ECHELON CORP (Form: 10-Q, Received: 08/08/2012 15:58:29)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

000-29748

(Commission file number)

ECHELON CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

77-0203595

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification Number)

550 Meridian Avenue

San Jose, CA 95126

(Address of principal executive office and zip code)

(408) 938-5200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of July 31, 2012, 42,884,265 shares of the registrant’s common stock were outstanding.

ECHELON CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2012

I NDEX


		Page
Part I. FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011		3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011		4
	Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2012 and 2011		5
	Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2012 and 2011		6
	Notes to Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		48
Item 4.	Controls and Procedures		49

Part II. OTHER INFORMATION
Item 1.	Legal Proceedings		50
Item 1A.	Risk Factors		50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		50
Item 6.	Exhibits		51

SIGNATURE			51
EXHIBIT INDEX			52

FORWARD-LOOKING INFORMATION

This report contains forward-looking statements within the meaning of the U.S. federal securities laws that involve risks and uncertainties. Certain statements contained in this report are not purely historical including, without limitation, statements regarding our expectations, beliefs, intentions, anticipations, commitments or strategies regarding the future that are forward-looking. These statements include those discussed in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, including “Critical Accounting Estimates,” “Results of Operations,” “Off-Balance-Sheet Arrangements and Other Critical Contractual Obligations,” “Liquidity and Capital Resources,” and “Recently Issued Accounting Standards,” and elsewhere in this report.

In this report, the words “may,” “could,” “would,” “might,” “will,” “should,” “plan,” “ forecast,” “anticipate,” “believe,” “expect,” “intend,” “estimate,” “predict,” “potential,” “continue,” “future,” “moving toward” or the negative of these terms or other similar expressions also identify forward-looking statements. Our actual results could differ materially from those forward-looking statements contained in this report as a result of a number of risk factors including, but not limited to, those set forth in the section entitled “Factors That May Affect Future Results of Operations” and elsewhere in this report. You should carefully consider these risks, in addition to the other information in this report and in our other filings with the SEC. All forward-looking statements and reasons why results may differ included in this report are made as of the date of this report, and we assume no obligation to update any such forward-looking statement or reason why such results might differ.

PART I. FINANCIAL INFORMATION

ITEM 1.

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ECHELON CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)


	June 30, 2012			December 31, 2011
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	17,389		$	17,658
Short-term investments		42,981			40,998
Accounts receivable, net		24,721			35,215
Inventories		9,982			11,125
Deferred cost of goods sold		1,249			6,536
Other current assets		3,081			4,044

Total current assets		99,403			115,576

Property and equipment, net		25,125			27,201
Goodwill		8,177			8,235
Other long-term assets		688			693

Total assets	$	133,393		$	151,705

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	11,383		$	18,313
Accrued liabilities		4,928			7,755
Current portion of lease financing obligations		2,024			1,870
Deferred revenues		6,710			12,716

Total current liabilities		25,045			40,654

LONG-TERM LIABILITIES:
Lease financing obligations, excluding current portion		19,228			20,193
Other long-term liabilities		1,700			1,750

Total long-term liabilities		20,928			21,943

STOCKHOLDERS’ EQUITY:
Common stock		461			457
Additional paid-in capital		349,707			346,952
Treasury stock		(28,130	)		(28,130	)
Accumulated other comprehensive income/(loss)		(39	)		244
Accumulated deficit		(234,864	)		(230,415	)

Total Echelon Corporation stockholders’ equity		87,135			89,108
Noncontrolling interest in subsidiary		285			—

Total stockholders’ equity		87,420			89,108

Total liabilities and stockholders’ equity	$	133,393		$	151,705

See accompanying notes to condensed consolidated financial statements.

ECHELON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Revenues:
Product	$	39,845		$	42,526		$	79,331		$	70,205
Service		977			1,217			1,824			1,920

Total revenues ⁽²⁾		40,822			43,743			81,155			72,125

Cost of revenues:
Cost of product ⁽¹⁾		24,230			22,966			46,680			37,618
Cost of service ⁽¹⁾		523			573			1,108			1,160

Total cost of revenues		24,753			23,539			47,788			38,778

Gross profit		16,069			20,204			33,367			33,347

Operating expenses:
Product development ⁽¹⁾		7,393			8,874			16,194			18,472
Sales and marketing ⁽¹⁾		5,548			6,056			11,705			13,298
General and administrative ⁽¹⁾		3,599			4,771			7,945			9,661
Restructuring charges		1,176			—			1,176			—

Total operating expenses		17,716			19,701			37,020			41,431

Income (loss) from operations		(1,647	)		503			(3,653	)		(8,084	)
Interest and other income (expense), net		254			(153	)		(10	)		(513	)
Interest expense on lease financing obligations		(344	)		(371	)		(695	)		(748	)

Loss before provision for income taxes		(1,737	)		(21	)		(4,358	)		(9,345	)
Income tax expense		144			120			91			115

Net loss	$	(1,881	)	$	(141	)	$	(4,449	)	$	(9,460	)

Net loss per share:
Basic	$	(0.04	)	$	(0.00	)	$	(0.10	)	$	(0.23	)

Diluted	$	(0.04	)	$	(0.00	)	$	(0.10	)	$	(0.23	)

Shares used in computing net loss per share:
Basic		42,560			42,038			42,442			41,911

Diluted		42,560			42,038			42,442			41,911

⁽¹⁾	See Note 4 for summary of amounts included representing stock-based compensation expense.

⁽²⁾	Includes related party amounts of $1,532 and $1,800 for the three months ended June 30, 2012 and 2011, respectively, and $1,759 and $2,969 for the six months ended June 30, 2012 and 2011, respectively. See Note 11 for additional information on related party transactions.

See accompanying notes to condensed consolidated financial statements.

ECHELON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Net loss	$	(1,881	)	$	(141	)	$	(4,449	)	$	(9,460	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		(493	)		214			(283	)		690
Unrealized holding gain (loss) on available-for-sale securities		—			4			—			(1	)

Total other comprehensive income (loss)		(493	)		218			(283	)		689

Comprehensive income (loss)	$	(2,374	)	$	77		$	(4,732	)	$	(8,771	)

See accompanying notes to condensed consolidated financial statements.

ECHELON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended June 30,
	2012			2011
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss	$	(4,449	)	$	(9,460	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		2,665			3,048
Increase in (reduction of) allowance for doubtful accounts		(32	)		(18	)
Loss on disposal of fixed assets		—			37
Reduction of (increase in) accrued investment income		3			45
Stock-based compensation		3,759			5,573
Change in operating assets and liabilities:
Accounts receivable		10,505			(3,799	)
Inventories		1,130			(1,661	)
Deferred cost of goods sold		5,286			242
Other current assets		952			482
Accounts payable		(6,861	)		659
Accrued liabilities		(2,873	)		105
Deferred revenues		(5,986	)		(935	)
Deferred rent		(23	)		(30	)

Net cash provided by (used in) operating activities		4,076			(5,712	)

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of available-for-sale short-term investments		(48,964	)		(14,979	)
Proceeds from maturities and sales of available-for-sale short-term investments		46,979			43,896
Change in other long-term assets		(2	)		(17	)
Capital expenditures		(503	)		(1,479	)

Net cash provided by (used in) investing activities		(2,490	)		27,421

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Principal payments of lease financing obligations		(960	)		(849	)
Proceeds from exercise of stock options		—			910
Proceeds from noncontrolling interests		285			—
Repurchase of common stock from employees for payment of taxes on vesting of restricted stock units and upon exercise of stock options		(970	)		(1,683	)

Net cash used in financing activities		(1,645	)		(1,622	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		(210	)		487

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(269	)		20,574

CASH AND CASH EQUIVALENTS:
Beginning of period		17,658			7,675

End of period	$	17,389		$	28,249

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest on lease financing obligations	$	577		$	743

Cash paid for income taxes	$	139		$	216

See accompanying notes to condensed consolidated financial statements.

ECHELON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies:

Basis of Presentation

The condensed consolidated financial statements include the accounts of Echelon Corporation, a Delaware corporation, its wholly-owned subsidiaries, and a subsidiary in which it has a controlling interest (collectively referred to as the “Company”). The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity. All material inter-company transactions between and among the Company and its consolidated subsidiaries and other consolidated entities have been eliminated in consolidation.

While the financial information furnished is unaudited, the condensed consolidated financial statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for the fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The results for interim periods are not necessarily indicative of the results for the entire year. The condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2011 included in its Annual Report on Form 10-K.

There have been no material changes to the Company’s significant accounting policies as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Risks and Uncertainties

The Company’s operations and performance depend significantly on worldwide economic conditions and their impact on purchases of the Company’s products, as well as the ability of suppliers to provide the Company with products and services in a timely manner. The impact of any of the matters described below could have an adverse effect on the Company’s business, results of operations and financial condition.

•

The Company’s sales are currently concentrated with a relatively small group of customers, as approximately 64% of net revenues for the quarter ended June 30, 2012, and 66% of net revenues for the six months ended June 30, 2012, were derived from four customers. Customers in any of the Company’s target market sectors may experience unexpected reductions in demand for their products and consequently reduce their purchases from us, resulting in either the loss of a significant customer or a notable decrease in the level of sales to a significant customer. In addition, if any of these customers are unable to obtain the necessary capital to operate their business, they may be unable to satisfy their payment obligations to the Company.

•

The Company utilizes third-party contract electronic manufacturers to manufacture, assemble, and test its products. As a result of current credit market conditions, if any of these third-parties were unable to obtain the necessary capital to operate their business, they may be unable to provide the Company with timely services or to make timely deliveries of products.

•

Due to the continuing worldwide economic situation, coupled with the fact that the Company’s Systems customers generally procure products that have been customized to meet their requirements, the Company has limited visibility into ultimate product demand, which makes sales forecasting more difficult. As a result, anticipated demand may not materialize, which could subject the Company to increased levels of excess and obsolete inventories.

•

From time to time, the Company has experienced shortages or interruptions in supply for certain products or components used in the manufacture of the Company’s products that have been or will be discontinued. In order to ensure an adequate supply of these items, the Company has occasionally purchased quantities of these items that are in excess of the Company’s then current estimate of short-term requirements. If the long-term requirements do not materialize as originally expected, and the Company is not otherwise able to dispose of these excess products or components, the Company could be subject to increased levels of excess and obsolete

inventories. For example, to ensure supply, the Company procured a substantial quantity of a certain component used in one of its Systems products. If the long-term requirements do not materialize as originally expected, or if the Company develops alternative solutions that no longer employ these items and the Company is not able to dispose of these excess products or components, the Company could be subject to increased levels of excess and obsolete inventories.

Use of Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions, and estimates that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Significant estimates and judgments are used for revenue recognition, performance-based equity compensation, inventory valuation, allowance for warranty costs, and other loss contingencies. In order to determine the carrying values of assets and liabilities that are not readily apparent from other sources, the Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes to be reasonable under the circumstances. Actual results experienced by the Company may differ materially from management’s estimates.

Recently Issued Accounting Standards

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (ASC Topic 220) — Presentation of Comprehensive Income. The amendments from this update will result in more converged guidance on how comprehensive income is presented under U.S. GAAP and International Financial Reporting Standards (“IFRS”). With this update to ASC 220, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In either option, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, nor do they affect how earnings per share is calculated or presented. The amended guidance also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. In December 2011, the FASB decided to defer the requirement to present reclassifications of other comprehensive income on the face of the income statement. The Company’s adoption of this guidance as of January 1, 2012 did not have a material impact on its condensed consolidated financial position, results of operations or cash flows.

Revenue Recognition

The Company’s revenues are derived from the sale and license of its products and to a lesser extent, from fees associated with training, technical support, and custom software design services offered to its customers. Product revenues consist of revenues from hardware sales and software licensing arrangements. Service revenues consist of product technical support (including software post-contract support services), training, and custom software development services.

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery to the customer’s carrier (and acceptance, as applicable) has occurred, the sales price is fixed or determinable, collectability is probable, and there are no post-delivery obligations. For non-distributor hardware sales, including sales to third party manufacturers, these criteria are generally met at the time of delivery to the customer’s carrier. However, for arrangements that contain contractual acceptance provisions, revenue recognition may be delayed until acceptance by the customer or the acceptance provisions lapse unless the Company can objectively demonstrate that

the contractual acceptance criteria have been satisfied, which is generally accomplished by establishing a history of acceptance for the same or similar products. For sales made to the Company’s distributor partners, revenue recognition criteria are generally met at the time the distributor sells the products through to its end-use customer. Service revenue is recognized as the training services are performed, or ratably over the term of the support period.

The Company accounts for the rights of return, price protection, rebates, and other sales incentives offered to distributors of its products as a reduction in revenue. With the exception of sales to distributors, the Company’s customers are generally not entitled to return products for a refund. For sales to distributors, due to contractual rights of return and other factors that impact our ability to make a reasonable estimate of future returns and other sales incentives, revenues are not recognized until the distributor has shipped its products to the end customer .

The Company’s multiple deliverable revenue arrangements are primarily related to sales of its Systems products, which may include, within a single arrangement, electricity meters, data concentrators and related hardware (collectively, the “Hardware”); NES system software; Element Manager software; post-contract customer support (“PCS”) for the NES system and Element Manager software; extended warranties for the Hardware; and, occasionally, specified enhancements or upgrades to software used in the NES system. For arrangements originating or materially modified after December 31, 2009, with the exception of the NES system software, each of these deliverables is considered a separate unit of accounting. The NES system software functions together with an electricity meter to deliver its essential functionality and any related software license fee is charged for on a per meter basis. Therefore, the NES system software and an electricity meter are combined and considered a single unit of accounting. The Element Manager software is not considered to be part of an electricity meter’s essential functionality and, therefore, Element Manager software and any related PCS continues to be accounted for under industry specific software revenue recognition guidance. However, all other NES system deliverables are no longer within the scope of industry specific software revenue recognition guidance.

The Company allocates revenue to each element in a multiple-element arrangement based upon their relative selling price. The Company determines the selling price for each deliverable using vendor specific objective evidence (“VSOE”) of selling price or third party evidence (“TPE”) of selling price, if it exists. If neither VSOE nor TPE of selling price exists for a deliverable, the Company uses its best estimated selling price (“BESP”) for that deliverable. Since the use of the residual method is eliminated under the new accounting standards, any discounts offered by the Company are allocated to each of the deliverables. Revenue allocated to each element is then recognized when the basic revenue recognition criteria is met for the respective element.

Consistent with its methodology under previous accounting guidance, if available, the Company determines VSOE of fair value for each element based on historical stand-alone sales to third parties or from the stated renewal rate for the elements contained in the initial contractual arrangement. The Company currently estimates selling prices for its PCS and extended warranties based on VSOE of fair value.

In many instances, the Company is not currently able to obtain VSOE of fair value for all deliverables in an arrangement with multiple elements. This may be due to the Company infrequently selling each element separately or not pricing products within a narrow range. When VSOE cannot be established, the Company attempts to estimate the selling price of each element based on TPE. TPE would consist of competitor prices for similar deliverables when sold separately. Generally, the Company’s offerings contain significant differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine the stand-alone selling prices for similar products of its competitors. Therefore, the Company is typically not able to obtain TPE of selling price.

When the Company is unable to establish a selling price using VSOE or TPE, which is generally the case for the Hardware and certain specified enhancements or upgrades to the Company’s NES software, the Company uses its BESP in determining the allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings.

The Company establishes pricing for its products and services by considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, and industry pricing practices. The determination of pricing also includes consultation with and formal approval by the Company’s management, taking into consideration the Company’s go-to-market strategy. These pricing practices apply to both the Company’s Hardware and software products.

Based on an analysis of pricing stated in contractual arrangements for its Hardware products in historical multiple-element transactions and, to a lesser extent, historical standalone transactions, the Company has concluded that it typically prices its Hardware within a narrow range of discounts when compared to the price listed on the Company’s standard pricing grid for similar deliverables (i.e., similar configuration, volume, geography, etc.). Therefore, the Company has determined that, for its current Hardware for which VSOE or TPE is not available, the Company’s BESP is generally comprised of prices based on a narrow range of discounts from pricing stated in its pricing grid.

When establishing BESP for the Company’s specified software enhancements or upgrades, the Company considers multiple factors including, but not limited to, the relative value of the features and functionality being delivered by the enhancement or upgrade as compared to the value of the software product to which the enhancement or upgrade relates, as well as the Company’s pricing practices for NES system software PCS packages, which may include rights to the specified enhancements or upgrades.

The Company regularly reviews VSOE and has established a review process for TPE and BESP. The Company maintains internal controls over the establishment and updates of these estimates. There were no material impacts during the three and six months ended June 30, 2012, resulting from changes in VSOE, TPE, or BESP, nor does the Company expect a material impact from such changes in the near term.

For multiple element arrangements that were entered into prior to January 1, 2010 and that included NES system and/or Element Manager software, the Company deferred the recognition of all revenue until all software required under the arrangement had been delivered to the customer. Once the software was delivered, the Company recognized revenues for the Hardware and software royalties upon customer acceptance of the Hardware based on a constant ratio of meters to data concentrators, which is determined on a contract-by-contract basis. To the extent actual deliveries of either meters or data concentrators was disproportionate to the expected overall ratio for any given arrangement, revenue for the excess meters or data concentrators was deferred until such time as additional deliveries of meters or data concentrators had occurred. Revenues for PCS on the NES system and Element Manager software, as well as for extended warranties on Systems Hardware products, were recognized ratably over the associated service period, which generally commenced upon the later of the delivery of all software, or the customer’s acceptance of any given Hardware shipment.

As of June 30, 2012 and December 31, 2011, approximately $2.8 million and $9.4 million, respectively, of the Company’s Systems revenue was deferred. This decrease in deferred revenues was primarily due to a change in the timing of revenue recognition for certain of the Company’s Systems products, which resulted from the Company’s ability to objectively demonstrate that the contractual acceptance criteria for these products was met at the time of delivery. All of the deferred revenue at June 30, 2012 and December 31, 2011 relates to revenue that is being accounted for under the revenue recognition guidance applicable to transactions entered into after December 31, 2009.

Deferred Revenue and Deferred Cost of Goods Sold

Deferred revenue consists substantially of amounts billed or payments received in advance of revenue recognition. Deferred cost of goods sold related to deferred product revenues includes direct product costs and applied overhead. Deferred cost of goods sold related to deferred service revenues includes direct labor costs and applied overhead. Once all revenue recognition criteria have been met, the deferred revenues and associated cost of goods sold are recognized.

2. Financial Instruments

The Company’s financial instruments consist of cash equivalents, short-term investments, accounts receivable, accounts payable, and lease financing obligations. The carrying value of the Company’s financial instruments approximates fair value. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments, which are classified as either cash equivalents or short-term, and accounts receivable. With respect to its investments, the Company has an investment policy that limits the amount of credit exposure to any one financial institution and restricts placement of the Company’s investments to financial institutions independently evaluated as highly creditworthy. With respect to its accounts receivable, the Company performs ongoing credit evaluations of each of its customers’ financial condition. For a customer whose credit

worthiness does not meet the Company’s minimum criteria, the Company may require partial or full payment prior to shipment. Alternatively, prior to shipment, customers may be required to provide the Company with an irrevocable letter of credit or arrange for some other form of coverage to mitigate the risk of uncollectibility, such as a bank guarantee. Additionally, the Company establishes an allowance for doubtful accounts and sales return allowances based upon factors surrounding the credit risk of specific customers, historical trends, and other available information.

On a recurring basis, the Company measures certain of its financial assets, namely its cash equivalents and available-for-sale investments, at fair value. The Company does not have any financial liabilities measured at fair value on a recurring basis. The fair value of the Company’s financial assets measured at fair value on a recurring basis was determined using the following inputs at June 30, 2012 (in thousands):


	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Money market funds ⁽¹⁾	$	5,228	$	5,228	$	—	$	—
U.S. government securities ⁽²⁾		42,981		—		42,981		—

Total	$	48,209	$	5,228		42,981	$	—

The fair value of the Company’s financial assets measured at fair value on a recurring basis was determined using the following inputs at December 31, 2011 (in thousands):


	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Money market funds ⁽¹⁾	$	5,215	$	5,215	$	—	$	—
U.S. government securities ⁽²⁾		45,999		—		45,999		—

Total	$	51,214	$	5,215	$	45,999	$	—

⁽¹⁾	Included in cash and cash equivalents in the Company’s condensed consolidated balance sheets

⁽²⁾	Represents our portfolio of available-for-sale securities and is included in either cash and cash equivalents or short-term investments in the Company’s condensed consolidated balance sheets

Cash equivalents consist of either investments with remaining maturities of three months or less at the date of purchase, or money market funds for which the carrying amount is a reasonable estimate of fair value.

The Company’s available-for-sale securities consist of U.S. government securities with a minimum and weighted average credit rating of A-1+. The Company values these securities based on pricing from pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. However, the Company classifies all of its fixed income available-for-sale securities as having Level 2 inputs. The valuation techniques used to measure the fair value of the Company’s financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques. Our procedures include controls to ensure that appropriate fair values are recorded such as comparing prices obtained from multiple independent sources.

As of June 30, 2012, the Company’s available-for-sale securities had contractual maturities from four to twelve months and an average remaining term to maturity of four months. As of June 30, 2012, the amortized cost basis, aggregate fair value, and gross unrealized holding gains and losses of the Company’s short-term investments by major security type were as follows (in thousands):


	Amortized Cost		Aggregate Fair Value		Unrealized Holding Gains		Unrealized Holding Losses
U.S. government and agency securities	$	42,979	$	42,981	$	2	$	—

The amortized cost basis, aggregate fair value and gross unrealized holding gains and losses for the Company’s available-for-sale short-term investments, by major security type, were as follows as of December 31, 2011 (in thousands):


	Amortized Cost		Aggregate Fair Value		Unrealized Holding Gains		Unrealized Holding Losses
U.S. government securities	$	45,997	$	45,999	$	3	$	1

Market values were determined for each individual security in the investment portfolio. Any decline in value of these investments is primarily related to changes in interest rates and is considered to be temporary in nature. The Company reviews its investments on a regular basis to evaluate whether or not any have experienced an other-than-temporary decline in fair value.

3. Earnings Per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted net loss per share computations for the three and six months ended June 30, 2012 and 2011 (in thousands, except per share amounts):


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Net loss (Numerator):
Net loss, basic & diluted	$	(1,881	)	$	(141	)	$	(4,449	)	$	(9,460	)

Shares (Denominator):
Weighted average common shares outstanding		42,560			42,038			42,442			41,911

Shares used in basic computation		42,560			42,038			42,442			41,911
Common shares issuable upon exercise of stock options (treasury stock method)		—			—			—			—

Shares used in diluted computation		42,560			42,038			42,442			41,911

Net loss per share:
Basic	$	(0.04	)	$	(0.00	)	$	(0.10	)	$	(0.23	)

Diluted	$	(0.04	)	$	(0.00	)	$	(0.10	)	$	(0.23	)

For the three and six months ended June 30, 2012 and 2011, the diluted net loss per share calculation is equivalent to the basic net loss per share calculation as there were no potentially dilutive stock options due to the Company’s net loss position. The number of stock options, stock appreciation rights, restricted stock units (“RSUs”), and restricted stock awards (“RSAs”) excluded from this calculation for the three and six months ended June 30, 2012 and 2011 was 6,769,248 and 5,647,067, respectively.

4. Stockholders’ Equity and Employee Stock Option Plans:

Stock-based Compensation Expense

The following table summarizes stock-based compensation expense for the three and six months ended June 30, 2012 and 2011 and its allocation within the condensed consolidated statements of operations (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Cost of revenues:
Cost of product	$	47	$	112	$	296	$	406
Cost of service		15		11		51		33
Operating expenses:
Product development		210		788		1,255		1,794
Sales and marketing		344		396		1,005		1,203
General and administrative		326		1,081		1,152		2,137

Total	$	942	$	2,388	$	3,759	$	5,573

Stock Award Activity

There were no options exercised for the three and six month periods ended June 30, 2012. The total intrinsic value of options exercised during the three and six months ended June 30, 2011 was approximately $767,000 and $1.1 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the options.

The total fair value of RSUs vested and released during the three and six months ended June 30, 2012 was approximately $2.0 million and $2.7 million, respectively. The total fair value of RSUs vested and released during the three and six months ended June 30, 2011 was approximately $3.0 million and $3.9 million, respectively. The fair value is calculated by multiplying the fair market value of the Company’s stock on the vesting date by the number of shares vested.

Stock-based Compensation Expense for Awards with Financial-Based Performance Vesting Requirements

As of June 30, 2012, there were 230,000 unvested RSUs and RSAs that were subject to service-based vesting conditions as well as certain financial or other performance-based vesting requirements that must be achieved before vesting can occur.

Through June 30, 2012, cumulative compensation expense of $621,000 associated with these 230,000 unvested RSUs and RSAs has been recognized because the Company believes it is probable that the associated performance requirements will be achieved. If such requirements are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed.

5. Significant Customers:

The Company markets its products and services throughout the world to original equipment manufacturers (OEMs) and systems integrators in the building, industrial, transportation, utility/home, and other automation markets. During the three and six months ended June 30, 2012 and 2011, the Company had four customers that accounted for a significant portion of its revenues: EBV Electronik GmbH and Avnet Europe Comm VA (“EBV/Avnet”), the Company’s primary distributors of its Sub-systems products in Europe, Duke Energy Corporation (“Duke”), a U.S. utility company; and Eltel Networks A/S (“Eltel”) and Telvent Energia y Medioambiente SA (“Telvent”), value added resellers of the Company’s Systems products. For the three and six months ended June 30, 2012 and 2011, the percentage of the Company’s revenues attributable to sales made to these customers was as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Telvent		26.2	%		14.0	%		32.2	%		13.8	%
Duke		17.5	%		28.8	%		18.8	%		25.9	%
Eltel		13.7	%		14.2	%		8.1	%		14.1	%
EBV/Avnet		6.5	%		9.7	%		7.0	%		11.2	%

Total		63.9	%		66.7	%		66.1	%		65.0	%

In April 2011, the Company’s distributor agreement with EBV was assigned from EBV to Avnet Europe Comm VA, a limited partnership organized under the laws of Belgium (“Avnet”). Each of EBV and Avnet are indirect subsidiaries of Avnet, Inc., a New York corporation, which is a distributor of electronic parts, enterprise computing and storage products and embedded subsystems. At the time of the assignment, the term of the distributor agreement was extended and will now expire in June 2014.

6. Commitments and Contingencies:

Legal Actions

In April 2009, the Company received notice that the receiver for two companies that filed for the Italian law equivalent of bankruptcy protection in May 2004, Finmek Manufacturing SpA and Finmek Access SpA (collectively, the “Finmek Companies”), had filed a lawsuit under an Italian “claw back” law in Padua, Italy against the Company, seeking the return of approximately $16.7 million in payments received by the Company in the ordinary course of business for components sold by the Company to the Finmek Companies prior to the bankruptcy filing. The Finmek Companies were among Enel’s third party meters manufacturers, and from time to time through January 2004, the Company sold components to the Finmek Companies that were incorporated into the electricity meters that were manufactured by the Finmek Companies and sold to Enel SpA for the Enel Project. The Company believes that the Italian claw back law is not applicable to its transactions with the Finmek Companies, and the claims of the Finmek Companies’ receiver are without merit, and it is defending the lawsuit. As such, no loss or range of loss associated with this action is considered probable or reasonably possible at this time.

From time to time, in the ordinary course of business, the Company may be subject to other legal proceedings, claims, investigations, and other proceedings, including claims of alleged infringement of third-party patents and other intellectual property rights, and commercial, employment, and other matters. In accordance with generally accepted accounting principles, the Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. While the Company believes it has adequately provided for such contingencies as of June 30, 2012, the amounts of which were immaterial, it is possible that the Company’s results of operations, cash flows, and financial position could be harmed by the resolution of any such outstanding claims.

Line of Credit

The Company maintains a $10.0 million line of credit with its primary bank, which expires on July 1, 2013. The letter of credit contains certain financial covenants requiring the Company to maintain an overall minimum tangible net worth level and to maintain a minimum level of liquid assets. As of June 30, 2012, the Company was in compliance with these covenants. As of June 30, 2012, the Company’s primary bank has issued, against the line of credit, one standby letter of credit totaling $113,000. Other than issuing standby letters of credit, the Company has never drawn against the line of credit, nor have amounts ever been drawn against the standby letters of credit issued by the bank.

7. Inventories:

Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and manufacturing overhead. When required, provisions are made to reduce excess and obsolete inventories to their estimated net realizable value. Inventories consist of the following (in thousands):


	June 30, 2012		December 31, 2011
Purchased materials	$	1,885	$	2,346
Work-in-process		63		86
Finished goods		8,034		8,693

	$	9,982	$	11,125

8. Accrued Liabilities:

Accrued liabilities consist of the following (in thousands):


	June 30, 2012		December 31, 2011
Accrued payroll and related costs	$	3,379	$	5,673
Warranty reserve		457		823
Restructuring charges		409		49
Customer deposits		2		101
Accrued taxes		85		170
Other accrued liabilities		596		939

	$	4,928	$	7,755

9. Segment Disclosure:

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing business performance. The Company’s chief operating decision-making group is the Executive Staff, which is comprised of the Chief Executive Officer and his direct reports.

The Company operates in one principal industry segment, its reportable segment: the design, manufacture and sale of products for the controls network industry, and markets its products primarily to the smart grid, smart cities and smart buildings markets. The Company’s products provide the infrastructure and support required to implement and deploy open, interoperable, control network solutions. All of the Company’s products either incorporate or operate with the Neuron ^® Chip and/or the LONWORKS protocol. The Company also provides a range of services to its customers that consist of technical support, training courses covering its LONWORKS network technology and products, and custom software development. Any given customer purchases a small subset of products and services that are appropriate for that customer’s application.

The Company operates in three main geographic areas: the Americas; Europe, Middle East and Africa (“EMEA”); and Asia Pacific / Japan (“APJ”). Each geographic area provides products and services to the Company’s customers located in the respective region. The Company’s long-lived assets include property and equipment, goodwill, purchased technology, and deposits on its leased facilities. Long-lived assets are attributed to geographic areas based on the country where the assets are located. As of June 30, 2012 and December 31, 2011, long-lived assets of approximately $31.1 million and $33.2 million, respectively, were domiciled in the United States. Long-lived assets for all other locations are not material to the condensed consolidated financial statements.

The Company has two primary product lines: Systems and Sub-systems. Systems revenue is primarily composed of sales of meters and data concentrators to system integrators or utilities. The Company previously referred to this as Utility revenue. Sub-systems revenue is principally composed of sales of components, software, and sub-system modules to utilities, building energy, or street lighting customers. This was previously reported as Commercial and Enel Project revenues. Summary revenue information by product line for the three and six months ended June 30, 2012 and 2011 is as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Systems	$	28,028	$	29,259	$	56,720	$	43,882
Sub-systems		12,794		14,484		24,435		28,243

Total	$	40,822	$	43,743	$	81,155	$	72,125

In North America, the Company sells its products primarily through a direct sales organization and select third-party electronics representatives. Outside North America, the Company sells its products through direct sales organizations in EMEA and APJ, value-added resellers, and local distributors. Revenues are attributed to geographic areas based on the country where the products are shipped to or the services are delivered. Summary revenue information by geography for the three and six months ended June 30, 2012 and 2011 is as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Americas	$	12,098	$	16,771	$	24,776	$	27,456
EMEA		24,474		23,215		49,480		38,026
APJ		4,250		3,757		6,899		6,643

Total	$	40,822	$	43,743	$	81,155	$	72,125

For information regarding the Company’s major customers, please refer to Note 5, Significant Customers.

10. Income Taxes:

The provision for income taxes for the three months ended June 30, 2012 and 2011 was $144,000 and $120,000, respectively. The provision for income taxes for the six months ended June 30, 2012 and 2011 was $91,000 and $115,000, respectively. The difference between the statutory rate and the Company’s effective tax rate is primarily due to the impact of foreign taxes, changes in the valuation allowance on deferred tax assets, and changes in the accruals related to unrecognized tax benefits.

As of June 30, 2012 and December 31, 2011, the Company had gross unrecognized tax benefits of approximately $3.7 million and $4.4 million, respectively, of which $704,000 and $755,000, respectively, if recognized, would impact the effective tax rate on income from continuing operations. The Company’s policy is to recognize interest and/or penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2012 and December 31, 2011, the Company had accrued $256,000 and $201,000, respectively, for interest and penalties. The $617,000 reduction in gross unrecognized tax benefits during the six months ended June 30, 2012 was primarily attributable to the expiration of the statute of limitations in certain foreign jurisdictions.

11. Related Parties:

The law firm of Wilson Sonsini Goodrich & Rosati, P.C. acts as principal outside counsel to the Company. Mr. Sonsini, a director of the Company, is a member of Wilson Sonsini Goodrich & Rosati, P.C.

In June 2000, the Company entered into a stock purchase agreement with Enel pursuant to which Enel purchased 3.0 million newly issued shares of its common stock for $130.7 million. The closing of this stock purchase occurred on September 11, 2000. At the closing, Enel had agreed that it would not, except under limited circumstances, sell or otherwise transfer any of those shares for a specified time period. That time period expired September 11, 2003. To the Company’s knowledge, Enel has not disposed of any of its 3.0 million shares. Under the terms of the stock purchase agreement, Enel has the right to nominate a member of the Company’s board of directors. A representative of Enel served on the board until March 14, 2012; no Enel representative is presently on the board.

