UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 1999

          | | 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)

              3255-3 Scott Boulevard, Santa Clara, California 95054

          (Address of principal executive offices, including zip code)

                                 (408) 496-0474

              (Registrant's telephone number, including area code)

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

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

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

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

The   approximate   aggregate   market   value   of  the   Common   Stock   held
by-non-affiliates  of the  Registrant,  based  upon the last  sale  price of the
Common  Stock  reported  on the  Nasdaq  SmallCap  Market  on March 1,  2000 was
$6,139,000. Shares of Common Stock held by persons who hold more than 10% of the
outstanding  shares and shares held by officers and directors of the  Registrant
have been  excluded  because such persons may be deemed to be  affiliates.  This
determination is not necessarily conclusive.

The number of shares of Common Stock outstanding as March 1, 2000 was 4,651,996.

                       DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of Castelle's proxy statement relating to the annual meeting of
shareholders to be held on May 10, 2000 (the "Proxy Statement") are incorporated
by reference into Part III of this Form 10-K.
<PAGE>
                                    CASTELLE
                                    FORM 10-K
                                TABLE OF CONTENTS

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PART I        ....................................................................................................1

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

     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 STOCKHOLDER MATTERS...........................21

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

     ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION..........22

     ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................26

     ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................27

     ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........27


PART III      ...................................................................................................28

     ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................28

     ITEM 11.     EXECUTIVE COMPENSATION.........................................................................28

     ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................28

     ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................28


PART IV       ...................................................................................................29

     ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................29


SIGNATURES    ...................................................................................................31

</TABLE>
<PAGE>


                                     PART I

                   SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements,  within the
meaning of Section  27A of the  Securities  Act of 1933 and  Section  21E of the
Securities  Exchange  Act of 1934,  that are based on our  current  expectations
about   our    company    and   our    industry.    We   use   words   such   as
"plan,""expect,""intend,""believe,""anticipate,""estimate"   and  other  similar
expressions   to  identify  some   forward-looking   statements,   but  not  all
forward-looking  statements  include  these  words.  All of our  forward-looking
statements involve risks and  uncertainties.  The Company's actual results could
differ  significantly from our expectations and from the results expressed in or
implied by these  forward-looking  statements.  Factors  that might cause such a
difference  include,  but are not limited to, those discussed  elsewhere in this
Annual Report on Form 10-K. We urge you to consider these cautionary  statements
carefully in evaluating our  forward-looking  statements.  Except as required by
law,  we  undertake  no  obligation  to  publicly  update  any   forward-looking
statements to reflect subsequent events and circumstances.

ITEM 1.  BUSINESS

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

                                  INTRODUCTION

         Castelle (the  "Company") was  incorporated  in California in 1987, and
its  principal  offices  are located at 3255-3  Scott  Boulevard,  Santa  Clara,
California 95054. The Company's telephone number is (408) 496-0474. Castelle(R),
LANpress(R)  and  JetPress(R)  are  registered  trademarks and  FaxPressTM,  and
InfoPressTM  are  trademarks  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;   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 a positive cash flow for the year.

         Castelle's  objective is to be a leading  worldwide  supplier of server
appliances  providing office messaging solutions and other shared services.  The
Company's  products  answer the need for specialized  networking  equipment that
allow network  administrators to deploy complex networking  applications without
the cost and time required to install server-based software solutions.  Castelle
pioneered  server  appliances,  establishing a benchmark for "plug and play" and
ease of use with its fax and print server product  families.  Castelle  products
are  installed  in most Fortune  1000  companies,  and in small and medium sized
businesses  worldwide.  Castelle is now applying its proven technology to expand
its line of server  appliances  to provide  Internet and Intranet  messaging and
communication  solutions for small and medium  enterprises,  and  departments of
large corporations.
                                       1
<PAGE>

         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.  The Company's  distributors  sell
Castelle's products to value-added  resellers  ("VARs"),  e-commerce vendors and
other resellers.  The Company's three major domestic distributors include Ingram
Micro, Inc.  ("Ingram"),  Tech Data Corporation ("Tech Data") and Merisel,  Inc.
("Merisel").  and its largest international distributors are Macnica Corporation
("Macnica")  in  Japan  and  Ingram  UK in the  United  Kingdom.  The  Company's
e-commerce  strategy  includes  developing  close  relationships  with such mass
market vendors as CDW, Insight,  MicroWarehouse,  and BUY.COM.  The Company also
distributes  its products  through its on-line  store on the Company's Web site.
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."
                                       2
<PAGE>

History of Losses; Accumulated Deficit

         The Company has  experienced  significant  operating  losses and, as of
December 31, 1999, had an accumulated  deficit of $25 million.  The  development
and  marketing  by  the  Company  of  new  products  will  continue  to  require
substantial product development and other expenditures. Although the Company had
been profitable in 1996, the Company has sustained annual losses in 1997 through
1999,  and 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 effect 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 Web and 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.

                                       3
<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,""--  Research and Product  Development," and
"-- Sales, Marketing and Distribution."

Key Personnel

         The  Company's  success  depends  to  a  significant  degree  upon  the
continued  contributions  of the Company's key  management,  marketing,  product
development and operational personnel. The success of the Company will depend to
a large extent upon its ability to retain and continue to attract highly skilled
personnel.  Competition for employees in the computer  industry is intense,  and
there can be no  assurance  that the Company  will be able to attract and retain
enough qualified employees.  If the business of the Company grows, it may become
increasingly  difficult for it to hire,  train and  assimilate the new employees
needed. 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 prices.  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.

                                       4
<PAGE>

         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 does 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 that of the Company.  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  31% and 38% of the Company's net sales in 1999 and
1998,  respectively.  The Company sells its products in approximately 40 foreign
countries  through  approximately 70 international  distributors.  Macnica,  the
Company's  principal Japanese  distributor,  accounted for approximately 60% and
67% of the Company's  international  sales in 1999 and 1998,  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 law 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.

                                       5
<PAGE>


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 product in  inventory if such
inventory  becomes obsolete.  The Company has in the past experienced  increased
returns of a particular  product version following the announcement of a planned
release of a new  version of that  product.  Although  the  Company  provides an
allowance for anticipated  returns,  and believes its existing policy results in
the  establishment of an allowance that is currently  adequate,  there can be no
assurance that product  returns will not exceed such allowance in the future and
will not have a material  adverse  effect on the Company's  business,  operating
results and financial condition.

Concentration of Distributors; Distribution Risks

         The Company sells its products  primarily  through a two-tier  domestic
and  international   distribution  network.  The  Company's   distributors  sell
Castelle's  products  to VARs,  e-commerce  vendors  and  other  resellers.  The
distribution   of  personal   computers   and   networking   products  has  been
characterized  by rapid change,  including  consolidations  due to the financial
difficulties  of  distributors  and the  emergence of  alternative  distribution
channels.  In addition,  an  increasing  number of companies  are  competing for
access to these channels.  The Company's  distributors typically represent other
products that are  complementary  to, or compete with, those of the Company.  In
particular,  certain of its competitors,  including  Hewlett-Packard  and Intel,
sell a  substantially  higher dollar volume of products  through  several of the
Company's large U.S.  distributors,  and as a result,  the Company believes such
distributors give higher priority to products offered by such  competitors.  The
Company's  distributors are not  contractually  committed to future purchases of
the Company's products and could discontinue  carrying the Company's products at
any time for any reason.  In  addition,  because the Company is  dependent  on a
small  number of  distributors  for a  significant  portion  of the sales of its
products, the loss of any of the Company's major distributors or their inability
to satisfy  their  payment  obligations  to the Company could have a significant
adverse  effect on the  Company's  business,  operating  results  and  financial
condition.  The  Company  has a  stock  rotation  policy  with  certain  of  its
distributors that allows them to return marketable  inventory against offsetting
orders. Should the Company reduce its prices, the Company credits certain of its
distributors for the difference between the purchase price of products remaining
in their  inventory  and the  Company's  reduced  price  for such  products.  In
addition,  due to industry  conditions or the actions of competitors,  inventory
levels of the Company's  products held by distributors  could become  excessive,
resulting  in  product  returns  and  inventory  write-downs.  There  can  be no
assurance  that in the  future  returns  and  price  protection  will not have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial  condition.  See "Business -- Sales,  Marketing and  Distribution" and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."
                                        6
<PAGE>


Dependence on Suppliers and Subcontractors

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

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

Government Regulation

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

                                       7
<PAGE>


Dependence on Proprietary Rights; Uncertainty of Obtaining Licenses

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

                                       8
<PAGE>

Future Capital Requirements

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

Voting Control by Officers, Directors and Affiliates

         At March  1,  2000 the  Company's  officers  and  directors  and  their
affiliates  beneficially  owned  approximately 24% 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 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;
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  restructuring and implementing
numerous cost reductions,  the company was able to report an operating profit of
$114,000 in the fourth quarter of 1999. Additionally,  increased cash management
during 1999 provided a positive cash flow for the year.

                                       9
<PAGE>

Industry Background

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

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

                   Fax Messaging  Products:  The increasing  popularity of email
         and  the  Internet  provided  the  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.

         Users can 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  and  route  them   electronically  and  confidentially
         directly to the  electronic  mailboxes of the intended  recipients  and
         store  non-urgent  outgoing  faxes  for  automatic  transmission  at an
         "off-peak"  time when telephone rates are lower. In addition to reduced
         cost of fax transmissions,  fax servers utilize Fax-Over-IP  technology
         to transmit faxes over the Internet.

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

                                       10
<PAGE>

         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,  eliminating  the need to print a document,
         take it to a stand-alone fax machine and wait for its transmission.

         The Company  also  has  Information  Delivery  Systems,  which  include
         email-on-demand  and  fax-on-demand  products.   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.



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

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



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.

                                       11
<PAGE>



         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,  TechData,  and
         Merisel.  Castelle's  products  are well suited for sale by  e-commerce
         vendors  and the  Company  has been  successful  working  with  leading
         suppliers such as CDW, BUY.COM,  Insight,  MicroWarehouse  domestically
         and  Software  Catalog  and W-Store in Europe.  The Company  also sells
         through OEM vendors  such as Fujitsu  Ltd. in Japan ("  Fujitsu").  and
         Veritek ("Veritek") in Korea. The Company is focused on maintaining and
         strengthening  its  current  distribution  network  in  North  America,
         Europe, and Asia-Pacific regions.

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

Products

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

         Fax  Messaging  Products:  The Company  offers the  FaxPress  family of
         email-integrated  fax server  appliances.  The  Company  positions  the
         FaxPress as the easiest way to add faxing to your network 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,
         configuration,  etc. The Company's fax server  products are designed to
         comply  with  regulatory  standards  in the  United  States  as well as
         countries  in Europe and the Pacific  Rim.  During  1999 and 1998,  fax
         products represented 78% and 68%, respectively, of total net sales.


                                       12
<PAGE>

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

               o    Easy Installation and maintenance:  FaxPress is a fax server
                    appliance  and  comes  with  all   necessary   hardware  and
                    software. The hardware system is a small box with integrated
                    10/100 Base-T Ethernet or Token Ring interfaces,  and one to
                    eight  intelligent  fax modems.  All the required system and
                    client software is provided with the product.

               o    Support for popular network operating environments: FaxPress
                    operates  in any  local  area  network  based  on  Microsoft
                    Windows 2000, Windows NT, 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    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 [DID (Direct  Inward  Dialing),  DTMF (Dual
                    Tone  Multifrequency),  T.30  sub-addressing,  OCR  (Optical
                    Character  Recognition)  routing,  line  routing] to deliver
                    incoming  faxes  direct  to the  email  or fax  inbox of the
                    intended recipient.

               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.  FaxPress can also  operate  within a Fax2Net
                    Internet Faxing network, a worldwide ISP.

               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 $7,995.  The server
         pricing  is  based on  hardware  model,  with no  per-user  costs.  The
         FaxPress  2500,  3500 and 5000 come with the  FaxPress  6.0 PRO version
         that adds  integration  with popular email packages,  and many advanced
         fax management and integration  features.  FaxPress 6.0 PRO is optional
         on FaxPress SBE. The following table summarizes the Company's  FaxPress
         system products:

                                       13
<PAGE>
<TABLE>
<CAPTION>
                                                                  -----------------------------
                                                                        Network Environment
  ---------------------------------------------------------------------------------------------
                                                                       NetWare      Windows
                       Number of     Email           Network       3.x, 4.x, 5.x    NT/2000
   Product Model        Modems      Integration     Topology           (IPX)       (IPX,IP)
  ---------------------------------------------------------------------------------------------
<S>                       <C>        <C>             <C>                <C>            <C>
  FaxPress SBE             1         Optional        Ethernet           |X|            |X|
  FaxPress 1500-N          2            |X|          Ethernet           |X|            |X|
  FaxPress 3500            4            |X|          Token Ring         |X|            |X|
  FaxPress 5000         4 or 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.

               o    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.

               o    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.

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

         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 10 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 $499.

                                       14
<PAGE>

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

                                        -----------------------------------------------------
                                                       Network Environment
-----------------------------------------.....................................................-------------------------
                             Ethernet                               Windows                      Flash
   Product Configuration      Network   NetWare 3.x,  UNIX TCP/IP  95 / 98 /       Apple        Upgrade     Internet
                             Interface    4.x, 5.x                 NT / 2000     Ethertalk    Capability    Printing
-----------------------------------------------------------------------------------------------------------------------

<S>                             <C>          <C>          <C>         <C>           <C>           <C>         <C>
LANpress 1P/100 MP (1)         10/1000       |X|          |X|         |X|           |X|           |X|         |X|
LANpress 3P/100                10/1000       |X|          |X|         |X|           |X|           |X|         |X|
LANpress Jr. MP (2)              10          |X|          |X|         |X|           |X|           |X|         |X|
LANpress 2+1 MP (3)              10          |X|          |X|         |X|           |X|           |X|         |X|
LANpress 3+1 MP (3)              10          |X|          |X|         |X|           |X|           |X|         |X|
----------------------------------------------------------------------------------------------------------------------
   --------------------
   (1)1 Centronics parallel port
   (2)Connects directly to port on Printer
   (3)Numbers  refer to the number of  parallel  and serial  port
      connections,  respectively.  The LANpress 2+1 MP also comes
      with a Token Ring network interface.

</TABLE>

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.

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

         o  Windows NT Terminal Server support

         o  Windows 2000 Professional, Server and Advanced Server support

         o  Linux file server support

         o  Improved integration with Microsoft Exchange via Exchange Connector

         Castelle   will   continue  to  further  its  strategy  of   supporting
Fax-Over-IP (Internet Faxing) through its own FaxPress-to-FaxPress communication
and interfaces to third-party Internet Fax providers.

         The Company  developed  new versions of its  FaxPress  servers to offer
higher  performance at a lower cost.  Furthermore,  the Company is applying this
technology to the development of new generations of server  appliances that will
provide integrated email/fax messaging and other shared services.
                                       15
<PAGE>

         The InfoPress  Information  Delivery  product line is being improved to
support  the current  versions of Adobe  Acrobat  Reader and  Netscape.  It will
support Windows 2000 with a new printer driver. New and improved Web integration
is also being developed for the next version release.

         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 and Veritek in Korea. 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.

                                     16

<PAGE>

         The Company's five largest distributors accounted for approximately 42%
of the  Company's  net sales in 1999 and 57% of its net sales in 1998.  Macnica,
the Company's principal Japanese distributor,  and Ingram, the Company's largest
domestic distributor,  accounted for approximately 18% and 12%, respectively, of
the Company's net sales in 1999 and 26% and 17%, respectively,  of its net sales
in 1998.  Sales to  customers  located in the Pacific  Rim and Europe  comprised
approximately  31%  and  38% of the  Company's  net  sales  in  1999  and  1998,
respectively. 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,  final test and assembly,  quality  control and
service repair. Certain of the Company's manufacturing  operations are performed
by third party manufacturers that provide customized,  integrated  manufacturing
services,  including  procurement,  manufacturing and associated printed circuit
board assembly. The Company also relies on SerComm to manufacture certain of its
print server products.  These  arrangements  enable the Company to shift certain
costs to such providers,  thereby allowing the Company to focus resources on its
product development  efforts.  The failure of such  manufacturers,  particularly
SerComm, to meet their contractual commitments to the Company could cause delays
in product  shipments,  thereby  potentially  adversely  affecting the Company's
business, operating results and financial condition.

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

                                       17

<PAGE>

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."

                                       18

<PAGE>

Employees

         As of February 22, 2000,  the Company  employed a total of 72 full-time
equivalent personnel, 15 in manufacturing,  and 16 in sales and marketing, 17 in
engineering,  12 in customer service and 12 in finance and  administration.  The
Company intends to continue to hire additional  personnel in connection with the
expansion  of its  operations.  The  Company has never had a work  stoppage,  no
employees are represented by a labor  organization and the Company considers its
employee relations to be good.

         The Company has entered into  confidentiality  agreements  with all its
employees  (including  its  officers)  that prohibit  disclosure of  information
confidential  to the Company to anyone  outside of the  Company  both during and
subsequent  to  employment  and  require  disclosure  to the  Company  of ideas,
discoveries or inventions  relating to or resulting from the employee's work for
the Company and  assignment  to the  Company of all  proprietary  rights to such
ideas, discoveries
or inventions.



                        EXECUTIVE OFFICERS OF THE COMPANY

Identification of Executive Officers

         The names of the executive officers of the Company and their ages as of
February 22, 2000 are set forth below:


         Name              Age                        Position
     Donald L. Rich       58   Chairman of the Board, President, Chief Executive
                                 Officer, Chief Financial Officer and Secretary
     Ronnie E. Mansoor    43   Chief Technology Officer, Vice President of
                                 Engineering
     Edward J. Heinze     54   Vice President Sales, North America


Donald L. Rich

         Mr. Rich  joined the  Company in November  1998 and has served as Chief
    Executive Officer and President from November 1998 to the present.  Mr. Rich
    has served as Chief  Financial  Officer since April 1999. He became Chairman
    of the Board in May 1999 and has served as Secretary  since  February  2000.
    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.

Ronnie E. Mansoor

         Mr. Mansoor  joined the Company in 1997,  after working as a consultant
    for Castelle  since 1995. He has served as the Director of  Engineering  and
    was appointed Chief Technology  Officer and Vice President of Engineering in
    August 1999. Prior to joining Castelle,  Mr. Mansoor served as the President
    of Implicit Inc., a consulting  company which provided software  development
    services to companies such as: Canon, Minolta,  Adaptec, ASP, and Cylink, in
    the fields of networking,  imaging, security, and Internet technologies.  In
    addition, he held project management positions at Document  Technologies,  a
    document imaging company, and ADAC Laboratories,  a medical imaging company.
    Mr. Mansoor holds a BS degree in Electrical  Engineering  and a PE degree in
    Physics from Tel Aviv University.

                                       19
<PAGE>

Edward J. Heinze

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

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 Santa Clara, California
with an  aggregate  of  approximately  21,400  square feet of floor  space.  The
Company  occupies  this  facility  under a lease,  the term of which  expires in
October 2000. The Company also occupies an additional 2,000 square feet of floor
space that is located in El Dorado Hills,  California.  This facility is under a
lease,  expiring in March 2001. 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

         None.

                                       20
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER 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 1998              High              Low
                 First Quarter        $3 3/8            $2
                 Second Quarter       $4                $1 1/2
                 Third Quarter        $2 1/2            $  7/8
                 Fourth Quarter       $1 5/8            $ 1/2

             Fiscal 1999              High              Low
                 First Quarter        $1 1/2            $ 1/2
                 Second Quarter       $1 5/32           $ 3/8
                 Third Quarter        $1 1/4            $ 5/8
                 Fourth Quarter       $2 3/8            $ 7/8

         As of  December  31,  1999,  there  were 114  holders  of record of the
Company's  Common  Stock.  On March 1, 2000 the last sale price  reported on the
Nasdaq SmallCap Market for the Company's Common Stock was $1.9375 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 31,
                                               ---------------------------------------------------------------
                                                   1999         1998          1997         1996         1995
                                               -----------  -----------  -----------  -----------  -----------
                                                            (in thousands, except per share amounts)
INCOME STATEMENT DATA:
<S>                                               <C>          <C>          <C>          <C>          <C>
         Net Sales                                $16,116      $21,746      $25,343      $29,461      $25,082
         Gross Profit                             $ 8,404      $11,598      $13,507      $14,468      $11,511
         Gross Profit as a % of Net Sales             52%          53%          53%          49%          46%
         Net income/(loss)                        ($3,555)     ($7,534)     ($6,895)      $5,724       $2,024
         Net income/(loss) as a % of Net Sales       (22%)        (35%)        (27%)         19%           8%
         Net income/(loss) per share - diluted     ($0.78)      ($1.67)      ($1.54)       $1.45        $0.78

BALANCE SHEET DATA:
         Cash and Cash Equivalents                 $4,714       $3,924       $6,204       $8,161       $7,268
         Working Capital                           $3,555       $6,763      $10,816      $13,163       $8,912
         Total Assets                              $8,502      $12,494      $18,926      $27,303      $14,728
         Long-term Liabilities                         --          $98          $52           --          $75
         Stockholders Equity                       $4,020       $7,501      $14,855      $21,616       $9,289
</TABLE>

         Net  loss  for  1999,   1998,   and  1997   included  net  charges  for
restructuring and other  non-recurring items of $.4 million,  $5.1 million,  and
$6.1  million  respectively,  and a net  benefit  of 2.5  million  in 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.

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

         Except for the historical  information  contained herein, the following
discussion   contains   forward-looking   statements   that  involve  risks  and
uncertainties.  Castelle's  actual  results could differ  materially  from those
discussed  herein.  Factors that could cause or contribute  to such  differences
include,  but are not limited to, those  discussed in this section as well as in
the section entitled "Business - Risk Factors".

                                       22

<PAGE>

         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  beginning from 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 of  $114,000  in the  fourth  quarter  of 1999.  Additionally,
increased  cash  management  during 1999  provided a positive  cash flow for the
year.  Accounts receivable  collections were improved,  resulting in the average
Days  Sales  Outstanding  of 35 at the end of 1999  versus  87 at the end of the
prior year. Inventory levels also decreased resulting in a doubling of inventory
turns in 1999.

Results of Operations

    Net Sales

         Net sales  decreased 26% to $16.1 million in 1999 from $21.7 million in
    1998. The decline of $5.6 million in net sales resulted primarily from lower
    sales of the Company's main product lines, including a $3.7 million decrease
    in print server  products in Asia, and the Company's  efforts to manage down
    the inventory in the distribution channel.  Revenue in 1998 had been reduced
    by increases in the sales return allowance of approximately $1.0 million.

