UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

            |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2000

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

                        Commission File Number: 0-220-20

                                    CASTELLE
             (Exact name of Registrant as specified in its charter)

                              California 77-0164056
        (State or other jurisdiction of (IRS Employer Identification No.)
                         incorporation or organization)

           855 Jarvis Drive, Suite 100, Morgan Hill, California 95037
          (Address of principal executive offices, including zip code)

                                 (408) 852-8000
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: None

 Securities registered pursuant to Section 12(g) of the Act: Common Stock,
 No Par Value

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 such filing
                requirements for the past 90 days. Yes |X| No __

 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
  of Regulation S-K is not contained herein, and will not be contained, to the
    best of Registrant's knowledge, in any amendment to this Form 10-K or in
definitive proxy or information statements incorporated by reference in Part III
                             of the From 10-K. ___

       The approximate aggregate market value of the Common Stock held by
 non-affiliates of the Registrant, based upon the last sale price of the Common
 Stock reported on the Nasdaq SmallCap Market on March 13, 2001 was $5,151,000.
Shares of Common Stock held by persons who hold more than 10% of the outstanding
  shares and shares held by officers and directors of the Registrant have been
excluded because such persons may be deemed to be affiliates. This determination
                         is not necessarily conclusive.

     The number of shares of Common Stock outstanding as March 13, 2001 was
                                   4,741,060.


                       DOCUMENTS INCORPORATED BY REFERENCE

 The information required by Part III of this Form 10-K will be incorporated by
 reference from certain portions of Castelle's proxy statement relating to the
2001 Annual Meeting of Shareholders (the "Proxy Statement") or will be provided
 in an amendment to this Form 10-K to be filed with the SEC no later than April
                                   30, 2001.



<PAGE>
<TABLE>
<CAPTION>


                                                 CASTELLE
                                                 FORM 10-K
                                             TABLE OF CONTENTS


                                                                                                               PAGE




<S>                                                                                                              <C>
PART I        ....................................................................................................1

     ITEM 1.      BUSINESS........................................................................................1

     ITEM 2.      PROPERTIES.....................................................................................22

     ITEM 3.      LEGAL PROCEEDINGS..............................................................................22

     ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS..........................................22


PART II       ...................................................................................................23

     ITEM 5.      MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS...........................23

     ITEM 6.      SELECTED FINANCIAL DATA........................................................................24

     ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION..........25

     ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................31

     ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................31

     ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........32


PART III      ...................................................................................................33

     ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................33

     ITEM 11.     EXECUTIVE COMPENSATION.........................................................................33

     ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................33

     ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................33


PART IV       ...................................................................................................34

     ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................34


SIGNATURES    ...................................................................................................36
</TABLE>



<PAGE>

                   SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements,  within the
meaning of Section  27A of the  Securities  Act of 1933 and  Section  21E of the
Securities  Exchange  Act of 1934,  that are based on our  current  expectations
about our  company  and our  industry,  including  the ability of the Company to
continue  to  (i)  develop,  introduce  and  achieve  market  acceptance  of new
products,  (ii) be  profitable,  (iii) be cash flow  positive,  (iv)  improve on
working capital, (v) control operating expenses,  (vi) maintain proper inventory
levels,  (vii) deliver quality customer support and (viii) keep accounts payable
current.   We  use  words  such  as  "plan,"  "expect,"   "intend,"   "believe,"
"anticipate,"   "estimate"  and  other  similar  expressions  to  identify  some
forward-looking statements, but not all forward-looking statements include these
words. All of our  forward-looking  statements  involve risks and uncertainties.
The Company's  actual results could differ  significantly  from our expectations
and  from  the  results  expressed  in  or  implied  by  these   forward-looking
statements.  Factors  that might cause such a  difference  include,  but are not
limited to, those  discussed  elsewhere in this Annual  Report on Form 10-K.  We
urge you to consider  these  cautionary  statements  carefully in evaluating our
forward-looking  statements.   Except  as  required  by  law,  we  undertake  no
obligation  to  publicly  update  any  forward-looking   statements  to  reflect
subsequent events and circumstances.

                                     PART I

ITEM 1.       BUSINESS

         The  following  summary  should  be read in  conjunction  with,  and is
qualified in its entirety by, the more  detailed  information  and  Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Annual Report
on Form 10-K.


                                  INTRODUCTION


         Castelle was  incorporated  in  California  in 1987,  and its principal
offices are located at 855 Jarvis  Drive,  Suite 100,  Morgan  Hill,  California
95037.  Unless the context otherwise  requires,  references in this Form 10-K to
"we," "us," or the "Company" refer to Castelle.  The Company's  telephone number
is (408)  852-8000.  Castelle(R),  LANpress(R)  and  JetPress(R)  are registered
trademarks and InfoPressTM is a trademark of the Company.  This Annual Report on
Form 10-K includes trademarks and trade names of other companies.

          The Company designs,  develops, markets and supports server appliances
providing  office messaging  solutions and other shared services.  The Company's
current  products  are focused on two areas:  fax  messaging  products and print
servers.   The   Company's   products   consist  of  FaxPress,   an   integrated
hardware/software network faxing solution; OfficeDirect, an integrated email/fax
messaging system, InfoPress, an enterprise-level fax-on-demand software product,
and LANpress print servers.

         The  Company's  products  have  historically  centered on fax and print
servers and related technologies.  Starting in 1997, the Company's revenues have
declined as competition  increased,  primarily with the print server products in
the Asia  Pacific  Region,  while  at the  same  time  the  Internet  and  other
networking  technologies  advanced.  As a result, the Company experienced annual
operating losses during 1997 through 1999. During the past two years, management
has  redirected  the  Company's  efforts  to focus on server  appliances  and on
development  efforts to integrate existing and future products with the Internet
and emerging  networking  technologies.  Through  restructuring and implementing
numerous cost reductions,  the Company was able to report an operating profit in
the fourth quarter of 1999 and in each of the four quarters of fiscal 2000.

                                       1
<PAGE>

         Castelle's  objective is to be a leading  worldwide  supplier of server
 appliances providing office messaging solutions and other shared services.  The
 Company's  specialized  networking  products  allow network  administrators  to
 deploy complex  networking  applications  without the cost and time required to
 install server-based software solutions.  Castelle pioneered server appliances,
 establishing  a benchmark  for "plug and play" and ease of use with its fax and
 print server product families.  Castelle products are installed in most Fortune
 1000 companies, and in small and medium sized businesses worldwide. Castelle is
 now applying its proven  technology to expand its line of server  appliances to
 provide Internet and Intranet  messaging and communication  solutions for small
 and medium enterprises, and departments of large corporations.

         The Company has adapted its products for use with the Internet and will
continue  to focus on the effect of the  Internet on network  productivity.  The
Company's  FaxPress fax servers  provide an  essential  component of a corporate
unified messaging  solution.  The Company has developed  Internet fax capability
with its FaxPress and InfoPress  servers and Internet print  capability with its
LANpress print servers.

         Castelle sells its products  through multiple  channels,  determined by
the product,  market and customer need. The Company has an established  two-tier
domestic and international distribution network of leading national and regional
network product  distributors  and resellers,  and also distributes its products
through  an  on-line  store on its Web site.  The  Company's  distributors  sell
Castelle's products to value-added  resellers  ("VARs"),  e-commerce vendors and
other resellers. The Company's two major domestic distributors are Ingram Micro,
Inc.  ("Ingram")  and  Tech  Data  Corporation  ("Tech  Data")  and its  largest
international  distributor in Japan is Macnica Corporation ("Macnica").  As part
of  the  Company's  e-commerce  strategy,  it is  attempting  to  develop  close
relationships  with such mass market vendors as CDW, Insight,  FirstChoice,  and
buy.com.  The Company also has  relationships  with certain  original  equipment
manufacturers and sells software and upgrades directly to end-users.


                                  RISK FACTORS

         Shareholders  or  investors  considering  the purchase of shares of the
Company's Common Stock should carefully consider the following risk factors,  in
addition to other  information  in this Annual  Report on Form 10-K.  Additional
risks and  uncertainties  not presently known to the Company or that the Company
currently deems immaterial also may impair the Company's business operations.

Fluctuations in Operating Results

         The Company's revenue and operating results have fluctuated in the past
and the Company's  future revenues and operating  results are likely to do so in
the future, particularly on a quarterly basis.

         The Company's  operating results may vary significantly from quarter to
quarter due to a variety of factors,  including changes in the Company's product
and customer mix,  constraints  in the Company's  manufacturing  and  assembling
operations,   shortages  or  increases  in  the  prices  of  raw  materials  and
components,  changes in pricing  policy by the  Company  or its  competitors,  a
slowdown  in the  growth  of  the  networking  market,  seasonality,  timing  of
expenditures and economic conditions in the United States,  Europe and Asia. The
Company's  sales will often reflect  orders shipped in the same quarter in which
they are received.  The Company's  backlog at any given time is not  necessarily
indicative of actual sales for any succeeding  period. In addition,  significant
portions of the Company's  expenses are relatively fixed in nature,  and planned
expenditures are based primarily on sales forecasts.  Therefore,  if the Company
inaccurately  forecasts demand for its products, the impact on net income may be
magnified  by the  Company's  inability  to adjust  spending  quickly  enough to
compensate for the net sales shortfall. The


                                       2
<PAGE>

Company's  performance  in any  quarter  is not  necessarily  indicative  of its
performance in any subsequent quarter.

         Other factors  contributing to fluctuations in the Company's  quarterly
operating  results  include  changes in the demand for the  Company's  products,
customer  order  deferrals  in  anticipation  of new  versions of the  Company's
products,  the  introduction  of new  products and product  enhancements  by the
Company or its  competitors,  the effects of filling the  distribution  channels
following such introductions,  potential delays in the availability of announced
or  anticipated   products,   the  mix  of  license  and  service  revenue,  the
commencement  or conclusion of  significant  development  contracts,  changes in
foreign  currency  exchange  rates,  the timing of  acquisitions  and associated
costs,  and the  timing  of  significant  marketing  and sales  promotions.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

History of Losses; Accumulated Deficit

         The Company has  experienced  significant  operating  losses and, as of
December 31, 2000, had an accumulated  deficit of $24 million.  The  development
and  marketing by the Company of its current and new products  will  continue to
require substantial expenditures. Although the Company returned to profitability
in 2000,  there can be no  assurance  that growth in net sales or  profitability
will be achieved or sustained in future years. See "Management's  Discussion and
Analysis of Financial Condition and Results of Operations."

Nasdaq SmallCap Listing; Risk associated with Limited Market

         The  Company's  Common  Stock has been  listed on the  Nasdaq  SmallCap
Market since April 1999. In order to maintain its listing on the Nasdaq SmallCap
Market,  the Company must  maintain  total  assets,  capital and public float at
specified  levels,  and generally must maintain a minimum bid price of $1.00 per
share.  If the Company fails to maintain the standard  necessary to be quoted on
the Nasdaq SmallCap  Market,  the Company's Common Stock could become subject to
delisting. If the Common Stock is delisted, trading in the Common Stock could be
conducted on the OTC Bulletin Board or in the over-the-counter market in what is
commonly  referred to as the "pink sheets." If this occurs,  a shareholder  will
find it more  difficult  to dispose of the  Common  Stock or to obtain  accurate
quotations  as to the price of the  Common  Stock.  Lack of any  active  trading
market would have an adverse effect on a  shareholder's  ability to liquidate an
investment  in the  Company's  Common  Stock  easily and quickly at a reasonable
price.  It might  also  contribute  to  volatility  in the  market  price of the
Company's Common Stock and could adversely affect the Company's ability to raise
additional  equity or debt financing on acceptable  terms or at all.  Failure to
obtain  desired  financing  on  acceptable  terms  could  adversely  affect  the
Company's business, financial condition and results of operations.

Rapid Technological Change; Risks Associated with New Products

         The market for the Company's  products is affected by rapidly  changing
networking  technology and evolving industry  standards and the emergence of the
Internet and other  communication  technologies.  The Company  believes that its
future success will depend upon its ability to enhance its existing products and
to develop and  introduce  new  products  which  conform to or support  emerging
network  telecommunications  standards,  are compatible  with a growing array of
computer and peripheral devices,  support popular computer and network operating
systems and  applications,  meet a wide range of evolving user needs and achieve
market acceptance. There can be no assurance that the Company will be successful
in these efforts. The Company has incurred,  and the Company expects to continue
to incur, substantial expenses associated with the introduction and promotion of
new  products.  There can be no assurance  that the expenses  incurred  will not
exceed research and development cost estimates or that new


                                       3
<PAGE>

products will achieve market  acceptance and generate sales sufficient to offset
development costs. In order to develop new products successfully, the Company is
dependent upon timely access to information about new technological developments
and standards.  There can be no assurance that the Company will have such access
or  that  it will be able to  develop  new  products  successfully  and  respond
effectively  to  technological  change or new product  announcements  by others.
Furthermore, the Company expects that printer and other peripheral manufacturers
will add  features to their  products  that make them more  network  accessible,
which  may  reduce  demand  for the  Company's  print  servers.  There can be no
assurance that products or technologies  developed by others will not render the
Company's  products  non-competitive  or obsolete.  The fax-on-demand  market in
general has been negatively affected by the growth of the Internet. Although the
Company has new Web/fax/email products in development, there can be no assurance
these products will compete successfully. Complex products such as those offered
by the Company may contain undetected or unresolved hardware defects or software
errors when they are first  introduced or as new versions are released.  Changes
in the Company's or its suppliers'  manufacturing  processes or the  inadvertent
use of defective  components  by the Company or its  suppliers  could  adversely
affect the  Company's  ability to achieve  acceptable  manufacturing  yields and
product reliability. The Company has in the past discovered hardware defects and
software  errors in certain of its new  products  and  enhancements  after their
introduction.  Although the Company has not experienced material adverse effects
resulting  from any such errors to date,  there can be no assurance that despite
testing by the Company and by third-party  test sites,  errors will not be found
in future  releases of the  Company's  products,  which would  result in adverse
product reviews and negatively affect market acceptance of these products.

         The  introduction of new or enhanced  products  requires the Company to
manage the transition from older  products.  The Company must manage new product
introductions so as to minimize disruption in customer ordering patterns,  avoid
excessive levels of older product  inventories and ensure that adequate supplies
of new products can be delivered to meet customer demands.  The Company has from
time to time experienced delays in the shipment of new products. There can be no
assurance that future product  transitions  will be managed  successfully by the
Company. See "Business -- Products," "-- Research and Product  Development," and
"-- Sales, Marketing and Distribution."

Key Personnel

         The  Company's  success  depends  to  a  significant  degree  upon  the
continued  contributions  of the Company's key  management,  marketing,  product
development and operational personnel. The success of the Company will depend to
a large extent upon its ability to retain and continue to attract highly skilled
personnel.  Competition for employees in the computer  industry is intense,  and
there can be no  assurance  that the Company  will be able to attract and retain
enough qualified  employees.  The Company's  inability to retain and attract key
employees  could  have  a  material  adverse  effect  on the  Company's  product
development,  business,  operating results and financial condition.  The Company
does not carry key person life  insurance  with respect to any of its personnel.
See "Business -- Research and Product Development."

Competition and Price Erosion

         The network  enhancement  products  and computer  software  markets are
highly  competitive,  and  the  Company  believes  that  such  competition  will
intensify in the future.  The competition is  characterized  by rapid change and
improvements in technology along with constant  pressure to reduce the prices of
products.  The Company currently competes  principally in the market for network
fax servers and network  print  servers and  fax-on-demand  software.  Increased
competition,  direct and indirect, could adversely affect the Company's business
and operating results through pricing  pressure,  loss of market share and other
factors.  In particular,  the Company expects that,  over time,  average selling
prices for its


                                       4
<PAGE>

print server products will continue to decline, as the market for these products
becomes increasingly competitive.  Any material reduction in the average selling
prices of the Company's products would adversely affect gross margins. There can
be no assurance the Company will be able to maintain the current average selling
prices of its products or the related gross margins.

         The  principal   competitive  factors  affecting  the  market  for  the
Company's  products  include  product   functionality,   performance,   quality,
reliability,  ease of use,  quality  of  customer  training  and  support,  name
recognition,  price, and compatibility  and conformance with industry  standards
and changing  operating system  environments.  Several of the Company's existing
and   potential   competitors,   most   notably  the   Hewlett-Packard   Company
("Hewlett-Packard") and Intel Corporation ("Intel"),  have substantially greater
financial, engineering,  manufacturing and marketing resources than the Company.
The  Company  also  experiences  competition  from a number  of other  software,
hardware  and service  companies.  In addition to its current  competitors,  the
Company may face  substantial  competition  from new  entrants  into the network
enhancement  market,  including  established  and  emerging  computer,  computer
peripherals, communications and software companies. In the fax server market the
Company competes with companies such as Applied Voice Technology,  Inc., Omtool,
Ltd. and Computer Associates International,  Inc. There can be no assurance that
competitors will not introduce products  incorporating  technology more advanced
than the technology  used by the Company in its products.  In addition,  certain
competing  methods of  communications  such as the Internet or  electronic  mail
could  adversely  affect the market for fax  products.  Certain of the Company's
existing and potential  competitors in the print server market are manufacturers
of printers and other  peripherals,  and these  competitors  may develop  closed
systems accessible only through their own proprietary  servers.  There can be no
assurance  that  the  Company  will  be  able to  compete  successfully  or that
competition will not have a material  adverse effect on the Company's  business,
operating  results and financial  condition.  See  "Management's  Discussion and
Analysis of Financial Condition and Results of Operations."

International Sales

         Sales  to  customers  located  outside  Canada  and the  United  States
accounted for  approximately  24% and 31% of the Company's net sales in 2000 and
1999,  respectively.  The Company sells its products in approximately 40 foreign
countries  through  approximately 50 international  distributors.  Macnica,  the
Company's  principal Japanese  distributor,  accounted for approximately 61% and
60% of the Company's  international  sales in 2000 and 1999,  respectively.  The
Company  expects  that   international   sales  will  continue  to  represent  a
significant  portion of the Company's product revenues and that the Company will
be subject to the normal  risks of  international  sales,  such as export  laws,
currency  fluctuations,  longer payment cycles, greater difficulties in accounts
receivable  collections  and the requirement of complying with a wide variety of
foreign  laws.  See also  "Dependence  on  Proprietary  Rights;  Uncertainty  of
Obtaining  Licenses."  Although the Company has not previously  experienced  any
difficulties  under foreign laws in exporting  its products to other  countries,
there can be no assurance that the Company will not experience such difficulties
in foreign countries in the future.  In addition,  because the Company primarily
invoices its foreign sales in U.S. dollars, fluctuations in exchange rates could
affect demand for the Company's products by causing its prices to be out of line
with products priced in the local currency.  Additionally, any such difficulties
would have a material adverse effect on the Company's  international sales and a
resulting material adverse effect on the Company's  business,  operating results
and financial  condition.  The Company may experience  fluctuations  in European
sales on a quarterly basis because European sales may be weaker during the third
quarter than the second  quarter due to extended  holiday  shutdowns in July and
August. See "Business -- Sales, Marketing and Distribution."

