UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934

Filed by the Registrantx                            Filed by a Party other than the Registrant¨

Check the appropriate box:

LUNA INNOVATIONS INCORPORATED

(Name of Registrant as Specified in its Charter)

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

1 Riverside Circle, Suite 400

Roanoke, Virginia 24016

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON MAY 15, 200822, 2012

To the Stockholders of Luna Innovations Incorporated:

Notice is hereby given that the Annual Meeting of Stockholders of Luna Innovations Incorporated (the “Company”) will be held at the offices ofWilson Sonsini Goodrich & Rosati, P.C., 1700 KRoanoke Higher Education Center, 108 N. Jefferson Street, NW, Fifth Floor, Washington, District of Columbia 20006Roanoke, Virginia 24016 on Thursday,Tuesday, May 15, 2008,22, 2012, at 3:9:00 p.m. E.D.T.a.m. EDT for the following purposes:

Please refer to the attached proxy statement, which forms a part of this Notice and is incorporated herein by reference, for further information with respect to the business to be transacted at the annual meeting.

Stockholders of record at the close of business on March 27, 2008April 9, 2012 (the “Record Date”) are entitled to notice of, and to vote at, the annual meeting or any adjournment or postponement thereof. The presence, in person or by proxy, of shares of the Company’s common stock representing a majority of shares of the Company’s common stock issued and outstanding on the record dateRecord Date will be required to establish a quorum at the annual meeting.

Your vote is important. Please sign, date and return the enclosed proxy card as soon as possible, or vote by telephone or on the Internet as instructed in these materials, to make sure that your shares are represented at the annual meeting. If you are a stockholder of record of the Company’s common stock, you may cast your vote by proxy or in person at the annual meeting. If your shares are held in an account atof record by a brokerage firm, bank or bank,other nominee, you must obtain a proxy issued in your name from that record holder and should instruct it onthe record holder as to how to vote your shares.

Roanoke, Virginia

April 9, 200824, 2012

You are cordially invited to attend the annual meeting. Whether or not you plan to attend in person, please complete, sign, date and return the accompanying proxy card in the enclosed envelope, or vote by telephone or on the Internet as instructed in these materials, as promptly as possible in order to ensure your representation at the meeting. Even if you have voted by proxy, you may still vote in person if you attend the meeting.

LUNA INNOVATIONS INCORPORATED

PROXY STATEMENT

FOR

ANNUAL MEETING OF STOCKHOLDERS

MAY 15, 200822, 2012

INFORMATION CONCERNING SOLICITATION AND VOTING

General

This proxy statement is furnished to ourthe stockholders of Luna Innovations Incorporated (the “Company,” “we,” “us,” or “our”) in connection with the solicitation of proxies for use at our annual meeting of stockholders to be held on May 15, 200822, 2012 at 3:9:00 p.m.a.m. EDT at the offices of Wilson Sonsini Goodrich & Rosati, P.C., 1700 KRoanoke Higher Education Center, 108 N. Jefferson Street, NW, Fifth Floor, Washington, District of Columbia 20006,Roanoke, Virginia 24016 for the purposes set forth in the accompanying “Notice of Annual Meeting of Stockholders.” Directions to the annual meeting may be found at http://www.education.edu/directions-parking.html. Information on how to vote in person at the annual meeting is discussed below.

A copy of our Annual Report to Stockholders, which includes our annual report on Form 10-K for the year ended December 31, 2007,2011 filed with the Securities and Exchange Commission, together with this proxy statement and accompanying proxy card, and notice, willis expected to be first mailed on or about April 15, 200824, 2012 to our stockholders of record.record as of the close of business on April 9, 2012 (the “Record Date”). Those materials are also available athttps://www. materials.proxyvote.com/550351.

This solicitation is made on behalf of our board of directors, and we will pay the costs of solicitation. Our directors, officers and employees may also solicit proxies by telephone, fax or personal interview, without additional consideration. We will reimburse banks, brokerage firms and other custodians, nominees and fiduciaries for reasonable expenses incurred by them in sending our proxy material to our stockholders. We have retained American Stock Transfer & Trust Company to assist in the solicitation of proxies with respect to shares of our common stock held of record by brokers, nominees and institutions for a customary fee.

Our principal executive offices are located at 1 Riverside Circle, Suite 400, Roanoke, Virginia 24016, and our telephone number is (540) 769-8400.

Shares Entitled to Vote and Quorum Requirement

Our outstanding common stock constitutes the only class of securities entitled to vote at the annual meeting. Stockholders of record of our common stock at the close of business on March 27, 2008the Record Date are entitled to notice of, and to vote at, our 20082012 annual meeting of stockholders. A list of our stockholders will be available for review at our principal executive offices during regular business hours for a period of ten days prior to the annual meeting. As of March 27, 2008, 10,901,122the close of business on April 9, 2012, 13,888,454 shares of our common stock were issued and outstanding. Theoutstanding; therefore, the presence at the meeting, in person or by proxy, of a majority of theat least 6,944,228 shares of the common stock issued and outstanding on March 27, 2008 will constitute a quorum. Each share of common stock owned as of the Record Date is entitled to one vote. If there is no quorum, holders of a majority of shares present at the meeting in person or represented by proxy may adjourn the meeting to another date.

Voting Procedures

The procedures for voting differ depending on whether you are a stockholder of record (that is, if your shares are registered directly in your own name with the Company’s transfer agent) or you hold your shares in “street name” (that is, your shares are held in an account at a brokerage, bank, dealer or other similar organization rather than in your own name, in which case you are considered to be the “beneficial owner” of those shares).

Stockholders of Record

Stockholders of record may vote by (i) completing and returning the enclosed proxy card prior to the meeting, (ii) voting over the telephone, (iii) voting on the Internet, (iv) voting in person by ballot at the meeting, or (v) submitting a signed proxy card at the meeting.

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A proxy card is enclosed for your use. We ask that you carefully review, complete, sign, date and return the proxy card in the accompanying envelope, which is postage prepaid if you mail itmailed in the United States.

Instead of submitting your vote in person or by mail, you may vote by telephone or over the Internet. In order to vote by telephone or over the Internet, please have the enclosed proxy card available for reference, and call the number or visit the website listed on the proxy card and follow the instructions. You will be asked to provide the company number and control number from the enclosed proxy card. Your vote must be received by 11:59 p.m., Eastern Time on Monday, May 21, 2012 to be counted. The telephone and Internet voting procedures are designed to authenticate stockholders’ identities, to allow stockholders to give their voting instructions and to confirm that stockholders’ instructions have been recorded properly.

If you are a stockholder of record and do not vote by completing your proxy card, by telephone, by mail, over the Internet or in person at the annual meeting, your shares will not be voted.

UnlessBeneficial Owners

If your shares are held in street name, the organization holding your account is considered to be the stockholder of record for purposes of voting at the annual meeting. If you are a beneficial owner of shares registered in the name of your broker, bank, or other agent, you should have received a voting instruction form with these proxy materials from that organization rather than from the Company. As a beneficial owner, you still have the right to direct your broker or other agent regarding how to vote the shares in your account. Simply complete and mail the voting instruction form to ensure that your vote is counted. Alternatively, you may vote by telephone or over the Internet as instructed by your broker or bank.

You are also invited to attend the annual meeting. However, since you are not the stockholder of record, you may not vote your shares in person at the meeting unless you request and obtain a valid proxy from your broker or other agent. Follow the instructions from your broker or bank included with these proxy materials, or contact your broker or bank to request a proxy form.