         In 1998, net sales decreased 14% to $21.7 million from $25.3 million in
    1997. The $3.6 million  decline in net sales  resulted  primarily from lower
    sales of the Company's  print server  products in Japan,  increases in sales
    returns and allowance of approximately $1.0 million,  and increases in local
    competition in Europe.  The increase in Sales Returns Allowances allowed the
    Company to better manage the level of inventory in the distribution channel.

         International sales were $4.9 million,  $8.3 million, and $11.9 million
    in  1999,  1998  and  1997,  respectively,  representing  31%,  38% and 47%,
    respectively,  of net sales. Lower  international sales were the result of a
    reduction in general demand for the Company's  print server products in Asia
    and  increased   local   competition  in  Europe.   Most  of  the  Company's
    international  sales to date have been  denominated  in U.S.  dollars.  Such
    sales  could be  adversely  affected  by  changes in demand  resulting  from
    fluctuations in currency exchange rates.

    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.  Cost of sales were $7.7 million,
    $10.1 million and $11.8 million in 1999,  1998 and 1997,  respectively,  and
    represented 48%, 47% and 47% of net sales for those years.  Cost of sales as
    a  percentage  of net sales has  remained  constant  during these years as a
    result of a higher  proportion of net sales being derived from higher margin
    fax  products,  offset by a lower gross margin  percentage on sales of print
    servers and unfavorable manufacturing overhead absorption rates due to lower
    volumes.  During  1999 the  Company  reduced  manufacturing  overhead by $.4
    million through  reduction of personnel and other costs savings.  However in
    1999 the Company  recognized  $1.1million of expense related to the disposal
    of obsolete inventory.

    Research and Development

         Research  and product  development  expenses  were $2.7  million,  $2.9
    million  and  $3.1  million  in  1999,  1998  and  1997,  respectively,  and
    represented  17%, 13% and 12% of net sales for those  periods.  Spending has
    supported  existing products and the development of unified messaging server
    appliances.  The absolute dollar amount of research and product  development
    expense  decreased  slightly  in  1999  due to  improved  expense  controls.
    However,  the Company continues to be committed to the development of highly
    competitive new products and services  through the efficient  utilization of
    its engineering resources.

         The decrease in research and  development  expenses in 1998 compared to
    1997 was mainly due to improved expense controls.

    Sales & Marketing

         Sales and marketing  expenses were $6.7 million,  $8.8 million and $9.2
    million for 1999, 1998 and 1997, respectively,  and represented 42%, 40% and
    36% of net sales for those periods.  The expense decline in 1999 compared to
    1998 was due to a reduction in personnel,  lower marketing promotion,  trade
    show, occupancy and other cost savings.

         The   expense   decline  in  1998   compared  to  1997  was  due  to  a
    reorganization  of the sales and  marketing  activities  implemented  in the
    fourth quarter of 1997, resulting in more efficient operations and a smaller
    staff, which was partially offset by the increase in sales efforts for a new
    fax product line.

    General & Administrative

         General and administrative expenses were $2.1 million, $2.4 million and
    $2.3 million for 1999,  1998 and 1997,  respectively,  or 13%, 11% and 9% of
    net sales for those  periods.  The decrease in expenses in 1999 was due to a
    lower  allowance for doubtful  accounts and overall cost savings,  offset by
    increases in the amounts paid for administrative salaries and bonuses.

         The  increase  in  expenses  in  1998  was  due to an  increase  in the
    Company's  allowance for doubtful  accounts and severance  costs  associated
    with  executives who left the Company,  which was only  partially  offset by
    expense reductions resulting from the Company's restructuring implemented in
    the fourth quarter of 1997.

    Restructuring and Other Charges & Amortization of Intangible Assets

         In 1999, the Company recognized a restructuring  charge of $402,000 for
    expenses  associated  with the Company's 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 the Company's operating costs in future years.

         In April 1998,  the Company  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, the
    Company recorded a one-time charge against earnings in the second quarter of
    1998  of  $1.1  million,   as  the  technology   acquired  had  not  reached
    technological  feasibility  and had no  alternative  future use. The Company
    also recorded  intangible  assets of $160,000,  which were amortized over 12
    months, resulting in a $120,000 charge in 1998. In determining the amount of
    in-process  research and  development,  the Company  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.

                                       24
<PAGE>

         In 1997,  the  Company  recorded a total  restructuring  charge of $6.2
    million to restructure its operations to streamline  activities and focus on
    key products to reduce ongoing  costs.  Of the total  restructuring  charge,
    $1.2  million  was  to  account  for   implementing   and   completing   the
    restructuring  plan which  included  relocation  of the  Company's  European
    office,  exit from certain  lines of business,  a workforce  reduction,  the
    write-off  of  certain   assets   relating  to  Ibex  and  other   estimated
    restructuring  costs.  This  was in  addition  to a charge  of $5.0  million
    associated with the write-off of the Ibex goodwill and related  intangibles.
    In addition,  the Company recorded  amortization expense of $574,000 in 1997
    related to intangible  assets  associated with the write-down to fair market
    value of assets acquired in the merger with Ibex in November 1996.

    Interest Income, net

         Net interest  income was $126,000,  $170,000 and $288,000 in 1999, 1998
    and 1997,  respectively.  The  changes in interest  income  versus the prior
    years are due to changing cash balances.

    Provision for (Benefit from) Income Taxes

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

         In the fourth quarter of 1998, due to the  uncertainty  surrounding the
    realization of favorable tax  attributes in future tax returns,  the Company
    provided  a  full  valuation  allowance  against  its  deferred  tax  asset,
    resulting in a non-recurring, non-cash charge of $4.0 million.

         In 1997  the  Company  recorded  a net  benefit  from  income  taxes of
    $732,000.  At the time,  this amount  reflected the  recognition  of various
    deductible deferred assets,  including prior years' net operating loss carry
    forwards, business tax credits and various temporary accounting differences.
    See  Note  9 of  the  Notes  to  Consolidated  Financial  Statements  for  a
    discussion of the Company's provision for income taxes.

Liquidity and Capital Resources

    Since its inception in 1987,  Castelle has funded its  operations  primarily
through the issuance of capital  stock and the  assumption  of bank debt.  As of
December  31, 1999,  the Company had $4.7 million of cash and cash  equivalents,
increased  from  $3.9  million  for the same  period  in 1998.  Working  capital
decreased to $3.6 million at December 31, 1999 from $6.8 million at December 31,
1998.  Cash and cash  equivalents  increased  in 1999,  even after  funding  the
operating loss for 1999, primarily because of significantly improved collections
of accounts receivable and reduction in inventory requirements.  Working capital
decreased primarily because of the operating loss in 1999.

    The Company has a $3.0 million secured revolving line of credit with a bank,
which  expires in March  2000,  pursuant  to which the  Company  may borrow 100%
against  pledges of cash at the bank's prime rate (8.50% at December 31,  1999).
Borrowings under this line of credit agreement are  collateralized by all of the
assets of the  Company.  Under the terms of the loan  agreement,  the Company is
restricted  from  loaning  money or  assets  or  entering  into any  mergers  or
acquisitions  where the total  consideration  exceeds  $15,000,000,  without the
bank's  consent.  The Company was in compliance with the terms of the agreement,
and at December 31, 1999 had no borrowings under the line of credit. The Company
expects to negotiate an extension of this line of credit.

                                       25
<PAGE>

    In  December  1997,  as a source of capital  asset  financing,  the  Company
entered into a loan and security  agreement with a finance company for an amount
up to $288,000.  As of December 31, 1999, the Company had drawn $288,000 against
this amount of which $98,000 is  outstanding  at December 31, 1999.  The loan is
subject to an interest  rate of 10.11%,  is  repayable  by December  2000 and is
collateralized  by a certificate of deposit of $125,000,  which is classified as
restricted cash on the Company's balance sheet.

    As of December 31, 1999,  net accounts  receivable  were $1.5 million,  down
from $3.5  million for the same  period in 1998.  At the end of 1999 the average
Days Sales  Outstanding  was 35 versus 87 at the end of 1998. This is the result
of a focus on increased cash collections by the Company in 1999.

    Net  inventories  as of December 31, 1999 were $1.4 million,  down from $3.7
million in 1998. Inventory turnover for the year-ended 1999 was 4.4, up from 1.9
in 1998.  This is the  result of efforts  by the  Company  to reduce  inventory,
especially for older product lines.

    Castelle acquired  additional  capital  equipment of $184,000,  $223,000 and
$732,000 in 1999, 1998 and 1997, respectively.  The decline in capital equipment
spending in 1998 was  primarily the result of large  one-time  purchases in 1997
for the Company's customer support system and an upgrade to the internal network
infrastructure.

    In 1998 the Company  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  the Company  believes  that its  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,  the Company may be
required to seek additional  equity or debt financing.  The timing and amount of
such capital requirements cannot be determined at this time and will depend on a
number of factors,  including demand for the Company's existing and new products
and changes in technology in the networking industry.  There can be no assurance
that such  additional  financing  will be available on  satisfactory  terms when
needed, if at all.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    The Company  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".  The Company
had no holdings of derivative financial or commodity instruments at December 31,
1999.  However,  the Company is exposed to  financial  market  risks,  including
changes in interest rates and foreign currency exchange rates. While much of the
Company's  revenue is  transacted  in U.S  dollars,  some  revenues  and capital
spending are  transacted  in Pounds  Sterling.  These  amounts are not currently
material to the  financial  statements  of  Castelle;  therefore we believe that
foreign  currency  exchange  rates should not  materially  affect the  Company's
overall financial position,  results of operations or cash flows. The fair value
of  the  Company's   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.

                                       26

<PAGE>

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

                      <S>                                                                               <C>
                      Report of Independent Accountants.............................................    F-1
                      Consolidated Balance Sheets as of December 31, 1999 and 1998..................    F-2
                      Consolidated Statements of Operations for the years ended
                           December 31, 1999, 1998 and 1997.........................................    F-3
                      Consolidated Statement of Shareholders' Equity for the years ended
                           December 31, 1999, 1998 and 1997.........................................    F-4
                      Consolidated Statements of Cash Flows for the years ended
                           December 31, 1999, 1998 and 1997.........................................    F-5
                      Notes to Consolidated Financial Statements....................................    F-6


         (b)      The following  financial  statement  schedules of Castelle for
                  the years ended December 31, 1999,  1998 and 1997 are filed as
                  part of this Form 10-K and should be read in conjunction  with
                  the Company's Financial Statements.

                                                                                                       Page in
                                                                                                      Form 10-K

                      Report of Independent Accountants.............................................    F-1
                      Schedule II - Valuation and Qualifying Accounts...............................    F-21

</TABLE>

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


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

              Not applicable.


                                       27
<PAGE>


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Identification of Directors

    The information  required by this Item concerning the Company's directors is
incorporated by reference from the sections  captioned  "Proposal 1: Election of
Directors"  contained in the Company's definitive Proxy Statement related to the
Annual  Meeting  of  Shareholders  to be held May 10,  2000,  to be filed by the
Company with the Securities and Exchange Commission (the "Proxy Statement").

Identification of Executive Officers

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

Compliance with Section 16(a) of the Exchange Act

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



ITEM 11. EXECUTIVE COMPENSATION

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


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                     28
<PAGE>

                                     PART IV

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

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


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

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

         (b)  Reports on Form 8-K - None

         (c)  Exhibits

               2.1(1)   Agreement  and Plan of  Merger,  dated as of August  22,
                        1996 among Castelle, Ibex Technologies, Inc. and Certain
                        Shareholders of Ibex Technologies, Inc.

               3.1(2)   Amended and Restated  Articles of  Incorporation  of the
                        Company.

               3.2(3)   Amended and Restated Bylaws of the Company.

               4.1      Reference is made to Exhibits 3.1 and 3.2.

               4.2      Fifth Amended and Restated Registration Rights Agreement
                        dated  November 20, 1996 by and among the Registrant and
                        certain  holders  of  the  Company's  Common  Stock  and
                        Warrants to purchase Common Stock.

               10.1(3)* 1995 Non-Employee Directors' Stock Option Plan, and form
                        of Director Stock Option Agreement.

               10.2(4)  Warrant for Common Stock issued to Unterberg Harris.

               10.3(2)* Form of Indemnity  Agreement  between the Registrant and
                        each of its directors and executive officers.

               10.4(2)  OEM  Purchase  Agreement  dated  May  23,  1995,  by and
                        between the Registrant and SerComm Corporation.

               10.5(2)  Distribution  Agreement  dated February 26, 1990, by and
                        between the Registrant and Ingram Micro D Inc.

               10.6(2)  Distributor  Contract  dated June 25,  1991,  as amended
                        June 25, 1991,  by and between the  Registrant  and Tech
                        Data Corporation.

               10.7(2)  Distribution  Agreement dated March 26, 1992, as amended
                        March  26,  1992,  by and  between  the  Registrant  and
                        Merisel, Inc.

               10.8(2)  Distributor  Agreement  dated  October 1,  1990,  by and
                        between the Registrant and Vitek.

               10.9(2)  International  Distributor  Agreement dated February 24,
                        1994, by and between the Registrant and Macnica.

     ------------------
     (1) Filed as an exhibit to the Company's Form 8-K dated August 22, 1996 and
         incorporated herein by reference.
     (2) 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.
     (3) Filed herewith.
     (4) Filed  as an  exhibit  to the  Company's  Form  10-KSB  for the  fiscal
         year-ended December 31, 1995 and incorporated herein by reference.
     *   Indicates  management  contracts or compensatory  plans or arrangements
         filed pursuant to Item 601(b)(10) of Regulation S-K.

                                       29
<PAGE>

               10.10(5)*1988 Equity Incentive Plan, as amended.

               10.11(4) Warrant for Common Stock issued to RvR Securities Corp.

               10.12(6)*Form of  Executive  Severance  and  Transition  Benefits
                        Agreement between the Company and Messier. P. Raje.

               10.13(6)*Form of  Executive  Severance  and  Transition  Benefits
                        Agreement between the Company and Messier. J. Burke.

               10.14(3)*The   Executive   Severance  and   Transition   Benefits
                        Agreement  dated  November  10, 1998 between the Company
                        and Messier. Don Rich.

               10.15(7)*Employment  agreement  between the Company and  Messier.
                        D. Rich.

               11.1(3)  Computation of Net Income (Loss) Per Share. Reference is
                        made to page F-20 of the Notes to Consolidated Financial
                        Statements.

               23.1(3)  Consent of PricewaterhouseCoopers LLP.

               24.1(3)  Power of Attorney.  Reference  is made to the  signature
                        page.

               27.1(3)  Financial data schedule.

     ------------------
     (1) Filed as an exhibit to the Company's Form 8-K dated August 22, 1996 and
         incorporated herein by reference.
     (2) 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.
     (3) Filed herewith.
     (4) Filed  as an  exhibit  to the  Company's  Form  10-KSB  for the  fiscal
         year ended December 31, 1996 and incorporated herein by reference.
     (5) Filed as an exhibit to the  Company's  Registration  Statement  on Form
         S-8, dated March 29, 1999.
     (6) Filed as an exhibit  to the  Company's  Form 10-Q for the period  ended
         September 26, 1997 and incorporated herein by reference.
     (7) 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.

                                       30
<PAGE>



                                   SIGNATURES

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


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

                               March 17, 2000

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


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


      Signature                               Title                    Date


/S/ DONALD L. RICH       Chairman of the Board and Director,     March 17, 2000
--------------------     Chief Executive Officer, President
  Donald L. Rich         (principal executive officer),
                         Secretary, Chief Financial Officer
                         (principal accounting officer)

/s/ PETER TIERNEY        Director                                March 17, 2000
--------------------
   Peter Tierney

/s/ SCOTT MCDONALD       Director                                March 17, 2000
--------------------
    Scott McDonald

/s/ ROBERT HAMBRECHT     Director                                March 20, 2000
--------------------
 Robert Hambrecht


                                       31
<PAGE>


                           Castelle and Subsidiaries
                       Consolidated Financial Statements
                        as of December 31, 1999 and 1998
                     and for each of the three years in the
                         period ended December 31, 1999


<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, 1999 and 1998,  and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 1999, in conformity  with  accounting  principles  generally
accepted in the United States. 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  which  require  that we plan and  perform  the  audit to  obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.


PricewaterhouseCoopers LLP
San Jose, California
February 4, 2000



<PAGE>


Castelle and Subsidiaries
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

                                                                                           December 31,
                                                                                ....................................
                                                                                     1999                1998
                                                                                ----------------   -----------------
Assets
Current assets:
<S>                                                                                  <C>                 <C>
    Cash and cash equivalents                                                        $   4,714           $   3,924
    Restricted cash                                                                        125                 125
    Accounts receivable, net of allowance for doubtful accounts
           of $493 in 1999 and $720 in 1998                                              1,525               3,472
    Inventories                                                                          1,411               3,739
    Prepaid expenses and other current assets                                              262                 398
                                                                                ----------------   -----------------
           Total current assets                                                          8,037              11,658

Property and equipment, net                                                                387                 666
Other, net                                                                                  78                 170
                                                                                ----------------   -----------------

             Total assets                                                             $  8,502           $  12,494
                                                                                ================   =================

Liabilities and Shareholders' Equity
Current liabilities:
    Long-term debt, current portion                                                   $     98                  96
    Accounts payable                                                                     1,336                2084
    Accrued liabilities                                                                  3,048                2715
                                                                                ----------------   -----------------
           Total current liabilities                                                     4,482               4,895

Other long-term liabilities                                                                  -                  98
                                                                                ----------------   -----------------
           Total liabilities                                                             4,482               4,993
                                                                                ----------------   -----------------

Commitments (Note 6)

Shareholders' Equity:
    Preferred stock, no par value:
      Authorized:  2,000 shares in 1999 and 1998
      Issued and outstanding:  none in 1999 and 1998                                         -                   -
    Common stock, no par value:
      Authorized:  25,000 shares
      Issued and outstanding: 4,641 shares in 1999
           and 4,337 shares in 1998                                                     29,002              29,255
    Notes receivable for purchase of common stock                                             -               (274)
    Deferred compensation                                                                  (67)              (120)
    Accumulated deficit                                                                (24,915)            (21,360)
                                                                                ----------------   -----------------
           Total shareholders' equity                                                    4,020               7,501
                                                                                ----------------   -----------------

             Total liabilities and shareholders' equity                              $   8,502           $  12,494
                                                                                ================   =================

</TABLE>

                                      F-2
   The accompanying notes are an integral part of these financial statements.

<PAGE>


Castelle and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>

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

                                                                               Years Ended December 31
                                                               ........................................................
                                                                     1999                1998               1997
                                                               -----------------   -----------------  -----------------

<S>                                                                  <C>                 <C>                <C>
Net sales                                                            $  16,116           $  21,746          $  25,343
Cost of sales                                                            7,712              10,148             11,836
                                                               -----------------   -----------------  -----------------
        Gross profit                                                     8,404              11,598             13,507
                                                               -----------------   -----------------  -----------------

Operating expenses:
    Research and development                                             2,741               2,878              3,141
    Sales and marketing                                                  6,732               8,776              9,180
    General and administrative                                           2,139               2,443              2,296
    Amortization of intangible assets                                       40                 120                574
    Restructuring and other charges                                        402               1,124              6,224
                                                               -----------------   -----------------  -----------------
                                                                        12,054              15,341             21,415
                                                               -----------------   -----------------  -----------------

           Operating  loss                                              (3,650)             (3,743)            (7,908)

Interest income, net                                                       126                 170                288
Other income (expense), net                                               (27)                   4                 (7)
                                                               -----------------   -----------------  -----------------

Loss before provision for (benefit from)
    income taxes                                                        (3,551)             (3,569)            (7,627)
Provision for (benefit from) income taxes                                    4               3,965               (732)
                                                               -----------------   -----------------  -----------------

           Net loss                                                 $   (3,555)         $   (7,534)        $   (6,895)
                                                               =================   =================  =================

Net loss per common share - basic                                    $   (0.78)          $   (1.67)         $   (1.54)
                                                               =================   =================  =================

Shares used in per share calculation - basic                             4,579               4,507              4,470
                                                               =================   =================  =================

Net loss per common share - diluted                                  $   (0.78)          $   (1.67)         $   (1.54)
                                                               =================   =================  =================

Shares used in per share calculation - diluted                           4,579               4,507              4,470
                                                               =================   =================  =================
</TABLE>


                                       F-3
   The accompanying notes are an integral part of these financial statements.
<PAGE>


Castelle and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------


                                                                                Notes
                                                                              Receivable
                                                                                 for
                                                                              Purchase
                                                                                  of
                                                         Common Stock           Common      Deferred    Accumulated
                                                   ..........................
                                                     Shares        Amount       Stock     Compensation    Deficit       Total
                                                   ------------  ------------ ----------- ------------- ------------ ------------

<S>                <C> <C>                              <C>       <C>           <C>           <C>         <C>         <C>
Balances, December 31, 1996                             4,420     $  28,843     $  (296)      $     -     $ (6,931)   $  21,616

    Issuance of common stock through:
      exercise of stock options                            70           112           -             -            -          112
    Repayment of notes receivable                           -             -          22             -            -           22
    Net loss                                                -             -           -             -       (6,895)      (6,895)

                                                   ------------  ------------ ----------- ------------- ------------ ------------
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                -           160           -          (160)                        -
      issued to 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           -             -                         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
                                                   ============  ============ =========== ============= ============ ============
</TABLE>


                                       F-4
   The accompanying notes are an integral part of these financial statements.
<PAGE>


Castelle and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------



                                                                                 Year Ended December 31,
                                                                   ....................................................
                                                                        1999              1998              1997
                                                                   ----------------  ----------------  ----------------
Cash flows from operating activities:
<S>                                                                   <C>               <C>               <C>
    Net income  (loss)                                                $    (3,555)      $    (7,534)      $    (6,895)
    Adjustments to reconcile net income (loss) to
      net cash (used in) provided by operating activities:
        Depreciation and amortization                                         440               640               967
        Purchased in-process research and development                           -             1,124                 -
        Write-off of goodwill and other intangible assets                       -                 -             5,074
        Provision for doubtful accounts and sales returns                       -               909               220
        Provision for excess and obsolete inventory                         1,579               418               412
        Compensation expense related to grant of stock options                 53                52                 -
        Loss on disposal of fixed assets                                       81                40                 -
        Changes in assets and liabilities:
           Accounts receivable                                              1,947            (1,108)            2,289
           Inventories                                                        749              (371)           (1,357)
           Prepaid expenses and other current assets                          136               175                53
           Accounts payable                                                  (748)              772              (550)
           Accrued liabilities                                                333                95            (1,205)
           Deferred income taxes                                                0             3,934              (367)
                                                                   ----------------  ----------------  ----------------
             Net cash (used in) provided by operating activities            1,015              (854)           (1,359)
                                                                   ----------------  ----------------  ----------------

Cash flows from investing activities:
    Acquisition of property and equipment                                    (184)             (223)             (732)
    Acquisition of Object-fax product line                                      -              (910)                -
    (Increase) decrease in other assets                                        34                24               (14)
                                                                   ----------------  ----------------  ----------------
             Net cash used in investing activities                           (150)           (1,109)             (746)
                                                                   ----------------  ----------------  ----------------

Cash flows from financing activities:
    (Increase) decrease in restricted cash                                      -               142              (125)
    Proceeds from notes payable                                                 -               (87)              146
    Repayment of notes payable                                                (96)                -                (7)
    Proceeds from collection of note receivable for stock                      11                 -                22
    Proceeds from issuance of common stock and warrants, net of                10              (372)              112
    repurchases
                                                                   ----------------  ----------------  ----------------
             Net cash provided by financing activities                        (75)             (317)              148
                                                                   ----------------  ----------------  ----------------

Net (decrease) increase in cash and cash equivalents                          790            (2,280)           (1,957)

Cash and cash equivalents, beginning of period                              3,924             6,204             8,161
                                                                   ----------------  ----------------  ----------------

Cash and cash equivalents, end of period                               $    4,714        $    3,924        $    6,204
                                                                   ================  ================  ================

Supplemental information:
    Cash paid during the period for:
      Interest                                                          $      19         $      27         $       3
      Income taxes                                                      $      47         $       5         $     123
    Noncash investing and financing activities:
      Issuance of common stock for acquisition of Object-fax            $       -         $     500         $       -
        product line
</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 (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, including a range of software enhancements, and print
       servers.  The  Company's  products  consist of  FaxPress,  an  integrated
       hardware/software network faxing solution; 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 and the United
       Kingdom. 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 42% of accounts  receivable at December 31, 1999 and three
       customers accounted for 60% of accounts receivable at December 31, 1998.
                                      F-6
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

       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. Intangibles are amortized over their estimated useful lives
       (typically one to five years).

