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

                                   FORM 10-K/A

      |X| AMENDMENT NO. 1 TO 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 the 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 this Form 10-K |X|.

       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 on April 9, 2001 was approximately
                                  $2,943,000.

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
    of affiliate status is not necessarily conclusive for any other purpose.

 The number of shares of Common Stock of the Registrant outstanding as of April
                             9, 2001 was 4,742,060.

                      DOCUMENTS INCORPORATED BY REFERENCE

None.
                      EXPLANATORY NOTE TO AMENDMENT NO. 1
Amendment No. 1 revises Part III of this Form 10-K to include information
previously  omitted.  With the exception of the inclusion of such information in
Part III, all  information  contained in this Report on Form 10-K was current as
of the date of filing of the  original  Report on April 2, 2001 and the  Company
has not undertaken to update the same in this Amendment No. 1.

<PAGE>
<TABLE>
<CAPTION>

                                    CASTELLE
                                    FORM 10-K
                                TABLE OF CONTENTS


                                                                                                                                PAGE

<S>                                                                                                                              <C>
PART I............................................................................................................................3.

     ITEM 1.      BUSINESS........................................................................................................3.

     ITEM 2.      PROPERTIES.....................................................................................................20.

     ITEM 3.      LEGAL PROCEEDINGS..............................................................................................20.

     ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS..........................................................20.

PART II..........................................................................................................................21.

     ITEM 5.      MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
                  SHAREHOLDER MATTERS............................................................................................21.

     ITEM 6.       SELECTED FINANCIAL DATA.......................................................................................22.

     ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
                   AND RESULTS OF OPERATION......................................................................................23.

     ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................................28.

     ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................................28.

     ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................28.

PART III.........................................................................................................................29.

     ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................................29.

     ITEM 11.     EXECUTIVE COMPENSATION.........................................................................................30.

     ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................35.

     ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................................36.

PART IV..........................................................................................................................36.

     ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................................36.


SIGNATURES.......................................................................................................................39.
</TABLE>

                                       2
<PAGE>


                   SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

The following Report 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
Report.  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 Report.

                                  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
InfoPress(TM)  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.

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


                                       3
<PAGE>

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 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."


                                       4
<PAGE>



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 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.

                                       5
<PAGE>

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,"   "Business  -  Research  and  Product
Development," and "Business - 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
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,


                                       6
<PAGE>

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."

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


                                       7
<PAGE>

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."

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.

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


                                       8
<PAGE>

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 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


                                       9
<PAGE>

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 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


                                       10
<PAGE>

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
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,


                                       11
<PAGE>

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.

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.

                                       12
<PAGE>

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  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:

        o         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.

        o         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.

        o         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.

        o         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.

        o         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.

        o         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.

        o         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.

                                       13
<PAGE>

        o         Integration into custom  applications:  The Company provides a
                  software development kit which allows programmers to integrate
                  faxing functions into their current  applications or to create
                  new customized applications that use the FaxPress server.

        o         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
-----------------------------------------------------------------------------------------------------------------------------------
Product Model              Number of Modems      Email Integration    Network Topology       Network 3.x, 4.x,      Windows NT/2000
                                                                                                5.x (IPX,IP)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>                  <C>                    <C>                     <C>                    <C>

FaxPress SBE                      1                  Optional               Ethernet                |X|                    |X|
FaxPress2500                      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.

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


                                       14
<PAGE>

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

(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.

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.


                                       15
<PAGE>

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 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


                                       16
<PAGE>

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.

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


                                       17
<PAGE>

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 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.


                                       18
<PAGE>


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

Name                            Age              Position
<S>                             <C>              <C>
Donald L. Rich                  59               Chairman of the Board, President and 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
</TABLE>

Donald L. Rich
Mr. Rich joined the Company in November  1998 and has served as Chief  Executive
Officer and  President  since  November  1998.  Mr. Rich became  Chairman of the
Company's Board of Directors in May 1999. 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.  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.

Eric Chen
Mr.  Chen  joined  the  Company  in  1989  and  was  appointed  Vice  President,
Engineering in May 2000. Prior to his appointment as Vice President Engineering,
Mr. Chen served as the Company's  Director of Print Server Product Marketing and
Business Unit and managed the engineering development and manufacturing business
relationships  with Castelle  partners.  Before joining  Castelle,  Mr. Chen was
employed  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.


