Echelon Corporation Reports Fourth Quarter Results

(San Jose, CA– January 21, 2004) - Echelon Corporation (NASDAQ: ELON) today announced financial results for the fourth quarter ended December 31, 2003, exceeding its previous guidance.

"I am very pleased with our results for this past quarter and in our execution throughout the year," said Ken Oshman Echelon's chairman and CEO. "We had our best quarter in over two years in our LonWorks® infrastructure business, a sign, we believe, of better worldwide economies and our position in the market for networking everyday devices. I am extremely excited with the progress we have made in our Networked Energy Services (NES) business. We made significant investments this past year in our NES system, acquiring certain assets of meter manufacturer Metering Technology Corporation which increased product development expenses and impacted our earnings. These investments were instrumental in achieving two very important milestones this quarter - initial, on-time product shipments to Nuon (the Dutch utility), and Nuon's first installations of IEC and Dutch approved NES meters. The Enel roll-out continues in line with their plans, with over 13 million meters installed at year end. Enel revenue for the quarter was in line with our guidance and reflects the adjustment of concentrator inventory that we have previously discussed."

Mr. Oshman continued, "As proud as I am of our performance this quarter, I am even more proud of the progress we have made this past year. For the full year, we saw year-over-year growth in our LonWorks infrastructure business, ending two years of decline. While many of our customers continue to experience difficult times in their markets, I believe that our performance in the second half of this year positions us well for continued revenue growth in this part of our business in 2004. This past year we also announced and began shipment of many new and important products that we believe will expand our existing markets and open new ones, including a new family of power line smart transceivers, the i.LON 600 LonWorks®/IP Server, and the PanoramixT Enterprise Platform, the first product resulting from our 2002 acquisition of BeAtHome. Further, we saw important activity in the marketplace with specifications for open LonWorks systems from a number of significant institutions and companies, including the United States Army Corps of Engineers, Mori Building in Japan , the New York City schools, and the City of Chicago.

In our Networked Energy Services business, we have made extraordinary progress this year - starting with the acquisition of certain assets of MTC Corporation in April and ending with the shipment and installation of fully homologated meters into Dutch homes just eight months later. We enter 2004 where we planned to be and are ready to respond to opportunities that we anticipate in the coming year. This was a tremendous accomplishment made possible in large part because our NES system leverages the device networking technology of our LonWorks infrastructure business - from power line smart transceivers in our NES meters to our Panoramix enterprise software in our NES system software. Our investments in LonWorks infrastructure has helped drive our NES business and I believe that our success in the NES business will help create new opportunities in our LonWorks business.

All in all, 2003 was a productive and exciting year at Echelon and has left us very well positioned as we enter 2004."

Revenues for the quarter ended December 31, 2003 were $23.5 million compared to revenues of $30.6 million for the same period in 2002. GAAP net loss for the quarter ended December 31, 2003 was $520,000, or $0.01 cent per share, based on a weighted average of 40,337,000 common shares outstanding, compared to net income of $3.6 million, or $.09 cents per share on a fully diluted basis, based on a weighted average of 40,557,000 common shares outstanding for the fourth quarter of 2002. Revenues for the year ended December 31, 2003 were $118.2 million compared to revenues of $122.8 million for the year ended December 31, 2002 . GAAP net income for the year ended December 31, 2003 was $1.9 million, or $0.05 cents per share on a fully diluted basis, based on a weighted average of 40,792,000 common shares outstanding, compared to net income of $16.8 million, or 41 cents per share on a fully diluted basis, based on a weighted average of 40,726,000 common shares outstanding for the year ended December 31, 2002. Excluding certain charges associated with acquisitions completed in 2003 and in prior periods, non-GAAP net income for the year was $12.7 million, or $0.31 cents per fully diluted share, compared to non-GAAP net income of $17.4 million or $0.43 cents per fully diluted share for the same period in 2002. All non-GAAP information in this release is reconciled in the "Non-GAAP Consolidated Condensed Statements of Operations" table below.

Gross margin for the quarter ended December 31, 2003 was 55.4% compared to 50.3% for the same period in 2002. Gross margin for the year ended December 31, 2003 was 55.9% compared to 51.2% for the year ended December 31, 2002 . Total operating expenses for the quarter ended December 31, 2003 were $14.7 million compared to total operating expenses of $12.3 million for the same period in 2002. Total operating expenses for the year ended December 31, 2003 were $65.8 million, compared to $48.5 million for the year ended December 31, 2002 .

