ASSET TRANSFER AND LICENSE AGREEMENT

Exhibit 10.21

CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been omitted pursuant to a request for confidential treatment and, where applicable, have been marked with an asterisk (“[****]”) to denote where omissions have been made. The confidential material has been filed separately with the Securities and Exchange Commission.

EXECUTION VERSION

ASSET TRANSFER AND LICENSE AGREEMENT

by and between

Coherent, Inc.

and

Luna Innovations Incorporated

Dated December 12, 2006

TABLE OF CONTENTS

ii

iii

ASSET TRANSFER AND LICENSE AGREEMENT

This Asset Transfer and License Agreement (this “ Agreement ”) is entered into as of December 12, 2006 (the “ Effective Date ”) by and between Coherent, Inc., a Delaware corporation with a place of business at 5100 Patrick Henry Drive, Santa Clara, California 95054 (“ Coherent ”) and Luna Innovations Incorporated, a Delaware corporation with offices at 1703 S. Jefferson Street, SW, Suite 400, Roanoke, Virginia 24014 (“ Luna ”) (each, a “ Party ;” together, the “ Parties ”).

RECITALS

A. Coherent operates a Clean Room (as defined below) where it manufactures certain swept-tunable Lasers (as defined below) (the “ Business ”).

B. Luna wishes to have its Contract Manufacturer (as defined below) assume the manufacture of the Transferred Lasers (as defined below) using certain of the equipment and technology currently employed by Coherent in the Business.

C. After visiting and performing a detailed technical review of the Clean Room and other due diligence by Luna, Luna has determined the specific items of equipment it wishes to purchase from Coherent, and acknowledges that the equipment it has selected may not be all of the equipment and technology used by Coherent to manufacture the Lasers.

D. Coherent is willing to sell to Luna, and Luna is willing to purchase the Transferred Assets (as defined below).

E. Coherent is willing to grant to Luna, and Luna is willing to accept, a royalty bearing license to manufacture and sell Lasers based upon the Coherent technology.

F. Coherent wishes to have the right to purchase Lasers from Luna.

NOW, THEREFORE , in consideration of the foregoing and of the mutual promises contained in this Agreement, the Parties hereby agree as follows:

1. CONSTRUCTION AND DEFINITIONS

1.1 Definitions . The following capitalized terms have the meanings set forth below:

(a) “ Affiliate ” means any entity that controls, is controlled by or is under common control with a Party. An entity shall be regarded as in “control” of another entity, if it owns or possesses, directly or indirectly: (i) voting shares or other securities, representing more than fifty percent (50%) of the outstanding shares or securities entitled to vote for the election of the board of directors or similar managing authority of such controlled entity; or (ii) if such controlling entity does not have voting shares or other securities, more than fifty percent (50%) of the ownership interest that represents the right to make decisions, including the election of directors, for such controlled entity.

(b) “ Assumed Liabilities ” has the meaning set forth in Section 2.4.

(c) “ Business Day ” means any day other than a Saturday, Sunday or a legal holiday under the federal laws of the United States or any other day on which banking institutions located in California are authorized or required by law or other governmental action to close.

(d) “ Change of Control ” means a transaction or series of related transactions that would directly or indirectly: (i) result in or have the effect of a third party obtaining legal or beneficial ownership of more than fifty percent (50%) of the voting shares (or other voting interests) of a Party (even if the Party is the surviving entity, such as in the case of a reverse triangular merger); or (ii) result in the sale, transfer, assignment, mortgage, exclusive license or other disposition of all or substantially all of a Party’s assets.

(e) “ Clean Room Schedule ” means Schedule 1.1(e) hereto, the list of material equipment in the Clean Room as of the date hereof that is used by Coherent in the manufacture of the Transferred Lasers in the Clean Room, but excluding commercially available portable maintenance, calibration and test equipment and commercially available computers and network equipment.

(f) “ Clean Room ” means the Coherent Clean Room located at 1870 Lundy Avenue, San Jose, California.