If you are a beneficial owner and do not instruct your broker, bank, or other agent how to vote your shares, the question of whether your broker or nominee will still be able to vote your shares depends on whether the New York Stock Exchange, or NYSE, deems the particular proposal to be a “routine” matter. Even though our common stock is listed on the NASDAQ Capital Market, the NYSE rules apply to brokers who are NYSE members voting on matters being submitted to stockholders at our annual meeting. Brokers and nominees can use their discretion to vote “uninstructed” shares with respect to matters that are considered to be “routine,” but not with respect to “non-routine” matters. Under the rules and interpretations of the NYSE, “non-routine” matters are matters that may substantially affect the rights or privileges of stockholders, such as mergers, stockholder proposals, elections of directors (even if not contested), executive compensation and certain corporate governance proposals, even if supported by management. Accordingly, your broker or nominee may not vote your shares on Proposal No. 1 without your instructions, but may vote your shares on Proposal No. 2.

The persons named as attorneys-in-fact to vote the proxies, My E. Chung and Dale E. Messick, were selected by the board of directors and are executive officers of the Company. All properly executed proxies returned in time to be counted at the annual meeting will be voted.

If you return a signed and dated proxy card without marking voting selections, then unless there are different instructions on the proxy allcard, your shares represented by valid proxies (and not revoked before they are voted) will be voted at the meetingFOR the election of all of the two director nominees listed in Proposal No. 1 andFOR the ratification of the appointment of our independent

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registered public registered accounting firm in Proposal No. 2. With respect to any other business that may properly come before the annual meeting and be submitted to a vote of stockholders, proxies will be voted in accordance with the best judgment of the designated proxy holders.

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The persons named as attorneys-in-fact to vote the proxies, Kent A. Murphy and Dale E. Messick, were selected by the board of directors and are executive officers of the company. All properly executed proxies retuned in time to be countedvotes cast at the annual meeting will be voted.

Shares representedtabulated by proxies that reflect abstentionsthe person or persons appointed by our board of directors to act as inspectors of election for the meeting. The inspectors of election will separately count, for Proposal No. 1, the election of directors, votes “For,” “Withhold” and “broker non-votes” (i.e., shares held by a broker or nominee that are represented at the meeting, butnon-votes,” and with respect to whichProposal No. 2, votes “For” and “Against,” abstentions and “broker non-votes.” Broker non-votes occur when a beneficial owner of shares held in “street name” does not give instructions to the broker or nominee is not empoweredholding the shares as to how to vote on a particular proposal)matters deemed “non-routine,” in which case the broker or nominee cannot vote the shares, as described above.

Abstentions and broker non-votes will be counted as shares that are present and entitled to vote for purposes of determining the presence of a quorum. Abstentions will be counted towards the vote total for Proposal No. 2 and will have the same effect as “Against” votes. Broker non-votes are not deemed to be entitled to vote for purposes of determining whether stockholder approval of a matter has been obtained. As a result, broker non-voteshave no effect and are not included in the tabulation of voting results on anyeither proposal.

The director nominees listed in Proposal No. 1 will be elected by a plurality of the votes of the shares present or represented by proxy at the meeting and entitled to vote on the election of directors. The two nominees receiving the most “For” votes will be elected. The appointment of our independent registered public accounting firm listed in Proposal No. 2 will be ratified if a majority of shares present or represented by proxy at the meeting and entitled to vote thereon voteFOR such proposal.

Stockholders of record may vote by (i) completing and returning the enclosed proxy card prior to the meeting, (ii) voting in person at the meeting, or (iii) submitting a signed proxy card at the meeting.

Your vote is important. Accordingly, please carefully review, complete, sign, date and return the accompanyingenclosed proxy card, or vote over the telephone or Internet, whether or not you plan to attend the annual meeting in person.

YouIf you receive more than one set of proxy materials, your shares may be registered in more than one name or in different accounts. Please follow the voting instructions on the proxy cards in the proxy materials to ensure that all of your shares are voted.

Changing Your Vote

If you are a stockholder of record, you may revoke your proxy at any time before it is actually voted at the meeting either by signing and submitting a new proxy card with a later date or by attending the annual meeting and voting in person. However, merelyYou may also grant a subsequent proxy by telephone or over the Internet. Your most recently submitted proxy card or telephone or Internet proxy is the one that will be counted. Merely attending the meeting, however, will not revoke your submitted proxy unless you specifically requestvote at the meeting, which will have the effect of revoking your proxy. You may also send a timely written notice that you are revoking your proxy be revoked. to our Corporate Secretary at 1 Riverside Circle, Suite 400, Roanoke, Virginia 24016.

If you hold shares through a bank or brokerage firm, you should have received a proxy card and voting instructions with these proxy materials, and you must contact thatthe bank or brokerage firm directly to revoke any prior voting instructions.

All votes castResults of Voting

Preliminary voting results will be announced at the meetingannual meeting. In addition, final voting results will be tabulated bypublished in a current report on Form 8-K that we expect to file within four business days after the persons appointed by our board of directorsannual meeting. If final voting results are not available to act as inspectors of election forus in time to file a Form 8-K within four business days after the meeting.annual meeting, we intend to file a Form 8-K to publish preliminary results and, within four business days after the final results are known to us, file an additional Form 8-K to publish the final results.

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In 2007, Michael Daniels joined our boardeach month of directors asservice during his second term. If re-elected again to a new member. Mr. Daniels received options on June 18, 2007 under our 2003 Stock Planthird term, such a director then would receive an additional option to purchase 100,000120,000 shares of common stock, which vests in 36 equal monthly installments from the date of grant.

All options issued to directors are granted with an exercise price equal to the closing price of our common stock at an exercise price of $4.72 per share. This exercise price was based on the fair market value of the class of common stock underlying the option on such date, as determined by the board of directors in good faith and based on our stock’s closing price on June 18, 2007, as reported on the NASDAQ Global Market.

Director Independence

Our board of directors has determined that each of Messrs. Backus, Daniels and Roedel, Ms. Kilberg, and Dr. Anderson is independent underCapital Market on the rules of the Securities and Exchange Commission and the listing standards of the NASDAQ Stock Market; therefore, every member of the audit committee, compensation committee and nominating and governance committee is an independent director in accordance with those standards. There were no related person transactions considered in the last fiscal year in the determination of the independence of the directors.grant date.

Compensation Committee Interlocks and Insider Participation

Between January and June 2007,During 2011, our compensation committeeCompensation Committee consisted of N. LeighMr. Dalhouse, Dr. Anderson Richard W.and Mr. Williamson until May 24, 2011, at which time Mr. Wise replaced Dr. Anderson and Mr. Roedel and Paul E. Torgersen. In May 2007, Dr. Torgersen retired, and in June 2007, Michael Daniels was elected by our board of directors as a committee member and served on the committee through the remainder of 2007.replaced Mr. Williamson. None of the current or former members of our compensation committee in 2007Compensation Committee during 2011 is or was a present or former officer or employee of the Company, nor did such members engage in any transaction or relationship requiring disclosure in this proxy statement under the section titled “Certain Relationships and Related Person Transactions.”

No executive officer of the Company served as a director or member of the Compensation Committee (or other board committee performing equivalent functions) of any other entity during the last fiscal year, one of whose executive officers served on our company. In addition, during 2007, noneboard of our officers had an “interlock” relationship, as that term is defined by the SEC.directors or Compensation Committee.

Code of Business Conduct and Ethics

We have adopted a Code of Business Conduct and Ethics that applies to all our directors and employees, including our principal executive officer, principal financial officer and principal accounting officer or controller. The full text of our Code of Business Conduct and Ethics is posted on our website at http://www.lunainnovations.com underin the “Investor Relations” section. If we make any substantive amendments to the Code of Business Conduct

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and Ethics or grant any waiver from a provision of the Code to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website.