       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.

       Advertising costs
       Advertising costs, included in sales and marketing expenses, are expensed
       as incurred and were $889,100,  $1,963,000  and $2,471,000 in 1999,  1998
       and 1997, respectively.


                                     F-7
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

       Foreign currency translation
       The functional  currency of the Company's foreign  subsidiary is the U.S.
       dollar.  Foreign currency  translation  gains and losses,  which have not
       been material, are reported in the statement of operations.

       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  September  1997,  the  Company  announced  and began to  implement  a
       restructuring  plan.  The  Company  recorded a  $1,150,000  restructuring
       charge to account for the estimated costs of implementing  and completing
       the  restructuring  plan. Such charge was in addition to the write-off of
       the Ibex goodwill and related  intangibles  as discussed in Note 3. These
       costs  consist  of  $402,000  to exit  from  certain  lines of  business,
       $343,000 for employee  termination  costs and to exit from various leases
       in  connection  with the  relocation of the  Company's  European  office,
       $340,000  for  estimated  employee   termination  costs  associated  with
       reductions   in  the   workforce,   and  $65,000   for  other   estimated
       restructuring  costs.  As of December 31, 1999, the Company had completed
       most of its  restructuring  plan with actual payments made of $1,131,000.
       The remaining  balance of $19,000 will be used to complete the payment on
       vacated leases.

       In 1999, the Company also recognized a  restructuring  charge of $402,000
       for expenses  associated  with the  Company's  exit from the ObjectFax NT
       product line, including the disposition of excess inventory and assets of
       $213,000,  reductions  in personnel of $43,000,  the  write-off of excess
       office  space of $63,000 and other costs of $83,000.  As of December  31,
       1999, the Company had made actual payments of $295,000.

       Comprehensive income
       Castelle has adopted the provisions of Statement of Financial  Accounting
       Standards (SFAS) No. 130,  "Reporting  Comprehensive  Income,"  effective
       January 1, 1998. This statement  requires the disclosure of comprehensive
       income  and its  components  in a full set of  general-purpose  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 adopted SFAS No. 131,  "Disclosure  about  Segments of an
       Enterprise and Related  Information," which is effective for fiscal years
       beginning  after December 31, 1997.  SFAS No. 131 supersedes SFAS No. 14,
       "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
       changes  current  practice  under  SFAS  No.  14  by  establishing  a new
       framework on which to base segment reporting and introduces  requirements
       for interim reporting of segment information.  The Company has determined
       that it  uses  one  measurement  of  profitability  of its  business  for
       internal reporting.  The Company's international operations in 1999, 1998
       and 1997 are analyzed in Note 11.


                                     F-8
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

       New accounting pronouncements
       In June 1998,  the  Financial  Accounting  Standards  Board (FASB) issued
       Statement  of Financial  Standards  No. 133 (SFAS 133),  "Accounting  for
       Derivative   Instruments  and  Hedging   Activities,"  which  establishes
       accounting  and reporting  standards for derivative  instruments  and for
       hedging activities.  It requires that an entity recognize all derivatives
       as either assets or  liabilities  in the statement of financial  position
       and measures 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 have a  material  on the  financial  position  or
       results of operations of the Company. The Company will adopt SFAS No. 133
       as amended by SFAS 137 "Accounting for Derivative Instruments and Hedging
       Activities - Deferral of the  Effective  Date of FASB  Statement No. 133"
       for its third quarterly filing of fiscal 2000.

       In November 1999, the SEC issued Staff Accounting  Bulletin (SAB) No. 100
       "Restructuring and Impairment  Charges." The SAB discusses the accounting
       for and disclosure of certain  expenses  commonly  reported in connection
       with exit activities and business  combinations.  Management believes the
       impact  of SAB 100 will  not  have a  material  impact  on the  financial
       position or results of operations of the Company.

       On 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.  Management  believes  the  impact  of SAB 101  will not have a
       material impact on the financial position or results of operations of the
       Company.

3.       Acquisition of Ibex Technologies, Restatement and Related Charges

       In November 1996, the Company acquired Ibex Technologies,  Inc. ("Ibex"),
       a  company  which   designed,   developed  and  marketed   fax-on-demand,
       fax-gateway  and fax broadcast  applications.  The Company issued 790,617
       shares of its common stock in exchange for all of the outstanding  common
       stock of Ibex and accounted for the transaction as a purchase.

       The  total  purchase  price  of  Ibex,  consisting  of  stock  valued  at
       $5,534,000  (based on the closing  price at the closing date) plus direct
       costs of  $1,430,000,  was  allocated to the net tangible and  identified
       intangible assets of Ibex, including in-process research and development,
       in the amounts of $142,000, $2,739,000, and $1,079,000, respectively. The
       identified  intangible assets,  consisting primarily of the fair value of
       current  technologies,  customer lists, and the workforce were originally
       assigned a five-year life. The excess of the purchase price over the fair
       value  of the  assets  acquired  was  approximately  $3,004,000  and  was
       originally amortized on a straight-line basis over 5 years. 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.
       Accordingly,  the in-process  research and development was written off at
       the date of the acquisition and was included with restructuring and other
       charges on the accompanying statement of operations.

       In 1997 Ibex suffered  significant  losses on its current products due to
       increasing  competition  from Internet based  applications and determined
       that its primary product under development was not economically feasible.
       As a result,  management  determined  that the value assigned to goodwill
       and other  intangible  assets was not  recoverable  and such  assets were
       written off. Such 1997  charges,  included as part of  restructuring  and
       other  charges,  was  $5,073,000,  which  amount was net of  amortization
       recorded in 1997 of $574,000.

                                       F-9
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------
4.     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  Tolvusamskepti  HF on April 9, 1999.  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.


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

       Inventories:

                                                                                  December 31,
                                                                        ..................................
                                                                             1999              1998
                                                                        ----------------  ----------------

<S>                                                                             <C>             <C>
              Raw material                                                      $  136          $  1,282
              Work in process                                                      300               130
              Finished goods                                                       975             2,327
                                                                        ----------------  ----------------

                                                                              $  1,411          $  3,739
                                                                        ================  ================
</TABLE>

                                     F-10
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
       Property and equipment:

                                                                                  December 31,
                                                                        ..................................
                                                                             1999              1998
                                                                        ----------------  ----------------

<S>                                                                            <C>               <C>
              Production, test and demonstration equipment                     $   281           $   495
              Computer equipment                                                 1,099             1,078
              Office equipment                                                      67                88
              Leasehold improvements                                               118               107
                                                                        ----------------  ----------------
                                                                                 1,565             1,768
              Less accumulated depreciation and amortization                    (1,178)           (1,102)
                                                                        ----------------  ----------------

                                                                               $   387           $   666
                                                                        ================  ================

</TABLE>

The Company  recorded  depreciation  and  amortization  related to property  and
equipment of $382,000 in 1999, $491,000 in 1998 and $340,000 in 1997
<TABLE>
<CAPTION>

       Accrued liabilities:

                                                                                  December 31,
                                                                        ..................................
                                                                             1999              1998
                                                                        ----------------  ----------------

<S>                                                                             <C>             <C>
              Accrued compensation                                              $  990          $  1,093
              Accrued sales and marketing                                          368               499
              Accrued professional fees                                            404                95
              Deferred revenue                                                     451               321
              Accrued acquisition costs                                              0               125
              Accrued taxes                                                        225               217
              Other                                                                610               365
                                                                        ----------------  ----------------

                                                                              $  3,048          $  2,715
                                                                        ================  ================


</TABLE>

6.     Commitments

       The  Company  leases  facilities  under  noncancelable  operating  leases
       expiring through 2001. The Company is responsible for certain maintenance
       costs,  taxes and insurance  under the leases.  Future  minimum  payments
       under noncancelable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>

<S>           <C>                                                             <C>
              2000                                                            $   381
              2001                                                                 22
              2002                                                                  7
                                                                        ---------------
                                                                              $   410
                                                                        ---------------

</TABLE>
       Rent expense,  including the facility  lease and  equipment  rental,  was
       $466,000, $584,000, and $332,000 for 1999, 1998 and 1997, respectively.
                                     F-11
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

7.     Bank Borrowings

       The Company has a $3.0 million  secured  revolving  line of credit with a
       bank,  which  expires in March  2000,  pursuant  to which the Company may
       borrow 100%  against  pledges of cash at the bank's  prime rate (8.50% at
       December 31, 1999).  Borrowings  under this line of credit  agreement are
       collateralized  by all of the assets of the  Company.  Under the terms of
       the loan  agreement,  the Company is  restricted  from  loaning  money or
       assets or  entering  into any  mergers  or  acquisitions  where the total
       consideration  exceeds  $15,000,000,  without  the  bank's  consent.  The
       Company  was in  compliance  with  the  terms  of the  agreement,  and at
       December 31, 1999 had no borrowings under the line of credit.


8.     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
       are subject to interest of 10.11%,  are repayable by December  2000,  and
       are partially  collateralized  by a  certificate  of deposit of $125,000,
       which is included as restricted cash on the accompanying balance sheet.

       At December 31, 1999,  future  minimum  payments are $98,000,  due in the
       year 2000.

9.     Common Stock

       In connection  with the sale of common stock to two  executives  (152,815
       shares at $0.20 per share in October 1994 and 52,500  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 52,500 shares
       from the executives at $5.00 per share.

                                     F-12
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------
       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, 1999, 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>       <C>
      Balances, January 1, 1997                      113              7       $8.00               $56       $8.00
      Options granted                                 (6)             6       $6.12               $37       $6.12
      Options cancelled                                3             (3)   $6.12-$8.00           ($19)      $7.00
                                             -------------  -------------                 -------------  -------------

      Balances, December 31, 1997                    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
                                             =============  =============                 =============  =============
</TABLE>

       At December 31, 1999 and 1998,  24,000 and 14,000 options,  respectively,
       were  exercisable at an aggregate  exercise price of $79,000 and $79,000,
       respectively.

       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, 1999, 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>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
       Option activity under the 1988 Plan was as follows (in thousands):

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

<S>                                           <C>            <C>           <C>             <C>            <C>
      Balances, January 1, 1997                      290            387    $0.20-$7.75       $  1,496       $3.87
      Authorized                                     982
      Options granted                             (1,184)         1,184    $4.50-$5.75          5,476       $4.62
      Options cancelled                              112           (112)   $0.20-$6.88           (567)      $5.09
      Options exercised                                -            (70)   $0.20-$5.00           (112)      $1.59
                                             -------------  -------------                 -------------  -------------

      Balances, December 31, 1997                    200          1,389    $0.20-$7.75       $  6,293       $4.53
      Options granted                             (1,466)         1,466    $1.00-$3.50          2,426       $1.65
      Options cancelled                            1,448         (1,448)   $0.20-$7.75         (6,494)      $4.47
      Options exercised                                 -           (40)   $0.20-$1.55            (12)      $0.29
                                             -------------  -------------                 -------------  -------------

      Balances, December 31, 1998                    182          1,367    $0.20-$7.75       $  2,210       $1.63
      Options granted                               (657)           657    $0.88-$1.03            604       $0.92
      Options cancelled                              698           (698)   $0.20-$6.88         (1,094)      $1.57
      Options exercised                                 -           (17)   $0.20-$1.56            (11)      $0.65
                                             -------------  -------------                 -------------  -------------

      Balances, December 31, 1999                    223          1,309    $0.20-$1.56         $ 1,710      $1.13
                                             =============  =============                 =============  =============
</TABLE>

       At December 31, 1999 and 1998,  644,000 and 508,000 options  outstanding,
       respectively, were exercisable at an aggregate exercise price of $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 941,845  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 (6) months after the effective date of the repricing.

       In  addition to the Plan,  Castelle  granted  options to purchase  common
       stock to  consultants  under  special  arrangements.  These  options were
       valued  consistent with the provisions of SFAS No. 123 and as a result, a
       compensation  expense of $52,000  was  recognized  in 1998 and $53,000 in
       1999. These options have an exercise price ranging from $1.56 to $1.63 in
       1998 and $0.94 to $1.63 in 1999.  There were 152,000 and 160,000 of these
       options outstanding at December 31, 1998 and 1999 respectively,  of which
       27,000 were exercisable at an aggregate exercise price of $44,000 in 1998
       and 77,000 were exercisable at an aggregate exercise price of $117,000 in
       1999.

       The Company has adopted the  disclosure-only  provisions  of Statement of
       Financial Accounting Standards No. 123 ("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.

                                     F-14
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

       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 1999,  1998 and 1997 would have been reduced
       to the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>

                                                                      1999              1998              1997
                                                                 ---------------   ----------------  ----------------

<S>                                                                  <C>                <C>               <C>
       Net income - as reported                                      $  (3,555)         $  (7,534)        $  (6,895)
       Net income - pro forma                                           (3,834)            (8,690)           (8,093)
       Net income per share - basic - as reported                        (0.78)             (1.67)            (1.54)
       Net income per share - basic - pro forma                          (0.84)             (1.93)            (1.81)
       Net income per share - diluted - as reported                      (0.78)             (1.67)            (1.54)
       Net income per share - diluted - pro forma                        (0.84)             (1.93)            (1.81)


       The fair value of each  option  grant is  estimated  on the date of grant
       using the  Black-Scholes  model with the following  assumptions for 1999,
       1998 and 1997:

                                                                      1999              1998              1997
                                                                 ---------------   ----------------  ----------------

       Risk-free interest rate                                    5.08%-5.98%            5.20%       4.88%-5.30%
       Expected life                                               5.62 years         4.4 years         5.6 years
       Expected dividends                                              -                  -                 -
       Volatility                                                     143%               79%              100%

</TABLE>

       The weighted average fair value of options granted in 1999, 1998 and 1997
       was $0.85, $1.05 and $3.78 per share, respectively.

                                     F-15
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

       The options  outstanding  and currently  exercisable by exercise price at
       December  31, 1999 are as follows  (in  thousands,  except  years and per
       share data):
<TABLE>
<CAPTION>

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

              <S>                      <C>          <C>             <C>                     <C>        <C>
               $0.00-$0.20                18         1.3             $0.20                    18        $0.20
               $0.21-$0.50                20         9.3             $0.34                     7        $0.34
               $0.51-$0.75                 2         8.6             $0.56                     1        $0.56
               $0.76-$1.00               793         6.0             $0.93                   337        $0.92
               $1.01-$1.50               117         6.2             $1.16                    26        $1.25
               $1.51-$2.00               541         5.3             $1.56                   339        $1.57
               $2.01-$3.00                 9         6.4             $2.37                     8        $2.37
               $3.01-$8.00                 8         0.4             $7.06                     8        $7.06
                              ----------------                                    ----------------

                                       1,508         5.8            $1.2002                  744       $1.2855
                              ================                                    ================

</TABLE>

       Warrants
       The Company has outstanding  fully  exercisable  warrants at December 31,
       1999 as follows (in thousands except per share data):
<TABLE>
<CAPTION>

                            Expiration          Stock Under         Exercise          Number of
                               Date               Warrant            Price             Shares
                        --------------------   ---------------   ---------------   ----------------

                       <S>                        <C>               <C>                     <C>
                        December 2000              Common             $   8.40                100
                        March 2000                 Common             $   1.00                133
</TABLE>

       The  warrant  holders  have  certain  demand and  registration  rights as
       specified in the warrant  agreement.  No warrants were  exercised  during
       1999, 1998 and 1997.

       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
       52,500 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>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

9.     Income Taxes

       The Company's  provision for (benefit  from) income taxes consists of the
       following (in thousands):
<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                              ....................................................
                                                                   1999              1998              1997
                                                              ----------------  ----------------  ----------------
              Current:
                <S>                                                 <C>               <C>               <C>
                 Federal                                             $     -           $     -           $     -
                 State                                                     4                 -                 -
                 Foreign                                                   -                 1                 -
                                                              ----------------  ----------------  ----------------
                                                                           4                 1                 -
                                                              ----------------  ----------------  ----------------
              Deferred:
                 Federal                                             $     -             3,495              (732)
                 State                                                     -               469                 -
                                                              ----------------  ----------------  ----------------
                                                                           -             3,964              (732)
                                                              ----------------  ----------------  ----------------

                                                                     $     4          $  3,965          $   (732)
                                                              ================  ================  ================

</TABLE>

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

                                                                     1999              1998              1997
                                                                ----------------  ----------------  ----------------

<S>                                                                   <C>               <C>              <C>
           Federal tax (benefit) at statutory rate                    $ (1,135)         $   (754)        $  (2,975)
           Permanent difference due to
               Non-deductible expenses                                      19                21             1,586
           State taxes (benefit), net of federal benefit                   (98)             (173)              (91)
           Change in valuation allowance                                 1,332             5,001               834
           General business credits                                       (114)             (131)              (86)
           Other                                                             -                 1                 -
                                                                ----------------  ----------------  ----------------

                                                                        $    4          $  3,965          $   (732)
                                                                ================  ================  ================

</TABLE>
                                      F-17
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

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

                                                                                     December 31,
                                                                          ...................................
                                                                               1999               1998
                                                                          ----------------  -----------------

<S>                                                                              <C>                <C>
               Inventory allowances and adjustments                              $   190            $   243
               Accounts receivable allowances                                        105                287
               Other liabilities and allowances                                      788              1,097
               Net operating loss carryforwards                                    4,987              3,127
               Tax credit carryforwards                                              796                785
               Depreciation and amortization                                         706                296
               Valuation allowance                                                (7,572)            (5,835)
                                                                          ----------------  -----------------

                    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, 1999, the Company had net operating loss carryforwards of
       approximately  $13,900,000  and  $4,300,000  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 1999,  1998 and 1997,  the Company made no
       contributions to the plan.

                                      F-18
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------


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,
                                                                ...................................................
                                                                     1999              1998              1997
                                                                ----------------  ----------------  ---------------

<S>                                                                  <C>               <C>              <C>
             North America                                           $  11,199         $  13,442        $  13,443
             Europe                                                      1,605             2,148            3,000
             Pacific Rim                                                 3,312             6,156            8,900
                                                                ----------------  ----------------  ---------------

                                                                     $  16,116         $  21,746        $  25,343
                                                                ================  ================  ===============

</TABLE>

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

                                                            Years Ended December 31,
                          ..............................................................................................
                                      1999                             1998                            1997
           Customer          Amount        Percentage         Amount        Percentage         Amount       Percentage
       -----------------  -------------- ---------------  --------------- ---------------  --------------- -------------

<S>                           <C>             <C>              <C>             <C>              <C>            <C>
              A               $  2,948        18%              $  5,596        26%              $  8,147       32%
              B                  1,998        12%                 3,752        17%                 3,629       14%
              C                      -         -%                     -         -%                 2,604       10%


</TABLE>
                                      F-19
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
--------------------------------------------------------------------------------

12.    Computation of Net Loss per Share

       Basic and diluted  earnings per share are calculated as follows for 1999,
       1998 and 1997 (in thousands except per share amounts):
<TABLE>
<CAPTION>

                                                                      1999              1998              1997
                                                                 ---------------   ----------------  ----------------
       Basic:
<S>                                                                      <C>                <C>               <C>
          Weighted average shares                                        4,579              4,507             4,470
                                                                 ===============   ================  ================

          Net loss                                                   $  (3,555)         $  (7,534)        $  (6,895)
                                                                 ===============   ================  ================

          Net loss per share                                         $   (0.78)         $   (1.67)        $   (1.54)
                                                                 ===============   ================  ================

       Diluted:
          Weighted average shares                                        4,579              4,507             4,470
          Common equivalent shares from stock options                        -                  -                 -
                                                                 ---------------   ----------------  ----------------

          Shares used in per share calculation                           4,579              4,507             4,470
                                                                 ===============   ================  ================

          Net loss                                                   $  (3,555)         $  (7,534)        $  (6,895)
                                                                 ===============   ================  ================

          Net loss per share                                         $   (0.78)         $   (1.67)        $   (1.54)
                                                                 ===============   ================  ================
</TABLE>

       The  calculation of diluted shares  outstanding  for 1999,  1998 and 1997
       excludes 1,508,000,  1,540,000 and 1,399,000 stock options, respectively,
       as their effect was antidilutive in the period.

                                      F-20
<PAGE>

       Report of Independent Accountants on Financial Statement Schedules





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 4, 2000  appearing on page F-1 of this
Form 10-K also included an audit of the financial  statement schedules listed in
Item  14(a)(2) of this Form 10-K.  In our  opinion,  these  financial  statement
schedules  present fairly, in all material  respects,  the information set forth
therein  when  read in  conjunction  with  the  related  consolidated  financial
statements.