                                       5
<PAGE>

Lack of Product Revenue Diversification

         The  Company  derives  substantially  all of its sales from its fax and
print server products. The Company is leveraging its expertise in these areas to
develop new messaging features and products to support greater  integration into
corporate network environments and with Internet  communications.  See "Business
-- Research  and Product  Development."  The  Company  expects  that its current
products will  continue to account for a majority of the Company's  sales in the
near future.  A decline in demand for these products as a result of competition,
technological  change or other factors, or a delay in the development and market
acceptance of new features and products, would have a material adverse effect on
the Company's business, operating results and financial condition.

Product Transition; Risk of Product Returns and Inventory Obsolescence

         From time to time,  the  Company may  announce  new  products,  product
versions,  capabilities  or  technologies  that have the potential to replace or
shorten the life cycles of  existing  products.  The release of a new product or
product  version may result in the  write-down  of products in inventory if such
inventory  becomes obsolete.  The Company has in the past experienced  increased
returns of a particular  product version following the announcement of a planned
release of a new  version of that  product.  Although  the  Company  provides an
allowance for anticipated  returns,  and believes its existing policy results in
the  establishment of an allowance that is currently  adequate,  there can be no
assurance that product  returns will not exceed such allowance in the future and
will not have a material  adverse  effect on the Company's  business,  operating
results and financial condition.

Concentration of Distributors; Distribution Risks

         The Company sells its products  primarily  through a two-tier  domestic
and  international   distribution  network.  The  Company's   distributors  sell
Castelle's  products  to VARs,  e-commerce  vendors  and  other  resellers.  The
distribution   of  personal   computers   and   networking   products  has  been
characterized  by rapid change,  including  consolidations  due to the financial
difficulties  of  distributors  and the  emergence of  alternative  distribution
channels.  In addition,  an  increasing  number of companies  are  competing for
access to these channels.  The Company's  distributors typically represent other
products that are  complementary  to, or compete with, those of the Company.  In
particular,  certain of its competitors,  including  Hewlett-Packard  and Intel,
sell a  substantially  higher dollar volume of products  through  several of the
Company's large U.S.  distributors,  and as a result,  the Company believes such
distributors give higher priority to products offered by such  competitors.  The
Company's  distributors are not  contractually  committed to future purchases of
the Company's products and could discontinue  carrying the Company's products at
any time for any reason.  In  addition,  because the Company is  dependent  on a
small  number of  distributors  for a  significant  portion  of the sales of its
products, the loss of any of the Company's major distributors or their inability
to satisfy  their  payment  obligations  to the Company could have a significant
adverse  effect on the  Company's  business,  operating  results  and  financial
condition.  The  Company  has a  stock  rotation  policy  with  certain  of  its
distributors that allows them to return marketable  inventory against offsetting
orders. Should the Company reduce its prices, the Company credits certain of its
distributors for the difference between the purchase price of products remaining
in their  inventory  and the  Company's  reduced  price  for such  products.  In
addition,  due to industry  conditions or the actions of competitors,  inventory
levels of the Company's  products held by distributors  could become  excessive,
resulting  in  product  returns  and  inventory  write-downs.  There  can  be no
assurance  that in the  future  returns  and  price  protection  will not have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial  condition.  See "Business -- Sales,  Marketing and  Distribution" and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

                                       6
<PAGE>

Dependence on Suppliers and Subcontractors

         The   Company's   products   incorporate   or  require   components  or
sub-assemblies procured from third-party suppliers.  Certain of these components
or  sub-assemblies  are  available  only from a single  source,  and  others are
available  only from limited  sources.  Certain key  components of the Company's
products,  including a modem chip set from  Rockwell  International  Corporation
("Rockwell")  and  a  microprocessor  from  Motorola,  Inc.  ("Motorola"),   are
currently available from single sources.  Other product components are currently
available  from only a limited  number of  sources.  In  addition,  the  Company
subcontracts a substantial  portion of its  manufacturing to third parties,  and
there can be no assurance that these  subcontractors will be able to support the
manufacturing  requirements of the Company. Other than an agreement with Sercomm
Corporation to manufacture  certain print server products,  the Company does not
have material long-term supply contracts with third parties or any other sole or
limited source vendors and subcontractors,  and otherwise,  purchases components
or  sub-assemblies  on a purchase order basis.  The Company's  ability to obtain
these components and  sub-assemblies is dependent upon its ability to accurately
forecast  customer  demand  for its  products  and to  anticipate  shortages  of
critical  components  or  sub-assemblies   created  by  competing  demands  upon
suppliers.  If the  Company  were  unable  to  obtain  a  sufficient  supply  of
high-quality  components or sub-assemblies from its current sources, the Company
could  experience  delays in obtaining such  components or  sub-assemblies  from
other  sources.  Resulting  delays or  reductions  in  product  shipments  could
adversely  affect  the  Company's  business,  operating  results  and  financial
condition and damage customer relationships. Furthermore, a significant increase
in the  price  of one or more  of  these  components  or  sub-assemblies  or the
Company's  inability to lower  component or  sub-assembly  prices in response to
competitive  price  reductions  could adversely  affect the Company's  business,
operating results and financial condition.

         The Company  augments  its product  offerings  by  obtaining  access to
third-party  products and technologies in areas outside of its core competencies
or where the Company believes internal  development of products and technologies
is not  cost-effective.  The  Company's  third-party  supplier of certain  print
server  products is SerComm.  There can be no assurance that these products will
produce gross margins comparable to those of the Company's  internally generated
products or that the parties with which the Company  contracts  will continue to
provide the  quantities  and  quality of products  needed by the Company or that
they will upgrade their  respective  products on a timely basis. The termination
of the  Company's  relationships  with  third-party  product  suppliers and with
SerComm,  in  particular,  could  result  in  delays or  reductions  in  product
shipments, which could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Manufacturing."

Government Regulation

         Certain  aspects  of the  networking  industry  in  which  the  Company
competes  are  regulated  both in the United  States  and in foreign  countries.
Imposition of public carrier tariffs,  taxation of  telecommunications  services
and the necessity of incurring  substantial  costs and expenditure of managerial
resources to obtain  regulatory  approvals,  particularly  in foreign  countries
where  telecommunications  standards differ from those in the United States,  or
the inability to obtain regulatory approvals within a reasonable period of time,
could have a  material,  adverse  effect on the  Company's  business,  operating
results and  financial  condition.  The  Company's  products  must comply with a
variety of  equipment,  interface  and  installation  standards  promulgated  by
communications  regulatory  authorities  in  different  countries.   Changes  in
government  policies,  regulations  and  interface  standards  could require the
redesign of products  and result in product  shipment  delays which could have a
material,  adverse  impact on the  Company's  business,  operating  results  and
financial condition.

                                       7
<PAGE>

Dependence on Proprietary Rights; Uncertainty of Obtaining Licenses

         The   Company's   success   depends  to  a  certain   extent  upon  its
technological expertise and proprietary software technology.  The Company relies
upon a combination  of  contractual  rights and  copyright,  trademark and trade
secret laws to establish and protect its  technologies.  Despite the precautions
taken by the Company,  it may be possible for unauthorized third parties to copy
the Company's products or to reverse engineer or obtain and use information that
the  Company  regards as  proprietary.  In  addition,  the laws of some  foreign
countries either do not protect the Company's  proprietary  rights or offer only
limited protection. Given the rapid evolution of technology and uncertainties in
intellectual property law in the United States and internationally, there can be
no assurance that the Company's  current or future  products will not be subject
to third-party claims of infringement.  Any litigation to determine the validity
of any third-party claims could result in significant expense to the Company and
divert the efforts of the Company's technical and management personnel,  whether
or not such litigation is determined in favor of the Company. In the event of an
adverse result in any such  litigation,  the Company could be required to expend
significant resources to develop non-infringing technology or to obtain licenses
to the  technology  that  is the  subject  of the  litigation.  There  can be no
assurance  that the Company would be successful in such  development or that any
such licenses would be available. The Company also relies on technology licenses
from third parties.  There can be no assurance that these licenses will continue
to be available to the Company upon reasonable  terms, if at all. Any impairment
or termination of the Company's  relationship  with third-party  licensors could
have a material adverse effect on the Company's business,  operating results and
financial  condition.  There can be no assurance that the Company's  precautions
will be adequate to deter  misappropriation  or  infringement of its proprietary
technologies.  Furthermore,  while the Company has obtained federal registration
for many of its trademarks in the United States,  certain of its trademarks have
not been registered in the United States or foreign jurisdictions.  There can be
no assurance that the Company's use of such  registered  trademarks  will not be
contested by third parties in the future.  See "Business -- Research and Product
Development" and "--Proprietary Rights."

         The Company has received, and may receive in the future, communications
asserting that its products infringe the proprietary  rights of third parties or
seeking  indemnification  against such  infringement.  There can be no assurance
that third parties will not assert  infringement claims against the Company with
respect to current or future products or that any such assertion may not require
the Company to enter into royalty  arrangements or result in costly  litigation.
As  the  number  of  software  products  in  the  industry   increases  and  the
functionality  of these  products  further  overlap,  the Company  believes that
software developers may become increasingly  subject to infringement claims. Any
such claims,  with or without  merit,  can be time  consuming  and  expensive to
defend. There can be no assurance that any such intellectual property litigation
that may be brought in the future will not have a material adverse effect on the
Company's business,  operating results and financial  condition.  As a result of
such claims or  litigation,  it may become  necessary or desirable in the future
for the Company to obtain  licenses  relating to one or more of its  products or
relating to current or future  technologies,  and there can be no assurance that
it  would  be able to do so on  commercially  reasonable  terms.  See  "Business
--Research and Product Development" and "--Proprietary Rights."

Possible Volatility of the Company's Common Stock Price

         The price of the Company's  Common Stock has  fluctuated  widely in the
past.  Sales of  substantial  amounts  of the  Company's  Common  Stock,  or the
perception that such sales could occur, could adversely affect prevailing market
prices for the Company's  Common Stock.  The management of the Company  believes
that such past fluctuations may have been caused by the factors identified above
as well as announcements of new products,  quarterly fluctuations in the results
of  operations  and other  factors,  including  changes in the  condition of the
personal computer industry in general.  These


                                       8
<PAGE>

fluctuations, as well as general economic, political and market conditions, such
as recessions or international currency  fluctuations,  may adversely affect the
market price of the  Company's  Common  Stock.  Stock  markets have  experienced
extreme price volatility in recent years.  This volatility has had a substantial
effect on the market prices of  securities  issued by the Company and other high
technology  companies,  often for reasons unrelated to the operating performance
of the  specific  companies.  The Company  anticipates  that prices for Castelle
Common Stock may continue to be volatile. Such future stock price volatility for
Castelle Common Stock may provoke the initiation of securities litigation, which
may divert  substantial  management  resources and have an adverse effect on the
Company's business, operating results and financial condition.

Future Capital Requirements

         Although  the Company  believes  that its existing  capital  resources,
expected  cash flows  from  operations  and  available  lines of credit  will be
sufficient to meet its  anticipated  capital  requirements  at least through the
next 12 months,  the Company may be required to seek  additional  equity or debt
financing.  The  timing  and  amount  of such  capital  requirements  cannot  be
determined at this time and will depend on a number of factors, including demand
for the  Company's  existing and new products and changes in  technology  in the
networking  industry.  There can be no assurance that such additional  financing
will  be  available  on  satisfactory   terms  when  needed,   if  at  all.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations -- Liquidity and Capital Resources."

Voting Control by Officers, Directors and Affiliates

         At March 13,  2001,  the  Company's  officers and  directors  and their
affiliates  beneficially  owned  approximately 25% of the outstanding  shares of
Common  Stock.  Accordingly,  together  they had the  ability  to  significantly
influence the election of the Company's  directors and other  corporate  actions
requiring  shareholder  approval.  Such  concentration of ownership may have the
effect of delaying, deferring or preventing a change in control of the Company.

Certain Charter Provisions

         The Company's Board of Directors has authority to issue up to 2,000,000
shares of Preferred  Stock and to fix the rights,  preferences,  privileges  and
restrictions,  including voting rights, of these shares without any further vote
or action by the shareholders. The rights of the holders of the Company's Common
Stock will be subject to, and may be  adversely  affected  by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance of
Preferred  Stock,  while  providing  desirable  flexibility  in connection  with
possible  acquisitions  and other corporate  purposes,  could have the effect of
making  it more  difficult  for a third  party  to  acquire  a  majority  of the
outstanding  voting  stock  of  the  Company,  thereby  delaying,  deferring  or
preventing a change in control of the Company. Furthermore, such Preferred Stock
may have other rights,  including  economic rights,  senior to the Common Stock,
and as a result,  the issuance  thereof could have a material  adverse effect on
the market value of the Company's Common Stock.


                                    BUSINESS

General

         Castelle  designs,  develops,  markets and supports  server  appliances
 providing office messaging  solutions and other shared services.  The Company's
 current  products  are  focused  on two  areas:  fax and  integrated  messaging
 products,  including a range of software  enhancements,  and print servers. The


                                       9
<PAGE>

 Company's products consist of FaxPress, an integrated hardware/software network
 faxing  solution;  OfficeDirect,  an  integrated  fax/email  messaging  system;
 InfoPress,  an  enterprise-level  fax-on-demand  software  product and LANpress
 print servers. See "Business -- Research and Product Development."

         The  Company's  products  have  historically  centered on fax and print
  servers and related  technologies.  Starting in 1997,  the Company's  revenues
  have  declined  as  competition  increased,  primarily  with the print  server
  products in the Asia Pacific  Region,  while at the same time the Internet and
  other networking  technologies  advanced. As a result, the Company experienced
  annual operating  losses during 1997 through 1999.  During the past two years,
  management has redirected the Company's  efforts to focus on server appliances
  and on development  efforts to integrate existing and future products with the
  Internet and emerging networking technologies. Through the introduction of the
  enhanced  fax  messaging   products  that  generate   higher  gross   profits,
  restructuring and implementing numerous cost reductions,  the Company was able
  to report  operating  profits in the fourth quarter of 1999 and in each of the
  four quarters of fiscal 2000.

Industry Background

          In  the  mid-1980s,   organizations  began  to  interconnect  personal
computers into local area networks (LANs) in order to allow work groups to share
files and peripherals  such as printers.  As LANs have  proliferated  throughout
organizations and client/server  architectures have gained acceptance, they have
become increasingly  complex,  the size and multimedia  intensity of files being
transmitted  has  increased  and  the  applications  operating  on the  computer
networks  have become more  critical to the success of the business  enterprise.
The  proliferation  of the Internet and Intranets  and  popularity of electronic
communications expanded the role of LAN's as a means to provide common access to
the Internet, email and other messaging applications.  Installation, maintenance
and  administration  of LAN  equipment  has  always  required  a staff of highly
skilled professionals.  The costs associated with LANs and related equipment are
significant and affordable only for larger organizations.  Many small and medium
sized  businesses  were not able to invest in  necessary  equipment  and support
staff.  This created the need for  specialized  networking  equipment that would
allow network  administrators to deploy complex networking  applications without
the cost and time required to install  server-based  software  solutions.  These
devices are known in the industry as "Server  Appliances" or "Thin  Servers".  A
server appliance is an integrated  software/hardware solution designed to reduce
the  complexity  and cost for a  specific  server  based  application.  Internet
routers, email servers, remote access servers,  communication servers, and print
servers are examples of the server appliances used by businesses today.

         Castelle  pioneered  server  appliances,  establishing  a benchmark for
"plug and play" and ease of use with its fax and print server product families.

          Fax Messaging  Products:  The  increasing  popularity of email and the
          Internet provided a boost to all types of electronic communications as
          many users and organizations became more comfortable and accustomed to
          their   use.   To   further    simplify   and   improve   inter-   and
          intra-organizational  communications,  corporate MIS  departments  are
          looking for ways to  integrate  different  types of  messaging  into a
          unified  messaging  environment.  Fax remains one of the key  business
          communication  tools  and is one of the  essential  components  of the
          corporate   messaging   environment.    In   corporate   communication
          infrastructures,  fax is being  integrated  into email.  To facilitate
          this capability companies install email-integrated fax server systems.

          Fax servers allow users to send and receive faxes as easily as emails,
          using the same email  application  for both types of  messages.  A fax
          server  can  sort   incoming   faxes   directly   and   deliver   them
          electronically and  confidentially to the electronic  mailboxes of the
          intended  recipients.  Fax servers can also be used as an  independent
          network shared messaging system in environments that


                                       10
<PAGE>

          require high volume  incoming and  outgoing  faxes.  Users are able to
          send and receive faxes directly from their computers or  workstations,
          elimination the need to print a document, take it to a stand-alone fax
          machine and wait for its transmission. Fax servers can help reduce fax
          transmission  costs  by  sending  non-urgent  faxes  at an  "off-peak"
          telephone rates and by utilizing a Fax-over-Internet technology.

          These fax servers  can be  implemented  using  complex  software  that
          require  Windows NT or UNIX  systems  and  specialized  expensive  fax
          modems.  The other approach is a dedicated fax server appliance,  such
          as the Castelle FaxPress.

          Automated  delivery of information is another  popular  application of
          the fax technology.  Fax-on-demand  is the ability to use a touch-tone
          phone and a fax machine to request and receive  copies of documents on
          demand.  Although there are a wide variety of applications  installed,
          the two most common  applications  are customer support and literature
          fulfillment applications.  The largest industry using fax-on-demand is
          the  high-technology  sector,  with  applications  also  installed  in
          travel,   government,   newspapers,   manufacturing   and   non-profit
          organizations.   Essentially,   any  company   with   information   to
          disseminate  publicly is a potential  information-on-demand  customer.
          Castelle's  InfoPress  product line provides a comprehensive  solution
          for automated information delivery via fax and email.