                                       19
<PAGE>


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  Castelle's
original  management team. He joined Castelle's  technical staff in 1988 and was
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.



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.




                                       20
<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.




                                       21
<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
                                                              ------------ -------------- ------------- ------------- -----------
                                                                 2000          1999           1998          1997         1996
                                                              ------------ -------------- ------------- ------------- -----------
                                                                           (in thousands, except per share amounts)
<S>                                                               <C>           <C>           <C>           <C>          <C>
INCOME STATEMENT DATA:
   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)        $5,724         $98
   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,  have 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.




                                       22
<PAGE>





Selected Quarterly Data (unaudited)
<TABLE>
<CAPTION>
                                                                                      Fiscal Year 2000, Quarter Ended
                                                               ---------------- ---------------- ---------------- ----------------
                                                                  March 31          June 30          Sep 30           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
                                                               ---------------- ---------------- ---------------- ----------------
                                                                  April 02          July 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.

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.

                                       23
<PAGE>

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.

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.


                                       24
<PAGE>


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.

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,


                                       25
<PAGE>

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 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.

                                       26
<PAGE>

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.

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.

                                       27
<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 Form 10-K/A
<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 Form 10-K/A

<S>                                                                                                                        <C>
    Report of Independent Accountants......................................................................................F-21
    Schedule II - Valuation and Qualifying Accounts........................................................................F-22
</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.

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

None




                                       28
<PAGE>
                                    PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The following table sets forth certain information  regarding the board
of directors of the Company and their ages as of April 9, 2001:

 Name                           Age     Position

 Donald L. Rich                 59      Director, President and Chief Executive
                                        Officer of the Company
 Robert H. Hambrecht (1)(2)     34      Director
 Scott C. McDonald (1)          48      Director
 Peter R. Tierney (2)           56      Director
 Jack Howard                    39      Director

(1)      Member of Audit Committee
(2)      Member of Compensation Committee

Robert H. Hambrecht

         Mr. Hambrecht has served as a director of the Company since March 1998.
Mr. Hambrecht was a founding partner of W.R. Hambrecht & Company,  an investment
banking firm,  founded in January 1998,  and is presently  Managing  Director of
Equity  Capital  Markets.  From April 1996  through  January  1998,  he was Vice
President of H&Q Venture Partners,  a venture capital firm. From January 1994 to
March 1996,  Mr.  Hambrecht  was employed by  Unterberg  Harris,  an  investment
banking firm,  most recently as an associate.  Mr.  Hambrecht also serves on the
Board of Directors of various private companies from time to time.

Donald L. Rich

         Mr. Rich  joined the  Company in November  1998 and has served as Chief
Executive  Officer and President  since November 1998. He became Chairman of the
Board  in May  1999.  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.

Peter R. Tierney

         Mr.  Tierney has served as a director of the Company  since April 1999.
He has served as President and Chief Executive  Officer of MarketFirst  Software
Inc., which focuses on marketing  automation  systems,  since July 1998.  During
1998 Mr. Tierney served as a consultant to Siebel Systems Corporation. From 1991
to  1997,  Mr.  Tierney  served  as  Chairman,  President  and CEO of  Inference
Corporation,  a provider  of  knowledge  management  tools.  Prior to 1991,  Mr.
Tierney  served as a Senior Vice  President of Oracle  Corporation  where he was
responsible  for  worldwide  marketing  and  served  as a member  of the  Oracle
Management  Committee.  Mr.  Tierney  also  currently  serves  on the  Board  of
Directors  of  MarketFirst  Software,  SlashSupport  Corporation  and The SoftAd
Group.

                                       29
<PAGE>

Scott C. McDonald

         Mr.  McDonald has served as a director of the Company since April 1999.
Since  December  1999,  Mr.  McDonald  has  served  as the Chief  Financial  and
Administrative   Officer  at  Conxion  Corporation,   an  Internet  network  and
intellectual  property services company. From 1993 to 1997, Mr. McDonald was the
senior operating and financial executive at CIDCO, focused in advanced telephony
products,  serving as Executive Vice President,  Chief Operating Officer,  Chief
Financial Officer and Secretary.  From 1989 to 1993 he served as Chief Financial
Officer and Vice  President,  Finance &  Administration  at Integrated  Systems,
Inc., a provider of software and design automation tools. Mr. McDonald currently
serves on the Board of  Directors  for  Digital  Power  Corporation  and  Octant
Technologies Inc.