EXECUTIVE OFFICERS

The following table sets forth certain summary information concerning our executive officers as of April 1, 2012.

Information about Mr. Chung is set forth above under “Class III Director Nominees for Election for a Three-Year Term Expiring at the 2015 Annual Meeting of Stockholders.”

Dale E. Messick has served as our Chief Financial Officer since August 2006, except during the period from August 2010 to April 2011 when he served as our interim President and Chief Operating Officer. Prior to joining us, Mr. Messick served in various capacities at Worldspan, L.P., a provider of transaction processing and information technology services to the global travel industry, including as Chief Financial Officer from 1997 to 2004 and Senior Vice President - Finance from 2004 to 2005. At Worldspan, Mr. Messick managed a staff of 160 people in the United States, Mexico, and Europe and was responsible for accounting, financial reporting, budgeting, financial planning and analysis, and internal audit operations. Previously, Mr. Messick worked in the audit practice of PricewaterhouseCoopers. Mr. Messick received a B.B.A. degree in accounting from the College of William and Mary and is a Certified Public Accountant.

Mark E. Froggatt, Ph. D. has served as our Chief Technology Officer since September 2005. Prior to joining us, Dr. Froggatt co-founded Luna Technologies in 2000 to develop instrumentation for fiber optic devices and served as its chief technology officer until our acquisition of Luna Technologies in September 2005. Dr. Froggatt is the primary inventor of the technology used in our OVA product and is a leader in the field of interferometric measurement. Before founding Luna Technologies, Dr. Froggatt worked at the NASA Langley Research Center, developing ultrasonic and optical instrumentation. He received B.S. and M.S. degrees in electrical engineering from Virginia Polytechnic Institute and State University (Virginia Tech) and a Ph.D. from the University of Rochester Institute of Optics.

Scott A. Graeff has served as our Chief Commercialization Officer since May 2010 and as our Treasurer since July 2005. He served as our interim Chief Financial Officer during the period from August 2010 to April 2011. He previously served as our Chief Operating Officer from March 2009 to May 2010, as our Chief Commercialization Officer from August 2006 to March 2009, and as our Chief Financial Officer and Executive Vice President, Corporate Development, from July 2005 to August 2006. Mr. Graeff was also a member of our Board of Directors from August 2005 until March 2006. From 1999 to 2001, Mr. Graeff served as Chief Financial Officer of Liquidity Link, a software development company. From 2001 to 2002, Mr. Graeff served as President and Chief Financial Officer of Autumn Investments. From 2002 until 2005, Mr. Graeff served as a Managing Director for Gryphon Capital Partners, a venture capital investment group. From 2003 until July 2005, Mr. Graeff also served as the Acting Chief Financial Officer of Luna Technologies, Inc., which we acquired in September 2005. Mr. Graeff holds a B.S. degree in commerce from the University of Virginia.

Talfourd H. Kemper,Jr. has served as our Vice President, General Counsel and Secretary since November 2008. Prior to joining us, Mr. Kemper was an equity Principal with the law firm of Woods Rogers PLC in Roanoke, Virginia from 2003 until 2008, where his legal practice focused on corporate and securities law,

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venture capital financing, mergers and acquisitions and intellectual property and licensing. Mr. Kemper received an A.B. degree in economics from Duke University and a J.D. degree from the University of Virginia School of Law, where he served on the Editorial Board of theVirginia Law Review.

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

Policies and Procedures for Transactions with Related Persons

Related person transactions, which we define as all transactions involving an executive officer, director, nominee for director or a holder of more than five percent of our common stock, including any of their immediate family members and any entity owned or controlled by such persons, are reviewed and approved by the audit committeeAudit Committee of our board of directors and a majority of disinterested directors on our board.

In any transaction involving a related person, our audit committeeAudit Committee and board of directors consider all of the available material facts and circumstances of the transaction, including:

After considering all such facts and circumstances, our audit committeeAudit Committee and board determine whether approval or ratification of the related person transaction is in our best interests. For example, if our audit committeeAudit Committee determines that the proposed terms of a related person transaction are reasonable and at least as favorable as could have been obtained from unrelated third parties, it will recommend to our board of directors that such transaction be approved or ratified. In addition,Alternatively, if a related person transaction will compromise the independence of one of our directors or director nominees, our audit committeeAudit Committee may recommend that our board of directors reject the transaction if it could affect our ability to comply with securities laws and regulations or NASDAQ listing requirements.

Each transaction described below was approved or ratified by our audit committeeAudit Committee or the disinterested members of our board of directors after making a determination that the transaction was executed on terms no less favorable than those we could have obtained from unrelated third parties.

The policies and procedures described above for reviewing and approving related person transactions are not set forth in writing. However, theThe charter for our audit committeeAudit Committee, however, provides that one of the committee’s responsibilities is to review and approve in advance any proposed related person transactions.

Transactions and Relationships with Directors, Nominees for Director, Executive Officers and Five Percent Stockholders

WeOther than compensation described in “Executive Compensation” and “Director Compensation” elsewhere in this proxy statement and as described below, we believe that there has not been any other transaction or series of transactions during 20072010 or 2011 to which we were or are to be a participant in which the amount involved exceeds $120,000 and in which any director, nominee for director, executive officer or holder of more than five percent of our common stock, or members of any such person’s immediate family, had or willare expected to have a direct or indirect material interest, other than compensation described in “Executive Compensation” elsewhere in this proxy statement and as described below.interest.

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Carilion Lease

On July 20, 2006, weWe have entered into an amendeda lease agreement with Carilion Medical Center, an affiliate of Carilion Clinic, related tofor our corporate headquarters in Roanoke, Virginia. Under the terms of the amended lease agreement, as amended to date, we agreed to lease a total of 24,057 square feet in two phases starting approximately September 1, 2006of office space. During 2010 and January 1, 2007. During 2007,2011, we paid Carilion Medical Center rent of $577,368. $605,627 and $612,708, respectively.

As a part of the 2010 transaction with Carilion described below, we agreed to extend this lease on customary and reasonable terms through December 31, 2015, and we also agreed not to exercise our right to terminate the lease prior to expiration of its term.

Carilion Clinic is the beneficial owner of more than five percent of our outstanding common stock, andstock. Until June 30, 2011, Dr. Edward Murphy, a current member of our board of directors, served as the Chief Executive Officer of Carilion Clinic.

Carilion Notes, Warrants and the Exchange of Carilion Notes for Preferred Stock

On May 21, 2008, we and Carilion Clinic is alsoamended each of the five Senior Convertible Promissory Notes dated December 30, 2005 and held by Carilion Clinic. The amendments extended the maturity dates of those notes from December 30, 2009 to December 31, 2012.

As consideration for the amendments to these notes, we granted Carilion Clinic a memberwarrant to purchase 10,000 shares of our boardcommon stock. The exercise price of directors.the warrant was $7.98 per share, the closing price of our common stock as reported on the NASDAQ Global Market on May 21, 2008. The warrants are exercisable beginning December 31, 2012 and originally had an exercise period through December 31, 2017.

In January 2010, we entered into a transaction with Carilion Clinic in which Carilion agreed to exchange all of its Senior Convertible Promissory Notes, including all accrued but unpaid interest, 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 a prior common stock warrant held by Carilion from $7.98 to $2.50 per share and to extend its expiration date to December 31, 2020. As of the date of the exchange, the outstanding principal balance of the Senior Convertible Promissory Notes was $5.0 million, and the aggregate accrued but unpaid interest on the notes was $1.2 million.

