Echelon Reports Second Quarter Results

Revenues for the quarter ended June 30, 2006 were $19.4 million,an increase of 11% from revenues of $17.5 million for the same periodin 2005. LonWorks(R) infrastructure revenue was $12.2 million in thesecond quarter of 2006 versus $11.7 million for the same period in2005, while Enel revenue was $6.9 million in 2006 versus $5.8 millionin 2005. As was announced earlier this year, in an effort to addresschanging business conditions in our Asian markets and to expand ourcustomer base there, we began modifying our Asian distributoragreements to allow limited rights of return. This process wascompleted during the second quarter and resulted in a one-time effectof reducing our LonWorks infrastructure revenue for the quarter byapproximately $1.0 million. Without this revision of our accountingmethod, LonWorks infrastructure revenues for the quarter would haveincreased by 13% over the same period last year. Net loss for thequarter ended June 30, 2006 was $3.1 million or $.08 cents per share,based on a weighted average of 39,615,000 common shares outstanding,compared to net loss of $4.6 million, or $0.11 cents per share, basedon a weighted average of 40,528,000 common shares outstanding for thesame period in 2005. The non-GAAP net loss for the quarter, whichexcludes stock-based compensation expenses and amortization ofpreviously purchased technology, was $1.8 million, or $0.05 cents pershare, compared to a non-GAAP net loss of $4.5 million, or $0.11 centsper share for the same period in 2005. All non-GAAP information inthis release is reconciled in the "Reconciliation of Non-GAAP to GAAPResults" table below.

"We had a terrific second quarter in both the LonWorksinfrastructure and NES businesses. The increasing momentum of the NESbusiness, the impact of new products in our infrastructure business,and the continuing effects of the trend toward energy conservation andmanagement resulted in very good performance for us," said M. KennethOshman, Echelon's chairman and chief executive officer. "In theinfrastructure business, all three regions performed well. Ourproposition to system manufacturers is proving successful as ouri.LON(R) business is showing healthy growth. As we had predicted,we're seeing increased adoption of networked controls being driven byenergy concerns, which is particularly good for our i.LON sales. Thebenefits of applications like street lighting highlight the need tothink in a broader context about energy -- one that includesintelligent use as well as alternative sources."

Mr. Oshman continued, "In the NES business, we had significantwins that underscored the generational shift in metering technologythat Vattenfall highlighted in their selection of our solution inDecember last year. With the E.ON win of 370,000 meters we have becomea leader in providing advanced metering infrastructure to the utilityindustry and one of the world's leading meter suppliers. This is atremendous achievement for us. All told, our contracts plus optionsmean that we may be carrying over a million meter backlog through2007. Furthermore, our win at Integral Energy in Australia, though asmall number of meters, provides us with a critical NES beachhead ina new region."

Revenues for the six-month period ended June 30, 2006 were $30.1million, compared to revenues of $39.2 million for the same period in2005. Net loss for the six-month period ended June 30, 2006 was $11.6million, or $0.29 per share, based on a weighted average of 39,691,000common shares outstanding, compared to net loss of $6.9 million, or$0.17 per share, based on a fully diluted weighted average of40,774,000 common shares outstanding for the same period in 2005. Thenon-GAAP net loss for the six-month period ended June 30, 2006 was$8.9 million, or $0.22 cents per share, compared to a non-GAAP netloss of $6.6 million, or $0.16 cents per share for the same period in2005.

Gross margin for the quarter ended June 30, 2006 was 60.0%,compared with 54.7% for the same period in 2005. Gross margin for thesix-month period ended June 30, 2006 was 57.6%, compared to 56.3% forthe same period in 2005. Total operating expenses for the quarterended June 30, 2006 were $16.1 million, compared to $15.4 million forthe same period in 2005. Total operating expenses for the six-monthperiod ended June 30, 2006 were $31.6 million, compared to $31.0million for the same period in 2005.

During the quarter ended June 30, 2006, we repurchasedapproximately 198,000 shares of Echelon common stock pursuant to ourpreviously announced stock repurchase program. Total cost of therepurchases was approximately $1.6 million. Since the repurchaseplan's inception, we have repurchased approximately 1.7 million sharesat a total cost of $12.3 million.

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

-- Energy continues to be a driver for LonWorks applications that
enable companies to embed energy strategies deep within a
control network, utilizing every device on the system to help
drive down costs and increase performance.