San Jose, California
February 4, 2000


                                      F-21

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

                                                        F-22
                                                                            Additional
                                                          Balance at        Charged to                          Balance at
                                                           Beginning         Costs and                            End of
                                                           of Period         Expenses         Deductions          Period
                                                        ----------------  ----------------  ----------------  ----------------

Year Ended December 31, 1997:
Deducted from asset accounts:
<S>                                                            <C>               <C>               <C>               <C>
    Allowance for doubtful accounts                            $   467           $   107           $    84           $   490
    Allowance for excess and obsolete inventory                $   807           $   301           $   713           $   395

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

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

</TABLE>
                                      F-22
<PAGE>
                                                                     Exhibit 3.2


                           AMENDED AND RESTATED BYLAWS

                                       OF

                                    CASTELLE

                           (A CALIFORNIA CORPORATION)

                        As amended through April 14, 1999







<PAGE>
<TABLE>
<CAPTION>
                                TABLE OF CONTENTS

                                                                                                               PAGE

<S>                                                                                                              <C>
Article I         Offices.........................................................................................1

Section 1.        Principal Office................................................................................1

Section 2.        Other Offices...................................................................................1

Article II        Corporate Seal..................................................................................1

Section 3.        Corporate Seal..................................................................................1

Article III       Shareholders'Meetings And Voting Rights.........................................................1

Section 4.        Place Of Meetings...............................................................................1

Section 5.        Annual Meeting..................................................................................1

Section 6.        Postponement Of Annual Meeting..................................................................2

Section 7.        Special Meetings................................................................................2

Section 8.        Notice Of Meetings..............................................................................2

Section 9.        Manner Of Giving Notice.........................................................................3

Section 10.       Quorum And Transaction Of Business..............................................................4

Section 11.       Adjournment and Notice of Adjourned Meetings....................................................4

Section 12.       Waiver Of Notice, Consent To Meeting Or Approval Or Minutes.....................................4

Section 13.       Action By Written Consent Without A Meeting.....................................................5

Section 14.       Voting..........................................................................................6

Section 15.       Persons Entitled To Vote Or Consent.............................................................6

Section 16.       Proxies.........................................................................................7

Section 17.       Inspectors Of Election..........................................................................7

Article IV        Board Of Directors..............................................................................8

Section 18.       Powers..........................................................................................8

Section 19.       Number Of Directors.............................................................................8

Section 20.       Election Of Directors, Term, Qualifications.....................................................8

Section 21.       Resignations....................................................................................8

Section 22.       Removal.........................................................................................9

Section 23.       Vacancies.......................................................................................9

Section 24.       Regular Meetings................................................................................9

Section 25.       Participation By Telephone.....................................................................10

Section 26.       Special Meetings...............................................................................10

                                       i
<PAGE>

                                                   TABLE OF CONTENTS
                                                      (CONTINUED)
                                                                                                               PAGE

Section 27.       Notice Of Meetings.............................................................................10

Section 28.       Place Of Meetings..............................................................................10

Section 29.       Action By Written Consent Without A Meeting....................................................10

Section 30.       Quorum And Transaction Of Business.............................................................10

Section 31.       Adjournment....................................................................................10

Section 32.       Organization...................................................................................11

Section 33.       Compensation...................................................................................11

Section 34.       Committees.....................................................................................11

Article V         Officers.......................................................................................12

Section 35.       Officers.......................................................................................12

Section 36.       Appointment....................................................................................12

Section 37.       Inability To Act...............................................................................12

Section 38.       Resignations...................................................................................12

Section 39.       Removal........................................................................................12

Section 40.       Vacancies......................................................................................12

Section 41.       Chairman Of The Board..........................................................................12

Section 42.       President......................................................................................13

Section 43.       Vice Presidents................................................................................13

Section 44.       Secretary......................................................................................13

Section 45.       Chief Financial Officer........................................................................14

Section 46.       Compensation...................................................................................15

Article VI        Contracts, Loans, Bank Accounts, Checks And Drafts.............................................15

Section 47.       Execution Of Contracts And Other Instruments...................................................15

Section 48.       Loans..........................................................................................15

Section 49.       Bank Accounts..................................................................................15

Section 50.       Checks, Drafts, Etc............................................................................15

Article VII       Certificates For Shares And Their Transfer.....................................................16

Section 51.       Certificate For Shares.........................................................................16

Section 52.       Transfer On The Books..........................................................................16

Section 53.       Lost, Destroyed And Stolen Certificates........................................................16

                                       ii
<PAGE>
                               TABLE OF CONTENTS
                                   (CONTINUED)
                                                                                                               PAGE

Section 54.       Issuance, Transfer And Registration Of Shares..................................................17

Article VIII      Inspection Of Corporate Records................................................................17

Section 55.       Inspection By Directors........................................................................17

Section 56.       Inspection By Shareholders.....................................................................17

Section 57.       Written Form...................................................................................18

Article IX        Miscellaneous..................................................................................18

Section 58.       Fiscal Year....................................................................................18

Section 59.       Annual Report..................................................................................18

Section 60.       Record Date....................................................................................18

Section 61.       Bylaw Amendments...............................................................................19

Section 62.       Construction And Definition....................................................................19

Article X         Indemnification................................................................................19

Section 63.       Indemnification Of Directors, Officers, Employees And Other Agents.............................19

Article XI        Loans Of Officers And Others...................................................................23

Section 64.       Certain Corporate Loans And Guaranties.........................................................23

</TABLE>
                                      iii

<PAGE>


                           AMENDED AND RESTATED BYLAWS

                                       OF

                                    CASTELLE

                           (A CALIFORNIA CORPORATION)

                      As amended through April 14, 1999

                                    ARTICLE I
                                     Offices

Section 1. Principal Office.  The principal  executive office of the corporation
shall be located at such place as the Board of  Directors  may from time to time
authorize.  If the principal executive office is located outside this state, and
the  corporation  has one or more business  offices in this state,  the Board of
Directors  shall fix and designate a principal  business  office in the State of
California.

Section 2. Other Offices. Additional offices of the corporation shall be located
at such place or places, within or outside the State of California, as the Board
of Directors may from time to time authorize.

                                   ARTICLE II
                                 Corporate Seal

Section 3.  Corporate  Seal. If the Board of Directors  adopts a corporate  seal
such seal shall have inscribed thereon the name of the corporation and the state
and date of its  incorporation.  If and when a seal is  adopted  by the Board of
Directors, such seal may be engraved, lithographed,  printed, stamped, impressed
upon, or affixed to any contract,  conveyance,  certificate for shares, or other
instrument executed by the corporation.

                                   ARTICLE III
                    Shareholders' Meetings And Voting Rights

Section 4. Place Of  Meetings.  Meetings  of  shareholders  shall be held at the
principal executive office of the corporation,  or at any other place, within or
outside  the  State of  California,  which  may be fixed  either by the Board of
Directors  or by the  written  consent of all  persons  entitled to vote at such
meeting,  given either  before or after the meeting and filed with the Secretary
of the Corporation.

Section 5.  Annual  Meeting.  The  annual  meeting  of the  shareholders  of the
corporation  shall be held on any date and time  which  may from time to time be
designated by the Board of Directors. At such annual meeting, directors shall be
elected and any other business may be transacted  which may properly come before
the meeting.

                                       1.
<PAGE>

Section  6.  Postponement  Of Annual  Meeting.  The Board of  Directors  and the
President  shall each have  authority to hold at an earlier date and/or time, or
to postpone to a later date and/or time, the annual meeting of shareholders.

Section 7. Special Meetings.

     (a) Special meetings of the shareholders,  for any purpose or purposes, may
be called by the Board of Directors, the Chairman of the Board of Directors, the
President,  or the holders of shares  entitled to cast not less than ten percent
(10%) of the votes at the meeting.

     (b) Upon  written  request to the Chairman of the Board of  Directors,  the
President,  any vice president or the Secretary of the corporation by any person
or  persons  (other  than the  Board of  Directors)  entitled  to call a special
meeting of the  shareholders,  such officer  forthwith  shall cause notice to be
given to the  shareholders  entitled to vote,  that a meeting  will be held at a
time requested by the person or persons calling the meeting, such time to be not
less than  thirty-five  (35) nor more than sixty (60) days after receipt of such
request.  If such notice is not given within  twenty (20) days after  receipt of
such request,  the person or persons calling the meeting may give notice thereof
in the manner  provided by law or in these  bylaws.  Nothing  contained  in this
Section 7 shall be construed as limiting,  fixing or affecting  the time or date
when a meeting of shareholders called by action of the Board of Directors may be
held.

Section 8. Notice Of Meetings.  Except as  otherwise  may be required by law and
subject to subsection 7(b) above, written notice of each meeting of shareholders
shall be given to each shareholder entitled to vote at that meeting (see Section
15 below),  by the Secretary,  assistant  secretary or other person charged with
that duty, not less than ten (10) (or, if sent by third-class mail, thirty (30))
nor more than sixty (60) days before such meeting.

         Notice of any meeting of shareholders  shall state the date,  place and
hour of the meeting and,

     (a) in the case of a special meeting, the general nature of the business to
be transacted, and no other business may be transacted at such meeting;

     (b) in the case of an annual  meeting,  the general nature of matters which
the Board of Directors,  at the time the notice is given, intends to present for
action by the shareholders;

     (c) in the case of any meeting at which  directors  are to be elected,  the
names of the  nominees  intended  at the time of the notice to be  presented  by
management for election; and

     (d) in the  case of any  meeting,  if  action  is to be taken on any of the
following proposals, the general nature of such proposal:

     (1) a proposal to approve a transaction within the provisions of California
     Corporations Code, Section 310 (relating to certain transactions in which a
     director has a direct or indirect financial interest);

                                      2.
<PAGE>


     (2) a proposal to approve a transaction within the provisions of California
     Corporations  Code,  Section  902  (relating  to amending  the  Articles of
     Incorporation of the corporation);

     (3) a proposal to approve a transaction within the provisions of California
     Corporations Code, Sections 181 and 1201 (relating to reorganization);

     (4) a proposal to approve a transaction within the provisions of California
     Corporations Code, Section 1900 (winding up and dissolution);

     (5) a proposal to approve a plan of  distribution  within the provisions of
     California  Corporations  Code,  Section 2007  (relating  to certain  plans
     providing for distribution not in accordance with the liquidation rights of
     preferred shares, if any).

         At a special meeting, notice of which has been given in accordance with
this  Section,  action may not be taken with  respect to  business,  the general
nature of which has not been stated in such notice. At an annual meeting, action
may be taken with  respect  to  business  stated in the notice of such  meeting,
given in accordance  with this Section,  and,  subject to subsection 8(d) above,
with respect to any other business as may properly come before the meeting.

Section 9. Manner Of Giving Notice.  Notice of any meeting of shareholders shall
be given either  personally or by first-class  mail, or, if the  corporation has
outstanding shares held of record by 500 or more persons (determined as provided
in  California  Corporations  Code  Section  605) on the  record  date  for such
meeting,  third-class  mail,  or  telegraphic  or other  written  communication,
addressed to the shareholder at the address of that shareholder appearing on the
books of the  corporation or given by the shareholder to the corporation for the
purpose of notice. If no such address appears on the  corporation's  books or is
given,  notice shall be deemed to have been given if sent to that shareholder by
first-class   mail  or  telegraphic  or  other  written   communication  to  the
corporation's  principal  executive  office,  or if published at least once in a
newspaper  of general  circulation  in the county  where that office is located.
Notice shall be deemed to have been given at the time when delivered  personally
or  deposited  in the  mail  or sent by  telegram  or  other  means  of  written
communication.

         If any  notice  addressed  to a  shareholder  at the  address  of  that
shareholder  appearing  on the  books  of the  corporation  is  returned  to the
corporation  by the United  States  Postal  Service  marked to indicate that the
United States Postal Service is unable to deliver the notice to the  shareholder
at that  address,  all  future  notices  shall be deemed to have been duly given
without  further  mailing if these  shall be  available  to the  shareholder  on
written  demand by the  shareholder  at the  principal  executive  office of the
corporation for a period of one year from the date of the giving of the notice.

         An affidavit of mailing of any notice or report in accordance  with the
provisions of this Section 9, executed by the Secretary,  Assistant Secretary or
any transfer agent, shall be prima facie evidence of the giving of the notice.

                                      3.
<PAGE>

Section 10. Quorum And Transaction Of Business.

     (a) At any meeting of the  shareholders,  a majority of the shares entitled
to vote,  represented  in person or by proxy,  shall  constitute a quorum.  If a
quorum is present, the affirmative vote of the majority of shares represented at
the  meeting  and  entitled  to  vote  on any  matter  shall  be the  act of the
shareholders,  unless  the vote of a greater  number or  voting  by  classes  is
required by law or by the Articles of  Incorporation,  and except as provided in
subsection (b) below.

     (b) The  shareholders  present  at a duly  called  or held  meeting  of the
shareholders  at which a quorum is present may  continue  to do  business  until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum,  provided  that any action  taken  (other  than  adjournment)  is
approved by at least a majority of the shares required to constitute a quorum.

     (c) In the absence of a quorum,  no business other than  adjournment may be
transacted, except as described in subsection (b) above.

Section  11.  Adjournment  and  Notice of  Adjourned  Meetings.  Any  meeting of
shareholders  may be  adjourned  from time to time,  whether  or not a quorum is
present,  by the  affirmative  vote of a majority of shares  represented at such
meeting either in person or by proxy and entitled to vote at such meeting.

         In the event any meeting is  adjourned,  it shall not be  necessary  to
give notice of the time and place of such adjourned meeting pursuant to Sections
8 and 9 of these  bylaws;  provided  that if any of the  following  three events
occur, such notice must be given:

     (a)  announcement of the adjourned  meeting's time and place is not made at
the original meeting which it continues or

     (b) such meeting is adjourned for more than  forty-five  (45) days from the
date set for the original meeting or

     (c) a new record date is fixed for the adjourned meeting.

         At the adjourned  meeting,  the  corporation  may transact any business
which might have been transacted at the original meeting.

Section 12. Waiver Of Notice, Consent To Meeting Or Approval Or Minutes.

     (a) Subject to subsection  (b) of this  Section,  the  transactions  of any
meeting of shareholders, however called and noticed, and wherever held, shall be
as valid as though made at a meeting duly held after regular call and notice, if
a quorum is present either in person or by proxy, and if, either before or after
the meeting,  each of the persons  entitled to vote but not present in person or
by proxy signs a written waiver of notice or a consent to holding of the meeting
or an approval of the minutes thereof.

                                      4.
<PAGE>

     (b) A waiver of notice,  consent to the holding of a meeting or approval of
the minutes thereof need not specify the business to be transacted or transacted
at nor the  purpose  of the  meeting;  provided  that in the  case of  proposals
described in subsection (d) of Section 8 of these bylaws,  the general nature of
such proposals must be described in any such waiver of notice and such proposals
can only be  approved  by waiver of  notice,  not by  consent  to holding of the
meeting or approval of the minutes.

     (c) All waivers,  consents and approvals  shall be filed with the corporate
records or made a part of the minutes of the meeting.

     (d) A person's attendance at a meeting shall constitute waiver of notice of
and presence at such meeting,  except when such person  objects at the beginning
of the  meeting  to  transaction  of any  business  because  the  meeting is not
lawfully  called or convened  and except that  attendance  at a meeting is not a
waiver of any right to object to the consideration of matters which are required
by law or these bylaws to be in such notice  (including those matters  described
in subsection (d) of Section 8 of these bylaws), but are not so included if such
person expressly  objects to consideration of such matter or matters at any time
during the meeting.

Section 13. Action By Written Consent Without A Meeting. Any action which may be
taken at any meeting of shareholders  may be taken without a meeting and without
prior notice if written consents setting forth the action so taken are signed by
the holders of the outstanding shares having not less than the minimum number of
votes that would be  necessary  to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted.

         Directors  may not be elected by written  consent  except by  unanimous
written  consent of all shares  entitled to vote for the election of  directors;
provided  that any  vacancy  on the  Board of  Directors  (other  than a vacancy
created by removal)  which has not been filled by the board of directors  may be
filled by the written  consent of a majority of outstanding  shares  entitled to
vote for the election of directors.

         Any written consent may be revoked pursuant to California  Corporations
Code Section  603(c)  prior to the time that  written  consents of the number of
shares  required  to  authorize  the  proposed  action  have been filed with the
Secretary.  Such  revocation  must be in writing and will be effective  upon its
receipt by the Secretary.

         If the  consents  of all  shareholders  entitled  to vote have not been
solicited  in  writing,  and if  the  unanimous  written  consent  of  all  such
shareholders  shall not have been  received,  the  Secretary  shall give  prompt
notice of any corporate action approved by the shareholders without a meeting to
those  shareholders  entitled  to vote on such  matters  who have not  consented
thereto  in  writing.  This  notice  shall be given in the manner  specified  in
Section 9 of these bylaws.  In the case of approval of (i) a transaction  within
the provisions of California Corporations Code, Section 310 (relating to certain
transactions in which a director has an interest), (ii) a transaction within the
provisions  of   California   Corporations   Code,   Section  317  (relating  to
indemnification  of agents of the corporation),  (iii) a transaction  within the
provisions of California  Corporations Code,  Sections 181 and 1201 (relating to
reorganization),  and  (iv) a plan of  distribution  within  the  provisions  of
California  Corporations Code, Section 2007 (relating to certain plans providing
for  distribution  not in accordance  with the  liquidation  rights of preferred
shares,  if any),  the notice  shall be given at least ten (10) days  before the
consummation of any action authorized by that approval.

                                      5.
<PAGE>


Section  14.  Voting.  The  shareholders  entitled  to  vote at any  meeting  of
shareholders shall be determined in accordance with the provisions of Section 15
of these  bylaws,  subject to the  provisions of Sections 702 through 704 of the
California  Corporations Code (relating to voting shares held by a fiduciary, in
the name of a  corporation,  or in joint  ownership).  Voting at any  meeting of
shareholders  need not be by  ballot;  provided,  however,  that  elections  for
directors  must be by ballot if  balloting is demanded by a  shareholder  at the
meeting and before the voting begins.

         Every person entitled to vote at an election for directors may cumulate
the votes to which such person is entitled,  i.e.,  such person may cast a total
number of votes equal to the number of directors to be elected multiplied by the
number of votes to which such person's  shares are  entitled,  and may cast said
total number of votes for one or more  candidates  in such  proportions  as such
person thinks fit;  provided,  however,  no shareholder  shall be entitled to so
cumulate  such  shareholder's   votes  unless  the  candidates  for  which  such
shareholder  is voting have been placed in nomination  prior to the voting and a
shareholder has given notice at the meeting,  prior to the vote, of an intention
to cumulate  votes. In any election of directors,  the candidates  receiving the
highest  number of votes,  up to the  number of  directors  to be  elected,  are
elected.

         Except as may be otherwise provided in the Articles of Incorporation or
by law, and subject to the  foregoing  provisions  regarding  the  cumulation of
votes, each shareholder shall be entitled to one vote for each share held.

         Any shareholder may vote part of such shareholder's  shares in favor of
a proposal and refrain from voting the remaining shares or vote them against the
proposal,  other than  elections  to office,  but, if the  shareholder  fails to
specify the number of shares such shareholder is voting  affirmatively,  it will
be conclusively  presumed that the shareholder's  approving vote is with respect
to all shares such shareholder is entitled to vote.

         No  shareholder  approval,  other  than  unanimous  approval  of  those
entitled to vote, will be valid as to proposals  described in subsection 8(d) of
these bylaws unless the general nature of such business was stated in the notice
of meeting or in any written waiver of notice.

Section 15. Persons Entitled To Vote Or Consent.  The Board of Directors may fix
a record  date  pursuant  to  Section  60 of these  bylaws  to  determine  which
shareholders  are  entitled  to notice of and to vote at a meeting or consent to
corporate  actions,  as provided in  Sections  13 and 14 of these  bylaws.  Only
persons  in whose  name  shares  otherwise  entitled  to vote stand on the stock
records of the corporation on such date shall be entitled to vote or consent.

         If no record date is fixed:

     (a) The record date for determining  shareholders  entitled to notice of or
to vote at a meeting of  shareholders  shall be at the close of  business on the
business day next preceding the day notice is given or, if notice is waived,  at
the close of business on the  business day next  preceding  the day on which the
meeting is held;

                                     6.
<PAGE>

     (b) The record date for determining  shareholders  entitled to give consent
to corporate  action in writing  without a meeting,  when no prior action by the
Board of Directors  has been taken,  shall be the day on which the first written
consent is given;

     (c) The record  date for  determining  shareholders  for any other  purpose
shall be at the close of  business  on the day on which  the Board of  Directors
adopts the resolution  relating thereto, or the sixtieth (60th) day prior to the
date of such other action, whichever is later.

         A  determination  of shareholders of record entitled to notice of or to
vote at a meeting of shareholders  shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting;
provided,  however,  that the Board of Directors  shall fix a new record date if
the meeting is adjourned  for more than  forty-five  (45) days from the date set
for the original meeting.

         Shares of the corporation  held by its subsidiary or  subsidiaries  (as
defined in California  Corporations  Code,  Section  189(b)) are not entitled to
vote in any matter.

Section 16. Proxies. Every person entitled to vote or execute consents may do so
either in person or by one or more agents  authorized  to act by a written proxy
executed by the person or such person's duly authorized agent and filed with the
Secretary of the  corporation;  provided that no such proxy shall be valid after
the  expiration  of eleven  (11) months  from the date of its  execution  unless
otherwise   provided  in  the  proxy.  The  manner  of  execution,   suspension,
revocation, exercise and effect of proxies is governed by law.

Section 17.  Inspectors  Of Election.  Before any meeting of  shareholders,  the
Board of Directors may appoint any persons,  other than nominees for office,  to
act  as  inspectors  of  election  at the  meeting  or  its  adjournment.  If no
inspectors of election are so appointed, the chairman of the meeting may, and on
the  request  of  any  shareholder  or  a  shareholder's  proxy  shall,  appoint
inspectors of election at the meeting.  The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request of
one or more  shareholders  or proxies,  the  majority of shares  represented  in
person or proxy shall  determine  whether one (1) or three (3) inspectors are to
be appointed.  If any person  appointed as inspector fails to appear or fails or
refuses to act,  the  chairman of the meeting  may,  and upon the request of any
shareholder  or a  shareholder's  proxy  shall,  appoint  a person  to fill that
vacancy.

         These inspectors shall:

     (a)  Determine  the number of shares  outstanding  and the voting  power of
each, the shares represented at the meeting,  the existence of a quorum, and the
authenticity, validity, and effect of proxies;

     (b) Receive votes, ballots, or consents;

     (c) Hear and determine all  challenges  and questions in any way arising in
connection with the right to vote;

     (d) Count and tabulate all votes or consents;

                                     7.
<PAGE>

     (e) Determine when the polls shall close;

     (f) Determine the result; and

     (g) Do any other acts that may be proper to conduct  the  election  or vote
with fairness to all shareholders.


