SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                              ---------------------

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 2001

                                       OR

       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-----  AND EXCHANGE ACT OF 1934

             For the transition period from __________ to __________


                          Commission File Number: 08354

                            nStor Technologies, Inc.
                            ------------------------
             (exact name of registrant as specified in its charter)

       Delaware                                            95-2094565
       --------                                            ----------
(State of Incorporation)                            (I.R.S. Employer ID No.)

                10140 Mesa Rim Road, San Diego, California 92121
                ------------------------------------------------
                    (Address of principal executive offices)

        Registrant's telephone number, including area code: 858-453-9191

Securities registered pursuant to Section 12(b) of the Act:

                                             Name of each exchange
          Title of each class                 on which registered
          -------------------                ---------------------
                None                                  None

Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $0.05 per share
                     ---------------------------------------
                                (Title of class)

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 _____


<PAGE> 2


                AGGREGATE MARKET VALUE OF THE VOTING COMMON STOCK
                     HELD BY NONAFFILIATES OF THE REGISTRANT


Common  Stock,  par value $.05 per share (Common  Stock),  was the only class of
voting common equity of the Registrant  outstanding on December 31, 2001.  Based
on the last  sales  price of the Common  Stock on the  American  Stock  Exchange
(AMEX) on March 5, 2002 ($.20),  the aggregate market value of the approximately
36,778,000  shares  of the  voting  Common  Stock  held  by  non-affiliates  was
approximately $7.4 million.


              APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:


Indicate  by check mark  whether  the  Registrant  has filed all  documents  and
reports  required  to be filed by  Section  12,  13, or 14(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. Yes X   No ____


                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)


Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date:


             114,603,144 shares of Common Stock, par value $.05 per
                  share, were outstanding as of March 5, 2002.


                       DOCUMENTS INCORPORATED BY REFERENCE


     Portions of the Definitive Proxy Statement of nStor Technologies, Inc.
                  for the 2002 Special Meeting of Stockholders
                           (incorporated in Part III)


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 definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]


<PAGE> 3


                                     PART I

Item 1.   Business

GENERAL

nStor Technologies,  Inc. designs, develops and manufactures direct attached and
SAN (Storage Area Network) ready data storage  enclosures and Storage Management
Software used in storage solutions for computing operations.  We incorporated as
a Delaware  corporation  in 1959 and  initially  acquired our  computer  storage
business  in 1996.  References  in this  Form  10-K to "we",  "our",  "us",  the
"Company",  and "nStor" refer to nStor  Technologies,  Inc. and its consolidated
subsidiaries.

Our product line supports a variety of operating  systems,  including Windows NT
and Windows 2000,  Macintosh,  SGI IRIX,  Sun Solaris,  and Linux,  and utilizes
technology  architectures  such as Fibre  Channel,  Ultra SCSI  (Small  Computer
Systems  Interface),  Ultra2 LVD (Low Voltage  Differential) SCSI, Ultra160 SCSI
(160MB/sec)  and  Ultra  320SCSI  (320MB/sec).  Our  RAID  (Redundant  Array  of
Independent  Disks) solutions provide data storage  solutions,  particularly for
storage-intensive   environments  such  as  the  Internet  and  mission-critical
applications  requiring  substantial storage  performance and capacity,  such as
document imaging, video and multimedia,  or transaction-intensive  environments,
such as banking and order entry systems.

We market our products  through direct sales  personnel in the United States and
indirectly  through  a  global  network  of  resellers  and  Original  Equipment
Manufacturer (OEM) partners.

Our executive and business  headquarters are located at 10140 Mesa Rim Road, San
Diego,  California  92121  and our  telephone  number  is  (858)  453-9191.  Our
principal  engineering  offices are located in Lake Mary,  Florida.  Information
regarding nStor can be accessed through the Internet at http:// www.nStor.com.

RECENT EVENTS

Effective  March  1,  2002,  we  entered  into  a  Reseller   Agreement  with  a
wholly-owned subsidiary of Pacific Electric Wire & Cable Company, Ltd (Pacific).
The  Agreement  grants  Pacific the right to market and sell our  products for a
period of two (2) years in Mainland China and Taiwan on an exclusive  basis, and
in the United States and Europe on a non-exclusive  basis. The exclusivity right
is conditioned upon minimum  purchases by Pacific of $5 million through February
28,  2003 and $10  million  during the  subsequent  year,  and upon the  parties
agreeing,  by the end of May 2002,  on  specific  purchase  prices to be paid by
Pacific.