At the time the Company entered into the stock purchase agreement with Enel, it also entered into a research and development agreement with an affiliate of Enel (the “R&D Agreement”). Under the terms of the R&D Agreement, the Company cooperated with Enel to integrate its L ON W ORKS technology into Enel’s remote metering management project in Italy, the Contatore Elettronico. The Company completed the sale of its components and products for the deployment phase of the Contatore Elettronico project during 2005. During 2006, the Company

supplied Enel and its designated manufacturers with limited spare parts for the Contatore Elettronico system. In October 2006, the Company entered into a new development and supply agreement and a software enhancement agreement with Enel. Under the development and supply agreement, Enel and its contract manufacturers purchase additional electronic components and finished goods from the Company. Under the software enhancement agreement, the Company provides software enhancements to Enel for use in its Contatore Elettronico system. The software enhancement agreement expires in December 2012 and the development and supply agreement expires in December 2013, although delivery of products and services can extend beyond those dates and the agreements may be extended under certain circumstances.

For the three months ended June 30, 2012 and 2011, the Company recognized revenue from products and services sold to Enel and its designated manufacturers of approximately $1.5 million and $1.8 million, respectively. For the six months ended June 30, 2012 and 2011, the Company recognized revenue from products and services sold to Enel and its designated manufacturers of approximately $1.8 million and $3.0 million, respectively. As of June 30, 2012, and December 31, 2011, none of the Company’s total accounts receivable balance related to amounts owed by Enel and its designated manufacturers.

12. Restructuring

In December 2010, the Company recorded restructuring charges of approximately $1.2 million related to termination benefits, of which $49,000 remained accrued as of December 31, 2011. The $49,000 was paid to the remaining affected employee during the quarter ended June 30, 2012.

In May 2012, the Company undertook further cost cutting measures aimed at reshaping its operating cost structure for the future by initiating a headcount reduction of 42 full-time employees worldwide, to be terminated between May 2012 and March 2013. In connection with this restructuring plan, in the second quarter of 2012, the Company recorded restructuring charges of approximately $1.2 million related to termination benefits for these personnel. The company expects to incur additional charges of approximately $100,000 through March 2013 for the employees whose termination dates will occur in the latter part of 2012 through the first quarter of 2013 and who will be entitled to additional severance payments if they remain employed with the Company through those dates.

The following table sets forth a summary of restructuring activities related to the Company’s May 2012 restructuring program (in thousands):


	March 31, 2012		Costs Incurred		Cash Payments		June 30, 2012
Termination benefits	$	—	$	1,176	$	767	$	409

Accrued restructuring charges of approximately $409,000 as of June 30, 2012 comprise the remaining liability balance and are reflected in accrued liabilities on the Company’s Condensed Consolidated Balance Sheet as of June 30, 2012. The Company expects to pay these accrued termination benefits prior to June 30, 2013.

13. Joint Venture

On March 23, 2012, the Company entered into an agreement with Holley Metering Limited (“Holley”), a designer and manufacturer of energy meters in China, to create a joint venture, Zhejiang Echelon-Holley Technology Co., Ltd. (“Echelon-Holley”). The joint venture will focus on the development and sales of smart energy products for China and rest-of-world markets. The Company has a 51 percent ownership interest in the joint venture and exercises controlling influence. Therefore, Echelon-Holley’s accounts are included in the Company’s Condensed Consolidated Financial Statements as of June 30, 2012 and for three months and six months then ended. Holley’s interests in Echelon-Holley’s net assets are reported in the noncontrolling interest in subsidiary on the Condensed Consolidated Balance Sheet as of June 30, 2012. Net income attributable to the noncontrolling interest in Echelon-Holley was not material during three months and six months ended June 30, 2012.

As of June 30, 2012, Echelon and Holley had contributed in cash a total of approximately $600,000 in Share Capital, as defined, to Echelon-Holley in proportion to their respective ownership interests.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Quarterly Report. The following discussion contains predictions, estimates, and other forward-looking statements that involve a number of risks and uncertainties about our business. These statements may be identified by the use of words such as “we believe,” “expect,” “anticipate,” “intend,” “plan,” “goal,” “continues,” “may” and similar expressions. Forward-looking statements include statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances. In particular, these statements include statements such as: our projections of Systems revenues; estimates of our future gross margins; statements regarding reinvesting a portion of our earnings from foreign operations; plans to use our cash reserves to strategically acquire other companies, products, or technologies; the sufficiency of our cash reserves to meet cash requirements; our expectations that our Sub-systems revenues will not fluctuate significantly from foreign currency sales; our forecasts regarding our sales and marketing expenses; and estimates of our interest income. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in the “Factors That May Affect Future Results of Operations” section. Therefore, our actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to review or update publicly any forward-looking statements for any reason.

E XECUTIVE O VERVIEW

Echelon Corporation was incorporated in California in February 1988 and reincorporated in Delaware in January 1989. We are based in San Jose, California, and maintain offices in eleven foreign countries throughout Europe and Asia. We develop, market, and sell energy control networking solutions, a critical element of incorporating action-oriented intelligence into the utility grid, buildings, streetlights, and other energy devices – all components of the evolving smart grid, which encompasses everything from the power plant to the plug. Echelon’s products can be used to make the management of electricity over the smart grid cost effective, reliable, survivable and instantaneous. Our products enable everyday devices — such as air conditioners, appliances, electricity meters, light switches, thermostats, and valves — to be made “smart” and inter-connected.

Our proven, open standard, multi-application energy control networking platform powers energy-savings applications for smart grid, smart cities and smart buildings that help customers save on their energy usage, reduce outage duration or prevent them from happening entirely, reduce carbon footprint and more. Today, we offer, directly and through our partners worldwide, a wide range of innovative, fully integrated products and services. We classify these products and services into two primary categories: Systems, such as our smart metering solutions, which are targeted for use by utilities and that we previously referred to as our Utility products and services; and Sub-systems that include our components, control nodes and development software, which are sold typically to OEMs who build them into their smart grid, smart cities and smart buildings solutions. Revenues from our Sub-systems products and services were previously referred to as Commercial and Enel Project revenues.

Our total revenues decreased by 6.7% during the second quarter of 2012 as compared to the same period in 2011, driven principally by decreased sales of our Systems products. Gross margins declined by 6.8 percentage points between the two periods, while overall operating expenses declined by 10.1%. The net effect was a second quarter loss in 2012 that increased by $1.7 million as compared to the second quarter of 2011. For the six months ended June 30, 2012, total revenues increased by 12.5% as compared to the same period in 2011. Gross margins declined by 5.0 percentage points between the two periods, while overall operating expenses declined by 10.6%. The net effect was a first half loss in 2012 that decreased by $5.0 million as compared to the first six months of 2011.

The following tables provide an overview of key financial metrics for the three and six months ended June 30, 2012 and 2011 that our management team focuses on in evaluating our financial condition and operating performance (in millions, except percentages).


	Three Months Ended June 30,
	2012			2011			$ Change			% Change
Net revenues	$	40,822		$	43,743		$	(2,921	)		(6.7	%)
Gross margin		39.4	%		46.2	%		—			(6.8	ppt)
Operating expenses	$	17,716		$	19,701		$	(1,985	)		(10.1	%)
Net loss	$	(1,881	)	$	(141	)	$	(1,740	)		(1,234.0	%)

	Six Months Ended June 30,
	2012			2011			$ Change			% Change
Net revenues	$	81,155		$	72,125		$	9,030			12.5	%
Gross margin		41.1	%		46.2	%		—			(5.1	ppt)
Operating expenses	$	37,020		$	41,431		$	(4,411	)		(10.6	%)
Net loss	$	(4,449	)	$	(9,460	)	$	5,011			53.0	%

	Balance as of
	June 30, 2012			December 31, 2011			$ Change			% Change
Cash, cash equivalents, and short-term investments	$	60,370		$	58,656		$	1,714			2.9	%

•

Net revenues: Our total revenues decreased by 6.7% during the second quarter of 2012 as compared to the same period in 2011, driven primarily by a $1.2 million, or 4.2%, decrease in sales of our Systems products and services and a $1.7 million or 11.7% decrease in net revenues from our Sub-systems products. The decrease in our Systems revenues was primarily due to an overall decrease in the level of large-scale deployments in the United States of our NES system products, partly offset by increased deployments in Finland. With respect to our Sub-systems product line, the 11.7% reduction in revenues during the second quarter of 2012 was due to a $1.4 million decrease in sales to our European Sub-system customers other than Enel, reflecting depressed economic conditions and some loss of market share. Many of our Sub-systems customers produce products used in commercial or industrial buildings. The markets for these products were adversely affected by the recession that started in 2008. These markets have yet to recover to their pre-recession levels. Our total revenues increased during the six months ended June 30, 2012 as compared to the same period in 2011 by 12.5%. This was due mainly to increased shipments of our Systems products for projects in Finland. To a lesser extent, Systems revenues increased in the first half of 2012 due to a change in the timing of revenue recognition for certain of our Systems products. These increases were partially offset by a reduction in products shipped for our projects in United States as well reduced Sub-systems sales in Europe.

•

Gross margin: Our gross margin declined by 6.8 percentage points and 5.1 percentage points during the three and six month periods ended June 30, 2012, respectively, as compared to the same periods in 2011. These decreases were primarily due to increased manufacturing costs for our Systems products, and for the six month period, the mix of products sold. In addition, for the three month period slightly higher indirect costs and overall reduced revenue levels also contributed to the gross margin decline. For the six month period, higher overall revenues and slightly lower indirect costs helped to offset some of the manufacturing cost increases.

•

Operating expenses: Our operating expenses decreased by 10.1% and 10.6% during the three and six month periods ended June 30, 2012, respectively, as compared to the same periods in 2011. These decreases were driven primarily by decreases in compensation costs (primarily due to reduced headcount) as well as fees paid to third party service providers. Also contributing to the decrease in operating expenses for both periods (as well as the costs of revenues mentioned above), was the impact of the reduction of stock compensation expense reflecting the restructuring action and the retirement of our former CFO during the second quarter of 2012. At the time of these employees’ departure, they had outstanding and unvested equity compensation awards for which cumulative compensation expense of approximately $800,000 had been recognized as of March 31, 2012. This cumulative compensation expense was reversed in the second quarter of 2012. Partially offsetting these operating expense decreases was a restructuring charge of approximately $1.2 million that we took during the second quarter of 2012.

•

Net loss: Our net loss increased by $1.7 million during the second quarter of 2012 as compared to the same period in 2011. This increase was directly attributable to the $2.9 million quarter-over-quarter decrease in net revenues, partly offset by reduced operating expenses. Excluding the impact of non-cash stock-compensation charges and restructuring charges, our net income decreased by approximately $2.0 million in the second quarter of 2012 as compared to the same period in 2011. Our net loss decreased by $5.0 million, or 53.0% during the six months ended June 30, 2012 as compared to the same period in 2011. This was directly attributable to the $9.0 million year-over-year increase in net revenues combined with the reduced operating expenses. Excluding the impact of non-cash stock-compensation charges and restructuring charges incurred in the first half of 2012, our net income increased by approximately $4.4 million in the first half of 2012 as compared to the same period in 2011.

•

Cash, cash equivalents, and short-term investments: During the first half of 2012, our cash, cash equivalents, and short-term investment balance increased by 2.9%, from $58.7 million at December 31, 2011 to $60.4 million at June 30, 2012. This increase was primarily the result of cash provided by operations of $4.1 million due mainly to reduction in working capital (increased A/R collections of $10.5 million being the primary driver), partly offset by cash used for taxes paid on stock awards released during the year and principal payments on our lease financing obligations.

C RITICAL A CCOUNTING P OLICIES AND E STIMATES

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Note 1, “Significant Accounting Policies” of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2011, which we filed with the Securities and Exchange Commission in March 2012, describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our revenues, stock-based compensation, allowance for doubtful accounts, inventories, and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

During the three and six months ended June 30, 2012, there were no material changes to our critical accounting policies or in the matters for which we make critical accounting estimates in the preparation of our condensed consolidated financial statements as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

R ESULTS OF O PERATIONS

The following table reflects the percentage of total revenues represented by each item in our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011:


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Revenues:
Product		97.6	%		97.2	%		97.8	%		97.3	%
Service		2.4			2.8			2.2			2.7

Total revenues		100.0			100.0			100.0			100.0

Cost of revenues:
Cost of product		59.4			52.5			57.5			52.2
Cost of service		1.2			1.3			1.4			1.6

Total cost of revenues		60.6			53.8			58.9			53.8

Gross profit		39.4			46.2			41.1			46.2

Operating expenses:
Product development		18.1			20.3			20.0			25.6
Sales and marketing		13.6			13.8			14.4			18.4
General and administrative		8.8			10.9			9.8			13.4
Restructuring charges		2.9			—			1.4			—

Total operating expenses		43.4			45.0			45.6			57.4

Income (loss) from operations		(4.0	)		1.2			(4.5	)		(11.2	)
Interest and other income (expense), net		0.6			(0.4	)		(0.0	)		(0.7	)
Interest expense on lease financing obligations		(0.8	)		(0.8	)		(0.9	)		(1.0	)

Loss before provision for income taxes		(4.2	)		(0.0	)		(5.4	)		(12.9	)
Income tax expense		0.4			0.3			0.1			0.2

Net loss		(4.6	%)		(0.3	%)		(5.5	%)		(13.1	%)

Revenues

Total revenues


	Three Months Ended				2012 over 2011 $ Change			2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change			2012 over 2011 % Change
Total revenues	$	40,822	$	43,743	$	(2,921	)		(6.7	%)


	Six Months Ended				2012 over 2011 $ Change		2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change		2012 over 2011 % Change
Total revenues	$	81,155	$	72,125	$	9,030		12.5	%

The $2.9 million decrease in total revenues for the quarter ended June 30, 2012 as compared to the same period in 2011 was primarily due to a $1.2 million, or 4.2%, decrease in sales of our Systems products and services and a $1.7 million or 11.7% decrease in net revenues from our Sub-systems products. The $9.0 million increase in total revenues for the six months ended June 30, 2012 as compared to the same period in 2011 was primarily the result of a $12.8 million increase in Systems revenues, which was partially offset by a $3.8 million decrease in Sub-systems revenues.

As we look forward to the remainder of 2012, the smart energy market continues to be in the midst of a challenging time. Macro conditions remain tentative amidst the European financial crisis, and competition is heightened as the industry faces slow growth and ongoing consolidation. New tender activity for smart–metering deployments is down and pricing pressures are increasing. In this challenging environment, we expect our revenues in the third quarter of 2012 will be lower than the first two quarters of the year, driven primarily by lower Systems revenue as a result of fewer systems deployments.

Systems revenues


	Three Months Ended				2012 over 2011 $ Change			2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change			2012 over 2011 % Change
Systems revenues	$	28,028	$	29,259	$	(1,231	)		(4.2	%)


	Six Months Ended				2012 over 2011 $ Change		2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change		2012 over 2011 % Change
Systems revenues	$	56,720	$	43,882	$	12,838		29.3	%

During the three and six months ended June 30, 2012 and 2011, our Systems revenues were derived primarily from a relatively small number of customers who have undertaken large-scale deployments of our NES System products. These deployments generally come to fruition after an extended and complex sales process, and each is relatively substantial in terms of its revenue potential. They vary significantly from one another in terms of, among other things, the overall size of the deployment, the duration of time over which the products will be sold, the mix of products being sold, the timing of delivery of those products, and the ability to modify the timing or size of those projects. This relative uniqueness among each deployment results in significant variability and unpredictability in our Systems revenues.

Systems revenues decreased during the quarter ended June 30, 2012 as compared to the same period in 2011. This was primarily due to an overall decrease in the level of large-scale deployments in the United States of our NES system products, partly offset by increased deployments in Finland. Systems revenues increased during the six months ended June 30, 2012 as compared to the same period in 2011. This was due to increased shipments of our Systems products for projects in Finland. These increases were partially offset by a reduction in products shipped for our projects in Denmark and the United States.

Our ability to recognize revenue for our Systems products depends on several factors, including, but not limited to, the impact on delivery dates of any modifications to existing shipment schedules included in the contracts that have been awarded to us thus far, and in some cases, certain contractual provisions, such as customer acceptance. For arrangements that contain contractual acceptance provisions, revenue recognition may be delayed until acceptance by the customer or the acceptance provisions lapse unless we can objectively demonstrate that the contractual acceptance criteria have been satisfied, which is generally accomplished by establishing a history of acceptance for the same or similar products. In the future, we will continue to evaluate historical acceptance rates for our Systems products and, when the data supports it, will recognize revenue at the point of delivery to the customer’s carrier for those particular products (once all other revenue recognition criteria have been met), which could increase our Systems revenue in the period in which this determination is made. In addition, the revenue recognition rules relating to products such as our NES System may require us to defer some or all of the revenue associated with NES product shipments until certain conditions are met in a future period.

Our Systems revenues have historically been concentrated with a relatively few customers. During the years ended December 31, 2011, 2010, and 2009, approximately 94.2%, 85.4%, and 82.5%, respectively, of our Systems revenues were attributable to four customers. While our Systems customers will change over time, given the nature of the Systems market, we expect our future Systems revenues will continue to be concentrated among a limited number of customers.

Sub-systems revenues


	Three Months Ended				2012 over 2011 $ Change			2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change			2012 over 2011 % Change
Sub-systems revenues	$	12,794	$	14,484	$	(1,690	)		(11.7	%)


	Six Months Ended				2012 over 2011 $ Change			2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change			2012 over 2011 % Change
Sub-systems revenues	$	24,435	$	28,243	$	(3,808	)		(13.5	%)

Our Sub-systems revenues are primarily comprised of sales of our hardware products, and to a lesser extent, revenues we generate from sales of our software products and from our customer support and training offerings. Included in these totals are products and services sold to Enel.

Excluding sales of products and services sold to Enel, which are discussed more fully below, our Sub-systems revenues decreased by $1.4 million, or 11.2% during the three months ended June 30, 2012, and by $2.6 million, or 10.3% during the six months ended June 30, 2012, as compared to the same periods in 2011. This decrease was primarily due to a decrease in revenues in the EMEA region and was attributable, we believe, to generally poor macroeconomic conditions in Europe during the first half of 2012 and some loss of market share. Within the Sub-systems family of products, the year-over-year decrease was driven primarily from decreased sales of our control and connectivity products, partially offset by an increase in sales of our SmartServer products.

Our future Sub-systems revenues will also be subject to further fluctuations in the exchange rates between the United States dollar and the foreign currencies in which we sell these products and services. In general, if the dollar were to weaken against these currencies, our revenues from those foreign currency sales, when translated into United States dollars, would increase. Conversely, if the dollar were to strengthen against these currencies, our revenues from those foreign currency sales, when translated into United States dollars, would decrease. The extent of this exchange rate fluctuation increase or decrease will depend on the amount of sales conducted in these currencies and the magnitude of the exchange rate fluctuation from year to year. The portion of our Sub-systems revenues conducted in currencies other than the United States dollar, principally the Japanese Yen, was about 8.8% for the six months ended June 30, 2012 and 7.1% for the same period in 2011. To date, we have not hedged any of these foreign currency risks. We do not currently expect that, during 2012, the amount of our Sub-systems revenues conducted in these foreign currencies will fluctuate significantly from prior year levels. Given the historical and expected future level of sales made in foreign currencies, we do not currently plan to hedge against these currency rate fluctuations. However, if the portion of our revenues conducted in foreign currencies were to grow significantly, we would re-evaluate these exposures and, if necessary, enter into hedging arrangements to help minimize these risks.

Enel project revenues (included in Sub-systems)


	Three Months Ended				2012 over 2011 $ Change			2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change			2012 over 2011 % Change
Enel project revenues	$	1,532	$	1,800	$	(268	)		(14.9	%)


	Six Months Ended				2012 over 2011 $ Change			2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change			2012 over 2011 % Change
Enel project revenues	$	1,759	$	2,969	$	(1,210	)		(40.8	%)

In October 2006, we entered into two agreements with Enel, a development and supply agreement and a software enhancement agreement. Under the development and supply agreement, Enel is purchasing additional metering kit and data concentrator products from us. Under the software enhancement agreement, we are providing software enhancements to Enel for use in its Contatore Elettronico system. Enel Project revenues recognized during the three and six month periods ended June 30, 2012 and 2011, respectively, related primarily to shipments under the development and supply agreement, and to a lesser extent, from revenues attributable to the software enhancement agreement. The software enhancement agreement expires in December 2012 and the development and supply agreement expires in December 2013.

We sell our products to Enel and its designated manufacturers in U.S. dollars. Therefore, the associated revenues are not subject to foreign currency risks.

Gross Profit and Gross Margin


	Three Months Ended						2012 over 2011 $ Change			2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012			June 30, 2011			2012 over 2011 $ Change			2012 over 2011 % Change
Gross Profit	$	16,069		$	20,204		$	(4,135	)		(20.5	%)
Gross Margin		39.4	%		46.2	%		—			(6.8	)


	Six Months Ended						2012 over 2011 $ Change		2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012			June 30, 2011			2012 over 2011 $ Change		2012 over 2011 % Change
Gross Profit	$	33,367		$	33,347		$	20		0.1	%
Gross Margin		41.1	%		46.2	%		—		(5.1	)

Gross profit is equal to revenues less cost of goods sold. Cost of goods sold for product revenues includes direct costs associated with the purchase of components, subassemblies, and finished goods, as well as indirect costs such as allocated labor and overhead; costs associated with the packaging, preparation, and shipment of products; and charges related to warranty and excess and obsolete inventory reserves. Cost of goods sold for service revenues consists of employee-related costs such as salaries and fringe benefits as well as other direct and indirect costs incurred in providing training, customer support, and custom software development services. Gross margin is equal to gross profit divided by revenues.

Gross margin declined by approximately 6.8 and 5.1 percentage points during the three and six month period ended June 30, 2012, respectively, as compared to the same periods in 2011. These decreases were primarily due to increased manufacturing costs for our Systems products, and for the six month period, the mix of products sold. In addition, for the three month period slightly higher indirect costs and overall reduced revenue levels also contributed to the gross margin decline. For the six month period, higher overall revenues and slightly lower indirect costs helped to offset some of the manufacturing cost increases.

In June 2011, Jabil, one of our primary CEMs, notified us that they intended to increase the prices they charge us for manufacturing our Systems products. The new pricing became effective July 1, 2011, and was based on increased fees for Jabil’s overhead and profit, cost increases for commodities contained in our products, and higher labor rates for Jabil’s production personnel. The impact of these cost increases began to phase in during the third quarter of 2011 and became fully effective at the beginning of the fourth quarter. In an effort to mitigate the effects of these price increases and thus improve our gross margins within the foreseeable future, we are working on certain design modifications for these products intended to reduce their cost to manufacture. We continue to work closely with Jabil to identify other opportunities to reduce their manufacturing costs associated with our products.

In addition to the impact of the Jabil cost increases, our future gross margins will continue to be affected by several factors, including, but not limited to: overall revenue levels, changes in the mix of products sold, periodic charges related to excess and obsolete inventories, warranty expenses, introductions of cost reduced versions of our Systems and Sub-systems products, changes in the average selling prices of the products we sell, purchase price variances, and fluctuations in the level of indirect overhead spending that is capitalized in inventory. In addition, the impact of foreign exchange rate fluctuations and labor rates may affect our gross margins in the future. We currently outsource the manufacturing of most of our products requiring assembly to CEMs located primarily in China. To the extent labor rates were to rise further, or to the extent the U.S. dollar were to weaken against the Chinese currency, or other currencies used by our CEMs, our costs for the products they manufacture could rise, which would negatively affect our gross margins. Lastly, many of our products, particularly our Systems products, contain significant amounts of certain commodities, such as silver, copper, and cobalt. Prices for these commodities have been volatile, which in turn have caused fluctuations in the prices we pay for the products in which they are incorporated.

Operating Expenses

Product Development


	Three Months Ended				2012 over 2011 $ Change			2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change			2012 over 2011 % Change
Product Development	$	7,393	$	8,874	$	(1,481	)		(16.7	%)


	Six Months Ended				2012 over 2011 $ Change			2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change			2012 over 2011 % Change
Product Development	$	16,194	$	18,472	$	(2,278	)		(12.3	%)

Product development expenses consist primarily of payroll and related expenses for development personnel, facility costs, expensed material, fees paid to third party service providers, depreciation and amortization, and other costs associated with the development of new technologies and products.

The decrease in product development expenses during the quarter and six months ended June 30, 2012 as compared to the same periods in 2011 was due primarily to a reduction in expenses associated with a specific development project. These design and development activities were being conducted in accordance with an arrangement we entered into with a third party in June 2010. This effort was completed in the fourth quarter of 2011. Also contributing to the reduction were reduced compensation costs including share based compensation expenses (as mentioned in the executive overview above), which were down primarily due to lower headcount, including the restructuring action, in our product development organization during the first half of 2012.

Sales and Marketing


	Three Months Ended				2012 over 2011 $ Change			2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change			2012 over 2011 % Change
Sales and Marketing	$	5,548	$	6,056	$	(508	)		(8.4	%)


	Six Months Ended				2012 over 2011 $ Change			2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change			2012 over 2011 % Change
Sales and Marketing	$	11,705	$	13,298	$	(1,593	)		(12.0	%)

Sales and marketing expenses consist primarily of payroll, commissions, and related expenses for sales and marketing personnel, travel and entertainment, facilities costs, advertising and product promotion, and other costs associated with our sales and marketing activities.

The decrease in sales and marketing expenses during the quarter and six months ended June 30, 2012 as compared to the same periods in 2011 was driven primarily by lower compensation expenses (including commission expenses, bonus expenses, and share based compensation expenses primarily due to the restructuring action as mentioned above in the executive summary), lower travel and entertainment expenses and reduced fees paid to consultants and other third party service providers.

General and Administrative


	Three Months Ended				2012 over 2011 $ Change			2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change			2012 over 2011 % Change
General and Administrative	$	3,599	$	4,771	$	(1,172	)		(24.6	%)


	Six Months Ended				2012 over 2011 $ Change			2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change			2012 over 2011 % Change
General and Administrative	$	7,945	$	9,661	$	(1,716	)		(17.8	%)

General and administrative expenses consist primarily of payroll and related expenses for executive, finance, and administrative personnel, professional fees for legal and accounting services rendered to the company, facility costs, insurance, and other general corporate expenses.

The decrease in general and administrative expenses during the quarter and six months ended June 30, 2012 as compared to the same periods in 2011 was primarily attributable to a decrease in compensation expenses (including bonus expenses, and share based compensation expenses primarily due to the restructuring action as mentioned above in the executive summary) and a decrease in fees paid to third party service providers.

Restructuring Charges


	Three Months Ended				2012 over 2011 $ Change		2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change		2012 over 2011 % Change
Restructuring Charges	$	1,176	$	—	$	1,176		100.0	%


	Six Months Ended				2012 over 2011 $ Change		2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change		2012 over 2011 % Change
Restructuring Charges	$	1,176	$	—	$	1,176		100.0	%

In May 2012, we undertook further cost cutting measures aimed at reshaping our operating cost structure for the future by initiating a headcount reduction of 42 full-time employees worldwide, to be terminated between May 2012 and March 2013. In connection with this restructuring plan, in the second quarter of 2012, we recorded restructuring charges of approximately $1.2 million related to termination benefits for these personnel. We expect to incur additional charges of approximately $100,000 through March 2013 for the employees whose termination dates will occur in the latter part of 2012 through the first quarter of 2013 and who will be entitled to additional severance payments if they remain employed with Echelon through those dates.

With the exception of $409,000 that remains accrued and reflected in accrued liabilities on our Condensed Consolidated Balance Sheets as of June 30, 2012, the restructuring charges of $1.2 million were paid out in the second quarter of 2012. We expect to pay the remaining $409,000 of accrued termination benefits through the first two quarters of 2013.

Interest and Other Income (Expense), Net


	Three Months Ended					2012 over		2012 over
(Dollars in thousands)	June 30, 2012		June 30, 2011			2011 $ Change		2011 % Change
Interest and Other Income (Expense), Net	$	254	$	(153	)	$	407		266.0	%


	Six Months Ended						2012 over		2012 over
(Dollars in thousands)	June 30, 2012			June 30, 2011			2011 $ Change		2011 % Change
Interest and Other Income (Expense), Net	$	(10	)	$	(513	)	$	503		98.1	%

Interest and other income (expense), net primarily reflects interest earned by our company on cash and short-term investment balances as well as foreign exchange translation gains and losses related to short-term intercompany balances.

The $407,000 increase in interest and other expense, net during the quarter ended June 30, 2012 as compared to the same period in 2011 was primarily attributable to the fact that, during the second quarter of 2012, we recognized approximately $251,000 of foreign currency translation gains, whereas in the second quarter of 2011, we recognized foreign currency translation losses of approximately $158,000. The $503,000 increase in interest and other expense, net during the six months ended June 30, 2012 as compared to the same period in 2011 was primarily attributable to

the fact that, during the first half of 2012, we recognized approximately $19,000 of foreign currency translation losses, whereas in the first half of 2011, we recognized foreign currency translation losses of approximately $549,000. These fluctuations are attributable to our foreign currency denominated short-term intercompany balances. We account for translation gains and losses associated with these balances by reflecting these amounts as either other income or loss in our consolidated statements of operations. During periods when the U.S. dollar weakens in value against these foreign currencies, the associated translation losses negatively impact other income. Conversely, when the U.S. dollar strengthens as it did during the first half of 2012, the resulting translation gains favorably impact other income.

We do not currently anticipate interest income on our investment portfolio will improve during 2012 as we expect interest rates to remain historically low. Future gains or losses associated with translating our foreign currency denominated short-term intercompany balances will depend on exchange rates in effect at the time of translation.

Interest Expense on Lease Financing Obligations


	Three Months Ended				2012 over			2012 over
(Dollars in thousands)	June 30, 2012		June 30, 2011		2011 $ Change			2011 % Change
Interest Expense on Lease Financing Obligations	$	344	$	371	$	(27	)		(7.3	%)


	Six Months Ended				2012 over			2012 over
(Dollars in thousands)	June 30, 2012		June 30, 2011		2011 $ Change			2011 % Change
Interest Expense on Lease Financing Obligations	$	695	$	748	$	(53	)		(7.1	%)

The monthly rent payments we make to our lessor under the lease agreements for our San Jose headquarters site are recorded in our financial statements partially as land lease expense, with the remainder being allocated to principal and interest on the financing liability. “Interest expense on lease financing obligations” reflects the portion of our monthly lease payments that is allocated to interest expense.

The decreases of $27,000 and $53,000 in interest expense on lease financing obligations during the three and six month periods ended June 30, 2012 as compared to the same periods in 2011 were a result of the nature of this expense. As with any amortizing fixed rate loan, payments made earlier in the term of the loan are comprised primarily of interest expense with little being allocated to principal repayment. Payments made later in the term of the loan, however, have an increasing proportion of principal repayment, with less being attributable to interest expense. Accordingly, as we continue to make payments in accordance with our lease obligation, we expect a higher proportion of the payments we make in the future will be allocated to principal repayment and less will be allocated to interest expense.

Income Tax Expense


	Three Months Ended				2012 over 2011 $ Change		2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change		2012 over 2011 % Change
Income Tax Expense	$	144	$	120	$	24		20.0	%


	Six Months Ended				2012 over 2011 $ Change			2012 over 2011 % Change
(Dollars in thousands)	June 30, 2012		June 30, 2011		2012 over 2011 $ Change			2012 over 2011 % Change
Income Tax Expense	$	91	$	115	$	(24	)		(20.9	%)

The income tax expense for the quarters ended June 30, 2012 and 2011 was $144,000 and $120,000, respectively. The income tax expense for the six month periods ended June 30, 2012 and 2011 was $91,000 and $115,000, respectively. The difference between the statutory rate and our effective tax rate is primarily due to the impact of foreign taxes, changes in the valuation allowance on deferred tax assets, and changes in the accruals related to unrecognized tax benefits.

O FF -B ALANCE -S HEET A RRANGEMENTS AND O THER C ONTRACTUAL O BLIGATIONS

Off-Balance-Sheet Arrangements. We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose our company to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to us.

Lease Commitments . In December 1999, we entered into a lease agreement with a real estate developer for our existing corporate headquarters in San Jose, California. In October 2000, we entered into a second lease agreement with the same real estate developer for an additional building at our headquarters site. These leases were scheduled to expire in 2011 and 2013, respectively.

Effective June 2008, the building leases were amended resulting in an extension of the lease term for both buildings through March 2020. The extended leases require minimum lease payments through March 2020 totaling approximately $48.9 million. Both leases permit us to exercise an option to extend the respective lease for two sequential five-year terms.

In addition, we lease facilities under operating leases for our sales, marketing, and product development personnel located elsewhere within the United States and in eleven foreign countries throughout Europe and Asia, including a land lease for accounting purposes associated with our corporate headquarters facilities. These operating leases expire on various dates through 2020, and in some instances are cancelable with advance notice. Lastly, we also lease certain equipment and, for some of our sales personnel, automobiles. These operating leases are generally less than five years in duration.

Purchase Commitments. We utilize several contract manufacturers who manufacture and test our products requiring assembly. These contract manufacturers acquire components and build product based on demand information supplied by us in the form of purchase orders and demand forecasts. These purchase orders and demand forecasts generally cover periods up to twelve months, and in rare cases, up to eighteen months. We also obtain individual components for our products from a wide variety of individual suppliers. We generally acquire these components through the issuance of purchase orders, and in some cases through demand forecasts, both of which cover periods up to twelve months.

We also utilize purchase orders when procuring capital equipment, supplies, and services necessary for our day-to-day operations. These purchase orders generally cover periods ranging up to twelve months, but in some instances cover a longer duration.

