Echelon Reports First Quarter Results

Revenues for the quarter ended March 31, 2006 of $10.7 millionwere in line with recently updated guidance and compare to revenues of$21.7 million for the same period in 2005. Revenues for the quarterended March 31, 2006 were comprised of $10.4 million from ourLonWorks(R) infrastructure business, $200,000 related to the Enelproject, and $166,000 from products and services sold to our NEScustomers. Revenues for the quarter ended March 31, 2005 werecomprised of $10.9 million from our LonWorks infrastructure business(LWI), $10.4 million related to the Enel project, and $352,000 fromproducts and services sold to our NES customers. As previouslyannounced, during the first quarter of 2006 we revised our method ofrevenue recognition for sales made to our European distributor, EBVElektronik ("EBV"). This revision resulted in a decrease in firstquarter 2006 LonWorks infrastructure revenues of approximately $2.9million. Excluding the impact of this revision, first quarter LonWorksinfrastructure revenues would have risen to a record level ofapproximately $13.3 million.

The GAAP net loss for the quarter ended March 31, 2006 was $8.5million, or $0.21 cents per share, based on a weighted average of39,767,000 common shares outstanding, compared to a GAAP net loss of$2.3 million, or $0.06 cents per share, based on a weighted average of41,023,000 common shares outstanding for the first quarter of 2005.The non-GAAP net loss for the quarter, which excludes stock-basedcompensation expenses and amortization of previously purchasedtechnology, was $7.1 million, or $0.18 cents per share, compared to anon-GAAP net loss of $2.1 million, or $0.05 cents per share for thesame period in 2005. GAAP gross margin for the quarter ended March 31,2006 was 53.4% compared to 57.5% for the same period in 2005. Non-GAAPgross margin for the quarter ended March 31, 2006 was 54.6% comparedto 57.6% for the same period in 2005. Total GAAP operating expensesfor the quarter ended March 31, 2006 were $15.5 million compared to$15.7 million for the same period in 2005. Non-GAAP operating expenseswere $14.3 million for the quarter ended March 31, 2006 and $15.6million for the same period in 2005. All non-GAAP information in thisrelease is reconciled in the "Non-GAAP Consolidated CondensedStatements of Operations" table below.

"The very good news is that we saw healthy growth in businesslevels for our LWI business and market confirmation that our NESstrategy is beginning to work. On the other hand, while meeting ourexpectations, our financial results do not meet our profitability andgrowth objectives. I hope this quarter represents the low point on ourplan to replace the large and highly successful Enel contract withrevenues and profits from a growing and profitable LWI business and anemerging NES business," said M. Kenneth Oshman, Echelon's chairman andchief executive officer. Our NES strategy is beginning to bear fruitwith two important victories. We entered 2006 with significantmomentum after winning our first NES tender with the Swedish utilityVattenfall in late 2005. Then, in February of this year, we added tothat momentum with our second win, this time with the Dutch utilityNuon. While the Nuon project is quite small when compared withVattenfall, it is significant in that Nuon plans on utilizing the NESSystem to carry smart metering services for both electricity and gas-- a mixed services offering common among utilities. We believe thatthese early NES projects are an indicator of an overall trend in theindustry as utilities move beyond Automated Meter Reading (AMR) toadopt smart, communications infrastructures that enable multipleservices for their metering businesses."

Oshman continued, "Our LonWorks infrastructure business also had agreat first quarter, even after being impacted by a revision in ourrevenue recognition methodology for sales to EBV. We experiencedrecord shipments of our i.LON(R) Internet Server family of productsand our power line signaling products. Both product lines areextremely well positioned, as is the entire LonWorks infrastructurebusiness, for energy management applications. While we only have onequarter of market data, we believe that energy management is indeedbecoming the driver for controls decisions in many industries. Newinitiatives like eStreet in the EU that will identify measures toconserve energy through smarter management of street lighting systems,and China's 'energy and environment' policy to make Chinese industriesmore energy efficient and environment friendly, are underscoring thevalue of our technology in many markets and bode well for us and ourcustomers in 2006 and beyond."