          Integrated  Messaging  Servers.  Proliferation  of  various  types  of
          electronic   communications  created  a  need  for  unified  messaging
          systems.  Instead  of  using  single-function  software  programs  for
          different  types of  messages,  such as emails and  faxes,  many users
          prefer to use a single  application such as Microsoft  Outlook for all
          messages.  Integrating  different  systems to handle  various  message
          types  can  be  complex  and  expensive.  To  simplify  this  process,
          next-generation  messaging  servers,  such as Castelle's  OfficeDirect
          Messaging  Server,  provide  both  email and fax  capabilities  in one
          integrated system.

          Print Servers:  The sharing of printers, a basic benefit of a LAN, has
          traditionally  been  provided  by  connecting  a  printer  either to a
          network  file  server  or to a  dedicated  personal  computer  on  the
          network.  However,  direct  connection  to the file server has several
          disadvantages,   including   the  risk  of  the  file   server   being
          overburdened by the processing  required to print large or graphically
          complex files, lower print transfer speeds and location inflexibility.
          Similarly,  printer connection to a dedicated personal computer, while
          providing  better  location  flexibility,  is more  costly  and offers
          substantially  lower print file transfer speed than a dedicated  print
          server can  provide.  A print  server  directly  connects  one or more
          printers to a LAN, providing a cost-effective,  high-speed solution to
          the  demand  for shared  print  resources  on a LAN.  In  addition  to
          providing location flexibility and convenience,  print servers improve
          network  performance  by  relieving  the  burden  on the file  server.
          Furthermore,   print   servers   enable  users  to  access   essential
          information  about the status of the printer and their print files and
          to select their desired printer configuration.

Server appliances, such as  communications/messaging  servers and print servers,
have  emerged to gain  significant  market  acceptance  due to their  ability to
significantly  reduce  complexity and cost associated with the  installation and
maintenance  of  networking  systems.  These  appliances  also make the  complex
functionality of Internet and Intranet  communications  available and affordable
to many smaller  businesses.  As MIS  professionals in larger  organizations and
business  owners of smaller  enterprises  continue to recognize  the benefits of
server  appliances  to provide  such  critical  functionality  as  Internet  and
Intranet communications,  remote access,  scanning,  electronic mail and related
functions,  the Company  believes that the demand for such network  systems will
increase.


                                       11
<PAGE>

Castelle Strategy

         Castelle's  objective is to be a leading  worldwide  supplier of server
appliances  providing  office  messaging  solutions  and other shared  services.
Castelle  pioneered  server  appliances,  establishing a benchmark for "plug and
play" and ease of use with its fax and print server product  families.  Castelle
products are installed in most Fortune 1000  companies,  and in small and medium
sized businesses  worldwide.  Castelle is now applying its proven  technology to
the office,  integrating  desktop messaging,  Internet  connectivity,  print and
other shared services.

         Focus  on  Server  Appliances:   The  Company  focuses  exclusively  on
         providing innovative, reliable, easy-to-use network products. Since its
         inception,  the Company has focused on developing  networking  products
         that  utilize  advanced  software  to  tightly  integrate   proprietary
         hardware systems with standard  computing  platforms.  As a result, the
         Company  believes  it  has  developed  a high  level  of  expertise  in
         networking,   software  development,   hardware  design  and  telephony
         technology.  The Company  plans to  capitalize  on these  attributes by
         continuing  to focus on providing  network  enhancement  products  that
         enable users to communicate more effectively.

         Focus  on  Messaging  and   Communications:   The  Company  focuses  on
         developing   application   solutions   for  inter   and   intra-company
         communications.  The  Company  believes  that its focus on  application
         servers rather than on  infrastructure  systems  enables the Company to
         offer  products  that bring  higher  value  services to  customers  and
         provide a higher margin to the Company.

         Expand  Product Line: The Company is leveraging its expertise in server
         appliances  to offer new  easy-to-use,  cost-effective  solutions.  The
         Company  continues to expand both its fax and print server products and
         apply its proven technology to other areas.

         Focus on E-commerce and Other High Volume  Distribution  Channels:  The
         Company  has   established  a  two-tier   domestic  and   international
         distribution  network of leading  national and regional network product
         distributors  and  resellers   including  Ingram  Micro  and  TechData.
         Castelle's  products are well suited for sale by e-commerce vendors and
         the Company has been successful  working with leading suppliers such as
         CDW, buy.com, Insight, MicroWarehouse domestically and Software Catalog
         and W-Store in Europe.  The Company also sells through OEM vendors such
         as Fujitsu Ltd. in Japan (" Fujitsu") and Veritek ("Veritek") in Korea.
         The Company is focused on  maintaining  and  strengthening  its current
         distribution network in North America, Europe and Asia-Pacific regions.

         Leverage  Strategic  Relationships:  The Company  augments  its product
         offerings by establishing  relationships with companies able to provide
         products in areas outside of the Company's core technical  competencies
         or in instances  where  internal  development  of such  products is not
         cost-effective.   The  Company  also  establishes   relationships  with
         numerous  leaders in hardware and software  technology  to enable it to
         keep abreast of, and respond quickly to, technological changes that may
         affect the network enhancement market.

Products

         The Company develops and markets a range of server  appliance  products
 that enhance network productivity, performance and functionality. The Company's
 current products are grouped into two areas: fax messaging products,  including
 a range of software enhancements, and print servers.

          Fax  Messaging  Products:  The Company  offers the FaxPress  family of
          email-integrated  fax server  appliances.  The Company  positions  the
          FaxPress as the easiest way to add faxing to your network


                                       12
<PAGE>

          and integrate fax with email.  FaxPress  allows network users to send,
          receive, route, print, store, edit and retrieve fax transmissions from
          their own personal computers on a local area network.  FaxPress can be
          integrated into an email system creating a unified fax/email messaging
          environment.  FaxPress enables users to transmit documents directly to
          a fax device as easily as if they were  printing to a laser printer or
          sending  an  email   message.   The  product  also  provides   network
          administration   features   like  control,   monitoring,   logging  or
          configuration.  The  Company's  fax server  products  are  designed to
          comply with current regulatory standards in the United States,  Europe
          and the  Pacific  Rim.  During  fiscal  2000 and  1999,  fax  products
          represented 86% and 78%, respectively, of total net sales.

               Key  features  of the  FaxPress  products  (configured  with  its
               current software versions) include:

                    Easy Installation and maintenance:  FaxPress is a fax server
                    appliance  that is packaged with all necessary  hardware and
                    software.  The  hardware  system  is a  small  box  with  an
                    integrated 10/100 Base-T Ethernet interface and one to eight
                    intelligent fax modems.  The FaxPress  includes all required
                    system and client software.

                    Support for popular network operating environments: FaxPress
                    operates  in any  local  area  network  based  on  Microsoft
                    Windows 98, ME and 2000;  Windows NT and NT Terminal Server;
                    Novell NetWare or Linux servers.

                    Ability to create unified fax/email  messaging  environment:
                    FaxPress has the ability to  integrate  fax into a corporate
                    email  system,  allowing  users to send and receive faxes in
                    the same  manner  as  emails.  FaxPress  supports  Microsoft
                    Exchange/Outlook,  Lotus Notes,  Novell GroupWise,  Netscape
                    and  other  SMTP  compatible   systems.   Castelle's  unique
                    Exchange  Direct  interface  offloads fax processing from MS
                    Exchange Server while maintaining tight integration with the
                    Outlook client.

                    Integration   with   many   popular   accounting   and   CRM
                    applications:     FaxPress    is    available    with    the
                    Reform-for-FaxPress software package ("Reform") from FabSoft
                    that   allows   users  to  send  faxes  from  many   popular
                    accounting,  financial and payroll systems including Oracle,
                    SAP, PeopleSoft,  Great Plains,  ACCPAC, and Macola.  Reform
                    can support any application that supports form printing.

                    Ability to send faxes from many  applications:  Easy  faxing
                    from within any Windows,  Windows 95/98 and Windows  NT/2000
                    application such as Microsoft Office and Lotus Smart Suite.

                    Electronic delivery of faxes to desktops:  FaxPress supports
                    several  methods to  deliver  incoming  faxes  direct to the
                    email or fax inbox of the intended  recipient.  Such methods
                    include  DID  (Direct  Inward  Dialing),   DTMF  (Dual  Tone
                    Multifrequency), T.30 sub-addressing, OCR (Optical Character
                    Recognition) routing, line routing.

                    Internet  faxing  capabilities  reduce  transmission  costs:
                    FaxPress  enables  users to  connect  several  units via the
                    Internet  or the  Intranet  to  form a  private  Fax-over-IP
                    network  that  can  significantly  reduce  the  cost  of fax
                    transmissions.

                    Integration into custom applications: The Company provides a
                    software   development  kit  which  allows   programmers  to
                    integrate faxing functions into


                                       13
<PAGE>

                    their  current  applications  or to  create  new  customized
                    applications that use the FaxPress server.

                    Software Options:  The Company offers a range of value-added
                    software   options  which  increase  the   functionality  of
                    Castelle's  FaxPress  systems and  enables  the  FaxPress to
                    address  specialized  applications.  Software  upgrades  and
                    options  are  available  to the  installed  base of FaxPress
                    units at prices ranging from $99 to $1,375.

          The Company  offers a family of FaxPress  fax server  systems  ranging
     from entry-level  products targeted to small businesses with under 50 users
     to  high-end   fax   solutions   capable  of   supporting   enterprise-wide
     installations.  The  suggested  U.S.  list prices for  FaxPress  fax server
     products  range  from  $1,495 to  $9,995.  The  server  pricing is based on
     hardware model,  with no per-user  costs.  The FaxPress 2500, 5000 and 7000
     family come with the FaxPress 6.x PRO version  that adds  integration  with
     popular email  packages,  and many advanced fax management and  integration
     features. FaxPress 6.x PRO is optional on FaxPress SBE. The following table
     summarizes the Company's FaxPress system products:
<TABLE>
<CAPTION>

                                                                -------------------------------
                                                                     Network Environment
----------------------------------------------------------------------------------------------
                       Number of       Email                       NetWare     Windows NT/2000
                        Modems      Integration      Network    3.x, 4.x, 5.x     (IPX,IP)
Product Model                                       Topology        (IPX)
-----------------------------------------------------------------------------------------------
<S>                     <C>           <C>            <C>             <C>             <C>
FaxPress SBE               1          Optional       Ethernet        |X|             |X|
FaxPress 2500              2            |X|          Ethernet        |X|             |X|
FaxPress 5000           4 or 8          |X|          Ethernet        |X|             |X|
FaxPress 7000              8            |X|          Ethernet        |X|             |X|
-----------------------------------------------------------------------------------------------
</TABLE>



     Information-on-demand  systems:  InfoPress  software  enables the access of
     information  via any  touch-tone  phone and a fax  machine  and  allows the
     dissemination of information via "broadcasting" to a select database of fax
     numbers.  InfoPress  allows  companies  to use one source of documents in a
     Castelle document library and to automatically  publish the documents using
     either the fax-on-demand and/or email-on-demand methods.


     Castelle's  InfoPress  is a  software  product  designed  to operate on the
     Microsoft  Windows  NT/2000  platform.  The system  utilizes  voice and fax
     processing  hardware,  as well as telephone system interface (analog or T1)
     hardware  with as few as two and as many as 288  ports  that  are  actually
     deployed at a customer site.

          Fax-on-Demand:  Fax-on-demand  allows a user to  request  and  receive
          information  on  demand  by  dialing  a  telephone  number.  The  user
          interacts with a series of voice prompts to select specific documents,
          by simply using the telephone keypad, and requesting delivery of these
          documents to a fax number.

          Email-on-Demand:  Email-on-demand allows a user to request and receive
          information on demand by using email.  Auto-reply  email exists today,
          but is limited to receiving one document,  usually in text format. The
          main benefit of  email-on-demand  is the ability to share the document
          library with fax-on-demand.

                                       14
<PAGE>

          Web Integration: InfoPress supports Web HTML documents in the document
          library. The documents are automatically  rendered into a fax document
          when required.


     Integrated   Messaging   Products:   In  2000,   Castelle   introduced  the
     OfficeDirect  family of products  designed to provide  integrated email and
     fax  communications to small offices.  The OfficeDirect  family consists of
     the OfficeDirect  Messaging Server.100 and OfficeDirect Storage Server.100.
     The  OfficeDirect  Messaging Server is an integrated  e-mail/fax  messaging
     server appliance  tailored to meet the needs of small offices or workgroups
     that need to provide robust  communication  services to network  users.  It
     combines an SMTP and POP3 e-mail server with a full-featured  fax server in
     a  plug-n-forget,   easy-to-use,  economical  system,  which  includes  all
     necessary  hardware  and  software.   The  OfficeDirect   Messaging  Server
     integrates  e-mail  and fax  services  into the  Microsoft  Outlook  client
     software. The OfficeDirect Storage Server is a complimentary product to the
     messaging  server and  provides  convenient  and  reliable  storage for the
     network system files and messages. It also provides generic network storage
     and printer sharing to network users.

     Print  Servers:  Printer  sharing  continues  to be one  of  the  important
     benefits of computer  networking.  Print servers are the most efficient and
     economical  way of sharing  printers on  networks.  While  demand for print
     servers in various  sizes of  businesses  continues to grow,  the market is
     very  competitive.  Castelle has been involved in the print server business
     for more than ten  years.  After  continuous  improvements  on the cost and
     feature set,  Castelle's  LANpress has become a well-received  print server
     product  line.   Our  latest  print  server   models   incorporate  a  RISC
     microprocessor,  Fast Ethernet,  Windows 2000,  Internet  Printing and many
     other attractive new features. Castelle LANpress JR is the world's smallest
     print server commercially  available today. It's similar in size to that of
     a standard  printer  cable  connector.  The  suggested  U.S. list price for
     LANpress  print  servers  ranges from $149 to $345.  During fiscal 1999 and
     2000, print server products represented 20% and 14%, respectively, of total
     net sales.

     The following  table  summarizes  the Company's  line of LANpress  external
     print servers:
<TABLE>
<CAPTION>

                                            -------------------------------------------------
                                                        Network Environment
                                            -------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
                                 Ethernet                           Windows                     Flash
     Product Configuration        Network   NetWare      UNIX       95/98/         Apple       Upgrade      Internet
                                 Interface  3.x,        TCP/IP      NT/2000      Ethertalk    Capability    Printing
                                            4.x, 5.x
----------------------------------------------------------------------------------------------------------------------
<S>                               <C>          <C>        <C>         <C>           <C>           <C>         <C>
LANpress JR 10/100 MP (1)         10/100       |X|        |X|         |X|           |X|           |X|         |X|
LANpress 3P/100                   10/100       |X|        |X|         |X|           |X|           |X|         |X|
LANpress Jr. MP (2)                 10         |X|        |X|         |X|           |X|           |X|         |X|
LANpress 2000 2+1 MP (3)          10/100       |X|        |X|         |X|           |X|           |X|         |X|

----------------------------------------------------------------------------------------------------------------------

                  (1) 1 Centronics parallel port
                  (2) Connects directly to port on Printer
                  (3) Numbers refer to the number of parallel and serial port connections, respectively.

</TABLE>


                                       15
<PAGE>

Research and Product Development

     The Company has invested substantially in research and product development.
The Company  believes  its future  performance  will depend in large part on its
ability to enhance its current  products,  to expand its product  offerings,  to
maintain  technological  competitiveness and meet an expanding range of customer
requirements.

     Castelle  continues to invest in  enhancing  its server  appliance  product
lines by  developing  new  versions  of client  and server  software  and server
hardware. The product feature set is driven by the increasing complexity of user
needs.   The  changing   corporate   communications/messaging   environment  and
increasing  demand for easy-to-use  networking  systems define these needs.  The
development efforts are focused on enhancing  functionality of existing products
and  developing  other systems to expand our product  offerings.  The Company is
leveraging its unique technology and engineering expertise in server appliances,
networking,  and  client  and  server  software  to develop a new line of office
messaging server appliances.  The Company's  development efforts are focusing on
high  value  applications,  while  relying  on its  partners  to  provide  basic
functionality for some of its product lines.

     In the year 2000,  the  Company  developed  new  versions  of its  FaxPress
servers offering simpler integration with PBX's and email systems.  The FaxPress
7500 offers 8 lines of fax and a 4-channel  integrated DID or E&M converter that
significantly simplifies  implementation of a fax system that provides automated
delivery of incoming faxes into individual mailboxes.

     The current  FaxPress fax server product line is  continuously  enhanced to
offer greater  integration  into  corporate  networking  environments  with such
features as:

     o Integrated storage for system files and messages;
     o Integrated email interfaces;
     o Network-environment-independent operation; and
     o Always-on operation.

     There can be no assurance that the Company will be successful in developing
and marketing the new software and hardware product versions or in responding to
other emerging  technological  developments or that any development will achieve
commercial acceptance.  The Company is seeking and will continue to seek to hire
additional  skilled  development  engineers.  Such engineers are likely to be in
short  supply,  and the  Company's  business,  operating  results and  financial
condition could be adversely affected if it encounters delays in hiring or fails
to retain the required skilled  engineers.  See "Business -- Risk Factors -- Key
Personnel."

Sales, Marketing and Distribution

     Castelle sells its products  through multiple  channels,  determined by the
product,  market and  customer  need.  The Company has an  established  two-tier
domestic and international distribution network of leading national and regional
network product  distributors and resellers.  The Company also sells through OEM
vendors  such as  Fujitsu  in Japan.  Software  enhancements  and  options  that
complement the FaxPress products are primarily  marketed directly by the Company
to registered end users. The direct sales group works closely with  distributors
and  VARs in  qualifying  sales  opportunities  for the  fax  and  print  server
products.  The Company also sells some products through the on-line store on its
Web site. The Company's European  headquarters  located in the UK provides sales
and support services for Europe.

     Demand for  Castelle's  products is created  through a variety of marketing
programs.  These programs are targeted toward  end-users to stimulate demand for
the products and toward distributors,  resellers, VARs


                                       16
<PAGE>

and  e-commerce  vendors to promote  the  product  in the sales  channel.  These
programs  include targeted and active  participation in industry  networking and
communication  trade shows,  as well as advertising in associated  publications.
The Company  increases  awareness of Company products by Internet  marketing via
targeted e-advertising,  publishing and sponsoring email newsletters,  enhancing
its Web presence, print advertising,  conducting direct mail campaigns, offering
seminars,  trade  shows  and  conferences  and other  forms of public  relations
efforts.  To further  expand its  Internet  marketing  efforts,  the Company has
deployed an  e-marketing  system by  MarketFirst  Software to better  respond to
customers who contact the Company via the  Internet.  The Company's Web site has
been updated and designed to assist  customers  in obtaining  information  about
Castelle products and contacting  Castelle sales personnel,  and offers selected
products and services through the Company's on-line store.