In March 2012, we announced the formation of a joint venture in Hangzhou, China with Holley Metering, a Chinese company with which we have been developing smart energy products for the Chinese and rest-of-world markets. The joint venture will require us to provide capital contributions of approximately $2.0 million, of which we had contributed approximately $306,000 as of June 30, 2012. We expect to contribute the balance $1.7 million by December 31, 2012.

Indemnifications . In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant. However, we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.

As permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that would enable us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of the applicable insurance coverage is minimal.

Royalties . We have certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a U.S. dollar amount per unit shipped or a percentage of the underlying revenue. Royalty expense, which was recorded as cost of products revenue in our consolidated statements of income, was approximately $128,000 during the quarter ended June 30, 2012, and $123,000 for the same period in 2011, and $281,000 for the six months ended June 30, 2012, and $269,000 for the same period in 2011.

We will continue to be obligated for royalty payments in the future associated with the shipment and licensing of certain of our products. While we are currently unable to estimate the maximum amount of these future royalties, such amounts will continue to be dependent on the number of units shipped or the amount of revenue generated from these products.

Taxes. We conduct our operations in many tax jurisdictions throughout the world. In many of these jurisdictions, non-income based taxes such as property taxes, sales and use taxes, and value-added taxes are assessed on Echelon’s operations in that particular location. While we strive to ensure compliance with these various non-income based tax filing requirements, there have been instances where potential non-compliance exposures have been identified. In accordance with generally accepted accounting principles, we make a provision for these exposures when it is both probable that a liability has been incurred and the amount of the exposure can be reasonably estimated. To date, such provisions have been immaterial, and we believe that, as of June 30, 2012, we have adequately provided for such contingencies. However, it is possible that our results of operations, cash flows, and financial position could be harmed if one or more non-compliance tax exposures are asserted by any of the jurisdictions where we conduct our operations.

Legal Actions . In April 2009, the Company received notice that the receiver for two companies that filed for the Italian law equivalent of bankruptcy protection in May 2004, Finmek Manufacturing SpA and Finmek Access SpA (collectively, the “Finmek Companies”), had filed a lawsuit under an Italian “claw back” law in Padua, Italy against Echelon, seeking the return of approximately $16.7 million in payments received by Echelon in the ordinary course of business for components we sold to the Finmek Companies prior to the bankruptcy filing. The Finmek Companies were among Enel’s third party meters manufacturers, and from time to time through January 2004, we sold components to the Finmek Companies that were incorporated into the electricity meters that were manufactured by the Finmek Companies and sold to Enel SpA for the Enel Project. We believe that the Italian claw back law is not applicable to our transactions with the Finmek Companies, and the claims of the Finmek Companies’ receiver are without merit and we are defending the lawsuit. As such, no loss associated with this action is considered probable or reasonably possible at this time.

From time to time, in the ordinary course of business, we are subject to legal proceedings, claims, investigations, and other proceedings, including claims of alleged infringement of third-party patents and other intellectual property rights, and commercial, employment, and other matters. In accordance with generally accepted accounting principles, we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. While we believe we have adequately provided for such contingencies as of June 30, 2012, it is possible that our results of operations, cash flows, and financial position could be harmed by the resolution of any such outstanding claims.

L IQUIDITY AND C APITAL R ESOURCES

Since our inception, we have financed our operations and met our capital expenditure requirements primarily from the sale of preferred stock and common stock, although during the years 2002 through 2004, we were also able to finance our operations through operating cash flow. From inception through June 30, 2012, we raised $294.7 million from the sale of preferred stock and common stock, including the exercise of stock options and warrants from our employees and directors.

The following table presents selected financial information as of June 30, 2012, and for each of the last three fiscal years (dollars in thousands):


	June 30, 2012		December 31,
	June 30, 2012		2011		2010		2009
Cash, cash equivalents, and short-term investments	$	60,370	$	58,656	$	64,632	$	80,116
Trade accounts receivable, net		24,721		35,215		25,102		21,496
Working capital		74,358		74,922		77,259		96,357
Stockholders’ equity		87,420		89,108		93,989		115,898

As of June 30, 2012, we had $60.4 million in cash, cash equivalents, and short-term investments, an increase of $1.7 million as compared to December 31, 2011. Historically, our primary source of cash, other than stock sales, has been receipts from revenue, and to a lesser extent, proceeds from the exercise of stock options and warrants by our employees and directors. Our primary uses of cash have been cost of product revenue, payroll (salaries, commissions, bonuses, and benefits), general operating expenses (costs associated with our offices such as rent, utilities, and maintenance; fees paid to third party service providers such as consultants, accountants, and attorneys; travel and entertainment; equipment and supplies; advertising; and other miscellaneous expenses), acquisitions, capital expenditures, and purchases under our stock repurchase programs.

Cash flows from operating activities. Cash flows from operating activities have historically been driven by net income (loss) levels; adjustments for non-cash charges such as stock-based compensation; depreciation and amortization; changes in accrued investment income; and fluctuations in operating asset and liability balances. Net cash provided by operating activities was $4,076,000 for the six months ended June 30, 2012, an increase in cash inflows of approximately $9.8 million as compared to the same period in 2011. During the six months ended June 30, 2012, net cash provided by operating activities was primarily the result of stock-based compensation expenses of $3.8 million and depreciation and amortization expense of $2.7 million and changes in operating assets and liabilities of $ 2.1 million, partially offset by our net loss of $4.4 million. The primary components of the $2.1 million net change in our operating assets and liabilities were a $10.5 million decrease in accounts receivable, a $5.3 million decrease in

deferred cost of goods sold, a $1.1 million decrease in inventories offset by a $6.9 million reduction in accounts payable, a $6.0 million decrease in deferred revenues and a $2.9 million reduction in accrued liabilities. Inventories decreased primarily due to the increased shipment of goods in the first and second quarters of 2012. Deferred revenues decreased due primarily to our ability to objectively demonstrate that the contractual acceptance criteria for much of the Systems products we shipped during the first quarter was satisfied at the time of delivery. Accrued liabilities decreased primarily due to the payment of bonuses and commissions during the first quarter of 2012 that were accrued as of December 31, 2011 in accordance with our 2011 compensation arrangements. Accounts payable decreased due to an overall reduction in the level of purchasing activity and timing of expenditures during the first half of 2012. Accounts receivable decreased primarily as a result of the timing of collections and revenues in the first half of 2012 as compared to the same period in 2011. Also contributing to the reduction in accounts receivable was a general improvement in the days sales outstanding for our Systems related receivables. Deferred cost of goods sold decreased in conjunction with a decrease in deferred revenues.

During the six months ended June 30, 2011, net cash used in operating activities was primarily the result of our net loss of $9.5 million and changes in our operating assets and liabilities of $4.9 million, partially offset by stock-based compensation expenses of $5.6 million, and depreciation and amortization expense of $3.0 million. The primary components of the $4.9 million net change in our operating assets and liabilities were a $3.8 million increase in accounts receivable, a $1.7 million increase in inventories, and a $935,000 decrease in deferred revenues, the impact of which was partially offset by a $659,000 increase in accounts payable, a $482,000 decrease in other current assets, a $242,000 decrease in deferred cost of goods sold, and a $105,000 increase in accrued liabilities. Accounts receivable increased primarily as a result of increased revenues during the second quarter of 2011 as compared to the first quarter of 2011. During the quarter ended June 30, 2011, total revenues were $43.7 million compared to $28.4 million during the quarter ended March 31, 2011. Inventories increased in part due to the timing of customer shipments during the latter part of the second quarter that had not yet reached their destination. Deferred revenues decreased due primarily to the timing of products shipped. During the second quarter of 2011, the amount of product shipped in the latter part of the quarter for which customer acceptance had not yet been received was less than what was observed in the fourth quarter of 2010. Accounts payable increased due to an overall increase in the level of purchasing activity due to higher revenues in the second quarter of 2011 as compared to the fourth quarter of 2010, as well as the timing of expenditures during the second quarter of 2011. Other current assets decreased primarily due to a reduction in unbilled receivables. Deferred cost of goods sold decreased in conjunction with a decrease in deferred revenues. Accrued liabilities increased primarily due to amounts accrued for our 2011 management bonus program and increased provisions for warranty expenses, partially offset by the payment of termination benefits that were accrued as part of our restructuring program in the fourth quarter of 2010.

Cash flows from investing activities . Cash flows from investing activities have historically been driven by transactions involving our short-term investment portfolio, capital expenditures, changes in our long-term assets, and acquisitions. Net cash used in investing activities was $2,490,000 for the six months ended June 30, 2012, a decrease in cash inflows of $29.9 million from the same period in 2011. During the six months ended June 30, 2012, net cash used in investing activities was primarily the result of the purchases of available-for-sale short-term investments of $49.0 million and capital expenditures of $503,000, partially offset by proceeds from maturities and sales of available-for-sale short-term investments of $47.0 million. During the six months ended June 30, 2011, net cash provided by investing activities was primarily the result of proceeds from maturities and sales of available-for-sale short-term investments of $43.9 million, partially offset by purchases of available-for-sale short-term investments of $15.0 million and capital expenditures of $1.5 million.

Cash flows from financing activities. Cash flows from financing activities have historically been driven by the proceeds from issuance of common and preferred stock offset by transactions under our stock repurchase programs and principal payments on our lease financing obligations. Net cash used in financing activities was $1.6 million for the six months ended June 30, 2012, a $23,000 increase in cash outflows as compared to the same period in 2011. During the six months ended June 30, 2012, net cash used in financing activities was primarily the result of $970,000 worth of shares repurchased from employees for payment of employee taxes on vesting of performance shares and upon exercise of stock options and $960,000 in principal payments on our building lease financing obligations, partly offset by cash provided by the capital infusion of $285,000 by Holley in our joint venture in China. During the six months ended June 30, 2011, net cash used in financing activities was primarily the result of $1.7 million worth of shares repurchased from employees for payment of employee taxes on vesting of performance shares and upon exercise of stock options and $849,000 in principal payments on our building lease financing obligations, partially offset by proceeds of $910,000 from the exercise of stock options by our employees.

As noted above, our cash and investments totaled $60.4 million as of June 30, 2012. Of this amount, approximately 3% was held by our foreign subsidiaries. Our intent is to permanently reinvest a significant portion of our earnings from foreign operations, and current plans do not anticipate that we will need funds generated from foreign operations to fund our domestic operations. In the event funds from foreign operations are needed to fund operations in the United States and if U.S. tax has not already been previously provided, we would provide for and pay any additional U.S. taxes due in connection with repatriating these funds.

We use well-regarded investment managers to manage our invested cash. Our portfolio of investments managed by these investment managers is primarily composed of highly rated U.S. government securities, and to a lesser extent, money market funds. All investments are made according to guidelines and within compliance of policies approved by the Audit Committee of our Board of Directors.

We maintain a $10.0 million line of credit with our primary bank, which expires on July 1, 2013. The letter of credit contains certain financial covenants requiring us to maintain an overall minimum tangible net worth level and to maintain a minimum level of liquid assets. As of June 30, 2012, we were in compliance with these covenants. As of June 30, 2012, our primary bank has issued, against the line of credit, one standby letter of credit totaling $113,000. Other than issuing standby letters of credit, we have never drawn against the line of credit, nor have amounts ever been drawn against the standby letters of credit issued by the bank.

In the future, our cash reserves may be used to strategically acquire other companies, products, or technologies that are complementary to our business. In addition, our combined cash, cash equivalents, and short-term investments balances could be negatively affected by various risks and uncertainties, including, but not limited to, the risks detailed in this Quarterly Report in the section titled “ Factors That May Affect Future Results of Operations .” For example, any continued weakening of economic conditions or changes in our planned cash outlay could negatively affect our existing cash reserves.

Based on our current business plan and revenue prospects, we believe that our existing cash reserves will be sufficient to meet our projected working capital and other cash requirements for at least the next twelve months. However, we currently expect that our combined cash, cash equivalent, and short-term investment balance will decline during 2012. We expect that cash requirements for our payroll and other operating costs will continue at about existing levels. We also expect that we will continue to acquire capital assets such as computer systems and related software, office and manufacturing equipment, furniture and fixtures, and leasehold improvements, as the need for these items arises. In the event that we require additional financing, such financing may not be available to us in the amounts or at the times that we require, or on acceptable terms. If we fail to obtain additional financing, when and if necessary, our business would be harmed.

R ELATED P ARTY T RANSACTIONS

The law firm of Wilson Sonsini Goodrich & Rosati, P.C. acts as principal outside counsel to our company. Mr. Sonsini, a director of our company, is a member of Wilson Sonsini Goodrich & Rosati, P.C.

In June 2000, we entered into a stock purchase agreement with Enel pursuant to which Enel purchased 3.0 million newly issued shares of our common stock for $130.7 million. The closing of this stock purchase occurred on September 11, 2000. At the closing, Enel had agreed that it would not, except under limited circumstances, sell or otherwise transfer any of those shares for a specified time period. That time period expired September 11, 2003. To our knowledge, Enel has not disposed of any of its 3.0 million shares. Under the terms of the stock purchase agreement, Enel has the right to nominate a member of our board of directors. A representative of Enel served on our board until March 14, 2012; no Enel representative is presently serving on our board.

At the time we entered into the stock purchase agreement with Enel, we also entered into a research and development agreement with an affiliate of Enel (the “R&D Agreement”). Under the terms of the R&D Agreement, we cooperated with Enel to integrate our L ON W ORKS technology into Enel’s remote metering management project in Italy, the Contatore Elettronico. We completed the sale of our components and products for the deployment phase of the Contatore Elettronico project during 2005. During 2006, we supplied Enel and its designated

manufacturers with limited spare parts for the Contatore Elettronico system. In October 2006, we entered into a new development and supply agreement and a software enhancement agreement with Enel. Under the development and supply agreement, Enel and its contract manufacturers purchase additional electronic components and finished goods from us. Under the software enhancement agreement, we provide software enhancements to Enel for use in its Contatore Elettronico system. The software enhancement agreement expires in December 2012 and the development and supply agreement expires in December 2013, although delivery of products and services can extend beyond those dates and the agreements may be extended under certain circumstances.

For the three months ended June 30, 2012 and 2011, we recognized revenue from products and services sold to Enel and its designated manufacturers of approximately $1.5 million and $1.8 million, respectively. For the six months ended June 30, 2012 and 2011, we recognized revenue from products and services sold to Enel and its designated manufacturers of approximately $1.8 million and $3.0 million, respectively. As of June 30, 2012, and December 31, 2011, none of our total accounts receivable balance related to amounts owed by Enel and its designated manufacturers.

R ECENTLY I SSUED A CCOUNTING S TANDARDS

There have been no new recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2012, that are of significance, or potential significance, to our company.

F ACTORS T HAT M AY A FFECT F UTURE R ESULTS O F O PERATIONS

Interested persons should carefully consider the risks described below in evaluating our company. Additional risks and uncertainties not presently known to us, or that we currently consider immaterial, may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our common stock would likely decline. Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described in this section. This section should be read in conjunction with the condensed consolidated financial statements and accompanying notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report on Form 10-Q.

Our Systems revenues may not meet expectations, which could cause volatility in the price of our stock.

We and our partners sell our smart metering and distribution automation products to utilities. For several reasons, sales cycles with utility companies can be extended and unpredictable. Utilities generally have complex budgeting, purchasing, and regulatory processes that govern their capital spending. In addition, in many instances, a utility may require one or more field trials of a smart grid system (such as one based on our NES Smart Grid System or our smart grid subsystem products) before moving to a volume deployment. There is also generally an extended development and integration effort required in order to incorporate a new technology into a utility’s existing infrastructure. A number of other factors may also need to be addressed before the utility decides to engage in a full-scale deployment of our NES Smart Grid System, including:

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regulatory factors, including public utility commission or similar approvals, the outcome and timing of which may be affected by matters unrelated to smart grid deployment; standards compliance; or internal utility requirements that may affect the smart metering system or the timing of its deployment;

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the time it takes for utilities to evaluate multiple competing bids, negotiate terms, and award contracts for large scale metering system deployments;

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the deployment schedule for projects undertaken by our utility or systems integrator customers; and

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delays in installing, operating, and evaluating the results of a smart grid field trial that is based on our NES Smart Grid System.

As a result, we can often spend up to two years working either directly or through a reseller to make a sale to a utility. At the end of that lengthy sales process, particularly in view of increasing competition in the Smart Grid market and continuing economic challenges, there is no guarantee that we will be selected by the utility.

In addition, shipment of Systems products and some Sub-systems components used in smart grid products to a particular jurisdiction or customer is generally dependent on either obtaining regulatory approval for the NES meter or other products, including modifications to those products, from a third party for the relevant jurisdiction, or satisfying the customer’s internal testing requirements, or both. This certification approval process is often referred to as homologation. Further, shipment of Systems products into some jurisdictions requires our contract manufacturers to pass certain tests and meet various standards related to the production of our NES meters. Failure to receive any such approval on a timely basis or at all, or failure to maintain any such approval, would have a material adverse impact on our ability to ship our Systems products, and would therefore have an adverse affect on our results of operations and our financial condition.

Once a utility decides to move forward with a large-scale deployment of a smart grid project that is based on our NES Smart Grid System, the timing of and our ability to recognize revenue on our Systems product shipments will depend on several factors. These factors, some of which may not be under our control, include shipment schedules that may be delayed or subject to modification, other contractual provisions, such as customer acceptance of all or any part of the NES Smart Grid System, our ability to manufacture and deliver quality products according to expected schedules, and customer cancellation rights. For example, in October 2011, Duke Energy cancelled certain orders for our products that we anticipated would have been delivered in late 2012 and beyond.

In addition, the revenue recognition rules relating to products such as our NES Smart Grid System may also require us to defer some of our Systems revenues until certain conditions are met in a future period. For example, beginning in the third quarter of 2011, we began shipping hardware products to a customer for which we had not yet delivered a final version of the related firmware. As a result, we were not able to recognize the revenue associated with that hardware until the first quarter of 2012, when the firmware was delivered because payment for the hardware was contingent upon delivery of the firmware.

As a consequence of these long sales cycles, unpredictable delay factors, and revenue recognition policies, our ability to predict the amount of Systems revenues that we may expect to recognize in any given fiscal quarter is likely to be limited. As Systems revenues account for an increasing percentage of our overall revenues, we are likely to have increasing difficulty in projecting our overall financial results. Our inability to accurately forecast future revenues is likely to cause our stock price to be volatile.

Sales of our products may fail to meet our financial targets, which would harm our results of operations.

If we are unable to receive orders for, ship, and recognize revenue for our products in a timely manner and in line with our targets (and often in the same year), our financial results will be harmed. We have invested and intend to continue to invest significant resources in the development and sales of our products, particularly our Systems products, such as our Smart Grid portfolio of products, the Echelon Control Operating System, or COS, and the Edge Control Node. Our long-term financial goals include expectations for a reasonable return on these investments, particularly for our Systems products. To date the revenues generated from sales of these Systems products have not yielded gross margins in line with our long term goals for this product line, although our operating expenses have increased significantly. Our Systems products are also experiencing continuing downward pricing pressures due to intense competition. In addition, as we sell more Sub-systems products for the Smart Grid, we may also experience downward pricing pressures that would reduce our gross margins for those products.

In order to achieve our financial targets, we must meet the following objectives:

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Increase worldwide market acceptance of our products in order to increase our revenues;

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Increase gross margin from our Systems revenues by continuing to reduce the cost of manufacturing our Systems products, while at the same time managing manufacturing cost pressures associated with commodity prices and foreign exchange fluctuations;

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Manage our operating expenses to a reasonable percentage of revenues; and

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Manage the manufacturing transition to reduced-cost Systems products.

Because a significant portion of our operating expenses are fixed, if we cannot achieve our revenue targets, our use of cash balances would increase, our losses would increase, and/or we would be required to take additional actions necessary to reduce expenses. We cannot assure you that we will meet any or all of these objectives to the extent necessary to achieve our financial goals and, if we fail to achieve our goals, our results of operations are likely to be harmed.

The loss of or significant curtailment of purchases by any of our key customers could adversely affect our results of operations and financial condition.

While we generate revenue from numerous customers worldwide, our sales are currently concentrated within a relatively small group of customers. During the six months ended June 30, 2012, a large percentage of our revenue, approximately 66%, came from sales to our top four customers. These customers have a variety of suppliers to choose from and therefore can make substantial demands on us, including demands on product pricing and on contractual terms, which often results in the allocation of risk to us as the supplier. In addition, if upon its expiration, a large customer contract is not replaced with new business of similar magnitude, our revenue and gross margin would be adversely affected. Our ability to maintain strong, long-term relationships with our key customers is essential to our future performance.

Customers in any of our target market sectors could also experience unexpected reductions in demand for their products and consequently reduce their purchases of our product, resulting in either the loss of a significant customer or a notable decrease in the level of sales to a significant customer. If any of our key customers are unable to obtain the necessary capital to operate their business, they may be unable to satisfy their payment obligations to us. The loss of or significant curtailment of purchases by any one or more of our key customers would adversely affect our results of operations and financial condition.

Our joint venture in China may not meet investment, product development, sales and other expectations.

We recently announced the formation of a joint venture in Hangzhou, China with Holley Metering, a Chinese company with which we have been developing smart energy products for the Chinese market. Operations at the joint venture could expose us to risks inherent in such activities, such as protection of our intellectual property, economic and political stability, labor matters, language and cultural differences and the need to manage product development, operations and sales activities that are located a long distance from our headquarters. The management of new product development activities, the sharing or transfer of technological capabilities to the joint venture and/ or the establishment of new manufacturing facilities associated with new products in particular, will expose us to risks. For example, it is possible that the product offerings from the joint venture will not be completed on time, will not perform as planned, will not meet sales targets or otherwise will not meet market demands. In addition, from time to time in the future, our joint venture partner may have economic or business interests or goals that are different from ours. Although our company currently has a 51% interest in the joint venture, the venture’s governing documents call for our partner’s approval on certain key matters, so we cannot provide assurance that the joint venture will be able to satisfy our corporate objectives. In addition, the joint venture documents will require us to make equity contributions from time to time up to specified amounts. If the joint venture business does not progress according to our plans and anticipated timing, our investment in the joint venture may not be considered successful.

We face operational and other risks associated with our international operations.

Risks inherent in our international business activities include the following:

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the imposition of tariffs or other trade barriers on the importation of our products;

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timing of and costs associated with localizing products for foreign countries and lack of acceptance of non-local products in foreign countries;

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inherent challenges in managing international operations;

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the burdens of complying with a wide variety of foreign laws; the applicability of foreign laws that could affect our business or revenues, such as laws that purport to require that we return payments that we received from insolvent customers in certain circumstances; and unexpected changes in regulatory requirements, tariffs, and other trade barriers;

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potentially adverse tax consequences, including restrictions on repatriation of earnings;

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economic and political conditions in the countries where we do business;

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differing vacation and holiday patterns in other countries, particularly in Europe;

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labor actions generally affecting individual countries, regions, or any of our customers, which could result in reduced demand for, or could delay delivery or acceptance of, our products; and

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international terrorism.

Any of these factors could have a material adverse effect on our revenues, results of operations, and our financial condition.

Adverse changes in general economic or political conditions in any of the major countries in which we do business could adversely affect our business or operating results.

Our business can be affected by a number of factors that are beyond our control, such as general geopolitical, economic, and business conditions. The ongoing economic slowdown, particularly in Europe, where we have sold many NES Smart Grid products, and the uncertainty over its breadth, depth and duration continue to have a negative effect on our business. Further, the continuing worldwide financial and credit crisis has hampered the availability of liquidity and credit to fund the continuation and expansion of business operations worldwide. The shortage of liquidity and credit, combined with losses in worldwide equity markets, has continued to contribute to the recent world-wide economic recession.

In addition, there could be a number of follow-on effects from the credit crisis on our business, such as the insolvency of certain of our key customers, which could impair our distribution channels or result in the inability of our customers to obtain credit to finance purchases of our products.

This uncertainty about future economic and political conditions continues to make it difficult for us to forecast operating results and to make decisions about future investments. We continue to see the effects of the economic slowdown on both our Systems and Sub-systems revenues, particularly in locations where government support for energy-related projects has ended or will end in the near future. If economic activity in the U.S. and other countries’ economies remains weak, many customers may continue to delay, reduce, or even eliminate their purchases of networking technology products. This could result in reductions in sales of our products, longer sales cycles, slower adoption of our technologies, increased price competition, and increased exposure to excess and obsolete inventory. For example, distributors could decide to reduce inventories of our products. Also, the inability to obtain credit could cause a utility to postpone its decision to move forward with a large scale deployment of our Systems products. If conditions in the global economy, U.S. economy or other key vertical or geographic markets we serve remain uncertain or continue to be weak, we would experience material negative impacts on our business, financial condition, results of operations, cash flow, capital resources, and liquidity.

Because the markets for our products are highly competitive, we may lose sales to our competitors, which would harm our revenues and results of operations.

Competition in our markets is intense and involves rapidly changing technologies, evolving industry standards, frequent new product introductions, rapid changes in customer or regulatory requirements, and localized market requirements. Competition in the Systems and Sub-systems business for the Smart Grid has increased as the smart metering industry faces slow growth and ongoing consolidation, particularly in Europe where the financial crisis has continued. In each of our existing and new target markets, we compete with a wide array of manufacturers, vendors, strategic alliances, systems developers and other businesses.

The principal competitive factors that affect the markets for our products include the following:

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our ability to anticipate changes in customer or regulatory requirements and to develop, have developed, or improve our products to meet these requirements in a timely manner;

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the price and features of our products such as adaptability, scalability, functionality, ease of use, and the ability to integrate with other products;

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our product reputation, quality, performance, and conformance with established industry standards;

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our ability to expand our product line to address our customers’ requirements, such as adding additional electricity meter form factors;

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our ability to meet a customer’s required delivery schedules;

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our customer service and support;

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warranties, indemnities, and other contractual terms; and

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customer relationships and market awareness.

Competitors for our Systems products include ESCO, Elster, Enel, GE, IBM, Iskraemeco, Itron, Kamstrup, Landis+Gyr (a subsidiary of Toshiba), Siemens, and Silver Spring Networks, which directly or through IT integrators such as IBM or telecommunications companies such as Telenor, offer metering systems that compete with our Systems offerings.

For our Sub-systems products, our competitors include some of the largest companies in the electronics industry, operating either alone or together with trade associations and partners. Key company competitors include companies such as Digi, STMicroelectronics, Maxim, Texas Instruments, and Siemens. Key industry standard and trade group competitors include BACnet, DALI, and Konnex in the buildings industry; DeviceNet, HART, and Profibus in the industrial control market; DLMS in the utility industry; Echonet, ZigBee and the Z-Wave alliance in the home control market; and the Train Control Network (TCN) in the rail transportation market. Each of these standards and/or alliances is backed by one or more competitors. For example, the ZigBee alliance includes over 300 member companies with promoter members such as Ember, Emerson, Freescale, Itron, Kroger, Landis+Gyr (a subsidiary of Toshiba), Philips, Reliant Energy, Schneider Electric, STMicroelectronics, Tendril, and Texas Instruments.

Many of our competitors, alone or together with their trade associations and partners, have significantly greater financial, technical, marketing, service and other resources, significantly greater name recognition, and broader product offerings. In addition, the utility metering market is experiencing a trend towards consolidation. As a result, these competitors may be able to devote greater resources to the development, marketing, and sale of their products, and may be able to respond more quickly to changes in customer requirements or product technology. Some of our competitors may also be eligible for stimulus money, which could give them an additional financial advantage. If we are unable to compete effectively in any of the markets we serve, our revenues, results of operations, and financial position would be harmed.

If we are not able to develop or enhance our products in a timely manner, our revenues will suffer.

Due to the nature of development efforts in general, we often experience delays in the introduction of new or improved products beyond our original projected shipping date for such products. Historically, when these delays have occurred, we experienced an increase in our development costs and a delay in our ability to generate revenues from these new products. In addition, such delays could impair our relationship with any of our customers that were relying on the timely delivery of our products in order to complete their own products or projects, or could cause them to cancel orders or to seek alternate sources of supply or other remedies. We believe that similar new product introduction delays in the future could also increase our costs and delay our revenues.

For System products we are sometimes required to modify products to meet local rules and regulations. We may not be able to increase the price of such products to reflect the costs of such modifications, given competitive markets. In addition, given the long term nature of development activities, we may be required to undertake such modifications prior to receiving firm commitments or orders from our customers.

We are in the process of moving our collaboration with our Chinese partner, Holley Metering, to develop smart metering products to our Chinese joint venture. To the extent we expand our development activities in China or elsewhere, our development activities will be exposed to risks, such as protection of intellectual property, investment risk, and labor costs and other matters. We could also be adversely affected by delays or cost increases experienced by third parties that are developing products on our behalf.

Because we depend on a limited number of key suppliers and in certain cases, a sole supplier, the failure of any key supplier to produce timely and compliant products could result in a failure to ship products, or could subject us to higher prices, which would harm our results of operations and financial position.

Our future success will depend significantly on our ability to timely manufacture our products cost effectively, in sufficient volumes, and in accordance with quality standards. For most of our products requiring assembly, we rely on a limited number of contract electronic manufacturers (CEMs), principally Jabil and TYCO. These CEMs procure material and assemble, test, and inspect the final products to our specifications. This strategy involves certain risks, including reduced control over quality, costs, delivery schedules, availability of materials, components, finished products, and manufacturing yields. As a result of these and other risks, our CEMs could demand price increases for manufacturing our products. The Jabil and TYCO factories where our products are manufactured are located in China. The Chinese government maintains programs, whereby labor rates for the manufacture of our products will increase over time. In addition, our agreements with our CEMs make us responsible for components and subassemblies purchased by the CEMs when based on our forecasts or purchase orders. Accordingly, we will be at risk for any excess and obsolete inventory purchased by our CEMs. Lastly, CEMs can experience turnover, instability, and lapses in manufacturing or component quality, exposing us to additional risks as well as missed commitments to our customers.

We also maintain manufacturing agreements with a limited number of semiconductor manufacturers for the production of key products. The Neuron Chip is an important component that we and our customers use in control network devices. In addition to those sold by Echelon, the Neuron Chip is currently manufactured and distributed only by Cypress Semiconductor. The other former producer of the Neuron Chip, Toshiba, ceased production due to earthquake damage at its factory in Japan in March 2011. As a result, we or our customers may experience longer lead times and higher pricing for these parts, which could result in reduced orders for our products from these same customers. In addition, Cypress Semiconductor could decide to reduce or cease production of the Neuron chip in the future.

We also have sole source relationships with third party foundries for the production of certain other key products, including STMicroelectronics, who produces our power line smart transceivers, and Open-Silicon, which is the foundry for our new Neuron 5000 processor. In addition, we currently purchase several key products and components from sole or limited source suppliers with which we do not maintain signed agreements that would obligate them to supply to us on negotiated terms. Any sole source relationship could make us vulnerable to price increases, particularly where we do not maintain long-term supply agreements with the supplier, or to supply disruptions that would result if the supplier issued an end of life notice with respect to a key product.

We are continuing to review the impact that the ongoing worldwide financial crisis is having on our suppliers. Some of these suppliers are large, well capitalized companies, while others are smaller and more highly leveraged. In order to mitigate these risks, we may take actions such as increasing our inventory levels and/or adding additional sources of supply. Such actions may increase our costs and increase the risk of excess and obsolete inventories. Even if we undertake such actions, there can be no assurance that we will be able to prevent any disruption in the supply of goods and services we receive from these suppliers.

We may also elect to change any of these key suppliers or to move manufacturing to our Chinese joint venture. As part of such a transition, we may be required to purchase certain raw material and in-process inventory from the existing supplier and resell it to the new source. In addition, if any of our key suppliers were to stop manufacturing our products or supplying us with our key components, it could be expensive and time consuming to find a replacement. Also, as our Systems business grows, we will be required to expand our business with our key suppliers or find additional sources of supply. There is no guarantee that we would be able to find acceptable alternative or additional sources. Additional risks that we face if we must transition between CEMs include:

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moving raw material, in-process inventory, and capital equipment between locations, some of which may be in different parts of the world;

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reestablishing acceptable manufacturing processes with a new work force; and

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exposure to excess or obsolete inventory held by contract manufacturers for use in our products.

The failure of any key manufacturer to produce a sufficient number of products on time, at agreed quality levels, and fully compliant with our product, assembly and test specifications could result in our failure to ship products, which would adversely affect our revenues and gross profit, and could result in claims against us by our customers, which could harm our results of operations and financial position.

We are dependent on our outsourcing arrangements.

We are dependent on third-party providers for the manufacturing of most of our products requiring assembly. Many of these third-party providers are located in markets that are subject to political risk, corruption, infrastructure problems and natural disasters in addition to country specific privacy and data security risks given current legal and regulatory environments. The failure of these service providers to meet their obligations and adequately deploy business continuity plans in the event of a crisis and/or the development of significant disagreements, natural or man-made disasters or other factors that materially disrupt our ongoing relationship with these providers could negatively affect operations.

Because our products use components or materials that may be subject to price fluctuations, shortages, interruptions of supply, or discontinuation, we may be unable to ship our products in a timely fashion, which would adversely affect our revenues, harm our reputation and negatively impact our results of operations.