Jack Howard

Jack Howard has served as a director of Castelle since January 2001. Since 1994,
Mr.  Howard  has been a  principal  of Mutual  Securities,  Inc.,  a  registered
broker-dealer.  Mr. Howard has served as a director of WebFinancial Corporation,
a commercial and consumer lender,  since 1996 and as Vice President,  Secretary,
Treasurer and Chief Financial Officer of WebFinancial Corporation since December
1997. Mr. Howard has been the Acting  President and Chief  Financial  Officer of
Gateway Industries,  Inc., a provider of database development and website design
and development services,  since September 1994. He has also served as Secretary
and Treasurer of CPX Corp.,  since  February 2001. Mr. Howard is also a director
of the following publicly held companies: Pubco Corporation, a printing supplies
and construction equipment manufacturer and distributor, and US Diagnostic Inc.,
an operator of outpatient diagnostic imaging.

Compliance with Section 16(a) of the Exchange Act

     Section  16(a) of the  Securities  Exchange  Act of 1934 (the  "1934  Act")
requires the Company's  directors and  executive  officers,  and persons who own
more than ten percent of a registered class of the Company's equity  securities,
to file with the SEC  initial  reports of  ownership  and  reports of changes in
ownership of Common Stock and other equity securities of the Company.  Officers,
directors  and  greater  than  ten  percent  shareholders  are  required  by SEC
regulation  to furnish the Company  with copies of all Section  16(a) forms they
file.

To the  Company's  knowledge,  based  solely on a review  of the  copies of such
reports  furnished  to the  Company and  written  representations  that no other
reports were  required,  during the fiscal year ended  December  31,  2000,  all
Section  16(a)  filing  requirements   applicable  to  the  Company's  officers,
directors and greater than ten percent beneficial owners were complied with.

ITEM 11.      EXECUTIVE COMPENSATION

Compensation of Directors

     Members  of the  Company's  Board of  Directors  currently  receive no cash
compensation  from the Company for their services as members of the Board.  They
are, however,  reimbursed for certain expenses incurred in connection with their
attendance at meetings of the board of directors and committee meetings thereof.

     Each  non-employee  director of the Company  receives  stock option  grants
under  the  Company's  1995  Non-Employee  Directors'  Stock  Option  Plan  (the
"Directors' Plan"), as amended.  Only non-employee  directors of the Company are
eligible to receive options under the Directors' Plan. Options granted under the
Directors'  Plan are intended by the Company not to qualify as  incentive  stock
options under the Code and are  non-discretionary.  Upon initial election to the
Company's board of directors, and provided such individual is not an employee, a
person is granted an option to  purchase  10,000  shares of Common  Stock of the
Company. Under the terms of the Directors' Plan as presently in effect, on April
1 of each year (or the next  business day should such date be a legal  holiday),
each member of the Company's Board eligible for  participation in the Directors'
Plan,  without further action by the Company,  the Board or the  shareholders of
the Company,  is  automatically  granted an option to purchase  10,000 shares of


                                       30
<PAGE>

Common Stock of the Company.  The exercise  price of options  granted  under the
Directors'  Plan is 100% of the fair market value of the Common Stock subject to
the option on the date of the option  grant.  Options  granted to members of the
board under the  Directors'  Plan vest in 24 equal  installments  beginning  one
month after the date of grant provided that the optionee has,  during the entire
period  prior  to such  vesting  date,  continuously  served  as a  non-employee
director of the Company.  The term of options  granted under the Directors' Plan
is ten  years.  In the event of a merger  of the  Company  with or into  another
corporation or a consolidation, acquisition of assets or other change-in-control
transaction  involving the Company,  vesting is accelerated under the Directors'
Plan and the option will terminate if not exercised prior to the consummation of
the  transaction.  During the last  fiscal  year,  the Company  granted  options
covering  10,000  shares to each of Messrs.  Hambrecht,  Tierney and McDonald at
exercise  prices of $1.9375 per share.  As of April 9, 2001, no options had been
exercised under the Directors' Plan.

