and industry experts to identify technologies and ideas with promising market potential. We then compete to win fee-for-service contracts from government agencies and industrial customers who seek innovative solutions to practical problems that require new technology. The Technology Development segment derives its revenue primarily from services.

The Products and Licensing segment develops and sells products or licenses technologies based on commercially viable concepts developed by the Technology Development segment. The Products and Licensing segment derives its revenue from product sales, funded product development and technology licenses.

Our President and Chief Executive Officer and his direct reports collectively represent our chief operating decision makers, and they evaluate segment performance based primarily on revenue and operating income or loss.

Information about the results of operations for each segment is set forth in the table below. There were no significant inter-segment sales during the three years ended December 31, 2011. There was an insignificant amount of product sales made outside the United States during these three years.


	Year Ended December 31,
	2009			2010			2011
Technology Development revenue	$	25,198,038		$	22,404,931		$	22,417,902
Products and Licensing revenue		9,373,849			12,133,463			13,195,822

Total revenue		34,571,887			34,538,394			35,613,724

Technology Development operating loss		(2,852,208	)		(2,257,509	)		(1,595,443	)
Products and Licensing operating income (loss)		(14,591,829	)		208,880			362,349

Total operating loss	$	(17,444,037	)	$	(2,048,629	)	$	(1,233,094	)

Depreciation, Technology Development	$	938,809		$	684,525		$	619,035
Depreciation, Products and Licensing		349,243			370,706			370,808
Amortization, Technology Development		411,905			179,411			295,600
Amortization, Products and Licensing		153,232			97,160			177,067

Additional segment information is as follows:


	December 31,
	2010		2011
Total segment assets:
Technology Development	$	14,839,358	$	14,427,172
Products and Licensing		8,036,303		8,492,249

Total	$	22,875,661	$	22,919,421

Property plant and equipment and intangible assets, Technology Development	$	2,509,863	$	2,112,663
Property plant and equipment and intangible assets, Products and Licensing	$	1,359,225	$	1,243,574

- Definition

The entire disclosure for reporting segments including data and tables. Reportable segments include those that meet any of the following quantitative thresholds a) it's reported revenue, including sales to external customers and intersegment sales or transfers is 10 percent or more of the combined revenue, internal and external, of all operating segments b) the absolute amount of its reported profit or loss is 10 percent or more of the greater, in absolute amount of 1) the combined reported profit of all operating segments that did not report a loss or 2) the combined reported loss of all operating segments that did report a loss c) its assets are 10 percent or more of the combined assets of all operating segments.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 131
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 2: http://www.xbrl.org/2003/role/presentationRef
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-Name Accounting Standards Codification
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+ Details

Quarterly Results (unaudited)

12 Months Ended

Dec. 31, 2011

Quarterly Results (unaudited)

14.

Quarterly Results (unaudited)

The following table sets forth our unaudited historical revenues, operating (loss) income and net (loss) income by quarter during 2010 and 2011:


	Quarter Ended
(Dollars in thousands, except per share amounts)	Mar. 31, 2010			Jun. 30, 2010			Sep. 30, 2010			Dec. 31, 2010			Mar. 31, 2011			Jun. 30, 2011			Sep. 30, 2011		Dec. 31, 2011
Revenues:
Technology	$	5,811		$	6,092		$	5,027		$	5,475		$	5,622		$	5,623		$	6162	$	5,011
Product and license		2,075			2,907			3,558			3,593			3,377			4,001			2,681		3,137

Total revenues		7,886			8,999			8,585			9,068			8,999			9,624			8843		8148
Gross Margin		2,834			3,306			3,438			3,366			3,340			3,661			3493		2736
Operating income (loss)		(1,043	)		(421	)		(253	)		(332	)		(898	)		(210	)		313		(433	)
Net (loss) Income		(1,196	)	$	(618	)	$	(424	)	$	(382	)		(1,025	)		(257	)		243		(353	)
Net (loss) attributable to common stockholders	$	(1,277	)	$	(711	)	$	(517	)	$	(476	)		(1,066	)		(289	)		222		(386	)

Net (loss) Income per share:
Basic	$	(0.10	)	$	(0.05	)	$	(0.04	)	$	(0.04	)		(0.08	)		(0.02	)		0.02		(0.03	)
Diluted	$	(0.10	)	$	(0.05	)	$	(0.04	)	$	(0.04	)		(0.08	)		(0.02	)		0.01		(0.03	)
Weighted average shares:
Basic		12,497,502			12,946,802			13,188,913			13,360,809			13,484,645			13,636,993			13,669,724		13,794,361
Diluted		12,497,502			12,946,802			13,188,913			13,360,809			13,484,645			13,636,993			15,898,639		13,794,361

- Definition

The entire disclosure for the quarterly financial data in the annual financial statements. The disclosure may include a tabular presentation of financial information for each fiscal quarter for the current and previous year, including revenues, gross profit, income or loss before extraordinary items and earnings per share data. It also includes an indication if the information in the note is unaudited, comments on the aggregate effect of year-end adjustments, and an explanation of matters or transactions that affect comparability or are pertinent to an understanding of the information furnished.

+ References + Details

Schedule II Valuation and Qualifying Accounts

12 Months Ended

Dec. 31, 2011

Schedule II Valuation and Qualifying Accounts

Schedule II

Luna Innovations Incorporated

Valuation and Qualifying Accounts


Column A	Column B		Column C		Column D			Column E		Column F
	Balance at beginning of Period		Charged to costs and expenses		Deductions			Valuation against asset		Balance at end of period
Year Ended December 31, 2011
Reserves deducted from assets to which they apply:
Allowances for doubtful Accounts	$	22,372	$	—	$	—		$	—	$	22,372

	$	22,372	$	—	$	—		$	—	$	22,372
Year Ended December 31, 2010
Reserves deducted from assets to which they apply:
Allowances for doubtful Accounts	$	157,535	$	—	$	(135,163	)	$	—	$	22,372

	$	157,535	$	—	$	(135,163	)	$	—	$	22,372
Year Ended December 31, 2009
Reserves deducted from assets to which they apply:
Allowances for doubtful Accounts	$	22,372	$	135,163	$	—		$	—	$	157,535

	$	22,372	$	135,163	$	—		$	—	$	157,535

All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements and notes thereto in Item 8 of Part II of this Annual Report on Form 10-K.