We may be vulnerable to price increases for products, components, or materials, such as silver, copper, and cobalt. We generally do not enter into forward contracts or other methods of hedging against supply risk for these items. In addition, we have in the past and may in the future occasionally experience shortages or interruptions in supply for certain of these items, including products or components that have been or will be discontinued, which can cause us to delay shipments beyond targeted or announced dates. Such shortages or interruptions could result from events outside our control, as was the case with the earthquake and tsunami in Japan in March 2011. To help address these issues, we may decide from time to time to purchase quantities of these items that are in excess of our estimated requirements. As a result, we could be forced to increase our excess and obsolete inventory reserves to provide for these excess quantities, which could harm our operating results. In addition, if a component or other product goes out of production, we may be required to requalify substitute components or products, or even redesign our products to incorporate an alternative component or product.

If we experience any shortage of products or components of acceptable quality, or any interruption in the supply of these products or components, or if we are not able to procure them from alternate sources at acceptable prices and within a reasonable period of time, our revenues, gross profits or both could decrease. In addition, under the terms of some of our contracts with our customers, we may also be subject to penalties if we fail to deliver our products on time.

We are subject to numerous governmental regulations concerning the manufacturing and use of our products. We must stay in compliance with all such regulations and any future regulations. Any failure to comply with such regulations, and the unanticipated costs of complying with future regulations, may adversely affect our business, financial condition, and results of operations.

We manufacture and sell products that contain electronic components that may contain materials that are subject to government regulation in the locations in which our products are manufactured and assembled, as well as the locations where we sell our products. Since we operate on a global basis, maintaining compliance with regulations concerning the materials used in our products is a complex process that requires continual monitoring of regulations and ongoing compliance procedures. For example, in 2011 the European Union issued recast regulations regarding the “Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment: (RoHS)”. The adoption of any unanticipated new regulations that significantly impact the various components we use or require that we use more expensive components would have a material adverse impact on our business, financial condition and results of operations.

Our manufacturing processes, including the processes used by our suppliers, are also subject to numerous governmental regulations that cover both the use of various materials as well as environmental concerns. Since we and our suppliers operate on a global basis, maintaining compliance with regulations concerning our production processes is also a complex process that requires continual monitoring of regulations and ongoing compliance procedures. For example, environmental issues such as pollution and climate change have seen significant legislative and regulatory interest on a global basis. Changes in these areas could directly increase the cost of energy, which may have an impact on the way we or our suppliers manufacture products or use energy to produce our products. In addition, any new regulations or laws in the environmental area might increase the cost of raw materials we use in our products. We are currently unable to predict how any such changes will impact us and if any such impact could be material to our business. Any new law or regulation that significantly increases our costs of manufacturing or causes us or our suppliers to significantly alter the way that our products are manufactured would have a material adverse effect on our business, financial condition and results of operations.

Liabilities resulting from defects in or misuse of our products, whether or not covered by insurance, may delay our revenues and increase our liabilities and expenses.

Our products may contain or may be alleged to contain undetected errors or failures, including relating to actual or potential security breaches. In addition, our customers or their installation partners may improperly install or implement our products, which could delay completion of a deployment or hinder our ability to win a subsequent award. Furthermore, because of the low cost and interoperable nature of our Sub-systems products, L ON W ORKS technology could be used in a manner for which it was not intended.

Even if we determine that an alleged error or failure in our products does not exist, we may incur significant expense and shipments and revenue may be delayed while we analyze the alleged error or failure. If errors or failures are found in our products, we may not be able to successfully correct them in a timely manner, or at all, and our reputation may suffer. Such errors or failures could delay our product shipments and divert our engineering resources while we attempt to correct them. In addition, we could decide to extend the warranty period, or incur other costs outside of our normal warranty coverage, to help address any known errors or failures in our products and mitigate the impact on our customers. This could delay our revenues and increase our expenses.

To address these issues, the agreements we maintain with our customers may contain provisions intended to limit our exposure to potential errors and omissions claims as well as any liabilities arising from them. However, our customer contracts may not effectively protect us against the liabilities and expenses associated with errors or failures attributable to our products.

Defects in our products may also cause us to be liable for losses in the event of property damage, harm or death to persons, claims against our directors or officers, and the like. Such liabilities could harm our reputation, expose our company to liability, and adversely affect our operating results and financial position.

To help reduce our exposure to these types of liabilities, we currently maintain property, general commercial liability, errors and omissions, directors and officers, and other lines of insurance. However, it is possible that such insurance may not be available in the future or, if available, may be insufficient in amount to cover any particular claim, or we might not carry insurance that covers a specific claim. In addition, we believe that the premiums for the types of insurance we carry will continue to fluctuate from period to period. Significant cost increases could also result in increased premiums or reduced coverage limits. Consequently, if we elect to reduce our coverage, or if we do not carry insurance for a particular type of claim, we will face increased exposure to these types of claims.

If we are unable to obtain additional funds when needed, our business could suffer.

We currently expect that our combined cash, cash equivalent, and short-term investment balance will decline during 2012. We expect that cash requirements for our payroll and other operating costs will continue at near existing levels. We also expect that we will continue to acquire capital assets such as computer systems and related software, office and manufacturing equipment, furniture and fixtures, and leasehold improvements, as the need for these items arises.

In the future, to the extent that our revenues grow, we may experience higher levels of inventory and accounts receivable, which will also use our cash balances. In addition, our cash reserves may be used to strategically acquire or invest in other companies, products, or technologies that are complementary to our business. Lastly, our combined cash, cash equivalents, and short-term investment balances could be negatively affected by the various risks and uncertainties that we face. For example, any continued weakening of economic conditions or changes in our planned cash outlay could negatively affect our existing cash reserves.

While we do not currently depend on access to the credit markets to finance our operations, there can be no assurance that the current state of the financial markets would not impair our ability to obtain financing in the future, including, but not limited to, our ability to draw on funds under our existing credit facilities or our ability to incur indebtedness or sell equity if that became necessary or desirable. In addition, if we do not meet our revenue targets, our use of our cash balances would increase due to the fact that a significant portion of our operating expenses are fixed. If we were not able to obtain additional financing when needed, or on acceptable terms, our ability to invest in additional research and development resources and sales and marketing resources could be adversely affected, which could hinder our ability to sell competitive products into our markets on a timely basis and harm our business.

We have limited ability to protect our intellectual property rights.

Our success depends significantly upon our intellectual property rights, which can vary significantly from jurisdiction to jurisdiction. We rely on a combination of patent, copyright, trademark and trade secret laws, non-disclosure agreements and other contractual provisions to establish, maintain and protect these intellectual property rights, all of which afford only limited protection, particularly in those countries that lack robust or accessible enforcement mechanisms. For example, we have formed a joint venture with Holley Metering to develop and sell certain products in China and rest-of-world markets, and the intellectual property mechanisms available in China are generally less stringent than those found in the U.S. If any of our patents fail to protect our technology, or if we do not obtain patents in certain countries, our competitors may find it easier to offer equivalent or superior technology. In addition, our trade secrets or other intellectual property that we license to third parties could be used improperly or otherwise in violation of the license terms.

We have also registered or applied for registration for certain trademarks, and will continue to evaluate the registration of additional trademarks as appropriate. If we fail to properly register or maintain our trademarks, or to otherwise take all necessary steps to protect our trademarks, the value associated with the trademarks may diminish. In addition, if we fail to protect our trade secrets or other intellectual property rights, we may not be able to compete as effectively in our markets.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or services or use information that we regard as proprietary, or it may not be economically feasible to enforce them. Any of our patents, trademarks, copyrights, trade secrets, or intellectual property rights could be challenged, invalidated or circumvented. In addition, we cannot assure you that we have taken or will take all necessary steps to protect our intellectual property rights. Third parties may also independently develop similar technology without breach of our trade secrets or other proprietary rights. In addition, the laws of some foreign countries, including several in which we operate or sell our products, do not protect proprietary rights to as great an extent as do the laws of the United States, and it may take longer to receive a remedy from a court outside of the United States. Also, some of our products are licensed under shrink-wrap license agreements that are not signed by licensees and therefore may not be binding under the laws of certain jurisdictions.

From time to time, litigation may be necessary to defend and enforce our proprietary rights. As a result, we could incur substantial costs and divert management resources, which could harm our business, regardless of the final outcome. Despite our efforts to safeguard and maintain our proprietary rights both in the United States and abroad, we may be unsuccessful in doing so. Also, the steps that we take to safeguard and maintain our proprietary rights may be inadequate to deter third parties from infringing, misusing, misappropriating, or independently developing our technology or intellectual property rights, or to prevent an unauthorized third party from misappropriating our products or technology.

We are exposed to credit risk and payment delinquencies on our accounts receivable, and this risk has been heightened during the ongoing decline in economic conditions.

We only recognize revenue when we believe collectability is reasonably assured. However, only a relatively small percentage of our outstanding accounts receivables are covered by collateral, credit insurance, or acceptable third-party guarantees. In addition, our standard terms and conditions require payment within a specified number of days following shipment of product, or in some cases, after the customer’s acceptance of our products. While we have procedures to monitor and limit exposure to credit risk on our receivables, there can be no assurance such procedures will effectively limit our credit risk and avoid losses. Additionally, when one of our resellers makes a sale to a utility, we face further credit risk, and we may defer revenue, due to the fact that the reseller may not be able to pay us until it receives payment from the utility. This risk could become more magnified during a particular fiscal period if the resellers facing credit issues represent a significant portion of our accounts receivable during that period. As economic conditions change and worsen, certain of our direct or indirect customers may face liquidity concerns and may be unable to satisfy their payment obligations to us or our resellers on a timely basis or at all, which would have a material adverse effect on our financial condition and results of operations. Our revenues are highly concentrated with 66% of our revenues during the first six months of 2012 being attributable to four customers and 69.3% of our June 30, 2012 accounts receivable balance being attributable to these same customers. This concentration risk further increases our credit exposure.

Our executive officers and technical personnel are critical to our business.

Our success depends substantially on the performance of our executive officers and key employees. Due to the specialized technical nature of our business, we are particularly dependent on our Chief Executive Officer and other executive officers, as well as our technical personnel. Our future success will depend on our ability to attract, integrate, motivate and retain qualified executive, managerial, technical, sales, and operations personnel.

Competition for qualified personnel in our business areas is intense, and we may not be able to continue to retain qualified executive officers and key personnel and attract new officers and personnel when necessary. Our product development and marketing functions are largely based in Silicon Valley, which is a highly competitive marketplace. It may be particularly difficult to recruit, relocate and retain qualified personnel in this geographic area. Moreover, the cost of living, including the cost of housing, in Silicon Valley is known to be high. Because we are legally prohibited from making loans to executive officers, we will not be able to assist potential key personnel as they acquire housing or incur other costs that might be associated with joining our company. In addition, if we lose the services of any of our key personnel and are not able to find suitable replacements in a timely manner, our business could be disrupted, other key personnel may decide to leave, and we may incur increased operating expenses in finding and compensating their replacements.

As we move product development capabilities to our joint venture in China, we would also face risks associated with long distance management of such personnel.

If we do not maintain adequate distribution channels, our revenues will be harmed.

We market our Systems products directly, as well as through selected VARs and integration partners. We believe that a significant portion of our Systems sales will be made through our VARs and integration partners, rather than directly by us. To date, our VARs and integration partners have greater experience in overseeing projects for utilities. As a result, if our relationships with our VARs and integration partners are not successful, or if we are not able to create similar distribution channels for our Systems products with other companies in other geographic areas, revenues from sales of our Systems products may not meet our financial targets, which will harm our operating results and financial condition.

Historically, significant portions of our Sub-systems revenues have been derived from sales to distributors, including EBV, the primary independent distributor of our products to OEMs in Europe. In April 2011, our distributor agreement with EBV was assigned from EBV to Avnet Europe Comm VA, a limited partnership

organized under the laws of Belgium (“Avnet”). Both EBV and Avnet are indirect subsidiaries of Avnet, Inc., a New York corporation, which is a distributor of electronic parts, enterprise computing and storage products and embedded subsystems. At the time of the assignment, the term of our distributor agreement with Avnet was extended and will now expire in June 2014. If our distributor relationship with Avnet is not successful, our business, revenues, and financial results will suffer.

Agreements with our other distributor partners are generally renewed on an annual basis. If any of these agreements are not renewed, we would be required to locate another distributor or add our own distribution capability to meet the needs of our end-use customers. Any replacement distribution channel could prove less effective than our current arrangements. In addition, if any of our distributor partners fail to dedicate sufficient resources to market and sell our products, our revenues would suffer. Furthermore, if our distributor partners were to significantly reduce their inventory levels for our products, we could expect a decrease in service levels to our end-use customers.

Voluntary and/or industry standards and governmental regulatory actions in our markets could limit our ability to sell our products.

Standards bodies, which are formal and informal associations that attempt to set voluntary, non-governmental product standards, are influential in many of our target markets. We participate in many voluntary and/or industry standards organizations around the world in order to help prevent the adoption of exclusionary standards as well as to promote standards for our products. However, we do not have the resources to participate in all standards processes that may affect our markets and our efforts to influence the direction of those standards bodies in which we do participate may not be successful. Many of our competitors have significantly more resources focused on standards activities and may influence those standards in a way that would be disadvantageous to our products.

Many of our products and the industries in which they are used are subject to U.S. and foreign regulation. For example, the power line medium, which is the communications medium used by some of our products, is subject to special regulations in North America, Europe and Japan. In general, these regulations limit the ability of companies to use power lines as a communication medium. In addition, some of our competitors have attempted to use regulatory actions to reduce the market opportunity for our products or to increase the market opportunity for their own products.

In addition, the markets for our Systems and Sub-systems products may experience a movement towards standards based protocols driven by governmental action, such as those being considered in the U.S. by NIST and in Europe by those related to the EU 441 mandate. We are also attempting to gain widespread adoption for our Open Smart Grid Protocol, which is used by smart meters and other devices within our NES Smart Grid System. To the extent that we do not adopt such protocols or do not succeed in achieving adoption of our own protocols as standards or de facto standards, sales of our Systems and Sub-systems products may be adversely affected. Moreover, if our own protocols are adopted as standards, we run the risk that we could lose business to competing implementations.

The adoption of voluntary and/or industry standards or the passage of governmental regulations, for example by state utility commissions or national regulatory bodies such as FERC in the United States and PTB or BSI in Germany, that are incompatible with our products or technology could limit the market opportunity for our products, which could harm our revenues, results of operations, and financial condition.

We may be unable to promote and expand acceptance of our open, interoperable control systems over competing protocols, standards, or technologies.

L ON W ORKS technology is open, meaning that many of our technology patents are broadly licensed without royalties or license fees. As a result, our Sub-systems customers are able to develop hardware and software solutions that compete with some of our products. Because some of our customers are OEMs that develop and market their own control systems, these customers in particular could develop competing products based on our open technology. For instance, we have published all of the network management commands required to develop software that competes with our LNS software.

In addition, many of our Sub-systems competitors are dedicated to promoting closed or proprietary systems, technologies, software and network protocols or product standards that differ from or are incompatible with ours. We also face strong competition from large trade associations that promote alternative technologies and standards for particular vertical applications or for use in specific countries. These include BACnet, DALI, and KNX in the buildings market; DeviceNet, HART, and ProfiBus in the industrial controls market; TCN in the rail transportation market; DLMS in the electric metering market; and Echonet, ZigBee, and Z-Wave in the home control market.

Our technologies, protocols, or standards may not be successful or we may not be able to compete with new or enhanced products or standards introduced by our Sub-systems product line competitors, which would have a material adverse effect on our revenues, results of operations, and financial condition.

Because we may incur penalties, be liable for damages, or otherwise subject to adverse contractual provisions with respect to sales of our Systems products, we could incur unanticipated liabilities or suffer other negative impacts to our business or operating results.

The agreements governing the sales of our NES Smart Grid System products may expose us to penalties, damages, order cancellations, and other liabilities in the event of, among other things, late deliveries, late or improper installations or operations, failure to meet product specifications or other product failures, failure to achieve performance specifications, indemnities, or other compliance issues. Even in the absence of such contractual provisions, we may agree, or may be required by law, to assume certain liabilities for the benefit of our customers. In addition, the contractual provisions governing sales of our Systems or other products could give our customers cancellation rights, even in the absence of a material failure by our company, such as upon the failure of conditions that are outside of our control. Such liabilities or rights could have an adverse effect on our financial condition and operating results.

We face currency risks associated with our international operations.

We have operations located in eleven countries and our products are sold in many more countries around the world. Revenues from international sales, which include both export sales and sales by international subsidiaries, accounted for about 62.8%, 78.1%, and 74.9% of our total revenues for the years ended December 31, 2011, 2010, and 2009, respectively. We expect that international sales will continue to constitute a significant portion of our total net revenues. Given our high dependency on sales of our products into Europe, the recent escalation in the financial crisis in that region could adversely affect our financial results significantly.

Changes in the value of currencies in which we conduct our business relative to the U.S. dollar have caused and could continue to cause fluctuations in our reported financial results. The three primary areas where we are exposed to foreign currency fluctuations are revenues, cost of goods sold, and operating expenses.

In general, we sell our products to foreign customers primarily in U.S. dollars. As such, fluctuations in exchange rates have had, and could continue to have, an impact on revenues. If the value of the dollar rises, our products will become more expensive to our foreign customers, which could result in their decision to postpone or cancel a planned purchase.

With respect to the relatively minimal amount of our revenues generated in foreign currencies, our historical foreign currency exposure has been related primarily to the Japanese Yen and has not been material to our consolidated results of operations. However, in the future, we expect that some foreign utilities may require us to price our Systems products in the utility’s local currency, which will increase our exposure to foreign currency risk.

In addition, for our cost of goods sold, our products are generally assembled by CEMs in China. Although our transactions with these companies are presently denominated in U.S. dollars, in the future they may require us to pay in their local currency, or demand a U.S. dollar price adjustment or other payment to address a change in exchange rates, which would increase our cost to procure our products. This is particularly a risk in China, where any future revaluations of the Chinese currency against the U.S. dollar could result in significant cost increases. In addition, increases in labor costs in the markets where our products are manufactured could also result in higher costs to procure our products. For example, China has recently experienced overall wage increases, which our CEMs have generally passed along to us.

We use the local currency to pay for our operating expenses in the various countries where we have operations. If the value of the U.S. dollar declines as compared to the local currency where the expenses are incurred, our expenses, when translated back into U.S. dollars, will increase. This risk will be heightened as we invest in our newly-formed joint venture in China.

To date, we have not hedged any of our foreign currency exposures and currently do not maintain any hedges to mitigate our foreign currency risks. Consequently, any resulting adverse foreign currency fluctuations could significantly harm our revenues, cost of goods sold, or operating expenses.

The sales cycle for our Sub-systems products is lengthy and unpredictable.

The sales cycle between initial Sub-systems customer contact and execution of a contract or license agreement with a customer or purchaser of our products, can vary widely. Initially, we must educate our customers about the potential applications of and cost savings associated with our products. If we are successful in this effort, OEMs typically conduct extensive and lengthy product evaluations before making a decision to design our products into their offerings. Once the OEM decides to incorporate our products, volume purchases of our products are generally delayed until the OEM’s product development, system integration, and product introduction periods have been completed. In addition, changes in our customer’s budgets, or the priority they assign to control network development, could also affect the sales cycle.

We generally have little or no control over these factors, any of which could prevent or substantially delay our ability to complete a transaction and could adversely affect the timing of our revenues and results of operations.

Our business may suffer if it is alleged or found that our products infringe the intellectual property rights of others, or if we are unable to secure rights to use the intellectual property rights of others on reasonable terms .

We may be contractually obligated to indemnify our customers or other third parties that use our products in the event our products are alleged to infringe a third party’s intellectual property rights. From time to time, we may also receive notice that a third party believes that our products may be infringing patents or other intellectual property rights of that third party. Responding to those claims, regardless of their merit, can be time consuming, result in costly litigation, divert management’s attention and resources, and cause us to incur significant expenses. We do not insure against infringement of a third party’s intellectual property rights.

As the result of such a claim, we may elect or be required to redesign our products that are alleged to infringe the third party’s patents or other intellectual property rights, which could cause those product offerings to be delayed. Or we could be required to cease distributing those products altogether. In the alternative, we could seek a license to the third party’s intellectual property. Even if our products do not infringe, we may elect to take a license or settle to avoid incurring litigation costs. However, it is possible that we would not be able to obtain such a license or settle on reasonable terms, or at all.

In some cases, even though no infringement has been alleged, we may attempt to secure rights to use the intellectual property rights of others that would be useful to us. We cannot guarantee that we would be able to secure such rights on reasonable terms, or at all.

Lastly, our customers may not purchase our products if they are concerned our products may infringe third party intellectual property rights. This could reduce the market opportunity for the sale of our products and services.

Any of the foregoing risks could have a material adverse effect on our revenues, results of operations, and financial condition.

If we sell our NES Smart Grid System products directly to a utility, we may face additional risks.

When we sell our NES Smart Grid System products to a utility directly, we may be required to assume responsibility for installing the NES Smart Grid System in the utility’s territory, integrating the NES Smart Grid System into the utility’s operating and billing system, overseeing management of the combined system, working

with other of the utility’s contractors, and undertaking other activities. To date, we do not have any significant experience with providing these types of services. As a result, when we sell directly to a utility, it may be necessary for us to contract with third parties to satisfy these obligations. We cannot assure you that we would find appropriate third parties to provide these services on reasonable terms, or at all. Assuming responsibility for these or other services would add to the costs and risks associated with NES Smart Grid System installations, and could also negatively affect the timing of our revenues and cash flows related to these transactions.

Fluctuations in our operating results may cause our stock price to decline.

Our quarterly and annual results have varied significantly from period to period, and we have sometimes failed to meet securities analysts’ expectations. Moreover, we have a history of losses and cannot assure you that we will achieve sustained profitability in the future. Our future operating results will depend on many factors, many of which are outside of our control, including the following:

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orders may be cancelled;

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the mix of products and services that we sell may change to a less profitable mix;

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shipment, payment schedules, and product acceptance may be delayed;

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our products may not be purchased by utilities, OEMs, systems integrators, service providers and end-users at the levels we project;

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we may be required to modify or add to our Systems product offerings to meet a utility’s requirements, which could delay delivery and/or acceptance of our products or increase our costs;

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the revenue recognition rules relating to products such as our NES Smart Grid System could require us to defer some or all of the revenue associated with Systems product shipments until certain conditions, such as delivery and acceptance criteria for our software and/or hardware products, are met in a future period;

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our CEMs may not be able to provide quality products on a timely basis, especially during periods where capacity in the CEM market is limited;

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our products may not be manufactured in accordance with specifications or our established quality standards, or may not perform as designed;

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downturns in any customer’s or potential customer’s business, or declines in general economic conditions, could cause significant reductions in capital spending, thereby reducing the levels of orders from our customers;

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we may incur costs associated with any future business acquisitions; and

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any future impairment charges related to goodwill, other intangible assets, and other long-lived assets required under generally accepted accounting principles in the United States may negatively affect our earnings and financial condition.

Any of the above factors could, individually or in the aggregate, have a material adverse effect on our results of operations and our financial condition, which could cause our stock price to decline.

If our Systems solutions become subject to cyber-attacks, or if public perception is that they are vulnerable to cyber-attacks, our reputation and business would suffer.

We have integrated security technologies into our Systems solutions that are designed to prevent and monitor unauthorized access, misuse, modification or other activity. However, we could be subject to liability or our reputation could be harmed if those technologies fail to prevent cyber-attacks, or if our partners or utility customers fail to safeguard the systems with security policies that conform to industry best practices. In addition, because some of the information collected by our Systems solutions is or could be considered confidential consumer information in some jurisdictions, a cyber-attack could cause a violation of applicable privacy, consumer or security laws, which could cause our company to face financial or legal liability. In addition, any cyber-attack or security breach that affects a competitor’s products could lead to the negative perception that our solutions are or could be subject to similar attacks or breaches.

Natural disasters, power outages, and other factors outside of our control such as widespread pandemics could disrupt our business.

We must protect our business and our network infrastructure against damage from earthquake, flood, hurricane and similar events, as well as from power outages. A natural disaster, power outage, or other unanticipated problem could also adversely affect our business by, among other things, harming our primary data center or other internal operations, limiting our ability to communicate with our customers, limiting our ability or our partners’ or customers’ ability to sell or use our products, affecting our third party developer’s ability to complete developments on schedule or at all, or affecting our suppliers’ ability to provide us with components or products. For example, the recent earthquake and tsunami in Japan may adversely impact our revenues from customers located in Japan and/or our ability to source parts from companies located in Japan. Shortly after the earthquake, we received notice from Toshiba (one of two manufacturers of the Neuron Chip - an important component that we and our customers use in control network devices), that they would no longer be able to manufacture Neuron Chips due to earthquake damage suffered at the semiconductor manufacturing facility that produced the Neuron Chips. However, the abrupt termination of Toshiba’s Neuron Chip manufacturing capability caused a disruption in supply and an increase in prices from the remaining supplier, Cypress Semiconductor. Consequently, there is a risk that the events in Japan could ultimately reduce demand for certain of our transceiver products, which are used in conjunction with Neuron Chips in developing control network devices by our customers. Such a reduction in demand could negatively impact our results of operations and financial condition. We do not insure against several natural disasters, including earthquakes.

Any outbreak of a widespread communicable disease pandemic, such as the outbreak of the H1N1 influenza virus in 2009, could similarly impact our operations. Such impact could include, among other things, the inability for our sales and operations personnel located in affected regions to travel and conduct business freely, the impact any such disease may have on one or more of the distributors for our products in those regions, and increased supply chain costs. Additionally, any future health-related disruptions at our third-party contract manufacturers or other key suppliers could affect our ability to supply our customers with products in a timely manner, which would harm our results of operations.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We have not experienced any material change in our exposure to interest rate and foreign currency risks since the date of our Annual Report on Form 10-K for the year ended December 31, 2011.

Market Risk Disclosures . The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments to hedge these exposures.

Interest Rate Sensitivity. We maintain a short-term investment portfolio consisting mainly of fixed income securities with a weighted average maturity of less than one year. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. If market rates were to increase immediately and uniformly by 10% from levels at June 30, 2012 and December 31, 2011, the fair value of the portfolio would decline by an immaterial amount. We currently intend to hold our fixed income investments until maturity, and therefore we would not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates. However, if necessary, we may sell short-term investments prior to maturity to meet the liquidity needs of the company.

Foreign Currency Exchange Risk. We have international subsidiaries and operations and are, therefore, subject to foreign currency rate exposure. To date, our exposure to exchange rate volatility has not been significant. If foreign exchange rates were to fluctuate by 10% from rates at June 30, 2012, and December 31, 2011, our financial position and results of operations would not be materially affected. However, we could experience a material impact in the future.

In addition, for our cost of goods sold, our products are generally assembled by CEMs in China, although our transactions with these vendors have historically been denominated in U.S. dollars. These vendors may require us to pay in their local currency, or demand a U.S. dollar price adjustment or other payment to address a change in exchange rates, which would increase our cost to procure our products. This is particularly a risk in China, where any future revaluations of the Chinese currency against the U.S. dollar could result in significant cost increases.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Effectiveness of Disclosure Controls and Procedures

We have designed our disclosure controls and procedures to ensure that information we are required to disclose in reports that we file or submit under the Securities and Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. As of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision of our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such terms are defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities and Exchange Act of 1934. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 2012.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(e) of the Exchange Act) that occurred during the quarter ended June 30, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

For a discussion regarding our legal proceedings and matters, please refer to the “Legal Actions” section of Note 6, Commitments and Contingencies, to our condensed consolidated financial statements included under Item 1 of Part I, Financial Information, which information is incorporated herein by reference.

ITEM 1A.

RISK FACTORS

A restated description of the risk factors associated with our business is included under “Factors That May Affect Future Results of Operations” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contained in Item 2 of Part I of this report. This description includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Item 1A of our 2011 Annual Report on Form 10-K and is incorporated herein by reference.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information about the repurchase of our common stock during the quarter ended June 30, 2012:


Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
April 1 – April 30		9,799	$	4.23		—		—
May 1 – May 31		185,066	$	3.72		—		—
June 1 – June 30		925	$	3.20		—		—

Total		195,790	$	3.74		—		—

(1)

Shares purchased that were not part of our publicly announced repurchase program represent those shares surrendered to us by employees in order to satisfy stock-for-stock option exercises and/or withholding tax obligations related to stock-based compensation. These purchases do not reduce the number of shares that may yet be purchased under our publicly announced repurchase program.

ITEM 6.

EXHIBITS


Exhibit No.		Description of Document

10.2(p)		Form of 1997 Stock Plan Stock Option Agreement for U.S. Optionees (2012)

10.2(q)		Form of 1997 Stock Plan Stock Option Agreement for U.S. Corporate Officers (2012)

10.2(r)		Form of 1997 Stock Plan Stock Option Agreement for Optionees Outside the U.S. (2012)

10.2(s)		Form of 1997 Stock Plan Stock Option Agreement for Corporate Officer Optionees Outside the U.S. (2012)

10.2(t)		Form of 1997 Stock Plan Stock Option Agreement Appendix A for Optionees Outside the U.S. (2012)

10.2(u)		Form of 1997 Stock Plan Performance Share Agreement for Participants Outside the U.S. (2012)

10.2(v)		Form of 1997 Stock Plan Performance Share Agreement for Corporate Officers Outside the U.S. (2012)

10.2(w)		Form of 1997 Stock Plan Performance Share Agreement Appendix A for Participants Outside the U.S. (2012)

10.2 +		1997 Stock Plan (as amended and restated August 18, 2010)

31.1		Certificate of Echelon Corporation Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certificate of Echelon Corporation Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification by the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.

101.INS+		XBRL Instance Document

101.SCH+		XBRL Taxonomy Extension Schema

101.CAL+		XBRL Taxonomy Extension Calculation Linkbase

101.LAB+		XBRL Taxonomy Extension Label Linkbase

101.PRE+		XBRL Taxonomy Extension Presentation Linkbase

+	The financial information contained in these XBRL documents is unaudited and is furnished, not filed with the Securities and Exchange Commission.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX


Exhibit No.		Description of Document

10.2(p)		Form of 1997 Stock Plan Stock Option Agreement for U.S. Optionees (2012)

10.2(q)		Form of 1997 Stock Plan Stock Option Agreement for U.S. Corporate Officers (2012)

10.2(r)		Form of 1997 Stock Plan Stock Option Agreement for Optionees Outside the U.S. (2012)

10.2(s)		Form of 1997 Stock Plan Stock Option Agreement for Corporate Officer Optionees Outside the U.S. (2012)

10.2(t)		Form of 1997 Stock Plan Stock Option Agreement Appendix A for Optionees Outside the U.S. (2012)

10.2(u)		Form of 1997 Stock Plan Performance Share Agreement for Participants Outside the U.S. (2012)

10.2(v)		Form of 1997 Stock Plan Performance Share Agreement for Corporate Officers Outside the U.S. (2012)

10.2(w)		Form of 1997 Stock Plan Performance Share Agreement Appendix A for Participants Outside the U.S. (2012)

10.2 +		1997 Stock Plan (as amended and restated August 18, 2010)

31.1		Certificate of Echelon Corporation Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certificate of Echelon Corporation Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification by the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.

101.INS+		XBRL Instance Document

101.SCH+		XBRL Taxonomy Extension Schema

101.CAL+		XBRL Taxonomy Extension Calculation Linkbase

101.LAB+		XBRL Taxonomy Extension Label Linkbase

101.PRE+		XBRL Taxonomy Extension Presentation Linkbase

+	The financial information contained in these XBRL documents is unaudited and is furnished, not filed with the Securities and Exchange Commission.

Exhibit 10.2

ECHELON CORPORATION

1997 STOCK PLAN

(as amended and restated August 18, 2010)

1. Purposes of the Plan . The purposes of this 1997 Stock Plan are:

•

to attract and retain the best available personnel for positions of substantial responsibility,

•

to provide additional incentive to Employees, Directors and Consultants, and

•

to promote the success of the Company’s business.

The Plan permits the grant of Incentive Stock Options, Nonstatutory Stock Options, Stock Purchase Rights, Restricted Stock, Stock Appreciation Rights, Performance Units and Performance Shares.

2. Definitions . As used herein, the following definitions shall apply:

(a) “ Administrator ” means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan.

(b) “ Affiliated SAR ” means an SAR that is granted in connection with a related Option, and which automatically will be deemed to be exercised at the same time that the related Option is exercised.

(c) “ Applicable Laws ” means the requirements relating to the administration of equity-based awards under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan.

(d) “ Award ” means, individually or collectively, a grant under the Plan of Options, Stock Purchase Rights, Restricted Stock, SARs, Performance Units or Performance Shares.

(e) “ Award Agreement ” means the written or electronic agreement setting forth the terms and provisions applicable to each Award granted under the Plan. The Award Agreement is subject to the terms and conditions of the Plan.

(f) “ Board ” means the Board of Directors of the Company.

(g) “ Cash Position ” means as to any Performance Period, the Company’ s level of cash and cash equivalents, including, without limitation, amounts classified for financial reporting purposes as short-term investments and restricted investments.

(h) “ Code ” means the Internal Revenue Code of 1986, as amended. Any reference to a section of the Code herein will be a reference to any successor or amended section of the Code.

(i) “ Committee ” means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan.

(j) “ Common Stock ” means the common stock of the Company.

(k) “ Company ” means Echelon Corporation, a Delaware corporation.

(l) “ Consultant ” means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity.

(m) “ Determination Date ” means the latest possible date that will not jeopardize the qualification of an Award granted under the Plan as “performance-based compensation” under Section 162(m) of the Code.

(n) “ Director ” means a member of the Board.

(o) “ Disability ” means total and permanent disability as defined in Section 22(e)(3) of the Code.