(g) “ Coherent Lasers ” means the swept-tunable lasers, including the Transferred Lasers, manufactured by Coherent prior to the Effective Date using the Transferred Assets in the Clean Room.

(h) “ Confidential Information ” has the meaning set forth in Section 9.2.

(i) “ Contract Manufacturer ” means an entity that will use the Transferred Assets to manufacture for, and supply lasers to, Luna and, if requested, Coherent, and any replacement of, or successor to, such contract manufacturer. The Contract Manufacturer shall initially be Avo Photonics.

(j) “ Contract Year ” means the twelve (12)-month period commencing on January 1, 2007, and each separate successive twelve (12) month period thereafter during the Term of this Agreement.

(k) “ Credit Amount ” has the meaning set forth in Section 5.3.

(l) “ Derivative Work ” has the meaning ascribed to it under the United States Copyright Law, Title 17 U.S.C. Sec. 101 et. seq., as the same may be amended from time to time.

2

(m) “ Disclosing Party ” has the meaning set forth in Section 9.2.

(n) “ Documentation ” means all documents in existence as of the Effective Date and necessary to the manufacture, use and testing of Transferred Lasers or the operation of the Transferred Equipment, including but not limited to the design and manufacturing documents (such as bill of materials, build instructions and test reports and vendor lists (but only to the extent Coherent is permitted by applicable laws, regulations and agreements to provide the same to Luna without restriction).

(o) “ Excluded Assets ” has the meaning set forth in Section 2.2.

(p) “ Excluded Liabilities ” has the meaning set forth in Section 2.4.

(q) “ Fields of Use ” means (i) for Lasers that operate from 1250 nm to 1700 nm, use in any application, and (ii) for Lasers that operate over any wavelength range other than the wavelengths set forth in the foregoing clause (i), for use only in applications in the fields of telecommunications, telecommunications test and/or coherent optical frequency domain reflectometry.

(r) “ First Payment ” has the meaning set forth in Section 2.6.

(s) “ Full Payment Date ” means the date upon which the full Purchase Price has been paid by Luna, subject to Luna’s right to offset, in accordance with Section 2.6.

(t) “ GAAP ” means generally accepted accounting principals as may be modified from time to time by the Securities and Exchange Commission, the Public Company Accounting Oversight Board and other recognized authorities.

(u) “ Governmental Authority ” means any U.S. or foreign, national, federal, state, municipal or local or other government, governmental, regulatory or administrative authority, agency or commission of any court, tribunal, or judicial or arbitral body.

(v) “ Intellectual Property Rights ” means the rights associated with the following: (i) all United States and foreign patents and applications, including continuation, divisional and continuation-in-part applications thereof as well as any reissues and reexaminations thereof (“ Patents ”); (ii) all trade-secret rights and all other rights in or to confidential business or technical information (“ Trade Secrets ”); (iii) all copyrights, copyright registrations and applications therefor and all other rights corresponding thereto throughout the world (“ Copyrights ”); (iv) trademarks, service marks, trade dress rights and similar designation of origin and rights therein (“ Marks ”); and (v) any similar, corresponding or equivalent rights to any of the foregoing any where in the world. Intellectual Property Rights specifically excludes contractual rights, including license grants.

(w) “ Inventory ” means all inventories of (i) raw and in-process materials, parts and supplies used in the manufacture of Lasers that constitute the Transferred Lasers listed on Schedule 1.1(tt), and (ii) the final, completed inventory of Lasers that constitute the Transferred Lasers listed on Schedule 2.1.

3

(x) “ Knowledge ” has the meaning set forth in Section 7.1.

(y) “ Lasers ” means swept-tunable lasers generally made by Coherent or Luna using the Transferred Technology in whole or part.

(z) “ Licenses ” means the Licensed IPR, the Licensed Patents and any other licenses granted by Coherent under this Agreement.

(aa) “ Licensed IPR ” means any Intellectual Property Rights (other than Patents and Marks) owned or licensed by Coherent as of the Effective Date that are embodied by the Transferred Technology delivered under this Agreement and necessary to the manufacture, use and testing of the Transferred Lasers.