In  connection   with  our  efforts  to  develop  further   strategic   business
relationships  with  Pacific,  effective  March 1, 2002,  we granted  Pacific an
option to purchase up to thirty (30) million  newly issued  shares of our common
stock for a purchase price of $.40 per share, expiring on November 30, 2002.

INDUSTRY

The  demand  for  increased  information  and data  storage  capacity  has grown
dramatically  as  new  storage  applications  create  greater  efficiencies.   A
significant  growth in Internet  users and Internet  business  transactions  has
resulted in the  creation of millions of new web sites.  Environments  that have
traditionally been paper-intensive such as insurance, healthcare, education, law
firms,  and  government  agencies  have  embraced  the use of  document  imaging
technology.  Specific  sectors such as broadcasting,  entertainment,  music, and
animation  have now fully  transitioned  their  operations to the digital realm.
This  exponential  growth  of  computerized  data has  accelerated  the need for
available and reliable data storage solutions.  To meet this need, companies are
investing in new centralized  storage  infrastructures  that not only meet their
demands today, but also lay the groundwork for their future needs.


<PAGE> 4


As  corporate   Information   Technology   (IT)   environments   increase  their
server-based  infrastructure to include storage-centric  solutions, the areas of
fault-tolerance   and  storage  management  play  a  vital  role  in  protecting
businesses' critical data. To meet this escalating demand, storage suppliers are
transitioning their RAID solutions into SAN's and Network Attached Storage (NAS)
environments,  the two fastest growing sectors in the data storage  marketplace.
To  successfully  compete in this aggressive  market,  companies need innovative
products, strong integration expertise, and excellent support services.

PRODUCT STRATEGY

We believe our NexStor 3000 2U (3.5  inches)  product line leads the industry in
terms of rack space  density.  The product  line is offered  for Fibre  Channel,
SCSI,  and  Fibre-to-SCSI  environments.  Our storage  enclosures  feature fully
redundant,  hot-swappable components and support the industry's fastest and most
dense disk drives.  NexStor's advanced design and capability are targeted to the
mid-range to enterprise computing environment.  The NexStor products designed by
us  include  SAF-TE  (SCSI  Access   Fault-Tolerant   Enclosure   Services)  and
SES-compliant  (SCSI  Enclosure  Services)  modules  that  can  store up to 1.44
Terabytes  (TB) of data in a 3.5-inch,  or 2U increment of rack space.  With the
anticipated  arrival of new disk drive  technology later this year, we expect to
expand this capacity to 1.76TB in that same amount of space.

Our current hardware  products include SAN-ready Fibre RAID and RAID-ready Fibre
JBODs (Just a Bunch of Disks).  In October 2000,  the NexStor Fibre product line
was expanded to include a 12-bay module featuring  increased  spindle count that
enhances throughput  performance.  During that same month, we also announced the
newly developed 802S SCSI storage  solution  offering for the SCSI  marketplace.
Historically,  our SCSI product  offerings were the mainstay for the majority of
nStor's customer base. During 2001, we announced further development of our SCSI
product  line in the form of 8- and  12-bay  SCSI RAID  enclosures  as well as a
12-bay JBOD module to round out our NexStor Ultra160 SCSI product line.

Our  AdminiStor  software  complements  our NexStor  product line as a web-based
Storage  Management  Software suite that is used to configure RAID  controllers,
monitor and report storage status, and manage disk arrays.  AdminiStor  provides
local or remote  monitoring  and  management  with remote  notification  (e-mail
and/or  pager  alerts  to  individuals  or  groups)  for both  Windows  and Unix
environments, allowing users to manage data from remote locations.