                                   ARTICLE IV
                               Board Of Directors

Section 18. Powers.  Subject to the provisions of law or any  limitations in the
Articles of Incorporation or these bylaws,  as to action required to be approved
by the  shareholders or by the outstanding  shares,  the business and affairs of
the corporation shall be managed and all corporate powers shall be exercised, by
or under the  direction of the Board of  Directors.  The Board of Directors  may
delegate  the  management  of the  day-to-day  operation  of the business of the
corporation to a management company or other person,  provided that the business
and affairs of the corporation  shall be managed and all corporate  powers shall
be exercised under the ultimate direction of the Board of Directors.

Section 19.  Number Of  Directors.  The  authorized  number of  directors of the
corporation shall be not less than a minimum of four (4) nor more than a maximum
of seven (7) (which  maximum  number in no case shall be greater  than two times
said  minimum,  minus one) and the number of directors  presently  authorized is
four (4). The exact  number of  directors  shall be set within these limits from
time  to  time  (a)  by  approval  of  the  Board  of  Directors,  or (b) by the
affirmative  vote of a majority of the shares  represented  and voting at a duly
held meeting at which a quorum is present  (which  shares  voting  affirmatively
also  constitute  at least a majority of the required  quorum) or by the written
consent of shareholders pursuant to Section 13 hereinabove.

         Any amendment of these bylaws changing the maximum or minimum number of
directors  may be adopted  only by the  affirmative  vote of a  majority  of the
outstanding shares entitled to vote; provided, an amendment reducing the minimum
number of  directors  to less than five (5),  cannot be  adopted  if votes  cast
against its adoption at a meeting or the shares not consenting to it in the case
of action by  written  consent  are equal to more than  16-2/3 % percent  of the
outstanding shares entitled to vote.

         No reduction  of the  authorized  number of directors  shall remove any
director prior to the expiration of such director's term of office.

Section 20. Election Of Directors, Term, Qualifications.  The directors shall be
elected at each annual  meeting of  shareholders  to hold office  until the next
annual meeting. Each director, including a director elected or appointed to fill
a vacancy,  shall hold office either until the  expiration of the term for which
elected or appointed  and until a successor has been elected and  qualified,  or
until his death,  resignation or removal.  Directors need not be shareholders of
the corporation.

Section 21.  Resignations.  Any director of the corporation may resign effective
upon giving  written  notice to the Chairman of the Board,  the  President,  the
Secretary  or the Board of  Directors  of the  corporation,  unless  the  notice
specifies  a later  time  for the  effectiveness  of  such  resignation.  If the
resignation specifies effectiveness at a future time, a successor may be elected
pursuant  to  Section  23 of these  bylaws  to take  office on the date that the
resignation becomes effective.

                                      8.
<PAGE>

Section 22.  Removal.  The Board of Directors may declare vacant the office of a
director  who has been  declared of unsound mind by an order of court or who has
been convicted of a felony.

         The entire Board of Directors or any individual director may be removed
from  office  without  cause  by  the  affirmative  vote  of a  majority  of the
outstanding  shares entitled to vote on such removal;  provided,  however,  that
unless the entire Board is removed,  no individual  director may be removed when
the votes cast against such director's  removal, or not consenting in writing to
such removal,  would be sufficient to elect that director if voted  cumulatively
at an  election  at which the same total  number of votes cast were cast (or, if
such action is taken by written consent, all shares entitled to vote were voted)
and the entire  number of directors  authorized  at the time of such  director's
most recent election were then being elected.

Section 23. Vacancies. A vacancy or vacancies on the Board of Directors shall be
deemed to exist in case of the death, resignation or removal of any director, or
upon increase in the authorized  number of directors or if shareholders  fail to
elect  the  full  authorized  number  of  directors  at  an  annual  meeting  of
shareholders or if, for whatever reason,  there are fewer directors on the Board
of Directors, than the full number authorized.  Such vacancy or vacancies, other
than a vacancy created by the removal of a director, may be filled by a majority
of the remaining  directors,  though less than a quorum,  or by a sole remaining
director.  A vacancy  created by the removal of a director may be filled only by
the  affirmative  vote of a majority of the shares  represented  and voting at a
duly  held  meeting  at  which  a  quorum  is  present   (which   shares  voting
affirmatively  also constitute at least a majority of the required quorum) or by
the written  consent of  shareholders  pursuant to Section 13  hereinabove.  The
shareholders  may elect a director at any time to fill any vacancy not filled by
the  directors.  Any such  election  by  written  consent,  other than to fill a
vacancy  created  by  removal,  requires  the  consent  of  a  majority  of  the
outstanding  shares  entitled to vote.  Any such election by written  consent to
fill a vacancy created by removal requires the consent of all of the outstanding
shares entitled to vote.

         If, after the filling of any vacancy by the  directors,  the  directors
then in office who have been elected by the shareholders  constitute less than a
majority of the directors then in office,  any holder or holders of an aggregate
of five percent (5%) or more of the shares  outstanding  at that time and having
the right to vote for such directors may call a special  meeting of shareholders
to be held to elect the  entire  Board of  Directors.  The term of office of any
director shall terminate upon such election of a successor.

Section 24. Regular  Meetings.  Regular meetings of the Board of Directors shall
be held at such times, places and dates as fixed in these bylaws or by the Board
of Directors;  provided, however, that if the date for such a meeting falls on a
legal  holiday,  then the  meeting  shall  be held at the same  time on the next
succeeding  full business day.  Regular  meetings of the Board of Directors held
pursuant to this Section 24 may be held without notice.

                                       9.
<PAGE>

Section 25.  Participation  By Telephone.  Members of the Board of Directors may
participate  in a  meeting  through  use  of  conference  telephone  or  similar
communications  equipment,  so long as all members participating in such meeting
can hear one another. Such participation  constitutes presence in person at such
meeting.

Section 26. Special Meetings. Special meetings of the Board of Directors for any
purpose may be called by the Chairman of the Board or the  President or any vice
president or the Secretary of the corporation or any two (2) directors.

Section  27.  Notice Of  Meetings.  Notice  of the  date,  time and place of all
meetings of the Board of Directors, other than regular meetings held pursuant to
Section 24 above shall be  delivered  personally,  orally or in  writing,  or by
telephone or telegraph to each director,  at least forty-eight (48) hours before
the meeting,  or sent in writing to each director by first-class  mail,  charges
prepaid, at least four (4) days before the meeting.  Such notice may be given by
the  Secretary  of the  corporation  or by the  person or  persons  who called a
meeting. Such notice need not specify the purpose of the meeting.  Notice of any
meeting of the Board of Directors  need not be given to any director who signs a
waiver of notice of such  meeting,  or a consent  to holding  the  meeting or an
approval of the minutes  thereof,  either  before or after the  meeting,  or who
attends the meeting without protesting prior thereto or at its commencement such
director's  lack of notice.  All such waivers,  consents and approvals  shall be
filed with the corporate records or made a part of the minutes of the meeting.

Section 28. Place Of Meetings. Meetings of the Board of Directors may be held at
any place within or without the state which has been designated in the notice of
the meeting or, if not stated in the notice or there is no notice, designated in
the bylaws or by resolution of the Board of Directors.

Section 29. Action By Written Consent Without A Meeting.  Any action required or
permitted to be taken by the Board of Directors  may be taken without a meeting,
if all members of the Board of Directors individually or collectively consent in
writing to such action. Such written consent or consents shall be filed with the
minutes of the  proceedings  of the Board of  Directors.  Such action by written
consent  shall  have the same  force  and  effect  as a  unanimous  vote of such
directors.

Section 30. Quorum And  Transaction  Of Business.  A majority of the  authorized
number of directors  shall  constitute a quorum for the transaction of business.
Every act or  decision  done or made by a majority of the  authorized  number of
directors  present at a meeting duly held at which a quorum is present  shall be
the act of the Board of Directors, unless the law, the Articles of Incorporation
or these  bylaws  specifically  require a greater  number.  A meeting at which a
quorum is initially present may continue to transact  business,  notwithstanding
withdrawal of directors,  if any action taken is approved by at least a majority
of the  number of  directors  constituting  a quorum  for such  meeting.  In the
absence of a quorum at any meeting of the Board of Directors,  a majority of the
directors  present may adjourn the  meeting,  as provided in Section 31 of these
bylaws.

Section 31. Adjournment. Any meeting of the Board of Directors, whether or not a
quorum is present, may be adjourned to another time and place by the affirmative
vote of a majority of the  directors  present.  If the meeting is adjourned  for
more than twenty-four (24) hours,  notice of such adjournment to another time or
place shall be given prior to the time of the adjourned meeting to the directors
who were not present at the time of the adjournment.

                                       10.
<PAGE>

Section 32.  Organization.  The  Chairman  of the Board  shall  preside at every
meeting of the Board of  Directors,  if present.  If there is no Chairman of the
Board or if the Chairman is not present,  a Chairman chosen by a majority of the
directors present shall act as chairman. The Secretary of the corporation or, in
the absence of the Secretary,  any person appointed by the Chairman shall act as
secretary of the meeting.

Section 33.  Compensation.  Directors and members of committees may receive such
compensation,  if any, for their services,  and such reimbursement for expenses,
as may be fixed or determined by the Board of Directors.

Section 34.  Committees.  The Board of Directors may, by resolution adopted by a
majority  of  the  authorized  number  of  directors,   designate  one  or  more
committees,  each  consisting  of two (2) or more  directors,  to  serve  at the
pleasure of the Board of  Directors.  The Board of  Directors,  by a vote of the
majority  of  authorized  directors,  may  designate  one or more  directors  as
alternate members of any committee,  to replace any absent member at any meeting
of such committee.  Any such committee shall have authority to act in the manner
and to the extent provided in the resolution of the Board of Directors,  and may
have all the  authority  of the  Board of  Directors  in the  management  of the
business and affairs of the corporation, except with respect to:

     (a) the approval of any action for which shareholders' approval or approval
of the outstanding shares also is required by the California Corporations Code;

     (b) the  filling  of  vacancies  on the  Board of  Directors  or any of its
committees;

     (c) the fixing of  compensation  of  directors  for serving on the Board of
Directors or any of its committees;

     (d) the adoption, amendment or repeal of these bylaws;

     (e) the  amendment  or repeal of any  resolution  of the Board of Directors
which by its express terms is not so amendable or repealable;

     (f) a  distribution  to  shareholders,  except  at a rate or in a  periodic
amount or within a price range determined by the Board of Directors; or

     (g) the  appointment  of other  committees of the Board of Directors or the
members thereof.

         Any committee  may from time to time provide by resolution  for regular
meetings at specified times and places. If the date of such a meeting falls on a
legal  holiday,  then the  meeting  shall  be held at the same  time on the next
succeeding  full business  day. No notice of such a meeting need be given.  Such
regular  meetings  need not be held if the  committee  shall so determine at any
time  before or after the time when such  meeting  would  otherwise  have  taken
place.  Special meetings may be called at any time in the same manner and by the
same persons as stated in Sections 26 and 27 of these bylaws for meetings of the
Board of  Directors.  The  provisions  of Sections  25, 28, 29, 30, 31 and 32 of
these bylaws shall apply to committees, committee members and committee meetings
as if the words "committee" and "committee member" were substituted for the word
"Board of Directors", and "director", respectively, throughout such sections.

                                       11.
<PAGE>

                                    ARTICLE V
                                    Officers

Section 35.  Officers.  The corporation  shall have a Chairman of the Board or a
President  or both,  a  Secretary,  a Chief  Financial  Officer  and such  other
officers  with such titles and duties as the Board of Directors  may  determine.
Any two or more offices may be held by the same person.

Section 36. Appointment. All officers shall be chosen and appointed by the Board
of Directors;  provided,  however,  the Board of Directors may empower the chief
executive  officer of the  corporation  to  appoint  such  officers,  other than
Chairman of the Board,  President,  Secretary or Chief Financial Officer, as the
business  of the  corporation  may  require.  All  officers  shall  serve at the
pleasure of the Board of Directors, subject to the rights, if any, of an officer
under a contract of employment.

Section 37.  Inability To Act. In the case of absence or inability to act of any
officer of the corporation or of any person authorized by these bylaws to act in
such officer's  place, the Board of Directors may from time to time delegate the
powers or duties of such officer to any other officer,  or any director or other
person  whom it may select,  for such  period of time as the Board of  Directors
deems necessary.

Section 38. Resignations. Any officer may resign at any time upon written notice
to the corporation,  without prejudice to the rights, if any, of the corporation
under any contract to which such officer is a party.  Such resignation  shall be
effective  upon its receipt by the  Chairman of the Board,  the  President,  the
Secretary or the Board of Directors, unless a different time is specified in the
notice  for  effectiveness  of such  resignation.  The  acceptance  of any  such
resignation  shall  not be  necessary  to make  it  effective  unless  otherwise
specified in such notice.

Section 39. Removal. Any officer may be removed from office at any time, with or
without  cause,  but subject to the rights,  if any, of such  officer  under any
contract of  employment,  by the Board of Directors or by any  committee to whom
such power of removal  has been duly  delegated,  or, with regard to any officer
who has been  appointed by the chief  executive  officer  pursuant to Section 36
above, by the chief executive  officer or any other officer upon whom such power
of removal may be conferred by the Board of Directors.

Section 40.  Vacancies.  A vacancy  occurring in any office for any cause may be
filled by the Board of  Directors,  in the manner  prescribed by this Article of
the bylaws for initial appointment to such office.

Section 41.  Chairman Of The Board.  The Chairman of the Board, if there be such
an officer, shall, if present, preside at all meetings of the Board of Directors
and shall  exercise  and perform such other powers and duties as may be assigned
from time to time by the Board of Directors or prescribed by these bylaws. If no
President is  appointed,  the  Chairman of the Board is the general  manager and
chief executive officer of the corporation, and shall exercise all powers of the
President described in Section 42 below.

                                       12.
<PAGE>


Section 42.  President.  Subject to such powers,  if any, as may be given by the
Board of Directors  to the  Chairman of the Board,  if there be such an officer,
the President shall be the general  manager and chief  executive  officer of the
corporation and shall have general supervision,  direction, and control over the
business and affairs of the corporation,  subject to the control of the Board of
Directors.  The President may sign and execute,  in the name of the corporation,
any instrument authorized by the Board of Directors, except when the signing and
execution thereof shall have been expressly  delegated by the Board of Directors
or by these  bylaws  to some  other  officer  or agent of the  corporation.  The
President  shall have all the general  powers and duties of  management  usually
vested in the president of a  corporation,  and shall have such other powers and
duties as may be prescribed from time to time by the Board of Directors or these
bylaws.  The  President  shall have  discretion to prescribe the duties of other
officers and employees of the corporation in a manner not inconsistent  with the
provisions of these bylaws and the directions of the Board of Directors.

Section 43. Vice Presidents.  In the absence or disability of the President,  in
the event of a vacancy in the office of President,  or in the event such officer
refuses to act, the Vice President shall perform all the duties of the President
and,  when so  acting,  shall  have all the powers of, and be subject to all the
restrictions  on, the President.  If at any such time the  corporation  has more
than one vice  president,  the duties and powers of the President  shall pass to
each vice president in order of such vice president's rank as fixed by the Board
of Directors or, if the vice presidents are not so ranked, to the vice president
designated by the Board of Directors.  The vice presidents shall have such other
powers and perform such other duties as may be prescribed  for them from time to
time by the Board of Directors or pursuant to Sections 35 and 36 of these bylaws
or otherwise pursuant to these bylaws.

Section 44.       Secretary.  The Secretary shall:

     (a) Keep, or cause to be kept, minutes of all meetings of the corporation's
shareholders,  Board of Directors,  and committees of the Board of Directors, if
any. Such minutes shall be kept in written form.

     (b) Keep,  or cause to be kept, at the  principal  executive  office of the
corporation,  or at the office of its  transfer  agent or  registrar,  if any, a
record of the corporation's shareholders, showing the names and addresses of all
shareholders,  and the number and classes of shares held by each.  Such  records
shall be kept in written form or any other form capable of being  converted into
written form.

     (c) Keep,  or cause to be kept, at the  principal  executive  office of the
corporation,  or if the principal executive office is not in California,  at its
principal business office in California, an original or copy of these bylaws, as
amended.
                                       13.
<PAGE>


     (d) Give,  or cause to be given,  notice of all  meetings of  shareholders,
directors and  committees  of the Board of  Directors,  as required by law or by
these bylaws.

     (e) Keep the seal of the corporation, if any, in safe custody.

     (f) Exercise  such powers and perform such duties as are usually  vested in
the office of secretary  of a  corporation,  and exercise  such other powers and
perform such other duties as may be prescribed from time to time by the Board of
Directors or these bylaws.

         If any assistant secretaries are appointed, the assistant secretary, or
one of the  assistant  secretaries  in the  order of their  rank as fixed by the
Board of  Directors  or,  if they are not so  ranked,  the  assistant  secretary
designated  by the Board of  Directors,  in the  absence  or  disability  of the
Secretary  or in the  event of such  officer's  refusal  to act or if a  vacancy
exists in the office of  Secretary,  shall  perform the duties and  exercise the
powers of the Secretary  and discharge  such duties as may be assigned from time
to time pursuant to these bylaws or by the Board of Directors.

Section 45.       Chief Financial Officer.  The Chief Financial Officer shall:

     (a) Be  responsible  for all  functions  and duties of the treasurer of the
corporation.

     (b) Keep and  maintain,  or cause to be kept and  maintained,  adequate and
correct books and records of account for the corporation.

     (c) Receive or be responsible  for receipt of all monies due and payable to
the corporation from any source  whatsoever;  have charge and custody of, and be
responsible  for,  all  monies and other  valuables  of the  corporation  and be
responsible  for deposit of all such monies in the name and to the credit of the
corporation  with  such  depositaries  as may be  designated  by  the  Board  of
Directors  or a  duly  appointed  and  authorized  committee  of  the  Board  of
Directors.

     (d) Disburse or be  responsible  for the  disbursement  of the funds of the
corporation  as may be ordered by the Board of Directors or a duly appointed and
authorized committee of the Board of Directors.

     (e) Render to the chief  executive  officer  and the Board of  Directors  a
statement of the financial condition of the corporation if called upon to do so.

     (f) Exercise  such powers and perform such duties as are usually  vested in
the office of chief financial officer of a corporation,  and exercise such other
powers  and  perform  such  other  duties as may be  prescribed  by the Board of
Directors or these bylaws.

         If  any  assistant  financial  officer  is  appointed,   the  assistant
financial officer, or one of the assistant financial officers, if there are more
than one, in the order of their rank as fixed by the Board of  Directors  or, if
they are not so ranked, the assistant  financial officer designated by the Board
of Directors, shall, in the absence or disability of the Chief Financial Officer
or in the  event of such  officer's  refusal  to act,  perform  the  duties  and
exercise the powers of the Chief Financial  Officer,  and shall have such powers
and discharge such duties as may be assigned from time to time pursuant to these
bylaws or by the Board of Directors.

                                       14.
<PAGE>

Section 46.  Compensation.  The compensation of the officers shall be fixed from
time to time by the Board of Directors,  and no officer shall be prevented  from
receiving  such  compensation  by reason of the fact that such officer is also a
director of the corporation.

                                   ARTICLE VI
               Contracts, Loans, Bank Accounts, Checks And Drafts

Section 47. Execution Of Contracts And Other Instruments. Except as these bylaws
may  otherwise  provide,  the  Board  of  Directors  or its duly  appointed  and
authorized committee may authorize any officer or officers,  agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the corporation,  and such authorization may be general or confined
to specific  instances.  Except as so authorized or otherwise expressly provided
in these  bylaws,  no  officer,  agent,  or  employee  shall  have any  power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or in any amount.

Section 48. Loans. No loans shall be contracted on behalf of the corporation and
no negotiable paper shall be issued in its name, unless and except as authorized
by the Board of Directors or its duly appointed and authorized  committee.  When
so authorized by the Board of Directors or such committee,  any officer or agent
of the corporation may effect loans and advances at any time for the corporation
from  any  bank,  trust  company,  or  other  institution,  or  from  any  firm,
corporation or individual, and for such loans and advances may make, execute and
deliver  promissory  notes,  bonds or other  evidences  of  indebtedness  of the
corporation and, when authorized as aforesaid, may mortgage, pledge, hypothecate
or transfer any and all stocks, securities and other property, real or personal,
at any time held by the corporation, and to that end endorse, assign and deliver
the  same  as  security  for  the  payment  of  any  and  all  loans,  advances,
indebtedness,  and liabilities of the  corporation.  Such  authorization  may be
general or confined to specific instances.

Section 49. Bank  Accounts.  The Board of  Directors or its duly  appointed  and
authorized  committee from time to time may authorize the opening and keeping of
general and/or special bank accounts with such banks, trust companies,  or other
depositaries  as may be selected by the Board of Directors,  its duly  appointed
and authorized committee or by any officer or officers,  agent or agents, of the
corporation  to whom such power may be delegated  from time to time by the Board
of  Directors.  The Board of  Directors  or its duly  appointed  and  authorized
committee  may make  such  rules  and  regulations  with  respect  to said  bank
accounts,  not inconsistent  with the provisions of these bylaws,  as are deemed
advisable.

Section 50.  Checks,  Drafts,  Etc.  All checks,  drafts or other orders for the
payment of money,  notes,  acceptances or other evidences of indebtedness issued
in the name of the  corporation  shall be signed by such  officer  or  officers,
agent or agents, of the corporation,  and in such manner, as shall be determined
from time to time by resolution of the Board of Directors or its duly  appointed
and  authorized  committee.  Endorsements  for  deposit  to  the  credit  of the
corporation  in any of its duly  authorized  depositaries  may be made,  without
countersignature,  by the President or any vice president or the Chief Financial
Officer or any assistant  financial  officer or by any other officer or agent of
the  corporation  to whom the  Board of  Directors  or its  duly  appointed  and
authorized  committee,  by  resolution,  shall have  delegated  such power or by
handstamped impression in the name of the corporation.

                                       15.
<PAGE>

                                   ARTICLE VII
                   Certificates For Shares And Their Transfer

Section 51.  Certificate  For Shares.  Every holder of shares in the corporation
shall be entitled to have a certificate signed in the name of the corporation by
the Chairman or Vice Chairman of the Board or the President or a Vice  President
and by the Chief Financial  Officer or an assistant  financial officer or by the
Secretary or an  assistant  secretary,  certifying  the number of shares and the
class or series of shares owned by the shareholder. Any or all of the signatures
on the  certificate  may be facsimile.  In case any officer,  transfer  agent or
registrar  who has signed or whose  facsimile  signature  has been placed upon a
certificate  shall have ceased to be such officer,  transfer  agent or registrar
before such certificate is issued,  it may be issued by the corporation with the
same effect as if such person were an officer,  transfer  agent or  registrar at
the date of issue.