Compensation of Executive Officers

Summary of Compensation

     The  following  table shows for the fiscal  years ended  December 31, 2000,
1999 and 1998,  compensation  awarded or paid to, or earned  by,  the  Company's
Chief Executive Officer, Chief Financial Officer, and its four other most highly
compensated  executive  officers at December 31, 2000 whose total annual  salary
and bonus exceeded $100,000 (the "Named Executive Officers"):
<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE

                                                                                                 Long-Term
                                                                                               Compensation
                                                          Annual Compensation                     Awards
                                                                                                Securities
                                                                                                Underlying        All Other
Name and Principal                   Fiscal
Position(1)                          Year     Salary ($)     Bonus ($)(2)     Other($)(3)      Options (#)      Compensation
-----------                          ----     ----------     ------------     ------------     -----------      ------------
<S>                                  <C>      <C>               <C>              <C>             <C>                 <C>
Donald L. Rich                       2000     $200,100          $94,020              --               --             --
President, Chairman of the           1999     $200,000         $100,000              --          200,000             --
Board, Chief Executive Officer       1998      $22,307               $0              --          300,000             --
And Director

Eric Chen                            2000     $137,965          $42,484              --           30,000             --
Vice President, Engineering          1999     $120,500          $30,000              --           20,000             --
                                     1998     $117,904           $2,154              --                0             --

Paul Cheng                           2000      $97,191          $26,320              --           45,000             --
Chief Financial Officer and          1999           --               --              --               --             --
Secretary                            1998           --               --              --               --             --

Boris Elpiner                        2000     $135,100          $39,797              --               --             --
Vice President, Marketing            1999      $90,865          $18,637              --           78,000             --
                                     1998           --               --              --               --             --

Edward J. Heinze                     2000       $91,139              $0          $41,224          15,000             --
Vice President, Sales, Americas      1999       $79,704          $5,253          $25,092          35,000             --
                                     1998       $67,800              $0          $24,809           5,000             --

Michael Petrovich                    2000      $103,102              $0          $77,881              --             --
Vice President, International        1999      $124,499              $0         $125,314          30,000             --
Sales                                1998      $135,000              $0         $148,271          10,000             --


------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       31
<PAGE>

(1)      Mr. Rich joined the Company as President and Chief  Executive  Officer
         in November 1998. Mr. Cheng joined the Company in March 2000.
         Mr. Elpiner joined the Company in April 1999.

(2)      Includes bonus amounts of $94,020, $11,259, $14,380, $10,949 and $8,726
         for Messrs.  Rich, Chen, Cheng, Elpiner and Heinze,  respectively,  for
         services  rendered  in 2000 but paid in  February  through  April 2001.
         Includes  bonus  amounts  of  $100,000,  $7,500,  $10,000  and  $5,348,
         respectively,   for  Messrs.   Rich,   Chen,   Elpiner  and  Petrovich,
         respectively, for services rendered in 1999 but paid in 2000. A portion
         of the bonus reflected for Mr. Chen in 1999 includes  amounts earned in
         1998 but paid in 1999.

(3)      Includes commission amounts of $8,726 and $3,520 for Messrs. Heinze and
         Petrovich,  respectively,  for  services  rendered  in 2000 but paid in
         2001.  Includes  commission  amounts of $10,283  and $5,348 for Messrs.
         Henize and Petrovich,  respectively,  for services rendered in 1999 but
         paid in 2000. A portion of the  commission  amounts for Messrs.  Henize
         and Petrovich in 1999 includes amounts earned in 1998 but paid in 1999.

Stock Option Grants and Exercises

         The Company  grants  options to its executive  officers  under its 1988
Equity  Incentive Plan. As of December 31, 2000,  options to purchase a total of
1,189,980  shares  were  outstanding  under the 1988 Equity  Incentive  Plan and
options to purchase 309,341 shares remained available for grant thereunder.  The
information  regarding stock options  granted to named  executive  officers as a
percentage of total options  granted to employees in 2000 is based on options to
purchase a total of 255,500 shares granted to employees and consultants in 2000,
under the 1988  Equity  Incentive  Plan.  There were no stock  option  exercises
during 2000 by any Named Executive Officer.  The Company did not grant any stock
appreciation  rights,  restricted  stock awards or stock purchase  rights during
2000.