     The Company's products are well suited for sale by e-commerce vendors,  and
the Company has experienced  success working with leading suppliers such as CDW,
buy.com, Insight,  MicroWarehouse  domestically and Software Catalog and W-Store
in Europe.

     The Company's five largest distributors  accounted for approximately 43% of
the  Company's net sales in fiscal 2000 and 42% of its net sales in fiscal 1999.
Ingram, the Company's largest domestic distributor,  one single end-customer and
Macnica,   the  Company's   principal   Japanese   distributor,   accounted  for
approximately 17%, 15% and 15%, respectively, of the Company's net sales in 2000
and 12%, 3% and 18%, respectively,  of its net sales in 1999. Sales to customers
located in the Pacific Rim and Europe comprised approximately 24% and 31% of the
Company's net sales in fiscal 2000 and fiscal 1999,  respectively.  In 2000, the
Company  terminated its agreement with Merisel, a domestic  distributor,  due to
the change in the distributor's  business  strategy,  which was not in line with
the Company's.  The Company's  distributors  typically  represent other products
that are  complementary  to or  compete  with  those of the  Company.  While the
Company attempts to encourage its  distributors to focus on Castelle's  products
through a variety of marketing and support  programs,  our distributors may give
higher  priority to products of other  suppliers,  thereby  reducing the efforts
they devote to selling our products. In particular,  certain of our competitors,
including  Hewlett-Packard  and Intel, sell a substantially  higher total dollar
volume of products through several of the Company's large U.S. distributors and,
as a result,  the Company  believes such  distributors  give higher  priority to
products  offered  by  such  competitors.  The  Company's  distributors  are not
contractually  committed to future purchases of the Company's products and could
discontinue  carrying  the  Company's  products at any time for any reason.  The
Company has a stock rotation policy with certain of its distributors that allows
them to return marketable inventory against offsetting orders. In the event that
the Company reduces its prices,  the Company credits certain of its distributors
for the  difference  between the purchase  price of products  remaining in their
inventory and the Company's  reduced price for such  products.  See "Business --
Risk Factors - Dependence on Suppliers and Subcontractors."

     Customer Service and Support

     The Company provides  customers with support services,  which are available
to assist customers with installation, use and operation issues that will ensure
smooth and  reliable  operation  of Castelle  products.  The  Company's  network
engineers,  located at corporate  headquarters,  provide  technical  support via
telephone,  fax and email during normal Company  business days from 6:00 a.m. to
5:00 p.m. (Pacific Time). As part of the Company's global partner program,  VARs
have access to "priority  technical support" via a special toll-free number that
provides  immediate  access to Castelle network  engineers.  Support is provided
under warranty as well as with different  extended software and hardware support
agreements  sold  directly to the customer by the Company.  The Company also has
other  customer  support,  including a Web site as well as an internal help desk
system.  The Company has an automated call management  distribution  system that
provides improved levels of support to help resolve customer issues.


                                       17
<PAGE>


Manufacturing

     The Company's current in-house  manufacturing  operations consist primarily
of material  planning,  assembly,  final  testing,  quality  control and service
repair. Certain of the Company's manufacturing operations are performed by third
party manufacturers that provide customized,  integrated manufacturing services,
including  procurement,  manufacturing  and  associated  printed  circuit  board
assembly. The Company also relies on SerComm to manufacture certain of its print
server products. These arrangements enable the Company to shift certain costs to
such providers,  thereby  allowing the Company to focus resources on its product
development efforts. The failure of such manufacturers, particularly SerComm, to
meet their contractual  commitments to the Company could cause delays in product
shipments,  thereby  potentially  adversely  affecting the  Company's  business,
operating results and financial condition.

     The Company does not currently have any material long-term supply contracts
with any of its manufacturing  subcontractors or component  suppliers other than
an agreement with SerComm  relating to the  manufacture of print servers.  Other
than its  relationship  with  SerComm,  the Company  purchases  components  on a
purchase order basis. The Company owns all engineering,  sourcing documentation,
functional test equipment and tooling used in manufacturing its products, except
for the products which are produced by SerComm, and believes that it could shift
product assembly to alternate suppliers if necessary.  Certain key components of
the  Company's  products,   including  a  modem  chip  set  from  Conexant,  and
microprocessors  from Motorola,  are currently  available  from single  sources.
Other components of the Company's  products are currently  available from only a
limited number of sources. In addition,  the Company  subcontracts a substantial
portion of its  manufacturing  to third  parties,  and there can be no assurance
that these subcontractors will be able to support the manufacturing requirements
of  the  Company.   The  Company's   ability  to  obtain  these   components  or
sub-assemblies  is dependent  upon its ability to accurately  forecast  customer
demand for its products and to  anticipate  shortages of critical  components or
sub-assemblies created by competing demands upon suppliers.  If the Company were
unable  to  obtain  a   sufficient   supply  of   high-quality   components   or
sub-assemblies from its current sources,  the Company could experience delays in
obtaining such components or sub-assemblies from other sources. Resulting delays
or  reductions  in  product  shipments  could  adversely  affect  the  Company's
business,   operating  results  and  financial  condition  and  damage  customer
relationships.  Furthermore,  a significant increase in the price of one or more
of these  components  or  sub-assemblies  or the  Company's  inability  to lower
component or  sub-assembly  prices in response to competitive  price  reductions
could adversely affect the Company's  business  operating  results and financial
condition.  See  "Business  --  Risk  Factors  -  Dependence  on  Suppliers  and
Subcontractors."

Competition

     See  "Business  -- Risk  Factors  --  Competition  and Price  Erosion"  and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Results of Operations."

Proprietary Rights

     The Company's  success  depends to a certain extent upon its  technological
expertise  and  proprietary  software  technology.  The  Company  relies  upon a
combination of contractual rights and copyright, trademark and trade secret laws
to establish and protect its technologies.  Additionally,  the Company generally
enters  into  confidentiality  agreements  with those  employees,  distributors,
customers  and  suppliers  who have access to sensitive  information  and limits
access to and distribution of its software  documentation  and other proprietary
information.  Because  of the  rapid  pace of  technological  change  in the LAN
product  industry,  the Company believes that patent protection for its products
is less significant to its success than the knowledge, ability and experience of
its employees,  the frequent  introduction and market acceptance of


                                       18
<PAGE>

new products and product enhancements, and the timeliness and quality of support
services provided by the Company. See "Risk Factors -- Dependence on Proprietary
Rights; Uncertainty of Obtaining Licenses."

     Despite  the  precautions  taken by the  Company,  it may be  possible  for
unauthorized third parties to copy certain portions of the Company's products or
to reverse  engineer or obtain and use  information  that the Company regards as
proprietary.  There can be no assurance that the Company's  precautions  will be
adequate  to  deter   misappropriation   or   infringement  of  its  proprietary
technologies.  Furthermore,  while the Company has obtained federal registration
for many of its trademarks in the United States,  certain of its trademarks have
not been  registered in the United States and the Company has registered some of
its  trademarks  in foreign  jurisdictions.  There can be no assurance  that the
Company's  use of such  unregistered  trademarks  will not be contested by third
parties in the future. In addition, the laws of some foreign countries either do
not protect the Company's  proprietary rights or offer only limited  protection.
Given the rapid  evolution  of  technology  and  uncertainties  in  intellectual
property law in the United States and internationally  there can be no assurance
that the Company's current or future products will not be subject to third-party
claims  of  infringement.  Any  litigation  to  determine  the  validity  of any
third-party claims could result in significant expense to the Company and divert
the efforts of the Company's technical and management personnel,  whether or not
such  litigation  is  determined  in favor of the  Company.  In the  event of an
adverse result in any such  litigation,  the Company could be required to expend
significant resources to develop non-infringing technology or to obtain licenses
to the  technology  that  is the  subject  of the  litigation.  There  can be no
assurance  that the Company would be successful in such  development or that any
such licenses would be available. The Company also relies on technology licenses
from third parties.  There can be no assurance that these licenses will continue
to be available to the Company upon reasonable  terms, if at all. Any impairment
or termination of the Company's  relationship  with third-party  licensors could
have a material adverse effect on the Company's business,  operating results and
financial condition.

Government Regulation

     See "Business -- Risk Factors -- Government Regulations."

Employees

     As of  March  1,  2001,  the  Company  employed  a  total  of 68  full-time
equivalent  personnel,  14 in  manufacturing,  19 in sales and  marketing,  9 in
engineering,  14 in customer service and 12 in finance and  administration.  The
Company has not  experienced a work stoppage,  no employees are represented by a
labor organization and the Company considers its employee relations to be good.

                                       19
<PAGE>

Executive Officers

     The names of the  executive  officers  of the  Company and their ages as of
March 1, 2001 are set forth below:

Name              Age                Position
Donald L. Rich    59   Chairman of the Board, President, Chief Executive Officer
Paul Cheng        52   Vice President, Finance and Administration, Chief
                        Financial Officer and Secretary
Eric Chen         48   Vice President, Engineering
Edward J. Heinze  55   Vice President, Sales, Americas
Michael Petrovich 39   Vice President, International Sales
Boris Elpiner     47   Vice President, Marketing




Donald L. Rich

          Mr. Rich  joined the Company in November  1998 and has served as Chief
     Executive Officer and President from November 1998 to the present. Mr. Rich
     became  Chairman  of the Board in May 1999.  Mr.  Rich has  served as Chief
     Financial Officer from April 1999 to March 2001 and Secretary from February
     2000 to March 2001.  From January 1997 until  November  1998,  Mr. Rich was
     self-employed  as a consultant.  From 1993 through 1997, Mr. Rich was Chief
     Executive  Officer and  President  of Talarian  Corporation,  a provider of
     communications  middleware  software.  Prior to that, he held various sales
     and  marketing  management  positions  at  Integrated  Systems,   Inc.  and
     International Business Machines Corporation.  Mr. Rich holds a BS degree in
     Mechanical  Engineering from Purdue University and an MBA from the Stanford
     Graduate School of Business.

Paul Cheng

          Mr.  Cheng  joined  the  Company  in April 2000 and has served as Vice
     President,  Finance and Administration  since that time. In March 2001, Mr.
     Cheng was appointed as Chief  Financial  Officer and  Secretary.  Mr. Cheng
     brings more than 20 years of financial  experience from a successful career
     that was  launched  in Hong  Kong  where  he was the  Plant  Controller  of
     Fairchild Semiconductor  operations.  Before joining Castelle, he served as
     the Vice President of Finance and Administration at Eclipse  International,
     Inc.,  a systems  development  company,  from April 1997 to March 2000.  In
     addition,  he has  held  various  executive  positions  including  the Vice
     President  of Finance at  Quintus  Corporation,  a  developer  of  customer
     relations  management  software  from  December  1993 to  August  1995  and
     Corporate   Controller  at  Power   Integration,   Inc.,  a   semiconductor
     manufacturer  from October 1995 to March 1997. Mr. Cheng is a member of the
     Chartered  Certified  Accountants  and holds a BS degree in Accounting from
     the Baptist College in Hong Kong.


                                       20
<PAGE>

Eric Chen

          Mr. Chen joined the Company in 1989 and was appointed Vice  President,
     Engineering in May 2000. Mr. Chen initially worked on software  development
     projects including  developing the first FaxPress e-mail gateways,  porting
     FaxPress to non-Novell  platforms,  and the first menu-driven  installation
     and configuration  programs for both FaxPress and LANpress.  Most recently,
     Mr.  Chen has been the  Director  of Print  Server  Product  Marketing  and
     Business Unit and has managed the engineering development and manufacturing
     business relationships with Castelle partners. Before joining Castelle, Mr.
     Chen was with 3COM,  a network  solutions  provider.  Mr.  Chen has a BS in
     Engineering  from Taiwan and an MS in Computer  Science from the University
     of Massachusetts.

Edward J. Heinze

          Mr.  Heinze has been with  Castelle  Inc.  since 1994.  Mr. Heinze was
     appointed Vice  President,  Sales,  Americas in January 2000.  Prior to his
     appointment  to Vice  President,  Mr.  Heinze  served  Castelle  as Product
     Manager of the Fax Product Line, and Regional Sales Manager. Before joining
     Castelle,  Mr. Heinze served in several  capacities  at  Visual/White  Pine
     Software, a software developer, including Vice President of Sales. Prior to
     his tenure at White Pine,  he was Chief  Operations  Officer  for XMARK,  a
     computer systems manufacturer, and Vice President of Sales and Marketing at
     EIT,  Millicom,  Olympia,  and Ontel.  He holds a BS degree from Waynesburg
     College.

Michael Petrovich

          Mr. Petrovich, Vice President, International Sales, joined Castelle in
     1992. He was appointed Vice President, International Sales in October 2000.
     Prior to joining Castelle,  Mr. Petrovich was the marketing  communications
     manager for Novell's National Reseller Organization, a software company. In
     this role Mr. Petrovich  focused on business  strategies and development of
     Novell's  direct  reseller  sales  channel.   Before  joining  Novell,  Mr.
     Petrovich   held  sales  and   marketing   positions  at  Excelan,   a  LAN
     manufacturer, and International Microcircuits Incorporated, a semiconductor
     company.   Since  joining  Castelle,  Mr.  Petrovich  has  concentrated  on
     developing the Asia Pacific marketplace and its distribution sales channel.
     Most recently Mr. Petrovich has taken on the responsibilities for all sales
     outside the Americas,  including Asia and Europe.  Mr. Petrovich holds a BA
     in Behavioral Sciences from San Jose State University.

Boris Elpiner

         Mr.  Elpiner,  Vice  President,  Marketing is one of the members of the
     original management team. He joined Castelle's  technical staff in 1988 and
     has been  responsible for the hardware design of FaxPress and several other
     products. In 1990, Mr. Elpiner assumed the role of the print server product
     line  manager,  and later the fax  server  product  line  manager.  He left
     Castelle in 1995 and until 1999 worked for Global Village Communications, a
     communications  systems  provider  and Cadence  Design  Systems,  a systems
     design company. In 1999 Mr. Elpiner rejoined Castelle to lead our marketing
     efforts and assist with the strategic product direction for the Company. He
     was appointed  Vice  President,  marketing in October 2000.  Before joining
     Castelle  in 1988,  Mr.  Elpiner  worked  for Daisy  Systems,  MCC  Powers,
     Matsushita Electric, and Northern Telecom. Mr. Elpiner has an MSEE from the
     Moscow  Institute  of  Telecommunications  and  a  Masters  in  Engineering
     Management from Northwestern University.


                                       21
<PAGE>

ITEM 2.       PROPERTIES

     The Company's  headquarters,  including its executive offices and corporate
administration,  development,  manufacturing,  marketing,  sales  and  technical
services/support   facilities,   are  located  in  Morgan  Hill,  California  in
approximately  16,600  square-feet of leased office space.  The Company occupies
this facility  under a lease,  the term of which expires in December  2005.  The
Company moved into this new facility in December 2000 from the previous location
in Santa Clara,  California,  after the Santa Clara lease  expired.  The Company
also occupies an additional 2,000  square-feet of leased office space located in
El Dorado Hills,  California.  This facility is under a lease, expiring in March
2001. The Company does not have any intention to extend the lease,  but instead,
will  consolidate the El Dorado Hills operations with the headquarters in Morgan
Hill. In addition, the Company rents office space for sales and customer support
offices in Illinois,  Pennsylvania and the United Kingdom.  The Company believes
its  existing  facilities  will be  adequate  to meet its  requirements  for the
foreseeable future.


ITEM 3.       LEGAL PROCEEDINGS

     The Company is not a party to any material litigation.

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

     Subsequent  to our Annual  Meeting of  Shareholders  held on May 10,  2000,
there were no matters submitted to a vote of securities holders in the remainder
of fiscal 2000. The voting results from the Annual Meeting of Shareholders  were
included in the  Company's  Quarterly  Report on Form 10-Q for the quarter ended
June 30, 2000.

                                       22
<PAGE>

                                     PART II


ITEM 5.     MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

     The  Company's  Common Stock  (Nasdaq  symbol  "CSTL") began trading on the
Nasdaq  National  Market on December 20, 1995 and was  transferred to the Nasdaq
SmallCap  Market as of April 1999.  The following  table shows the intraday high
and low sale  prices per share of  Castelle's  Common  Stock as  reported on the
Nasdaq  National  Market for the  periods  indicated  prior to April 1999 and as
reported on the Nasdaq  SmallCap  Market for the periods  indicated  after April
1999. Such quotations do not include retail markups, markdowns or commissions.

FISCAL 1999                         HIGH                LOW
     First Quarter                  $1.50               $0.50
     Second Quarter                 $1.16               $0.38
     Third Quarter                  $1.25               $0.62
     Fourth Quarter                 $2.38               $0.88

FISCAL 2000                         HIGH                LOW
     First Quarter                  $4.00               $1.13
     Second Quarter                 $2.13               $1.16
     Third Quarter                  $1.88               $1.00
     Fourth Quarter                 $1.44               $0.75

     As of December 31, 2000,  there were 116 holders of record of the Company's
Common  Stock.  On March 13,  2001 the last sale  price  reported  on the Nasdaq
SmallCap Market for the Company's Common Stock was $1.31 per share.

Dividend Policy

     The Company has not paid cash  dividends on its Common Stock.  The Board of
Directors  currently  intends  to  retain  any and all  earnings  for use in the
Company's  business and the Company does not anticipate paying cash dividends in
the foreseeable future.