(bb) “ Licensed Patents ” means those Patents listed on Schedule 1.1(bb), which represent the Patents owned, licensed or controlled by Coherent and necessary to make and have made Licensed Products and to sell, offer for sale, import and use any such Licensed Products in the Field of Use.

(cc) “ Licensed Product ” means any device or product that: (i) embodies, comprises or incorporates Lasers; (ii) is made or developed using any Licensed IPR; (iii) is made, had made, used, offered for sale, sold or imported, by Luna pursuant to the licenses granted under this Agreement; or (iv) is covered by a Valid Claim of the Licensed Patents.

(dd) “ Lien ” means, with respect to any asset, any mortgage, lien, pledge, charge, security interest, claim, restriction or other encumbrance or defect of title of any nature whatsoever in respect of such asset.

(ee) “ Luna Technical Personnel ” has the meaning set forth in Section 4.1.

(ff) “ Minimum Royalties ” has the meaning set forth in Section 5.2.

(gg) “ Net Revenues ” means the greater of the total amount invoiced or received upon Sales of Licensed Products by Luna and its Affiliates to non-Affiliate third parties in arms-length transactions, less the following reasonable and customary deductions if charged separately on the invoice and paid by the customer: (i) rebates, refunds and credits (including amounts repaid by reason of returns, billing errors, retroactive price adjustments and the like), and cash and trade discounts, in each case to the extent actually given; and (ii) insurance, transportation and other delivery charges paid by the seller, and (iii) sales taxes, duties and other governmental charges (including value added tax), but excluding what is commonly known as income taxes. Net Revenues shall not include amounts invoiced or received on Sales of Licensed Products among Luna and its Affiliates for resale, provided that in such case, Net Revenues shall include the amounts invoiced or received on subsequent re-Sales of such Licensed Products to non-Affiliate third parties in arms-length transactions. If any Licensed Products are Sold in whole or in part in exchange for consideration other than cash, Net Revenues shall include the fair market value of such Licensed Products. Further, if Licensed Products are Sold for less than their fair market value (for example, as part of “bundle” of products or as a “loss leader”), such Licensed Products shall be considered for Royalty purposes to have been Sold at Licensee’s or its

4

Affiliate’s (as applicable) average, bona fide list price for such Licensed Product to end-user customers over the 12-month period immediately preceding such Sale (such average to be weighted to account for the number of such Licensed Product units Sold while each list price was in effect during such 12-month period).

(hh) “ Permitted Liens ” has the meaning set forth in Section 7.1.

(ii) “ Purchase Price ” has the meaning set forth in Section 2.6.

(jj) “ Receiving Party ” has the meaning set forth in Section 9.2.

(kk) “ Royalty ” has the meaning set forth in Section 5.1.

(ll) “ Sale ” means, for purposes of determining Net Revenues payable under this Agreement, any sale, lease, transaction or other disposition in which a Licensed Product is exchanged for value and Luna recognizes revenue in accordance with GAAP, provided, however, that the provision by Luna of any Laser to a third party for use by such third party solely for use in a research or development activity with Luna shall not be considered a Sale hereunder, even if Luna receives research or development funds from such third party.

(mm) “ Tax ” or “ Taxes ” means all federal, state and local taxes (including, without limitation, income, profit, franchise, sales, use, real property, personal property, ad valorem, excise, employment, social security and wage withholding taxes) and installments of estimated taxes, assessments, deficiencies, levies, imports, duties, license fees, registration fees, withholdings, or other similar charges of every kind, character or description (domestic or foreign) imposed by any Governmental Authorities responsible for the imposition of any such Tax (a “Tax Authority”), and any interest, penalties or additions to tax imposed thereon or in connection therewith.

(nn) “ Technology ” means all tangible embodiments, whether in electronic, written or other media, of all technology, including all techniques, design rules, inventions (whether or not patented or patentable), algorithms, routines, software, databases, processes, prototypes, and devices.

(oo) “ Training Completion Date ” means the date on which the requirements related to the Training Obligations set forth in Section 4.1 have been satisfied, which date shall be no later than December 31, 2006.