         The following  tables show for the fiscal year ended December 31, 2000,
certain  information  regarding  options  granted to,  exercised by, and held at
year-end by the Named Executive Officers:
<TABLE>
<CAPTION>

                        OPTION GRANTS IN LAST FISCAL YEAR

                                                                                              Potential Realizable Value at
                                                                                              Assumed Annual Rates of Stock
                                                                                                   Price Appreciation
                                                                                                   for Option Term (4)
                                                 % of Total
                                 Number of    Options Granted
                                Securities      to Employees
                                Underlying    and Consultants    Exercise or
                                  Options        in Fiscal       Base Price     Expiration
Name and Principal Position     Granted (1)       Year(2)       Per Share (3)      Date           5% ($)          10% ($)
                                -----------       -------       -------------      ----           ------          -------
<S>                                <C>            <C>             <C>            <C>          <C>              <C>
Donald L. Rich                          0              0                --          --                --               --
Chairman of the Board,
President, Chief Executive
Officer, Chief Financial
Officer, Secretary and
Director

Eric Chen                          30,000         11.74%           $1.2812       05/10/07     $15,647.31       $36,464.89
Vice President, Engineering

Paul Cheng                         45,000         17.61%           $1.1582       04/19/07     $21,217.69       $49,446.19
Chief Financial Officer and
Secretary

Boris Elpiner                           0              0                 -          -                  -                -
Vice President, Marketing

Edward J. Heinze                   15,000          5.87%            $0.875       11/08/07      $5,343.19       $12,451.91
Vice President, Sales,
Americas

Michael Petrovich                       0              0                 -          -                  -                -
Vice President,
International Sales
</TABLE>

                                       32
<PAGE>

(1)      One-fourth  of the options  granted to Mr. Cheng vest on April 19, 2001
         and the  remaining  options vest monthly in equal  installments  over a
         36-month  period.  One-fourth of the options granted to Mr. Heinze vest
         on November 8, 2001 and the  remaining  options  vest  monthly in equal
         increments over a 36-month period. One-fourth of the options granted to
         Mr. Chen vest on May 10, 2001 and the remaining options vest monthly in
         equal increments over a 36-month period.

(2)      Based on an aggregate of 255,500 shares of Common Stock subject to
         options granted to employees in 2000.

(3)      The exercise price is equal to 100% of the fair market value of Common
         Stock at the date of grant.

(4)      The potential  realizable  value is calculated based on the term of the
         option at its date of grant.  It is calculated  based on the assumption
         that the stock price on the date of grant  appreciates from the date of
         grant at the indicated  annual rate compounded  annually for the entire
         term of the  option and that the  option is  exercised  and sold on the
         last day of its term for the  appreciated  stock price.  The 5% and 10%
         assumed  rates  of  appreciation  are  derived  from  the  rules of the
         Commission and do not represent the Company's estimate or projection of
         future Common Stock prices.
<TABLE>
<CAPTION>

                          AGGREGATE OPTION EXERCISES IN 2000 AND FISCAL YEAR-END VALUES AT DECEMBER 31, 2000

         The  following  table sets  forth the number of shares of common  stock
subject to exercisable and  unexercisable  stock options held as of December 31,
2000 by each of the Named Executive Officers.

                                                                      Number of Securities            Value of Unexercised
                                                                     Underlying Unexercised           In-the-Money Options
                                                                      Options at FY-End (#)             at FY-End ($) (2)
                             Shares Acquired        Value        ------------------------------  --------------------------------
                             on Exercise (1)     Realized ($)    Exercisable      Unexercisable  Exercisable        Unexercisable
                             ----------------    ------------    -----------      -------------  --------------------------------
<S>                                    <C>               <C>         <C>               <C>        <C>              <C>
Donald Rich............                -                 -           408,344           91,656     $50,521.50       $5,728.50
Eric Chen..............                -                 -            36,727           47,023              0               0
Paul Cheng.............                -                 -                 0           45,000              0               0
Boris Elpiner..........                -                 -            37,163           40,837      $1,947.80       $1,327.20
Edward Heinze..........                -                 -            21,249           41,251              0       $2,629.44
Michael Petrovich......                -                 -            68,540           26,460              0               0
--------------------
</TABLE>

(1)......No options were exercised by any of the Named Executive Officers during
fiscal 2000, and accordingly no values are shown.