                                       23
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

     The  following  selected  financial  information  has been derived from the
audited Consolidated  Financial  Statements.  The information set forth below is
not necessarily  indicative of results of future operations,  and should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
Notes thereto included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>

                                                                     Years ended December 31,
                                         ..........................................................................
                                              2000            1999           1998            1997           1996
                                         --------------  -------------  --------------  ------------   ------------
                                                             (in thousands, except per share amounts)
INCOME STATEMENT DATA:
<S>                                         <C>             <C>             <C>            <C>            <C>
  Net Sales                                 $14,832         $16,116         $21,746        $25,343        $29,461

  Gross Profit                               $9,380         $ 8,404         $11,598        $13,507        $14,468
  Gross Profit as a % of Net Sales              63%             52%             53%            53%            49%

  Net income/(loss)                            $732         ($3,555)        ($7,534)       ($6,895)        $5,724
  Net income/(loss) as a % of Net Sales          5%            (22%)           (35%)          (27%)           19%

  Net income/(loss) per share - diluted       $0.14          ($0.78)         ($1.67)        ($1.54)         $1.45

BALANCE SHEET DATA:
  Cash and Cash Equivalents                  $3,893          $4,714          $3,924         $6,204         $8,161
  Working Capital                            $3,876          $3,555          $6,763        $10,816        $13,163
  Total Assets                               $8,543          $8,502         $12,494        $18,926        $27,303
  Long-term Liabilities                         $63              --             $98            $52             --
  Shareholders' Equity                       $4,683          $4,020          $7,501        $14,855        $21,616
</TABLE>

     Net  loss  for  fiscal  1999,  1998  and  1997  included  net  charges  for
restructuring and other non-recurring  items of $400,000,  $1.1 million and $6.1
million  respectively,  and a net benefit of $2.5  million in fiscal  1996.  For
detailed  information on these  transactions  see  "Management's  Discussion and
Analysis of Financial  Condition and Results of Operations -  Restructuring  and
Other  Charges and  Amortization  of  Intangible  Assets"  and the  Consolidated
Financial Statements and related Notes thereto included elsewhere in this Annual
Report on Form 10-K.


Quarterly Results of Operations


     The following  table sets forth certain  unaudited  consolidated  quarterly
financial data for the eight quarters ended December 31, 2000. This  information
is unaudited, but in the opinion of management,  has been prepared substantially
on the same basis as the audited  consolidated  financial  statements  appearing
elsewhere in this report,  and all  necessary  adjustments,  consisting  only of
normal recurring adjustments,  hade been included in the amounts stated below to
present fairly the unaudited  consolidated financial statements and the notes to
such statements  appearing  elsewhere in this report.  The results of operations
for any quarter are not necessarily  indicative of the results of operations for
any future period.

                                       24
<PAGE>

Selected Quarterly Data (unaudited)
<TABLE>
<CAPTION>
                                                    Fiscal Year 2000, Quarter Ended
                       ----------------------------------------------------------------------------
                                   Mar  31            Jun  30           Sep  29            Dec  31
                       ----------------------------------------------------------------------------
                                          (in thousands, except per share data)
<S>                                 <C>                <C>               <C>                <C>
Revenue                             $4,100             $3,761            $3,730             $3,241
Gross profit                         2,451              2,451             2,416              2,062
Profit from operations                 168                214               224                 59
Net profit                             169                211               240                112
Net profit per share                  0.03               0.04              0.05               0.02
</TABLE>


<TABLE>
<CAPTION>

                                                    Fiscal Year 1999, Quarter Ended
                       ----------------------------------------------------------------------------
                                  Apr  02            Jul  02            Oct  01            Dec  31
                       ----------------------------------------------------------------------------
                                           (in thousands, except per share data)
<S>                                <C>                <C>                <C>                <C>
Revenue                            $4,468             $3,738             $4,017             $3,893
Gross profit                        1,619              1,985              2,470              2,330
Profit/(loss) from operations      (1,418)            (1,462)              (867)                97
Net profit/(loss)                  (1,411)            (1,460)              (798)               114
Net profit/(loss) per share         (0.33)             (0.31)             (0.17)              0.02
</TABLE>




ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
       AND RESULTS OF OPERATION

     This  Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of Operations  contains  forward-looking  statements that are subject to
many  risks  and  uncertainties  that  could  cause  actual  results  to  differ
significantly  from  expectations.   For  more  information  on  forward-looking
statements,  refer to the "Special Note on Forward  Looking  Statements"  at the
front of this Annual Report on Form 10-K.

     Our  products  have  historically  centered  on fax and print  servers  and
related   technologies.   Starting  in  1997,  our  revenues  have  declined  as
competition  increased,  primarily  with the print  server  products in the Asia
Pacific  Region,  while  at the same  time the  Internet  and  other  networking
technologies  advanced.  As a result,  we experienced  annual  operating  losses
beginning from fiscal 1997 through fiscal 1999.  During the past three years, we
have  redirected  our efforts to focus on server  appliances  and on development
efforts to integrate existing and future products with the Internet and emerging
networking  technologies.  We introduced our new products,  the FaxPress 5000 in
February 1999,  FaxPress 2500 in November  1999,  FaxPress SBE in February 2000,
the FaxPress 7500 in September 2000 and the  OfficeDirect  family of products in
the  fourth  quarter of 2000.  Through  mainly  the  release  of these  enhanced
products in the fax messaging  family,  our gross profit  improved and the total
cost of sales have decreased from 46.7% in fiscal 1997 to 36.8% in fiscal 2000.

     In fiscal 1997, we announced and began to implement a  restructuring  plan,
which was mostly completed in fiscal 1999. As a result,  operating expenses, not
including  non-recurring  restructuring charges, were reduced from $14.6 million
in fiscal 1997 to $14.1 million,  $11.6 million and $8.7 million,  respectively,
in fiscal 1998, 1999 and 2000.

                                       25
<PAGE>

     With the gross profit improvement,  restructuring and implementing numerous
other product cost reductions, we were able to report an operating profit in the
fourth quarter of fiscal 1999, and in each of the four quarters in fiscal 2000.

     Additionally,  increased cash  management  provided a positive cash flow in
fiscal 1999 and improved working capital in fiscal 2000.


Results of Operations

     Comparison of Years Ended December 31, 2000 and 1999

          Net Sales

               Net  sales  consist  of  sales  from  product  sales,  which  are
          calculated  net of returns  and  allowances,  plus  extended  warranty
          contracts,  to  distributors  and  end-users.  Sales  of  products  to
          end-users  are  recognized   upon  shipment.   Sales  of  products  to
          distributors   who  have  limited  stock  rotation   rights  are  also
          recognized  upon  shipment,  but  are  reduced  by  our  estimates  of
          anticipated   exchanges  and  returns,  even  though  we  require  our
          distributors  to purchase  additional  products of equal value for the
          rotated products. Revenue from the sale of extended warranty contracts
          is recognized ratably over the period of the contracts.

               Net sales decreased 8% to $14.8 million in fiscal 2000 from $16.1
          million  in fiscal  1999.  The  decline  of $1.3  million in net sales
          resulted  primarily  from lower sales of our print server  products of
          $1.1 million,  or 35%,  mainly to customers in the Asia Pacific region
          and a slight  decrease of $157,000,  or 1%, in sales of our fax server
          products mainly to the domestic channels.

               International  sales were $3.6 million in fiscal 2000 as compared
          to  $4.9   million  in  fiscal   1999,   representing   24%  and  31%,
          respectively,  of total net  sales.  Lower  international  sales  were
          largely due to reduced demand for our print server  products in Europe
          and Asia Pacific regions.  Most of our  international  sales have been
          denominated  in U.S.  dollars and thus could be adversely  affected by
          changes in demand  resulting from  fluctuations  in currency  exchange
          rates.

               Domestic  sales  were  $11.1  million  in  fiscal  2000  and were
          consistent   with  fiscal   1999,   and   represented   75%  and  69%,
          respectively,  of total net sales for  fiscal  2000 and  fiscal  1999,
          respectively.

               In fiscal 2000, two distributors  and one customer  accounted for
          approximately  17%, 15% and 15% of our net sales.  In fiscal 1999, the
          same two  distributors  and one customer  accounted for  approximately
          12%, 18% and 3% of net sales, respectively.


         Cost of Sales; Gross profit

               Gross  profit is equal to net sales  less cost of sales.  Cost of
          sales  includes  cost of  materials,  including  components,  manuals,
          diskettes,  packaging  materials,  assembly and  shipping,  as well as
          certain royalties.  Cost of sales also includes compensation costs and
          overhead   related   to  the   Company's   manufacturing   operations,
          obsolescence  and  manufacturing  costs and warranty  expenses.  Gross
          profit increased to $9.4 million, or 63% of net sales, in fiscal 2000,
          from $8.4 million,  or 52% of net sales, in fiscal 1999.  Efficiencies
          realized  from the  restructuring  in  fiscal  1998 and  fiscal  1999,
          continuous  product cost reductions and  outsourcing of  manufacturing
          contributed  to the  improvements  in gross profit in fiscal 2000.  In
          fiscal 1999, we also  recognized  $1.5 million of expenses  related to
          the disposal of obsolete inventory.


                                       26
<PAGE>

         Research and Development

               Research   and   development   expenses   consist   primarily  of
          employee-related  expenses  and expensed  material and facility  costs
          associated with the development of new products.  Research and product
          development expenses were $1.8 million and $2.7 million in fiscal 2000
          and fiscal  1999,  respectively,  and  represented  12% and 17% of net
          sales for those  periods.  The absolute  dollar amount of research and
          product  development  expense decreased in fiscal 2000 due to improved
          expense  controls and staff  reductions  that occurred in fiscal 1999.
          Research and development  spending has supported existing products and
          the development of unified messaging server  appliances.  However,  we
          continue to be committed to the development of highly  competitive new
          products  and  services  through  the  efficient  utilization  of  our
          engineering resources.


         Sales & Marketing

               Sales   and    marketing    expenses    consist    primarily   of
          employee-related  expenses,   commissions  to  sales  representatives,
          product promotion expenses,  facilities  expenses,  including expenses
          associated  with our  regional  sales and support  offices.  Sales and
          marketing  expenses were $5.3 million and $6.7 million for fiscal 2000
          and fiscal  1999,  respectively,  and  represented  36% and 42% of net
          sales for those periods.  The reduction in expenses compared to fiscal
          1999 was  largely  due to a  reduction  in  personnel  related  costs,
          occupancy and other cost savings.


         General & Administrative

               General  and   administrative   expenses  consist   primarily  of
          employee-related expenses for administration, finance, human resources
          and general management, as well as consulting, outside services, legal
          and auditing expenses.  General and administrative  expenses were $1.7
          million  and  $2.1   million   for  fiscal   2000  and  fiscal   1999,
          respectively,  or 11% and 13% of net  sales  for  those  periods.  The
          decrease  in expenses in fiscal 2000 was mostly due to lower legal and
          personnel related costs.


         Restructuring and Other Charges & Amortization of Intangible Assets

               There were no restructuring  and other charges recorded in fiscal
          2000.

               In fiscal 1999, we recognized a restructuring  charge of $402,000
          for expenses  associated  with our exit from the Object-Fax NT product
          line  including the  disposition  of excess  inventory,  reductions in
          personnel and the write-off of excess office space.  This  disposition
          is expected to reduce our operating costs in future years.

               In April  1998,  we  acquired  the  Object-Fax  NT  product  from
          Tolvusamskipti HF, an Icelandic corporation. A portion of the purchase
          price was  allocated  to  in-process  research and  development,  and,
          accordingly,  we recorded a one-time  charge  against  earnings in the
          second  quarter  of fiscal  1998 of $1.1  million,  as the  technology
          acquired  had  not  reached  technological   feasibility  and  had  no
          alternative  future  use.  We  also  recorded   intangible  assets  of
          $160,000, which were amortized over 12 months, resulting in a $120,000
          charge  in fiscal  1998.  In  determining  the  amount  of  in-process
          research and development,  we engaged an independent valuation firm to
          conduct an appraisal of the acquired  assets.  The  intangible  assets
          acquired,  including in-process research and development,  were valued
          based on estimates of future cash flows  discounted  to their  present
          value at risk-adjusted rates of return.


                                       27
<PAGE>

         Interest and other income, net

               Interest and other income, net, was $73,000 and $99,000 in fiscal
          2000 and fiscal  1999,  respectively.  The  reduction  in other income
          reflected  mostly  higher  translation  losses from  foreign  currency
          transactions   in  fiscal  2000,  and  higher  bank  and  credit  card
          processing  fees  offset  in part by  higher  interest  income  due to
          changes in cash balances and interest rates.


         Provision for Income Taxes

               In fiscal  2000,  our  provision  for  incomes  taxes was $6,000,
          representing  state taxes only.  Our current  income tax provision was
          offset by the utilization of our net operating loss carry forward.

               In fiscal  1999,  our  provision  for  income  taxes was  $4,000,
          representing state taxes only. Because of our net loss in fiscal 1999,
          there were no federal nor substantial state income taxes recognized.

     Comparison of Years Ended December 31, 1999 and 1998

          Net Sales

               Net sales  decreased  26% from $21.7  million  in fiscal  1998 to
          $16.1 million in fiscal 1999. The sales shortfall  resulted  primarily
          from lower sales of our main product  lines,  including a $3.7 million
          decrease in print server  products in Asia,  and our efforts to manage
          down the inventory in the distribution channels.  Sales in fiscal 1998
          had been reduced by  increases  in the sales return  allowance of $1.2
          million.

               International  sales were $4.9 million and $8.3 million in fiscal
          1999 and  fiscal  1998,  respectively,  representing  31% and 38% and,
          respectively,  of net sales. Lower international sales were the result
          of a reduction in general demand for our print server products in Asia
          and increased local competition in Europe.

               Domestic  sales were $11.2 million in fiscal 1999, as compared to
          $13.5 million in fiscal 1999,  representing 69% and 62%, respectively,
          of total net sales. This reduction of $2.3 million, or 17% was chiefly
          due to managing down the inventory in the distribution channels.

               In  fiscal  1999,   two  separate   distributors   accounted  for
          approximately  18% and 12% of net  sales.  In  fiscal  1998,  the same
          distributors  accounted  for  approximately  26% and 15% of net sales,
          respectively.


          Cost of Sales; Gross profit

               Gross profit  decreased to $8.4  million,  or 52% of net sales in
          fiscal 1999,  from $11.6 million,  or 53% of net sales in fiscal 1998.
          During  fiscal  1999,  we reduced  manufacturing  overhead by $400,000
          through reduction of personnel and other cost savings,  but recognized
          $1.5 million of expenses related to disposal of obsolete inventory.


          Research and Development

                  Research and  development  expenses were $2.7 million and $2.9
         million in fiscal 1999 and fiscal 1998, respectively,  representing 17%
         and 13% of total net sales for those periods.  The slight


                                       28
<PAGE>

          reduction in research and development expenses in fiscal 1999 compared
          to fiscal 1998 was mainly due to improved expense controls.


          Sales & Marketing

               Sales and marketing expenses were $6.7 million in fiscal 1999 and
          $8.8 million in fiscal 1998,  representing 42% and 40%,  respectively,
          of total net sales for those periods.  The expense  decline in was due
          to a reduction in personnel,  lower marketing  promotion,  trade show,
          occupancy and other cost savings.


          General & Administrative

               General and  administrative  expenses  were $2.1 million and $2.4
          million for fiscal 1999 and fiscal 1998, respectively,  or 13% and 11%
          of net sales for those  periods.  The  decrease  in expenses in fiscal
          1999 was chiefly due to a lower  allowance  for doubtful  accounts and
          overall  cost  savings,  offset by  increases  in the amounts paid for
          administrative salaries and bonuses.


          Interest and other income, net

               Interest  and other  income,  net,  was $99,000  and  $174,000 in
          fiscal 1999 and fiscal 1998, respectively.  The higher interest income
          reflected mostly higher cash balances in fiscal 1998.


          Provision for Income Taxes

               In fiscal  1999,  our  provision  for  income  taxes was  $4,000,
          representing state taxes only. Because of our net loss in fiscal 1999,
          there were no federal nor substantial  state income taxes  recognized.
          In  addition,  the tax  benefit  for 1999 was  entirely  offset  by an
          increase in our valuation  allowance  against our deferred tax assets,
          including the benefit from our net operating loss carry forward.
               In the fourth quarter of 1998, due to the uncertainty surrounding
          the realization of favorable tax attributes in future tax returns,  we
          provided a full  valuation  allowance  against our deferred tax asset,
          resulting in a non-recurring, non-cash charge of $4.0 million.

                                       29
<PAGE>

Liquidity and Capital Resources

     Since our initial  public  offering of common stock in December  1995,  our
principal source of funding has been cash from our operations, with some funding
from capital equipment lease lines. As of December 31, 2000, we had $3.9 million
of cash and cash equivalents, reduced from $4.7 million as of December 31, 1999.
The reduction in cash and cash  equivalents in fiscal 2000 was  attributable  in
part to a cash  settlement in early 2000 for $474,000 of a dispute with a vendor
and a $500,000  investment  in December for  leasehold  improvements  in our new
headquarters in Morgan Hill,  California.  Working  capital,  defined as current
assets less current liabilities, improved slightly to $4 million at December 31,
2000 from $3.6 million at December 31, 1999.

     We have a $3.0 million secured  revolving line of credit with a bank, which
expires in March 2001,  pursuant to which we may borrow 100% against  pledges of
cash at the bank's prime rate (9.50% at December  31,  2000).  Borrowings  under
this line of credit agreement are collateralized by all of our assets. We are in
compliance  with the terms of the  agreement,  and at  December  31, 2000 had no
borrowings under the line of credit. We expect to negotiate an extension of this
line of credit.

     In December 1997, as a source of capital asset financing, we entered into a
loan and security agreement with a finance company for an amount up to $288,000.
The  amounts  borrowed  are subject to interest  of 10.11%,  were  repayable  by
December 2000, and were partially  collateralized by a certificate of deposit of
$125,000,  which is  included as  restricted  cash on the  accompanying  balance
sheet.  The loan was completely paid off as of December 31, 2000. The restricted
cash was returned to us in February 2001.

     In December 2000, as a source of capital asset financing, we entered into a
loan and  security  agreement  with a finance  company for an amount of $75,000.
This loan is subject to interest of 12.82% and is repayable by December 2006. As
of December 31, 2000, the future minimum payments are $72,000.

     As of December 31, 2000,  net accounts  receivable  were $2.1  million,  an
increase  from $1.5  million at  December  31,  1999.  The  increase  was mostly
attributable to slower than expected collections.

     Net inventories as of December 31, 2000 were $1.4 million,  consistent with
net  inventories at December 31, 1999. Due to the continued  decline in sales of
our print server products,  we have less of the related  components and finished
inventory,  but have  increased  inventory  in fiscal  2000 in  relation  to our
enhanced fax server and OfficeDirect products.

     We acquired  additional property and equipment of $593,000,  $184,000,  and
$223,000 in fiscal 2000, 1999 and 1998,  respectively.  The increase in property
and  equipment  in fiscal 2000 was largely a  reflection  of the  investment  of
leasehold  improvements in our new headquarters,  and excluded capital equipment
of $75,000 purchased through an equipment lease.

     In fiscal  1998,  we acquired  the  Object-Fax  NT product line for a total
purchase price of $1.4 million, including $300,000 in cash and 440,000 shares of
Castelle Common Stock.