         In the event that the corporation shall issue any shares as only partly
paid,  the  certificate  issued to represent  such partly paid shares shall have
stated thereon the total consideration to be paid for such shares and the amount
paid thereon.

Section 52.  Transfer On The Books.  Upon surrender to the Secretary or transfer
agent (if any) of the corporation of a certificate for shares of the corporation
duly endorsed,  with  reasonable  assurance that the  endorsement is genuine and
effective,  or  accompanied  by proper  evidence of  succession,  assignment  or
authority  to transfer and upon  compliance  with  applicable  federal and state
securities  laws and if the  corporation  has no statutory  duty to inquire into
adverse  claims  or has  discharged  any  such  duty and if any  applicable  law
relating to the collection of taxes has been complied with, it shall be the duty
of the  corporation,  by its  Secretary  or  transfer  agent,  to cancel the old
certificate,  to issue a new certificate to the person  entitled  thereto and to
record the transaction on the books of the corporation.

Section  53.  Lost,  Destroyed  And  Stolen  Certificates.  The  holder  of  any
certificate for shares of the corporation  alleged to have been lost,  destroyed
or  stolen  shall  notify  the  corporation  by making a  written  affidavit  or
affirmation  of such fact.  Upon receipt of said  affidavit or  affirmation  the
Board of  Directors,  or its duly  appointed  and  authorized  committee  or any
officer or officers  authorized by the Board so to do, may order the issuance of
a new certificate for shares in the place of any certificate  previously  issued
by the corporation and which is alleged to have been lost,  destroyed or stolen.
However,  the  Board of  Directors  or such  authorized  committee,  officer  or
officers  may  require  the owner of the  allegedly  lost,  destroyed  or stolen
certificate,  or such owner's legal  representative,  to give the  corporation a
bond or other adequate security  sufficient to indemnify the corporation and its
transfer  agent  and/or  registrar,  if any,  against any claim that may be made
against  it or them on  account  of such  allegedly  lost,  destroyed  or stolen
certificate or the replacement thereof.  Said bond or other security shall be in
such amount,  on such terms and conditions and, in the case of a bond, with such
surety or sureties as may be acceptable to the Board of Directors or to its duly
appointed and authorized  committee or any officer or officers authorized by the
Board of Directors to determine the  sufficiency  thereof.  The requirement of a
bond or other  security may be waived in particular  cases at the  discretion of
the Board of Directors or its duly  appointed  and  authorized  committee or any
officer or officers authorized by the Board of Directors so to do.

                                       16.
<PAGE>

Section  54.  Issuance,  Transfer  And  Registration  Of  Shares.  The  Board of
Directors may make such rules and regulations, not inconsistent with law or with
these bylaws,  as it may deem advisable  concerning  the issuance,  transfer and
registration of certificates for shares of the capital stock of the corporation.
The Board of Directors  may appoint a transfer  agent or registrar of transfers,
or both, and may require all  certificates for shares of the corporation to bear
the signature of either or both.

                                  ARTICLE VIII
                         Inspection Of Corporate Records

Section 55.  Inspection By  Directors.  Every  director  shall have the absolute
right  at any  reasonable  time to  inspect  and copy all  books,  records,  and
documents of every kind of the  corporation and any of its  subsidiaries  and to
inspect the physical  properties of the corporation and any of its subsidiaries.
Such  inspection  may be made by the director in person or by agent or attorney,
and the right of inspection includes the right to copy and make extracts.

Section 56. Inspection By Shareholders.

     (a) Inspection Of Corporate Records.

     (1) A shareholder or shareholders holding at least five (5%) percent in the
     aggregate of the  outstanding  voting shares of the corporation or who hold
     at least one  percent of such voting  shares and have filed a Schedule  14B
     with the United States Securities and Exchange  Commission  relating to the
     election of directors of the corporation shall have an absolute right to do
     either or both of the following:

         (i) Inspect and copy the record of  shareholders'  names and  addresses
         and  shareholdings  during usual  business hours upon five (5) business
         days' prior written demand upon the corporation; or

         (ii) Obtain from the transfer agent, if any, for the corporation,  upon
         five  business  days' prior  written  demand and upon the tender of its
         usual  charges  for such a list (the amount of which  charges  shall be
         stated to the  shareholder by the transfer agent upon request),  a list
         of the  shareholders'  names and addresses who are entitled to vote for
         the  election  of  directors  and their  shareholdings,  as of the most
         recent  record  date for  which it has  been  compiled  or as of a date
         specified by the shareholder subsequent to the date of demand.

     (2) The record of shareholders shall also be open to inspection and copying
     by any  shareholder  or holder of a voting  trust  certificate  at any time
     during usual business hours upon written demand on the  corporation,  for a
     purpose  reasonably  related to such holder's  interest as a shareholder or
     holder of a voting trust certificate.

                                       17.
<PAGE>

     (3) The  accounting  books and records and  minutes of  proceedings  of the
     shareholders  and the Board of Directors and of any committees of the Board
     of Directors of the  corporation and of each of its  subsidiaries  shall be
     open to inspection,  copying and making extracts upon written demand on the
     corporation of any  shareholder or holder of a voting trust  certificate at
     any reasonable time during usual business hours,  for a purpose  reasonably
     related to such holder's  interests as a shareholder or as a holder of such
     voting trust certificate.

     (4) Any inspection, copying, and making of extracts under this subsection

     (a) may be done in person or by agent or attorney.

     (b)  Inspection Of Bylaws.  The original or a copy of these bylaws shall be
kept as provided in Section 44 of these  bylaws and shall be open to  inspection
by  the  shareholders  at all  reasonable  times  during  office  hours.  If the
principal  executive  office of the  corporation is not in  California,  and the
corporation  has no  principal  business  office in the state of  California,  a
current copy of these bylaws shall be furnished to any shareholder  upon written
request.

Section  57.  Written  Form.  If any record  subject to  inspection  pursuant to
Section 56 above is not  maintained in written form, a request for inspection is
not complied  with unless and until the  corporation  at its expense  makes such
record available in written form.

                                   ARTICLE IX
                                  Miscellaneous

Section 58. Fiscal Year.  Unless  otherwise  fixed by resolution of the Board of
Directors,  the  fiscal  year of the  corporation  shall  end on the 31st day of
December in each calendar year.

Section 59. Annual Report. Subject to the provisions of Section 59(b) below, the
Board of Directors  shall cause an annual report to be sent to each  shareholder
of the corporation in the manner provided in Section 9 of these bylaws not later
than one hundred twenty (120) days after the close of the  corporation's  fiscal
year.  Such report  shall  include a balance  sheet as of the end of such fiscal
year and an income statement and statement of changes in financial  position for
such fiscal year,  accompanied by any report thereon of independent  accountants
or, if there is no such report,  the certificate of an authorized officer of the
corporation  that such statements were prepared without audit from the books and
records of the corporation.  When there are more than 100 shareholders of record
of the  corporation's  shares,  as determined  by Section 605 of the  California
Corporations Code, additional  information as required by Section 1501(b) of the
California  Corporations  Code shall also be contained in such report,  provided
that if the corporation has a class of securities registered under Section 12 of
the  United  States  Securities  Exchange  Act of  1934,  that  Act  shall  take
precedence. Such report shall be sent to shareholders at least fifteen (15) (or,
if sent by  third-class  mail,  thirty-five  (35)) days prior to the next annual
meeting of shareholders after the end of the fiscal year to which it relates.

Section 60. Record Date.  The Board of Directors may fix a time in the future as
a record date for the determination of the shareholders entitled to notice of or
to vote at any meeting or entitled to receive  payment of any  dividend or other
distribution  or  allotment  of any rights or entitled to exercise any rights in
respect of any change,  conversion or exchange of shares or entitled to exercise
any rights in respect of any other lawful action. The record date so fixed shall
not be more than  sixty  (60) days nor less than ten (10) days prior to the date
of the meeting nor more than sixty (60) days prior to any other  action or event
for the purpose of which it is fixed. If no record date is fixed, the provisions
of Section 15 of these  bylaws  shall apply with  respect to notice of meetings,
votes,  and consents and the record date for  determining  shareholders  for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolutions  relating  thereto,  or the sixtieth (60th) day
prior to the date of such other action or event, whichever is later.

                                       18.
<PAGE>

         Only shareholders of record at the close of business on the record date
shall be entitled to notice and to vote or to receive the dividend, distribution
or  allotment  of  rights  or to  exercise  the  rights,  as the  case  may  be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise  provided in the Articles of Incorporation,
by agreement or by law.

Section 61. Bylaw Amendments.  Except as otherwise provided by law or Section 19
of these  bylaws,  these  bylaws  may be  amended  or  repealed  by the Board of
Directors or by the  affirmative  vote of a majority of the  outstanding  shares
entitled to vote, including,  if applicable,  the affirmative vote of a majority
of the  outstanding  shares  of each  class  or  series  entitled  by law or the
Articles  of  Incorporation  to vote as a class or  series on the  amendment  or
repeal or adoption of any bylaw or bylaws; provided,  however, after issuance of
shares,  a bylaw  specifying  or  changing a fixed  number of  directors  or the
maximum or minimum  number or changing from a fixed to a variable  board or vice
versa may only be adopted by  approval  of the  outstanding  shares as  provided
herein.

Section 62. Construction And Definition.  Unless the context requires otherwise,
the general provisions, rules of construction,  and definitions contained in the
California Corporations Code shall govern the construction of these bylaws.

         Without  limiting  the  foregoing,  "shall" is  mandatory  and "may" is
permissive.

                                    ARTICLE X
                                 Indemnification

Section 63. Indemnification Of Directors, Officers, Employees And Other Agents.

     (a) Directors And Executive  Officers.  The corporation shall indemnify its
directors and  executive  officers to the fullest  extent not  prohibited by the
California General Corporation Law; provided,  however, that the corporation may
limit the  extent  of such  indemnification  by  individual  contracts  with its
directors and executive officers;  and, provided,  further, that the corporation
shall not be  required  to  indemnify  any  director  or  executive  officer  in
connection with any proceeding (or part thereof) initiated by such person or any
proceeding by such person against the  corporation  or its directors,  officers,
employees or other agents unless (i) such  indemnification is expressly required
to be made by law, (ii) the  proceeding was authorized by the board of directors
of the corporation or (iii) such indemnification is provided by the corporation,
in its sole discretion,  pursuant to the powers vested in the corporation  under
the California General Corporation Law.

                                       19.
<PAGE>

     (b) Other Officers,  Employees And Other Agents. The corporation shall have
the power to indemnify  its other  officers,  employees  and other agents as set
forth in the California General Corporation Law.

     (c)  Determination By The Corporation.  Promptly after receipt of a request
for  indemnification  hereunder  (and in any  event  within 90 days  thereof)  a
reasonable,  good  faith  determination  as to  whether  indemnification  of the
director or  executive  officer is proper under the  circumstances  because such
director or executive  officer has met the applicable  standard of care shall be
made by:

     (1) a majority vote of a quorum consisting of directors who are not parties
     to such proceeding;

     (2) if such quorum is not  obtainable,  by  independent  legal counsel in a
     written opinion; or

     (3) approval or ratification  by the affirmative  vote of a majority of the
     shares of this corporation represented and voting at a duly held meeting at
     which  a  quorum  is  present  (which  shares  voting   affirmatively  also
     constitute  at least a  majority  of the  required  quorum)  or by  written
     consent of a majority of the outstanding  shares entitled to vote; where in
     each case the  shares  owned by the person to be  indemnified  shall not be
     considered entitled to vote thereon.

     (d) Good Faith.

     (1) For  purposes  of any  determination  under this  bylaw,  a director or
     executive  officer  shall be  deemed to have  acted in good  faith and in a
     manner  he  reasonably  believed  to  be  in  the  best  interests  of  the
     corporation and its shareholders,  and, with respect to any criminal action
     or proceeding,  to have had no reasonable cause to believe that his conduct
     was unlawful, if his action is based on information,  opinions, reports and
     statements,  including  financial  statements and other  financial data, in
     each case prepared or presented by:

         (i) one or more  officers  or  employees  of the  corporation  whom the
         director or executive  officer believed to be reliable and competent in
         the matters presented;

         (ii) counsel,  independent  accountants  or other persons as to matters
         which the  director  or  executive  officer  believed to be within such
         person's professional competence; and

         (iii) with  respect to a director,  a committee of the Board upon which
         such director  does not serve,  as to matters  within such  committee's
         designated  authority,  which committee the director  believes to merit
         confidence; so long as, in each case, the director or executive officer
         acts  without   knowledge   that  would  cause  such   reliance  to  be
         unwarranted.

                                       20.
<PAGE>

     (2) The  termination  of any  proceeding  by judgment,  order,  settlement,
     conviction or upon a plea of nolo  contendere or its equivalent  shall not,
     of itself,  create a presumption  that the person did not act in good faith
     and in a manner which he reasonably believed to be in the best interests of
     the  corporation and its  shareholders  or that he had reasonable  cause to
     believe that his conduct was unlawful.

     (3)  The  provisions  of this  paragraph  (d)  shall  not be  deemed  to be
     exclusive or to limit in any way the circumstances in which a person may be
     deemed to have met the  applicable  standard  of  conduct  set forth by the
     California General Corporation Law.

     (e) Expenses. The corporation shall advance, prior to the final disposition
of any proceeding, promptly following request therefor, all expenses incurred by
any  director or  executive  officer in  connection  with such  proceeding  upon
receipt of an  undertaking  by or on behalf of such person to repay said amounts
if it shall be  determined  ultimately  that such  person is not  entitled to be
indemnified under this bylaw or otherwise.

         Notwithstanding the foregoing,  unless otherwise determined pursuant to
paragraph (f) of this bylaw,  no advance shall be made by the  corporation  if a
determination  is  reasonably  and promptly  made by the Board of Directors by a
majority  vote of a quorum  consisting  of directors who were not parties to the
proceeding  (or, if no such quorum  exists,  by  independent  legal counsel in a
written  opinion) that the facts known to the decision  making party at the time
such determination is made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner  that such person did not believe to be in the
best interests of the corporation and its shareholders.

     (f)  Enforcement.  Without  the  necessity  of  entering  into  an  express
contract,  all rights to indemnification and advances to directors and executive
officers  under  this  bylaw  shall be deemed to be  contractual  rights  and be
effective  to the same extent and as if provided  for in a contract  between the
corporation and the director or executive officer.  Any right to indemnification
or advances  granted by this bylaw to a director or executive  officer  shall be
enforceable  by or on behalf of the  person  holding  such right in the forum in
which the  proceeding  is or was pending or, if such forum is not available or a
determination  is made  that  such  forum  is not  convenient,  in any  court of
competent  jurisdiction  if (i) the claim for  indemnification  or  advances  is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor.  The claimant in such enforcement  action,
if successful in whole or in part, shall be entitled to be paid also the expense
of  prosecuting  his claim.  The  corporation  shall be  entitled  to raise as a
defense  to any such  action  that the  claimant  has not met the  standards  of
conduct that make it permissible  under the California  General  Corporation Law
for the  corporation to indemnify the claimant for the amount  claimed.  Neither
the failure of the  corporation  (including its board of directors,  independent
legal counsel or its  shareholders)  to have made a  determination  prior to the
commencement  of such action that  indemnification  of the claimant is proper in
the  circumstances  because he has met the  applicable  standard  of conduct set
forth in the California General Corporation Law, nor an actual  determination by
the corporation (including its board of directors,  independent legal counsel or
its  shareholders)  that the  claimant has not met such  applicable  standard of
conduct,  shall be a defense to the action or create a presumption that claimant
has not met the applicable standard of conduct.

                                       21.
<PAGE>

     (g)  Non-Exclusivity  Of Rights.  To the fullest  extent  permitted  by the
corporation's  Articles of Incorporation and the California General  Corporation
Law, the rights  conferred on any person by this bylaw shall not be exclusive of
any other  right  which such  person  may have or  hereafter  acquire  under any
statute, provision of the Articles of Incorporation,  bylaws, agreement, vote of
shareholders or disinterested  directors or otherwise,  both as to action in his
official capacity and as to action in another capacity while holding office. The
corporation is specifically  authorized to enter into individual  contracts with
any  or  all  of  its  directors,   officers,  employees  or  agents  respecting
indemnification and advances,  to the fullest extent permitted by the California
General Corporation Law and the corporation's Articles of Incorporation.

     (h)  Survival Of Rights.  The rights  conferred on any person by this bylaw
shall  continue  as to a person  who has ceased to be a  director  or  executive
officer  and  shall  inure  to  the   benefit  of  the  heirs,   executors   and
administrators of such a person.

     (i) Insurance.  The  corporation,  upon approval by the board of directors,
may  purchase  insurance  on behalf of any person  required or  permitted  to be
indemnified pursuant to this bylaw.

     (j)  Amendments.  Any repeal or  modification  of this bylaw  shall only be
prospective  and shall not affect  the rights  under this bylaw in effect at the
time of the  alleged  occurrence  of any action or  omission  to act that is the
cause of any proceeding against any agent of the corporation.

     (k) Employee Benefit Plans.  The corporation  shall indemnify the directors
and officers of the  corporation  who serve at the request of the corporation as
trustees,  investment managers or other fiduciaries of employee benefit plans to
the fullest extent permitted by the California General Corporation Law.

     (l) Saving Clause. If this bylaw or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the corporation shall
nevertheless indemnify each director and executive officer to the fullest extent
permitted  by any  applicable  portion  of this  bylaw  that shall not have been
invalidated, or by any other applicable law.

     (m) Certain  Definitions.  For the  purposes of this bylaw,  the  following
definitions shall apply:

     (1) The term  "proceeding"  shall be broadly  construed and shall  include,
     without limitation, the investigation,  preparation,  prosecution, defense,
     settlement and appeal of any threatened,  pending or completed action, suit
     or proceeding,  whether  civil,  criminal,  administrative,  arbitrative or
     investigative.

     (2) The term  "expenses"  shall be  broadly  construed  and shall  include,
     without  limitation,  court costs,  attorneys' fees,  witness fees,  fines,
     amounts paid in  settlement or judgment and any other costs and expenses of
     any nature or kind incurred in connection  with any  proceeding,  including
     expenses of establishing a right to indemnification under this bylaw or any
     applicable law.

                                       22.
<PAGE>

     (3) The term the "corporation"  shall include, in addition to the resulting
     corporation,  any constituent  corporation  (including any constituent of a
     constituent)  absorbed in a consolidation  or merger which, if its separate
     existence  had  continued,  would have had power and authority to indemnify
     its directors, officers, and employees or agents, so that any person who is
     or  was  a  director,  officer,  employee  or  agent  of  such  constituent
     corporation,  or is or was  serving  at the  request  of  such  constituent
     corporation  as  a  director,   officer,   employee  or  agent  of  another
     corporation,  partnership,  joint venture, trust or other enterprise, shall
     stand in the same position  under the provisions of this bylaw with respect
     to the resulting or surviving  corporation as he would have with respect to
     such constituent corporation if its separate existence had continued.

     (4)  References to a "director,"  "officer,"  "employee," or "agent" of the
     corporation shall include, without limitation, situations where such person
     is or was serving at the request of the corporation as a director, officer,
     employee,  trustee  or agent of  another  corporation,  partnership,  joint
     venture, trust or other enterprise.

                                   ARTICLE XI
                          Loans Of Officers And Others

Section 64. Certain  Corporate  Loans And  Guaranties.  If the  corporation  has
outstanding shares held of record by 100 or more persons on the date of approval
by the Board of Directors,  the  corporation may make loans of money or property
to, or  guarantee  the  obligations  of, any officer of the  corporation  or its
parent or any  subsidiary,  whether or not a director of the  corporation or its
parent or any subsidiary, or adopt an employee benefit plan or plans authorizing
such loans or guaranties,  upon the approval of the Board of Directors alone, by
a vote  sufficient  without  counting  the vote of any  interested  director  or
directors,  if the Board of Directors determines that such a loan or guaranty or
plan may reasonably be expected to benefit the corporation.  Notwithstanding the
foregoing,  the corporation  shall have the power to make loans permitted by the
California Corporations Code.


                                      23.


<PAGE>
                                                                    Exhibit 10.1

                                    CASTELLE

                 1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

                          ADOPTED ON NOVEMBER 15, 1995

                            APPROVED BY SHAREHOLDERS
                               ON DECEMBER 6, 1995

 AMENDED BY THE BOARD ON JULY 16, 1996, FEBRUARY 23, 1999 AND FEBRUARY 24, 2000


1. PURPOSE.

(a) The  purpose of the 1995  Non-Employee  Directors'  Stock  Option  Plan (the
"Plan") is to provide a means by which each director of Castelle (the "Company")
who is not  otherwise at the time of grant an employee of or  consultant  to the
Company or of any  Affiliate of the Company  (each such person  being  hereafter
referred  to as a  "Non-Employee  Director")  will be  given an  opportunity  to
purchase  stock of the  Company.

(b) The word  "Affiliate"  as used in the Plan means any parent  corporation  or
subsidiary  corporation  of the  Company as those  terms are defined in Sections
424(e) and (f),  respectively,  of the Internal Revenue Code of 1986, as amended
from time to time (the "Code").

(c) The Company,  by means of the Plan,  seeks to retain the services of persons
now serving as Non-Employee  Directors of the Company,  to secure and retain the
services  of  persons  capable  of  serving  in such  capacity,  and to  provide
incentives  for such  persons to exert  maximum  efforts  for the success of the
Company.

2. ADMINISTRATION.

(a) The Plan shall be administered by the Board of Directors of the Company (the
"Board") unless and until the Board delegates  administration to a committee, as
provided in subparagraph 2(b).

                                       1.
<PAGE>


(b) The Board may delegate administration of the Plan to a committee composed of
not fewer than two (2) members of the Board (the "Committee"). If administration
is delegated to a Committee,  the Committee  shall have, in connection  with the
administration  of the Plan,  the  powers  theretofore  possessed  by the Board,
subject,  however, to such resolutions,  not inconsistent with the provisions of
the  Plan,  as may be  adopted  from  time to time by the  Board.  The Board may
abolish the Committee at any time and revest in the Board the  administration of
the Plan.

3. SHARES SUBJECT TO THE PLAN.

(a) Subject to the  provisions  of  paragraph  10 relating to  adjustments  upon
changes in stock,  the stock that may be sold pursuant to options  granted under
the Plan shall not  exceed in the  aggregate  one  hundred  and twenty  thousand
(120,000)  shares of the Company's common stock. If any option granted under the
Plan shall for any reason  expire or  otherwise  terminate  without  having been
exercised in full, the stock not purchased  under such option shall again become
available for the Plan.