(2)      Value of  unexercised  options at fiscal  year-end is based on the fair
         market  value of the  Company's  Common  Stock at December  31, 2000 of
         $1.0625  (based  on the  closing  sale  price  reported  on the  Nasdaq
         National Market on that date) minus the exercise price of the option.

Employment and Severance Arrangements

         Employment Agreement and Severance Arrangements with Donald Rich

         In November 1998, the Company entered into an employment agreement with
Donald Rich,  pursuant to which Mr. Rich agreed to serve as our Chief  Executive
Officer.  The employment agreement is not for a specified term and is terminable
at will or  without  cause at any  time  upon  written  notice,  subject  to the
conveyance  of certain  severance  benefits  to Mr.  Rich upon  termination,  as
described below.  Mr. Rich's  employment  agreement  provides for an annual base
salary of $200,000,  plus an annual bonus of up to a sum of $100,000, if certain
performance criteria are met, or above $100,000, if such performance criteria is
exceeded  in the  discretion  of the  Compensation  Committee.  Pursuant  to his
employment agreement, Mr. Rich was also granted an initial incentive stock award
to purchase 300,000 shares of the Company's stock, subject to a vesting schedule
set forth in his employment agreement.

         The Company has also entered into a severance  and  transition  benefit
agreement  with Mr. Rich  pursuant to which the Company will pay Mr. Rich a lump
sum equal to 100% of his  annualized  salary and maintain  the medical  benefits


                                       33
<PAGE>

conveyed to him for one year, plus provide for the  accelerated  vesting of 100%
of his  outstanding  options to purchase  shares of the Company's  Common Stock,
following  either a voluntary  termination  of employment for good reason by Mr.
Rich or an involuntary  termination of employment without cause (each as defined
in his  agreement).  In  addition,  Mr. Rich is eligible  for a lump sum payment
equal to six months of his base  salary if he remains  with the Company at least
ninety  days  after a change  in  control  and his  employment  is  subsequently
terminated for any reason;  provided  further that Mr. Rich shall receive such a
lump sum payment if he should  remain with the Company for at least  ninety days
following  such a change in  control in  addition  to any  benefits  that may be
conveyed to Mr. Rich upon termination.

Compensation Committee Interlocks

Mr. Hambrecht, a member of the Company's Compensation Committee, is a partner of
W.R. Hambrecht & Co. ("WRH & Co."), an investment banking firm which the Company
engaged in January 2001 to provide certain advisory services to the Company.  As
of April 2001, WRH & Co. had rendered an insignificant  level of services to the
Company  under  this  arrangement.   See  "Certain   Relationships  and  Related
Transactions-Advisory Relationship with W.R. Hambrecht & Co." set forth herein.




                                       34
<PAGE>




ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following  table  sets forth  certain  information  regarding  the
ownership  of the  Company's  Common  Stock  as of April  9,  2001 by:  (i) each
director and nominee for director;  (ii) each of the executive officers named in
the Summary  Compensation  Table;  (iii) all executive officers and directors of
the Company as a group; and (iv) all those known by the Company to be beneficial
owners of more than 5% of its Common Stock.

<TABLE>
<CAPTION>


                                                                          Beneficial Ownership (1)
                                                                         Number of       Percent of
                          Beneficial Owner                                 Shares          Total
<S>                                                                         <C>             <C>
Entities Affiliated with: (2).....................................          581,626         12.3%
   J.P. Morgan Chase & Co., Inc.
   One Bush Street
   18th Floor
   San Francisco, CA 94104
Tolvusamskipti hf.................................................          439,560          9.3%
   Mariubakki 26
   109 Reykjavik
    Iceland
Eric Chen (3).....................................................           52,498          1.1%
Paul Cheng (4)....................................................           12,187             *
Boris Elpiner (5) ................................................           45,577            1%
Robert Hambrecht (6)..............................................           22,209             *
Ed Heinze (7).....................................................           25,727             *
Jack Howard (8)...................................................          234,779          4.9%
Scott McDonald (9)................................................           16,665             *
Michael Petrovich (10)............................................           80,832          1.7%
Donald L. Rich (11) ..............................................          450,014          9.5%
Peter Tierney (12)................................................           16,665             *
All officers and directors as a group (10 persons) (13)...........          957,153         20.2%
</TABLE>


*        Less than one percent.