Highlights from the fourth quarter may be found at http://www.echelon.com/about/press/. These include:

Release of German Editions of Echelon's LonMakerT Integration Tools which are used to integrate, configure, and manage LonWorks® device networks;
An extension of Echelon's i.LON® family of Internet connectivity devices with the shipment of the i.LON 600 LonWorks/IP Server that enables peer-based communications across any IP connection including those of corporate LANs, the Internet, or other IP-based WANs and the releases of an updated i.LON 10 Ethernet Adapter v2.0 that adds point-to-point protocol (PPP) dial-up support to its existing ability to connect automation networks to service providers, corporate terminals or RAS servers over high-speed Ethernet connections;
Participation at a very successful LonWorld® 2003 Exhibition and LonWorks Conference held in Munich, Germany in October. The event, according to organizer TEMA AG, drew over 1,700 attendees;
Announcement of the OpenLDVT driver, Internet enabled software that is intended to expand the LonWorks market to include software vendors with legacy HMI and enterprise applications by allowing them make high performance connections to LonWorks devices through Echelon interfaces such as the i.LON 10 Ethernet Adapter and i.LON 100 Internet Server products;
The creation of Echelon Networked Energy Services (NES) Value-Added Reseller program with the signing of VAR, Telvent, the IT subsidiary of Abengoa, one of Spain's largest applied engineering and process management firms, and Singapore's EDMI, a provider of electronic revenue meters to utilities in markets in Australia, Asia, ASEAN, the Middle East, and Europe. The NES VAR program is designed to establish Echelon's NES system as a global standard for intelligent metering systems.

For those interested in further discussion regarding this release, Echelon's management will participate in a conference call today, January 21, at 2:00 pm PST . To access the conference call, dial 1-800-388-8975 (callers outside the U.S. please use +1-973-317-1170) no earlier than 10 minutes prior to the start of the call; however, due to a limited number of available phone lines, the company asks that only those persons without Web access call this number. The call will be available live today, and for playback on the Investor Relations section of Echelon's web site (www.echelon.com) through January 28, 2004 .

Use of Non-GAAP Financial Information
Echelon provides non-GAAP net income and non-GAAP net income per share data as additional information for its operating results. These measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. Echelon believes that this presentation of non-GAAP net income and non-GAAP net income per share provides useful information relating to its financial condition and results of operations, which provides management and investors with a more complete understanding of Echelon's past performance and certain additional financial and business trends. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income or net income per share prepared in accordance with generally accepted accounting principles.

About Echelon Corporation
Echelon Corporation (NASDAQ: ELON) is the creator of the LonWorks platform, the world's most widely used standard for connecting everyday devices such as appliances, thermostats, air conditioners, electric meters, and lighting systems to each other and to the Internet. Echelon's hardware and software products enable manufacturers and integrators to create smart devices and systems that lower cost, increase convenience, improve service, and enhance productivity, quality, and safety. Thousands of companies have developed and installed LonWorks products and nearly 40 million LonWorks enabled processors have been shipped for use in homes, buildings, factories, trains, and other systems worldwide. More information is available at http://www.echelon.com.

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Echelon, LonWorks , LonWorld, i .LON and the Echelon logo are trademarks of Echelon Corporation registered in the United States and other countries. LonMaker, Panoramix, and OpenLDV are trademarks of Echelon in the US and other countries. Other marks belong to their respective holders.

This press release may contain statements relating to future plans, events or performance. Such statements may involve risks and uncertainties, including risks associated with uncertainties pertaining to the timing and level of customer orders, demand for products and services, risks that the R&D activities or subsequent product deployment activities with Enel are not successful, do not meet their target dates, or are terminated, or that the contemplated transactions are challenged by third parties, risks that our development projects with other parties are not successful, risks relating to the development and growth of markets for Echelon's products and services, including the NES system, and the ability of those products and services to meet customer and consumer expectations, and other risks identified in Echelon's SEC filings. Actual results, events and performance may differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Echelon undertakes no obligation to release publicly the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The financial statements that follow should be read in conjunction with the notes set forth in Echelon's Form 10-K when filed with the Securities and Exchange Commission.

ECHELON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

	December 31, 2003	December 31, 2002
	------------	------------
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$ 18,667	$ 34,941
Short-term investments	126,256	99,548
Accounts receivable, net	20,110	22,930
Inventories	5,906	7,991
Other current assets	2,770	3,217
	-------------	-------------
Total current assets	173,709	168,627

Property and equipment, net	19,098	16,677
Other long-term assets	21,572	22,188
	-------------	-------------
	$ 214,379	$ 207,492
	========	========
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable	$ 6,922	$ 5,993
Accrued liabilities	5,044	3,773
Current portion of deferred revenues	998	2,541
	-------------	-------------
Total current liabilities	12,964	12,307
	-------------	-------------
Long-term liabilities	491	167

Total stockholders' equity	200,924	195,018
	-------------	-------------
	$ 214,379	$ 207,492
	========	========