Separation and Consulting Agreement with Dr. Kent Murphy

On August 10, 2010, we and Dr. Kent Murphy mutually agreed to terminate his employment with the Company, and Dr. Murphy resigned his position as our President and Chief Executive Officer. On that date, we entered into a separation and consulting agreement providing that, for a period of 18 months beginning August 10, 2010, Dr. Murphy would provide certain consulting services to us as our Senior Strategic and Technology Advisor, and we would compensate him at a fixed rate of $22,500 per month, plus business expenses as may be approved by us. We also agreed to pay group healthcare coverage continuation premiums for Dr. Murphy and his covered dependents during the term of the consulting arrangement, which had a value of approximately $1,212 per month. We also paid Dr. Murphy $72,500 in respect of his accrued paid time off and any legal fees incurred by Dr. Murphy in connection with the preparation of the separation and consulting agreement and related agreements. In May 2011, we and Dr. Murphy amended the agreement to extend the period of reimbursement of health insurance premiums through August 10, 2012, up to an amount equal to $1,250 per month. In addition, by this amendment, we agreed to accelerate an aggregate of $80,000 in monthly payments that were already payable to Dr. Murphy under the agreement. The aggregate value of the amounts paid to Dr. Murphy under this agreement during 2010 and 2011 were $181,738 and $289,740, respectively.

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As part of the consulting agreement, Dr. Murphy agreed not to compete with us or to solicit specified customers of ours during the term of his consultancy. We and Dr. Murphy also agreed to customary covenants relating to non-disparagement and to our confidential information and intellectual property.

Dr. Murphy has also agreed that through December 31, 2012, he will not hire, retain the services of or recruit (or attempt to do any of the foregoing) any employee or representative of ours, either directly or indirectly, on his own behalf or on behalf of any other person or company. He also cannot encourage, prompt, induce or solicit any of our employees or representatives to (i) end their relationship with us or (ii) become affiliated with or perform any work for any business that is competitive with our business. This applies to any employee or representative of ours as of August 10, 2010, or as of any time during the term of the consulting arrangement, except for employees that may be terminated in connection with any general reduction in force of more than five individuals at the same time.

Contemporaneously with the execution of the consulting agreement, and again upon its amendment, we and Dr. Murphy entered into a mutual release of any potential claims, including any arising out of Dr. Murphy’s employment with us.

Letter Agreement with Dr. Kent Murphy Relating to Registration Rights

In connection with the separation and consulting agreement entered into with Dr. Murphy described above, we and Dr. Murphy also entered into a letter agreement relating to Dr. Murphy’s registration rights for his shares of common stock under that certain Amended and Restated Investor Rights Agreement, dated as of January 13, 2010, by and among us, Carilion Clinic and certain of our other stockholders, including Dr. Murphy, which we refer to as the Rights Agreement. Under the Rights Agreement, Dr. Murphy has specified rights to cause us to effect the registration of his shares in certain circumstances.

Under the letter agreement, Dr. Murphy agreed, through the period ending December 31, 2011, that he would not sell or otherwise make certain transfers of his shares of common stock and, subject to certain exceptions, would not exercise his registration rights under the Rights Agreement.

Indemnification Agreements with Officers and Directors

We have entered into indemnity agreements with certain of our officers and directors that provide, among other things, that we will indemnify such officer or director, under the circumstances and to the extent provided for therein, for expenses, damages, judgments, fines and settlements he may be required to pay in actions or proceedings that he is or may be made a party by reason of his position as a director, officer or other agent of the Company, and otherwise to the fullest extent permitted under Delaware law and our bylaws.

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PROPOSAL NO. 2

RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

Our audit committeeAudit Committee has appointed Grant Thornton LLP as our independent registered public accounting firm for the year ending December 31, 2008.2012 and has further directed that management submit the selection of our independent registered public accounting firm for ratification by the stockholders at the annual meeting. Grant Thornton has served as our independent audit firm since 2005 and has audited our financial statements for each of fiscal years 2003 through 2007.2005. A representative of Grant Thornton LLP is expected to be present at our 20082012 annual meeting of stockholders and will have an opportunity to make a statement and respond to appropriate questions from stockholders.

Ratification of the appointment of Grant Thornton LLP as our independent registered public accounting firm is not required by our bylaws or other applicable legal requirements. However, our board of directors is submitting the appointment of Grant Thornton LLP to the stockholders for ratification as a matter of good corporate practice. If our stockholders fail to ratify the appointment, the audit committeeAudit Committee will reconsider whether or not to retain thethat firm. Even if the appointment is ratified, the audit committeeAudit Committee at its discretion may direct the appointment of a different independent registered public accounting firm at any time during the year if it determines that such a change would be in our best interests and the best interests of our stockholders.

The affirmative vote of a majority of shares of our common stock present at the 20082012 annual meeting of stockholders in person or by proxy and entitled to vote is required to ratify the appointment of Grant Thornton LLP as our independent registered public accounting firm for the year ending December 31, 2008.2012. Abstentions will have the same effect as a vote against this proposal. Broker non-votes are counted towards a quorum, but are not counted for any purpose in determining whether this matter has been approved.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS YOU VOTE “FOR” PROPOSAL NUMBER 2.

Audit and Related Fees for Fiscal Years 20062010 and 20072011

The following table sets forth a summary of the aggregate fees billed to us by Grant Thornton LLP for professional services for the fiscal years ended December 31, 20062010 and 2007,2011, respectively. All of the services described in the following fee table were approved by the audit committee.Audit Committee.

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The audit committeeAudit Committee meets regularly with Grant Thornton LLP throughout the year and reviews both audit and, if applicable, non-audit services performed by Grant Thornton LLP as well as fees charged for such services. The audit committee has determined that the provision of the services described above is compatible with maintaining Grant Thornton LLP’s independence in the conduct of its audit functions.

Pre-Approval Policies and Procedures

The audit committeeAudit Committee has adopted, and the board of directors has approved, a policy that sets forth the procedures and the conditions pursuant to which services proposed to be performed by the independent auditorauditors may be pre-approved. The policy generally pre-approves all audit services and non-audit services by our independent auditors, except in the case of non-audit services where subsequent approval is necessary and

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permissible. Pursuant to its audit, audit-related and non-audit services pre-approval policy, the audit committeeAudit Committee may delegate either type of pre-approval authority for non-audit services to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the audit committeeAudit Committee at its next scheduled meeting. During 20062010 and 2007,2011, all services provided by Grant Thornton LLP were pre-approved by the audit committeeAudit Committee in accordance with this policy.

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AUDIT COMMITTEE REPORT

The audit committee is comprised of “independent” directors, as determined in accordance with Rule 4200(a)(15) of the Nasdaq Marketplace Rules and Rule 10A-3 of the Securities Exchange Act of 1934. The audit committee operates pursuant to a written charter adopted by the board of directors, a copy of which is available under the “Investor Relations” section of our website.

As described more fully in its charter, the purpose of the audit committeeAudit Committee is to assist the board of directors with its oversight responsibilities regarding the integrity of our company’s financial statements, our compliance with legal and regulatory requirements, assessing our independent registered public accounting firm’s qualifications and independence and, if applicable, the performance of the persons performing internal audit duties for our company.the Company.

Company management is responsible for preparation, presentation and integrity of our financial statements as well as our financial reporting process,processes, accounting policies, internal audit function, internal accounting controls and disclosure controls and procedures. Our independent registered public accounting firm is responsible for performing an independent audit of our consolidated financial statements in accordance with generally accepted auditing standards and to issue a report thereon. The audit committee’sAudit Committee’s responsibility is to monitor and oversee these processes. The following is the audit committee’sAudit Committee’s report submitted to the board of directors for 2007.2011.