(p) “ Earnings Per Share ” means as to any Performance Period, the Company’s or a business unit’s Net Income, divided by a weighted average number of common shares outstanding and dilutive common equivalent shares deemed outstanding, determined in accordance with U.S. GAAP; provided, however, that if Net Income as to any such Performance Period is a negative amount, then Earnings Per Share means the Company’s or business unit’s Net Income, divided by a weighted average number of common shares outstanding, determined in accordance with U.S. GAAP.

(q) “ Employee ” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Participant shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

(r) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

(s) “ Excluded Items ” includes, without limitation, (i) incentive compensation, (ii) in-process research and development expenses, (iii) acquisition costs, (iv) compensation expense from equity compensation, (v) operating expenses from acquired businesses, (vi) amortization of acquired intangible assets, and (vii) such other unusual or one-time items as may be identified by the Administrator.

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(t) “ Fair Market Value ” means, as of any date, the value of Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or

(iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator.

(u) “ Fiscal Year ” means the fiscal year of the Company.

(v) “ Freestanding SAR ” means a SAR that is granted independently of any Option.

(w) “ Incentive Stock Option ” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

(x) “ Individual Objectives ” means as to a Participant for any Performance Period, the objective and measurable goals set by a “management by objectives” process and approved by the Administrator (in its discretion).

(y) “ Net Income ” means as to any Performance Period, the Company’s or a business unit’s income after taxes determined in accordance with U.S. GAAP, adjusted for any Excluded Items approved for exclusion by the Administrator.

(z) “ Nonstatutory Stock Option ” means an Option not intended to qualify as an Incentive Stock Option.

(aa) “ Officer ” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(bb) “ Operating Cash Flow ” means as to any Performance Period, the Company’s or a business unit’s cash flow generated from operating activities, as reported in the Company’s cash flow statements and calculated in accordance with U.S. GAAP, adjusted for any Excluded Items approved for exclusion by the Administrator.

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(cc) “ Operating Income ” means as to any Performance Period, the Company’s or a business unit’s income from operations determined in accordance with U.S. GAAP, adjusted for any Excluded Items approved for exclusion by the Administrator.

(dd) “ Option ” means a stock option granted pursuant to the Plan.

(ee) “ Optionee ” means the holder of an outstanding Option or Stock Purchase Right granted under the Plan.

(ff) “ Option Exchange Program ” means a program whereby outstanding Options or SARs are surrendered in exchange for Options or SARs with a lower exercise price.

(gg) “ Optioned Stock ” means the Common Stock subject to an Award.

(hh) “ Parent ” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

(ii) “ Participant ” means the holder of an outstanding Award, including any Optionee.

(jj) “ Performance Goals ” means the goal(s) (or combined goal(s)) determined by the Administrator (in its discretion) to be applicable to a Participant with respect to an Award granted under the Plan. As determined by the Administrator, the Performance Goals applicable to an Award may provide for a targeted level or levels of achievement using one or more of the following measures: (a) Cash Position, (b) Earnings Per Share, (c) Individual Objectives, (d) Net Income, (e) Operating Cash Flow, (f) Operating Income, (g) Return on Assets, (h) Return on Equity, (i) Return on Sales, (j) Revenue and (k) Total Shareholder Return. The Performance Goals may differ from Participant to Participant and from Award to Award. Prior to the Determination Date, the Administrator shall determine whether any significant element(s) shall be included in or excluded from the calculation of any Performance Goal with respect to any Participant.

(kk) “ Performance Period ” means any Fiscal Year of the Company or such other period as determined by the Administrator in its sole discretion.

(ll) “ Performance Share ” means the right to receive Shares or cash pursuant to Section 9.

(mm) “ Performance Unit ” means the right to receive Shares or cash pursuant to Section 9.

(nn) “ Period of Restriction ” means the period during which the transfer of Shares of Restricted Stock are subject to restrictions and therefore, the Shares are subject to a substantial risk of forfeiture. Such restrictions may be based on the passage of time, the achievement of Performance Goals, or the occurrence of other events as determined by the Administrator.

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(oo) “ Plan ” means this 1997 Stock Plan, as amended and restated.

(pp) “ Restricted Stock ” means shares of Common Stock issued pursuant to a Stock Purchase Right under Section 7A of the Plan or an Award of Restricted Stock under Section 7B of the Plan, or issued pursuant to the early exercise of an Option.

(qq) “ Return on Assets ” means as to any Performance Period, the percentage equal to the Company’s or a business unit’s Operating Income divided by average net Company or business unit, as applicable, assets, determined in accordance with U.S. GAAP.

(rr) “ Return on Equity ” means as to any Performance Period, the percentage equal to the Company’s Net Income divided by average stockholder’s equity, determined in accordance with U.S. GAAP.

(ss) “ Return on Sales ” means as to any Performance Period, the percentage equal to the Company’s or a business unit’s Operating Income divided by the Company’s or the business unit’s, as applicable, Revenue.

(tt) “ Revenue ” means as to any Performance Period, the Company’s or business unit’s net sales, determined in accordance with U.S. GAAP.

(uu) “ Rule 16b-3 ” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.

(vv) “ Section 16(b) ” means Section 16(b) of the Exchange Act.

(ww) “ Service Provider ” means an Employee, Director or Consultant.

(xx) “ Share ” means a share of the Common Stock, as adjusted in accordance with Section 11 of the Plan.

(yy) “ Stock Appreciation Right ” or “ SAR ” means an Award, granted alone or in connection with an Option, that pursuant to Section 8 is designated as a SAR.

(zz) “ Stock Purchase Right ” means the right to purchase Common Stock pursuant to Section 7A of the Plan.

(aaa) “ Subsidiary ” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.

(bbb) “ Tandem SAR ” means a SAR that is granted in connection with a related Option, the exercise of which will require forfeiture of the right to purchase an equal number of Shares under the related Option (and when a Share is purchased under the Option, the SAR will be canceled to the same extent).

(ccc) “ Total Shareholder Return ” means as to any Performance Period, the total return (change in share price plus reinvestment of any dividends) of a Share.

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(ddd) “ U.S. GAAP ” means generally accepted accounting principles in the United States.

3. Stock Subject to the Plan . Subject to the provisions of Section 11 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 6,200,000 Shares, plus an annual increase to be added on the first day of the Company’s fiscal year (beginning in 1999) equal to the lesser of (i) 5,000,000 Shares, (ii) 5% (4% for fiscal years beginning after the Company’s 2004 fiscal year) of the outstanding shares on such date or (iii) a lesser amount determined by the Board. The Shares may be authorized, but unissued, or reacquired Common Stock. Shares will not be deemed to have been issued pursuant to the Plan with respect to any portion of an Award that is settled in cash. Upon payment in Shares pursuant to the exercise of an SAR, the number of Shares available for issuance under the Plan will be reduced only by the number of Shares actually issued in such payment. If the exercise price of an Option is paid by tender to the Company, or attestation to the ownership, of Shares owned by the Participant, the number of Shares available for issuance under the Plan will be reduced by the gross number of Shares for which the Option is exercised.

If an Award expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided , however , that Shares that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if unvested Shares of Restricted Stock are forfeited or repurchased by the Company, such Shares shall become available for future grant under the Plan.

4. Administration of the Plan .

(a) Procedure .

(i) Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different groups of Service Providers.

(ii) Section 162(m) . To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as “performance-based compensation” within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more “outside directors” within the meaning of Section 162(m) of the Code.

(iii) Rule 16b-3 . To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3.

(iv) Other Administration . Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws.

(b) Powers of the Administrator . Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion:

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(i) to determine the Fair Market Value;

(ii) to select the Service Providers to whom Awards may be granted hereunder;

(iii) to determine the number of Shares to be covered by each Award granted hereunder;

(iv) to approve forms of agreement for use under the Plan;

(v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Awards may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine;

(vi) to institute an Option Exchange Program;

(vii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan;

(viii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of satisfying applicable foreign laws;

(ix) to modify or amend each Award (subject to Section 16(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Awards longer than is otherwise provided for in the Plan. Notwithstanding the foregoing, the Administrator may not modify or amend an Option or SAR to reduce the exercise price of such Option or SAR after it has been granted (except for adjustments made pursuant to Section 11), unless approved by the Company’s stockholders;

(x) to allow Participants to satisfy withholding tax obligations in such manner as prescribed in Section 12;

(xi) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Administrator;

(xii) to allow a Participant to defer the receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant under an Award; and

(xiii) to make all other determinations deemed necessary or advisable for administering the Plan.

(c) Effect of Administrator’s Decision . The Administrator’s decisions, determinations and interpretations shall be final and binding on all Participants and any other holders of Awards.

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5. Eligibility . Nonstatutory Stock Options, Stock Purchase Rights, Restricted Stock, Stock Appreciation Rights, Performance Units and Performance Shares may be granted to Service Providers. Incentive Stock Options may be granted only to Employees.

6. Stock Options .

(a) Limitations .

(i) Each Option shall be designated in the Award Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted.

(ii) The following limitations shall apply to grants of Options:

(A) No Service Provider shall be granted, in any Fiscal Year, Options to purchase more than 1,000,000 Shares.

(B) In connection with his or her initial service, a Service Provider may be granted Options to purchase up to an additional 1,000,000 Shares which shall not count against the limit set forth in subsection (i) above.

(C) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company’s capitalization as described in Section 11.

(D) If an Option is cancelled in the same Fiscal Year in which it was granted (other than in connection with a transaction described in Section 11), the cancelled Option will be counted against the limits set forth in subsections (A) and (B) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option.

(b) Term of Option . The term of each Option shall be stated in the Award Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Award Agreement. Moreover, in the case of an Incentive Stock Option granted to a Participant who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Award Agreement.

(i) Exercise Price . The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following:

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(A) In the case of an Incentive Stock Option

a) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant.

b) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant.

(B) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator, but shall be no less than 100% of the Fair Market Value per Share on the date of grant.

(C) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction.

(ii) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised.

(iii) Form of Consideration . The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of:

(A) cash;

(B) check;

(C) promissory note (provided that a promissory note will not be acceptable consideration to the extent the issuance of a promissory note would not be permitted by Applicable Laws);

(D) other Shares, provided Shares acquired directly or indirectly from the Company, (A) have been owned by the Participant and not subject to substantial risk of forfeiture for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option will be exercised;

(E) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan;

(F) a reduction in the amount of any Company liability to the Participant, including any liability attributable to the Participant’s participation in any Company-sponsored deferred compensation program or arrangement;

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(G) any combination of the foregoing methods of payment; or

(H) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws.

(d) Exercise of Option .

(i) Procedure for Exercise; Rights as a Stockholder . Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Award Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share.

An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in such form as the Administrator specify from time to time) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised (together with any applicable withholding taxes). Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Award Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Participant or, if requested by the Participant, in the name of the Participant and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 11 of the Plan.

Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

(ii) Termination of Relationship as a Service Provider . If a Participant ceases to be a Service Provider, other than upon the Participant’s death or Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option shall remain exercisable for three (3) months following the Participant’s termination. If, on the date of termination, the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Participant does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

(iii) Disability of Participant . If a Participant ceases to be a Service Provider as a result of the Participant’s Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent the Option is vested

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on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option shall remain exercisable for twelve (12) months following the Participant’s termination. If, on the date of termination, the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Participant does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

(iv) Death of Participant . If a Participant dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Award Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Participant’s estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Award Agreement, the Option shall remain exercisable for twelve (12) months following the Participant’s termination. If, at the time of death, the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Participant’s estate or, if none, by the person(s) entitled to exercise the Option under the Participant’s will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

7A. Stock Purchase Rights .

(a) Rights to Purchase . Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other Awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically of the terms and conditions related to the offer, including the Period of Restriction, the number of Shares that the Participant shall be entitled to purchase, the price to be paid, and the time within which the Participant must accept such offer. Notwithstanding the foregoing, during any Fiscal Year no Participant will receive more than an aggregate of 200,000 Shares subject to Stock Purchase Rights or Restricted Stock Awards; provided, however, that in connection with a Participant’s initial service as an Employee, an Employee may be granted an aggregate of up to an additional 400,000 Shares subject to Stock Purchase Rights or Restricted Stock Awards. The offer shall be accepted by execution of an Award Agreement in the form determined by the Administrator.

(b) Repurchase Option . Unless the Administrator determines otherwise, during the Period of Restriction, the Award Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser’s service with the Company for any reason (including death or Disability). Unless the Administrator determines otherwise, the purchase price for Shares repurchased pursuant to the Award Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company.

(c) Other Provisions. The Award Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion.

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(d) Rights as a Stockholder . Once the Stock Purchase Right is exercised, the Participant shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 11 of the Plan.

(e) Section 162(m) Performance Restrictions . For purposes of qualifying a Stock Purchase Right as “performance-based compensation” under Section 162(m) of the Code, the Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goals, which shall be set by the Administrator on or before the Determination Date. In this connection, the Administrator shall follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Stock Purchase Right under Section 162(m) of the Code (e.g., in determining the Performance Goals).

7B. Restricted Stock .

(a) Grant of Restricted Stock . Subject to the terms and provisions of the Plan, the Administrator, at any time and from time to time, may grant Shares of Restricted Stock to Service Providers in such amounts as the Administrator, in its sole discretion, will determine. Notwithstanding the foregoing, during any Fiscal Year no Participant will receive more than an aggregate of 200,000 Shares subject to Stock Purchase Rights or Restricted Stock Awards; provided, however, that in connection with a Participant’s initial service as an Employee, an Employee may be granted an aggregate of up to an additional 400,000 Shares subject to Stock Purchase Rights or Restricted Stock Awards.

(b) Restricted Stock Agreement . Each Award of Restricted Stock will be evidenced by an Award Agreement that will specify the Period of Restriction, the number of Shares granted, and such other terms and conditions as the Administrator, in its sole discretion, will determine. Unless the Administrator determines otherwise, Shares of Restricted Stock will be held by the Company as escrow agent until the restrictions on such Shares have lapsed.

(c) Transferability . Except as provided in this Section 7B or as otherwise permitted by the Administrator, Shares of Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction.

(d) Other Restrictions . The Administrator, in its sole discretion, may impose such other restrictions on Shares of Restricted Stock as it may deem advisable or appropriate.

(e) Removal of Restrictions . Except as otherwise provided in this Section 7B, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan will be released from escrow as soon as practicable after the last day of the Period of Restriction. The Administrator, in its discretion, may accelerate the time at which any restrictions will lapse or be removed.

(f) Voting Rights . During the Period of Restriction, Service Providers holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares, unless the Administrator determines otherwise.

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(g) Dividends and Other Distributions . During the Period of Restriction, Service Providers holding Shares of Restricted Stock will be entitled to receive all dividends and other distributions paid with respect to such Shares unless otherwise provided in the Award Agreement. Any such dividends or distributions will be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid.

(h) Return of Restricted Stock to Company . On the date set forth in the Award Agreement, the Restricted Stock for which restrictions have not lapsed will revert to the Company and again will become available for grant under the Plan.

(i) Performance Restrictions . The Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals will be set by the Administrator on or before the Determination Date pursuant to such procedures determined by the Administrator from time to time as it deems necessary or appropriate.

8. Stock Appreciation Rights .

(a) Grant of SARs . Subject to the terms and conditions of the Plan, a SAR may be granted to Service Providers at any time and from time to time as will be determined by the Administrator, in its sole discretion. The Administrator may grant Affiliated SARs, Freestanding SARs, Tandem SARs, or any combination thereof.

(b) Number of Shares . The Administrator will have complete discretion to determine the number of SARs granted to any Participant, provided that during any Fiscal Year, no Participant will be granted SARs covering more than 1,000,000 Shares. Notwithstanding the foregoing limitation, in connection with a Participant’s initial service as an Employee, an Employee may be granted SARs covering up to an additional 1,000,000 Shares.

(c) Exercise Price and Other Terms . The Administrator, subject to the provisions of the Plan, will have complete discretion to determine the terms and conditions of SARs granted under the Plan. In the case of a Freestanding SAR, the exercise price will be not less than one hundred percent (100%) of the Fair Market Value of a Share on the date of grant. The exercise price of Tandem or Affiliated SARs will equal the exercise price of the related Option.

(d) Exercise of Tandem SARs . Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. With respect to a Tandem SAR granted in connection with an Incentive Stock Option: (a) the Tandem SAR will expire no later than the expiration of the underlying Incentive Stock Option; (b) the value of the payout with respect to the Tandem SAR will be for no more than one hundred percent (100%) of the difference between the exercise price of the underlying Incentive Stock Option and the Fair Market Value of the Shares subject to the underlying Incentive Stock Option at the time the Tandem SAR is exercised; and (c) the Tandem SAR will be exercisable only when the Fair Market Value of the Shares subject to the Incentive Stock Option exceeds the Exercise Price of the Incentive Stock Option.

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(e) Exercise of Affiliated SARs . An Affiliated SAR will be deemed to be exercised upon the exercise of the related Option. The deemed exercise of an Affiliated SAR will not necessitate a reduction in the number of Shares subject to the related Option.

(f) Exercise of Freestanding SARs . Freestanding SARs will be exercisable on such terms and conditions as the Administrator, in its sole discretion, will determine.

(g) SAR Agreement . Each SAR grant will be evidenced by an Award Agreement that will specify the exercise price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the Administrator, in its sole discretion, will determine.

(h) Expiration of SARs . An SAR granted under the Plan will expire upon the date determined by the Administrator, in its sole discretion, and set forth in the Award Agreement. Notwithstanding the foregoing, the rules of Section 6(d) also will apply to SARs.

(i) Payment of SAR Amount . Upon exercise of an SAR, a Participant will be entitled to receive payment from the Company, less any applicable withholding taxes, in an amount determined by multiplying:

(i) The difference between the Fair Market Value of a Share on the date of exercise and the exercise price; times

(ii) The number of Shares with respect to which the SAR is exercised.

At the discretion of the Administrator, the payment upon SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof.

9. Performance Units and Performance Shares .

(a) Grant of Performance Units/Shares . Performance Units and Performance Shares may be granted to Service Providers at any time and from time to time, as will be determined by the Administrator, in its sole discretion. The Administrator will have complete discretion in determining the number of Performance Units and Performance Shares granted to each Participant provided that during any Fiscal Year, (a) no Participant will receive Performance Units having an initial value greater than $1,000,000, and (b) no Participant will receive more than 1,000,000 Performance Shares. Notwithstanding the foregoing limitation, in connection with a Participant’s initial service as an Employee, an Employee may be granted up to an additional 1,000,000 Performance Shares.

(b) Value of Performance Units/Shares . Each Performance Unit will have an initial value that is established by the Administrator on or before the date of grant. Each Performance Share will have an initial value equal to the Fair Market Value of a Share on the date of grant.

(c) Performance Objectives and Other Terms . The Administrator will set performance objectives or other vesting provisions (including, without limitation, continued status as a Service Provider) in its discretion which, depending on the extent to which they are met, will determine the number or value of Performance Units/Shares that will be paid out to the Service

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Provider. The time period during which the performance objectives or other vesting provisions must be met will be called the “Performance Period.” Each Award of Performance Units/Shares will be evidenced by an Award Agreement that will specify the Performance Period, and such other terms and conditions as the Administrator, in its sole discretion, will determine.

(i) General Performance Objectives . The Administrator may set performance objectives based upon the achievement of Company-wide, divisional, or individual goals, or any other basis determined by the Administrator in its discretion.

(ii) Section 162(m) Performance Objectives . For purposes of qualifying grants of Performance Units/Shares as “performance-based compensation” under Section 162(m) of the Code, the Administrator, in its discretion, may determine that the performance objectives applicable to Performance Units/Shares will be based on the achievement of Performance Goals. The Administrator will set the Performance Goals on or before the Determination Date. In granting Performance Units/Shares which are intended to qualify under Section 162(m) of the Code, the Administrator will follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Performance Units/Shares under Section 162(m) of the Code (e.g., in determining the Performance Goals).

(d) Earning of Performance Units/Shares . After the applicable Performance Period has ended, the holder of Performance Units/Shares will be entitled to receive a payout of the number of Performance Units/Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance objectives or other vesting provisions have been achieved. After the grant of a Performance Unit/Share, the Administrator, in its sole discretion, may reduce or waive any performance objectives or other vesting provisions for such Performance Unit/Share.

(e) Form and Timing of Payment of Performance Units/Shares . Payment of earned Performance Units/Shares will be made as soon as practicable after the expiration of the applicable Performance Period. The Administrator, in its sole discretion, may pay earned Performance Units/Shares in the form of cash, in Shares (which have an aggregate Fair Market Value equal to the value of the earned Performance Units/Shares at the close of the applicable Performance Period) or in a combination thereof, taking into consideration any applicable withholding taxes which may be due as a result of the Award.

(f) Cancellation of Performance Units/Shares . On the date set forth in the Award Agreement, all unearned or unvested Performance Units/Shares will be forfeited to the Company, and again will be available for grant under the Plan.

10. Transferability of Awards . Unless determined otherwise by the Administrator, an Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Participant, only by the Participant. If the Administrator makes an Award transferable, such Award will contain such additional terms and conditions as the Administrator deems appropriate.

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11. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale .

(a) Changes in Capitalization . Subject to any required action by the shareholders of the Company, the number and class of Shares that may be delivered under the Plan and/or the number, class, and price of Shares covered by each outstanding Award, and the numerical Share limits set forth in Sections 3, 6, 7A, 7B, 8 and 9 shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided , however , that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Award.

(b) Dissolution or Liquidation . In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Participant as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for a Participant to have the right to exercise his or her Award until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Award would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Award shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Award will terminate immediately prior to the consummation of such proposed action.

(i) General . In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company (a “Merger”), each outstanding Award shall be assumed or an equivalent award substituted by the successor corporation or a Parent or Subsidiary of the successor corporation (the “Successor Corporation”). In the event that the Successor Corporation refuses to assume or substitute for the Award, the Participant shall fully vest in and have the right to exercise his or her Option or Stock Appreciation Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable, all restrictions on Restricted Stock will lapse, and, with respect to Performance Shares and/or Units, all performance goals or other vesting criteria will be deemed achieved at target levels and all other terms and conditions met. If an Option or Stock Appreciation Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a Merger, the Administrator shall notify the Participant in writing or electronically that such Award shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Award shall terminate upon the expiration of such period. For the purposes of this paragraph, the Award shall be considered assumed if, following the Merger, the award confers the right to purchase or receive, for each Share subject to the Award immediately prior to the Merger, the consideration (whether stock, cash, or other securities or property) or, in the case of a Stock Appreciation Right, upon the exercise

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of which the Administrator determines to pay cash or a Performance Share and/or Unit which the Administrator can determine to pay in cash, the fair market value of the consideration received in the Merger by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided , however , that if such consideration received in the Merger is not solely common stock of the Successor Corporation or its Parent, the Administrator may, with the consent of the Successor Corporation, provide for the consideration to be received upon the exercise of an Option or Stock Appreciation Right or upon the payout of a Performance Share and/or Unit, for each Share subject to an Award (or in the case of Performance Units, the number of implied Shares determined by dividing the value of the Performance Units by the per share consideration received by holders of Common Stock in the Merger), to be solely common stock of the Successor Corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the Merger.

Notwithstanding anything in this Section 11(c) to the contrary, an Award that vests, is earned or paid-out upon the satisfaction of one or more performance goals will not be considered assumed if the Company or its successor modifies any of such performance goals without the Participant’s consent; provided, however, a modification to such performance goals only to reflect the successor corporation’s corporate structure post-merger or post-sale of assets will not be deemed to invalidate an otherwise valid Award assumption.

(ii) Employee Options Following Assumption or Substitution . Following an assumption or substitution in connection with a Merger as described in Section 11(c)(i) above, and in the event that upon the Merger the stockholders of the Company immediately prior to the Merger hold less than 50% of the outstanding voting equity securities of the Successor Corporation following the Merger (a “Change of Control Merger”), if a Participant’s status as an Employee of the Successor Corporation is terminated by the Successor Corporation as a result of an Involuntary Termination (as defined below) within twelve months following the Change of Control Merger, the Participant shall fully vest in and have the right to exercise Participant’s Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which Participant would not otherwise be vested or exercisable. Thereafter, the Option or Stock Purchase Right shall remain exercisable in accordance with its terms as determined by the Administrator.

(A) For purposes of this section, any of the following events shall constitute an “Involuntary Termination”: (i) without the Participant’s express written consent, a significant reduction of the Participant’s duties, authority or responsibilities, relative to the Participant’s duties, authority or responsibilities as in effect immediately prior to the Change of Control Merger; (ii) without the Participant’s express written consent, a substantial reduction, without good business reasons, of the facilities and perquisites (including office space and location) available to the Participant immediately prior to the Change of Control Merger; (iii) a reduction in the base salary of the Participant as in effect immediately prior to the Change of Control Merger; (iv) a material reduction in the kind or level of employee benefits, including bonuses, to which the Participant was entitled immediately prior to the Change of Control Merger with the result that the Participant’s overall benefits package is significantly reduced; (v) the relocation of the Participant to a facility or a location more than thirty (30) miles from the Participant’s then present location, without the Participant’s express written consent; or (vi) any purported termination of the Participant which is not effected for Disability or for Cause (as defined below), or any purported termination for which the grounds relied upon are not valid.

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(B) For purposes of this section, “Cause” shall mean (i) any act of personal dishonesty taken by the Participant in connection with his responsibilities as a Service Provider and intended to result in substantial personal enrichment of the Participant, (ii) Participant’s conviction of a felony, (iii) a willful act by the Participant which constitutes gross misconduct and which is injurious to the Successor Corporation, and (iv) following delivery to the Participant of a written demand for performance from the Successor Corporation which describes the basis for the Successor Corporation’s belief that the Participant has not substantially performed his duties, continued violations by the Participant of the Participant’s obligations to the Successor Corporation which are demonstrably willful and deliberate on the Participant’s part.

(iii) Director Options Following Assumption or Substitution . Following an assumption or substitution in connection with a Change of Control Merger, if a Participant’s status as a director of the Successor Corporation terminates other than upon a voluntary resignation by the Participant, the Participant shall fully vest in and have the right to exercise Participant’s Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which Participant would not otherwise be vested or exercisable. Thereafter, the Option or Stock Purchase Right shall remain exercisable in accordance with its terms as determined by the Administrator.

12. Tax Withholding

(a) Withholding Requirements . Prior to the delivery of any Shares or cash pursuant to an Award (or exercise thereof), the Company will have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, local, foreign or other taxes (including the Participant’s FICA obligation) required to be withheld with respect to such Award (or exercise thereof).

(b) Withholding Arrangements . The Administrator, in its sole discretion and pursuant to such procedures as it may specify from time to time, may permit a Participant to satisfy such tax withholding obligation, in whole or in part by (a) paying cash, (b) electing to have the Company withhold otherwise deliverable cash or Shares having a Fair Market Value equal to the amount required to be withheld, or (c) delivering to the Company already-owned Shares having a Fair Market Value equal to the amount required to be withheld. The amount of the withholding requirement will be deemed to include any amount which the Administrator agrees may be withheld at the time the election is made, not to exceed the amount determined by using the maximum federal, state or local marginal income tax rates applicable to the Participant with respect to the Award on the date that the amount of tax to be withheld is to be determined. The Fair Market Value of the Shares to be withheld or delivered will be determined as of the date that the taxes are required to be withheld.

13. No Effect on Employment or Service . Neither the Plan nor any Award will confer upon a Participant any right with respect to continuing the Participant’s relationship as a Service Provider with the Company, nor will they interfere in any way with the Participant’s right or the Company’s right to terminate such relationship at any time, with or without cause, to the extent permitted by Applicable Laws.

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14. Date of Grant . The date of grant of an Award shall be, for all purposes, the date on which the Administrator makes the determination granting such Award, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Participant within a reasonable time after the date of such grant.

15. Term of Plan . Subject to Section 20 of the Plan, the Plan, as amended and restated on March 26, 2004, shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years from such date, unless terminated earlier under Section 16 of the Plan.

16. Amendment and Termination of the Plan .

(a) Amendment and Termination . The Board may at any time amend, alter, suspend or terminate the Plan.

(b) Stockholder Approval . The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.

(c) Effect of Amendment or Termination . No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Participant, unless mutually agreed otherwise between the Participant and the Administrator, which agreement must be in writing and signed by the Participant and the Company. Termination of the Plan shall not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination.

17. Conditions Upon Issuance of Shares .

(a) Legal Compliance . Shares shall not be issued pursuant to the exercise of an Award unless the exercise of such Award and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance.

(b) Investment Representations. As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.

18. Inability to Obtain Authority . The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

19. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

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20. Stockholder Approval . The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws.

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Exhibit 10.2(p)

ECHELON CORPORATION

1997 STOCK PLAN

STOCK OPTION AGREEMENT

By executing the Grant Acceptance process and using the services on this Morgan Stanley Smith Barney Benefit Access ^® website, you, the Optionee (“Optionee”) and Echelon Corporation (the “Company”) agree that this Award is granted under and governed by the terms and conditions of Company’s 1997 Stock Plan (the “Plan”) and the Terms and Conditions of the Stock Option Agreement (the “Agreement”), which may be amended or modified from time to time. Optionee has reviewed the Plan and this Agreement in its entirety, has had an opportunity to obtain the advice of counsel prior to accepting this Award and fully understands provisions of the Plan and this Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and this Agreement. Optionee further agrees to promptly notify the Company upon any change in the Optionee’s residence address.

The Company hereby grants you, the optionee, a stock option (the “Option”) under the Plan, to exercise in exchange for a payment from the Company pursuant to this Option Agreement. However, as provided in the Agreement, this Option may expire earlier than the Expiration Date.

Unless otherwise defined herein, the terms defined in the 1997 Stock Plan shall have the same defined meanings in this Option Agreement.

I. AGREEMENT

1 Grant of Option . The Plan Administrator of the Company hereby grants to the Optionee named in the Grant Summary (the “Optionee”) an option (the “Option”) to purchase the number of Shares, as set forth in the Grant Summary, at the exercise price per share set forth in the Grant Summary (the “Exercise Price”), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 16(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail.

If designated in the Grant Summary as an Incentive Stock Option (“ISO”), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option (“NSO”).

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2 Vesting Schedule:

This Option may be exercised, in whole or in part, in accordance with the following schedule:

25% of the Shares subject to the Option shall vest on each annual anniversary of the date of grant subject to the Optionee continuing to be a Service Provider on such dates.

Notwithstanding anything in this paragraph 2 to the contrary, and except as otherwise provided by the Administrator, vesting of the Option will be suspended during any unpaid leave of absence other than military leave and will resume on the date the Employee returns to work on a regular schedule as determined by the Company; provided, however, that no vesting credit will be awarded for the time vesting has been suspended during such leave of absence. The Administrator, in its discretion, may accelerate the vesting of the balance, or some lesser portion of the balance, of the Option at any time, subject to the terms of the Plan. If so accelerated, such Option (or the portion thereof) will be considered as having vested as of the date specified by the Administrator.

3 Termination Period:

This Option may be exercised for thirty (30) days after Optionee ceases to be a Service Provider. Upon the death or Disability of the Optionee, this Option may be exercised for twelve (12) months after Optionee ceases to be a Service Provider. In no event shall this Option be exercised later than the Term/Expiration Date as provided in the Grant Summary.

4 Exercise of Option :

(a) Right to Exercise . This Option is exercisable during its term in accordance with the Vesting Schedule set out in Section 2 and the applicable provisions of the Plan and this Option Agreement, subject to the Optionee’s remaining a Service Provider on each vesting date.

(b) Method of Exercise . This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the “Exercise Notice”), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to the Chief Financial Officer of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price.

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No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares.

5 Method of Payment . Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:

(a) cash; or

(b) check; or

(c) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan.

6 Non-Transferability of Option . This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

7 Term of Option . This Option may be exercised only within the term set out in the Grant Summary, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement.

8 Tax Consequences . Some of the federal tax consequences relating to this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

(a) Exercising the Option .

(i) Nonstatutory Stock Option . The Optionee may incur regular federal income tax liability upon exercise of a NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise.

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federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee ceases to be an Employee but remains a Service Provider, any Incentive Stock Option of the Optionee that remains unexercised shall cease to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the date three (3) months and one (1) day following such change of status.

(b) Disposition of Shares .

(i) NSO . If the Optionee holds NSO Shares for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes.

(ii) ISO . If the Optionee holds ISO Shares for at least one year after exercise and two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the lesser of (A) the difference between the Fair Market Value of the Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the sale price of such Shares and the aggregate Exercise Price. Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held.

(c) Notice of Disqualifying Disposition of ISO Shares . If the Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee.

9 Entire Agreement; Governing Law . The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California.

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that the Company cannot and has not guaranteed that the IRS will agree that the per Share Grant Price of this Option equals or exceeds the Fair Market Value of a Share on the date of grant in a later examination. The Optionee agrees that if the IRS determines that this Option was granted with a per Share Grant Price that was less than the Fair Market Value of a Share on the date of grant, the Employee will be solely responsible for the Employee’s costs related to such a determination.

11 NO GUARANTEE OF CONTINUED SERVICE . OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.

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Exhibit 10.2(q)

ECHELON CORPORATION

1997 STOCK PLAN

STOCK OPTION AGREEMENT

Unless otherwise defined herein, the terms defined in the 1997 Stock Plan shall have the same defined meanings in this Option Agreement.

I. AGREEMENT

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2 Vesting Schedule:

This Option may be exercised, in whole or in part, in accordance with the following schedule:

25% of the Shares subject to the Option shall vest on each annual anniversary of the date of grant subject to the Optionee continuing to be a Service Provider on such dates.