(1)      This table is based upon  information  supplied by officers,  directors
         and  principal  stockholders  and  Schedules 13D and 13G filed with the
         Securities and Exchange  Commission.  Unless otherwise indicated in the
         footnotes  to this table and subject to community  property  laws where
         applicable, the Company believes that each of the shareholders named in
         this table has sole  voting and  investment  power with  respect to the
         shares  indicated as beneficially  owned by them,  subject to community
         property laws where applicable. For purposes of this table, shares held
         my  stockholders  include any shares held as tenants in common or joint
         tenants with spouses.  Beneficial  ownership  also  includes  shares of
         common stock subject to options  currently  exercisable  or exercisable
         within  60 days of the date of this  table and  shares of common  stock
         into which  preferred  stock is currently  convertible  or  convertible
         within 60 days of the date of this table.  Applicable  percentages  are
         based on 4,742,060  shares  outstanding  on April 9, 2001,  adjusted as
         required by rules promulgated by the SEC.

(2)      Includes 346,849 shares held by H&Q London Ventures, 60,835 shares held
         by H&Q Ventures IV, 1,250 shares held by Hamquist,  43,633  shares held
         by  Hambrecht  & Quist  Venture  Partners  and  129,059  shares held by
         Hambrecht  &  Quist  California.  The  entities  named  above  and  the
         entities' respective general partners,  directors,  executive officers,
         members and/or managers,  as applicable,  disclaim beneficial ownership
         as defined in Rule 13d-3 under the  Securities  Exchange Act of 1934 of
         any securities other than those directly held by such person.

(3)      Includes 47,498 shares of Common Stock subject to options exercisable
         within 60 days of April 9, 2001.

(4)      Includes 12,187 shares of Common Stock subject to options exercisable
         within 60 days of April 9, 2001.

                                       35
<PAGE>

(5)      Includes 44,453 shares of Common Stock subject to options exercisable
         within 60 days of April 9, 2001.

(6)      Includes 16,289 shares of Common Stock subject to options exercisable
         within 60 days of April 9, 2001.

(7)      Includes 25,727 shares of Common Stock subject to options exercisable
         within 60 days of April 9, 2001.

(8)      The shares  listed are held jointly by Mr. Howard and his wife,  Kathy.
         Mr. and Mrs.  Howard,  each acting  alone,  have the power to vote and
         dispose of such  shares.  Also  includes  1,664 shares of Common  Stock
         subject to options held in Mr.  Howard's  name solely  exercisable
         within 60 days of April 9, 2001.

(9)      Includes 16,665 shares of Common Stock subject to options exercisable
         within 60 days of April 9, 2001.

(10)     Includes 75,832 shares of Common Stock subject to options exercisable
         within 60 days of April 9, 2001.

(11)     Includes 450,014 shares of Common Stock subject to options exercisable
         within 60 days of April 9, 2001.

(12)     Includes 16,665 shares of Common Stock subject to options exercisable
         within 60 days of April 9, 2001.

(13)     Includes shares described in notes 3-12 above.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Indemnification - Charter Documents

The Company's  Bylaws  provide that the Company will indemnify its directors and
executive officers to the fullest extent not prohibited by California law. Under
the Company's Bylaws,  indemnified  parties are entitled to indemnification  for
negligence,  gross  negligence and otherwise to the fullest extent  permitted by
law. The Bylaws also require the Company to advance  litigation  expenses in the
case of legal  proceedings,  against an undertaking by the indemnified  party to
repay such advances if it is ultimately determined that the indemnified party is
not entitled to indemnification.

Advisory Relationship with W.R. Hambrecht & Co.

In January  2001,  the Company  engaged W.R.  Hambrecht & Co. ("WRH & Co."),  an
investment bank in which Mr. Hambrecht, a director of the Company, is a partner,
to provide certain financial advisory services to the Company. As of April 2001,
WRH & Co. had rendered an  insignificant  level of services to the Company under
this arrangement.