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

	Three Months Ended December 31, -----------------		Twelve Months Ended December 31, -----------------
	2003	2002	2003	2002
	----------	---------	----------	---------
REVENUES:
Product	$ 23,334	$ 30,295	$ 117,153	$ 121,454
Service	193	286	1,000	1,380
	---------	---------	---------	---------
Total revenues	23,527	30,581	118,153	122,834
	---------	---------	---------	---------
COST OF REVENUES:
Cost of product	9,786	14,483	49,407	57,059
Cost of service	711	730	2,650	2,880
	---------	---------	---------	---------
Total cost of revenues	10,497	15,213	52,057	59,939
	---------	---------	---------	---------
Gross profit	13,030	15,368	66,096	62,895
	---------	---------	---------	---------
OPERATING EXPENSES:
Product development	7,079	5,055	35,113	21,456
Sales and marketing	4,632	4,358	18,597	17,291
General and administrative	2,954	2,839	12,108	9,711
	---------	---------	---------	---------
Total operating expenses	14,665	12,252	65,818	48,458
	---------	---------	---------	---------
Income (loss) from operations	(1,635)	3,116	278	14,437
	---------	---------	---------	---------
Interest and other income, net	399	844	2,219	3,777
	---------	---------	---------	---------
Income (loss) before provision for income taxes	(1,236)	3,960	2,497	18,214
Income tax expense (benefit)	(716)	317	600	1,457
	---------	---------	---------	---------
Net income (loss)	$ (520)	$ 3,643	$ 1,897	$ 16,757
	======	======	======	======
Net income (loss) per share
Basic	$ (0.01)	$ 0.09	$ 0.05	$ 0.42
Diluted	$ (0.01)	$ 0.09	$ 0.05	$ 0.41

Shares used in computing net income (loss) per share:
Basic	40,337	39,685	40,070	39,468
Diluted	40,337	40,557	40,792	40,726
	======	======	======	======

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

	Three Months Ended December 31, -----------------		Twelve Months Ended December 31, -----------------
	2003	2002	2003	2002
	----------	---------	----------	---------
Revenues	$ 23,527	$ 30,581	$ 118,153	$ 122,834
Cost of revenues	10,497	15,213	52,057	59,939
	---------	---------	---------	---------
Gross profit	13,030	15,368	66,096	62,895
	---------	---------	---------	---------

Operating Expenses:
Product development	6,735	4,964	24,185	20,712
Sales and marketing	4,632	4,358	18,597	17,291
General and administrative	2,954	2,839	11,778	9,711
	---------	---------	---------	---------
Total operating expenses	14,321	12,161	54,560	47,714
	---------	---------	---------	---------
Non-GAAP income (loss) from operations	(1,291)	3,207	11,536	15,181
Interest and other income, net	399	844	2,219	3,777
	---------	---------	---------	---------
Non-GAAP income (loss) before taxes	(892)	4,051	13,755	18,958
Income tax expense (benefit)	(72)	325	1,100	1,517
	---------	---------	---------	---------
Non-GAAP net income (loss)	$ (820)	$ 3,726	$ 12,655	$ 17,441
	======	======	======	======
Non-GAAP net income (loss) per share:
Diluted	$ (0.02)	$ 0.09	$ 0.31	$ 0.43
Shares used in computing net income (loss) per share:
Diluted	40,337	40,557	40,792	40,726

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

GAAP net income (loss)	$ (520)	$ 3,643	$ 1,897	$ 16,757
In-process research and development	--	--	9,808	400
Amortization of purchased intangible assets	344	91	1,120	344
Third party acquisition related costs	--	--	330	--
	---------	---------	---------	---------
Total non-GAAP adjustments to earnings from operations	344	91	11,258	744
Income tax effect of reconciling items	(644)	(8)	(500)	(60)
	---------	---------	---------	---------
Non-GAAP net income (loss)	$ (820)	$ 3,726	$ 12,655	$ 17,441
	======	======	======	======

ECHELON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	Twelve Months Ended December 31,
	2003	2002
	------------	------------
Cash flows provided by (used in) operating activities:
Net income	$ 1,897	$ 16,757
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	5,644	4,062
In-process research and development	9,808	400
Provision for doubtful accounts	10	55
Deferred compensation expense	--	31
Loss on disposal of fixed assets	8	7
Change in operating assets and liabilities:
Accounts receivable	2,810	6,161
Inventories	2,085	2,325
Other current assets	446	8,354
Accounts payable	929	(2,183)
Accrued liabilities	1,272	1,194
Deferred revenues	(1,543)	1,445
Deferred rent	324	120
	-------------	-------------
Net cash provided by operating activities	23,690	38,728
	-------------	-------------

Cash flows used in investing activities:
Net change in available-for-sale short-term investments	(27,105)	(11,305)
Purchase of assets of Metering Technology Corporation	(11,000)	--
Purchase of BeAtHome.com, Inc	--	(5,811)
Purchase of restricted investments	(341)	(10,526)
Change in other long-term assets	576	358
Capital expenditures	(6,500)	(3,425)
	-------------	-------------
Net cash used in investing activities	(44,370)	(30,709)
	-------------	-------------
Cash flows provided by financing activities:
Proceeds from issuance of common stock	3,447	3,106
	-------------	-------------
Net cash provided by financing activities	3,447	3,106
	-------------	-------------
Effect of exchange rates on cash:	959	584
	-------------	-------------
Net increase (decrease) in cash and cash equivalents	(16,274)	11,709
Cash and cash equivalents:
Beginning of period	34,941	23,232
	-------------	-------------
End of period	$ 18,667	$ 34,941
	========	========

Contact Information

Press Contact:	Investor Relations Contact
Steve Nguyen Echelon Corporation +1-408-938-5272 qnguyen@echelon.com	Chris Stanfield Echelon Corporation +1-408-938-5243 cstanfield@echelon.com

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