Highlights from the first quarter may be found athttp://www.echelon.com/about/press/. These include:

Energy applications and initiatives --

Echelon announced its participation in the eStreet Initiative, aEuropean Union initiative to identify ways of lowering the cost ofenergy for public street lighting systems. In a typical European city,street lighting may use as much as 38% of the city's energy demand forlighting. Echelon was selected as a technology expert to help theeStreet group move the EU toward greater energy efficiency.

The company also announced that the City of Oslo has successfullydeployed a managed public street lighting system utilizing Echelon'spower line and Internet server technology. The results show that theCity saves 30% on street lighting energy costs while simultaneouslyproviding better, safer lighting environments -- highlighting thevalue of control networks implemented at the device level (i.e.,individual light ballast).

In China, Shaogang Iron and Steel Group of China deployed asimilar control infrastructure (Echelon Internet servers and powerline communications) to optimize its energy utilization and processcontrol systems. In accordance with the government's "energy andenvironment" initiative, the system begins the process of establishinga standard method and technology platform for energy savingapplications in the Chinese steel production industry. The result hasbeen a 10% reduction in operating costs -- energy use is approximatelyone third of the total operating cost in typical steel plants inChina.

Smart Metering and the NES Business --

Echelon announced continued success in early 2006. In January,Echelon announced an NES tender win with the Dutch utility Nuon. Theproject is for 25,000 electricity meters using the latest addition tothe NES metering family -- smart meters able to communicate over anM-Bus interface, the European standard for connecting variousconsumption meters. Nuon's project calls for utilizing the NES Systemas a single infrastructure to communicate with both electricity meters(NES meters) and, via the NES meters' M-Bus interface, to as many as25,000 gas meters. Nuon's project is one of the first to utilize asingle infrastructure for communications to multiple residentialutility meters. The addition of the M-Bus interface can make the NESSystem a leading candidate for the entire European and Asian automatedmeter management (AMM) and advanced metering infrastructure (AMI)market estimated at 1.28 billion units worldwide.

Echelon also expanded the market reach of the NES System with theaddition of Ferranti NV to its Value Added Reseller program. Ferranti,a supplier of specialized information technology (IT) services forutilities, plans to interconnect its metering and contract managementsystem software with the NES infrastructure to provide web-basedautomated meter management (AMM) solutions to energy marketsthroughout Europe.

LonWorks Infrastructure Business --

Echelon announced an expansion of its market reach in the Americasregion with the creation of a manufacturer's representative channel.In Korea, Kolon Data Communication Co., Ltd. (KDC), a market leader ininformation technology (IT), announced plans to collaborate withEchelon to expand the market in Korea and other countries for LonWorkscontrol networks and energy management through integration services,training programs, marketing, product development and smart metering.KDC plans to collaborate to establish a "LonWorks Business Center" topromote energy and automation solutions that integrate both IT andcontrol networks as well as to develop the Korean market for smartmetering.

Additionally, Echelon announced that the China Academy of RailSciences and Sifang Rolling Stock Research Institute have standardizedon the LonWorks networking platform for safety monitoring on nextgeneration passenger trains -- effectively making it a de factostandard for high speed rail travel in the world's largest passengerrail transport market.

Business Outlook

The following statements are based on the company's currentexpectations. These statements are forward-looking, and actual resultsmay differ materially. Please see "Risk Factors of Forward LookingStatements" at the end of this release for a description of certainimportant risk factors that could cause actual results to differ.

Echelon management offers the following guidance for the quarterending June 30, 2006 and the full year ending December 31, 2006:

-- For the quarter, revenue is expected to be approximately $18.0 million, plus or minus $1.0 million. Of this $18.0 million, we expect LonWorks infrastructure revenues to be approximately $11.0 million, Enel project revenues to be approximately $6.8 million, and NES revenues to be approximately $200,000.

-- For the full year, we expect revenue will be approximately $62.0 million, plus or minus $3.0 million. Of this $62.0 million, we expect LonWorks infrastructure revenues to be approximately $50.0 million, Enel project revenues to be approximately $7.0 million, and NES revenues to be approximately $5.0 million.