At the November 2001 Comdex Show, we displayed our next  generation of enclosure
architecture that is designed to provide Ultra320 SCSI and 2Gbit (2GB/sec) Fibre
Channel connectivity, doubling current performance architecture. The new design,
the 4000 Series, leverages our 3.5-inch (2U) design and will be one of the first
fully  compatible  Ultra320  designs  available  to the  market.  This  new SCSI
enclosure design permits the integration of two SCSI RAID controllers within the
same  3.5-inch form factor,  eliminating  the  dependency of an additional  RAID
controller  subsystem resulting in a more cost-effective  design targeted at the
cost-sensitive, entry-level SCSI marketplace.

The 2Gbit Fibre Channel 4000 Series products provide  high-availability  storage
with   flexibility  and  scalability  to  meet  a  customer's   growing  storage
requirements.  This new Fibre  Channel  product line will allow nStor to enhance
the  current  integrated  controller  design  while  increasing  more of the SAN
capabilities  of the RAID  controller.  Fibre  Channel  has been the  choice for
mid-range to  enterprise-level  storage,  and we expect that it will continue to
grow as cost savings are  realized by sharing the same managed  storage pool for
multiple servers.  This product is targeted to become the storage foundation for
newly deployed SANs.


<PAGE> 5


The new 4000 Series  designs  (SCSI and Fibre  Channel)  will be  introduced  in
12-bay versions,  backward compatible to the prior 3000 Series, and will also be
managed by AdminiStor  software.  We feel that since neither  Ultra320 nor 2Gbit
Fibre Channel has been completely  accepted as a replacement for current product
technologies,  our new product offerings should provide an opportunity to gain a
greater foothold in the OEM and System Integrator marketplace.

CURRENT PRODUCT OFFERINGS

NexStor  3150F / 3250F and 802F / 1202F - Fibre  Channel JBOD  (RAID-ready)  and
RAID Systems

Our Fibre Channel products include the SAN-ready 3150F and 3250F complimented by
the RAID-ready 802F and 1202F. The NexStor 3150F is an 8-bay module, designed to
meet high  capacity  needs while  fitting into a small space.  It connects up to
fifteen 802F JBOD modules behind a single set of RAID controllers, scaling up to
22 TB of storage  within 56 inches of space.  The 802F/3150F  capacity  solution
takes advantage of the largest  capacity disk drives on the market by supporting
both 1 and 1.6-inch  drives.  The NexStor 802F JBOD product allows a customer to
grow to extreme  capacity  points and  upgrade  to the  high-availability  3150F
within the same enclosure by simply integrating a pair of RAID controllers. This
investment  protection  permits IT managers to grow in 3.5-inch  modular shelves
and  convert to RAID  capability  as the  computing  environment  dictates.  The
NexStor  3150F and 802F  product  series is  targeted  at  sectors  such as data
warehousing and seismic analysis.

The NexStor 3250F is a 12-bay module,  accommodating  up to twelve 1-inch drives
and offering higher performance through increased spindle count. It scales up to
876 GB in  3.5-inch  increments  and  provides  33% more disk drives in the same
space as the 8-bay series.  The NexStor 3250F can connect up to seven additional
1202F JBOD modules behind a single set of RAID  controllers,  reaching a maximum
capacity of 7 TB of storage  within 28 inches of space.  The  NexStor  3250F and
1202F are designed for intense I/O applications that prioritize performance over
capacity such as Online Transaction  Processing (OLTP),  database (Oracle,  SQL,
Microsoft Exchange Server) and video editing.

NexStor 3150S/3250S and 802S/1202S  - SCSI JBOD (RAID-ready) and RAID Systems

The NexStor 802S was our first Ultra160 JBOD product in our 3.5-inch form factor
and served as the foundation  for the later release of RAID and 12-bay  Ultra160
SCSI  designs.  nStor  announced  the  release of the  12-bay and RAID  Ultra160
versions  during the second  quarter of 2001 to  complement  the existing  8-bay
JBOD. The 8-bay SCSI series  featured the 3150S and 802S that  accommodate up to
eight 1.6 or 1-inch  disk  drives  and offer up to 1.44TB of data  storage.  The
8-bay SCSI storage system is targeted for larger capacity  storage  environments
such as pre-and post-production editing and research and development facilities.
The  introduction  of the 12-bay  RAID and JBOD SCSI series  accommodates  up to
twelve  1-inch  disk drives and offers up to 876GB of data  storage.  The 12-bay
SCSI storage system is targeted for I/O intensive  environments  such as growing
databases and the storage for a Microsoft Exchange Server.