(pp) “ Training Obligations ” has the meaning set forth in Section 4.1.

(qq) “ Training Period ” has the meaning set forth in Section 4.1.

(rr) “ Transferred Assets ” has the meaning set forth in Section 2.1.

(ss) “ Transferred Equipment ” means all equipment, machinery, tools and other tangible personal property set forth on Schedule 2.1 hereto.

5

(tt) “ Transferred Lasers ” means the particular product form of swept-tunable Lasers that as of the date hereof are being manufactured by Coherent in the Clean Room and supplied to Luna and the bill of materials for which product is listed on Schedule 1.1(tt).

(uu) “ Transferred Software ” means the software authored by, or on behalf of, or licensed by Coherent and used in the operation of the Clean Room and manufacture of the Transferred Lasers, including the control of the Transferred Equipment. The Transferred Software will include both source code and object code to the extent available.

(vv) “ Transferred Technology ” means all the Transferred Equipment, the Documentation and other Technology owned and transferable by Coherent that is included within the Transferred Assets or disclosed by Coherent to Luna hereunder.

(ww) “ Transfer Taxes ” has the meaning set forth in Section 2.8.

(xx) “ Valid Claim ” means a claim of any Patent which has not been declared unpatentable by the applicable national or regional patent authority or invalid by a court of competent jurisdiction in an unappealed and unappealable decision.

1.2 Construction .

(a) For purposes of this Agreement, whenever the context requires: the singular number will include the plural, and vice versa; the masculine gender will include the feminine and neuter genders; the feminine gender will include the masculine and neuter genders; and the neuter gender will include the masculine and feminine genders. The Parties hereto agree that they have had the opportunity to discuss this Agreement with and obtain advice from their legal counsel, have had sufficient time to, and have carefully read and fully understand all the provisions of this Agreement, and are knowingly and voluntarily entering into this Agreement. Therefore, the Parties waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the Party drafting such agreement or document. As used in this Agreement, the words “include” and “including,” and variations thereof, will not be deemed to be terms of limitation, but rather will be deemed to be followed by the words “without limitation.” Except as otherwise indicated, all references in this Agreement to “Sections” and “Exhibits” are intended to refer to Sections of this Agreement and Exhibits to this Agreement. The headings in this Agreement are for convenience of reference only, will not be deemed to be a part of this Agreement, and will not be referred to in connection with the construction or interpretation of this Agreement.

2. PURCHASE AND SALE

2.1 Transferred Assets . On the terms and subject to the conditions set forth in this Agreement, Coherent hereby sells, transfers, and assigns to Luna, and Luna purchases, assumes, and acquires from Coherent, all rights of Coherent (other than Intellectual Property Rights which are subject to the provisions of Article 3) in the following (collectively, the “ Transferred Assets ”):

6

EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SET FORTH IN ARTICLE 7, ALL TRANSFERRED ASSETS ARE PROVIDED “AS IS,” “WHERE IS” AND WITHOUT WARRANTY OF ANY KIND.

2.2 Excluded Assets . Notwithstanding anything to the contrary set forth in this Agreement, but subject to Section 4.6, any assets that are not Transferred Assets are retained by Coherent and will not be sold, transferred or assigned to Luna under this Agreement except as otherwise agreed pursuant to the Agreement (the “ Excluded Assets ”). Without limitation the Excluded Assets include: (a) any items not otherwise included on Schedule 2.1, and (b) any assets otherwise listed on Schedule 2.2.

2.3 Transfer of Title to the Assets; Risk of Loss . Coherent shall sell, convey, transfer and assign the Transferred Assets to Luna as of the Effective Date by means of bills of sale, assignments, endorsements, certificates and such other instruments of transfer as shall be necessary and appropriate to vest title to the Transferred Assets, free and clear of any liens, mortgages, pledges and similar encumbrances, in Luna as and to the extent provided in this Agreement or in the Schedules hereto. Subject to the terms and conditions of this Agreement, risk of loss with respect to the Transferred Assets will pass to Luna upon physical delivery of the Transferred Assets to and acceptance of delivery by Luna to occur at the Clean Room, provided that Coherent shall add Luna as an additional insured party to its property insurance policy covering the Transferred Assets effective as of the Effective Date, which coverage shall end not less than five (5) Business Days following the Training Completion Date.