-- While there have been no material changes to our full year forecasts for shipments of our LonWorks infrastructure and NES products, our estimates for full year revenues from both businesses have been reduced from prior guidance. For the LonWorks infrastructure business, the $4.0 million reduction from prior guidance is due to the previously announced revision to our revenue recognition method for sales made to our distributor partners. For the NES business, there are two primary reasons for the $13.0 million guidance reduction. First, as the start of deployments for the Vattenfall and Nuon projects approach, minor modifications are being made to the original shipment schedules. In some cases, these schedule adjustments are resulting in later shipments of our NES products, which in turn results in later revenue recognition since certain events, such as customer acceptance, are now expected to occur in early 2007 rather than late 2006. In addition, we are also reducing our NES guidance due to the complex revenue recognition rules pertaining to sales of system products such as NES. In some instances, the reasons for these deferrals may not be fully under our control, and the actual timing of revenue may be significantly different than we currently anticipate. Our estimate for full year NES revenues will continue to be subject to modification for the same reasons.

-- For the quarter, non-GAAP gross margin, which excludes any stock-based compensation expense, is expected to be between 55.0% and 57.0%. For the full year, non-GAAP gross margin is expected to be between 52.0% and 54.0%.

-- For the quarter, non-GAAP operating expenses, which exclude any stock-based compensation charges, are expected to be approximately $15.25 million, plus or minus $250,000. For the full year, we expect non-GAAP operating expenses will be approximately $59.5 million, plus or minus $1.0 million.

-- For the quarter, we expect stock-based compensation expenses associated with stock options and other equity compensation awards to be approximately $1.7 million, plus or minus $100,000. For the full year, we expect stock-based compensation expenses to be approximately $7.2 million, plus or minus $400,000. This estimate could change based on the size and timing of options actually granted by the Compensation Committee, as well as other factors we will use in valuing future option grants, such as the market price and historical volatility of Echelon's stock price when those grants are made.

-- For the quarter, interest and other income is expected to be approximately $1.3 million. For the full year, we expect interest and other income to be approximately $4.6 million.

-- For the quarter, we expect our provision for income taxes will be approximately $80,000. For the full year, we expect our provision for income taxes will be approximately $320,000.

-- For the quarter, we expect to generate a non-GAAP loss per share of approximately $0.10, plus or minus $0.01, based on a weighted average of 40,000,000 shares outstanding. This non-GAAP estimate excludes the impact of any stock-based compensation charges.

-- For the quarter, we expect to generate a GAAP loss per share of approximately $0.14, plus or minus $0.01, based on a weighted average of 40,000,000 shares outstanding.

-- For the full year, we expect the non-GAAP loss per share will be approximately $0.56, plus or minus $0.03, based on a weighted average of 40,000,000 shares outstanding. This non-GAAP estimate excludes the impact of any stock-based compensation charges.

-- For the full year, we expect the GAAP loss per share will be approximately $0.74, plus or minus $0.03, based on a weighted average of 40,000,000 shares outstanding.

For those interested in further discussion regarding this release,Echelon's management will participate in a conference call today at2:00 pm PDT. To access the conference call, dial 866-550-6338 (callersoutside the US please use +1-347-284-6930); however, due to a limitednumber of available phone lines, the company asks that only thosepersons without Web access call this number. The call will beavailable live today, and for playback on the Investor Relationssection of Echelon's web site (www.echelon.com) through April 27th,2006.

Use of Non-GAAP Financial Information

Echelon provides non-GAAP net income and non-GAAP net income pershare data as additional information for its operating results. Thesemeasures are not in accordance with, or an alternative for, generallyaccepted accounting principles and may be different from non-GAAPmeasures used by other companies. Echelon believes that thispresentation of non-GAAP net income and non-GAAP net income per shareprovides useful information relating to its financial condition andresults of operations, which provides management and investors with amore complete understanding of Echelon's past performance and certainadditional financial and business trends. The presentation of thisadditional information is not meant to be considered in isolation oras a substitute for net income or net income per share prepared inaccordance with generally accepted accounting principles.

About Echelon Corporation

Echelon Corporation (NASDAQ:ELON) is a pioneer and world leader incontrol networking -- networks that connect machines and otherelectronic devices -- for the purpose of sensing, monitoring andcontrolling the world around us. Echelon's LonWorks platform forcontrol networking was released in 1990 and has become a worldwidestandard in the building, industrial, transportation, and homeautomation markets. Launched in 2003, Echelon's Networked EnergyServices system is an open, extensible, advanced meteringinfrastructure that can bring benefits to every aspect of a utility'soperation, from metering and customer services to distributionoperations and value-added business. In 2005 Echelon released theworld's first embedded control network infrastructure, the Pyxos(TM)platform, extending the benefits of networking inside machines to thesensors and actuators that make them function.