With a large part of the storage market still using SCSI, the NexStor 802S/3150S
and 1202S/3250S fill a direct-connect  SCSI requirement  still in demand by many
IT  environments.  This product  line is focused on providing  high-performance,
workgroup  solutions with an entry-level price point. Like nStor's Fibre Channel
product,  the NexStor  SCSI series  offers an easy JBOD to RAID  upgrade path to
protect the investment of an entry-level JBOD purchase.

2002 Planned Product Offerings

For 2002 we are  planning a redesign of our chassis to improve its price  points
and feature sets. The new line of products,  the 4000 series,  provides  modular
electronics  and mechanical  designs that will allow us to take advantage of new
host and disk drive interface  technologies  more  efficiently  than our current
design, while reducing overall manufacturing costs.


<PAGE> 6


nStor 4000F and 4100F/4150F - Fibre Channel JBOD (RAID-ready) and RAID Systems

The next  generation  nStor Fibre Channel  product line will have complete 2Gbit
host to drive  connectivity.  The  4000F  series  is  positioned  to be a direct
replacement of nStor's  current 3000F series and will provide twice the possible
bandwidth.  Since  drive  manufacturers  are  focused on only  releasing  1-inch
low-profile disk drives, the 4000F will be a 12-bay enclosure system that can be
a standalone  JBOD (4000F),  a single RAID  controller  system (4100F) or a dual
RAID  controller  system  (4150F).  The 4000F JBOD system  protects a customer's
storage investment as RAID controllers can be simply integrated into the back of
the system for instant RAID  protection in the same  3.5-inch form factor.  With
twelve 144GB disk  drives,  the 4000F series will be able to scale up to 18TB in
1.76TB,  3.5-inch modular  increments.  This modular design allows customers the
`pay as you grow' ability in a space-saving, high-performance, high-availability
storage system.

The 4000F JBOD and RAID series is  currently in  development  and is planned for
initial  shipments in the second quarter of 2002, with full  production  volumes
expected during the third quarter of 2002.

nStor 4000S and 4100S/4150S - SCSI JBOD (RAID-ready) and RAID Systems

To  complement  our Fibre  Channel  offering  and broaden  our  product  line to
approach  more market  opportunities,  nStor's  SCSI  product line is also being
re-designed  to  add  the  latest   Ultra320   technology  and  provide  a  more
cost-effective  storage  system for the price  sensitive SCSI  marketplace.  The
initial  introduction  of the 4000 Series  products  will be a SCSI version with
Ultra320 JBOD and Ultra160 RAID host connectivity.

The 4000S series will also  incorporate a 12-bay  enclosure  technology and will
house the latest,  high-performance  15,000RPM and highest  capacity  144GB disk
drives,  providing the fastest I/O  transfers and the largest  amount of storage
capacity  within a 2U form  factor.  The 4000S  JBOD will have an  Ultra320  bus
architecture that will provide 320 MB/s single and 640 MB/s dual bus data paths.
The 4000S JBOD is easily  upgraded to the 4100S  single RAID  controller  or the
4150S dual RAID controller  system by simply  integrating  RAID controllers into
the  back of the  storage  system.  The  ability  to  integrate  the  SCSI  RAID
controllers  directly into the back of the storage  system  eliminates  the cost
that the previous 1U nStor SCSI controller bridgehead required to convert a JBOD
into a high-availability RAID system.

The 4000S is designed to be a direct  replacement  of the current  3000S product
line and is planned for  initial  shipments  by the end of the first  quarter of
2002 with full production volumes by the end of the second quarter of 2002.