The audit committeeAudit Committee has:

In addition, the audit committeeAudit Committee has met separately with companyCompany management and with Grant Thornton LLP.

Based on the review and discussions referred to above, the audit committeeAudit Committee recommended to the board of directors that the audited 20072011 financial statements be included in our company’s Annual Report on Form 10-K for the year ended December 31, 20072011 for filing with the Securities and Exchange Commission.

AUDIT COMMITTEE

Richard W. Roedel, Chairman

N. Leigh Anderson

John C. Backus

The foregoing audit committee report is not “soliciting material,” shall not be deemed incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof, and shall not otherwise be deemed filed under these acts, except to the extent we specifically incorporate by reference into such filings.

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EXECUTIVE COMPENSATION DISCUSSION AND ANALYSIS

Compensation Discussion and Analysis

The following discussion and analysis of our compensation arrangements ofwith our named executive officers should be read together with the compensation tables and related disclosures set forth elsewhere in this proxy statement. This discussion contains forward looking statements that are based on our current plans and expectations regarding future compensation programs. Actual compensation programs that we adopt may differ materially from currently planned programs as summarized in this discussion.

For 2011, our named executive officers consisted of:

Executive Summary

We seek to closely align the interests of our named executive officers with the interests of our stockholders. Our compensation programs are designed to reward our named executive officers for the achievement of short-term and long-term strategic and operational goals and financial performance, without encouraging unnecessary or excessive risk-taking. Our performance-oriented compensation program consists of base salary, annual cash bonuses, long-term equity incentives, such as stock awards and stock option grants, benefits and, for certain senior executive officers, severance and termination protection.

For 2011, our primary corporate goals related to our net income or loss for the year, our earnings before interest, taxes, depreciation, amortization and stock compensation expense (which we refer to as “adjusted EBITDA”), our cash flow, our total revenue for the year, and various qualitative objectives. Our executive compensation policies for the year were, therefore, designed to incentivize our executive officers to execute against the most significant financial performance objectives and to focus on creation of value for our stockholders. We sought to incentivize this performance primarily through cash incentives that were based on our financial performance.

The highlights of our 2011 executive compensation program were as follows:

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Overview of Compensation Philosophy

Our overall compensation philosophy is to provide executive compensation packages that enable us to attract, retain and motivate highly qualified executive officers to achieve our short-term and long-term business goals. Consistent with this philosophy, the following elements provide a framework for our executive compensation program: 1) base salary; 2)a cash bonus and award programsprogram designed to reinforce desired performance goals; and 3) use of non-cash compensation intended to align the interests of our executives with those of our stockholders.

Role of Compensation Committee and Compensation Consultant

Our executive compensation program is approved and monitored by the compensation committeeCompensation Committee of our board of directors. Until May 2007,During most of 2011, the members of the compensation committeeCompensation Committee were Warner Dalhouse, Richard W. Roedel (chairman), N. Leighand Michael W. Wise. Mr. Wise replaced Dr. Anderson Ph.D. and Paul E. Torgersen, Ph.D. In June 2007, Michael Daniels was appointed toMr. Roedel replaced Mr. Williamson on the board and tocommittee on May 24, 2011. Mr. Dalhouse served as chairman of the compensation committee, replacing Dr. Torgersen, who retired in May 2007.committee. All of the members of our compensation committee wereCompensation Committee are independent, non-employee directors during 2007. The compensation committee maintains a practice of meeting prior to each regular board of directors meeting and generally holds an executive session (without management present) at each regular meeting.

directors. Under the terms of its charter, the compensation committeeCompensation Committee is responsible for reviewing and approving compensation granted to our executive officers, including our chief executive officer, or CEO, and those executive officers who report directly to the CEO and any other officers as determined under Section 16 officers.of the Securities Exchange Act of 1934, as amended. In particular, the compensation committeeCompensation Committee reviews and approves for the CEO and the other executive officers the following components of compensation:

The compensation committeeCompensation Committee also serves as the administrator for our 2003 Stock Plan and our 2006 Equity Incentive Plan, as amended and restated April 16, 2007.equity incentive plans. All option grants,stock-based awards, including new grants to existing employees and executive officers, as well as grants to new employees, are approved by the compensation committee.Compensation Committee. The compensation committeeCompensation Committee is also responsible for annually evaluating the performance of our CEO.

We generally attempt to align our overall executive compensation with other publicly-traded peer companies who share similar characteristics. Because of our diversified product and service offerings, we believe our peer group includes a broad range of technology and growth companies with whom we compete for executive talent. Data on compensation practices at such companies has historically been gathered for us by our compensation consultant, Radford, through searches of publicly available information, including subscription databases and Securities and Exchange Commission filings. We use such information primarily to help guide decisions on base salary, target bonuses and equity-based awards.

The compensation committeeCompensation Committee has the authority to retain its own compensation consultant and to obtain advice and assistance from internal or external legal, accounting or other advisors as it sees fit. For example, in 2006, the compensation committeeThe Compensation Committee engaged Deloitte Consulting LLP, an independent third-party compensation consultant, Radford, in 2010 and 2011 to (i)conduct a competitive review and assessanalysis of our annual incentive plans forcurrent executive compensation program and to benchmark executive compensation and to

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provide us with insights and market data on executive and director compensation matters, both generally and within our executivesindustry. In 2011, Radford compared the salary, target cash incentives, and (ii) provide feedback regarding proposed employment agreements with certainequity compensation of our executive officers. Theofficers against an identified peer group of publicly traded companies. Radford determined our peer group based on its survey consisting of 81 public companies with less than $50 million in revenues, with a technology industry focus on medical device and life science companies. As a result of its analysis, Radford made recommendations to the Compensation Committee that were intended to bring the compensation committee did not engage an independent third-party compensation consultant in 2007, but has engaged one in 2008.elements paid to our executive officers towards the median of the identified peer companies.

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Executive Compensation Program

OurAs described above, our performance-oriented compensation program consists of base salary, annual cash bonuses, long termlong-term equity incentives, (includingsuch as stock awards and stock option grants),grants, benefits and, for certain senior executive officers, severance and termination protection. We believe that appropriately balancing the total compensation package and ensuring the viability of each component of the package is necessary in order to provide compensation whichthat is competitive and to attract and retain talent. Accordingly, in 2012 we entered into new employment agreements with our executive officers towards these goals. As a small company, we also try to optimize the mix of components to make such compensation programs cost effective for us. For example, on March 6, 2008,

The Compensation Committee intends for our compensation program to provide basic elements that ensure that management is fairly remunerated and has reasonable security so that the compensationmanagement team can perform at its best and take prudent risks. The committee approvedbelieves that it does not use highly leveraged short-term incentives that drive high risk investments at the issuanceexpense of sharesour long-term value.

Our Compensation Committee typically evaluates the performance of restricted common stock in lieu of a portion of certain executive officers’ cash bonuses earned in 2007. The compensation committee determined that paying a portion of these bonuses in stock (approximately $300,000 in the aggregate) helped reduce our cash outflow while also providing longer term equity-based incentive compensation to our executive officers.

We evaluate each executive officer annually, based on the achievement of both companycorporate goals and individual qualitative performance objectives and makemakes its compensation decisions and recommendations to the compensation committee accordingly. Total compensation for our executive officers may vary significantly from year-to-yearyear to year based on company,Company, divisional and individual performance. Further, the value of equity-based awards to our executives will vary in value based on fluctuation in our stock price performance overfrom time to time.

The following is a more detailed explanation of the primary components of our executive compensation program.