Echelon is based in San Jose, California, with internationaloffices in China, France, Germany, Italy, Hong Kong, Japan, Korea, TheNetherlands, and the United Kingdom. Further information regardingEchelon can be found at http://www.echelon.com.

Echelon, LonWorks, i.LON and the Echelon logo are trademarks ofEchelon Corporation registered in the United States and othercountries. Pyxos is a trademark of Echelon in the US and othercountries. Other marks belong to their respective holders.

This press release may contain statements relating to futureplans, events or performance, including statements regarding Echelon'splans to replace Enel contract revenues, whether early NES projectsare indicators of overall trends in the industry, the positioning ofproduct lines in the LonWorks infrastructure business in the energymanagement space and other industries in China, Korea and othercountries, the effect of the M-Bus interface on Echelon's ability towin NES-related projects in European and Asian markets, and Echelon'sprojected financial results for the second quarter and full year 2006.Such statements may involve risks and uncertainties, including risksassociated with uncertainties pertaining to the development and growthof markets for Echelon's products and services, particularly ourLonWorks infrastructure and NES products; risks relating to theability of Echelon's products and services to perform as designed andmeet customer and consumer expectations; risks that our products ortechnology might not be accepted in standards specifications, or evenif accepted, that our products might not be used in applicableimplementations; the risk that Vattenfall, Nuon, or any other utilitythat awards a tender to Echelon or one of its resellers will notproceed with a deployment, will order fewer than the number of metersanticipated by Echelon or will cancel the project, or the risk thatthe project will not pass certain tests imposed by the utility; therisk that Echelon does not meet expected shipment schedules for theNES system; risks associated with uncertainties pertaining to thetiming and level of customer orders and demand for products andservices; risks that the application of U.S. generally acceptedaccounting principles could significantly affect the method ofcalculating and the timing of NES revenues that Echelon expects torecognize from time to time; and other risks identified in Echelon'sSEC filings. Actual results, events and performance may differmaterially. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date hereof.Echelon undertakes no obligation to release publicly the result of anyrevisions to these forward-looking statements that may be made toreflect events or circumstances after the date hereof or to reflectthe occurrence of unanticipated events.

The financial statements that follow should be read in conjunctionwith the notes set forth in Echelon's Form 10-Q when filed with theSecurities and Exchange Commission; and with our 2005 annual report onForm 10-K, which was filed with the Securities and Exchange Commissionin March 2006.

ECHELON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

March 31, December 31,
2006 2005
-------------- --------------
ASSETS

Current Assets:
Cash and cash equivalents........... $65,437 $59,080
Short-term investments.............. 86,085 95,400
Accounts receivable, net............ 6,155 11,006
Inventories......................... 3,444 3,240
Other current assets................ 4,016 2,289
-------------- --------------

Total current assets.................. 165,137 171,015

Property and equipment, net........... 14,885 14,886
Other long-term assets................ 10,077 10,037
-------------- --------------

$190,099 $195,938
============== ==============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable.................... $4,333 $3,972
Accrued liabilities................. 4,601 7,473
Current portion of
deferred revenues................... 6,591 2,096
-------------- --------------

Total current liabilities............. 15,525 13,541
-------------- --------------

Deferred rent......................... 1,150 1,089

Total stockholders' equity............ 173,424 181,308
-------------- --------------

$190,099 $195,938
============== ==============

ECHELON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

Three Months Ended
March 31,
------------------------------
2006 2005
-------------- --------------
Revenues:
Product............................. $10,574 $21,516
Service............................. 171 167
-------------- --------------

Total revenues........................ 10,745 21,683
-------------- --------------

Cost of revenues:
Cost of product..................... 4,563 8,707
Cost of service..................... 445 506
-------------- --------------

Total cost of revenues................ 5,008 9,213
-------------- --------------

Gross profit.......................... 5,737 12,470
-------------- --------------