(b) The stock subject to the Plan may be unissued  shares or reacquired  shares,
bought on the market or otherwise.

4. ELIGIBILITY.

Options shall be granted only to Non-Employee Directors of the Company.

5. NON-DISCRETIONARY GRANTS.

(a) Each person who is, after the effective date of the initial public  offering
of the Company's common stock (the "IPO Date"), elected for the first time to be
a Non-Employee Director automatically shall, upon the date of his or her initial
election  to be a  Non-Employee  Director  by the Board or  shareholders  of the
Company, be granted an option to purchase ten thousand (10,000) shares of common
stock of the Company on the terms and conditions set forth herein.

                                       2.
<PAGE>

(b) On April 1 of each year,  commencing  with April 1, 2000, each person who on
that date is then a Non-Employee  Director  (whether elected before or after the
IPO Date)  automatically  shall be granted an option to  purchase  ten  thousand
(10,000)  shares of common stock of the Company on the terms and  conditions set
forth herein.


6. OPTION PROVISIONS.

Each option shall be subject to the following terms and conditions:

(a) The term of each  option  commences  on the date it is granted  and,  unless
sooner  terminated  as set forth  herein,  expires on the date (the  "Expiration
Date")  ten (10) years from the date of grant.  If the  optionee's  service as a
Non-Employee Director of the Company terminates for any reason or for no reason,
the option  shall  terminate on the earlier of the  Expiration  Date or the date
twelve (12)  months  following  the date of  termination  of service;  provided,
however, that if such termination of service is due to the optionee's death, the
option shall  terminate on the earlier of the  Expiration  Date or eighteen (18)
months following the date of the optionee's death. In any and all circumstances,
an option may be exercised following  termination of the optionee's service as a
Non-Employee  Director  of the  Company  only as to that  number of shares as to
which it was exercisable as of the date of termination of such service under the
provisions of subparagraph  6(e).

(b) The exercise price of each option shall be one hundred percent (100%) of the
fair market value of the stock subject to such option on the date such option is
granted.

(c) The optionee  may elect to make  payment of the exercise  price under one of
the following alternatives:

     (i)  Payment  of the  exercise  price  per  share  in cash  at the  time of
exercise; or

                                       3.
<PAGE>

     (ii) Provided  that at the time of the exercise the Company's  common stock
is publicly traded and quoted  regularly in the Wall Street Journal,  payment by
delivery of shares of common stock of the Company already owned by the optionee,
held  for the  period  required  to  avoid a charge  to the  Company's  reported
earnings,  and  owned  free and  clear of any  liens,  claims,  encumbrances  or
security  interest,  which common stock shall be valued at its fair market value
on the date preceding the date of exercise; or

     (iii)  Payment by a  combination  of the  methods of payment  specified  in
subparagraph 6(c)(i) and 6(c)(ii) above.

         Notwithstanding the foregoing, this option may be exercised pursuant to
a program  developed  under  Regulation T as promulgated by the Federal  Reserve
Board  which  results in the  receipt of cash (or check) by the  Company  either
prior to the issuance of shares of the Company's common stock or pursuant to the
terms of irrevocable  instructions  issued by the optionee prior to the issuance
of shares of the Company's common stock.

(d) An option shall not be transferable except by will or by the laws of descent
and distribution,  and shall be exercisable during the lifetime of the person to
whom the  option is  granted  only by such  person or by his  guardian  or legal
representative.  The  person to whom the Option is granted  may,  by  delivering
written notice to the Company, in a form satisfactory to the Company,  designate
a third party who, in the event of the death of the Optionee,  shall  thereafter
be entitled to exercise the Option.

(e) The option shall become  exercisable  in  installments  over a period of two
years  from the date of grant  at the  rate of one  twenty-fourth  of the  total
number of shares  subject  to the  option a month,  in  twenty-four  (24)  equal
monthly installments commencing on the date one month after the date of grant of
the option,  provided that the optionee  has,  during the entire period prior to
such vesting date,  continuously served as a Non-Employee Director,  employee or
consultant  of the Company or Affiliate of the  Company,  whereupon  such option
shall become fully exercisable in accordance with its terms with respect to that
portion of the shares represented by that installment.

                                       4.
<PAGE>

(f) The Company may  require  any  optionee,  or any person to whom an option is
transferred  under  subparagraph  6(d),  as a condition of  exercising  any such
option:  (i) to give written  assurances  satisfactory  to the Company as to the
optionee's  knowledge and experience in financial and business matters; and (ii)
to give written assurances  satisfactory to the Company stating that such person
is acquiring  the stock  subject to the option for such person's own account and
not with any present  intention of selling or otherwise  distributing the stock.
These  requirements,  and any assurances  given  pursuant to such  requirements,
shall be  inoperative if (i) the issuance of the shares upon the exercise of the
option  has  been  registered  under  a  then-currently-effective   registration
statement under the Securities Act of 1933, as amended (the  "Securities  Act"),
or (ii), as to any particular  requirement,  a determination  is made by counsel
for the Company that such requirement need not be met in the circumstances under
the then  applicable  securities  laws.  The Company may require any optionee to
provide such other representations,  written assurances or information which the
Company shall  determine is necessary,  desirable or  appropriate to comply with
applicable  securities laws as a condition of granting an option to the optionee
or permitting the optionee to exercise the option.  The Company may, upon advice
of counsel to the Company,  place legends on stock certificates issued under the
Plan as such  counsel  deems  necessary or  appropriate  in order to comply with
applicable securities laws,  including,  but not limited to, legends restricting
the transfer of the stock.
                                       5.
<PAGE>

(g) Notwithstanding anything to the contrary contained herein, an option may not
be exercised  unless the shares  issuable  upon exercise of such option are then
registered  under  the  Securities  Act or,  if  such  shares  are  not  then so
registered,  the Company has determined that such exercise and issuance would be
exempt from the registration requirements of the Securities Act.

7. COVENANTS OF THE COMPANY.

(a) During the terms of the options  granted  under the Plan,  the Company shall
keep  available  at all times the number of shares of stock  required to satisfy
such options.

(b) The Company shall seek to obtain from each  regulatory  commission or agency
having jurisdiction over the Plan such authority as may be required to issue and
sell  shares of stock  upon  exercise  of the  options  granted  under the Plan;
provided,  however,  that this  undertaking  shall not  require  the  Company to
register  under the Securities Act either the Plan, any option granted under the
Plan,  or any stock issued or issuable  pursuant to any such  option.  If, after
reasonable  efforts,  the Company is unable to obtain  from any such  regulatory
commission or agency the authority which counsel for the Company deems necessary
for the lawful  issuance and sale of stock under the Plan,  the Company shall be
relieved from any liability for failure to issue and sell stock upon exercise of
such options.

8. USE OF PROCEEDS FROM STOCK.

Proceeds from the sale of stock pursuant to options granted under the Plan shall
constitute general funds of the Company.

9. MISCELLANEOUS.

(a) Neither an optionee  nor any person to whom an option is  transferred  under
subparagraph  6(d)  shall be deemed to be the  holder  of, or to have any of the
rights of a holder with respect to, any shares subject to such option unless and
until such person has  satisfied  all  requirements  for  exercise of the option
pursuant to its terms.

                                       6.
<PAGE>

(b) Throughout the term of any option granted  pursuant to the Plan, the Company
shall make  available to the holder of such  option,  not later than one hundred
twenty (120) days after the close of each of the  Company's  fiscal years during
the option term, upon request,  such financial and other  information  regarding
the Company as comprises  the annual report to the  shareholders  of the Company
provided for in the Bylaws of the Company and such other  information  regarding
the Company as the holder of such option may reasonably request.

(c) Nothing in the Plan or in any  instrument  executed  pursuant  thereto shall
confer upon any  Non-Employee  Director  any right to continue in the service of
the Company or any  Affiliate  in any  capacity or shall affect any right of the
Company,  its Board or shareholders or any Affiliate to remove any  Non-Employee
Director  pursuant to the Company's By-Laws and the provisions of the California
General  Corporation  Law (or the laws of the Company's  state of  incorporation
should that change in the future).

(d) No Non-Employee  Director,  individually  or as a member of a group,  and no
beneficiary or other person claiming under or through him, shall have any right,
title or  interest  in or to any option  reserved  for the  purposes of the Plan
except as to such shares of common  stock,  if any, as shall have been  reserved
for him pursuant to an option granted to him.

(e) In  connection  with each  option made  pursuant to the Plan,  it shall be a
condition precedent to the Company's obligation to issue or transfer shares to a
Non-Employee  Director,  or to  evidence  the  removal  of any  restrictions  on
transfer, that such Non-Employee Director make arrangements  satisfactory to the
Company  to insure  that the  amount of any  federal  or other  withholding  tax
required to be withheld  with respect to such sale or transfer,  or such removal
or lapse, is made available to the Company for timely payment of such tax.


                                       7.
<PAGE>

(f) As used in this Plan,  fair market value means, as of any date, the value of
the common stock of the Company determined as follows:

     (i) If the common stock is listed on any  established  stock  exchange or a
national market system,  including without limitation the National Market System
of the National  Association of Securities  Dealers,  Inc.  Automated  Quotation
("NASDAQ") System, the Fair Market Value of a share of common stock shall be the
closing  sales  price  for such  stock (or the  closing  bid,  if no sales  were
reported)  as  quoted on such  system  or  exchange  (or the  exchange  with the
greatest volume of trading in common stock) on the last market trading day prior
to the day of  determination,  as reporting  in the Wall Street  Journal or such
other source as the Board deems reliable;

     (ii) If the  common  stock is quoted on the NASDAQ  System  (but not on the
National  Market  System  thereof)  or  is  regularly  quoted  by  a  recognized
securities dealer but selling prices are not reported,  the Fair Market Value of
a share of common  stock shall be the mean  between the bid and asked prices for
the  common  stock  on  the  last  market  trading  day  prior  to  the  day  of
determination,  as reported in the Wall Street  Journal or such other  source as
the Board deems reliable;

     (iii) In the absence of an  established  market for the common  stock,  the
Fair Market Value shall be determined in good faith by the Board.

10. ADJUSTMENTS UPON CHANGES IN STOCK.

(a) If any change is made in the stock  subject  to the Plan,  or subject to any
option granted under the Plan (through  merger,  consolidation,  reorganization,
recapitalization,  stock dividend,  dividend in property other than cash,  stock
split,  liquidating dividend,  combination of shares, exchange of shares, change
in  corporate  structure  or other  transaction  not  involving  the  receipt of
consideration  by the  Company),  the  Plan  and  outstanding  options  will  be
appropriately  adjusted in the class(es) and maximum number of shares subject to
the Plan and the  class(es)  and  number of shares  and price per share of stock
subject to outstanding options. Such adjustments shall be made by the Board, the
determination of which shall be final, binding, and conclusive.  (The conversion
of any  convertible  securities  of  the  Company  shall  not  be  treated  as a
"transaction not involving the receipt of consideration by the Company.")


                                       8.
<PAGE>

(b)  In  the  event  of:  (1) a  dissolution,  liquidation,  or  sale  of all or
substantially all of the assets of the Company; (2) a merger or consolidation in
which the  Company is not the  surviving  corporation;  (3) a reverse  merger in
which the Company is the surviving  corporation  but the shares of the Company's
common  stock  outstanding  immediately  preceding  the merger are  converted by
virtue of the merger  into other  property,  whether in the form of  securities,
cash or otherwise; or (4) the acquisition by any person, entity or groups within
the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any comparable successor provisions  (excluding
any employee  benefit  plan,  or related  trust,  approved or  maintained by the
Company or any Affiliate of the Company) of the beneficial ownership (within the
meaning  of Rule  13d-3  promulgated  under  the  Exchange  Act,  or  comparable
successor rule) of securities of the Company representing at least fifty percent
(50%)  of the  combined  voting  power  entitled  to  vote  in the  election  of
directors,  then to the extent not prohibited by applicable law: the time during
which options  outstanding  under the Plan may be exercised shall be accelerated
prior to such  event and the  options  terminated  if not  exercised  after such
acceleration and at or prior to such event.


                                       9.
<PAGE>

11. AMENDMENT OF THE PLAN.

(a) The Board at any time, and from time to time, may amend the Plan and/or some
or all outstanding options granted under the Plan, provided,  however,  that the
Board shall not amend the plan more than once every six (6) months, with respect
to the  provisions  of the Plan which relate to the amount,  price and timing of
grants,  other than to comport with changes in the Code, the Employee Retirement
Income  Security Act of 1974,  as amended  ("ERISA"),  or the rules  thereunder.
Except as provided in  paragraph  10 relating  to  adjustments  upon  changes in
stock,  no amendment shall be effective  unless approved by the  shareholders of
the  Company  within  twelve  (12)  months  before or after the  adoption of the
amendment, where the amendment will:

     (i) Increase the number of shares which may be issued under the Plan;

     (ii) Modify the  requirements  as to eligibility for  participation  in the
Plan (to the extent such modification requires shareholder approval in order for
the Plan to comply with the requirements of Rule 16b-3); or

     (iii)  Modify  the  Plan in any  other  way if such  modification  requires
shareholder  approval in order for the Plan to comply with the  requirements  of
Rule 16b-3.

(b) Rights and obligations  under any option granted before any amendment of the
Plan shall not be or impaired by such amendment  unless (i) the Company requests
the  consent of the person to whom the option was  granted  and (ii) such person
consents in writing.

12. TERMINATION OR SUSPENSION OF THE PLAN.

(a) The Board may  suspend  or  terminate  the Plan at any time.  Unless  sooner
terminated,  the Plan shall  terminate on November  14, 2005.  No options may be
granted under the Plan while the Plan is suspended or after it is terminated.

(b) Rights and obligations  under any option granted while the Plan is in effect
shall not be altered or  impaired  by  suspension  or  termination  of the Plan,
except  with the consent of the person to whom the option was  granted.

(c) The Plan shall terminate upon the occurrence of any of the events  described
in Section 10(b) above.

                                       10.
<PAGE>

13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE.

(a) Upon  adoption  of the Plan by the Board of  Directors  and  subject  to the
condition  subsequent  that  the Plan is  approved  by the  shareholders  of the
Company, the Plan shall become effective on the IPO Date.

(b) No option  granted under the Plan shall be exercised or  exercisable  unless
and until the conditions of subparagraph 13(a) above has been met.


                                       11.

<PAGE>


                                    CASTELLE
                 1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

                            NONSTATUTORY STOCK OPTION


__________________, Optionee:

         On ______________, 2000, (the "Grant Date") an option was automatically
granted to you  pursuant  to the  Castelle  (the  "Company")  1995  Non-Employee
Directors' Stock Option Plan (the "Plan") to purchase shares of the common stock
of the Company ("Common Stock"). This option is not intended to qualify and will
not be treated as an "incentive  stock option" within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code").

         The grant  hereunder is in connection  with and in  furtherance  of the
Company's compensatory benefit plan for the Company's Non-Employee Directors (as
defined in the Plan).

         The details of your option are as follows:

         1. The total number of shares of Common Stock subject to this option is
( ). Subject to the  limitations  contained  herein,  this option shall vest and
become exercisable in twenty-four (24) equal monthly installments  measured from
the Grant Date.

         2. The  exercise  price of this  option is ($___) per share,  being the
Fair  Market  Value (as  defined in the Plan) of the  Common  Stock on the Grant
Date.

         3. (a) This option may be exercised,  to the extent specified above, by
delivering a notice of exercise (in a form  designated by the Company)  together
with the  exercise  price,  in one or a  combination  of the  forms  of  payment
permitted  under the Plan,  to the  Secretary of the  Company,  or to such other
person as the Company may designate,  during regular  business  hours,  together
with such  additional  documents  as the  Company may then  require  pursuant to
paragraph 6 of the Plan. This option may only be exercised for whole shares.

            (b) The  exercise  price  may be  paid  under  one of the  following
alternatives:
                (i) Payment of the exercise price per share in cash or check;

                (ii)  Provided that at the time of the exercise the Common Stock
is publicly traded and quoted  regularly in the Wall Street Journal,  payment by
delivery of shares of Common  Stock  already  owned by you,  held for the period
required to avoid a charge to the Company's  reported  earnings,  and owned free
and clear of any liens, claims,  encumbrances or security interest, which Common
Stock shall be valued at its Fair Market Value on the date preceding the date of
exercise;

                                       1.
<PAGE>

                (iii) Payment pursuant to a program developed under Regulation T
as promulgated by the Federal Reserve Board which results in the receipt of cash
(or check) by the Company either prior to the issuance of shares of Common Stock
or pursuant to the terms of irrevocable  instructions issued by you prior to the
issuance of shares of Common Stock; or

                (iv)  Payment  by  a  combination  of  the  methods  of  payment
specified in subparagraphs (i) through (iii) above.

            (c) By exercising this option you agree that the Company may require
you to enter an arrangement providing for the cash payment by you to the Company
of any tax  withholding  obligation  of the  Company  arising  by  reason of the
exercise of this option or the lapse of any  substantial  risk of  forfeiture to
which the shares are subject at the time of exercise.

         4. The term of this option is ten (10) years,  commencing  on the Grant
Date,  unless  sooner  terminated as set forth in the Plan. In no event may this
option be exercised on or after the date on which it terminates.

         5. This  option is not  transferable,  except by will or by the laws of
descent and distribution, and is exercisable during your life only by you.

         6. Any notices  provided  for in this option or the Plan shall be given
in writing and shall be deemed effectively given upon receipt or, in the case of
notices  delivered  by the  Company to you,  five (5) days after  deposit in the
United States mail,  postage prepaid,  addressed to you at the address specified
below or at such other address as you hereafter  designate by written  notice to
the Company.

         7. This option is subject to all the  provisions of the Plan, a copy of
which is  attached  hereto and its  provisions  are  hereby  made a part of this
option,  including without  limitation the provisions of paragraph 6 of the Plan
relating to option  provisions,  and is further subject to all  interpretations,
amendments, rules and regulations which may from time to time be promulgated and
adopted  pursuant  to  the  Plan.  In the  event  of any  conflict  between  the
provisions  of this  option and those of the Plan,  the  provisions  of the Plan
shall control.

         Dated the______________day of_______________, 19____.


                                                     Very truly yours,
                                                     CASTELLE


                                                     By:______________________
                                                      Duly authorized on behalf
                                                      of the Board of Directors

                                       2.
<PAGE>

ATTACHMENT:  Castelle 1995 Non-Employee Directors' Stock Option Plan

                                       3.
<PAGE>



The undersigned:

         (a)  Acknowledges  receipt  of the  foregoing  option  and the Plan and
understands  that all rights and liabilities with respect to this option are set
forth in the option and the Plan;

         (b) Acknowledges  that as of the date of grant of this option,  it sets
forth the entire understanding  between the undersigned optionee and the Company
and its  affiliates  regarding  the  acquisition  of  stock in the  Company  and
supersedes  all prior  oral and  written  agreements  on that  subject  with the
exception  of  (i)  only  options   previously  granted  and  delivered  to  the
undersigned  under stock  option plans of the  Company,  and (ii) the  following
agreements only:

                  NONE  _______________________
                                    (Initial)

                  OTHER _______________________
                        _______________________
                        _______________________



                                                     _______________________
                                                          Optionee

                                                     _______________________
                                                          Address
                                                     _______________________


                                       4.
<PAGE>






                               NOTICE OF EXERCISE


Castelle
3255-3 Scott Boulevard
Santa Clara, CA  95054                       Date of Exercise:________________



Ladies and Gentlemen:

         This constitutes  notice under my stock option that I elect to purchase
the number of shares for the price set forth below.

         Type of option:                       Nonstatutory

         Stock option dated:                 _________________

         Number of shares as to
         which option is exercised:          _________________

         Certificates to be
         issued in name of:                  _________________

         Total exercise price:              $_________________

         Cash payment delivered:            $_________________

         Value of ______ shares
         of common stock delivered(1):      $_________________

         By this exercise,  I agree (i) to provide such additional  documents as
you may  require  pursuant  to the  terms  of the  Company's  1995  Non-Employee
Directors'  Stock  Option  Plan and (ii) to provide for the payment by me to you
(in the  manner  designated  by you) of  your  withholding  obligation,  if any,
relating to the exercise of this option.

                                                          Very truly yours,

                                                          _________________



--------------------------------------------------------------------------------
(1) Shares must meet the public  trading  requirements  set forth in the option.
Shares  must be  valued  in  accordance  with  the  terms  of the  option  being
exercised,  must have been owned for the minimum period  required in the option,
and must be owned free and clear of any liens, claims,  encumbrances or security
interests.   Certificates  must  be  endorsed  or  accompanied  by  an  executed
assignment separate from certificate.

                                       1.
<PAGE>



                                                                   Exhibit 10.14

                             EXECUTIVE SEVERANCE AND
                          TRANSITION BENEFITS AGREEMENT


         THIS  EXECUTIVE   SEVERANCE  AND  TRANSITION  BENEFITS  AGREEMENT  (the
"Agreement")  is entered into  effective  as of the 10th day of  November,  1998
between DONALD L. RICH,  ("Executive")  and CASTELLE,  a California  corporation
(the  "Company").  This  Agreement  is  intended to provide  Executive  with the
compensation  and  benefits  described  herein upon the  occurrence  of specific
events.  Certain capitalized terms used in this Agreement are defined in Article
5.

         The Company and Executive hereby agree as follows:

                                   ARTICLE 1

                            EMPLOYMENT BY THE COMPANY

1.1 The Company and Executive  wish to set forth the  compensation  and benefits
which  Executive  shall be  entitled  to  receive  (i) in the event  Executive's
employment with the Company  terminates,  or (ii) in the event there is a Change
in Control of the Company, under the circumstances described herein.

1.2 The duties and  obligations of the Company to Executive under this Agreement
shall  be in  consideration  for  Executive's  past  services  to  the  Company,
Executive's  continued employment with the Company, and Executive's execution of
the general waiver and release described in Section 3.2.

1.3 This Agreement shall remain in full force and effect so long as Executive is
employed by the Company; provided,  however, that Executive's rights to payments
and benefits under Article 2 shall  continue  until the Company's  obligation to
provide such payments and benefits is satisfied.

1.4 This Agreement shall supersede any other agreements  relating to Executive's
termination of employment with the Company.