Base Salary

Base salary is primarilygenerally determined by considering competitive salary data and individual job performance. WeIn determining base salary, we primarily rely on considerations of executives’factors such as job performance, skill set, prior experience, past levels of compensation, experience,seniority, pay levels of similarly situated positions internally, alternative opportunities that may be available to executives, retention, and comparative rank within the company, and establish a base salary that, in the collective judgment and experience of the compensation committee, provides incentives for long-term employment of talented executives.market conditions generally. Base salaries for executive officers are reviewed at least annually. In each case, we take into account the results achieved by the executive, his or her future potential, the scope of the officer’s responsibilities and the depth of his experience. We do not apply specific formulas to determine annual pay increases, if any, and attemptour Compensation Committee attempts to make decisions regarding changes in base salary in the context of other short-term and long-term compensation components. Approved increases in base salary are effective upon approval by the Compensation Committee, generally effective in Januarythe first quarter of the following year.

Relative toSince we became a public company in 2006 and through June 2010, we generally did not implement changesprovide annual increases in the base salarysalaries of our executive officers. In July 2010, considering the factors noted above as well as the improvements experienced in 2007 forthe Company’s cash flow and available cash on hand, and in consultation with Radford, our namedindependent compensation consultant, we increased the base salaries of our executive officers exceptin amounts generally consistent with the cumulative value that the officers would have received had they received previous annual increases at a rate approximating the annual merit increases provided to our employees overall. In March 2011 and in March 2012, the Compensation Committee approved further annual increases for

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the executive officers in amounts consistent with the percentage increase provided to the rest of our employees in those years, as follows:

As Mr. Chung did not become our President and Chief Executive Officer until April 2011, his base salary was established by the Compensation Committee at the commencement of Scott A. Graeff, our Chief Commercialization Officer (CCO). We increasedhis employment, based upon negotiations with Mr. Graeff’s base salary by approximately 23% to more closely alignChung. Mr. Chung also received a $50,000 starting bonus under the terms of his salary with that of our other senior executive officers. As Chief Commercialization Officer, Mr. Graeff has responsibility for implementing and monitoring our product commercialization strategy. Prior to 2007, Mr. Graeff was also directly involved in our capital raising activities and led key acquisition and licensing transactions.

Relative to 2007, we do not anticipate significant changes in the base salary in 2008 for our named executive officers.employment agreement.

Incentive Bonuses

During 2007,In December 2010, our Compensation Committee adopted a senior management incentive plan for fiscal year 2011. Under the terms of the incentive plan, certain of our employees, including all of our named executive officers, were eligible for bonuses under our Senior Management Cash Bonus Plan. In general, the Senior Management Cash Bonus Plan provided cash bonuses upon attainment of: (i) quantitative goals based on company performance against budget; and (ii) if the quantitative goals under (i) above have been met, qualitative goals based on individual performance tied to our overall corporate objectives. The target payout under this plan for our CEO, however, was tied exclusively to quantitative goals in 2007.

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In 2006, annual bonus opportunities under the plan ranged from 25% for vice president level officers up to 50% of base salary for our CEO, CFO, CCO and COO. The weighting between quantitative and qualitative components for executive officers, other than our CEO and CFO, was initially established at 40% and 60%, respectively. However, following review of the plan by Deloitte Consulting in April 2006, the compensation committee approved a modification to the plan which weighted quantitative performance 70% and qualitative performance 30%. In addition, achievement of certain of the quantitative goals was made a pre-requisite to any payout based on qualitative performance.

In addition, Deloitte Consulting recommended and the compensation committee approved a change to the timing of such cash bonus payouts in 2007. In 2006, the Senior Management Cash Bonus Plan was payable and evaluated quarterly, and bonuses were paid for performance goals achieved during the first quarter, third quarter and fourth quarter of 2006. In 2007, bonuses under the plan were to be payable and evaluated annually following the completion of our fiscal year, which ends December 31, and receipt of our audited financial results.

On April 4, 2007, the compensation committee approved the Senior Management Cash Bonus Plan for 2007, or 2007 Bonus Plan. Under the terms of the 2007 Bonus Plan, participants would be eligible for annualreceive bonus payments based upon a target percentage equal to 50% of their respective salaries earned in 2011 and the achievement of specifiedcertain quantitative and qualitative performance objectives. Depending upon actual performance versusFor each of the named executive officers, the corporate objectives participants could receive between zero and 150%were weighted at 80% of their individualthe target bonus percentage. Eligible payments underand the 2007 Bonus Planindividual objectives were divided into two categories, each representing 50%weighted at 20% of the participant’s individual target. Amounts earnedtarget bonus. The specified corporate objectives, and their relative percentage weighting of the overall bonus for each named executive officer in 2011, were net loss attributable to common stockholders (20%), adjusted EBITDA (15%), net cash flow (excluding debt or equity financing transactions) (15%), total revenue (10% for Messrs. Chung, Messick and Graeff and 3% for Dr. Froggatt), revenues for our technology development segment, excluding our secure computing (SCC) group (2% for Messrs. Chung, Messick and Graeff and 1.5% for Dr. Froggatt), SCC (2% for Messrs. Chung, Messick and Graeff and 1.5% for Dr. Froggatt), and our product and licensing segment (2% for Messrs. Chung, Messick and Graeff and 10% for Dr. Froggatt), and voluntary employee turnover (14%). The qualitative objectives generally related to new product commercialization and process improvement activities. The Compensation Committee selected these corporate metrics because the committee believed them to be the appropriate indicators of success in the first categoryexecution of our operating plan and achievement of key corporate goals and because these factors are critical to increasing the value of our common stock. No bonuses would be determined based in part upon meetingpaid, however, unless our budgeted revenues and net loss for 20072011 was less than a threshold amount of $2.4 million.

For each of the quantitative objectives, minimum, target and in part uponmaximum levels of achievement were possible. At the minimum level of individualachievement, the officer would receive a payout of 25% of the weighting for that component. At the target level of achievement, the officer would receive a payout of 100% of the weighting for that component. At the maximum level of achievement, the officer would receive a payout of 150% of the weighting for that component. For performance objectives, as described abovevalues falling between the minimum and consistent withtarget levels, or between the recommendations of a Deloitte Consulting in 2006. Amounts earned in the second categorytarget and maximum levels, award amounts would be determined solely upon improvement from our budgetedinterpolated on a linear basis.

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Our actual net loss attributable to common stockholders for 2011 was $1.5 million. Accordingly, our performance exceeded the year. Payments under both categories would be subject to achievement of an overall threshold performance for both revenue and net loss.

On March 6, 2008, the compensation committee approved the disbursement of bonuses for 2007 to named executive officers pursuant to the termsrequirement of the 2007 Bonus Plan. Based on the components of the 2007 Bonus Plan, bonusesplan, and incentive compensation was earned by our named executive officers in 2007 ranged from approximately 41% to 62%based upon the company’s performance against the plan metrics. For 2011, our targets, actual levels of their base salaries. The total bonuses earned by our named executive officers in 2007, whether paid entirely in cash or in a combination of cashachievement and stock, arepayout percentages were as follows:

On March 6, 2008, our compensation committee also approved an amendmentWith respect to the 2007 Bonus Plan whereby portions ofqualitative metrics focused on commercialization and process improvement activities, the bonuses would be paid in shares of our common stock in lieu of cash. As an incentive to named executive officers to accept stock in lieu of cash bonuses, the compensation committee approved grants of additional shares of stock in amounts equal to five percent (5%) of the number of shares accepted in lieu of the cash bonuses. The compensation committeeCompensation Committee determined that the grantCompany achieved 44% of an additional 5%the objectives. As a result of sharesthese performance levels, the incentive compensation earned approximated 36% of each participant’s annual salary as for 2011 (or 72% of the target bonus). Under the 2011 senior management incentive plan, if our cash balance at December 31, 2011 exceeded $8.5 million, the bonuses earned were payable in cash. Our cash balance at December 31, 2011 was an appropriate incentive$8.9 million and, therefore, for our named executive officers to accept stock in lieu of cash and appropriately recognized that the stock shall be restricted common stock subject to the terms and conditions of our 2006 Equity Compensation Plan. The compensation committee determined to calculate the actual number of shares of stock issued in lieu of cash bonuses to the named executive officers, usingthese incentive bonuses earned for 2011 were paid in cash and are reported in the closing market price“Non-Equity Incentive Plan Compensation” column of the stock as listed onSummary Compensation Table below.