AdminiStor

nStor's AdminiStor Storage  Management  Software suite allows  administrators to
configure, manage, and monitor all of nStor's product lines from anywhere in the
world.  AdminiStor  is  comprised  of  two  applications,   AdminiStor  RCU  and
AdminiStor  Plus.  AdminiStor  RCU  (RAID  Configuration  Utility)  is the basic
configuration  utility  that allows an  administrator  to  configure  and assign
storage  from a  server  that is  directly  connected  or on the same SAN as the
storage. AdminiStor Plus is the expansion of AdminiStor RCU and provides greater
flexibility  for the IT manager.  Through the use of  AdminiStor  Plus,  storage
systems directly-connected or part of a SAN architecture can be managed from any
location utilizing a standard  web-connection.  The enhanced Plus version of the
software allows remote fault notification and multiple party fault notification.
Offering  different  levels of security,  AdminiStor  allows  administrators  to
define  who  will be  able  to  view  the  configuration,  change  parts  of the
configuration,   or  have  complete  authority  over  their  storage  subsystem.
AdminiStor  is  JAVA-based  and  provides  heterogeneous  support  for  multiple
platforms with an easy to understand tree structure to outline the storage.  The
GUI (Graphic User Interface) is displayed in user-friendly Netscape(R) Navigator
or Microsoft(R) Internet Explorer.


<PAGE> 7


Technical Service

We offer a range of full-time service and support programs through a third party
service  company,  providing  customers  with a variety of on-site and help-desk
support services (see Technical Support and Customer Service).

SAN Solutions

As an alternative to direct-connect,  server-attached storage, networked storage
architectures  have been  gaining  popularity.  SANs  provide  the  scalability,
accessibility,   and  manageability  to  satisfy  present  and  future  business
computing requirements.

We develop,  test, and install high  availability SAN storage  solutions in both
clustered and heterogeneous  server  environments.  In addition to our SAN-ready
Fibre Channel  products,  we also offer  pre-tested  and certified  switches and
attach kits necessary for a complete SAN architecture.

As the need for storage  continues to grow,  the physical space required to hold
racks of storage  systems  becomes a premium.  We believe our focus on providing
space-sensitive,  high capability,  and fully integrated SAN solutions will help
us compete  successfully  in this  growing  market.  We believe our enhanced SAN
capability,  now included in our AdminiStor  software,  further  extends our SAN
installation and integration  capabilities.  However,  there can be no assurance
that we will be successful in these efforts due to the  possibility of increased
competition,  the  development or advancement of alternative  technologies,  and
other factors.

PROPRIETARY TECHNOLOGY

We  rely  upon  patent,   copyright  and  trademark   protection,   as  well  as
non-disclosure and confidentiality  agreements with employees and customers,  to
establish,  protect and  preserve  our  proprietary  rights.  We own  registered
trademarks or copyrights for AdminiStor, GigaRAID, Enterprise Storage Packaging,
RAID Lite, Rapid-Tape,  StorView, WEB STORAGE MANAGER, and "for the life of your
data".  In  addition,  we have  patents  pending on data  storage  chassis  with
adaptable  rack  monitoring  and disk drive  storage  enclosures  with  isolated
cooling paths for storage  media.  For a discussion of certain risks relating to
the protection of our intellectual property rights, see Risk Factors - Potential
Infringement of Intellectual Property Rights.

SALES AND MARKETING

We market our products and services  through direct sales personnel to end-users
in the United States and indirectly through a global network of OEM partners and
volume channels such as Systems Integrators and Value Added Resellers (VARs).

Direct and indirect product sales  represented 43% and 35%,  respectively of our
total sales in 2001, compared to 75% and 14%, respectively,  in 2000, reflecting
the shift in our sales and  marketing  strategy  to  provide  greater  technical
marketing  and sales  support  to our  indirect  sales  function.  One  customer
(indirect)  accounted for 12% of net sales in 2001.  No customers  accounted for
more than 10% in 2000. In 1999, two customers,  Silicon Graphics  (indirect) and
Intel (direct), accounted for 15% and 11%, respectively, of our 1999 sales.


<PAGE> 8


Service  contracts,  principally with end-users,  represented 22% and 11% during
2001 and 2000,  respectively.  During  2001,  we sold  substantially  all of our
servicing business and we expect servicing revenues to be insignificant in 2002.
The increase in service  revenue for 2001 is primarily the result of recognizing
the remaining  unamortized  service revenue  following the sale of our servicing
business.  Substantially,  all of our servicing business is currently contracted
through a third party service company.

