31347--3/14/2006--ECHELON

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{product, liability, claim}

{product, market, service}

{customer, product, revenue}

{stock, price, operating}

{property, intellectual, protect}

{operation, natural, condition}

{regulation, change, law}

{financial, litigation, operation}

{control, financial, internal}

{personnel, key, retain}

{competitive, industry, competition}

{cost, regulation, environmental}

{operation, international, foreign}

{investment, property, distribution}

Now that the deployment phase of the Enel project has been completed, our overall revenue has declined and may decline further. Although we have invested substantial amounts of time and money into our NES system, our utility market product offerings may fail to meet customers expectations, or may fail to meet our financial targets. If we incur penalties and/or damages with respect to sales of the NES system, such penalties and/or damages could have an adverse effect on our financial condition, revenues, and operating results. Compliance with new rules and regulations concerning hazardous materials is costly and time-consuming, and may result in increased costs and a reduction in, or changes in the timing of, our expected revenues. In 2006 we will be required to take a compensation expense for the value of stock options or other compensatory equity-based awards that we issue to our employees, which will harm our results of operations. Our markets are highly competitive. Many of our competitors have longer operating histories and greater resources than we do. If we are unable to effectively compete in the industry, our operating results would be harmed. As a result of our lengthy sales cycle, we have limited ability to forecast the amount and timing of revenue related to specific sales. If we fail to complete or are delayed in completing transactions, our revenues could vary significantly from period to period. If we do not maintain adequate distribution channels for our LONWORKS Infrastructure products or our NES system products, our revenues will be harmed significantly. The undetermined market acceptance of our products makes it difficult to evaluate our future prospects. Compliance with new rules and regulations concerning corporate governance is costly, time-consuming, and difficult to achieve, which could harm our operating results and business. We depend on a limited number of key manufacturers and use contract electronic manufacturers for most of our products requiring assembly. If any of these manufacturers terminates or decreases its relationships with us, we may not be able to supply our products and our revenues would suffer. Since we depend on sole or a limited number of suppliers, any price increases, shortages, or interruptions of supply would adversely affect our revenues and/or gross profits. Our business may suffer if it is alleged or found that our products infringe the intellectual property rights of others or if our customers are concerned about the potential for such infringement We have a history of losses and, although we achieved profitability in prior years, we expect to incur substantial losses again in 2006. We face operational and financial risks associated with international operations. Fluctuations in our operating results may cause our stock price to decline. Many of our competitors develop, support, and promote alternative control systems. If we are unable to promote and expand acceptance of our open, interoperable control systems, our revenues and operating results may be harmed. Defects in or misuse of our products or other liabilities not covered by insurance may delay our ability to generate revenues and may increase our liabilities and expenses. Defects in or misuse of our products or other liabilities not covered by insurance may delay our ability to generate revenues and may increase our liabilities and expenses. We promote an open technology platform that could increase our competition. Downturns in the control network technology market and related markets may decrease our revenues and margins. If our OEMs do not employ our products and technologies our revenues could decrease significantly. We have limited ability to protect our intellectual property rights. If OEMs fail to develop interoperable products or if our targeted markets do not accept our interoperable products, we may be unable to generate sales of our products. Our executive officers and technical personnel are critical to our business, and if we lose or fail to attract key personnel, we may not be able to successfully operate our business. The markets for our products are rapidly evolving. If we are not able to develop or enhance products to respond to changing market conditions, our revenues will suffer. The trading price of our stock has been volatile, and may fluctuate due to factors beyond our control. Voluntary standards that are established in our markets could limit our ability to sell our products and reduce our revenues. Regulatory actions could limit our ability to market and sell our products. Regulatory actions could limit our ability to market and sell our products. Our existing stockholders control a significant percentage of our stock, which will limit other stockholders ability to influence corporate matters. Potential conflicts of interest could limit our ability to act on opportunities that are adverse to a significant stockholder or its affiliates. Natural disasters or power outages could disrupt our business.

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31347--3/14/2006--ECHELON_CORP