Luna Innovations announced its financial results for the fourth quarter and year ended December 31, 2008.

As against the same quarter last year, fourth quarter 2008 revenues down by 26%, from $9.9 million to $7.4 million, gross profit decreased from $3.7 million to $2.3 million, and loss per share increased from $0.11 to $0.19. For the year, revenues increased by 10% from $33.7 million to $36.9 million against 2007. Gross profit increased from $12.3 million to $14.0 million, or 14%. The loss per share decreased from $0.77 in 2007 to $0.57 in 2008.

Kent Murphy, chairman and chief executive officer, provided this overview of Luna’s results:

“Through the first three quarters of 2008, revenues increased 24% over the first three quarters of 2007. We were having a strong year until the fourth quarter, when the economy changed dramatically. The lower than expected fourth quarter 2008 revenues were primarily caused by a decline in orders for telecommunications products we believe related to customers reducing their capital expenditures in this uncertain economy. In recognition of this decline, we took the appropriate steps to control our expenses and cash flow. We ended 2008 with $15.5 million in cash, a net increase of about $0.3 million for the fourth quarter.

“A major portion of our business is geared toward partnerships with industry leaders in selected market spaces. During 2008, we entered into or continued partnership relationships with global market leaders in surgical robotics, heart bypass equipment, oilfield services, telecommunications equipment, power generation equipment and defense systems. The company continues to make progress towards new opportunities for partnering in solar and wind energy generation, non-robotic medical devices, pharmaceuticals and defense solutions.

“In addition, our Technology Development Division, which provides applied contract research to customers, achieved our planned revenue growth of 15% in 2008 and has continued to be successful in attracting new contract awards in early 2009. We believe our backlog of $29 million as of year-end in new research opportunities will continue to support product development in sensors, nanomedicines and defense in accordance with our long-term business strategy.

“In the fourth quarter, we were awarded work with GE Aviation on a U.S. Army program to develop an integrated corrosion health monitoring system. GE Aviation selected Luna for this project due to our experience and knowledge of aircraft corrosion and materials and our concurrent development efforts in corrosion monitoring, modeling, and prediction. The goals of this Army program are to improve rotorcraft safety, decrease maintenance costs, and increase rotorcraft readiness.

“We also continue to garner interest in our unique organic solar cells, which use patented carbon nanomaterials to capture energy more efficiently than many existing organic solar cells to convert to electricity. Our research was recently published in Nature Materials, and demonstrates an entirely new approach of enhancing organic photovoltaic device performance. We are collaborating with solar cell manufacturers for testing and evaluation of Luna’s proprietary nanomaterial technology.”

On the outlook for 2009, Murphy commented, “Given these times of economic uncertainty, it is difficult to project 2009 revenue. We currently expect flat to modest revenue growth in 2009. We believe that our development relationships with industry leaders in broadband, alternative energy and healthcare markets, in addition to our opportunities within the federal government, position us to offset some of the uncertainty in our sensing and instrumentation product sales. As the economy recovers, we believe our Luna-branded test & measurement products will be attractive products to address the needs of broadband access and high speed network infrastructure in 2009 and beyond.”

Fourth Quarter Financial Highlights

Total revenues for the fourth quarter of 2008 down 26%, against the fourth quarter of 2007.

Product and license revenues decreased 63% to about $1.4 million in the fourth quarter of 2008, against $3.7 million in the fourth quarter of 2007. About $0.6 million of this decline is attributable to a change in the estimated percentage of completion on certain product development activities.

Gross profit for the fourth quarter of 2008 decreased to $2.3 million, or 31% of total revenues, from $3.7 million, or 37% of total revenues, for the corresponding period of 2007. The aforementioned percentage-of-completion adjustment alone reduced the fourth quarter 2008 gross margin by about 8 percentage points.

Operating expenses were flat at $4.9 million in the fourth quarters of 2007 and 2008. Operating expenses for the fourth quarter of 2008 include a $0.7 million increase in legal expenses and a reduction of $1.0 million in incentive compensation costs.

Net loss per share for the fourth quarter of 2008 was $0.19 per share from a loss per share of $0.11 for the fourth quarter of 2007.

Cash and cash equivalents totaled $15.5 million at December 31, 2008, as against $15.2 million at September 30, 2008.

Year-End Financial Highlights

Technology Development Division revenues grew 15% in 2008, increasing from $23.4 million for the year ended December 31, 2007 to $26.8 million for the year ended December 31, 2008. Product and license revenue was $10.1 million in 2008 as against $10.3 million in 2007.

Gross profit increased to $14 million, or 38% of revenues, for 2008, from $12.3 million, or 37% of revenues, in 2007.

Operating expenses were $21.3 million in 2008, against $20.6 million in 2007.

Net loss from operations was $7.3 million in 2008, versus a loss from operations of $8.3 million for the prior year, an improvement of 12%.

For the first nine months of 2008, prior to the global economic crisis, the company had increased revenues by 24% and improved its net loss by 33% against the first nine months of 2007.

Entered into a $10 million credit facility with Silicon Valley Bank, including a four-year term debt of $5 million outstanding as of December 31, 2008, with the remaining facility available under a revolving line of credit.

Guidance 2009

The company expects flat to modest growth in 2009 with total revenue to be in the range of about $37 million to $40 million, consisting of product and license revenue of about $7 to $9 million and technology development revenue of about $30 to $31 million. Also for 2009, the company anticipates a net loss in the range of about $5.5 to $6.0 million.

For the first quarter of 2009, the company expects revenue of about $9 million and a net loss of about $2.2 million.