                                     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

                                       36
<PAGE>

(c)      Exhibits

     3.1(1)     Amended and Restated Articles of Incorporation of the Company.
     3.2(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(3)*   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(4)*   1988  Equity  Incentive  Plan,  as  amended  and  form of
                option agreements.
     10.11(3)*  Form of Executive  Severance and  Transition  Benefits
                Agreement between the Company and Messier. D. Rich.
     10.12(5)*  Employment agreement between the Company and Messier. D. Rich.
     11.1(2)    Computation  of Net Income (Loss) Per Share.  Reference is made
                to page F-20 of the Notes to Consolidated Financial Statements.
     23.1(2)    Consent of PricewaterhouseCoopers LLP.
     24.1(2)    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.

                                       37
<PAGE>

(2)  Previously  filed with the  Company's  Form 10-K for the fiscal  year ended
     December 31, 2000 as filed on April 2, 2001.
(3)  Filed as an exhibit  to the  Company  Form 10-K for the  fiscal  year ended
     December 31, 1999 and incorporated herein by reference.

(4)  Filed as an exhibit to the  Company's  Form 10-Q for the period ended March
     31, 2000 and incorporated herein by reference.
(5)  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.








                                       38
<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 amendment to Annual Report
on Form 10-K to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized on the thirtieth day of April 2001.

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



Pursuant  to the  requirements  of the  Securities  Exchange  Act of 1934,  this
amendment to Annual Report on Form 10-K/A 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,                      April 30, 2001
 Donald L. Rich         Chief Executive Officer, President (principal executive
                        officer)

      *                                                                          April 30, 2001
--------------          Vice  President,   Finance  and  Administration,   Chief
Paul Cheng              Financial  Officer   (principal   accounting   officer),
                        Secretary

      *                 Director                                                 April 30, 2001
---------------
Peter Tierney

      *                 Director                                                 April 30, 2001
----------------
Scott McDonald

      *                 Director                                                 April 30, 2001
------------------
Robert Hambrecht

      *                 Director                                                 April 30, 2001
-------------
Jack Howard
</TABLE>


*By: /s/ DONALD L. RICH

     Donald L. Rich
     (Attorney-in-fact)





                                       39
<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.


/s/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
                                                        ..........................
                                                          Shares        Amount       Stock     Compensation    Deficit       Total
                                                        ------------  ------------ ----------- ------------- ------------ ----------

<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 acquisition                              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     $  29,255     $  (274)       $ (120)  $ (21,360)    $  7,501

    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
                                                                   ----------------  ----------------  ----------------
Cash flows from operating activities:
<S>                                                                     <C>             <C>               <C>
    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
                                                                   ================  ================  ================
</TABLE>
<TABLE>
<CAPTION>

Supplemental information:
<S>                                                                     <C>               <C>               <C>
    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
                                    ----------------  ----------------
       Total inventories                  $  1,363          $  1,411
                                    ================  ================
</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
                                                      ----------------  ----------------
        Total accrued liabilities                            $  2,681          $  3,048
                                                      ================  ================
</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>





    Year Ended December 31,
          2001                                                       $   254
          2002                                                           260
          2003                                                           271
          2004                                                           282
          2005                                                           278
    Thereafter                                                            14
                                                              ----------------
                                                                    $  1,359
                                                              ================


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):

   Year Ended December 31,
         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
                                                                ================

                                      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>       <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
                                                 ---------------   ----------------  ----------------
Current:
<S>                                                    <C>                <C>               <C>
    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
                                                                ----------------  ----------------  ---------------
                Total revenues                                       $  14,832         $  16,116        $  21,746
                                                                ================  ================  ===============
</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
                                                                 ---------------   ----------------  ----------------
       Basic:
<S>                                                                      <C>                <C>               <C>
          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.








/s/PricewaterhouseCoopers LLP
San Jose, California
February 14, 2001


<PAGE>
<TABLE>
<CAPTION>


Castelle and Subsidiaries                                            Schedule II
Valuation and Qualifying Accounts
(in thousands)
------------------------------------------------------------------------------------------------------------------------------------


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

Year Ended December 31, 1998:
<S>                                                            <C>                <C>              <C>                <C>
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>






                                      F-22