Operating expenses:
Product development................. 6,991 6,217
Sales and marketing................. 5,147 5,025
General and administrative.......... 3,402 4,451
-------------- --------------

Total operating expenses.............. 15,540 15,693
-------------- --------------

Loss from operations.................. (9,803) (3,223)

Interest and other income, net........ 1,394 1,061
-------------- --------------
Loss before provision for
income taxes.......................... (8,409) (2,162)
Income tax expense.................... 80 100
-------------- --------------

Net loss.............................. $(8,489) $(2,262)
============== ==============

Net loss per share:
Basic............................... $(0.21) $(0.06)
Diluted............................. $(0.21) $(0.06)

Shares used in computing net loss
per share:
Basic............................... 39,767 41,023
Diluted............................. 39,767 41,023


ECHELON CORPORATION
NON-GAAP CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Excluding adjustments itemized below
(In thousands, except per share amounts)
(Unaudited)

Three Months Ended
March 31,
------------------------------
2006 2005
-------------- --------------

Revenues.............................. $10,745 $21,683
Cost of revenues...................... 4,882 9,204
-------------- --------------

Gross profit.......................... 5,863 12,479
-------------- --------------

Operating Expenses:
Product development................. 6,377 6,168
Sales and marketing................. 4,787 5,013
General and administrative.......... 3,096 4,391
-------------- --------------

Total operating expenses.............. 14,260 15,572
-------------- --------------

Non-GAAP loss from operations......... (8,397) (3,093)
Interest and other income, net........ 1,394 1,061
-------------- --------------

Non-GAAP loss before taxes............ (7,003) (2,032)
Income tax expense.................... 80 100
-------------- --------------

Non-GAAP net loss..................... $(7,083) $(2,132)
============== ==============

Non-GAAP net loss per share:
Diluted............................. $(0.18) $(0.05)

Shares used in computing net loss
per share:
Diluted............................. 39,767 41,023

An itemized reconciliation between net earnings on a GAAP basis and
non-GAAP basis is as follows:

GAAP net loss......................... $(8,489) $(2,262)

Amortization of purchased
intangible assets.................. -- 37
Stock-based compensation........... 1,406 93
-------------- --------------

Total non-GAAP adjustments to
earnings from operations........... 1,406 130

Income tax effect of reconciling
items.............................. -- --
-------------- --------------

Non-GAAP net loss..................... $(7,083) $(2,132)
============== ==============

ECHELON CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

Three Months Ended
March 31,
------------------------------
2006 2005
-------------- --------------
Cash flows provided by (used in)
operating activities:
Net loss............................ $(8,489) $(2,262)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization..... 1,032 1,089
Loss on disposal of fixed assets.. -- 18
Provision for doubtful accounts... (94) --
Stock-based compensation.......... 1,406 93
Change in operating assets and
liabilities:
Accounts receivable............. 4,945 (56)
Inventories..................... (204) 67
Other current assets............ (1,727) (683)
Accounts payable................ 361 (75)
Accrued liabilities............. (2,872) 192
Deferred revenues............... 4,495 442
Deferred rent................... 61 79
-------------- --------------

Net cash provided by (used in)
operating activities................ (1,086) (1,096)
-------------- --------------

Cash flows provided by (used in)
investing activities:
Purchases of available-for-sale
short-term investments.............. (12,842) (36,487)
Proceeds from maturities and
sales of available-for-sale
short-term investments.............. 22,192 23,764
Purchase of restricted investments.. -- (1)
Change in other long-term assets.... (40) (57)
Capital expenditures................ (1,031) (556)
-------------- --------------

Net cash provided by (used in)
investing activities................ 8,279 (13,337)
-------------- --------------

Cash flows provided by (used in)
financing activities:
Repurchase of common stock.......... (977) (2,099)
-------------- --------------
Net cash used in financing
activities.......................... (977) (2,099)
-------------- --------------

Effect of exchange rates on cash...... 141 (304)
-------------- --------------

Net increase (decrease) in cash and
cash equivalents...................... 6,357 (16,836)
Cash and cash equivalents:
Beginning of period................. 59,080 35,510
-------------- --------------

End of period....................... $65,437 $18,674
============== ==============