(a)

(b)

Further, and notwithstanding the foregoing, upon Employee’s “Involuntary Termination” (as defined below) within twelve (12) months following a “Change of Control Merger” (as defined in the Plan), 100% of the outstanding and unvested portion of the Option awarded by this Agreement will vest in full and, to the extent applicable, all performance goals or other vesting criteria to which the Option is subject will be deemed achieved at one hundred percent (100%) of target levels and all other terms and conditions met.

(c)

For purposes of this Agreement, “Involuntary Termination” shall mean, without Employee’s express written consent: (i) a significant reduction of the Employee’s duties, authority or responsibilities, relative to the Employee’s duties, authority or responsibilities as in effect immediately prior to the Change of Control Merger; (ii) a material reduction in the total cash compensation of the Employee as in effect immediately prior to the Change of Control Merger; (iii) the relocation of the Employee to a facility or a location more than thirty (30) miles from the Employee’s then present location, without the Employee’s express written consent; or (iv) any purported termination of the Employee which is not effected for “Disability” or for “Cause” (each as defined in the Plan), or any purported termination for which the grounds relied upon are not valid.

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3 Termination Period:

4 Exercise of Option .

5 Method of Payment . Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:

(a) cash; or

(b) check; or

(c) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan.

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(a) Exercising the Option .

(ii) Incentive Stock Option . If this Option qualifies as an ISO, the Optionee will have no regular federal income tax liability upon its exercise, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to alternative minimum taxable income for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee ceases to be an Employee but remains a Service Provider, any Incentive Stock Option of the Optionee that remains unexercised shall cease to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the date three (3) months and one (1) day following such change of status.

(b) Disposition of Shares .

(i) NSO . If the Optionee holds NSO Shares for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes.

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10 Section 409A . Under Section 409A of the Internal Revenue Code of 1986, as amended, an Option that vests after December 31, 2004, that was granted with a per share Grant Price that is determined by the Internal Revenue Service (the “IRS”) to be less than the fair market value of a share of common stock on the date of grant (a “discount Option”) may be considered “deferred compensation.” An Option that is a “discount Option” may result in (i) income recognition by the Optionee prior to the exercise of the Option, (ii) an additional twenty percent (20%) tax, and (iii) potential penalty and interest charges. The Optionee acknowledges that the Company cannot and has not guaranteed that the IRS will agree that the per Share Grant Price of this Option equals or exceeds the Fair Market Value of a Share on the date of grant in a later examination. The Optionee agrees that if the IRS determines that this Option was granted with a per Share Grant Price that was less than the Fair Market Value of a Share on the date of grant, the Employee will be solely responsible for the Employee’s costs related to such a determination.

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Exhibit 10.2(r)

ECHELON CORPORATION

1997 STOCK PLAN

STOCK OPTION AGREEMENT

FOR OPTIONEES OUTSIDE THE U.S.

TERMS AND CONDITIONS OF THE STOCK OPTION AGREEMENT

By executing the Grant Acceptance process and using the services on this Morgan Stanley Smith Barney Benefit Access ^® website, you, the Optionee (the “Optionee”) and Echelon Corporation (the “Company”) agree that this Option is granted under and governed by the terms and conditions of Company’s 1997 Stock Plan (the “Plan”) and the Terms and Conditions of the Stock Option Agreement (the “Option Agreement”), which may be amended or modified from time to time. The Optionee has reviewed the Plan and this Option Agreement in its entirety, has had an opportunity to obtain the advice of counsel prior to accepting this Option grant and fully understands provisions of the Plan and this Option Agreement. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and this Option Agreement. The Optionee further agrees to promptly notify the Company upon any change in the Optionee’s residence address. PLEASE BE SURE TO READ ALL OF THE PROVISIONS FOR YOUR COUNTRY (IF ANY) IN APPENDIX A THAT CONTAIN SPECIAL TERMS AND CONDITIONS OF THIS AWARD APPLICABLE TO YOU.

The Company hereby grants you, the Optionee, an Option under the Plan, to exercise in exchange for a payment from the Company pursuant to this Option Agreement. However, as provided in this Option Agreement, this Option may expire earlier than the Expiration Date. The Option is subject to the provisions of the Plan and this Option Agreement, including any special terms and conditions for the Optionee’s country in the Appendix hereto, which constitutes part of this Option Agreement. Unless otherwise defined herein, the terms defined in the 1997 Stock Plan shall have the same defined meanings in this Option Agreement.

I. NOTICE OF STOCK OPTION GRANT

You have been granted a Nonstatutory Stock Option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, including any special terms and conditions for the Optionee’s country in the appendix hereto (the “Appendix,” which constitutes part of this Option Agreement.

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Vesting Schedule:

This Option may be exercised, in whole or in part, in accordance with the following schedule:

25% of the Shares subject to the Option shall vest on each anniversary of the date of grant subject to the Optionee continuing to be a Service Provider on such dates.

Termination Period :

II. AGREEMENT

1 Grant of Option . The Company hereby grants to the Optionee named in the Grant Summary an option (the “Option”) to purchase the number of Shares, as set forth in the Grant Summary, at the exercise price per share set forth in the Grant Summary (the “Exercise Price”), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 16(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail.

2 Exercise of Option .

(a) Right to Exercise . This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Grant Summary and the applicable provisions of the Plan and this Option Agreement, subject to the Optionee’s remaining a Service Provider on each vesting date.

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3 Method of Payment . Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:

(a) cash; or

(b) check; or

(c) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan.

4 Non-Transferability of Option . This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of the Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

5 Term of Option . This Option may be exercised only within the term set out in the Grant Summary, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement.

6 Responsibility for Taxes . The Optionee acknowledges that, regardless of any action taken by the Company or, if different, the Optionee’s employer (the “Employer”), the ultimate liability for all income tax, social insurance, payroll tax, fringe benefits tax, payment on account or other tax-related items related to the Optionee’s participation in the Plan and legally applicable to the Optionee (“Tax-Related Items”), is and remains the Optionee’s responsibility and may exceed the amount actually withheld by the Company or the Employer. The Optionee further acknowledges that the Company and/or the Employer (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Option, including, but not limited to, the grant, vesting or exercise of the Option, the subsequent sale of Exercised Shares acquired pursuant to such exercise and the receipt of any dividends; and (ii) do not commit to and are under no obligation to structure the terms of the grant or any aspect of the Option to reduce or eliminate the Optionee’s liability for Tax-Related Items or achieve any particular tax result. Further, if the Optionee is subject to Tax-Related Items in more than one jurisdiction between the Date of Grant and the date of any relevant taxable or tax withholding event, as applicable, the Optionee acknowledges that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction.

Prior to any relevant taxable or tax withholding event, as applicable, the Optionee agrees to make adequate arrangements satisfactory to the Company and/or the Employer to satisfy all Tax-Related Items.

In this regard, the Optionee authorizes the Company and/or the Employer, or their respective agents, at their discretion, to satisfy the obligations with regard to all Tax-Related

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Items by means of one or a combination of the following: (i) withholding from the Optionee’s wages or other cash compensation paid to the Optionee by the Company and/or the Employer; or (ii) withholding from proceeds of the sale of Exercised Shares acquired at exercise of the Option either through a voluntary sale or through a mandatory sale arranged by the Company (on the Optionee’s behalf pursuant to this authorization) without further consent. The Company may withhold or account for Tax-Related Items by considering maximum applicable rates, in which case the Optionee will receive a refund of any over-withheld amount in cash and will have no entitlement to the Common Stock equivalent.

Finally, the Optionee agrees to pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to withhold or account for as a result of the Optionee’s participation in the Plan that cannot be satisfied by the means previously described. The Company may refuse to issue or deliver the Shares or the proceeds of the sale of Shares, if the Optionee fails to comply with his or her obligations in connection with the Tax-Related Items.

7 Nature of Grant . In accepting the Option, the Optionee acknowledges, understands and agrees that:

(a) the grant of the Option is voluntary and occasional and does not create any contractual or other right to receive future grants of options, or benefits in lieu of options, even if options have been granted in the past;

(b) all decisions with respect to future Option or other grants, if any, will be at the sole discretion of the Company;

(c) the Option grant and the Optionee’s participation in the Plan shall not create a right to employment or engagement as a Service Provider, or be interpreted as forming an employment or service contract with the Company, the Employer or any Subsidiary or affiliate of the Company;

(d) the Optionee is voluntarily participating in the Plan;

(e) the Option and any Shares acquired under the Plan are not intended to replace any pension rights or compensation;

(f) the Option and any Shares acquired under the Plan and the income and value of same, are not part of normal or expected compensation for any purpose, including, without limitation, calculating any severance, resignation, termination, redundancy, dismissal, end of service payments, bonuses, long-service awards, pension or retirement or welfare benefits or similar payments;

(g) the future value of the Shares underlying the Option is unknown, indeterminable, and cannot be predicted with certainty;

(h) if the underlying Shares do not increase in value, the Option will have no value;

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(i) if the Optionee exercises the Option and acquires Shares, the value of such Shares may increase or decrease in value, even below the Exercise Price;

(j) no claim or entitlement to compensation or damages shall arise from forfeiture of the Option resulting from the termination of the Optionee’s relationship as a Service Provider (for any reason whatsoever, whether or not later found to be invalid or in breach of employment laws in the jurisdiction where the Optionee is engaged as a Service Provider or the terms of the Optionee’s employment or service agreement, if any), and in consideration of the grant of the Option to which the Optionee is otherwise not entitled, the Optionee irrevocably agrees never to institute any claim against the Company, any of its Subsidiaries or affiliates or the Employer, waives his or her ability, if any, to bring any such claim, and releases the Company, its Subsidiaries and affiliates and the Employer from any such claim; if, notwithstanding the foregoing, any such claim is allowed by a court of competent jurisdiction, then, by participating in the Plan, the Optionee shall be deemed irrevocably to have agreed not to pursue such claim and agrees to execute any and all documents necessary to request dismissal or withdrawal of such claim;

(k) for purposes of the Option, the Optionee’s engagement as a Service Provider will be considered terminated as of the date the Optionee is no longer actively providing services to the Company or one of its Subsidiaries or affiliates (regardless of the reason for such termination and whether or not later found to be invalid or in breach of employment laws in the jurisdiction where the Optionee is engaged as a Service Provider or the terms of the Optionee’s employment or service agreement, if any), and unless otherwise expressly provided in this Option Agreement or determined by the Company, (i) the Optionee’s right to vest in the Option under the Plan, if any, will terminate as of such date and will not be extended by any notice period ( e.g ., the Optionee’s period of service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction where the Optionee is engaged as a Service Provider or the terms of the Optionee’s employment or service agreement, if any); and (ii) the period (if any) during which the Optionee may exercise the Option after such termination of the Optionee’s relationship as a Service Provider will commence on the date the Optionee cease to actively provide services and will not be extended by any notice period mandated under employment laws in the jurisdiction where the Optionee is engaged as a Service Provider or terms of the Optionee’s employment or service agreement, if any; the Administrator shall have the exclusive discretion to determine when the Optionee is no longer actively providing services for purposes of his or her Option grant (including whether the Optionee may still be considered to be providing services while on a leave of absence);

(l) unless otherwise provided in the Plan or by the Company in its discretion, the Option and the benefits evidenced by this Option Agreement do not create any entitlement to have the Option or any such benefits transferred to, or assumed by, another company nor be exchanged, cashed out or substituted for, in connection with any corporate transaction affecting the shares of the Company;

(m) the Option and the Shares subject to the Option are not part of normal or expected compensation or salary for any purpose; and

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(n) the Optionee acknowledges and agrees that neither the Company, the Employer nor any Subsidiary or affiliate of the Company shall be liable for any foreign exchange rate fluctuation between the Optionee’s local currency and the United States Dollar that may affect the value of the Option or of any amounts due to the Optionee pursuant to the exercise of the Option or the subsequent sale of any Shares acquired upon exercise.

8 No Advice Regarding Grant . The Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding the Optionee’s participation in the Plan, or the Optionee’s acquisition or sale of the underlying Shares. The Optionee is hereby advised to consult with his or her own personal tax, legal and financial advisors regarding his or her participation in the Plan before taking any action related to the Plan.

9 Data Privacy . The Optionee hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Optionee’s personal data as described in this Option Agreement and any other Option grant materials by and among, as applicable, the Employer, the Company and its Subsidiaries and affiliates for the exclusive purpose of implementing, administering and managing the Optionee’s participation in the Plan.

The Optionee understands that the Company and the Employer may hold certain personal information about the Optionee, including, but not limited to, the Optionee’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company, details of all Options or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in the Optionee’s favor, for the exclusive purpose of implementing, administering and managing the Plan (“Personal Data”).

The Optionee understands that Personal Data will be transferred to Morgan Stanley Smith Barney or any other third parties assisting the Company with the implementation, administration and management of the Plan. The Optionee understands that the recipients of the Personal Data may be located in the United States or elsewhere, and that the recipient’s country (e.g., the United States) may have different data privacy laws and protections than the Optionee’s country. The Optionee understands that he or she may request a list with the names and addresses of any potential recipients of the Personal Data by contacting his or her local human resources representative. The Optionee authorizes the Company, Morgan Stanley Smith Barney or any other third parties assisting the Company (presently or in the future) with implementing, administering and managing the Plan to receive, possess, use, retain and transfer the Personal Data, in electronic or other form, for the sole purposes of implementing, administering and managing the Optionee’s participation in the Plan. The Optionee understands that Personal Data will be held only as long as is necessary to implement, administer and manage the Optionee’s participation in the Plan. The Optionee understands that he or she may, at any time, view Personal Data, request additional information about the storage and processing of Personal Data, require any necessary amendments to Personal Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing his or her local human resources representative. Further, the Optionee understands that he or she is providing the consents herein on a purely voluntary basis. If the Optionee does not consent, or if the Optionee later seeks to revoke his or her

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consent, the Optionee’s employment status or service and career with the Employer will not be adversely affected; the only adverse consequence of refusing or withdrawing the Optionee’s consent is that the Company would not be able to grant Options or other equity awards to the Optionee or administer or maintain such awards. Therefore, the Optionee understands that refusing or withdrawing his or her consent may affect the Optionee’s ability to participate in the Plan. For more information on the consequences of the Optionee’s refusal to consent or withdrawal of consent, the Optionee understands that he or she may contact his or her local human resources representative.

10 Address for Notices . Any notice to be given to the Company under the terms of this Agreement will be addressed to the Company, in care of Human Resources Department, at Echelon Corporation, 550 Meridian Avenue, San Jose, CA 95126, or at such other address as the Company may hereafter designate in writing.

11 Restrictions on Sale of Securities . Subject to the provisions of paragraph 13 below, the Shares issued as payment for exercised Options granted under this Agreement will be registered under the U.S. federal securities laws and will be freely tradable upon receipt. However, your subsequent sale of the Shares will be subject to any market blackout-period that may be imposed by the Company and must comply with the Company’s insider trading policies, and any other applicable securities laws.

12 Binding Agreement . Subject to the limitation on the transferability of this grant contained herein, this Option Agreement will be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto, to the extent permissible under local law.

13 Compliance with Law . Notwithstanding any other provision of the Plan or this Option Agreement, unless there is an available exemption from any registration, qualification or other legal requirement applicable to the Shares, the Company shall not be required to deliver any Shares issuable upon exercise of the Option prior to the completion of any registration or qualification of the Shares under any local, state, federal or foreign securities or exchange control law or under rulings or regulations of the U.S. Securities and Exchange Commission (“SEC”) or of any other governmental regulatory body, or prior to obtaining any approval or other clearance from any local, state, federal or foreign governmental agency, which registration, qualification or approval the Company shall, in its absolute discretion, deem necessary or advisable. The Employee understands that the Company is under no obligation to register or qualify the shares with the SEC or any state or foreign securities commission or to seek approval or clearance from any governmental authority for the issuance or sale of the Shares. Further, the Optionee agrees that the Administrator shall have unilateral authority to amend the Plan and this Option Agreement without the Optionee’s consent to the extent necessary to comply with securities or other laws applicable to issuance of Shares.

14 Captions . Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Option Agreement.

15 Agreement Severable . In the event that any provision in this Option Agreement will be held invalid or unenforceable, such provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Option Agreement.

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16 Entire Agreement . The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and the Optionee. The Optionee expressly warrants that he or she is not accepting this Option Agreement in reliance on any promises, representations, or inducements other than those contained herein.

17 Amendment, Suspension or Termination of the Plan . The Employee understands that the Plan is established voluntarily by the Company, it is discretionary in nature and may be amended, altered, suspended or terminated by the Company at any time, to the extent permitted by the Plan.

18 Notice of Governing Law and Venue . The Option grant and this Option Agreement shall be subject to the laws, but not the choice of law rules, of the State of California, U.S.A. For purposes of any action, lawsuit or other proceedings brought to enforce this Option Agreement, relating to it, or arising from it, the parties hereby submit to and consent to the sole and exclusive jurisdiction of the courts of Santa Clara County, California, or the federal courts for the United States for the Northern District of California, and no other courts, where this grant is made and/or to be performed.

19 NO GUARANTEE OF CONTINUED SERVICE . THE OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). THE OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH THE OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE THE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. THE DATE OF TERMINATION OF THE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER WILL BE DETERMINED UNDER SECTION 7(k) ABOVE.

20 Electronic Delivery and Acceptance . The Company may, in its sole discretion, decide to deliver any documents related to current or future participation in the Plan by electronic means. The Optionee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an online or electronic system established and maintained by the Company or a third party designated by the Company.

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21 Language . If the Optionee has received this Option Agreement, or any other document related to the Option and/or the Plan translated into a language other than English, and if the meaning of the translated version is different than the English version, the English version will control.

22 Appendix . Notwithstanding any provisions in this Option Agreement, the Option grant shall be subject to any special terms and conditions set forth in any Appendix to this Option Agreement for the Optionee’s country. Moreover, if the Optionee relocates to one of the countries included in the Appendix, the special terms and conditions for such country will apply to the Optionee, to the extent the Company determines that the application of such terms and conditions is necessary or advisable for legal or administrative reasons. The Appendix constitutes part of this Option Agreement.

23 Imposition of Other Requirements . The Company reserves the right to impose other requirements on the Optionee’s participation in the Plan, on the Option and on any Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Optionee to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.

24 Waiver . The Optionee acknowledges that a waiver by the Company of breach of any provision of this Option Agreement shall not operate or be construed as a waiver of any other provision of this Option Agreement, or of any subsequent breach by the Optionee or any other Optionee.

25 Section 409A . Under Section 409A of the U.S. Internal Revenue Code of 1986, as amended, an Option that vests after December 31, 2004, that was granted with a per share grant price that is determined by the U.S. Internal Revenue Service (the “IRS”) to be less than the fair market value of a share common stock on the date of grant (a “discount Option”) may be considered “deferred compensation.” For Optionees who are U.S. taxpayers, an Option that is a “discount Option” may result in (i) income recognition by the Optionee prior to the exercise of the Option, (ii) an additional twenty percent (20%) tax, and (iii) potential penalty and interest charges. The Optionee acknowledges that the Company cannot and has not guaranteed that the IRS will agree that the per Share Exercise Price of this Option equals or exceeds the Fair Market Value of a Share on the Date of Grant in a later examination. The Optionee agrees that if the IRS determines that this Option was granted with a per Share Exercise Price that was less than the Fair Market Value of a Share on the Date of Grant, the Optionee will be solely responsible for the Optionee’s costs related to such a determination.

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Exhibit 10.2(s)

ECHELON CORPORATION

1997 STOCK PLAN

STOCK OPTION AGREEMENT

FOR CORPORATE OFFICER OPTIONEES OUTSIDE THE U.S.

TERMS AND CONDITIONS OF THE STOCK OPTION AGREEMENT

I. NOTICE OF STOCK OPTION GRANT

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Vesting Schedule:

This Option may be exercised, in whole or in part, in accordance with the following schedule:

25% of the Shares subject to the Option shall vest on each anniversary of the date of grant subject to the Optionee continuing to be a Service Provider on such dates.

Termination Period :

This Option may be exercised for thirty (30) days after the Optionee ceases to be a Service Provider. Upon the death or Disability of the Optionee, this Option may be exercised for one (1) year after the Optionee ceases to be a Service Provider. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. Notwithstanding anything in this paragraph to the contrary, and except as otherwise provided by the Administrator or as required by local law, vesting of the option shall be suspended during any unpaid leave of absence other than military leave and will resume on the date the Employee returns to work on a regular schedule as determined by the Company; provided, however, that no vesting credit will be awarded for the time vesting has been suspended during such leave of absence, if permissible under local law. Further, and notwithstanding the foregoing, upon the Optionee’s “Involuntary Termination” (as defined in the Plan) within twelve (12) months following a “Change of Control Merger” (as defined in the Plan), 100% of the unvested Shares subject to the Option shall vest in full and the Optionee shall have the right to exercise the Option as to all of the then remaining Shares subject to the Option, including Shares as to which the Optionee would not otherwise be vested or exercisable. Thereafter, the Option shall remain exercisable in accordance with its terms as determined by the Administrator.

II. AGREEMENT

2 Exercise of Option .

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Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to the Chief Financial Officer of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price.

3 Method of Payment . Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:

(a) cash; or

(b) check; or

(c) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan.

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In this regard, the Optionee authorizes the Company and/or the Employer, or their respective agents, at their discretion, to satisfy the obligations with regard to all Tax-Related Items by means of one or a combination of the following: (i) withholding from the Optionee’s wages or other cash compensation paid to the Optionee by the Company and/or the Employer; or (ii) withholding from proceeds of the sale of Exercised Shares acquired at exercise of the Option either through a voluntary sale or through a mandatory sale arranged by the Company (on the Optionee’s behalf pursuant to this authorization) without further consent. The Company may withhold or account for Tax-Related Items by considering maximum applicable rates, in which case the Optionee will receive a refund of any over-withheld amount in cash and will have no entitlement to the Common Stock equivalent.

7 Nature of Grant . In accepting the Option, the Optionee acknowledges, understands and agrees that:

(b) all decisions with respect to future Option or other grants, if any, will be at the sole discretion of the Company;

(d) the Optionee is voluntarily participating in the Plan;

(e) the Option and any Shares acquired under the Plan are not intended to replace any pension rights or compensation;

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(g) the future value of the Shares underlying the Option is unknown, indeterminable, and cannot be predicted with certainty;

(h) if the underlying Shares do not increase in value, the Option will have no value;

(i) if the Optionee exercises the Option and acquires Shares, the value of such Shares may increase or decrease in value, even below the Exercise Price;

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(m) the Option and the Shares subject to the Option are not part of normal or expected compensation or salary for any purpose; and

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information about the storage and processing of Personal Data, require any necessary amendments to Personal Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing his or her local human resources representative. Further, the Optionee understands that he or she is providing the consents herein on a purely voluntary basis. If the Optionee does not consent, or if the Optionee later seeks to revoke his or her consent, the Optionee’s employment status or service and career with the Employer will not be adversely affected; the only adverse consequence of refusing or withdrawing the Optionee’s consent is that the Company would not be able to grant Options or other equity awards to the Optionee or administer or maintain such awards. Therefore, the Optionee understands that refusing or withdrawing his or her consent may affect the Optionee’s ability to participate in the Plan. For more information on the consequences of the Optionee’s refusal to consent or withdrawal of consent, the Optionee understands that he or she may contact his or her local human resources representative.

11 Changes in the Option . In the event that as a result of a stock or extraordinary cash dividend, stock split, distribution, reclassification, recapitalization, combination of Shares or the adjustment in capital stock of the Company or otherwise, or as a result of a merger, consolidation, spin-off or other corporate transaction or event, the Option will be increased, reduced or otherwise affected, and by virtue of any such event the Optionee will in his or her capacity as owner of unvested Shares subject to the Option which have been awarded to him or her (the “Prior Option”) be entitled to new or additional or different shares of stock, cash or other securities or property (other than rights or warrants to purchase securities); such new or additional or different shares, cash or securities or property will thereupon be considered to be unvested Shares and will be subject to all of the conditions and restrictions that were applicable to the Prior Option pursuant to this Option Agreement and the Plan. If the Optionee receives rights or warrants with respect to any Prior Option, such rights or warrants may be held or exercised by the Optionee, provided that until such exercise any such rights or warrants and after such exercise any shares or other securities acquired by the exercise of such rights or warrants will be considered to be unvested Shares and will be subject to all of the conditions and restrictions which were applicable to the Prior Option pursuant to the Plan and this Option Agreement. The Administrator in its absolute discretion at any time may accelerate the vesting of all or any portion of such new or additional shares of stock, cash or securities, rights or warrants to purchase securities or shares or other securities acquired by the exercise of such rights or warrants.

12 Restrictions on Sale of Securities . Subject to the provisions of paragraph 14 below, the Shares issued as payment for exercised Options granted under this Agreement will be registered under the U.S. federal securities laws and will be freely tradable upon receipt. However, your subsequent sale of the Shares will be subject to any market blackout-period that may be imposed by the Company and must comply with the Company’s insider trading policies, and any other applicable securities laws.

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13 Binding Agreement . Subject to the limitation on the transferability of this grant contained herein, this Option Agreement will be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto, to the extent permissible under local law.

14 Compliance with Law . Notwithstanding any other provision of the Plan or this Option Agreement, unless there is an available exemption from any registration, qualification or other legal requirement applicable to the Shares, the Company shall not be required to deliver any Shares issuable upon exercise of the Option prior to the completion of any registration or qualification of the Shares under any local, state, federal or foreign securities or exchange control law or under rulings or regulations of the U.S. Securities and Exchange Commission (“SEC”) or of any other governmental regulatory body, or prior to obtaining any approval or other clearance from any local, state, federal or foreign governmental agency, which registration, qualification or approval the Company shall, in its absolute discretion, deem necessary or advisable. The Employee understands that the Company is under no obligation to register or qualify the shares with the SEC or any state or foreign securities commission or to seek approval or clearance from any governmental authority for the issuance or sale of the Shares. Further, the Optionee agrees that the Administrator shall have unilateral authority to amend the Plan and this Option Agreement without the Optionee’s consent to the extent necessary to comply with securities or other laws applicable to issuance of Shares.

15 Captions . Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Option Agreement.

16 Agreement Severable . In the event that any provision in this Option Agreement will be held invalid or unenforceable, such provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Option Agreement.

17 Entire Agreement . The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and the Optionee. The Optionee expressly warrants that he or she is not accepting this Option Agreement in reliance on any promises, representations, or inducements other than those contained herein.

18 Amendment, Suspension or Termination of the Plan . The Employee understands that the Plan is established voluntarily by the Company, it is discretionary in nature and may be amended, altered, suspended or terminated by the Company at any time, to the extent permitted by the Plan.

19 Notice of Governing Law and Venue . The Option grant and this Option Agreement shall be subject to the laws, but not the choice of law rules, of the State of California, U.S.A. For purposes of any action, lawsuit or other proceedings brought to enforce this Option Agreement, relating to it, or arising from it, the parties hereby submit to and consent to the sole

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and exclusive jurisdiction of the courts of Santa Clara County, California, or the federal courts for the United States for the Northern District of California, and no other courts, where this grant is made and/or to be performed.

20 NO GUARANTEE OF CONTINUED SERVICE . THE OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). THE OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH THE OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE THE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. THE DATE OF TERMINATION OF THE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER WILL BE DETERMINED UNDER SECTION 7(k) ABOVE.

21 Electronic Delivery and Acceptance . The Company may, in its sole discretion, decide to deliver any documents related to current or future participation in the Plan by electronic means. The Optionee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an online or electronic system established and maintained by the Company or a third party designated by the Company.

22 Language . If the Optionee has received this Option Agreement, or any other document related to the Option and/or the Plan translated into a language other than English, and if the meaning of the translated version is different than the English version, the English version will control.

23 Appendix . Notwithstanding any provisions in this Option Agreement, the Option grant shall be subject to any special terms and conditions set forth in any Appendix to this Option Agreement for the Optionee’s country. Moreover, if the Optionee relocates to one of the countries included in the Appendix, the special terms and conditions for such country will apply to the Optionee, to the extent the Company determines that the application of such terms and conditions is necessary or advisable for legal or administrative reasons. The Appendix constitutes part of this Option Agreement.

24 Imposition of Other Requirements . The Company reserves the right to impose other requirements on the Optionee’s participation in the Plan, on the Option and on any Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Optionee to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.

25 Waiver . The Optionee acknowledges that a waiver by the Company of breach of any provision of this Option Agreement shall not operate or be construed as a waiver of any other provision of this Option Agreement, or of any subsequent breach by the Optionee or any other Optionee.

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26 Section 409A . Under Section 409A of the U.S. Internal Revenue Code of 1986, as amended, an Option that vests after December 31, 2004, that was granted with a per share grant price that is determined by the U.S. Internal Revenue Service (the “IRS”) to be less than the fair market value of a share common stock on the date of grant (a “discount Option”) may be considered “deferred compensation.” For Optionees who are U.S. taxpayers, an Option that is a “discount Option” may result in (i) income recognition by the Optionee prior to the exercise of the Option, (ii) an additional twenty percent (20%) tax, and (iii) potential penalty and interest charges. The Optionee acknowledges that the Company cannot and has not guaranteed that the IRS will agree that the per Share Exercise Price of this Option equals or exceeds the Fair Market Value of a Share on the Date of Grant in a later examination. The Optionee agrees that if the IRS determines that this Option was granted with a per Share Exercise Price that was less than the Fair Market Value of a Share on the Date of Grant, the Optionee will be solely responsible for the Optionee’s costs related to such a determination.

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Exhibit 10.2(t)

APPENDIX

ECHELON CORPORATION

1997 PLAN

STOCK OPTION AGREEMENT

FOR OPTIONEES OUTSIDE THE U.S.

Terms and Conditions

This Appendix includes additional terms and conditions that govern the Option granted to the Optionee under the Plan if the Optionee resides and/or works in one of the countries listed below. This Appendix forms part of the Option Agreement. Capitalized terms used, but not defined herein, shall have the same meanings assigned to them in the Plan and the Option Agreement.

If the Optionee is a citizen or resident of a country other than the one in which the Optionee is currently working, is considered a resident of another country for local law purposes or transfers employment and/or residency between countries after the Date of Grant, the Company shall, in its sole discretion, determine to what extent the additional terms and conditions included herein will apply to the Optionee under these circumstances.

Notifications

This Appendix also includes information regarding exchange controls and certain other issues of which the Optionee should be aware with respect to his or her participation in the Plan. The information is based on the securities, exchange control, and other laws in effect in the Optionee’s country as of July 2012. Such laws are often complex and change frequently. As a result, the Company strongly recommends that the Optionee not rely on the information in this Appendix as the only source of information relating to the consequences of his or her participation in the Plan because the information may be out of date at the time the Optionee exercises the Option or sells Shares acquired under the Plan.

In addition, the information contained herein is general in nature and may not apply to the Optionee’s particular situation, and the Company is not in a position to assure the Optionee of a particular result. Accordingly, the Optionee is advised to seek appropriate professional advice as to how the relevant laws in his or her country may apply to the Optionee’s situation.

Finally, if the Optionee is a citizen or resident of a country other than the one in which the Optionee is currently working, is considered a resident of another country for local law purposes or transfers employment and/or residency between countries after the Date of Grant, the information contained herein may not be applicable in the same manner to the Optionee.

FRANCE

Terms and Conditions

Language Consent

In accepting this Option, the Optionee confirms having read and understood the Plan, the Option Agreement and this Appendix, including all terms and conditions included therein, which were provided in the English language. The Optionee accepts the terms of those documents accordingly.

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En acceptant l’Option, le Bénéficiaire de l’Option confirme avoir lu et compris le Plan, le Contrat d’Option et le présent Appendice, y compris leurs termes et conditions, qui lui ont été communiqués en langue anglaise. Le Bénéficiaire de l’Option accepte les termes de ces documents en connaissance de cause.

Notifications

Tax Information

The Option is not intended to be a French tax-qualified Award.

Exchange Control Information

If the Optionee maintains a foreign bank account, he or she is required to report such to the French tax authorities when filing his or her annual tax return.

GERMANY

Notifications

Exchange Control Information

If the Optionee makes cross-border payments in excess of €12,500 in connection with the purchase or sale of securities (including Shares acquired under the Plan) or the receipt of any dividends, the Optionee must file a report with the Servicezentrum Außenwirtschaftsstatistik , which is the competent federal office of the Deutsche Bundesbank (the German Central Bank) for such notifications in Germany. The Optionee is responsible for satisfying the reporting obligation and should be able to obtain a copy of the form used for this purpose from the German bank the Optionee uses to carry out the transfer.

In addition, in the unlikely event that the Optionee holds Shares exceeding 10% of the total capital of the Company, the Optionee must report his or her holdings in the Company on an annual basis.

HONG KONG

Terms and Conditions

Securities Law Information

WARNING: The grant of the Option under the terms of the Option Agreement and the Plan and the issuance of Shares upon exercise of the Option do not constitute a public offer of securities under Hong Kong law and are available only to Employees of the Company or its Subsidiaries or affiliates of the Company.

Please be aware that the Option Agreement, including this Appendix, the Plan, and other incidental communication materials related to the Option that the Optionee may receive have not been reviewed by any regulatory authority in Hong Kong. The Optionee is advised to exercise caution in relation to the right to acquire Shares at exercise of the Option, or otherwise, under the Plan. If the Optionee is in any doubt about any of the contents of the Option Agreement, the Plan or any other communication materials, the Optionee should obtain independent professional advice.

Sale of Shares

In accepting the Option, the Optionee agrees that in the event that he or she acquires Shares in respect of the Option within six months of the Date of Grant, the Optionee agrees that he or she will not dispose of any Shares acquired prior to the six-month anniversary of the Date of Grant.

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Notifications

Nature of Scheme

The Company specifically intends that the Plan will not be an occupational retirement scheme for purposes of the Occupational Retirement Schemes Ordinance.