     Although we believe that our existing  capital  resources and expected cash
flows  from  operations  will be  sufficient  to meet  its  anticipated  capital
requirements  at least  through  the next 12 months,  we may be required to seek
additional  equity or debt  financing.  The timing  and  amount of such  capital
requirements  cannot be  determined  at this time and will depend on a number of
factors,  including  demand  for  existing  and  new  products  and  changes  in
technology  in the  networking  industry.  There can be no  assurance  that such
additional  financing will be available on satisfactory terms when needed, if at
all.
                                       30
<PAGE>



ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We  considered  the  provision  of  Financial   Reporting  Release  No.  48
"Disclosure of Accounting  Policies for  Derivative  Financial  Instruments  and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information  about Market Risk  Inherent in  Derivative  Financial  Instruments,
Other Financial  Instruments and Derivative  Commodity  Instruments."  We had no
holdings of derivative financial or commodity  instruments at December 31, 2000.
However, we are exposed to financial market risks, including changes in interest
rates  and  foreign  currency  exchange  rates.  While  much of our  revenue  is
transacted in U.S dollars,  some revenues and capital spending are transacted in
Pounds  Sterling.  These  amounts are not  currently  material to our  financial
statements; therefore we believe that foreign currency exchange rates should not
materially affect our overall financial position,  results of operations or cash
flows. The fair value of our money market account or related income would not be
significantly impacted by increases or decreases in interest rates due mainly to
the highly liquid nature of this investment. However, sharp declines in interest
rates could seriously harm interest earnings on this account.


ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     (a)  The  following  financial  statements of the Company and the report of
          the Company's independent accountants are included in Item 14:
<TABLE>
<CAPTION>
                                                                                     Page in
                                                                                    Form 10-K

<S>                                                                                   <C>
    Report of Independent Accountants.............................................    F-1
    Consolidated Balance Sheets as of December 31, 2000 and 1999..................    F-2
    Consolidated Statements of Operations for the years ended
         December 31, 2000, 1999 and 1998.........................................    F-3
    Consolidated Statement of Shareholders' Equity for the years ended
         December 31, 2000, 1999 and 1998.........................................    F-4
    Consolidated Statements of Cash Flows for the years ended
         December 31, 2000, 1999 and 1998.........................................    F-5
    Notes to Consolidated Financial Statements....................................    F-6
</TABLE>


     (b)  The following  financial statement schedules of Castelle for the years
          ended December 31, 2000,  1999 and 1998 are filed as part of this Form
          10-K and should be read in  conjunction  with the Company's  Financial
          Statements.
<TABLE>
<CAPTION>

                                                                                     Page in
                                                                                    Form 10-K

<S>                                                                                   <C>
    Report of Independent Accountants.............................................    F-1
    Schedule II - Valuation and Qualifying Accounts...............................    F-21

</TABLE>

          Schedules  not listed  above have been  omitted  because  they are not
          applicable or are not required or because the required  information is
          included in the Financial Statements or Notes thereto.


                                       31
<PAGE>

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
       AND FINANCIAL DISCLOSURE

                                      None

                                       32
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Identification of Directors

     The information required by this Item concerning the Company's directors is
incorporated by reference from the sections  captioned  "Proposal 1: Election of
Directors"  contained in the Company's definitive Proxy Statement related to the
2001 Annual Meeting of Shareholders (the "Proxy Statement"),  to be filed by the
Company with the Securities and Exchange Commission.

Identification of Executive Officers

     The information  required by this Item  concerning the Company's  executive
officers is set forth in Part I of this Report.

Compliance with Section 16(a) of the Exchange Act

     The information required by this Item is incorporated by reference from the
section captioned  "Compliance with Section 16(a) of the Securities and Exchange
Act of 1934" contained in the Proxy Statement.



ITEM 11. EXECUTIVE COMPENSATION

     The  information  required by this Item is incorporated by reference to the
section captioned "Executive Compensation" in the Proxy Statement.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  information  required by this Item is incorporated by reference to the
section  captioned   "Security   Ownership  of  Certain  Beneficial  Owners  and
Management" contained in the Proxy Statement.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item is incorporated by reference from the
sections captioned "Certain Transactions" and "Executive Compensation" contained
in the Proxy Statement.

                                       33
<PAGE>

                                     PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a)  The  following  documents  are filed as part of this Annual  Report on
          Form 10-K:


          1.   Consolidated  Financial Statements required to be filed by Item 8
               of Form 10-K. See the list of Financial  Statements  contained in
               Item 8 of this Report.


          2.   Financial  Statement  Schedules required to be filed by Item 8 of
               Form  10-K.  See  the  list  of  Financial   Statement  Schedules
               contained in Item 8 of this Report.


     (b)  Reports on Form 8-K - None


     (c)  Exhibits

          3.1(1)  Amended and Restated Articles of Incorporation of the Company.
          3.2     Amended and Restated  Bylaws of the Company,  as amended
                  through January 25, 2001.
          4.1     Reference is made to Exhibits 3.1 and 3.2.
         10.1(2)* 1995  Non-Employee  Directors' Stock Option Plan, as amended,
                  and form of Director Stock Option Agreement.
         10.2(1)* Form of Indemnity  Agreement  between the Registrant and each
                  of its directors and executive officers.
         10.3(1)  OEM Purchase  Agreement dated May 23, 1995, by and between
                  the Registrant and SerComm Corporation.
         10.4(1)  Distribution Agreement dated February 26, 1990, by and
                  between the Registrant and Ingram Micro D Inc.
         10.5(1)  Distributor  Contract dated June 25, 1991, as amended
                  June 25,1991, by and between the Registrant and Tech Data
                  Corporation.
         10.6(1)  Distribution  Agreement dated March 26, 1992, as amended
                  March 26, 1992, by and between the Registrant and
                  Merisel, Inc.
         10.7(1)  Distributor  Agreement  dated October 1, 1990, by and between
                   the Registrant and Vitek.
         10.8(1)  International  Distributor  Agreement dated February 24,
                  1994, by and between the Registrant and Macnica.
         10.9(3)* 1988  Equity  Incentive  Plan,  as amended and form of option
                  agreements.
         10.11(2)*Form  of  Executive   Severance  and  Transition   Benefits
                  Agreement between the Company and Messier. D. Rich.
         10.12(4)*Employment  agreement  between the Company and Messier.  D.
                  Rich.
         11.1     Computation of Net Income (Loss) Per Share.  Reference is
                  made to page F-20 of the Notes to Consolidated Financial
                  Statements.
         23.1     Consent of PricewaterhouseCoopers LLP.
         24.1     Power of Attorney. Reference is made to the signature page.

     ------------------
     (1) Filed as an exhibit to the  Company's  Registration  Statement  on Form
         SB-2 (Reg. No.  33-99628-LA-)  or amendments  thereto and  incorporated
         herein by reference.
     (2) Filed as an exhibit to the Company  Form 10-K for the fiscal year ended
         December 31, 1999 and incorporated herein by reference.
     (3) Filed as an exhibit  to the  Company's  Form 10-Q for the period  ended
         March  31,  2000 and  incorporated  herein  by  reference.

                                       34
<PAGE>

     (4) Filed as an exhibit to the Company's  Form 10-K for the fiscal year
         ended  December 31, 1998 and incorporated herein by reference.
      *   Indicates management contracts or compensatory plans or arrangements
         filed pursuant to Item 601(b)(10) of Regulation S-K.

                                       35
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Act of 1934, an amended,  the  Registrant  has duly caused this Annual Report on
Form  10-K  to be  signed  on its  behalf  by the  undersigned,  thereunto  duly
authorized on the thirtieth day of March 2001.


                                 By:    /S/ DONALD L. RICH
                                 -----------------------------------------------
                                  Donald L. Rich
                                  Chief Executive Officer and President



         KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below  constitutes  and appoints  Donald L. Rich, as his true and lawful
attorney-in-fact  and agent, with full power of substitution for him, and in his
name in any and all  capacities,  to sign any and all  amendments to this Annual
Report on Form  10-K,  and to file the same,  with  exhibits  thereto  and other
documents in connection therewith,  with the Securities and Exchange Commission,
granting unto said  attorney-in-fact  and agent,  full power and authority to do
and perform  each and every act and thing  requisite  and  necessary  to be done
therewith,  as  fully to all  intents  and  purposes  as he might or could do in
person,  hereby  ratifying and  confirming  all that said  attorney-in-fact  and
agent,  and any of them, or his  substitute or  substitutes,  may lawfully do or
cause to be done by virtue hereof.

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the  following  persons
on behalf of the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>

Name                                       Title                                   Date


<S>                    <C>                                                      <C>
/S/ DONALD L. RICH     Chairman of the Board and Director,                      March 29, 2001
------------------
Donald L. Rich         Chief Executive Officer, President (principal executive
                       officer)

/S/ PAUL CHENG         Vice  President,   Finance  and  Administration,   Chief March 29, 2001
--------------         Financial  Officer   (principal   accounting   officer),
Paul Cheng             Secretary


/S/ PETER TIERNEY      Director                                                 March 29, 2001
-----------------
Peter Tierney

/S/ SCOTT MCDONALD     Director                                                 March 29, 2001
------------------
Scott McDonald

/S/ ROBERT HAMBRECHT   Director                                                 March 29, 2001
--------------------
Robert Hambrecht

/s/ JACK HOWARD        Director                                                 March 29, 2001
---------------
Jack Howard
</TABLE>

                                       36
<PAGE>



Castelle and Subsidiaries
Consolidated Financial Statements
as of December 31, 2000 and 1999
and for each of the three years in the
period ended December 31, 2000



<PAGE>




                        Report of Independent Accountants




To the Board of Directors and
Shareholders of Castelle


In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  statements  of  operations,  shareholders'  equity  and cash flows
present fairly, in all material respects, the consolidated financial position of
Castelle  and  subsidiaries  at December  31, 2000 and 1999,  and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 2000,  in  conformity  with  generally  accepted  accounting
principles in the United States of America.  These financial  statements are the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements in  accordance  with  auditing  standards  generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.


PricewaterhouseCoopers LLP
San Jose, California
February 14, 2001



<PAGE>
<TABLE>
<CAPTION>
Castelle and Subsidiaries
Consolidated Balance Sheets
(in thousands)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                           December 31,
                                                                                ....................................
                                                                                     2000                1999
                                                                                ----------------   -----------------
<S>                                                                                 <C>                 <C>
Assets
Current assets:
    Cash and cash equivalents                                                        $   3,893           $   4,714
    Restricted cash                                                                        125                 125
    Accounts receivable, net of allowance for doubtful accounts
           of $285 in 2000 and $493 in 1999                                              2,083               1,525
    Inventories                                                                          1,363               1,411
    Prepaid expenses and other current assets                                              209                 262
                                                                                ----------------   -----------------
           Total current assets                                                          7,673               8,037

Property and equipment, net                                                                768                 387
Other, net                                                                                 102                  78
                                                                                ----------------   -----------------

             Total assets                                                             $  8,543            $  8,502
                                                                                ================   =================

Liabilities and Shareholders' Equity
Current liabilities:
    Long-term debt, current portion                                                    $     9            $     98
    Accounts payable                                                                     1,014               1,336
    Accrued liabilities                                                                  2,681               3,048
                                                                                ----------------   -----------------
           Total current liabilities                                                     3,704               4,482

Long-term debt, net of current portion                                                      63                   -
                                                                                ----------------   -----------------
           Total liabilities                                                             3,767               4,482
                                                                                ----------------   -----------------

Commitments (see Note 5)

Shareholders' Equity:
    Preferred stock, no par value:
      Authorized:  2,000 shares in 2000 and 1999
      Issued and outstanding:  none in 2000 and 1999                                         -                   -
    Common stock, no par value:
      Authorized:  25,000 shares
      Issued and outstanding: 4,741 shares in 2000
           and 4,641 shares in 1999                                                     28,976              29,002
    Deferred compensation                                                                  (17)               (67)
    Accumulated deficit                                                                (24,183)            (24,915)
                                                                                ----------------   -----------------
           Total shareholders' equity                                                    4,776               4,020
                                                                                ----------------   -----------------

             Total liabilities and shareholders' equity                              $   8,543           $   8,502
                                                                                ================   =================


</TABLE>


                                      F-2
   The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Castelle and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
-----------------------------------------------------------------------------------------------------------------------
                                                                                 Years Ended December 31
                                                               ........................................................
                                                                     2000                1999               1998
                                                               -----------------   -----------------  -----------------

<S>                                                                  <C>                 <C>                <C>
Net sales                                                            $  14,832           $  16,116          $  21,746
Cost of sales                                                            5,452               7,712             10,148
                                                               -----------------   -----------------  -----------------
        Gross profit                                                     9,380               8,404             11,598
                                                               -----------------   -----------------  -----------------

Operating expenses:
    Research and development                                             1,759               2,741              2,878
    Sales and marketing                                                  5,293               6,732              8,776
    General and administrative                                           1,663               2,139              2,443
    Amortization of intangible assets                                        -                  40                120
    Restructuring and other charges                                          -                 402              1,124
                                                               -----------------   -----------------  -----------------
                                                                         8,715              12,054             15,341
                                                               -----------------   -----------------  -----------------

           Operating income/(loss)                                         665              (3,650)            (3,743)

Interest income, net                                                       195                 126                170
Other income (expense), net                                               (122)                (27)                 4
                                                               -----------------   -----------------  -----------------

Income/(loss) before provision for
    income taxes                                                           738              (3,551)            (3,569)
Provision for income taxes                                                   6                   4              3,965
                                                               -----------------   -----------------  -----------------

           Net income/(loss)                                          $    732          $   (3,555)        $   (7,534)
                                                               =================   =================  =================

Net income/(loss) per common share - basic                            $   0.16           $   (0.78)         $   (1.67)
                                                               =================   =================  =================

Shares used in per share calculation - basic                             4,664               4,579              4,507
                                                               =================   =================  =================

Net income/(loss) per common share - diluted                          $   0.14           $   (0.78)         $   (1.67)
                                                               =================   =================  =================

Shares used in per share calculation - diluted                           5,080               4,579              4,507
                                                               =================   =================  =================
</TABLE>

                                      F-3
   The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Castelle and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 2000, 1999 and 1998
(in thousands)
------------------------------------------------------------------------------------------------------------------------------------

                                                                                  Notes
                                                                                Receivable
                                                                                   for
                                                                                Purchase
                                                                                    of
                                                           Common Stock           Common      Deferred    Accumulated
                                                     ..........................   Stock     Compensation    Deficit       Total
                                                       Shares        Amount
                                                     ------------  ------------ ----------- ------------- ------------ ------------
<S>                                                       <C>       <C>           <C>           <C>        <C>          <C>
Balances, December 31, 1997                               4,490     $  28,955     $  (274)      $     -    $ (13,826)   $  14,855
    Repurchase of common stock                             (293)         (384)          -             -            -         (384)
    Issuance of common stock through
      exercise of stock options                              40            12           -             -            -           12
    Issuance of common stock in
      connection with acquisitio                            100           500           -             -                       500
    Deferred  compensation related to options issued to       -           160           -          (160)           -            -
    consultant
    Amortization of deferred compensation                     -             -           -            40            -           40
    Compensation   expense   related  to  fully  vested
    options
      granted to consultant                                   -            12           -             -            -           12
    Net loss                                                  -             -           -             -       (7,534)      (7,534)

                                                     ------------  ------------ ----------- ------------- ------------ ------------
Balances, December 31, 1998                               4,337     $             $  (274)      $ (120)    $ (21,360)    $  7,501
                                                                       29,255

    Issuance of common stock through
      exercise of stock options                              17            10           -             -            -           10
    Issuance of common stock in
      connection with acquisition                           340             -           -             -            -            0
    Amortization of deferred compensation                                                            53                        53
    Repayment of notes receivable                             -             -          11             -            -           11
    Cancellation of notes receivable                                                  263                                     263
    Retirement of  restricted stock                         (53)         (263)          -             -            -         (263)
    Net loss                                                  -             -           -             -       (3,555)      (3,555)

                                                     ------------  ------------ ----------- ------------- ------------ ------------
Balances, December 31, 1999                               4,641     $  29,002       $    -      $   (67)   $ (24,915)    $  4,020
                                                     ------------  ------------ ----------- ------------- ------------ ------------

    Issuance of common stock through
      exercise of stock options                              30            24           -             -            -           24
    Exchange of warrants
      for common stock                                       70             -           -             -            -            -
    Deferred  compensation related to options issued to       -            17           -           (17)           -            -
    consultant
    Write-off of deferred compensation
         related to cancelled options                         -           (67)          -            67            -            -
    Net                                                       -             -           -             -           732         732
    income

                                                     ------------  ------------ ----------- ------------- ------------ ------------
Balances, December 31, 2000                               4,741     $  28,976       $    -       $ (17)    $ (24,183)    $  4,776
                                                     ============  ============ =========== ============= ============ ============
</TABLE>

                                      F-4
   The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Castelle and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2000, 1999 and 1998
(in thousands)
------------------------------------------------------------------------------------------------------------------------------------

                                                                                 Year Ended December 31,
                                                                   ....................................................
                                                                        2000              1999              1998
                                                                   ----------------  ----------------  ----------------
<S>                                                                     <C>             <C>               <C>
Cash flows from operating activities:
    Net income  (loss)                                                  $     732       $    (3,555)      $    (7,534)
    Adjustments to reconcile net income (loss) to
      net cash (used in) provided by operating activities:
        Depreciation and amortization                                         260               440               640
        Purchased in-process research and development                           -                 -             1,124
        Provision for doubtful accounts and sales returns                    (257)                -               909
        Provision for excess and obsolete inventory                           (80)            1,579               418
        Compensation expense related to grant of stock options                  -                53                52
        Loss on disposal of fixed assets                                      (10)               81                40
        Changes in assets and liabilities:
           Accounts receivable                                               (301)            1,947            (1,108)
           Inventories                                                        128               749              (371)
           Prepaid expenses and other current assets                           53               136               175
           Other assets                                                       (24)               34                24
           Accounts payable                                                  (322)             (748)              772
           Accrued liabilities                                               (367)              333                95
           Deferred income taxes                                                -                 -             3,934
                                                                   ----------------  ----------------  ----------------
             Net cash (used in)/provided by operating activities             (188)             1,049             (830)
                                                                   ----------------  ----------------  ----------------

Cash flows from investing activities:
    Acquisition of property and equipment                                    (593)             (184)             (223)
    Proceeds from sale of fixed assets                                         34                 -                 -
    Acquisition of Object-fax product line                                      -                 -              (910)
                                                                   ----------------  ----------------  ----------------
             Net cash used in investing activities                           (559)             (184)           (1,133)
                                                                   ----------------  ----------------  ----------------

Cash flows from financing activities:
    (Increase) decrease in restricted cash                                      -                 -               142
    Proceeds from notes payable                                                 -                 -               (87)
    Repayment of notes payable                                                (98)              (96)                -
    Proceeds from collection of note receivable for stock                       -                11                 -
    Proceeds from  issuance of common stock and  warrants,  net of             24                10              (372)
    repurchases
                                                                   ----------------  ----------------  ----------------
             Net cash used in financing activities                            (74)              (75)             (317)
                                                                   ----------------  ----------------  ----------------

Net (decrease) increase in cash and cash equivalents                         (821)              790            (2,280)

Cash and cash equivalents, beginning of period                                                3,924             6,204
                                                                            4,714
                                                                   ----------------  ----------------  ----------------

Cash and cash equivalents, end of period                               $    3,893        $    4,714        $    3,924
                                                                   ================  ================  ================

Supplemental information:
    Cash paid during the period for:
      Interest                                                          $       6         $      19         $      27
      Income taxes                                                      $       5         $      47         $       5
    Noncash investing and financing activities:
      Issuance  of common  stock  for  acquisition  of  Object-fax      $       -         $       -         $     500
      product line
      Note payable for fixed asset acquisition                          $      75         $       -         $       -
      Warrants converted into common stock                              $      70         $       -         $       -
</TABLE>

                                      F-5
   The accompanying notes are an integral part of these financial statements.
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

1.     Business and Organization of the Company

Castelle designs,  develops,  markets and supports server  appliances  providing
office  messaging  solutions and other shared  services.  The Company's  current
products  are  focused  on two areas:  fax and  integrated  messaging  products,
including a range of software  enhancements,  and print  servers.  The Company's
products  consist of FaxPress,  an integrated  hardware/software  network faxing
solution;  OfficeDirect, an integrated fax/email messaging system; InfoPress, an
enterprise-level fax-on-demand software product and LANpress print servers.