                                   ARTICLE 2

              SEVERANCE, CHANGE IN CONTROL AND TRANSITION BENEFITS

2.1  Severance  Benefits.  If  Executive's   employment  terminates  due  to  an
Involuntary Termination Without Cause or a Voluntary Termination for Good Reason
after the date of execution of this Agreement,  and without regard to any Change
in Control of the  Company,  the  termination  of  employment  will be a Covered
Termination.  Executive  shall  receive Base Pay and bonus that have accrued but
are unpaid as of the date of such Covered  Termination,  and, within thirty (30)
days following such Covered Termination, Executive shall also receive a lump sum
payment equal to one hundred percent (100%) of Executive's  Base Pay, all of the
foregoing  subject to  applicable  tax  withholding.  In  addition,  following a
Covered  Termination,  Executive  and  Executive's  covered  dependents  will be
eligible to continue  their health care  benefit  coverage as permitted by COBRA
(Internal Revenue Code Section 4980B) at the same cost to Executive as in effect
immediately  prior  to the  Covered  Termination  for  the one  (l)-year  period
following the Covered Termination.

                                       1.
<PAGE>

2.2      Transition Bonus.

     (a) In the event there is a Change in Control of the Company and  Executive
continues to render  services to the Company for ninety (90) days  following the
closing of the transaction resulting in such Change in Control, then, if:

     (i) Executive's  employment has been terminated and such termination is not
     a Covered  Termination,  Executive shall be entitled to a lump-sum  payment
     equal to fifty percent (50%) of Executive's Base Pay, subject to applicable
     withholding; or

     (ii)  Executive's  employment has been terminated and such termination is a
     Covered  Termination,  Executive  shall be entitled  to a lump-sum  payment
     equal to the Severance Benefits set forth in Section 2.1 of this Agreement,
     subject to applicable withholding.

     (b) If Executive does not terminate  employment with the successor  company
on or before  the  ninetieth  (90th) day after the  closing  of the  transaction
resulting in a Change in Control and continues to render services to the Company
from and after the ninetieth  (90th) day following such closing,  then Executive
shall  be  entitled  to a  lump-sum  payment  equal to  fifty  percent  (50%) of
Executive's Base Pay, subject to applicable  withholding,  and without regard to
any  payment  that might be  received  by  Executive  with  respect to a Covered
Termination.

2.3      Acceleration of Vesting of Outstanding Options.

     (a) If  Executive's  employment  terminates  on a date  that is  less  than
eighteen  (18) months after the date  Executive  commences  employment  with the
Company  and such  termination  is a Covered  Termination,  the  vesting  of any
options to purchase  common stock of the Company  then held by  Executive  shall
accelerate and such options shall become  immediately vested as to fifty percent
(50%) of the total number of shares of common stock subject to such options.

     (b) If  Executive's  employment  terminates on a date that is eighteen (18)
months or more after the date Executive  commences  employment  with the Company
and such  termination  is a Covered  Termination,  the vesting of any options to
purchase common stock of the Company then held by Executive shall accelerate and
such options shall become immediately vested as to one hundred percent (100%) of
the total number of shares of common stock subject to such options.

     (c) Notwithstanding (a) and (b) above, if Executive's employment terminates
in connection  with a Change in Control that is a transaction  that is accounted
for as a pooling of interests for financial accounting purposes, then no portion
of any option to purchase common stock of the Company granted to Executive after
November  10,  1998 shall  accelerate  unless the  Company  receives  reasonable
assurances  from its  independent  public  accountants  (and from the  acquiring
party's  independent public  accountants) that in their good faith judgment such
acceleration  will not affect the pooling of interests  accounting  treatment of
such Change in Control transaction.

                                       2.
<PAGE>

2.4  Mitigation.  Executive  shall not be required  to  mitigate  damages or the
amount of any payment  provided under this Agreement by seeking other employment
or  otherwise,  nor shall the  amount of any  payment  provided  for under  this
Agreement  be reduced by any  compensation  earned by  Executive  as a result of
employment  by  another  employer  or by any  retirement  benefits  received  by
Executive after the date of the Covered Termination, or otherwise.

2.5 Possible  Outcomes.  The chart  attached  hereto as Exhibit B is intended to
summarize  the  possible  cash  benefits  payable  under  this  Article 2 in the
circumstances  indicated  and  is  incorporated  into  this  Agreement  for  the
convenience of the parties.

                                   ARTICLE 3

                     LIMITATIONS AND CONDITIONS ON BENEFITS

3.1 Withholding of Taxes. The Company shall withhold appropriate federal, state,
local (and foreign, if applicable) income and employment taxes from any payments
hereunder.

3.2  Employee  Agreement  and  Release  Prior to Receipt of  Benefits.  Upon the
occurrence  of a Covered  Termination,  and prior to the receipt of any benefits
under this Agreement on account of the  occurrence of such Covered  Termination,
Executive  shall execute the Employee  Agreement and Release (the  "Release") in
the form attached hereto as Exhibit A. Such Release shall specifically relate to
all of Executive's  rights and claims in existence at the time of such execution
and shall confirm  Executive's  obligations under the Company's standard form of
proprietary   information  agreement.   It  is  understood  that  Executive  has
twenty-one (21) days to consider whether to execute such Release,  and Executive
may revoke such Release within seven (7) business days after  execution.  In the
event  Executive does not execute such Release  within the  twenty-one  (2l)-day
period,  or if Executive  revokes such Release within the  subsequent  seven (7)
business day period,  no benefits shall be payable under this Agreement and this
Agreement shall be null and void.

                                   ARTICLE 4

                            OTHER RIGHTS AND BENEFITS

4.1 Nonexclusivity.  Except as otherwise  expressly provided herein,  nothing in
the  Agreement  shall  prevent  or  limit   Executive's   continuing  or  future
participation  in any  benefit,  bonus,  incentive  or  other  plans,  programs,
policies  or  practices  provided by the  Company  and for which  Executive  may
otherwise  qualify,  nor shall  anything  herein limit or otherwise  affect such
rights as Executive may have under other agreements with the Company.  Except as
otherwise expressly provided herein,  amounts which are vested benefits or which
Executive is otherwise entitled to receive under any plan,  policy,  practice or
program of the  Company at or  subsequent  to the date of a Covered  Termination
shall be payable in accordance with such plan, policy, practice or program.

                                       3.
<PAGE>

4.2  Parachute  Payments.  If the  severance  and  other  benefits  provided  to
Executive under this Agreement (i) constitute  "parachute  payments"  within the
meaning of Section  280G of the Internal  Revenue Code of 1986,  as amended (the
"Code") and (ii) but for this Section 4.2,  such  severance  and other  benefits
would be subject to the excise  tax  imposed by Section  4999 of the Code,  then
Executive's benefits under this Agreement shall be payable either:

     (a) in full; or

     (b) as to such  lesser  amount  which  would  result in no  portion of such
severance  and other  benefits  being subject to excise tax under Section 499 of
the Code, whichever of the foregoing amounts, taking into account the applicable
federal,  state and local  income  taxes and the excise  tax  imposed by Section
4999,  results in the  receipt  by  Executive,  on an  after-tax  basis,  of the
greatest amount of severance  benefits under this Agreement.  Unless the Company
and Executive otherwise agree in writing, any determination  required under this
Section 4.2 shall be made in writing by independent public accountants agreed to
by the Company and Executive (the  "Accountants"),  whose determination shall be
conclusive  and binding upon  Executive  and the Company for all  purposes.  For
purposes  of  making  the  calculations   required  by  this  Section  4.2,  the
Accountants  may make  reasonable,  good faith  interpretations  concerning  the
application  of Sections  280G and 4999 of the Code.  The Company and  Executive
shall  furnish  to  the  Accountants  such  information  and  documents  as  the
Accountants may reasonably  request in order to make a determination  under this
Section 4.2. The Company  shall bear all costs the  Accountants  may  reasonably
incur in connection with any calculations contemplated by this Section 4.2.

                                   ARTICLE 5

                                   DEFINITIONS

         For  purposes  of the  Agreement,  the  following  terms are defined as
follows:

5.1 "Base Pay" means  Executive's  annual base pay at the rate in effect  during
the  last  regularly   scheduled  payroll  period   immediately   preceding  any
termination of Executive's employment or, if higher, Executive's annual base pay
in effect as of the date of this  Agreement if subsequent to that time Executive
has agreed to a reduction in base pay in connection with a general  reduction in
the base pay of other similarly situated employees of the Company.

5.2 "Change in Control" means (1) a  dissolution,  liquidation or sale of all or
substantially all of the assets of the Company; (2) a merger or consolidation in
which the  Company is not the  surviving  corporation;  (3) a reverse  merger in
which the Company is the surviving  corporation  but the shares of the Company's
common  stock  outstanding  immediately  preceding  the merger are  converted by
virtue of the merger  into other  property,  whether in the form of  securities,
cash or otherwise;  or (4) the acquisition by any person, entity or group within
the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any comparable successor provisions  (excluding
any employee  benefit  plan,  or related  trust,  sponsored or maintained by the
Company or any Affiliate of the Company) of the beneficial ownership (within the
meaning  of Rule  13d-3  promulgated  under  the  Exchange  Act,  or  comparable
successor rule) of securities of the Company representing at least fifty percent
(50%)  of the  combined  voting  power  entitled  to  vote  in the  election  of
directors.

                                       4.
<PAGE>

5.3 "Covered  Termination" means an Involuntary  Termination  Without Cause or a
Voluntary Termination for Good Reason.

5.4  "Involuntary  Termination  Without  Cause" means  Executive's  dismissal or
discharge  for  reasons  other than  fraud,  misappropriation,  embezzlement  or
intentional misconduct on the part of Executive which resulted in material loss,
damage or injury to the Company. The termination of Executive's  employment will
not  be  deemed  to  be an  "Involuntary  Termination  Without  Cause"  if  such
termination occurs as a result of Executive's death or disability.  For purposes
of the foregoing,  "disability"  means a disability,  as that term is defined in
the long term disability  plan maintained by the Company that covers  Executive,
that continues for ninety (90) days.

5.5 "Voluntary Termination For Good Reason" means that the Executive voluntarily
terminates  employment  within  ninety (90) days after any of the  following are
undertaken without Executive's express written consent:

     (a) the  assignment  to Executive of any duties or  responsibilities  which
result in a material  diminution  or  adverse  change of  Executive's  position,
status or circumstances of employment;

     (b) a reduction by the Company in Executive's Base Pay;

     (c) any failure by the  Company to  continue in effect any benefit  plan or
arrangement,  including  incentive  plans or plans to receive  securities of the
Company,  in  which  Executive  is  participating  (hereinafter  referred  to as
"Benefit  Plans"),  or the  taking of any  action  by the  Company  which  would
adversely affect  Executive's  participation in or reduce  Executive's  benefits
under any Benefit Plans or deprive  Executive of any fringe benefit then enjoyed
by  Executive,  provided,  however,  that  Executive  may not terminate for Good
Reason if the Company offers a range of benefit plans and programs which,  taken
as a whole,  are  comparable to the Benefit Plans as determined in good faith by
the Company;

     (d) a relocation of Executive or the Company's  principal  business offices
to a location  more than twenty  (20) miles from the  current  location at which
Executive  performs  duties,  except for  required  travel by  Executive  on the
Company's  business  to an  extent  substantially  consistent  with  Executive's
business travel obligations;

     (e) any  breach  by the  Company  of any  provision  of this  Agreement  or
Executive's Employment Agreement dated November 10, 1998; or

     (f) any failure by the Company to obtain the  assumption of this  Agreement
by any successor or assign of the Company.

                                       5.
<PAGE>

                                   ARTICLE 6

                               GENERAL PROVISIONS

6.1  Employment  Status.  This  Agreement  does not  constitute  a  contract  of
employment  or impose on Executive any  obligation to remain as an employee,  or
impose on the Company any  obligation  (i) to retain  Executive  as an employee,
(ii) to change  the status of  Executive  as an  at-will  employee,  or (iii) to
change the Company's policies regarding termination of employment.

6.2 Notices.  Any notices provided hereunder must be in writing and such notices
or any other written communication shall be deemed effective upon the earlier of
personal  delivery  (including  personal delivery by facsimile) or the third day
after mailing by first class mail, to the Company at its primary office location
and to  Executive  at  Executive's  address as listed in the  Company's  payroll
records.  Any payments made by the Company to Executive  under the terms of this
Agreement shall be delivered to Executive  either in person or at the address as
listed in the Company's payroll records.

6.3 Severability.  Whenever  possible,  each provision of this Agreement will be
interpreted  in such manner as to be effective and valid under  applicable  law,
but if any  provision  of  this  Agreement  is held to be  invalid,  illegal  or
unenforceable   in  any  respect  under  any  applicable  law  or  rule  in  any
jurisdiction,  such invalidity,  illegality or unenforceability  will not affect
any  other  provision  or any other  jurisdiction,  but this  Agreement  will be
reformed,  construed  and  enforced  in such  jurisdiction  as if such  invalid,
illegal or unenforceable provisions had never been contained herein.

6.4 Waiver.  If either party should waive any breach of any  provisions  of this
Agreement,  he or it shall not thereby be deemed to have waived any preceding or
succeeding breach of the same or any other provision of this Agreement.

6.5  Arbitration.  Unless  otherwise  prohibited by law or specified  below, all
disputes,  claims  and  causes of  action,  in law or  equity,  arising  from or
relating  to  this  Agreement  or  its  enforcement,   performance,  breach,  or
interpretation  shall be resolved  solely and  exclusively  by final and binding
arbitration held in San Francisco,  California  through  Judicial  Arbitration &
Mediation  Services/Endispute  ("JAMS") under the then existing JAMS arbitration
rules. However, nothing in this section is intended to prevent either party from
obtaining  injunctive  relief in court to prevent  irreparable  harm pending the
conclusion of any such arbitration.  Each party in any such arbitration shall be
responsible  for its own  attorneys'  fees,  costs and necessary  disbursements;
provided,  however,  that in the event one party  refuses to  arbitrate  and the
other  party seeks to compel  arbitration  by court  order,  if such other party
prevails,  it shall be entitled to recover reasonable attorneys' fees, costs and
necessary  disbursements.  Pursuant to California  Civil Code Section 1717, each
party  warrants  that it was  represented  by  counsel  in the  negotiation  and
execution of this Agreement, including the attorneys' fees provision herein.

6.6 Complete Agreement. This Agreement,  including Exhibit A, Exhibit B, and any
other written agreements  referred to in this Agreement,  constitutes the entire
agreement between  Executive and the Company and it is the complete,  final, and
exclusive  embodiment of their agreement with regard to this subject matter.  It
is entered into  without  reliance on any promise or  representation  other than
those expressly contained herein.

                                       6.
<PAGE>

6.7  Amendment or  Termination  of Agreement.  This  Agreement may be changed or
terminated  only upon the mutual  written  consent of the Company and Executive.
The written  consent of the Company to a change or termination of this Agreement
must be signed by an  executive  officer of the  Company  after  such  change or
termination  has been  approved by the  Compensation  Committee of the Company's
Board of Directors.

6.8 Counterparts.  This Agreement may be executed in separate counterparts,  any
one of which need not  contain  signatures  of more than one  party,  but all of
which taken together will constitute one and the same Agreement.

6.9 Headings.  The headings of the Articles and Sections hereof are inserted for
convenience  only and shall not be deemed to  constitute  a part  hereof  nor to
affect the meaning hereof.

6.10 Successors and Assigns. This Agreement is intended to bind and inure to the
benefit of and be enforceable by Executive and the Company, and their respective
successors, assigns, heirs, executors and administrators,  except that Executive
may not  assign  any duties  hereunder  and may not assign any rights  hereunder
without the written consent of the Company,  which consent shall not be withheld
unreasonably.

6.11 Attorneys' Fees. Except as otherwise  provided in Section 6.5, if Executive
brings  any  action  to  enforce  his  rights  hereunder,   Executive  shall  be
responsible  for his own attorneys'  fees and costs incurred in connection  with
such action, regardless of the outcome of such action.

6.12 Choice Of Law. All  questions  concerning  the  construction.  validity and
interpretation  of this  Agreement  will be  governed by the law of the State of
California, without regard to such state's conflict of laws rules.

6.13  Non-Publication.  The parties mutually agree not to disclose  publicly the
terms of this  Agreement  except to the extent  that  disclosure  is mandated by
applicable law or to respective personal advisors.

6.14  Construction Of Agreement.  In the event of a conflict between the text of
the Agreement and any summary,  description or other  information  regarding the
Agreement, the text of the Agreement shall control.

                                       7.
<PAGE>

         IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year written above.


CASTELLE                                                     DONALD  L. RICH


By: /s/ Jerome Burke                                         /s/ Don. L. Rich

Name: Jerome Burke

Title: Executive Vice President




Exhibit A: Employee Agreement and Release
Exhibit B: Chart of Possible Outcomes


                                       8.
<PAGE>

                                    EXHIBIT A

                         EMPLOYEE AGREEMENT AND RELEASE


         I  understand  and  agree  completely  to the  terms  set  forth in the
foregoing agreement.

         I  hereby  confirm  my  obligations  under  the  Company's  proprietary
information agreement.

         I  acknowledge  that I have  read and  understand  Section  1542 of the
California Civil Code which reads as follows: "A general release does not extend
to claims which the  creditor  does not know or suspect to exist in his favor at
the time of executing  the release,  which if known by him must have  materially
affected  his  settlement  with  the  debtor."  I  hereby  expressly  waive  and
relinquish  all  rights  and  benefits  under  that  section  and any law of any
jurisdiction  of similar  effect with  respect to my release of any claims I may
have against the Company.

         Except as  otherwise  set forth in this  Agreement,  I hereby  release,
acquit and forever  discharge  the Company,  its parents and  subsidiaries,  and
their  officers,   directors,   agents,   servants,   employees,   shareholders,
successors, assigns and affiliates, of and from any and all claims, liabilities,
demands,   causes  of  action,  costs,   expenses,   attorneys'  fees,  damages,
indemnities  and  obligations  of every  kind and  nature,  in law,  equity,  or
otherwise,  known  and  unknown,   suspected  and  unsuspected,   disclosed  and
undisclosed (other than any claim for  indemnification I may have as a result of
any third party  action  against me based on my  employment  with the  Company),
arising out of or in any way related to agreements,  events,  acts or conduct at
any time prior to and including the Effective Date of this Agreement,  including
but not limited to: all such claims and demands  directly or indirectly  arising
out of or in any way  connected  with my  employment  with  the  Company  or the
termination  of  that  employment,  including  but not  limited  to,  claims  of
intentional  and negligent  infliction of emotional  distress,  any and all tort
claims  for  personal  injury,  claims or demands  related  to salary,  bonuses,
commissions,  stock,  stock  options,  or any other  ownership  interests in the
Company, vacation pay, fringe benefits,  expense reimbursements,  severance pay,
or any other form of  compensation;  claims  pursuant to any  federal,  state or
local law or cause of action  including,  but not limited to, the federal  Civil
Rights Act of 1964, as amended; the federal Age Discrimination in Employment Act
of 1967, as amended  ("ADEA");  the federal  Americans with  Disabilities Act of
1990; the  California  Fair  Employment  and Housing Act, as amended;  tort law;
contract law; wrongful discharge;  discrimination;  fraud; defamation; emotional
distress;  and breach of the implied  covenant  of good faith and fair  dealing;
provided,  however, that nothing in this paragraph shall be construed in any way
to release the  Company  from its  obligation  to  indemnify  me pursuant to the
Company's indemnification  obligation pursuant to agreement or applicable law or
to reduce or eliminate any coverage I may have under the Company's  director and
officer liability policy, if any.

                                       1.
<PAGE>

         I acknowledge that I am knowingly and voluntarily waiving and releasing
any rights I may have under  ADEA.  I also  acknowledge  that the  consideration
given  for the  waiver  and  release  in the  preceding  paragraph  hereof is in
addition  to  anything  of value  to which I was  already  entitled.  I  further
acknowledge  that I have been advised by this writing,  as required by the ADEA,
that:  (A) my waiver and  release do not apply to any rights or claims  that may
arise  after  the  Effective  Date of this  Agreement;  (B) I have the  right to
consult  with  an  attorney  prior  to  executing  this  Agreement;  (C) I  have
twenty-one  (21) days to  consider  this  Agreement  (although  I may  choose to
voluntarily execute this Agreement earlier); (D) I have seven (7) days following
the execution of this Agreement by the parties to revoke the Agreement;  and (E)
this Agreement  shall not be effective  until the date upon which the revocation
period has  expired,  which  shall be the eighth  day after  this  Agreement  is
executed by me,  provided that the Company has also  executed this  Agreement by
that date (the "Effective Date").

CASTELLE                                                     DONALD  L. RICH


By: /s/ Jerome Burke                                         /s/ Don L. Rich

Name:  Jerome Burke                                          Date: 11/10/98

Title:  Executive Vice President



                                       2.
<PAGE>



                                    EXHIBIT B

                          POSSIBLE CASH PAYMENTS UNDER
              EXECUTIVE SEVERANCE AND TRANSITION BENEFITS AGREEMENT


<TABLE>
<CAPTION>

---------------------------------------- -------------------------------------- --------------------------------------
                                         Termination that Does Not Qualify as      Termination that Qualifies as a
                                                 a Covered Termination                   Covered Termination
---------------------------------------- -------------------------------------- --------------------------------------
---------------------------------------- -------------------------------------- --------------------------------------
<S>                                              <C>                                   <C>
Prior to Change in Control               Cash:  -0-                             Cash:  12 months base pay
---------------------------------------- -------------------------------------- --------------------------------------
---------------------------------------- -------------------------------------- --------------------------------------
0 - 89 days after Change in Control      Cash:  -0-                             Cash:  12 months base pay
---------------------------------------- -------------------------------------- --------------------------------------
---------------------------------------- -------------------------------------- --------------------------------------
90 days after Change in Control          Cash:  6 months base pay               Cash:  12 months base pay
---------------------------------------- -------------------------------------- --------------------------------------
---------------------------------------- -------------------------------------- --------------------------------------
90+ days after Change in Control         Cash:  6 months base pay               Cash:  18 months base pay
---------------------------------------- -------------------------------------- --------------------------------------
</TABLE>




<PAGE>





Castelle and Subsidiaries                                           Exhibit 23.1

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




                      Consent of PricewaterhouseCoopers LLP
                             Independent Accountants




We consent to the  incorporation by reference in the registration  statements of
Castelle and  Subsidiaries  on form S-8 (File Numbers  333-75247,  333-21845 and
333-06083)  of  our  report  dated  February  4,  2000,  on  our  audits  of the
consolidated  financial  statements of Castelle and  subsidiaries as of December
31, 1999 and 1998,  and for each of the three years in the period ended December
31, 1999,  and our report dated  February 4, 2000 on our audit of the  financial
statement schedule, which reports are included in this Form 10-K.









PricewaterhouseCoopers LLP
San Jose, California
March 20, 2000



<PAGE>