Castelle Announces Fourth Quarter and 1998 Annual Results.

SANTA CLARA, Calif.--(BUSINESS WIRE)--Feb. 26, 1999--Castelle (Nasdaq:CSTL) today announced financial results for the fourth quarter and full year ended Dec. 31, 1998.

Net sales for the fourth quarter of 1998 were $3.6 million down from $5.3 million in the same period of 1997. The company recorded a net loss for the fourth quarter of 1998 of $6.4 million or $1.47 per share, compared to a net loss of $930,000 or $0.21 per share for the comparable period of 1997. Excluding the effect of one-time adjustments noted below, net sales and net loss would have been $4.6 million and $1.7 million respectively.

Donald L. Rich, who joined Castelle in November, 1998 as president and chief executive officer, stated "The fourth quarter loss includes a non-cash non-recurring charge of $4 million to reserve the benefit of the company's net operating loss carryforwards. In addition, during the fourth quarter of 1998 the company increased by $1 million its sales return reserves (net impact of $0.7 million) which allow the company to more accurately adjust the level of inventory in the distribution channel."

"Our operating results reflect the continuing decline in print server sales, due primarily to business conditions in the Asia Pacific region. We expect this condition may continue for some time in the future. Further, the one-time charges in the fourth quarter represent a re-positioning of the business to allow the company to operate more efficiently going forward and to focus on its higher-margin fax server segment of the market," continued Rich.

Net sales for the year ended Dec. 31, 1998 were $21.7 million compared to $25.3 million for the same period in 1997. Net loss for the year ended Dec. 31, 1998 was $7.5 million or $1.67 per share, compared to $6.9 million or $1.54 per share for the same period in 1997. Excluding the effect of one-time adjustments noted above and the additional one-time adjustment of $1.1 million in the second quarter from the acquisition of Traffic Software, net sales and net loss would have been $22.7 million and $1.7 million respectively.

Founded in 1987, Castelle is an industry leader and pioneer of network fax and print servers that increase productivity in workgroups and the enterprise. Over the past two years the company has acquired Object-Fax, an NT-based enterprise fax server from Traffic Software and the InfoPress family of fax-on-demand and voice response solutions from Ibex Technologies.

These acquisitions strategically complement Castelle's flagship fax server product, FaxPress, and will create a fax product suite that supports centralized or distributed enterprises of all sizes. Castelle products are available through a worldwide network of distributors. Castelle has headquarters in Santa Clara, Calif. and can be reached at 800/289-7555; 408/496-0474; or www.castelle.com.

Except for the historical information contained herein, this release contains forward-looking statements that involve risks and uncertainties, including timely development, acceptance and pricing of new products and general economic conditions as they affect the company's customers, as well as the other risks detailed from time to time in the company's Securities Exchange Commission reports, including the company's Form 10-K Annual Report for the year ended Dec. 31, 1997. -0-

                               Castelle
            Condensed Consolidated Statements of Operations
                 (in thousands, except per share data)
                              (unaudited)


                      Three months ended             Year ended
                     12/31/98    12/31/97       12/31/98    12/31/97

Net sales             $ 3,600     $ 5,325        $21,746     $25,343
Cost of sales           1,814       2,644         10,148      11,836
 Gross profit           1,786       2,681         11,598      13,507

Operating expenses:
 Research and
  development             701         727          2,878       3,141
 Sales and marketing    2,349       2,699          8,776       9,180
 General and
  administrative        1,089         603          2,443       2,296
 Restructuring charges     --          --             --       6,224
 Amortization of
  intangible assets        40          --            120         574
 Acquistion of
  in-process R&D           --          --          1,124          --


 Total operating
  expenses              4,179       4,029         15,341      21,415

Loss from
 operations            (2,393)     (1,348)        (3,743)     (7,908)

Other income, net           0         124            175         281


Loss before
 income taxes          (2,393)     (1,224)        (3,568)     (7,627)

Provision for/
 (benefit from)
  income taxes          4,002        (294)         3,965        (732)

Net loss             $ (6,395)     $ (930)       $(7,533)    $(6,895)

Net loss per
 share - basic
 and diluted          $ (1.47)    $ (0.21)       $ (1.67)    $ (1.54)

Shares used in per
 share calculation -
 basic and diluted      4,336       4,489          4,507       4,470

As a percentage of net
 sales:
Net sales               100.0%      100.0%         100.0%      100.0%
Cost of sales            50.4%       49.7%          46.7%       46.7%
Gross profit             49.6%       50.3%          53.3%       53.3%

Operating expenses:
 Research and
  development            19.5%       13.7%          13.2%       12.3%
 Sales and marketing     65.2%       50.6%          40.3%       36.2%
 General and
  administrative         30.3%       11.3%          11.2%        9.1%
 Restructuring charges     --          --             --        24.6%
 Amortization of
  intangible assets       1.1%         --            0.6%        2.3%
 Acquistion of
  in-process R&D           --          --            5.2%         --
Total operating
 expenses               116.1%       75.6%          70.5%       84.5%

Loss from operations    (66.5%)     (25.3%)        (17.2%)     (31.2%)

Other income, net          --         2.3%           0.8%        1.1%

Loss before income
 taxes                  (66.5%)     (23.0%)        (16.4%)     (30.1%)

Provision for/
 (benefit from)
 income taxes           111.1%       (5.5%)         18.2%       (2.9%)

Net loss               (177.6%)     (17.5%)        (34.6%)     (27.2%)


                               Castelle
                 Condensed Consolidated Balance Sheets
                            (in thousands)
                                      Dec. 31, 1998     Dec. 31, 1997
                                        (audited)         (audited)
Assets
 Current assets:
  Cash and cash equivalents            $   3,924         $   6,204
  Restricted cash                            125               125
  Accounts receivable, net                 3,472             3,273
  Inventories                              3,739             3,786
  Prepaids and other assets                  398               573
  Deferred income taxes                       --               874
   Total current assets                   11,658            14,835
 Property, plant & equipment, net            666               938
 Other assets, net                           170                93
 Deferred income taxes                        --             3,060
  Total assets                        $   12,494        $   18,926
Liabilities & shareholders'  equity
 Current liabilities:
  Long-term debt, current                    $97               $87
  Accounts payable                         2,083             1,312
  Accrued liabilities                      2,715             2,620
   Total current liabilities               4,895             4,019
Other long-term liabilities                   98                52
 Total liabilities                         4,993             4,071
Shareholders' equity                       7,501            14,855
 Total liabilities &
  shareholders' equity                $   12,494        $   18,926