As described above, in March 2011, in addition to the NASDAQ Global Market on March 7, 2008,payments awarded under the following day.

In particular,2010 senior management incentive plan, the compensation committeeCompensation Committee approved a discretionary bonus with a value in the issuanceamount of 20,349 shares$70,000 to each of stock to Dr. Murphy in lieu of cash bonus of $100,000, 9,488 shares of stock to Mr. Messick, in lieu of cash bonus of $46,625, 14,677

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shares of stock toour then interim President and Chief Operating Officer, and Mr. Graeff, our then interim Chief Financial Officer and Chief Commercialization Officer, in lieurecognition of their performance of additional responsibilities in 2010 as part of a management transition. Each bonus consisted of a $35,000 cash bonuspayment and $35,000 of $72,125, 4,916 shares ofrestricted common stock, to Dr. Lenk in lieu of cash bonus of $24,161, and 9,757 shares of stock to Mr. Ferris in lieu of cash bonus of $47,950. The grant wasvalued based onupon the closing price of our common stock as reported on the NASDAQ Global Market ondate of grant, which shares will vest ratably over a three-year period ending in March 7, 20082014, subject to the officer’s continued service with us. In accordance with SEC compensation disclosure rules, the cash portion of these bonuses is reported as 2010 compensation in the “Bonus” column of the Summary Compensation Table below, and the foregone portionsrestricted stock portion of cashthese bonuses plus a 5% incentive foris reported as 2011 compensation in the election of stock based bonus in lieu of cash.

On March 6, 2008, the compensation committee also approved the Senior Management Incentive Compensation Plan, or 2008 Bonus Plan. Under the terms“Stock Awards” column of the 2008 Bonus Plan, named executive officers would be eligible for annual bonus payments based upon the achievement of specified objectives. Depending upon actual performance versus objectives, participants could receive between zero and 150% of their individual target bonus percentage. Eligibility is triggered only if 95% of our consolidated net income target is met. After this trigger is achieved, a bonus is awarded for each financial component if at least 95% of target for the respective component is achieved. The awards are calculated based upon the participant’s overall target with component weights, as follows: 35% based on the achievement of the 2008 net income target, 25% on the achievement of 2008 revenue target, 25% on the cash usage target and 15% on individual qualitative goals being met. It is anticipated that 2008 bonuses will be paid, if earned, in a combination of cash and stock or, under certain circumstances, entirely in stock.

We work with each named executive officer at the beginning of each year to define the qualitative goals based on his or her personal objectives, as well as those of the business unit or function for which the executive is responsible. This process is an integral part of our culture and is intended to reinforce our collaborative, team-oriented and performance-driven environment.Summary Compensation Table below.

Long Term Equity Incentives—Stock and Stock OptionsIncentives

Consistent with our compensation philosophy, our Compensation Committee believes that equity awards can be a substantial portionsignificant motivator in attracting, retaining and rewarding the success of ourmanagement employees by providing compensation program is based onwith long-term performancevesting requirements and linking the ultimate value of our company and the price of our common stock.those awards to stockholder returns. This component is made upmay include both grants of restricted common stock andas well as stock options.options, although our compensation committee has historically favored the use of stock options only. Similar to base salary increases, options aremay also be granted to addressin connection with promotions andor significant changes in responsibility. Although stock options are expensed ongrants of stock-based awards can impact our statement of operations and have a negative impact on our net loss,operating results, we believe that long-term equity-based compensation is a criticalcan be an important element of our overall compensation program because it helps

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focus our executives on our long-term financial and operational performance and also aligns the interests of our executives with those of our stockholders. The potential financial value offered through such options is also an important retention tool.

In order to provide an incentive for continued employment, employee stock options previously granted underTo the extent that our 2003 Stock Plan typicallyCompensation Committee approves stock-based awards, the grants have historically vested 25% upon the one year anniversaryover a period of thefive years, with 40% vesting commencement date (generally the employment start date for new hires or the grant date for existing employees) and 1/48 per month thereafter for three years. Since our initial public offering in June 2006, other than the initial option award to our current CFO, which vested according the schedule described above, employee stock options granted under our 2006 Equity Incentive Plan typically vest 40% uponon the two-year anniversary of the date of grant, and the remaining 60% vesting commencement date and 1/60 per month thereafter for three years. The longerin 36 monthly installments thereafter. This vesting schedule currently used for options granted under our 2006 Equity Incentive Plan, as amended and restated April 16, 2007, iswas intended to help us maintain eligibility for Small Business Innovative Research, or SBIR, grants through 2008 and also to minimize the short-term dilution to our public stockholders caused by the exercise and sale of employee stock options. To maintain our eligibility for SBIR grants, we must be at least 51% owned and controlled by U.S. citizens or permanent resident aliens, among other conditions. AllIn February 2012, the Compensation Committee determined, following consultation with Radford, that future employee stock options grantedshould vest monthly over a period of four years (thus with no “cliff” vesting) in order for us to executives other than Kent A. Murphy (who is a greater than 10% holder)better incentivize and retain our employees. Stock options generally expire ten years from the date of the grant.

Stock option grants to new hires and annual option grants to existing employees are generally determined within ranges established for each job level. The compensation committee,Compensation Committee, however, has the ability to award a significantly greater number of stock options if it deems doing so to be in our best interests and the best interests of our stockholders. As part of its report to the Compensation Committee in 2011, Radford recommended that we resume making periodic equity grants to our executives as part of moving total compensation toward the median for our peer group. In February 2012, the Compensation Committee granted a total of 285,370 stock options to our named executive officers.

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Based on the definition of fair market value in our 2006 Equity Incentive Plan stockStock options are granted havingwith an exercise price equal to the closing price of our stock on the grant date, except for options granted to employees who are beneficial owners of more than 10% of our common stock. Any incentive stock in which case the options are generally granted havingto a holder of greater than 10% of our outstanding common stock have an exercise price equal to 110% of the closing price in order to qualify such options for incentive stock option treatment underon the Internal Revenue Code.date of grant.

We do not time the granting of our options relative to any favorable or unfavorable news that we release. Stock options for new employees, including executive officers, are generally awarded at the first regular meeting of the compensation committeeCompensation Committee following the employee’s hire date, or, in certain limited cases, at the first regular meeting of the compensation committeeCompensation Committee following the prospective employee’s written acceptance of an employment offer. In the latter case, the grant date of the stock options is the date of the employee’s first day of employment, with the exercise price equal to the closing price of the stock that day. All other option awards are also made at regularly scheduled committee meetings. The compensation committee’sCompensation Committee’s regular meeting schedule is established several months in advance of each meeting. Thus, proximity of any option or stock award to an earnings announcement or other market events is coincidental.