-- Street lighting highlights the power of networked control
showing significant benefits and market gains. The City of
Oslo is installing 55,000 networked street lights using
Echelon's power line signaling. The initial installation
of 6,500 lights has delivered a 30% reduction in energy
costs. AMEC SPIE, one of the largest providers of
streetlight related services to municipalities across
Europe, will initially target the French streetlight
market (8 million streetlights) using a solution built on
Echelon controllers/web servers, web services, and
software from streetlight.vision.

-- Cummins Power Generation is using Echelon's web servers
for a powerful monitoring and control system for remote
generator sets. These sets are used to deliver emergency
power or curtail peak demand on the energy grid. Remote
monitoring and control helps to ensure lower overall
energy demand and stress on the energy grid and to improve
customer satisfaction.

-- The tremendous momentum behind Echelon's NES System for smart
metering continues.

-- E.ON Sverige (E.ON Sweden) selected Echelon's NES System
for 370,000 residential meters. EON's meters plus existing
projects including all options would put the total number
of meters to be updated with the NES System over 1 million
by 2007.

-- Integral Energy of Australia selected the NES system for
as many as 10,000 meters. While a small win, it points the
way for shaping Australian legislation for smart metering
and a significant new market entry for the NES system.

-- Echelon was approved as a supplier to SAMS, a purchasing
consortium of 33 small and medium sized utilities in
Sweden that controls about one third of the country's
meters. Under the SAMS agreement, any SAMS member utility
may purchase NES meters from Echelon under the negotiated
terms (price, delivery schedule, etc.), without undergoing
a public tender process. This should help speed the
adoption process for managed meters in Sweden as the 2009
deadline approaches. By mid-2009, all residential meters
in Sweden must be read monthly.

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 September 30, 2006 and the full year ending December 31, 2006:

-- For the quarter, revenue is expected to be approximately $13.0
million, plus or minus $1.0 million. Of this $13.0 million, we
expect LonWorks infrastructure revenues to be approximately
$12.9 million and NES revenues to be approximately $100,000.

-- For the full year, we continue to expect revenue will be
approximately $62.0 million, plus or minus $2.0 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.

-- 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 $14.8 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 $1.2 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 $0.16, 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 $0.20, 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 $0.02, 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 at8:00 am PT. As part of the call, Echelon management will also discussthe outlook for the NES business for the remainder of this year andprovide an assessment of current market conditions. To access theconference call, dial 888-695-0608 (callers outside the US please use+1-719-457-2659); however, due to a limited number of available phonelines, the company asks that only those persons without Web accesscall this number. The call will be available live today, and forplayback on the Investor Relations section of Echelon's web site(www.echelon.com) through July 31, 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's in the US and othercountries. Other marks belong to their respective holders.

Risk Factors Regarding Forward Looking Statements

This press release may contain statements relating to futureplans, events or performance, such as statements regarding expectedgrowth in the LonWorks business, projected backlog for the NESbusiness based on options that may or may not be exercised, andEchelon's projected financial results for the third quarter and fullyear 2006. Such statements may involve risks and uncertainties,including risks associated with uncertainties pertaining to thedevelopment and growth of markets for Echelon's products and services,including both our LonWorks infrastructure and NES products; risksrelating to the positioning of product lines in the LonWorksinfrastructure business in the street lighting and energy managementspace; risks relating to the ability of Echelon's products andservices to perform as designed and meet customer and consumerexpectations; risks that our products or technology might not beaccepted in standards specifications, or even if accepted, that ourproducts might not be used in applicable implementation; the risk thata utility that has awarded or will award a tender to Echelon or one ofits resellers will not proceed with a deployment, will order fewerthan the number of meters anticipated by Echelon, will not exerciseoptions in full or at all, or will cancel the project; the risk thatan NES 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)

June 30, December 31,
2006 2005
------------ ------------
ASSETS

Current Assets:
Cash and cash equivalents $ 48,566 $ 59,080
Short-term investments 92,799 95,400
Accounts receivable, net 16,789 11,006
Inventories 4,460 3,240
Other current assets 7,677 2,289
------------ ------------

Total current assets 170,291 171,015

Property and equipment, net 15,631 14,886
Other long-term assets 10,195 10,037
------------ ------------

$ 196,117 $ 195,938
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable $ 6,724 $ 3,972
Accrued liabilities 4,970 7,473
Deferred revenues 12,577 2,096
------------ ------------

Total current liabilities 24,271 13,541
------------ ------------

Deferred rent 1,195 1,089

Total stockholders' equity 170,651 181,308
------------ ------------

$ 196,117 $ 195,938
============ ============


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

Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Revenues:
Product $ 19,209 $ 17,268 $ 29,783 $ 38,784
Service 165 212 336 379
--------- --------- --------- ---------