2.4 Assumption of Liabilities . Effective as of the Effective Date, Luna assumes and is responsible for all obligations and liabilities solely relating to, arising out of, or resulting from the Transferred Assets on or after the Effective Date, or to the exercise of the license rights granted under this Agreement (collectively, the “ Assumed Liabilities ”). Coherent, without any responsibility or liability of or recourse to Luna or any of Luna’s directors, stockholders, officers, employees, agents, consultants, attorneys, representatives, affiliates, successors or assigns, shall absolutely and irrevocably retain all liabilities (including Taxes) that existed, related to or arose prior to the Effective Date including those relating to Coherent, the Business or the Transferred Assets (the “ Excluded Liabilities ” ).

2.5 Delivery .

(a) Upon the Effective Date, Coherent shall make available to Luna all of the Transferred Assets, Ex Works (Incoterms 2000) the Clean Room or at such other Coherent location as the Parties may mutually agree in writing.

(b) Luna shall remove the Transferred Assets from the Clean Room no later than five (5) Business Days after the Training Completion Date.

7

(c) Luna will detach and disconnect the Transferred Asset from the Clean Room and from utilities.

(d) Luna will be solely responsible for otherwise preparing and packaging the Transferred Assets for shipment; provided that Coherent shall have the right to supervise such activities to assure that no damage is done to the Clean Room and no Excluded Assets are removed from the Clean Room.

2.6 Consideration .

(a) Luna shall pay to Coherent by wire transfer of immediately available funds to an account designated by Coherent the sum of [****] dollars ($[****]) (the “ Purchase Price ”), payable as follows:

(i) [****] dollars ($[****]) (the “ First Payment ”) shall be due and payable upon the Effective Date;

(ii) [****] dollars ($[****]) shall be due and payable on the one (1)-year anniversary of the Effective Date; and

(iii) [****] dollars ($[****]) shall be due and payable on the two (2)-year anniversary of the Effective Date.

(b) The obligation of Luna to pay the amounts set forth above shall be subject to the rights and obligations of the Parties set forth herein. Luna shall retain a right of offset against its payment obligations under the Agreement in the event of a material breach by Coherent. In the event of Luna’s failure to pay the Purchase Price when due, interest shall be due on all overdue amounts in accordance with Section 5.7. Absent a failure to pay the Purchase Price when due, no interest with respect to the Purchase Price is otherwise due or payable by Luna. Notwithstanding anything herein to the contrary, in the event that a complaint is filed in a court of competent jurisdiction requesting an injunction preventing Luna from using, making, having made, importing, selling or offering for sale Licensed Products, Luna may suspend payments under this Section 2.6 until such action is dismissed and until all appeals are otherwise exhausted.

2.7 Allocation of Purchase Price . Within ninety (90) days of the Effective Date, Luna shall provide Coherent with an allocation among the Transferred Assets and the Licenses granted hereunder of the Purchase Price, the Royalty and the amount of the Assumed Liabilities to the extent properly taken into account under Section 1060 of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder (the “ Allocation ”). The Allocation shall be conclusive and binding upon Luna and Coherent for all purposes, and the parties agree that all returns and reports (including Internal Revenue Service (“ IRS ”) Form 8594) and all financial statements shall be prepared in a manner consistent with (and the parties shall not otherwise take a position on a tax return that is inconsistent with) the Allocation unless required by the IRS or any other applicable taxing authority.

8

2.8 Transfer Taxes .

(a) The amounts payable by Luna under this Agreement are exclusive of any future sales, property or excise tax, duties, value added tax, tariffs, lending charges or other taxes, fees and charges. Luna and Coherent shall share equally all expenses with respect to all transfer, documentary, sales, use, stamp, registration, value added, gross receipts, conveyance, excise, recording, license, filing and other such taxes and fees (including any penalties and interest) applicable to, imposed upon or arising out of the transactions contemplated hereby including, without limitation, any transfer tax or filing fee relating to the transfer of personal property (“ Transfer Taxes ”), whether now in effect or hereinafter adopted and regardless of which Party such Transfer Taxes are imposed upon.