ITALY

Terms and Conditions

Method of Payment

Notwithstanding anything to the contrary in the Plan or Agreement, due to regulatory requirements in Italy, the Optionee will be required to exercise the Option using the cashless sell-all exercise method pursuant to which all Exercised Shares will be sold immediately upon exercise and the proceeds of the sale, less the Exercise Price, any Tax-Related Items and broker’s fees or commissions, will be remitted to the Optionee. The Company reserves the right to provide additional methods of exercise depending on the development of local law.

Data Privacy . This section replaces paragraph 9 of the Option Agreement.

The Optionee understands that the Employer, the Company and any of its Subsidiaries and affiliates may hold certain personal information about the Optionee, including, but not limited to, the Optionee’s name, home address and telephone number, date of birth, social insurance or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company or its Subsidiaries and affilitates, and details of any Options or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding for the purpose of implementing, administering and managing the Plan (“Personal Data”).

The Optionee also understands that providing the Company with Personal Data is necessary for the performance of the Plan and that the Optionee’s refusal to provide such Personal Data would make it impossible for the Company to perform its contractual obligations and may affect the Optionee’s ability to participate in the Plan. The Controller of Personal Data processing is Echelon Corporation, with registered offices at 550 Meridian Avenue, San Jose, CA 95126, U.S.A., and, pursuant to Legislative Decree no. 196/2003, its representative in Italy for data privacy purposes is Echelon Europe LTD – Italy with registered offices in Piazzale Biancamano 8, 20121 Milano, Italy. The Optionee understands that Personal Data will not be publicized, but it may be accessible by the Employer and its internal and external personnel in charge of processing of such Personal Data and by the data processor (the “Processor”), if any. An updated list of Processors and other transferees of Personal Data is available upon request from the Employer. Furthermore, Personal Data will be transferred to Morgan Stanley Smith Barney and may also be transferred to banks, other financial institutions or brokers involved in the management and administration of the Plan. The Optionee understands that Personal Data may also be transferred to the independent registered public accounting firm engaged by the Company. The Optionee further understands that the Company and/or its Subsidiaries and affiliates will transfer Personal Data amongst themselves as necessary for the purpose of implementing, administering and managing the Optionee’s participation in the Plan and that the Company and/or its Subsidiaries and affiliates may each further transfer Personal Data to third parties assisting the Company in the implementation, administration and management of the Plan, including any requisite transfer to Morgan Stanley Smith Barney, or another third party with whom the Optionee may elect to deposit any Shares acquired under the Plan. Such recipients may receive, possess, use, retain and transfer Personal Data in electronic or other form, for the purposes of implementing, administering and managing the Optionee’s participation in the Plan. The Optionee understands that these recipients may be acting as Controllers, Processors or persons in charge of processing, as the case may be, in accordance with local law and may be located in or outside the

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European Economic Area in countries such as the United States that may not provide the same level of protection as intended under Italian data privacy laws. Should the Company exercise its discretion in suspending all necessary legal obligations connected with the management and administration of the Plan, it will delete Personal Data as soon as it has accomplished all the necessary legal obligations connected with the management and administration of the Plan.

The Optionee understands that Personal Data processing related to the purposes specified above shall take place under automated or nonautomated conditions, anonymously when possible, that comply with the purposes for which Personal Data is collected and with confidentiality and security provisions as set forth by applicable laws and regulations, with specific reference to Legislative Decree no. 196/2003.

The processing activity, including communication, the transfer of Personal Data abroad, including outside of the European Economic Area, as herein specified and pursuant to applicable laws and regulations, does not require the Optionee’s consent thereto as the processing is necessary to performance of contractual obligations related to implementation, administration and management of the Plan. The Optionee understands that, pursuant to Section 7 of the Legislative Decree no. 196/2003, the Optionee has the right to, including but not limited to, access, delete, update, correct or terminate, for legitimate reason, the Personal Data processing. The Optionee should contact the Employer in this regard. Furthermore, the Optionee is aware that Personal Data will not be used for direct marketing purposes. In addition, the Personal Data provided can be reviewed and questions or complaints can be addressed by contacting the Optionee’s human resources department.

Plan Acknowledgment

In accepting the Option, the Optionee acknowledges that he or she has received a copy of the Plan and the Option Agreement, including this Appendix, and has reviewed such documents in their entirety, fully understands the contents thereof and accepts all provisions of the Plan and the Option Agreement, including this Appendix.

The Optionee further acknowledges that he or she has read and specifically and expressly approves, without limitation, the following clauses in the Option Agreement: Part I, Termination Period; Paragraph 4: Non-Transferability of Option; Paragraph 6: Responsibility for Taxes; Paragraph 7: Nature of Grant; Paragraph 8: No Advice Regarding Grant; Paragraph 11: Restrictions on Sale of Securities; Paragraph 19: Notice of Governing Law and Venue; Paragraph 20: No Guarantee of Continued Service; Paragraph 22: Language; Paragraph 24: Imposition of Other Requirements; and the Data Privacy consent above.

Notifications

Exchange Control Information

Exchange control reporting is required if the Optionee transfers cash or Shares to or from Italy in excess of €10,000 or the equivalent amount in U.S. dollars. If the payment is made through an authorized broker resident in Italy, the broker will comply with the reporting obligation. In addition, the Optionee will have exchange control reporting obligations if the Optionee has any foreign investment (including Shares) held outside Italy in excess of €10,000. The reporting must be done on the Optionee’s individual tax return.

JAPAN

Notifications

Exchange Control Information

If the Optionee maintains a foreign bank account outside of Japan with a value exceeding ¥50 million as of December 31, the Optionee is required to report such to the Japanese authorities on an annual basis.

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In addition, if the Optionee pays more than ¥30,000,000 in a single transaction for the purchase of Shares when the Optionee exercises the Option, the Optionee must file a Payment Report with the Ministry of Finance through the Bank of Japan by the 20th day of the month following the month in which the payment was made. The precise reporting requirements vary depending on whether or not the relevant payment is made through a bank in Japan.

Finally, in the unlikely event that the Optionee purchases Shares valued at more than ¥100,000,000 in a single transaction, the Optionee must file a Securities Acquisition Report with the Ministry of Finance through the Bank of Japan within 20 days of the purchase of the Shares. A Payment Report is required independently from a Securities Acquisition Report. Therefore, if the total amount that the Optionee pays upon a one-time transaction for exercising the Option and purchasing Shares exceeds ¥100,000,000, the Optionee must file both a Payment Report and a Securities Acquisition Report.

KOREA

Notifications

Exchange Control Information

If the Optionee realizes US$500,000 or more from the sale of Shares or the receipt of any dividends in a single transaction, he or she must repatriate the proceeds to Korea within eighteen (18) months of receipt.

NETHERLANDS

Notifications

Insider Trading Notification

The Optionee should be aware of the Dutch insider trading rules, which may impact the sale of Shares acquired pursuant to exercise of the Option. In particular, the Optionee may be prohibited from effecting certain transactions involving Shares during the period in which the Optionee possesses “insider information” regarding the Company.

In accepting the Option, the Optionee acknowledges having read and understood the Insider Trading Notification and further acknowledges that it is the Optionee’s responsibility to comply with the following Dutch insider trading rules:

Under Article 5:56 of the Dutch Financial Supervision Act, anyone who has “inside information” related to an issuing company is prohibited from effectuating a transaction in securities in or from the Netherlands. “Inside information” is knowledge of a detail concerning the issuing company to which the securities relate that is not public and which, if published, would reasonably be expected to affect the stock price, regardless of the development of the price. The insider could be any Employee of the Company or a Subsidiary or affiliate of the Company in the Netherlands who has inside information as described herein.

Given the broad scope of the definition of inside information, certain Employees of the Company working at a Subsidiary or affiliate of the Company in the Netherlands (including the Optionees participating in the Plan) may have inside information and, thus, would be prohibited from effectuating a transaction in securities in the Netherlands at a time when the Optionee had such inside information. Please note that the Company cannot be held liable if the Optionee violates the Dutch insider trading rules. If the Optionee is uncertain whether the insider trading rules apply to him or her, the Optionee should consult with his or her personal legal advisor.

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NORWAY

No country-specific terms apply.

SINGAPORE

Notifications

Securities Law Information

The grant of the Option under the Plan is being made in reliance on Section 273(1)(f) of the Securities and Futures Act (Chapter 289, 2006 Ed.) (“SFA”), pursuant to which it is exempt from the prospectus and registration requirements under the SFA. The Plan has not been lodged or registered as a prospectus with the Monetary Authority of Singapore. The Optionee should note that the Option is subject to Section 257 of the SFA and that the Optionee will not be able to sell, or offer for sale, Shares acquired pursuant to exercise of the Option, unless such sale or offer is made pursuant to the exemptions under Part XIII Division (1) Subdivision (4) (other than section 280) of the SFA (Chapter 289, 2006 Ed.).

Director Notification Obligation

If the Optionee is a director, associate director or shadow director of a Singapore Subsidiary or affiliate of the Company, the Optionee is subject to certain notification requirements under the Singapore Companies Act. Among these requirements is an obligation to notify the Singapore Subsidiary or affiliate in writing of an interest ( e.g. , the Option, Shares, etc.) in the Company or any Subsidiary, affiliate or other related companies within two (2) business days of (i) its acquisition or disposal, (ii) any change in previously disclosed interest ( e.g. , when Shares acquired pursuant to exercise of the Option are sold), or (iii) becoming a director, associate director or shadow director.

Insider Trading Notification

The Optionee should be aware of the Singapore insider trading rules, which may impact the acquisition or disposal of Shares or rights to Shares ( e.g. , an Option) the under the Plan. Under the Singapore insider trading rules, the Optionee is prohibited from selling Shares when in possession of information which is not generally available and which the Optionee knows or should know will have a material effect on the price of Shares once such information is generally available.

SWEDEN

No country-specific terms apply.

UNITED KINGDOM

Terms and Conditions

Responsibility for Taxes . This provision supplements paragraph 8 of the Option Agreement.

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the Optionee to the Employer, effective as of the Due Date. The Optionee agrees that the loan will bear interest at the then-current Official Rate of Her Majesty’s Revenue and Customs (“HMRC”), it will be immediately due and repayable, and the Company and/or the Employer may recover it at any time thereafter by any of the means referred to in paragraph 6 of the Option Agreement. The Optionee authorizes the Company to delay the issuance of Shares to the Optionee unless and until the loan is repaid in full.

Notwithstanding the foregoing, if the Optionee is a director or executive officer of the Company (within the meaning of Section 13(k) of the U.S. Securities Exchange Act of 1934, as amended), the Optionee will not be eligible for such a loan to cover the income tax due. In the event that the Optionee is a director or executive officer and the income tax is not collected from or paid by the Optionee by the Due Date, the amount of any uncollected income tax will constitute a benefit to the Optionee on which additional income tax and national insurance contributions (“NICs”) may be payable. The Optionee will be responsible for reporting and paying any income tax due on this additional benefit directly to HMRC under the self-assessment regime and for reimbursing the Company and/or the Employer (as applicable) the value of any employee NICs due on this additional benefit.

Joint Election

As a condition of the exercise of the Option, the Optionee agrees to accept any liability for secondary Class 1 NICs (the “Employer NICs”) that may be payable by the Company and/or the Employer in connection with the Option and any event giving rise to Tax-Related Items. Without limitation to the foregoing, the Optionee agrees to enter into a joint election with the Employer (the “Election”) in the form approved for such Election by HMRC, and any other required consent or election required to accomplish the transfer of Employer NICs to the Optionee. The Optionee understands that the Election applies to any Option granted to the Optionee under the Plan after the execution of the Election. The Optionee further agrees to execute such other joint elections as may be required between the Optionee and any successor to the Company and/or the Employer.

If the Optionee does not enter into the Election prior to the exercise of the Option or any other event giving rise to Tax-Related Items, the Optionee shall not be entitled to exercise the Option or receive any benefit in connection with the Option unless and until the Optionee enters into the Election, and no Shares or other benefit pursuant to the Option will be issued to the Optionee under the Plan, without any liability to the Company or the Employer.

The Optionee further agrees that the Company and/or the Employer may collect the Employer NICs by any of the means set forth in paragraph 8 of the Option Agreement, as supplemented above.

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Exhibit 10.2(u)

ECHELON CORPORATION

1997 STOCK PLAN

Performance Share Agreement

for Employees Outside the U.S.

TERMS AND CONDITIONS OF PERFORMANCE SHARES

By executing the Grant Acceptance process and using the services on this Morgan Stanley Smith Barney Benefit Access ^® website, you, the Employee, and Echelon Corporation (the “Company”) agree that this Award is granted under and governed by the terms and conditions of the Company’s 1997 Stock Plan (the “Plan”) and the Terms and Conditions of Performance Shares (the “Agreement”), which may be amended or modified from time to time. The Employee has reviewed the Plan and this Agreement in its entirety, has had an opportunity to obtain the advice of counsel prior to accepting this Award and fully understands provisions of the Plan and this Agreement. The Employee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and this Agreement. The Employee further agrees to promptly notify the Company upon any change in the Employee’s residence address. PLEASE BE SURE TO READ ALL OF THE PROVISIONS FOR YOUR COUNTRY (IF ANY) IN APPENDIX A THAT CONTAIN SPECIAL TERMS AND CONDITIONS OF THIS AWARD APPLICABLE TO YOU.

The Company hereby grants you, the Employee, an award (the “Award”) of Performance Shares under the Plan. The Award is subject to the provisions of the Plan and the Agreement, including any special terms and conditions for the Employee’s country in Appendix A hereto, which constitutes part of this Agreement. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Agreement.

1. Grant . The Company hereby grants Performance Shares to the Employee under the Plan subject to all of the terms and conditions in the Plan and this Agreement. If the Performance Shares are paid out in Shares to the Employee upon vesting, par value for the Common Stock underlying the Performance Shares will be deemed to have been paid by the Employee’s services over the vesting period rendered by the Employee to the Company or any of its Subsidiaries or affiliates.

2. Company’s Obligation to Pay . Each Performance Share represents an unfunded promise by the Company to issue one share of the Company’s Common Stock, subject to certain restrictions and on the terms and conditions contained in this Agreement. Unless and until the Performance Shares have vested in the manner set forth in paragraphs 3 or 4, the Employee will have no right to the payment of Shares. Prior to actual payment of any vested Performance Shares, such Performance Shares will represent an unsecured obligation.

3. Vesting Schedule/Period of Restriction . Except as otherwise provided in paragraph 4 of this Agreement, the Performance Shares awarded by this Agreement shall vest in accordance with the vesting schedule set forth in the Grant Summary, subject to the Employee’s continuing to be a Service Provider on each relevant vesting date. Notwithstanding anything in this paragraph 3 to the contrary, and except as otherwise provided by the Administrator or as required by local law, vesting of the Performance Shares shall be suspended during any unpaid leave of absence other than military leave and will resume on the date the Employee returns to work on a regular schedule as determined by the Company; provided, however, that no vesting credit will be awarded for the time vesting has been suspended during such leave of absence, if permissible under local law.

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4. Administrator Discretion . The Administrator, in its discretion, may accelerate the vesting of the balance, or some lesser portion of the balance, of the Performance Shares at any time, subject to the terms of the Plan, and if permissible under local law. If so accelerated, such Performance Shares will be considered as having vested as of the date specified by the Administrator.

5. Payment after Vesting . Any Performance Shares that vest in accordance with paragraphs 3 or 4 will be paid to the Employee (or in the event of the Employee’s death, to his or her estate) in Shares which have an aggregate Fair Market Value equal to the value of the earned Performance Shares at vesting as soon as practicable following the date of vesting, subject to paragraph 8.

6. Forfeiture . Notwithstanding any contrary provision of this Agreement, the balance of the Performance Shares that have not vested pursuant to paragraphs 3 or 4 at the time of the Employee’s termination as a Service Provider for any or no reason will be forfeited and automatically transferred to and reacquired by the Company at no cost to the Company. The Employee shall not be entitled to a refund of the price paid for the Performance Shares forfeited to the Company pursuant to this paragraph 6.

7. Death of Employee . Any distribution or delivery to be made to the Employee under this Agreement will, if the Employee is then deceased, be made to the administrator or executor of the Employee’s estate. Any such administrator or executor must furnish the Company with (a) written notice of his or her status as transferee, and (b) evidence satisfactory to the Company to establish the validity of the transfer and compliance with any laws or regulations pertaining to said transfer.

8. Responsibility for Taxes . The Employee acknowledges that, regardless of any action taken by the Company or, if different, the Employee’s employer (the “Employer”), the ultimate liability for all income tax, social insurance, payroll tax, fringe benefits tax, payment on account or other tax-related items related to the Employee’s participation in the Plan and legally applicable to the Employee (“Tax-Related Items”) is and remains the Employee’s responsibility and may exceed the amount actually withheld by the Company or the Employer. The Employee further acknowledges that the Company and/or the Employer (a) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Performance Shares, including, but not limited to, the grant, vesting or settlement of the Performance Shares, the subsequent sale of Shares acquired pursuant to such settlement and the receipt of any dividends and/or any dividend equivalents; and (b) do not commit to and are under no obligation to structure the terms of the Award or any aspect of the Performance Shares to reduce or eliminate the Employee’s liability for Tax-Related Items or achieve any particular tax result. Further, if the Employee is subject to Tax-Related Items in more than one jurisdiction between the date of grant and the date of any relevant taxable or tax withholding event, as applicable, the Employee acknowledges that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction.

Prior to any relevant taxable or tax withholding event, as applicable, the Employee agrees to make adequate arrangements satisfactory to the Company and/or the Employer to satisfy all Tax-Related Items. No Shares will be issued to the Employee (or his or her estate) for Performance Shares unless and until satisfactory arrangements (as determined by the Administrator) have been made by the Employee with respect to the payment of any Tax-Related Items.

In this regard, the Employee authorizes the Company and/or its agents to satisfy the obligations with regard to all Tax-Related Items by withholding in Shares to be issued upon settlement of the Performance Shares. In the event that such withholding in Shares is problematic under applicable tax or securities law or has materially adverse accounting consequences, by the Employee’s acceptance of the Award, the Employee authorizes and directs the Company and any brokerage firm determined acceptable to the Company to sell on the Employee’s behalf a whole number of Shares from those Shares issued to the Employee as the Company determines to be appropriate to generate cash proceeds sufficient to satisfy the obligation for Tax-Related Items. If the obligation

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for Tax-Related Items is satisfied by withholding a number of whole Shares as described herein, for tax purposes, the Employee is deemed to have been issued the full number of Shares subject to the vested Performance Shares, notwithstanding that a number of the Shares is held back solely for the purpose of paying the Tax-Related Items. No fractional Shares will be withheld or issued pursuant to the grant of Performance Shares and the issuance of Shares thereunder; any additional withholding necessary for this reason will be done by the Company or the Subsidiary through the Employee’s paycheck or other cash compensation paid to the Employee by the Company and/or the Subsidiary. The Company or the Subsidiary, in its discretion, may, and with respect to its executive officers (as determined by the Company) will withhold an amount equal to two (2) times the Fair Market Value of a Share from the last paycheck or other cash compensation due to the Employee prior to the vesting of the Performance Shares. In the event that the cash amounts withheld by the Company or the Subsidiary exceed the Tax-Related Items that are due after the automatic withholding of whole Shares, the Company or the Subsidiary will reimburse the Employee for the excess amounts and the Employee will have no entitlement to the Common Stock equivalent.

In addition, the Employee authorizes the Company and/or the Subsidiary, in their sole discretion, in lieu of or in addition to the foregoing and in each case to the extent permissible under local law, to (i) sell or to arrange for the sale of Shares received as a result of vesting/settlement of the Performance Shares either through a voluntary sale or through a mandatory sale arranged by the Company (on the Employee’s behalf pursuant to this authorization without further consent), with the proceeds going toward satisfaction of the Tax-Related Items, (ii) require the Employee to pay the Tax Related Items in cash or with a cashier’s check or certified check, and/or (iii) withhold all applicable Tax-Related Items legally payable by the Employee from the Employee’s wages or other cash compensation payable to the Employee by the Company and/or the Employer.

Depending on the withholding method, the Company may withhold or account for Tax-Related Items by considering applicable minimum statutory withholding rates or other applicable withholding rates, including maximum applicable rates, in which case the Employee will receive a refund of any over-withheld amount in cash and will have no entitlement to the Common Stock equivalent.

Finally, the Employee shall pay to the Company and/or the Employer any amount of Tax-Related Items that the Company may be required to withhold as a result of the Employee’s participation in the Plan that cannot be satisfied by one or more of the means previously described in this paragraph 8. The Company shall not be required to deliver any of the Shares if the Employee fails to comply with his or her obligations in connection with the Tax-Related Items as described in this paragraph 8.

9. Rights as Stockholder . Neither the Employee nor any person claiming under or through the Employee will have any of the rights or privileges of a stockholder of the Company with respect to any Shares deliverable hereunder unless and until certificates representing such Shares (which may be in book entry form) will have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Employee (including through electronic delivery to a brokerage account). After such issuance, recordation and delivery, the Employee will have all the rights of a stockholder of the Company with respect to voting such Shares and receipt of dividends and distributions on such Shares.

10. No Effect on Employment . Subject to any employment contract with the Employee, the terms of such employment will be determined from time to time by the Company, or the Employer, as the case may be, and the Company, the Employer, or any Subsidiary or affiliate of the Company, as the case may be, will have, and the Employee’s participation in the Plan shall not interfere with the right, which is hereby expressly reserved, to terminate or change the terms of the employment of the Employee. The transactions contemplated hereunder, the Employee’s participation in the Plan and the vesting schedule set forth in the Grant Summary do not constitute an express or implied promise of continued employment for any period of time. The Award and the Employee’s participation in the Plan shall not create a right to employment or be interpreted as forming an employment or service contract with the Company, the Employer or any Subsidiary or affiliate of the Company.

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11. Nature of Grant . In accepting the Performance Shares, the Employee acknowledges, understands and agrees that:

(a) the grant of the Performance Shares is voluntary and occasional and does not create any contractual or other right to receive future grants of Performance Shares, or benefits in lieu of Performance Shares even if Performance Shares have been granted repeatedly in the past;

(b) all decisions with respect to future awards of Performance Shares or other grants, if any, will be at the sole discretion of the Company;

(d) the Performance Shares and the Shares subject to the Performance Shares are not part of regular or expected compensation or salary for any purpose;

(e) the Performance Shares and the Shares subject to the Performance Shares are not intended to replace any pension rights or compensation;

(f) the Performance Shares and the Shares subject to the Performance Shares, and the income and value of same, are not part of normal or expected compensation or salary for any purpose, including, without limitation, calculating any severance, termination, resignation, redundancy, dismissal, end of service payments, bonuses, long-service awards, pension or retirement or welfare benefits or similar payments;

(g) the future value of the underlying Shares is unknown, indeterminable and cannot be predicted with certainty;

(h) no claim or entitlement to compensation or damages shall arise from forfeiture of the Performance Shares resulting from the termination of the Employee’s relationship as a Service Provider (for any reason whatsoever, whether or not later found to be invalid or in breach of employment laws in the jurisdiction where the Employee is employed or the terms of the Employee’s employment or service agreement, if any), and in consideration of the Award of Performance Shares to which the Employee is otherwise not entitled, the Employee irrevocably agrees never to institute any claim against the Company, any of its Subsidiaries or affiliates or the Employer, waives the Employee’s ability, if any, to bring any such claim, and releases the Company, its Subsidiaries and affiliates and the Employer from any such claim; if, notwithstanding the foregoing, any such claim is allowed by a court of competent jurisdiction, then, by participating in the Plan, the Employee shall be deemed irrevocably to have agreed not to pursue such claim and agrees to execute any and all documents necessary to request dismissal or withdrawal of such claim;

(i) for purposes of the Award, the Employee’s engagement as a Service Provider will be considered terminated as of the date the Employee is no longer actively providing services to the Company or one of its Subsidiaries or affiliates (regardless of the reason for such termination and whether or not later found to be invalid or in breach of employment laws in the jurisdiction where the Employee is engaged as a Service Provider or the terms of the Employee’s employment or service agreement, if any), and unless otherwise expressly provided in this Agreement or determined by the Company, the Employee’s right to vest in the Performance Shares under the Plan, if any, will terminate as of such date and will not be extended by any notice period ( e.g. , the Employee’s period of service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction where the Employee is engaged as a Service Provider or the terms of the Employee’s employment or service agreement, if any); the Administrator shall have the exclusive discretion to determine when the Employee is no longer actively providing services for purposes of his or her Award of Performance Shares (including whether the Employee may still be considered to be providing services while on a leave of absence);

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(j) unless otherwise provided in the Plan or by the Company in its discretion, the Performance Shares and the benefits evidenced by this Agreement do not create any entitlement to have the Performance Shares or any such benefits transferred to, or assumed by, another company nor be exchanged, cashed out or substituted for, in connection with any corporate transaction affecting the shares of the Company;

(k) the Employee acknowledges and agrees that neither the Company, the Employer nor any Subsidiary or affiliate of the Company shall be liable for any foreign exchange rate fluctuation between the Employee’s local currency and the United States Dollar that may affect the value of the Performance Shares or of any amounts due to the Employee pursuant to the settlement of the Performance Shares or the subsequent sale of any Shares acquired upon settlement.

12. No Advice Regarding Grant . The Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding the Employee’s participation in the Plan, or the Employee’s acquisition or sale of the underlying Shares. The Employee is hereby advised to consult with his or her own personal tax, legal and financial advisors regarding his or her participation in the Plan before taking any action related to the Plan.

13. Data Privacy . The Employee hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Employee’s personal data as described in this Agreement by and among, as applicable, the Employer, the Company and its Subsidiaries and affiliates for the exclusive purpose of implementing, administering and managing the Employee’s participation in the Plan.

The Employee understands that the Company and the Subsidiary may hold certain personal information about the Employee, including, but not limited to, the Employee’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company or its Subsidiaries and affiliates, details of all Performance Shares or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in the Employee’s favor, for the exclusive purpose of implementing, administering and managing the Plan (“Personal Data”).

The Employee understands that Personal Data will be transferred to Morgan Stanley Smith Barney or any other third parties assisting the Company with the implementation, administration and management of the Plan. The Employee understands that these recipients may be located in the Employee’s country, or elsewhere, and that the recipient’s country (e.g., the United States) may have different data privacy laws and protections than the Employee’s country. The Employee understands that he or she may request a list with the names and addresses of any potential recipients of the Personal Data by contacting the Employee’s local human resources representative. The Employee authorizes the Company, Morgan Stanley Smith Barney or any other third parties assisting the Company (presently or in the future) with implementing, administering and managing the Plan to receive, possess, use, retain and transfer the Personal Data, in electronic or other form, for the sole purpose of implementing, administering and managing the Employee’s participation in the Plan, including any requisite transfer of such Personal Data as may be required to a broker or other third party with whom the Employee may elect to deposit any Shares received upon vesting of the Award. The Employee understands that Personal Data will be held only as long as is necessary to implement, administer and manage the Employee’s participation in the Plan. The Employee understands that he or she may, at any time, view Personal Data, request additional information about the storage and processing of Personal Data, require any necessary amendments to Personal Data or refuse or withdraw the consents herein, without cost, by contacting in writing the Employee’s local human resources representative. Further, the Employee understands that he or she is providing the consents herein on a purely voluntary basis. If the Employee does not consent, or if the Employee later seeks to revoke his or her consent, the Employee’s employment status or service and career with the Employer will not be adversely affected; the only adverse consequence of refusing or withdrawing the Employee’s consent is that the Company would not be able to grant Performance Shares or other equity

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awards to the Employee or administer or maintain such awards. Therefore, the Employee understands that refusing or withdrawing his or her consent may affect the Employee’s ability to participate in the Plan. For more information on the consequences of the Employee’s refusal to consent or withdrawal of consent, the Employee understands that he or she may contact his or her local human resources representative.

14. Address for Notices . Any notice to be given to the Company under the terms of this Agreement will be addressed to the Company, in care of Human Resources Department, at Echelon Corporation, 550 Meridian Avenue, San Jose, CA 95126, or at such other address as the Company may hereafter designate in writing.

15. Grant is Not Transferable . Except to the limited extent provided in paragraph 7 above, this grant of Performance Shares and the rights and privileges conferred hereby may not be sold, pledged, assigned, hypothecated, transferred or disposed of any way (whether by operation of law or otherwise) and may not be subject to sale under execution, attachment or similar process, until you have been issued the Shares. Upon any attempt to sell, pledge, assign, hypothecate, transfer or otherwise dispose of this grant, or any right or privilege conferred hereby, or upon any attempted sale under any execution, attachment or similar process, this grant and the rights and privileges conferred hereby immediately will become null and void.

16. Restrictions on Sale of Securities . Subject to the provisions of paragraph 18 below, the Shares issued as payment for vested Performance Shares awarded under this Agreement will be registered under the U.S. federal securities laws and will be freely tradable upon receipt. However, your subsequent sale of the Shares will be subject to any market blackout-period that may be imposed by the Company and must comply with the Company’s insider trading policies, and any other applicable securities laws.

17. Binding Agreement . Subject to the limitation on the transferability of this grant contained herein, this Agreement will be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto, to the extent permissible under local law.

18. Compliance with Law . Notwithstanding any other provision of the Plan or this Agreement, unless there is an available exemption from any registration, qualification or other legal requirement applicable to the Shares, the Company shall not be required to deliver any Shares issuable upon settlement of the Performance Shares prior to the completion of any registration or qualification of the Shares under any local, state, federal or foreign securities or exchange control law or under rulings or regulations of the U.S. Securities and Exchange Commission (“SEC”) or of any other governmental regulatory body, or prior to obtaining any approval or other clearance from any local, state, federal or foreign governmental agency, which registration, qualification or approval the Company shall, in its absolute discretion, deem necessary or advisable. The Employee understands that the Company is under no obligation to register or qualify the shares with the SEC or any state or foreign securities commission or to seek approval or clearance from any governmental authority for the issuance or sale of the Shares. Further, the Employee agrees that the Company shall have unilateral authority to amend the Plan and this Agreement without the Employee’s consent to the extent necessary to comply with securities or other laws applicable to issuance of shares. In addition, the Company shall not be required to deliver any Shares issuable upon settlement of the Performance Shares prior to the lapse of such reasonable period of time following the date of vesting of the Performance Shares as the Administrator may establish from time to time for reasons of administrative convenience, subject to compliance with Section 409A of the U.S. Internal Revenue Code of 1986, as amended (the “Code”).

19. Plan Governs . This Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between one or more provisions of this Agreement and one or more provisions of the Plan, the provisions of the Plan will govern. Capitalized terms used and not defined in this Agreement will have the meaning set forth in the Plan.

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20. Captions . Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.

21. Agreement Severable . In the event that any provision in this Agreement will be held invalid or unenforceable, such provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement.

22. Entire Agreement . The Plan is incorporated herein by reference. The Plan and this Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Employee with respect to the subject matter hereof, and may not be modified adversely to the Employee’s interest except by means of a writing signed by the Company and the Employee. The Employee expressly warrants that he or she is not accepting this Agreement in reliance on any promises, representations, or inducements other than those contained herein.

23. Amendment, Suspension or Termination of the Plan . The Employee understands that the Plan is established voluntarily by the Company, it is discretionary in nature and may be amended, altered, suspended or terminated by the Company at any time, to the extent permitted by the Plan.

24. Notice of Governing Law and Venue . This grant of Performance Shares and this Agreement shall be subject to the laws, but not the choice of law rules, of the State of California, U.S.A. For purposes of any action, lawsuit or other proceedings brought to enforce this Agreement, relating to it, or arising from it, the parties hereby submit to and consent to the sole and exclusive jurisdiction of the courts of Santa Clara County, California, or the federal courts for the United States for the Northern District of California, and no other courts, where this grant is made and/or to be performed.

25. Electronic Delivery and Acceptance . The Company may, in its sole discretion, decide to deliver any documents related to current or future participation in the Plan by electronic means. The Employee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an online or electronic system established and maintained by the Company or a third party designated by the Company.

26. Language . If the Employee has received this Agreement, or any other document related to the Performance Shares and/or Plan translated into a language other than English, and if the meaning of the translated version is different than the English version, the English version will control.

27. Appendix A . Notwithstanding any provisions in this Agreement, the Award of Performance Shares shall be subject to any special terms and conditions set forth in Appendix A to this Agreement for the Employee’s country. Moreover, if the Employee relocates to one of the countries included in Appendix A, the special terms and conditions for such country will apply to the Employee, to the extent the Company determines that the application of such terms and conditions is necessary or advisable for legal or administrative reasons. Appendix A constitutes part of this Agreement.

28. Imposition of Other Requirements . The Company reserves the right to impose other requirements on the Employee’s participation in the Plan, on the Performance Shares and on any Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Employee to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.

29. Waiver . The Employee acknowledges that a waiver by the Company of breach of any provision of this Agreement shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by the Employee or any other Employee.

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30. No Compensation Deferrals. Payments made pursuant to the Plan and this Award are intended to qualify for the “short-term deferral” exemption from Section 409A of the Code. The Company reserves the right, to the extent the Company deems necessary or advisable in its sole discretion, to unilaterally amend or modify the Plan and/or this Agreement, including Appendix A and Appendix B (if any) to ensure that all Performance Share Awards are made in a manner that qualifies for exemption from or complies with Section 409A of the Code, provided, however, that the Company makes no representation that this Award is not subject to Section 409A of the Code nor makes any undertaking to preclude Section 409A of the Code from applying to this Award.

