Castelle CEO Provides Positive Outlook in Special Letter to Shareholders; Four Quarters Of Profitability Provide Foundation For Growth Stock Trading Below Cash Value.

Business Editors/High-Tech Writers

MORGAN HILL, Calif.--(BUSINESS WIRE)--Aug. 21, 2002

CASTELLE (Nasdaq:CSTL), a leading provider of fax solutions for Fortune 1000 companies and small to medium-sized businesses, today announced that it has issued a Special Letter to Shareholders in an effort to update existing Castelle investors on the current status of the Company, and more importantly, management's perspective on the Company's future growth outlook. The text from the letter follows:

Dear Castelle Shareholder,

As you are painfully aware, the recent stock market environment that has so sorely tried the patience of investors has also put corporate executives and their performance under scrutiny as never before. I want to assure all Castelle shareholders that we adhere to, and are in compliance with, sound financial reporting requirements. Castelle's Chief Financial Officer and I have personally certified our second quarter financial results filed with the Securities and Exchange Commission in accordance with the requirements of the new Sarbanes-Oxley Act of 2002 signed into law by President Bush on July 30, 2002. Tough questions are being asked, as they should be. However, to me, as President and CEO of Castelle, the most fundamental and important question is: Is management truly putting the shareholders' interests first?

At Castelle, our top priority is to create value -- solid, long-term value -- for our shareholders. I am writing to you today to inform you of the steps that management has taken and plans to take to reach our objective of maximizing shareholder value. In particular, I want to give you a progress report on my first four months as Castelle's President & CEO. These past few months, as the overall market conditions have yet to improve, there have been encouraging and even exciting times at Castelle. I will start with some key information from our latest quarterly earnings report. Growth must start from a solid base of profitability and balance-sheet strength. I am pleased to report that Castelle is both profitable and financially strong.

Castelle has just reported its fourth consecutive quarter of profitability. For the second quarter of fiscal 2002, ending June 30, net income was $62,000, or one cent per diluted share. That profit was an increase from a net loss of $268,000, or six cents per diluted share, in the second quarter of fiscal 2001, and was slightly above the profit for the first quarter of fiscal 2002, which had a net income of $32,000, or one cent per diluted share. The latest profit amount is modest but significant in light of the losses we experienced a year earlier and the current economic environment. It is doubly significant in the context of our slightly down to flat top-line sales. Sales were $2.3 million in the second quarter of fiscal 2002, compared to $2.4 million a year earlier. Our achievement of maintaining steady profit under these conditions speaks to our efforts in reducing operating costs. With our operating costs streamlined, we plan to build on our progress by placing our primary focus and priority on growing the business and expanding sales, particularly toward the international markets where we have already made substantial headway.

We are well positioned with a strong balance sheet as we move into new markets. On June 30 of this year, we reported current assets of $5.92 million, including $4.31 million in cash or approximately $0.90 per share, compared to current liabilities of $2.19 million and approximately $55,000 in long-term debt. With a current ratio of 2.7 and little debt, we believe that we have the capacity to finance our planned growth strategy. "Value" investors may also want to take special note that the shares of the Company, based upon recent share prices, trade in a range below their cash value, and at only about 80% of their book value and 80% of their cash minus long-term debt value.

As noted earlier, growth must start from a base of profit and financial strength. We have built that base from which to pursue additional growth and profit opportunities. From here, we are moving aggressively to expand in overseas markets -- especially China and Continental Europe -- and we expect these efforts to increase our sales, margins and profits in coming quarters.

Castelle is a long-standing leading provider of fax solutions in the U.S. and United Kingdom, with customers among Fortune 1000 companies as well as many small- and medium-sized businesses. Since I became President and CEO on April 22, 2002, the Company has taken at least two great strides to expand its reach into other large overseas markets.

One of the markets that we are expanding our presence in is Continental Europe. On July 24, Castelle kicked-off a major sales initiative in this market when it signed up AMS Ltd., a successful UK distributor for Castelle since 1990, to market our family of FaxPress fax servers and LANpress print servers throughout Europe. Under the new agreement, AMS will market Castelle products and provide support to more than 24 countries in Europe, including the United Kingdom, Italy, Sweden, Switzerland, Germany, France, Belgium, Spain and The Netherlands. Historically, our sales for all of Europe, including the UK, have run at about $200,000 per quarter, with just 25% of these sales from the European Continent. Due in large part to the expanded relationship with AMS, we believe that we have good reason to anticipate that sales volume in Continental Europe will rise significantly.

A few days earlier, on July 15, we announced a major sales expansion in the mainland China market through the establishment of strategic partnerships with four China-based stocking distributors. This year, we have already received about $200,000 in new product orders from these distributors, or approximately 10% of our total international sales in fiscal 2001. These initial product orders are expected to ship before the end of our third quarter, ending September 30, 2002. As the economy in China has grown by approximately 10 percent a year since 1979 and will continue to expand by 7 percent for the next several decades regardless of economic conditions outside the country, according to a study conducted by Stanford University, we expect continued sales growth in the China market beyond the third quarter.

One reason that we feel confident about our future in our expanding markets is that our core fax server business has held steady in the technology sector during this difficult economic period. Faxing remains a basic and essential method of business communication everywhere -- in the U.S., U.K., Europe, China and elsewhere.

Our products help businesses carry out fundamental and important tasks more efficiently and effectively, in part by automating the faxing process as well as integrating it into back office and email systems. Our planning and investments have ensured that our economical, easy-to-use fax servers remain innovative, on the cutting edge of technology and continue to help bring basic faxing into the Internet Age. We believe that demand for our products will continue to grow, domestically and internationally, allowing us to maintain and hopefully increase our strength and profitability in the quarters ahead.

I would like to thank you for your continued interest in Castelle, and I hope this letter has given you a clear picture of how the Castelle management team is working for you.

Yours truly,

/s/ Scott C. McDonald

Scott C. McDonald

President and CEO

If you would like to be added to Castelle's investor fax or e-mail lists, please contact Karin Smith via e-mail at [e-mail] or fax at 408/852-8134.

About Castelle

Castelle develops office automation systems that allow organizations to easily implement faxing and printing over local area networks and the Internet. It is a market leader in fax solutions for small to medium-sized workgroups. Castelle's FaxPress fax servers provide a simple way to integrate fax with email, desktop and back-end applications. In addition, the company manufactures the popular LANpress print servers, which enable users to locate printers anywhere on the network. Castelle products are easy to use and maintain, and provide an economical way for companies to share resources over the network.

Castelle was founded in 1987 and is headquartered in Morgan Hill, California. Its products are utilized by Fortune 1000 companies and small to medium-sized businesses, and are available through a worldwide network of distributors, value-added resellers, systems integrators, e-commerce retailers, and the Castelle Online Store. Visit Castelle online at www.castelle.com.

Forward-looking Statements 

This press release contains forward-looking statements that involve risks and uncertainties relating to future events, including but not limited to, statements regarding management's expectations that demand for the Company's products will continue to grow, sales, margins and profits will increase in the future and that the Company has the capacity to finance its growth strategy. Actual events or the Company's results may differ materially from the events or results discussed in the forward-looking statements. More information about potential factors that could affect Castelle's business and financial results is included in the Company's reports to the Securities and Exchange Commission, including the Company's Form 10-K for the fiscal year ended December 31, 2001, and the Form 10-Q for the Quarter ended June 30, 2002. All forward-looking statements are based on information available to Castelle on the date hereof, and Castelle assumes no obligation to update such statements.