My Chung – President & Chief Executive Officer Dale Messick – Chief Financial Officer

Good day, ladies and gentlemen, and welcome to the Q2 Luna Innovations Inc. Earnings Conference Call. My name is Ann and I will be your coordinator for today’s call. As a reminder, this conference is being recorded for replay purposes. (Operator instructions.) We will be facilitating a question-and-answer session after the presentation. I would now like to turn the presentation over to your host for today’s call, Mr. Dale Messick, Chief Financial Officer. Please proceed, sir.

Thank you, Ann. Good afternoon, everyone, and thanks for joining us today as we review Luna’s results for Q2 as well as for the first six months of 2012. Before proceeding with our presentation today, let me remind each of you that statements made in this conference call as well as our public valuations and websites which are not historical facts may be forward-looking statements that involve risks and uncertainties and are subject to change at any time, including but not limited to statements about future financial and operating performance. We caution investors that any forward-looking statements made by us are management’s beliefs based on currently available information and should not be taken as a guarantee of future results or performance. Actual results may differ materially as the result of a variety of factors discussed in our earnings release and our latest Forms 10(k) and 10(q) filed with the Securities and Exchange Commission. We disclaim any obligations to update any such factors or to announce publicly the results of any revisions to the forward-looking statements to reflect future events or developments. Find more complete information regarding forward-looking statements, risks and uncertainties in the company’s filings with the SEC available on our website. At this time I would like to turn the call over to My Chung, President and CEO of Luna Innovations.

Thank you, Dale. As I have done in the past I would like to start by giving you an update on our key business developments, particularly as they relate to the strategic growth initiatives we previously laid out. Following my comments I will turn the call back over to Dale for a discussion about our operating results and then I will be happy to take any questions you might have. Luna remains focused on three key initiatives. First is to become the leading supplier of fiber optic shape-sensing and localization systems and components for minimally invasive surgical systems. Second is to be a leading provider of composite strain-sensing systems, and third is to be a leading supplier of cyber security services to companies with critical system components utilizing FPGAs. On our last call we announced that in addition to our ongoing relationships in healthcare we now have a new development partner with Philips Medical. This joint effort will allow us to further advance our fiber optic shape-sensing technology for its commercialization in non-robotic medical applications. That work is now well underway and I am pleased at the progress the team is making with the first milestone having been successfully delivered in Q2. In addition, our efforts towards productization of the shape-sensing technology for robotic applications remain focused and on track. The second key growth strategy of ours is to become the leading provider of sensing systems for testing composite materials. Our technology gives manufacturers and operators the ability to understand what is happening inside their composite structures and to see potential damage even when it’s not visible. We are improving the way composite materials are tested and validated for peak performance and safety. During Q2, in addition to the continued sales of our ODiSI A product we made our first customer shipments of our recently introduced higher sampling rate yet lower cost ODiSI P system. We believe that our sensing platforms, serving a completely different market than our historic telecom test and measurement products represents a significant market opportunity for us and at the same time provides us diversity in our revenue sources. We’re optimistic that the total demand for composites continues to grow globally. Our third growth strategy is to continue to advance our industry-leading cyber security solutions. Our computing group has unique capabilities in reverse engineering our field-programmable gamma rays to improve design integrity and further enhance cyber security. This unprecedented capability makes it possible to perform high reliability verification of FPGA designs at the bit stream level to detect any malicious functionality. Our technology is like a virus scan for FPGA designs. Only recently have we been able to publicly discuss our capabilities, so as we begin to communicate what it is specifically that we can do we hope to expand our secure computing services revenue. In addition to making progress on our key growth strategies, we will also be expanding our offerings in the fiber optic testing market through the development of a faster, easier to use, lower-cost precision reflectometer. It directly addresses the manufacturing environment needs by introducing an instrument that is 200x faster than the competition providing measurement over a longer distance with better resolution at a significantly lower price. Also later this quarter look for us to roll out a new branding for the company, focused on clarifying our vision and strengthening our position within the market. We have developed a new logo design and brand image to better represent Luna’s unique value. Our new tag line “Define Impossible” speaks to what makes us special. We aren’t afraid to challenge convention and do things that others have deemed impossible. This rebranding will be rolled out within the next month in various stages. With that I will now turn the call over to Dale to review the financial highlights.