Total revenues 19,374 17,480 30,119 39,163
--------- --------- --------- ---------

Cost of revenues:
Cost of product (1) 7,303 7,315 11,866 16,022
Cost of service (1) 452 598 897 1,104
--------- --------- --------- ---------

Total cost of revenues 7,755 7,913 12,763 17,126
--------- --------- --------- ---------

Gross profit 11,619 9,567 17,356 22,037
--------- --------- --------- ---------

Operating expenses:
Product development (1) 7,163 6,360 14,154 12,577
Sales and marketing (1) 5,089 5,396 10,236 10,421
General and administrative
(1) 3,798 3,596 7,200 8,047
--------- --------- --------- ---------

Total operating expenses 16,050 15,352 31,590 31,045
--------- --------- --------- ---------

Loss from operations (4,431) (5,785) (14,234) (9,008)
Interest and other income, net 1,404 1,281 2,798 2,342
--------- --------- --------- ---------

Loss before provision for
income taxes (3,027) (4,504) (11,436) (6,666)
Income tax expense 80 100 160 200
--------- --------- --------- ---------

Net loss $ (3,107) $ (4,604) $(11,596) $ (6,866)
========= ========= ========= =========

Net loss per share:
Basic $ (0.08) $ (0.11) $ (0.29) $ (0.17)
Diluted $ (0.08) $ (0.11) $ (0.29) $ (0.17)

Shares used in computing net
loss per share:
Basic 39,615 40,528 39,691 40,774
Diluted 39,615 40,528 39,691 40,774

======================================================================

(1) Amounts include stock-based compensation costs as follows:

Cost of product $ 103 $ 9 $ 215 $ 18
Cost of service 12 -- 26 --
Product development 484 12 1,098 24
Sales and marketing 302 12 662 24
General and administrative 408 60 714 120
--------- --------- --------- ---------

Total stock-based
compensation expenses $ 1,309 $ 93 $ 2,715 $ 186
========= ========= ========= =========


ECHELON CORPORATION
RECONCILIATION OF NON-GAAP TO GAAP RESULTS
Excluding adjustments itemized below
(In thousands, except per share amounts)
(Unaudited)

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

Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2006 2005 2006 2005
--------- --------- --------- ---------

GAAP net loss $ (3,107) $ (4,604) $(11,596) $ (6,866)

Amortization of purchased
intangible assets -- -- -- 37
Stock-based compensation 1,309 93 2,715 186
--------- --------- -------------------

Total non-GAAP adjustments
to earnings from
operations 1,309 93 2,715 223

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

Non-GAAP net loss $ (1,798) $ (4,511) $ (8,881) $ (6,643)
========= ========= ===================

Non-GAAP net loss per share:
Diluted $ (0.05) $ (0.11) $ (0.22) $ (0.16)

Shares used in computing net
loss per share:
Diluted 39,615 40,526 39,691 40,774


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

Six Months Ended
June 30,
-------------------
2006 2005
--------- ---------
Cash flows provided by (used in) operating
activities:
Net loss $(11,596) $ (6,866)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,167 2,111
Loss on disposal of fixed assets -- 38
Provision for doubtful accounts (35) (1)
Stock-based compensation 2,715 186
Change in operating assets and liabilities:
Accounts receivable (5,748) 6,491
Inventories (1,220) 672
Other current assets (5,388) (266)
Accounts payable 2,752 (150)
Accrued liabilities (2,503) 565
Deferred revenues 10,481 51
Deferred rent 106 141
--------- ---------

Net cash provided by (used in) operating
activities (8,269) 2,972
--------- ---------

Cash flows used in investing activities:
Purchase of available-for-sale short-term
investments (34,470) (61,886)
Proceeds from maturities and sales of available-
for-sale short-term investments 37,121 54,193
Purchase of restricted investments -- 89
Change in other long-term assets (158) 224
Capital expenditures (2,912) (826)
--------- ---------

Net cash used in investing activities (419) (8,206)
--------- ---------

Cash flows provided by (used in) financing
activities:
Proceeds from issuance of common stock. 191 --
Repurchase of common stock. (2,545) (7,090)
--------- ---------

Net cash used in financing activities (2,354) (7,090)
--------- ---------

Effect of exchange rates on cash: 528 (778)
--------- ---------

Net decrease in cash and cash equivalents (10,514) (13,102)
Cash and cash equivalents:
Beginning of period 59,080 35,510
--------- ---------

End of period $ 48,566 $ 22,408
========= =========