8-K

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

_______________________

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): April 26, 2006

_______________________

Castelle

(Exact Name of Registrant as Specified in Its Charter)

California

(State or Other Jurisdiction of Incorporation)

000-22020	77-0164056
(Commission File Number)	(IRS Employer Identification No.)

855 Jarvis Drive Suite 100 Morgan Hill, California	95037
(Address of Principal Executive Offices)	(Zip Code)

(408) 852-8000

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

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Section 2.02 - Results of Operations and Financial Condition.

(a)The information contained in this Section 2.02, and the exhibit hereto, are being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be deemed incorporated by reference in any filing with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any filings. On April 26, 2006, Castelle issued a press release regarding its financial results for its first fiscal quarter ended March 31, 2006. A copy of Castelle’s press release is attached hereto as Exhibit 99.1.

Section 9.01 - Financial Statements and Exhibits

(c) Exhibits

The following exhibit is being furnished herewith:

Exhibit Number	Description
99.1	Text of press release issued by Castelle dated April 26, 2006.*

*  This information shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed incorporated by reference in any filing with the Securities and Exchange Commission under the Securities Exchange Act of 1934 or the Securities Act of 1933, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: April 26, 2006

	Castelle
By:	/s/ Paul W. Cheng
	Paul W. Cheng
	Vice President, Chief Financial Officer and Secretary

EXHIBIT INDEX

Exhibit Number	Description
99.1	Text of press release issued by Castelle dated April 26, 2006.*

*This information shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed incorporated by reference in any filing with the Securities and Exchange Commission under the Securities Exchange Act of 1934 or the Securities Act of 1933, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

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EX-99.1

EXHIBIT 99.1

Contact Information:
Scott C. McDonald	Karin Smith
President & Chief Executive Officer	Director of Marketing
Tel 408-852-8009	Tel 408-852-8034
Fax 408-852-8109	Fax 408-852-8134
smcdonald@castelle.com	ksmith@castelle.com

FOR IMMEDIATE RELEASEAPRIL 26, 2006

Castelle Reports Strong Financial Results for First Quarter of Fiscal Year 2006

MORGAN HILL, CA – April 26, 2006 – Castelle^® (Nasdaq: CSTL), a leader in ‘all-in-one’ network fax solutions for business and enterprise markets, today reported financial results for the Company’s first quarter ended March 31, 2006.

Revenues and Earnings Continue Growth Trend

Revenues for the first quarter of 2006 totaled $2.99 million, up 15% from $2.59 million in the first quarter of 2005. This represented the Company’s highest quarterly revenues since the fourth quarter of 2000.

The Company achieved net income of $206,000, or $0.05 per fully diluted share, for the first quarter of 2006, representing an increase of 53% from net income of $135,000, or $0.03 per fully diluted share, in the first quarter of 2005. The increase for the first quarter of 2006 was achieved despite being negatively impacted by non-cash share-based compensation expenses of $82,000, or $0.01 per fully diluted share, related to the adoption of fair value accounting for share-based compensation. No comparable expenses occurred in the first quarter of 2005. Net income in the first quarter of 2005 was negatively impacted by approximately $180,000, or $0.04 per fully diluted share, as a result of certain accounting and legal fees.

“Our first quarter of 2006 was a clear reflection of Castelle’s successful expansion into the enterprise market with FaxPress Premier™,” said Scott McDonald, President and CEO of Castelle. “FaxPress Premier has been a significant contributor in helping Castelle capture additional market share, and has been one of the key drivers behind our revenue and earnings growth. Also in the first quarter, Castelle introduced a more robust digital fax server, FaxPress Enterprise™, to support the increasing demand for installations in digital environments. FaxPress™, FaxPress Premier and FaxPress Enterprise have been well received by new and existing customers worldwide, and we look forward to expanding our share of the fax server market.”

Castelle Continues to Strengthen its Balance Sheet

Castelle’s balance sheet as of March 31, 2006 reported cash and cash equivalents of $7.14 million, up 5.6% from December 31, 2005. This translates to nearly $1.59 per fully diluted share. Cash has not been at this level since the second quarter of 1997. Castelle remains free of long-term debt.

Strategic Partnerships to Support New Growth Initiatives

Castelle has recently taken several significant steps to expand its product offerings and establish new solution partnerships. In addition to the introduction of FaxPress Enterprise in March, Castelle announced that FaxPress Premier has been approved by Fujitsu Limited as an “Interstage^® Enabled” product in Japan. In April, Castelle announced the integration of its fax servers with Ricoh’s new GlobalScan 2.0 software to provide a complete fax solution for all electronic and paper-based documents.

EXHIBIT 99.1

Use of Pro Forma Operating Results

The Company’s GAAP results reflect the adoption of Statement of Financial Accounting Standard No. 123 (revised 2004) “Share Based Payment” (“SFAS No. 123R”). On a non-GAAP basis, net income, excluding share-based compensation expenses, was $288,000 for the first quarter of 2006, which was more than double the net income (GAAP and non-GAAP) of $135,000 in the first quarter of 2005. Prior to fiscal 2006, Castelle had not reported share-based compensation in the determination of its GAAP operating results. Castelle discloses non-GAAP financial measures of net income and net income per share and believes that this non-GAAP information provides historical comparability of its core operating results over multiple reporting periods. These non-GAAP financial measures should not be considered an alternative to earnings and earnings per share presented in conformity with U.S. generally accepted accounting principles. Further, these non-GAAP financial measures are unlikely to be comparable to non-GAAP information provided by other companies. In accordance with SEC regulations, reconciliation of the Castelle statements of earnings to the non-GAAP information is provided in the tables attached to this press release.