Thank you, My. For Q2 2012 our total revenues were $8.2 million compared to $9.6 million in Q2 2011, with the decrease attributable mostly to lower sales in telecom test and measurement products. Within our technology development segment, revenues were $5.3 million for the quarter compared to $5.6 million in Q2 2011. This 5% decrease in technology development revenue came largely from lower contract awards in the latter part of 2011. In our product and licensing segment, revenues for the quarter were $2.8 million compared to $4.0 million in Q2 of the prior year. Revenues from our traditional telecom products represented the bulk of this decline. Partially offsetting this was the sales of our newly-introduced ODiSI sensing systems. The thing to note here is that our product and licensing revenue for this past quarter has been consistent with our reported quarterly revenues since Q3 of last year when the current slowdown in the overall test and measurement market first impacted our results. Our product and licensing revenues have been in the range of $2.7 million to $3.1 million quarterly since Q3 2011. Our overall gross margins remained consistent at 38% for Q2 2012 and Q2 2011. Within our operating segments, products and licensing margins were approximately 55.5% in each of the Q2s while technology development margins improved from 25% in Q2 last year to 29% in the most recent quarter with the improvement being largely driven by lower overhead costs. Operating expenses decreased by $0.5 million or 14% to $3.3 million in Q2 2012, compared to $3.9 million in Q2 2011. The reduction in expenses here was primarily driven by lower spending in legal and consulting fees. Our resulting net loss attributable to common stockholders after also considering the accrual in dividend to our preferred stock was $269,000 for Q2 compared to $289,000 for Q2 2011. On a per share basis, the loss was $0.02 fully diluted. Adjusted EBITDA was approximately $550,000 for the quarter compared to $683,000 in Q2 of last year. For the first six months of the year revenue decreased 11% to $16.6 million compared to $18.6 million for the first half of 2011. Again, the decrease was primarily driven by lower sales of telecom test and measurement equipment in our products and licensing segment. Technology development revenues were lower by 2% for the first six months, while product and licensing revenues declined 25% for the first six months of this year compared to the same period a year ago. Operating expenses for the first six months were $6.8 million, an improvement of $1.3 million or 16% from operating expenses in the first half of 2011. Expenses savings for the first six months were achieved primarily through lower share-based compensation expenses of $0.4 million in addition to the lower legal and consulting expenses I mentioned earlier. With these reductions in operating expenses, our net loss attributable to common stockholders improved to $638,000 for the first half of 2012 compared to a net loss of approximately $1.4 million for the first six months of 2011 while net loss per share improved to $0.05 fully diluted compared to a loss of $0.10 per share for the first half of 2011. We ended Q2 with $6.6 million in cash, a net usage of $1.2 million for the quarter. As I mentioned during our [Lazarings] call we had planned for this net cash outflow in the quarter due to the payment during Q2 of various liabilities accrued for at the end of 2011. You can see from our balance sheet that accrued liabilities of $3.6 million at December 31, 2011, as well as a similar balance as of March 31 of this year have now been reduced to $2.6 million at the end of June, accounting for most of the cash usage in Q2. With that I’d now like to turn the call back over to My.

Thank you, Dale. As you can see we are optimistic about the future based on the progress we continue to make in developing new and innovative solutions for the markets we serve. We’re responding to customer needs in both the sensing and telecommunications markets and have continued to advance our cyber security capabilities. Additionally, our technology development division provides an ongoing pipeline of new solutions through their applied research. Recently we’ve also increased our activity in advancing the commercialization of a number of these technologies. At this point I would like to open the line up for any questions that you might have.

Thank you. (Operator instructions.) And we have no questions today.

Alright, thank you, Ann. Thank you everyone again for your participation with us today and we look forward to speaking with you again at our next update call.

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.