The Company distributes its products primarily through a two-tier,  domestic and
international  distribution  network,  with its distributors  selling Castelle's
products to value-added resellers, system integrators,  e-commerce retailers and
other  resellers in the United  States,  Europe and the Pacific Rim. The Company
also has relationships with selected original  equipment  manufactures and sells
software enhancements and upgrades directly to end-users.

2.       Summary of Significant Accounting Policies

     Basis of consolidation
The consolidated  financial  statements include the accounts of Castelle and its
wholly  owned  subsidiaries  in the United  States,  the United  Kingdom and the
Netherlands. All intercompany balances and transactions have been eliminated.

     Use of estimates
The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

     Financial instruments
Cash equivalents  consist of highly liquid investments with original  maturities
of three months or less.

Amounts  reported  for  cash   equivalents,   receivables  and  other  financial
instruments  approximate  fair values based upon comparable  market  information
available at the respective balance sheet dates.

Financial  instruments that potentially subject the Company to concentrations of
credit risks consist  principally of cash,  notes  receivable and trade accounts
receivable.  The Company  maintains  its cash balances at a variety of financial
institutions  and has not  experienced  any losses  relating to any of its money
market funds or bank deposits.

     Certain risks and concentrations
Ongoing customer credit evaluations are performed by the Company, and collateral
is not required.  The Company  maintains  allowances  for potential  returns and
credit  losses,   and  such  returns  and  losses  have  generally  been  within
management's  expectations.  Three  customers  accounted  for  59%  of  accounts
receivable  at  December  31,  2000 and  three  customers  accounted  for 42% of
accounts receivable at December 31, 1999.

                                      F-6
<PAGE>

The Company's products include components subject to rapid technological change.
Significant  technological change could adversely affect the Company's operating
results and subject  the  Company to returns of product  and  inventory  losses.
While the Company has ongoing  programs to minimize  the adverse  effect of such
changes and consider  technological  change in estimating its  allowances,  such
estimates  could change in the future.  In addition,  one of the Company's print
server  products is currently  manufactured by a single supplier and certain key
components are currently available from only single sources.

     Inventories
Inventories are stated at the lower of standard cost (which approximates cost on
a first-in, first-out basis) or market.

     Property and equipment
Property and  equipment  are stated at cost less  accumulated  depreciation  and
amortization.  Depreciation is provided using the straight-line  method over the
estimated useful lives of the respective assets, generally three to seven years.
Amortization of leasehold improvements is provided on a straight-line basis over
the life of the related  asset or the lease term,  if shorter.  Gains and losses
upon asset disposal are recognized in the year of disposition.

     Accounting for long-lived assets
The Company reviews  property,  equipment,  goodwill and other intangible assets
for impairment  whenever  events or changes in  circumstances  indicate that the
carrying amount of an asset may not be recoverable.  Recoverability  is measured
by  comparison  of its  carrying  amount to future net cash flows the assets are
expected  to  generate.  If such  assets  are  considered  to be  impaired,  the
impairment  to be  recognized  is measured  by the amount by which the  carrying
amount of the asset exceeds its fair market value.

     Software production costs
Costs related to the conceptual  formulation and design of software products are
expensed  as  research  and  development  while  costs  incurred  subsequent  to
establishing  technological  feasibility  of software  products are  capitalized
until general release of the product.  Generally,  technological  feasibility is
established upon completion of a working model. No significant  costs subsequent
to such point have been incurred, and all such costs have been expensed.

     Revenue recognition
Product revenue is recognized upon shipment if a signed contract exists, the fee
is fixed and determinable,  collection of the resulting  receivables is probable
and product returns are reasonably estimable. The Company enters into agreements
with certain of its  distributors  which permit limited stock  rotation  rights.
These stock rotation  rights allow the distributor to return products for credit
but require the purchase of additional products of equal value. Revenues subject
to stock rotation  rights are reduced by  management's  estimates of anticipated
exchanges.  Provisions for estimated warranty costs and anticipated  retroactive
price  adjustments  are recorded at the time  products are shipped.  The Company
recognizes revenue from the sale of extended warranty contracts ratably over the
period of the contracts.

In December  1999 the  Securities  and  Exchange  Commission  (SEC) issued Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial  Statements"
which  provides  guidance on the  recognition,  presentation  and  disclosure of
revenue in financial  statements  filed with the SEC. SAB 101 outlines the basic
criteria  that  must be met to  recognize  revenue  and  provides  guidance  for
disclosures related to revenue recognition  policies.  The impact of SAB 101 has
not had a material impact on the financial  position or results of operations of
the Company.

                                      F-7
<PAGE>

     Advertising costs
Advertising  costs,  included in sales and marketing  expenses,  are expensed as
incurred and were  $1,171,000,  $889,000 and $1,963,000 in 2000,  1999 and 1998,
respectively.

     Foreign currency translation
The functional  currency of the Company's foreign subsidiary is the U.S. dollar.
Foreign currency  translation  gains and losses are reported in the statement of
operations.  For fiscal 2000, the Company experienced a foreign currency loss of
$77,000.  There were no significant  foreign  currency gains or losses in fiscal
1999 and 1998.

     Net income/(loss) per share
Basic net  income/(loss)  per share is computed by  dividing  net  income/(loss)
available to common shareholders by the weighted average number of common shares
outstanding  for that period.  Diluted net  income/(loss)  per share is computed
giving  effect to all dilutive  potential  common  shares that were  outstanding
during the period.  Dilutive  potential  shares  consist of  incremental  common
shares issuable upon exercise of stock options and warrants.

     Restructuring
In 1999, the Company  recognized a restructuring  charge of $402,000,  including
the disposition of assets  associated with the Company's exit from the ObjectFax
NT product line of $213,000,  reducing headcount by 14 for a charge of $110,000,
the write-off of excess  office space of $63,000 and other costs of $16,000.  As
of December  31,  1999,  the Company had made actual  payments of  $295,000.  In
fiscal 2000,  the Company  continued to pay vacated  lease  payments of $23,000,
leaving a balance of $84,000 for future obligations.

     Comprehensive income
Under  Statement  of  Financial   Accounting   Standards  No.  130,   "Reporting
Comprehensive  Income" disclosure of comprehensive  income and its components is
required in financial  statements.  Comprehensive income is the change in equity
from transactions and other events and circumstances  other than those resulting
from investments by owners and distributions to owners. There are no significant
components  of  comprehensive  income  excluded from net income,  therefore,  no
separate statement of comprehensive income has been presented.

     Segment information
The Company has determined that it uses one measurement of  profitability of its
business for internal  reporting,  and  therefore  operates in one segment.  The
Company's international  operations in 2000, 1999 and 1998 are discussed in Note
11.

     New accounting pronouncements
Under Statement of Financial  Accounting Standards ("SFAS") 133, "Accounting for
Derivative  Instruments  and  Hedging  Activities,"  companies  are  required to
recognize all  derivatives  as either assets or  liabilities in the statement of
financial  position and to measure those  instruments at fair value.  Changes in
fair value shall be recognized  currently in earnings.  Management  believes the
impact of SFAS No. 133 will not be material on the financial position or results
of operations  of the Company.  The Company will adopt SFAS No. 133, as amended,
in its first quarterly filing for fiscal 2001.

                                      F-8
<PAGE>

3.   Acquisition of the Object-Fax NT Product Line

In April 1998,  the Company  completed  its  acquisition  of the  Object-Fax  NT
product line, a facsimile  software  application  designed for LAN's,  WAN's and
Internet-based  networks, from Tolvusamskipti HF, an Icelandic corporation.  The
acquisition has been accounted for as a purchase,  valued at approximately  $1.4
million,  included the exchange of $300,000 in cash,  100,000 shares of Castelle
common stock,  and the right to receive either  additional cash or the number of
shares of Castelle  common  stock on the date six months  after the  acquisition
necessary to make the fair market value of the common stock and additional  cash
received  in the  transaction  not less  than  $500,000.  Since the value of the
Castelle  common stock received in the transaction was less than $500,000 on the
date six months after the acquisition,  an additional 339,560 shares of Castelle
common stock were issued to  Tolvusamskipti  HF on April 9, 1999. The results of
the operations of Object-Fax NT product line were included in the results of the
Company since  acquisition.  In connection with the  acquisition,  Castelle also
entered into asset  acquisition  agreements  with Traffic USA,  Inc. and Traffic
Software  USA, Inc. in which  Castelle  acquired  fixed assets and  intellectual
property rights associated with the marketing,  sales,  distribution and support
of the  Object-Fax  NT software.  In exchange for these  assets,  Castelle  paid
$135,000 and agreed to pay a royalty on sales of the Object-Fax NT software, not
to  exceed  $75,000  or to be paid  beyond  24  months  after  the  acquisition.
Additionally,  Castelle entered into consulting and  non-competition  agreements
with key employees of Traffic USA, Inc. and Traffic Software USA, Inc. A portion
of the purchase price was allocated to in-process research and development, and,
accordingly,  the Company recorded a one-time charge against earnings in 1998 of
$1.1 million.  The amount of the purchase price allocated to in-process research
and development related to products for which technological  feasibility had not
been established and for which there was no alternative future use. Further, the
Company  recorded  intangible  assets of $160,000,  which were amortized over 12
months.

In 1999, the Company  decided to discontinue  the Object-FAX NT product line and
recorded a restructuring reserve of $402,000.

4.   Balance Sheet Detail (in thousands)
<TABLE>
<CAPTION>

Inventories:

                                         December 31,
                               ..................................
                                    2000              1999
                               ----------------  ----------------

<S>                                    <C>               <C>
 Raw material                          $  335            $  136
 Work in process                          201               300
 Finished goods                           827               975
                               ----------------  ----------------

                                     $  1,363          $  1,411
    Total inventories
                               ================  ================
</TABLE>


                                      F-9
<PAGE>
<TABLE>
<CAPTION>

Property and equipment:

                                                             December 31,
                                                   ..................................
                                                        2000              1999
                                                   ----------------  ----------------

<S>                                                       <C>               <C>
  Production, test and demonstration equipment            $   350           $   281
  Computer equipment                                        1,157             1,099
  Office equipment                                             92                67
  Leasehold improvements                                      395               118
                                                   ----------------  ----------------
                                                            1,994             1,565
  Less accumulated depreciation and amortization           (1,226)           (1,178)
                                                   ----------------  ----------------

     Total property and equipment                         $   768           $   387
                                                   ================  ================
</TABLE>


The Company  recorded  depreciation  and  amortization  related to property  and
equipment of $260,000 in 2000,  $382,000 in 1999 and $491,000 in 1998.  Castelle
follows the IRS recommendations regarding useful lives of the assets.

Accrued liabilities:
<TABLE>
<CAPTION>

                                                             December 31,
                                                   ..................................
                                                        2000              1999
                                                   ----------------  ----------------

<S>                                                        <C>               <C>
  Accrued compensation                                     $  852            $  990
  Accrued sales and marketing                                 349               368
  Accrued professional fees                                   416               404
  Deferred revenue                                            486               451
  Other                                                       578               835
                                                   ----------------  ----------------

                                                         $  2,681          $  3,048
     Total accrued liabilities
                                                   ================  ================
</TABLE>



5.     Commitments

The Company entered into noncancelable operating leases expiring in 2006, and is
responsible for certain maintenance costs, taxes and insurance under the leases.
The Company entered into a lease for a new facility in Morgan Hill,  California,
in August 2000 and relocated its corporate  headquarters  in December 2000 after
the lease at the Santa Clara,  California location expired at the same time. The
lease on the new facility has a term of 5 years,  expiring in December 2005 with
one conditional  three-year option, which, if exercised,  would extend the lease
to December  2008  commencing  with rent at  ninety-five  percent of fair market
value.  Future minimum  payments  under  noncancelable  operating  leases are as
follows (in thousands):

                                      F-10
<PAGE>
<TABLE>
<CAPTION>
  Year Ended December 31,
<S>                                                                    <C>
        2001                                                           $   254
        2002                                                               260
        2003                                                               271
        2004                                                               282
        2005                                                               278
  Thereafter                                                                14
                                                                ----------------
                                                                      $  1,359
                                                                ================
</TABLE>
Rent expense,  including the facility lease and equipment rental,  was $510,000,
$466,000, and $584,000 for 2000, 1999 and 1998, respectively.


6.     Bank Borrowings

The Company has a $3.0 million  collateralized  revolving  line of credit with a
bank, which expires in March 2001, pursuant to which the Company may borrow 100%
against  pledges of cash at the bank's prime rate (9.50% at December 31,  2000).
Borrowings under this line of credit agreement are  collateralized by all of the
assets of the  Company.  The  Company  was in  compliance  with the terms of the
agreement, and at December 31, 2000 had no borrowings under the line of credit.


7.     Long-Term Debt

In December 1997, the Company entered into a loan and security  agreement with a
finance company for an amount of $288,000.  The amounts borrowed were subject to
interest  of  10.11%,  and were  repaid in  December  2000,  and were  partially
collateralized  by a  certificate  of deposit of $125,000,  which is included as
restricted cash on the accompanying balance sheet.

In December 2000, the Company entered into a loan and security  agreement with a
finance  company for an amount of  $75,000.  This loan is subject to interest of
12.82% and is  repayable  by December  2006.  As of December  31,  2000,  future
minimum lease payments are $103,000 as follows (in thousands):
<TABLE>
<CAPTION>

  Year Ended December 31,
<S>                                                                     <C>
        2001                                                            $   18
        2002                                                                18
        2003                                                                18
        2004                                                                18
        2005                                                                17
  Thereafter                                                                14
                                                                ----------------
     Total minimum lease payments                                          103
  Less amount representing interest                                        (31)
                                                                ----------------
     Present value of capital lease obligations                             72
  Less current portion                                                      (9)
                                                                ----------------
     Long-term portion of capital lease obligations                     $   63
                                                                ================
</TABLE>

                                      F-11
<PAGE>

8.     Common Stock

In connection with the sale of common stock to two executives (153,000 shares at
$0.20 per share in October  1994 and  53,000  shares at $5.00 per share in April
1995),  the Company had the right to repurchase  the shares at cost in the event
of termination  of service.  These rights lapsed  ratably  through 1999.  During
1999,  the Company  repurchased  53,000 shares from the  executives at $5.00 per
share.

A  deferred  compensation  expense of $93,000  was  recognized  in 1998 and 1999
related to a grant of stock options to a consultant.  Deferred  compensation  of
$67,000  was written off in 2000 as the options  were  cancelled.  In 2000,  the
Company granted an additional 20,000 options to other consultants. These options
were  recorded  at fair value and will be  amortized  over their five year term.
There were 55,000, 160,000 and 152,000 of options to consultants  outstanding at
December 31, 2000,  1999 and 1998,  respectively,  of which  35,000,  77,000 and
27,000 were  exercisable at a weighted  exercise price of $52,000,  $117,000 and
$44,000 in 2000, 1999 and 1998, respectively.

       Non-Employee Directors' Stock Option Plan
In November 1995, the Company's Board of Directors adopted the 1995 Non-Employee
Directors'  Stock  Option Plan  ("Directors  Plan").  As of December  31,  2000,
120,000  shares of the  Company's  common stock have been  reserved for issuance
under  the  Directors  Plan  and  activity  under  the  Plan is as  follows  (in
thousands):
<TABLE>
<CAPTION>

                                                                               Outstanding Options
                                                            ..........................................................
                                                                                                           Weighted
                                                                                                           Average
                                              Available        Number        Exercise                      Exercise
                                              for Grant      of Shares        Price          Total          Price
                                             -------------  ------------- --------------- -------------  -------------

<S>                                                  <C>             <C>  <C>                     <C>       <C>
      Balances, January 1, 1998                      110             10   $6.12 - $8.00           $74       $7.20
      Options granted                                (11)            11   $2.37 - $2.38            26       $2.38
      Options cancelled                                -              -                             -           -
                                             -------------  -------------                 -------------  -------------

      Balances, December 31, 1998                     99             21   $2.37 - $8.00          $100       $4.69
      Options granted                                (26)            26   $0.34 - $0.56           $10       $0.39
      Options cancelled                                8             (8)  $0.56 - $8.00          ($24)      $3.00
                                             -------------  -------------                 -------------  -------------

      Balances, December 31, 1999                     81             39   $0.34 - $8.00           $86       $2.20
      Options granted                                (30)            30   $1.94                   $58       $1.94
      Options cancelled                               10            (10)  $0.56 - $8.00          ($60)      $5.97
                                             -------------  -------------                 -------------  -------------

      Balances, December 31, 2000                     61             59    $0.34-$2.38         $   84       $1.42
                                             =============  =============                 =============  =============
</TABLE>
At  December  31,  2000,  1999,  and 1998  35,000,  24,000 and  27,000  options,
respectively,  were exercisable at a weighted average exercise price of $43,000,
$79,000, and $44,000, respectively.