On January 23, 2007, certain ofWe do not have any requirements for our named executive officers entered into amended and restated stock sale restriction agreements whereby such named executive officers agreed not to sell more than a fixed number of beneficially held shareshold minimum amounts of our common stock for a two-year period ending December 31, 2008. In particular, Dr. Murphy, Mr. Messick, Mr. Graeff, and Dr. Lenk each agreed not to sell any securities subject to the agreement in calendar year 2007 and to sell no more than ten percent (10%) of such named executive officer’s securities subject to the agreement in calendar year 2008. Mr. Ferris agreed not to sell more than ten percent (10%) of these securities in 2007 and ten percent (10%) in 2008.

On February 27, 2008, certain of our named executive officers again entered into amended and restated stock sale restriction agreements whereby such named executive officers agreed not to sell more than a fixed number of beneficially held shares of our common stock for a three-year period ending December 31, 2010. In particular, Dr. Murphy, Mr. Messick, Mr. Graeff, and Dr. Lenk each agreed not to sell any securities subject to the agreement in calendar year 2008 and to sell no more than ten percent (10%) of such named executive officer’s securities subject to the agreement in each of calendar years 2009 and 2010.

The stock sale restriction agreements were entered into with the expectation that such restrictions may help to prolong the company’s eligibility for SBIR grants, although there can be no assurance that the company will be able to maintain its SBIR eligibility.stock.

Other Benefits

In general, our practice is to provide commensurate benefits to employees at all levels of our organization. Consistent with this practice, the following are the primary benefits provided to our full-time employees, including our named executive officers:

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We believe that these benefits are consistent with those offered by other companies and specifically with those companies with which we compete for employees.

Additionally, we provide the following benefits to our CEO and other named executive officers:

TerminationControl Benefits and Severance

In 2006, weWe have entered into employment agreements, which were amended and restated in March 2012, with three of our seniornamed executive officers: our CEO, CFO and our CCO. A brief description of theofficers. The terms and conditions of these employment agreements are summarized abovebelow under the section “Employment Agreements and Potential Payments upon Termination or Change-In-Control.”

With respectThe Compensation Committee believes that change in control benefits play an important role in attracting and retaining valuable executives. The payment of such benefits ensures a smooth transition in management following a change in control by giving the named executive officer the incentive to our CEO, Dr. Murphy’s employment agreement provides that if hisremain with the Company through the transition period, and, in the event the officer’s employment is terminated involuntarily without cause (as definedas part of the transition, by compensating the officer with a degree of financial and personal security during a period in his employment agreement) or voluntarily with good reason (as defined in his employment agreement),which he is eligible for either, (a) if such termination occurs within twelve (12) monthslikely to be unemployed. The Compensation Committee believes that severance benefits also play an important role in attracting and retaining valuable executives.

Our Compensation Committee’s analysis indicates that the change in control and severance provisions of a change of control, severance equal to eighteen (18) months base salary and eighteen (18) months of continuation of group health benefits, or (b) if such termination does not occur within twelve (12) months of a change of control, severance equal to twelve (12) months base salary and twelve (12) months of continuation of group health benefits. In addition to any severance payable under his employment agreement, Dr. Murphy will also immediately receive an additional twelve (12) months of additional vesting of any unvested stock options and a cash payment equal to the value of any unvested 401(k) match amount.

With respect to our CFO and CCO, each of their respective employment agreements provide that if the executive’s employment is terminated involuntarily without cause (as defined in his employment agreement) or voluntarily with good reason (as defined in his employment agreement), the executive is eligible for either, (a) if such termination occurs within twelve (12) months of a change of control, severance equal to twelve (12) months base salary and twelve (12) months of continuation of group health benefits, or (b) if such termination does not occur within twelve (12) months of a change of control, severance equal to nine (9) months base salary and nine (9) months of continuation of group health benefits. In addition to any severance payable under the employment agreements, each executive officer will also immediately receive an additional twelve (12) months of additional vesting of any unvested stock options and a cash payment equal to the value of any unvested 401(k) match amount.

We have no otheramended employment agreements with our executive officers and all of our employees andnamed executive officers are employed “at will.”consistent with the provisions and benefit levels of our peer companies, and it believes these arrangements to be reasonable.

Competitive Market Review and Future Trends

We attempt to align our overall executive compensation with other publicly-traded peer companies who share similar characteristics. Because of our diversified product and service offerings, our peer group includes a broad range of technology and growth companies with whom we compete for executive talent. In general, we consider peer companies based on industry focus, market capitalization, revenue, net income/loss and geographic proximity. Data on compensation practices at such companies has historically been gathered through searches of publicly-available information, including subscription databases and Securities and Exchange Commission filings. We use such information primarily to help guide decisions on base salary, target bonuses and equity-based awards. In determining base salary, we also consider other factors such as job performance, skill set, prior experience, seniority, pay levels of similarly situated positions internally, retention, and market conditions generally.

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We intend to continue our strategy of paying competitive short-term cash compensation and offering long-term incentives through equity-based compensation programs that align individual compensation with corporate financial performance. We believe that our total compensation package is reasonable in the aggregate. We also believe that, in light of our compensation philosophy, total compensation for our executives should continue to consist of base salary, annual bonus awards (consisting of cash, stock or a combination of both), long-term equity based compensation, and certain other benefits.

We anticipate that the competitive posture of our total direct compensation will vary year-to-yearyear to year as a result of our performance, as well as the performance of peer group companies and the market as a whole. Accordingly, the magnitude and weighting of different compensation components will likely evolve as our companythe Company grows and we come closer to achieving profitability. Asprofitability on a consistent basis.

Tax Considerations

Section 162(m). Limitations on deductibility of compensation may occur under Section 162(m) of the dateInternal Revenue Code, which generally limits the tax deductibility of this proxy statement,compensation paid by a public company to its chief executive officer and certain other highly compensated executive officers to $1 million in the year the compensation becomes taxable to the executive officer. There is an exception to the limit on deductibility for performance-based compensation that meets certain requirements.

The portion of the compensation taxable to our chief executive officer and other executive officers in 2011 that did not qualify for an exemption from Section 162(m) did not exceed the $1 million limit per officer. We periodically review the potential consequences of Section 162(m) and may structure the performance-based portion of our executive compensation to qualify for an exemption from Section 162(m). However, we reserve

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the right to use our judgment to authorize compensation payments that do not intendcomply with the exemptions in Section 162(m) when we believe that such payments are appropriate and in the best interests of our stockholders, after taking into account changing business conditions or the officer’s performance.

Section 409A. Under Section 409A of the Internal Revenue Code, if a named executive officer is entitled to enter into any other employment agreements.non-qualified deferred compensation benefits that are subject to Section 409A, and such benefits do not comply with Section 409A, the officer would be subject to adverse tax treatment, including accelerated income recognition (in the first year that benefits are no longer subject to a substantial risk of forfeiture) and a 20% penalty tax pursuant to Section 409A. With respect to equity and cash compensation, we generally seek to structure such awards so that they do not constitute “deferred compensation” under Section 409A, thereby avoiding penalties and taxes on such compensation applicable to deferred compensation.

COMPENSATION COMMITTEE REPORT

The compensation committeeCompensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this proxy statement with companyCompany management. Based on the compensation committee’sCompensation Committee’s review of, and the discussions with management with respect to, the Compensation Discussion and Analysis, the compensation committeeCompensation Committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 for filing2011 filed with the Securities and Exchange Commission.

The foregoing compensation committee report is not “soliciting material,” shall not be deemed incorporated by reference into any filing by us under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof, and shall not otherwise be deemed filed under these acts, except to the extent we specifically incorporate by reference into such filings.

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