(b) Luna will, at its own expense, file all necessary tax returns and other documentation with respect to all Transfer Taxes imposed upon Luna, and, if required by applicable law, Coherent will join in the execution of any such tax returns and other documentation.

(c) Coherent will, at its own expense, file all necessary tax returns and other documentation with respect to all Transfer Taxes imposed upon Coherent, and, if required by applicable law, Luna will join in the execution of any such tax returns or other documentation.

(d) In the case of any personal property taxes (or other similar Taxes) attributable to the Transferred Assets for which Taxes are reported on a tax return covering a period commencing before the Effective Date and ending thereafter (a “ Straddle Period Tax ”), any such Straddle Period Taxes shall be prorated between Coherent and Luna on a per diem basis. The Party required by law to pay any such Straddle Period Tax (the “ Paying Party ”) shall file the tax return related to such Straddle Period Tax within the time period prescribed by law and shall timely pay such Straddle Period Tax. To the extent any such payment exceeds the obligation of the Paying Party hereunder, the Paying Party shall provide the other party (the “ Non-Paying Party ”) with notice of payment, and within 10 days of receipt of such notice of payment, the Non-Paying Party shall reimburse the Paying Party for the Non-Paying Party’s share of such Straddle Period Taxes.

(e) To the extent relevant to the Transferred Assets, each Party shall (i) provide the other with such assistance as may reasonably be required in connection with the preparation of any tax return and the conduct of any audit or other examination by any taxing authority or in connection with judicial or administrative proceedings relating to any liability for Taxes and (ii) retain and provide the other with all records or other information that may be relevant to the preparation of any tax returns, or the conduct of any audit or examination, or other proceeding relating to Taxes. Coherent shall retain all documents, including prior years’ tax returns, supporting work schedules and other records or information with respect to all sales, use and employment tax returns and, absent the receipt by Coherent of the relevant tax clearance certificates, shall not destroy or otherwise dispose of any such records for six (6) years after Effective Date without the prior written consent of Luna.

3. LICENSES

3.1 Technology License . Subject to the terms and conditions of this Agreement, Coherent hereby grants to Luna and its Affiliates under all of Coherent’s rights in

9

the Licensed IPR, a perpetual, world-wide, non-exclusive, right and license to fully use the Transferred Assets delivered hereunder in connection with the design, making, using, selling and maintenance of Licensed Products in the Field of Use.

3.2 Patent License . Subject to the terms and conditions of this Agreement, Coherent hereby grants to Luna and its Affiliates, under all of Coherent’s rights in the Licensed Patents, a limited, world-wide, non-exclusive, license to make and have made Licensed Products and to sell, offer for sale, import and use any such Licensed Products in the Field of Use; provided, however , that upon the fulfillment of Luna’s Royalty obligations under Article 5 hereof, all Licenses granted by Coherent under this Agreement will become fully paid up.

(a) The foregoing licenses do not grant to Luna or its Affiliates rights with respect to any Licensed Products other than those for which the designs, specifications and working drawings for manufacture either are delivered hereunder as Transferred Technology or originate with Luna or its Affiliates and are owned exclusively or jointly by Luna or its Affiliates, or to which Luna or its Affiliates otherwise has rights.

(b) Luna or its Affiliates may not sublicense the rights granted to it in this Section 3.2 to any third party; provided that nothing in this Section 3.2(b) shall in any way limit the License rights of Luna or its Affiliates to have made for use and sale by Luna, its Affiliates, distributors, or representatives.

(c) Luna and its Affiliates shall not exercise any rights, including their make and have made rights, in a manner that is intended to or would have the effect of sublicensing the rights licensed to it under this Section 3.2 to any third party, or that would otherwise expand the subject of the foregoing