                                      F-12
<PAGE>

The options outstanding and currently  exercisable by exercise price at December
31, 2000 are as follows (in thousands, except years and per share data):
<TABLE>
<CAPTION>

                       Options Outstanding                                 Options Exercisable
 ...................................................................  .................................
                                      Weighted
                                      Average         Weighted                           Weighted
   Range of                          Remaining         Average                            Average
   Exercise          Number         Contractual       Exercise           Number          Exercise
    Prices         Outstanding          Life            Price          Exercisable         Price
---------------- ----------------  --------------- ----------------  ---------------- ----------------

<S>                          <C>        <C>             <C>                      <C>       <C>
  $0.00-$0.50                20         8.3             $0.34                    16        $0.34
  $0.51-$0.75                 2         8.2             $0.56                     2        $0.56
  $0.76-$2.00                30         9.2             $1.94                    10        $1.94
  $2.01-$3.00                 7         7.2             $2.37                     7        $2.37

                 ----------------                                    ----------------
                 ----------------                                    ----------------
                             59         8.6             $1.40                    35        $1.21
                 ================                                    ================
</TABLE>


       1988 Incentive Stock Plan
       Under the 1988 Incentive Stock Plan ("1988 Plan"), the Board of Directors
       may grant  either the right to  purchase  shares or  options to  purchase
       shares of the  Company's  common  stock at prices  not less than the fair
       market value at the date of grant for incentive  stock options and 85% of
       the fair market  value for  non-qualified  options and  purchase  rights.
       Options granted under the 1988 Plan generally become exercisable, and the
       Company's  right to  repurchase  shares issued and sold pursuant to stock
       purchase  rights  lapses,  at a rate of  one-quarter  of the shares under
       option or purchased  under stock purchase  rights at the end of the first
       year and  thereafter  ratably  over the next  three  years and  generally
       expire seven years from the date of grant. As of December 31, 2000, there
       were no  stock  purchase  rights  outstanding,  and no  shares  purchased
       pursuant to stock  purchase  rights  were  subject to  repurchase  by the
       Company.


                                      F-13
<PAGE>

       Option activity under the 1988 Plan was as follows (in thousands):
<TABLE>
<CAPTION>

                                                                               Outstanding Options
                                                            ..........................................................
                                                                                                           Weighted
                                                                                                           Average
                                              Available        Number        Exercise                      Exercise
                                              for Grant      of Shares        Price          Total          Price
                                             -------------  ------------- --------------- -------------  -------------

<S>                                               <C>            <C>       <C>               <C>            <C>
      Balances, January 1, 1998                      624            965    $0.20-$7.75       $  4,381       $4.54
      Options granted                             (1,466)         1,466    $1.00-$3.50          2,406       $1.64
      Options cancelled                            1,105         (1,105)   $0.20-$7.75         (4,929)      $4.46
      Options exercised                                 -           (40)   $0.20-$1.55            (12)      $0.30
                                             -------------  -------------                 -------------  -------------

      Balances, December 31, 1998                    263          1,286    $0.20-$7.75       $  1,846       $1.43
      Options granted                               (657)           657    $0.88-$1.03            604       $0.92
      Options cancelled                              617           (617)   $0.20-$6.88           (962)      $1.56
      Options exercised                                 -           (17)   $0.20-$1.56            (10)      $0.62
                                             -------------  -------------                 -------------  -------------

      Balances, December 31, 1999                    223          1,309    $0.20-$1.56       $  1,477       $1.13
      Options granted                               (256)           256    $0.88-$1.88            289       $1.13
      Options cancelled                              342           (342)   $0.20-$1.56           (440)      $1.29
      Options exercised                                 -           (30)   $0.20-$1.56            (24)      $0.77
                                             -------------  -------------                 -------------  -------------

      Balances, December 31, 2000                    309          1,193    $0.20-$1.56       $  1,302       $1.09
                                             =============  =============                 =============  =============
</TABLE>

At December  31,  2000,  1999 and 1998  721,000,  644,000  and 508,000  options,
respectively, were exercisable at a weighted average exercise price of $812,000,
$761,000 and $1,023,000, respectively.

In August  1998,  the  company  offered  employees  the right to cancel  certain
outstanding  stock options at original  exercise  prices and receive new options
with a new exercise price. The new exercise price was $1.56 per share,  based on
the closing price of common stock on the date  employees  agreed to cancel their
original  outstanding  stock  options.  Options  to  purchase a total of 942,000
shares at original  exercise  prices  ranging from $2.50 to $7.75 per share were
cancelled  and new options were issued in August  1998.  In return for the lower
exercise price,  each optionee agreed that no portion of a repriced option would
be exercisable until six months after the effective date of the repricing.

In March 2000, the FASB issued  Interpretation  No. 44,  "Accounting for Certain
Transactions  Involving Stock  Compensation - an  interpretation  of APB Opinion
No.25" ("FIN 44"). This Interpretation  clarifies (i) the definition of employee
for purposes of applying  APB Opinion No. 25, (ii) the criteria for  determining
whether  a plan  qualifies  as a  noncompensatory  plan,  (iii)  the  accounting
consequence of various  modifications to the terms of the previously fixed stock
option or award,  and (iv) the accounting for an exchange of stock  compensation
awards in a business combination.  FIN 44 is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998,  or January 12, 2000. To the extent that FIN 44 covers events
occurring  during the period after  December 15, 1998, or January 12, 2000,  but
before  the  effective  date of July 1,  2000,  the  effects  of  applying  this
Interpretation  are  recognized  on a prospective  basis from July 1, 2000.  The
Company adopted FIN 44 during the fiscal year 2000.

                                      F-14
<PAGE>

The  Company  has  adopted  the  disclosure-only  provisions  of  SFAS  No.  123
"Accounting for Stock-Based  Compensation." Accordingly no compensation cost has
been recognized for the  Non-Employee  Directors'  Stock Option Plan or the 1988
Incentive Stock Plan.

Had compensation cost for these Plans been determined based on the fair value at
the grant date for awards since January 1, 1995  consistent  with the provisions
of SFAS No. 123, the Company's net income (loss) and net income (loss) per share
for 2000,  1999 and 1998  would  have  been  reduced  to the pro  forma  amounts
indicated below (in thousands):
<TABLE>
<CAPTION>

                                                                      2000              1999              1998
                                                                 ---------------   ----------------  ----------------

<S>                                                                      <C>            <C>               <C>
       Net income - as reported                                          $  732         $  (3,555)        $  (7,534)
       Net income - pro forma                                               589            (3,834)           (8,690)
       Net income per share - basic - as reported                          0.16             (0.78)            (1.67)
       Net income per share - basic - pro forma                            0.13             (0.84)            (1.93)
       Net income per share - diluted - as reported                        0.14             (0.78)            (1.67)
       Net income per share - diluted - pro forma                          0.12             (0.84)            (1.93)
</TABLE>


The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes model with the following assumptions for 2000, 1999 and 1998:
<TABLE>
<CAPTION>

                                                                      2000              1999              1998
                                                                 ---------------   ----------------  ----------------

<S>                                                               <C>                 <C>                 <C>
       Risk-free interest rate                                    5.85%-6.44%         5.08%-5.98%         5.20%
       Expected life                                              6.71 years          5.62 years          4.4 years
       Expected dividends                                              -                  -                 -
       Volatility                                                     163%              143%               79%
</TABLE>


The weighted  average fair value of options  granted in 2000,  1999 and 1998 was
$1.21, $0.85 and $1.05 per share, respectively

                                      F-15
<PAGE>

The options outstanding and currently  exercisable by exercise price at December
31, 2000, including those issued to Directors and outsiders,  are as follows (in
thousands, except years and per share data):
<TABLE>
<CAPTION>

                                    Options Outstanding                                 Options Exercisable
             ...................................................................  .................................
                                                   Weighted
                                                   Average         Weighted                           Weighted
                Range of                          Remaining         Average                            Average
                Exercise          Number         Contractual       Exercise           Number          Exercise
                 Prices         Outstanding          Life            Price          Exercisable         Price
             ---------------- ----------------  --------------- ----------------  ---------------- ----------------

<S>            <C>                     <C>           <C>             <C>                     <C>        <C>
               $0.00-$0.20                13         6.9             $0.20                    13        $0.20
               $0.21-$0.50                20         8.3             $0.34                    17        $0.34
               $0.51-$0.75                 2         8.2             $0.56                     2        $0.56
               $0.76-$1.00               744         5.6             $0.93                    48        $0.94
               $1.01-$1.25               171         5.9             $1.09                    34        $1.03
               $1.26-$1.50                91         6.0             $1.32                    10        $1.47
               $1.51-$1.75               236         3.5             $1.57                   210        $1.57
               $1.76-$2.00                31         9.1             $1.94                    10        $1.94
               $2.01-$2.50                 7         7.2             $2.37                     7        $2.37
                              ----------------                                    ----------------
                                       1,315         5.4             $1.11                   787        $1.12
                              ================                                    ================
</TABLE>


       Warrants
The Company had 233,000  outstanding fully exercisable  warrants at December 31,
1999 at a price range from $1.00 to $8.40.

The warrant holders have certain demand and registration  rights as specified in
the warrant  agreement.  In March 2000,  warrants to purchase  133,000 shares of
common stock were exercised whereby the holders of these warrants,  received, in
a "cash-less"  exchange,  70,000 shares of common stock.  The other  warrants to
purchase 100,000 shares of common stock outstanding, which had a strike price of
$8.40, expired in December 2000 without being exercised.

       Notes receivable
At December 31, 1998, the Company held notes receivable of $274,000,  which bear
interest between 6.3% and 7.05% per annum, from two executive  officers,  issued
in connection with the purchase of common stock under  restricted stock purchase
agreements.  In 1999,  the Company  repurchased  53,000  shares of the Company's
common stock from the executive  officers upon their  termination of service and
cancelled the notes  receivable  of $263,000 with the remaining  balance paid in
cash.

                                      F-16
<PAGE>

9.     Income Taxes

The  Company's  provision  for  income  taxes  consists  of  the  following  (in
thousands):
<TABLE>
<CAPTION>

                                                               Year Ended December 31,
                                                 ....................................................
                                                      2000              1999              1998
                                                 ---------------   ----------------  ----------------
<S>                                                   <C>                 <C>              <C>
Current:
    Federal                                            $     -            $     -           $     -
    State                                                    6                  4                 -
    Foreign                                                  -                  -                 1
                                                 ---------------   ----------------  ----------------
                                                             6                  4                 1
                                                 ---------------   ----------------  ----------------
Deferred:
    Federal                                            $     -            $     -             3,495
    State                                                    -                  -               469
                                                 ---------------   ----------------  ----------------
                                                             -                  -             3,964
                                                 ---------------   ----------------  ----------------

                                                       $     6            $     4          $  3,965
                                                 ===============   ================  ================
</TABLE>

Current  federal  tax  provision  is net of the  benefit of the  utilization  of
brought  forward losses of $378,000  (none in 1999 and 1998).  Current state tax
provision is net of the benefit of the  utilization of brought forward losses of
$393,000 (none in 1999 and 1998).

The Company's tax provision differs from the provision  computed using statutory
income tax rates as follows (in thousands):
<TABLE>
<CAPTION>

                                                                     2000              1999              1998
                                                                ----------------  ----------------  ----------------

<S>                                                                   <C>               <C>               <C>
           Federal tax (benefit) at statutory rate                    $   210           $ (1,135)         $   (754)
           Permanent difference due to
               non-deductible expenses                                      36                19                21
           State taxes (benefit), net of federal benefit                    4                (98)             (173)
           Change in valuation allowance                                 (190)             1,332             5,001
           General business credits                                       (54)              (114)             (131)
           Other                                                             -                 -                 1
                                                                ----------------  ----------------  ----------------

                                                                        $    6            $    4         $  3,965
                                                                ================  ================  ================
</TABLE>

                                      F-17
<PAGE>

The components of the net deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                     December 31,
                                                                          ...................................
                                                                               2000               1999
                                                                          ----------------  -----------------

<S>                                                                              <C>                <C>
               Inventory allowances and adjustments                              $   149            $   190
               Accounts receivable allowances                                         70                105
               Other liabilities and allowances                                      929                788
               Net operating loss carryforwards                                    4,644              4,987
               Tax credit carryforwards                                            1,271                796
               Depreciation and amortization                                         654                706
               Valuation allowance                                                (7,717)            (7,572)
                                                                          ----------------  -----------------

                    Total net deferred tax assets                                $     -            $     -
                                                                          ================  =================
</TABLE>
Due to the  uncertainty  surrounding the realization of favorable tax attributes
in future tax returns, the Company has placed a full valuation allowance against
its deferred tax asset balance.

At December  31,  2000,  the Company had net  operating  loss  carryforwards  of
approximately  $13,084,000 and $3,347,000 available to offset future federal and
California taxable income,  respectively.  These loss carryforwards  expire from
2003 through 2019.

For  federal  and state  income tax  purposes,  a portion of the  Company's  net
operating  loss  carryforward  is  subject  to  certain  limitations  on  annual
utilization in case of changes in ownership, as defined by federal and state tax
laws.

The Company's loss before provision for income taxes is  substantially  all from
domestic operations.


10.    Retirement Plan

The Company has a voluntary  401(k) plan covering  substantially  all employees.
The plan provides for employer  contributions  at the discretion of the Board of
Directors.  In 2000,  1999 and 1998,  the Company made no  contributions  to the
plan.


                                      F-18
<PAGE>

11.    Major Customers and Segment Information

Revenues by geographic  area are  determined by the location of the end user and
are summarized as follows (in thousands):
<TABLE>
<CAPTION>

                                                                  Years Ended December 31,
                                                     ...................................................
                                                          2000              1999              1998
                                                     ----------------  ----------------  ---------------
<S>                                                       <C>               <C>              <C>
  North America                                           $  11,260         $  11,199        $  13,442
  Europe                                                        853             1,605            2,148
  Pacific Rim                                                 2,719             3,312            6,156
                                                     ----------------  ----------------  ---------------

                                                          $  14,832         $  16,116        $  21,746
     Total revenues
                                                     ================  ================  ===============
</TABLE>


Customers that  individually  accounted for greater than 10% of net sales are as
follows (in thousands):
<TABLE>
<CAPTION>

                                                     Years Ended December 31,
                   ..............................................................................................
                               2000                             1999                            1998
    Customer          Amount        Percentage         Amount        Percentage         Amount       Percentage
-----------------  -------------- ---------------  --------------- ---------------  --------------- -------------
<S>                    <C>             <C>              <C>             <C>              <C>            <C>
       A               $  2,485        17%              $  1,998        12%              $  3,752       17%
       B                  2,213        15%                   518          3%                    -         -%
       C                  2,183        15%                 2,948        18%                 5,569       26%
</TABLE>



                                      F-19
<PAGE>


12.    Computation of Net Income/(Loss) per Share

Basic and diluted  earnings per share are  calculated as follows for 2000,  1999
and 1998 (in thousands except per share amounts):
<TABLE>
<CAPTION>

                                                                2000              1999              1998
                                                          ---------------   ----------------  ----------------
<S>                                                             <C>              <C>               <C>
Basic:
   Weighted average shares                                        4,664              4,579             4,507
                                                          ===============   ================  ================
   Net income/(loss)                                            $   732          $  (3,555)        $  (7,534)
                                                          ===============   ================  ================
   Net income/(loss) per share                                 $   0.16          $   (0.78)        $   (1.67)
                                                          ===============   ================  ================
Diluted:
   Weighted average shares                                        4,664              4,579             4,507
   Common equivalent shares from stock options                      416                  -                 -
                                                          ---------------   ----------------  ----------------

   Shares used in per share calculation                           5,080              4,579             4,507
                                                          ===============   ================  ================

   Net income(loss)                                             $   732          $  (3,555)        $  (7,534)
                                                          ===============   ================  ================

   Net income(loss) per share                                  $   0.14          $   (0.78)        $   (1.67)
                                                          ===============   ================  ================
</TABLE>

Due to the losses in the periods,  the calculation of diluted shares outstanding
for 1999 and 1998 excludes 1,508,000, and 1,540,000 stock options, respectively,
as their  effect  was  antidilutive  in the  period.  In 2000,  no  shares  were
excluded.


                                      F-20
<PAGE>

        Report of Independent Accountants on Financial Statement Schedule





To the Board of Directors of Castelle:

Our audits of the consolidated financial statements of Castelle and subsidiaries
referred to in our report dated February 14, 2001 appearing in this Form 10-K of
Castelle and  Subsidiaries  also  included an audit of the  financial  statement
schedule  listed  in Item  14(a)(2)  of this  Form  10-K.  In our  opinion,  the
financial  statement  schedule  present fairly,  in all material  respects,  the
information  set  forth  therein  when  read in  conjunction  with  the  related
consolidated financial statements.









San Jose, California
February 14, 2001


<PAGE>


Castelle and Subsidiaries                                            Schedule II
Valuation and Qualifying Accounts
(in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                            Additional
                                                          Balance at        Charged to                          Balance at
                                                           Beginning         Costs and                            End of
                                                           of Period         Expenses         Deductions          Period
                                                        ----------------  ----------------  ----------------  ----------------

<S>                                                            <C>               <C>               <C>                <C>
Year Ended December 31, 1998:
Deducted from asset accounts:
    Allowance for doubtful accounts                            $   490           $    257          $     27           $   720
    Allowance for excess and obsolete inventory                $   395           $    418          $     22           $   791

Year Ended December 31, 1999:
Deducted from asset accounts:
    Allowance for doubtful accounts                            $   720           $     -           $    227           $   493
    Allowance for excess and obsolete inventory                $   791           $  1,579          $  1,911           $   459

Year Ended December 31, 2000:
Deducted from asset accounts:
    Allowance for doubtful accounts                            $   493           $    257           $   465           $   285
    Allowance for excess and obsolete inventory                $   459           $     80           $   173           $   366

</TABLE>
<PAGE>


Castelle and Subsidiaries
Index To Exhibits
--------------------------------------------------------------------------------




EXHIBIT
NUMBER           DESCRIPTION
--------------------------------------------------------------------------------
   3.2           Amended and Restated Bylaws of Castelle.
  23.1           Consent of PricewaterhouseCoopers LLP.
  24.1           Power of Attorney.  Reference is made to the signature page,
                 (page 36).



<PAGE>