If you would like to be added to Castelle’s investor email list, please contact Karin Smith at ksmith@castelle.com.

About Castelle

Castelle (Nasdaq: CSTL), a market leader in ‘all-in-one’ network fax solutions for business and enterprise, develops office automation systems that allow organizations to easily implement faxing over local area networks and the Internet. Castelle’s network fax servers, FaxPress™, FaxPress Premier™, and FaxPress Enterprise™ provide a simple way to integrate fax with email, desktop and back-end applications. Castelle products are designed to be 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 available through a worldwide network of distributors, resellers, and online retailers. Visit Castelle online at www.castelle.com.

FaxPress™, FaxPress Premier™, and FaxPress Enterprise™ are trademarks of Castelle.

Forward-Looking Statements

This press release may contain forward-looking statements, including but not limited to references to revenue growth and our ability to successfully expand our product offerings to penetrate new and current markets. These statements are subject to risks and uncertainties, including but not limited to the impact on our results from fluctuations in demand for our products, our ability to maintain and increase market share, the timely development, acceptance and pricing of our products, the impact on EPS from future non-cash tax provisions or benefits and general economic conditions as they affect our customers. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements as contained in our reports to the Securities and Exchange Commission, including our Forms 10-K and 10-Q. The Company assumes no obligation to update the forward-looking information.

EXHIBIT 99.1

CASTELLE
Condensed Consolidated Statements of Earnings
(in thousands, except per share data)
(Unaudited)
				Three months ended
				March 31, 2006	March 31, 2005
Revenues:
	Products			$      2,187	$      1,893
	Services			802	701
		Total net revenues		2,989	2,594
Cost of revenues:
	Products			791	542
	Services			276	270
			Total cost of revenues	1,067	812
			Gross profit	1,922	1,782
Operating expenses:
	Research and development			485	439
	Sales and marketing			674	598
	General and administrative			616	635
			Total operating expenses	1,775	1,672
			Operating income	147	110
Other income, net				59	25
			Income before income taxes	206	135
Provision for income taxes				—	—
			Net income	$        206	$         135
Net income per common share:
			Basic	$        0.05	$        0.04
			Diluted	$        0.05	$        0.03
Shares used in per share calculation:
			Basic	4,001	3,820
			Diluted	4,485	4,465

EXHIBIT 99.1

CASTELLE
	Pro Forma Condensed Consolidated Statements of Earnings
Excluding 123R Share Based Payment Expenses
(in thousands, except per share data)
(Unaudited)
					Three months ended
					March 31, 2006	March 31, 2005
Revenues:
		Products			$      2,187	$      1,893
		Services			802	701
			Total net revenues		2,989	2,594
Cost of revenues:
		Products			791	542
		Services			266	270
				Total cost of revenues	1,057	812
				Gross profit	1,932	1,782
Operating expenses:
		Research and development			455	439
		Sales and marketing			665	598
		General and administrative			583	635
				Total operating expenses	1,703	1,672
				Operating income	229	110
Other income, net					59	25
				Income before income taxes	288	135
Provision for income taxes					—	—
				Net income	$         288	$         135
Net income per common share:
				Basic	$        0.07	$        0.04
				Diluted	$        0.06	$        0.03
Shares used in per share calculation:
				Basic	4,001	3,820
				Diluted	4,485	4,465

EXHIBIT 99.1

CASTELLE
GAAP to Pro Forma Reconciliation of Statements of Earnings
Excluding 123R Share Based Payment Expenses
(in thousands, except per share data)
(Unaudited)
				Three months ended
				March 31, 2006
				GAAP		Excluded		Pro forma
Revenues
	Products			$      2,187		$        —		$      2,187
	Services			802		—		802
		Total net revenues		2,989		—		2,989
	Products			791		—		791
	Services			276		(10)		266
		Total cost of revenues		1,067		(10)		1,057
		Gross profit	1,922		10		1,932
	Research and development		485		(30)		455
	Sales and marketing		674		(9)		665
	General and administrative		616		(33)		583
		Total operating expenses	1,775		(72)		1,703
		Operating income	147		82		229
	Other income, net		59		—		59
		Income before income taxes	206		82		288
	Provision for income taxes		—		—		—
		Net income	$       206		$         82		$       288
Net income per common share:
		Basic	$      0.05		$      0.02		$      0.07
		Diluted	$      0.05		$      0.01		$      0.06
Shares used in per share calculation:
		Basic	4,001				4,001
		Diluted	4,485				4,485

EXHIBIT 99.1

CASTELLE
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
				March 31, 2006	December 31, 2005
Assets
	Current assets:
		Cash and cash equivalents		$       7,144	$       6,766
		Accounts receivable, net		913	1,137
		Inventories		1,300	1,156
		Prepaid and other current assets		231	135
		Deferred taxes		212	212
			Total current assets	9,800	9,406
		Property and equipment, net		212	200
		Other assets		135	140
		Deferred taxes		928	928
			Total assets	$      11,075	$      10,674
Liabilities and shareholders’ equity
	Current liabilities:
		Current portion of long-term debt		$             10	$             14
		Accounts payable		320	286
		Accrued liabilities		828	824
		Deferred revenue		1,538	1,498
			Total current liabilities	2,696	2,622
	Long-term debt, net of current portion			—	—
			Total liabilities	2,696	2,622
	Shareholders’ equity			8,379	8,052
			Total liabilities and shareholders’ equity	$      11,075	$      10,674

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