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Exhibit 10.2(v)

ECHELON CORPORATION

1997 STOCK PLAN

Performance Share Agreement

for Corporate Officers Outside the U.S.

TERMS AND CONDITIONS OF PERFORMANCE SHARES

3. Vesting Schedule/Period of Restriction .

(a) Except as otherwise provided in paragraph 4 of this Agreement, the Performance Shares awarded by this Agreement shall vest in accordance with the vesting schedule set forth in the Grant Summary, subject to the Employee’s continuing to be a Service Provider on each relevant vesting date. Notwithstanding anything in this paragraph 3 to the contrary, and except as otherwise provided by the Administrator or as required by local law, vesting of the Performance Shares shall be suspended during any unpaid leave of absence other than military leave and will resume on the date the Employee returns to work on a regular schedule as determined by the Company; provided, however, that no vesting credit will be awarded for the time vesting has been suspended during such leave of absence, if permissible under local law. Further, and notwithstanding the foregoing, upon

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Employee’s “Involuntary Termination” (as defined in the Plan) within twelve (12) months following a “Change of Control Merger” (as defined in the Plan), 100% of the outstanding and unvested Performance Shares awarded by this Agreement will vest in full and, to the extent applicable, all performance goals or other vesting criteria to which such Performance Shares are subject will be deemed achieved at one hundred percent (100%) of target levels and all other terms and conditions met.

4. Administrator Discretion .

(a) The Administrator, in its discretion, may accelerate the vesting of the balance, or some lesser portion of the balance, of the Performance Shares at any time, subject to the terms of the Plan, and if permissible under local law. If so accelerated, such Performance Shares will be considered as having vested as of the date specified by the Administrator.

(b) If (x) the Employee is subject to U.S. income tax at any point between the date of grant of the Performance Shares and when the Performance Shares are paid out or forfeited (a “U.S. Taxpayer”), and (y) the Administrator, in its discretion, accelerates the vesting of the balance, or some lesser portion of the balance, of the Award, the payment of such accelerated Performance Shares nevertheless shall be made at the same time or times as if such Performance Shares had vested in accordance with the vesting schedule set forth in paragraph 3, including any necessary delay in payment pursuant to the application of paragraph 5(c) (whether or not the Employee remains employed by the Company or a Parent or Subsidiary of the Company as of such date(s)). Notwithstanding the foregoing, any delay in payment pursuant to this paragraph 4 will cease upon the Employee’s death and such payment will be made as soon as practicable after the date of Employee’s death.

5. Payment after Vesting .

(a) One Share shall be issued for each Performance Share that vests. No fractional Shares shall be issued under this Agreement.

(b) Subject to paragraph 8, any Performance Shares that vest in accordance with paragraphs 3 will be paid to the Employee (or in the event of the Employee’s death, to his or her estate) in Shares as soon as practicable following the date of vesting, subject to paragraph 8 but, except as provided in this Agreement, in no event later than two and one-half (2 ¹ / ₂ ) months following the applicable Vesting Date, subject to the terms and provisions of the Plan and this Agreement.

(c) Notwithstanding anything in the Plan or this Agreement to the contrary, and subject to paragraph 8, if (x) the Employee is a U.S. Taxpayer, and (y) the vesting of the balance, or some lesser portion of the balance, of the Performance Shares is accelerated in connection with the Employee’s termination as a Service Provider, such accelerated Performance Shares will not be paid out until Employee has a “separation from service” within the meaning of Section 409A, as determined by the Company. Further, if (x) Employee is a U.S. Taxpayer, and (y) at the time of Employee’s “separation from service” within the meaning of Section 409A (as determined by the Company), other than due to death, Employee is a “specified employee” within the meaning of Section 409A, then the payment of such accelerated Performance Shares will not be made until the date six (6) months and one (1) day following the date of the Employee’s termination as a Service Provider (or such later date as is necessary to avoid the imposition of additional taxation under Section 409A). Notwithstanding the foregoing, any delay in payment pursuant to this paragraph 5 will cease upon the Employee’s death and such payment will be made as soon as practicable after the date of Employee’s death, subject to paragraph 8. For purposes of this Agreement, “Section 409A” means Section 409A of the Internal Revenue Code of 1986, as amended, and any proposed, temporary or final Treasury Regulations and Internal Revenue Service guidance thereunder, as each may be amended from time to time.

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(d) If (x) the Employee is a U.S. Taxpayer, and (y) the vesting of all or a portion of the Performance Shares awarded under this Agreement accelerate pursuant to (i) Section 11(c)(i) of the Plan in the event of a “Merger” (as defined in the Plan) that is not a “change in control” within the meaning of Section 409A or (ii) any other plan or agreement that provides for acceleration in the event of a change in control that is not a “change in control” within the meaning of Section 409A, the timing of payment rules that apply to discretionary accelerations under paragraph 4 also shall apply. If the vesting of all or a portion of the Performance Shares awarded under this Agreement accelerate pursuant to (i) Section 11(c)(i) of the Plan in the event of a “Merger” (as defined in the Plan) that is a “change in control” within the meaning of Section 409A or (ii) any other plan or agreement that provides for acceleration in the event of a change in control that is a “change in control” within the meaning of Section 409A, then the timing of payment rules that apply under paragraph 5(b) also shall apply.

(e) It is the intent of this Agreement to comply with the requirements of Section 409A so that none of the Performance Shares provided under this Agreement or Shares issuable thereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply.

6. Forfeiture . Notwithstanding any contrary provision of this Agreement, the balance of the Performance Shares that have not vested pursuant to paragraphs 3, 4 or 15 at the time of the Employee’s termination as a Service Provider for any or no reason will be forfeited and automatically transferred to and reacquired by the Company at no cost to the Company. The Employee shall not be entitled to a refund of the price paid for the Performance Shares forfeited to the Company pursuant to this paragraph 6.

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In the event that such withholding in Shares is problematic under applicable tax or securities law or has materially adverse accounting consequences, by the Employee’s acceptance of the Award, the Employee authorizes and directs the Company and any brokerage firm determined acceptable to the Company to sell on the Employee’s behalf a whole number of Shares from those Shares issued to the Employee as the Company determines to be appropriate to generate cash proceeds sufficient to satisfy the obligation for Tax-Related Items. If the obligation for Tax-Related Items is satisfied by withholding a number of whole Shares as described herein, for tax purposes, the Employee is deemed to have been issued the full number of Shares subject to the vested Performance Shares, notwithstanding that a number of the Shares is held back solely for the purpose of paying the Tax-Related Items. No fractional Shares will be withheld or issued pursuant to the grant of Performance Shares and the issuance of Shares thereunder; any additional withholding necessary for this reason will be done by the Company or the Subsidiary through the Employee’s paycheck or other cash compensation paid to the Employee by the Company and/or the Subsidiary. The Company or the Subsidiary, in its discretion, may, and with respect to its executive officers (as determined by the Company) will withhold an amount equal to two (2) times the Fair Market Value of a Share from the last paycheck or other cash compensation due to the Employee prior to the vesting of the Performance Shares. In the event that the cash amounts withheld by the Company or the Subsidiary exceed the Tax-Related Items that are due after the automatic withholding of whole Shares, the Company or the Subsidiary will reimburse the Employee for the excess amounts and the Employee will have no entitlement to the Common Stock equivalent.

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terminate or change the terms of the employment of the Employee. The transactions contemplated hereunder, the Employee’s participation in the Plan and the vesting schedule set forth in the Grant Summary do not constitute an express or implied promise of continued employment for any period of time. The Award and the Employee’s participation in the Plan shall not create a right to employment or be interpreted as forming an employment or service contract with the Company, the Employer or any Subsidiary or affiliate of the Company.

11. Nature of Grant . In accepting the Performance Shares, the Employee acknowledges, understands and agrees that:

(b) all decisions with respect to future awards of Performance Shares or other grants, if any, will be at the sole discretion of the Company;

(d) the Performance Shares and the Shares subject to the Performance Shares are not part of regular or expected compensation or salary for any purpose;

(e) the Performance Shares and the Shares subject to the Performance Shares are not intended to replace any pension rights or compensation;

(g) the future value of the underlying Shares is unknown, indeterminable and cannot be predicted with certainty;

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period of service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction where the Employee is engaged as a Service Provider or the terms of the Employee’s employment or service agreement, if any); the Administrator shall have the exclusive discretion to determine when the Employee is no longer actively providing services for purposes of his or her Award of Performance Shares (including whether the Employee may still be considered to be providing services while on a leave of absence);

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request additional information about the storage and processing of Personal Data, require any necessary amendments to Personal Data or refuse or withdraw the consents herein, without cost, by contacting in writing the Employee’s local human resources representative. Further, the Employee understands that he or she is providing the consents herein on a purely voluntary basis. If the Employee does not consent, or if the Employee later seeks to revoke his or her consent, the Employee’s employment status or service and career with the Employer will not be adversely affected; the only adverse consequence of refusing or withdrawing the Employee’s consent is that the Company would not be able to grant Performance Shares or other equity awards to the Employee or administer or maintain such awards. Therefore, the Employee understands that refusing or withdrawing his or her consent may affect the Employee’s ability to participate in the Plan. For more information on the consequences of the Employee’s refusal to consent or withdrawal of consent, the Employee understands that he or she may contact his or her local human resources representative.

15. Changes in Performance Shares . In the event that as a result of a stock or extraordinary cash dividend, stock split, distribution, reclassification, recapitalization, combination of Shares or the adjustment in capital stock of the Company or otherwise, or as a result of a merger, consolidation, spin-off or other corporate transaction or event, the Performance Shares will be increased, reduced or otherwise affected, and by virtue of any such event the Employee will in his or her capacity as owner of unvested Performance Shares which have been awarded to him or her (the “Prior Performance Shares”) be entitled to new or additional or different shares of stock, cash or other securities or property (other than rights or warrants to purchase securities); such new or additional or different shares, cash or securities or property will thereupon be considered to be unvested Performance Shares and will be subject to all of the conditions and restrictions that were applicable to the Prior Performance Shares pursuant to this Agreement and the Plan. If the Employee receives rights or warrants with respect to any Prior Performance Shares, such rights or warrants may be held or exercised by the Employee, provided that until such exercise any such rights or warrants and after such exercise any shares or other securities acquired by the exercise of such rights or warrants will be considered to be unvested Performance Shares and will be subject to all of the conditions and restrictions which were applicable to the Prior Performance Shares pursuant to the Plan and this Agreement. The Administrator in its absolute discretion at any time may accelerate the vesting of all or any portion of such new or additional shares of stock, cash or securities, rights or warrants to purchase securities or shares or other securities acquired by the exercise of such rights or warrants; provided, however, that the payment of such accelerated new or additional awards shall be made in accordance with the timing of payment rules under paragraph 4(b). If the vesting of all or a portion of such new or additional award accelerates pursuant to (i)Section 11(c)(i) of the Plan in the event of a “Merger” (as defined in the Plan) that is not a “change in control” within the meaning of Section 409A or (ii) any other plan or agreement that provides for acceleration in the event of a change in control that is not a “change in control” within the meaning of Section 409A, the timing of payment rules that apply to discretionary accelerations under paragraph 4 also shall apply. If the vesting of all or a portion of the of such new or additional award accelerates pursuant to (i) Section 11(c)(i) of the Plan in the event of a “Merger” (as defined in the Plan) that is a “change in control” within the meaning of Section 409A or (ii) any other plan or agreement that provides for acceleration in the event of a change in control that is a “change in control” within the meaning of Section 409A, the timing of payment rules that apply under paragraph 5(b) also shall apply.

16. Grant is Not Transferable . Except to the limited extent provided in paragraph 7 above, this grant of Performance Shares and the rights and privileges conferred hereby may not be sold, pledged, assigned, hypothecated, transferred or disposed of any way (whether by operation of law or otherwise) and may not be subject to sale under execution, attachment or similar process, until you have been issued the Shares. Upon any attempt to sell, pledge, assign, hypothecate, transfer or otherwise dispose of this grant, or any right or privilege conferred hereby, or upon any attempted sale under any execution, attachment or similar process, this grant and the rights and privileges conferred hereby immediately will become null and void.

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17. Restrictions on Sale of Securities . Subject to the provisions of paragraph 19 below, the Shares issued as payment for vested Performance Shares awarded under this Agreement will be registered under the U.S. federal securities laws and will be freely tradable upon receipt. However, your subsequent sale of the Shares will be subject to any market blackout-period that may be imposed by the Company and must comply with the Company’s insider trading policies, and any other applicable securities laws.

18. Binding Agreement . Subject to the limitation on the transferability of this grant contained herein, this Agreement will be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto, to the extent permissible under local law.

19. Compliance with Law . Notwithstanding any other provision of the Plan or this Agreement, unless there is an available exemption from any registration, qualification or other legal requirement applicable to the Shares, the Company shall not be required to deliver any Shares issuable upon settlement of the Performance Shares prior to the completion of any registration or qualification of the Shares under any local, state, federal or foreign securities or exchange control law or under rulings or regulations of the U.S. Securities and Exchange Commission (“SEC”) or of any other governmental regulatory body, or prior to obtaining any approval or other clearance from any local, state, federal or foreign governmental agency, which registration, qualification or approval the Company shall, in its absolute discretion, deem necessary or advisable. The Employee understands that the Company is under no obligation to register or qualify the shares with the SEC or any state or foreign securities commission or to seek approval or clearance from any governmental authority for the issuance or sale of the Shares. Further, the Employee agrees that the Company shall have unilateral authority to amend the Plan and this Agreement without the Employee’s consent to the extent necessary to comply with securities or other laws applicable to issuance of shares. In addition, the Company shall not be required to deliver any Shares issuable upon settlement of the Performance Shares prior to the lapse of such reasonable period of time following the date of vesting of the Performance Shares as the Administrator may establish from time to time for reasons of administrative convenience, subject to compliance with Section 409A.

20. Plan Governs . This Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between one or more provisions of this Agreement and one or more provisions of the Plan, the provisions of the Plan will govern. Capitalized terms used and not defined in this Agreement will have the meaning set forth in the Plan.

21. Captions . Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.

22. Agreement Severable . In the event that any provision in this Agreement will be held invalid or unenforceable, such provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement.

23. Entire Agreement . The Plan is incorporated herein by reference. The Plan and this Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Employee with respect to the subject matter hereof, and may not be modified adversely to the Employee’s interest except by means of a writing signed by the Company and the Employee. The Employee expressly warrants that he or she is not accepting this Agreement in reliance on any promises, representations, or inducements other than those contained herein.

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24. Amendment, Suspension or Termination of the Plan . The Employee understands that the Plan is established voluntarily by the Company, it is discretionary in nature and may be amended, altered, suspended or terminated by the Company at any time, to the extent permitted by the Plan.

25. Notice of Governing Law and Venue . This grant of Performance Shares and this Agreement shall be subject to the laws, but not the choice of law rules, of the State of California, U.S.A. For purposes of any action, lawsuit or other proceedings brought to enforce this Agreement, relating to it, or arising from it, the parties hereby submit to and consent to the sole and exclusive jurisdiction of the courts of Santa Clara County, California, or the federal courts for the United States for the Northern District of California, and no other courts, where this grant is made and/or to be performed.

26. Electronic Delivery and Acceptance . The Company may, in its sole discretion, decide to deliver any documents related to current or future participation in the Plan by electronic means. The Employee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an online or electronic system established and maintained by the Company or a third party designated by the Company.

27. Language . If the Employee has received this Agreement, or any other document related to the Performance Shares and/or Plan translated into a language other than English, and if the meaning of the translated version is different than the English version, the English version will control.

28. Appendix A . Notwithstanding any provisions in this Agreement, the Award of Performance Shares shall be subject to any special terms and conditions set forth in Appendix A to this Agreement for the Employee’s country. Moreover, if the Employee relocates to one of the countries included in Appendix A, the special terms and conditions for such country will apply to the Employee, to the extent the Company determines that the application of such terms and conditions is necessary or advisable for legal or administrative reasons. Appendix A constitutes part of this Agreement.

29. Imposition of Other Requirements . The Company reserves the right to impose other requirements on the Employee’s participation in the Plan, on the Performance Shares and on any Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Employee to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.

30. Waiver . The Employee acknowledges that a waiver by the Company of breach of any provision of this Agreement shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by the Employee or any other Employee.

31. No Compensation Deferrals. The Company reserves the right, to the extent the Company deems necessary or advisable in its sole discretion, to unilaterally amend or modify the Plan and/or this Agreement, including Appendix A and Appendix B (if any) to ensure that all Performance Share Awards are made in a manner that qualifies for exemption from or complies with Section 409A of the Code, provided, however, that the Company makes no representation that this Award is not subject to Section 409A of the Code nor makes any undertaking to preclude Section 409A of the Code from applying to this Award.

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Exhibit 10.2(w)

APPENDIX A

ECHELON CORPORATION

1997 PLAN

Performance Share Agreement

for Participants Outside the U.S.

Terms and Conditions

This Appendix A includes additional terms and conditions that govern the Award of Performance Shares granted to the Employee under the Plan if the Employee resides and/or works in one of the countries listed below. This Appendix A forms part of the Agreement. Capitalized terms used, but not defined herein, shall have the same meanings assigned to them in the Plan and the Agreement.

If the Employee is a citizen or resident of a country other than the one in which the Employee is currently working, is considered a resident of another country for local law purposes or transfers employment and/or residency between countries after the date of grant, the Company shall, in its sole discretion, determine to what extent the additional terms and conditions included herein will apply to the Employee under these circumstances.

Notifications

This Appendix A also includes information regarding exchange controls and certain other issues of which the Employee should be aware with respect to his or her participation in the Plan. The information is based on the securities, exchange control, and other laws in effect in the Employee’s country as of July 2012. Such laws are often complex and change frequently. As a result, the Company strongly recommends that the Employee not rely on the information in this Appendix A as the only source of information relating to the consequences of his or her participation in the Plan because the information may be out of date at the time the Employee vests in the Performance Shares or sells Shares acquired under the Plan.

In addition, the information contained herein is general in nature and may not apply to the Employee’s particular situation, and the Company is not in a position to assure the Employee of a particular result. Accordingly, the Employee is advised to seek appropriate professional advice as to how the relevant laws in his or her country may apply to the Employee’s situation.

Finally, if the Employee is a citizen or resident of a country other than the one in which the Employee is currently working, is considered a resident of another country for local law purposes or transfers employment and/or residency between countries after the date of grant, the information contained herein may not be applicable in the same manner to the Employee.

FRANCE

Terms and Conditions

Language Consent

In accepting this Award, the Employee confirms having read and understood the Plan, the Agreement and this Appendix A, including all terms and conditions included therein, which were provided in the English language. The Employee accepts the terms of those documents accordingly.

En acceptant cette Attribution, l’Employé confirme avoir lu et compris le Plan, le Contrat d’Attribution et le présent Appendice A, y compris leurs termes et conditions, qui lui ont été communiqués en langue anglaise. L’Employé accepte les termes de ces documents en connaissance de cause.

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Notifications

Tax Information

The Performance Shares are not intended to be French tax-qualified Awards.

Exchange Control Information

If the Employee maintains a foreign bank account, he or she is required to report such to the French tax authorities when filing his or her annual tax return.

GERMANY

Notifications

Exchange Control Information

If the Employee makes cross-border payments in excess of €12,500 in connection with the sale of securities (including Shares acquired under the Plan) or the receipt of any dividends, the Employee must file a report with the Servicezentrum Außenwirtschaftsstatistik , which is the competent federal office of the Deutsche Bundesbank (the German Central Bank) for such notifications in Germany. The Employee is responsible for satisfying the reporting obligation and should be able to obtain a copy of the form used for this purpose from the German bank the Employee uses to carry out the transfer.

In addition, in the unlikely event that the Employee holds Shares exceeding 10% of the total capital of the Company, the Employee must report his or her holdings in the Company on an annual basis.

HONG KONG

Terms and Conditions

Performance Shares Payable in Shares Only

Notwithstanding any discretion in the Plan or anything to the contrary in the Agreement, the Performance Shares are payable in Shares only and does not provide any right for the Employee to receive a cash payment.

Securities Law Information

WARNING: The Award of the Performance Shares under the terms of the Agreement and the Plan and the issuance of Shares upon vesting of the Performance Shares do not constitute a public offer of securities under Hong Kong law and are available only to Employees of the Company or its Subsidiaries or affiliates of the Company.

Please be aware that the Agreement, including this Appendix A and Appendix B (if any), the Plan, and other incidental communication materials related to the Performance Shares that the Employee may receive have not been reviewed by any regulatory authority in Hong Kong. The Employee is advised to exercise caution in relation to the right to acquire Shares at vesting of the Performance Shares, or otherwise, under the Plan. If the Employee is in any doubt about any of the contents of the Agreement, the Plan or any other communication materials, the Employee should obtain independent professional advice.

Sale of Shares

In accepting the Award, the Employee agrees that in the event that Performance Shares vest and Shares are issued to the Employee within six months of the date of grant, the Employee agrees that he or she will not dispose of any Shares acquired prior to the six-month anniversary of the date of grant.

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Notifications

Nature of Scheme

The Company specifically intends that the Plan will not be an occupational retirement scheme for purposes of the Occupational Retirement Schemes Ordinance.

ITALY

Terms and Conditions

Data Privacy . This section replaces paragraph 13 of the Agreement.

The Employee understands that the Employer, the Company and any of its Subsidiaries and affiliates may hold certain personal information about the Employee, including, but not limited to, the Employee’s name, home address and telephone number, date of birth, social insurance or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company or its Subsidiaries and affilitates, and details of any Performance Shares or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding for the purpose of implementing, administering and managing the Plan (“Personal Data”).

The Employee also understands that providing the Company with Personal Data is necessary for the performance of the Plan and that the Employee’s refusal to provide such Personal Data would make it impossible for the Company to perform its contractual obligations and may affect the Employee’s ability to participate in the Plan. The Controller of Personal Data processing is Echelon Corporation, with registered offices at 550 Meridian Avenue, San Jose, CA 95126, U.S.A., and, pursuant to Legislative Decree no. 196/2003, its representative in Italy for data privacy purposes is Echelon Europe LTD – Italy with registered offices in Piazzale Biancamano 8, 20121 Milano, Italy. The Employee understands that Personal Data will not be publicized, but it may be accessible by the Employer and its internal and external personnel in charge of processing of such Personal Data and by the data processor (the “Processor”), if any. An updated list of Processors and other transferees of Personal Data is available upon request from the Employer. Furthermore, Personal Data will be transferred to Morgan Stanley Smith Barney and may also be transferred to banks, other financial institutions or brokers involved in the management and administration of the Plan. The Employee understands that Personal Data may also be transferred to the independent registered public accounting firm engaged by the Company. The Employee further understands that the Company and/or its Subsidiaries and affiliates will transfer Personal Data amongst themselves as necessary for the purpose of implementing, administering and managing the Employee’s participation in the Plan and that the Company and/or its Subsidiaries and affiliates may each further transfer Personal Data to third parties assisting the Company in the implementation, administration and management of the Plan, including any requisite transfer to Morgan Stanley Smith Barney, or another third party with whom the Employee may elect to deposit any Shares acquired under the Plan. Such recipients may receive, possess, use, retain and transfer Personal Data in electronic or other form, for the purposes of implementing, administering and managing the Employee’s participation in the Plan. The Employee understands that these recipients may be acting as Controllers, Processors or persons in charge of processing, as the case may be, in accordance with local law and may be located in or outside the European Economic Area in countries such as the United States that may not provide the same level of protection as intended under Italian data privacy laws. Should the Company exercise its discretion in suspending all necessary legal obligations connected with the management and administration of the Plan, it will delete Personal Data as soon as it has accomplished all the necessary legal obligations connected with the management and administration of the Plan.

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The Employee understands that Personal Data processing related to the purposes specified above shall take place under automated or nonautomated conditions, anonymously when possible, that comply with the purposes for which Personal Data is collected and with confidentiality and security provisions as set forth by applicable laws and regulations, with specific reference to Legislative Decree no. 196/2003.

The processing activity, including communication, the transfer of Personal Data abroad, including outside of the European Economic Area, as herein specified and pursuant to applicable laws and regulations, does not require the Employee’s consent thereto as the processing is necessary to performance of contractual obligations related to implementation, administration and management of the Plan. The Employee understands that, pursuant to Section 7 of the Legislative Decree no. 196/2003, the Employee has the right to, including but not limited to, access, delete, update, correct or terminate, for legitimate reason, the Personal Data processing. The Employee should contact the Employer in this regard. Furthermore, the Employee is aware that Personal Data will not be used for direct marketing purposes. In addition, the Personal Data provided can be reviewed and questions or complaints can be addressed by contacting the Employee’s human resources department.

Plan Acknowledgment

In accepting the Award, the Employee acknowledges that he or she has received a copy of the Plan and the Agreement, including this Appendix A and Appendix B (if any), and has reviewed such documents in their entirety, fully understands the contents thereof and accepts all provisions of the Plan and the Agreement, including this Appendix A and Appendix B (if any).

The Employee further acknowledges that he or she has read and specifically and expressly approves, without limitation, the following clauses in the Agreement: Paragraph 3: Vesting Schedule/Period of Restriction; Paragraph 4: Administrator Discretion; Paragraph 6: Forfeiture; Paragraph 7: Death of Employee; Paragraph 8: Responsibility for Taxes; Paragraph 9: Rights as Stockholder; Paragraph 10: No Effect on Employment; Paragraph 11: Nature of Grant; Paragraph 12: No Advice Regarding Grant; Paragraph 15 or 16 (as applicable): Grant is Not Transferable; Paragraph 16 or 17 (as applicable): Restrictions on Sale of Securities; Paragraph 24 or 25 (as applicable): Notice of Governing Law and Venue; Paragraph 26 or 27 (as applicable): Language; Paragraph 28 or 29 (as applicable): Imposition of Other Requirements; and the Data Privacy consent above.

Notifications

Exchange Control Information

Exchange control reporting is required if the Employee transfers cash or Shares to or from Italy in excess of €10,000 or the equivalent amount in U.S. dollars. If the payment is made through an authorized broker resident in Italy, the broker will comply with the reporting obligation. In addition, the Employee will have exchange control reporting obligations if the Employee has any foreign investment (including Shares) held outside Italy in excess of €10,000. The reporting must be done on the Employee’s individual tax return.

JAPAN

Notifications

Exchange Control Information

If the Employee maintains a foreign bank account outside of Japan with a value exceeding ¥50 million as of December 31, the Employee is required to report such to the Japanese authorities on an annual basis.

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KOREA

Notifications

Exchange Control Information

If the Employee realizes US$500,000 or more from the sale of Shares or the receipt of any dividends in a single transaction, he or she must repatriate the proceeds to Korea within eighteen (18) months of receipt.

NETHERLANDS

Notifications

Insider Trading Notification

The Employee should be aware of the Dutch insider trading rules, which may impact the sale of Shares acquired pursuant to vested Performance Shares. In particular, the Employee may be prohibited from effecting certain transactions involving Shares during the period in which the Employee possesses “insider information” regarding the Company.

In accepting the Award, the Employee acknowledges having read and understood the Insider Trading Notification and further acknowledges that it is the Employee’s responsibility to comply with the following Dutch insider trading rules:

Given the broad scope of the definition of inside information, certain Employees of the Company working at a Subsidiary or affiliate of the Company in the Netherlands (including the Employees participating in the Plan) may have inside information and, thus, would be prohibited from effectuating a transaction in securities in the Netherlands at a time when the Employee had such inside information. Please note that the Company cannot be held liable if the Employee violates the Dutch insider trading rules. If the Employee is uncertain whether the insider trading rules apply to him or her, the Employee should consult with his or her personal legal advisor.

NORWAY

No country-specific terms apply.

SINGAPORE

Notifications

Securities Law Information

The Award of the Performance Shares under the Plan is being granted in reliance on Section 273(1)(f) of the Securities and Futures Act (Chapter 289, 2006 Ed.) (“SFA”), pursuant to which it is exempt from the prospectus and registration requirements under the SFA. The Plan has not been lodged or registered as a prospectus with the Monetary Authority of Singapore. The Employee should note that the Performance Shares are subject to Section 257 of the SFA and that the Employee will not be able to sell, or offer for sale, Shares acquired pursuant to vested Performance Shares, unless such sale or offer is made pursuant to the exemptions under Part XIII Division (1) Subdivision (4) (other than section 280) of the SFA (Chapter 289, 2006 Ed.).

Page 5 of 7

Director Notification Obligation

If the Employee is a director, associate director or shadow director of a Singapore Subsidiary or affiliate of the Company, the Employee is subject to certain notification requirements under the Singapore Companies Act. Among these requirements is an obligation to notify the Singapore Subsidiary or affiliate in writing of an interest ( e.g. , Performance Shares, Shares, etc.) in the Company or any Subsidiary, affiliate or other related companies within two (2) business days of (i) its acquisition or disposal, (ii) any change in previously disclosed interest ( e.g. , when Shares acquired pursuant to vested Performance Shares are sold), or (iii) becoming a director, associate director or shadow director.

Insider Trading Notification

The Employee should be aware of the Singapore insider trading rules, which may impact the acquisition or disposal of Shares or rights to Shares ( e.g. , an Award of Performance Shares) the under the Plan. Under the Singapore insider trading rules, the Employee is prohibited from selling Shares when in possession of information which is not generally available and which the Employee knows or should know will have a material effect on the price of Shares once such information is generally available.

SWEDEN

No country-specific terms apply.

UNITED KINGDOM

Terms and Conditions

Performance Shares Payable in Shares Only

Notwithstanding any discretion in the Plan or anything to the contrary in the Agreement, the Performance Shares are payable in Shares only. An Award of Performance Shares does not provide any right for the Employee to receive a cash payment.

Responsibility for Taxes . This provision supplements paragraph 8 of the Agreement.

If payment or withholding of the income tax due is not made within ninety (90) days of the event giving rise to the income tax or such other period specified in Section 222(1)(c) of the U.K. Income Tax (Earnings and Pensions) Act 2003 (the “Due Date”), the amount of any uncollected income tax shall constitute a loan owed by the Employee to the Employer, effective as of the Due Date. The Employee agrees that the loan will bear interest at the then-current Official Rate of Her Majesty’s Revenue and Customs (“HMRC”), it will be immediately due and repayable, and the Company and/or the Employer may recover it at any time thereafter by any of the means referred to in paragraph 8 of the Agreement. The Employee authorizes the Company to delay the issuance of Shares to the Employee unless and until the loan is repaid in full.

Notwithstanding the foregoing, if the Employee is a director or executive officer of the Company (within the meaning of Section 13(k) of the U.S. Securities Exchange Act of 1934, as amended), the Employee will not be eligible for such a loan to cover the income tax due. In the event that the Employee is a director or executive officer and the income tax is not collected from or paid by the Employee by the Due Date, the amount of any uncollected income tax will constitute a benefit to the Employee on which additional income tax and national insurance contributions (“NICs”) may be payable. The Employee will be responsible for reporting and paying any income tax due on this additional benefit directly to HMRC under the self-assessment regime and for reimbursing the Company and/or the Employer (as applicable) the value of any employee NICs due on this additional benefit.

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Joint Election

As a condition of the Performance Shares becoming vested and the Shares subject to the Performance Shares being delivered to the Employee, the Employee agrees to accept any liability for secondary Class 1 NICs (the “Employer NICs”) that may be payable by the Company and/or the Employer in connection with the Performance Shares and any event giving rise to Tax-Related Items. Without limitation to the foregoing, the Employee agrees to enter into a joint election with the Employer (the “Election”) in the form approved for such Election by HMRC, and any other required consent or election required to accomplish the transfer of Employer NICs to the Employee. The Employee understands that the Election applies to any Performance Shares granted to the Employee under the Plan after the execution of the Election. The Employee further agrees to execute such other joint elections as may be required between the Employee and any successor to the Company and/or the Employer.

If the Employee does not enter into the Election prior to the vesting of the Performance Shares or any other event giving rise to Tax-Related Items, the Employee shall not be entitled to vest in the Performance Shares or receive any benefit in connection with the Award unless and until the Employee enters into the Election, and no Shares or other benefit pursuant to the Award will be issued or delivered to the Employee under the Plan, without any liability to the Company or the Employer.

The Employee further agrees that the Company and/or the Employer may collect the Employer NICs by any of the means set forth in paragraph 8 of the Agreement, as supplemented above.

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EXHIBIT 31.1

I, Ronald A. Sege, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Echelon Corporation;

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly represent in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


		ECHELON CORPORATION

Date: August 8, 2012	By:	/s/ Ronald A. Sege
		Ronald A. Sege, Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)

EXHIBIT 31.2

I, William R. Slakey, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Echelon Corporation;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly represent in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


		ECHELON CORPORATION

Date: August 8, 2012	By:	/s/ William R. Slakey
		William R. Slakey, Executive Vice President and Chief Financial Officer (Principal Financial Officer)

EXHIBIT 32

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002*

I, Ronald A. Sege, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Echelon Corporation on Form 10-Q for the fiscal quarter ended June 30, 2012 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Echelon Corporation.


		ECHELON CORPORATION

Date: August 8, 2012	By:	/s/ Ronald A. Sege
		Ronald A. Sege, Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)

I, William R. Slakey, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Echelon Corporation on Form 10-Q for the fiscal quarter ended June 30, 2012 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Echelon Corporation.


		ECHELON CORPORATION

Date: August 8, 2012	By:	/s/ William R. Slakey
		William R. Slakey, Executive Vice President and Chief Financial Officer (Principal Financial Officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Echelon Corporation and will be retained by Echelon Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies this Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant (whether made before or after the date of this Form 10-Q) under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, irrespective of any general incorporation language contained in such filing.