OEM-grade  products are primarily sold directly to OEM server  manufacturers for
integration  into their  product  offerings.  Generally,  the OEM  products  are
labeled under the OEM's brand name where our products are frequently packaged as
part of a complete data processing system or combined with other storage devices
to deliver a storage subsystem. We believe OEM channel sales provide significant
revenue  opportunity,  market  visibility  and  credibility,  and can serve as a
proving ground for new  technologies  that can later be marketed and sold in the
distribution  channel.  OEM's are  strategic in nature and,  therefore,  require
unique  sales  strategies.  The sales and  support  organization  must be highly
technical and generally involves several corporate resources.

The sales model for product  distribution in Europe and the  Asia/Pacific-Rim is
similar to the  domestic  OEM and  Reseller  channel  model,  utilizing  Systems
Integrators and VARs.  Complementary pricing and margin structures and marketing
programs support each sales channel.  We believe this strategy allows us and our
customers  to  effectively  sell and  market  our  products  to  their  specific
marketplace while maintaining channel integrity.

Our marketing plan utilizes a variety of programs to promote and develop new and
expanding  markets for our product lines and to support our sales strategy.  The
focal  points of this  plan  include  a supply  of  highly  focused  promotional
material including product  specification  literature and application notes, web
site  innovation,   development  and  promotion  of  the  distribution  channel,
strategic  media  placement,  regional,  national  and  international  tradeshow
participation, and public relations.

TECHNICAL SUPPORT AND CUSTOMER SERVICE

We provide  technical  support for pre-sales system design and manage post sales
service through our enterprise resource planning software.  Products are tracked
through each stage of engineering, manufacturing and distribution for the entire
life of a product,  and our customer service  department can view the history of
each individual system.

We provide comprehensive  customer and technical support for all of our products
through our technical and customer services organization.  A toll-free telephone
number is provided for customer support.

Our standard warranty is a one-year  return-to-factory policy, which covers both
parts  and  labor.  We pass on to the  customer  the  warranty  provided  by the
manufacturers for products that we distribute.  We have not experienced material
warranty claims;  however, there can be no assurance that future warranty claims
will not have a material  adverse effect on our future  financial  condition and
operating results. We also offer extended warranties (two, three and five years)
and various  levels of on-site  service for our products,  for which we contract
primarily with  third-party  service  providers.  In addition,  we offer a Depot
Express  program  for  certain  of our  products,  which  provides  for  advance
replacement of failed components.  If our Help Desk technical staff determines a
replacement is necessary, we will ship a new component by the next business day,
based upon  availability.  This service is  available  for a one-time fee at the
time of the original purchase.

We also offer an Incident  Depot  Express  program for certain of our  products,
which provides expedited shipment for failed components on a per-incident basis,
based upon  availability.  This is a  non-contracted  service and requires a fee
only if a component fails and a replacement is shipped.


<PAGE> 9


MANUFACTURING AND SUPPLIERS

Our manufacturing operations are located in San Diego, California.  Our products
are assembled from  components and  prefabricated  parts,  such as  controllers,
cabinets,  disk drives and power supplies,  manufactured and supplied by others.
We work closely with a group of regional,  national and international suppliers,
that are selected based on their ability to provide quality parts and components
that meet our specifications and volume requirements.  A number of our parts and
components are designed specifically for integration into our products.

We depend heavily on our suppliers to provide high quality materials on a timely
basis and at reasonable prices. Although many of the components for our products
are currently available from numerous sources at competitive prices, some of the
components used in our products are presently available from a limited number of
suppliers,  or from a single supplier.  Further,  because of increased  industry
demand for many of those components, their manufacturers may, from time to time,
be  unable  to make  delivery  of our  orders on a timely  basis.  In  addition,
manufacturers of components on which we rely may choose,  for numerous  reasons,
not to  continue  to make  those  components,  or the next  generation  of those
components,  available to us. The inability to obtain a key product component as
needed may cause a reduction in our sales volume.

We have no long-term supply  contracts.  There can be no assurances that we will
be able to obtain,  on a timely basis,  all of the components we require.  If we
cannot  obtain  essential  components  as  required,  we could be unable to meet
demand for our products,  thereby materially  adversely  affecting our operating
results and allowing competitors to gain market share. In addition,  scarcity of
such components could result in cost increases, which could materially adversely
affect our operating results.

The sophisticated  nature of our products requires  extensive testing by skilled
personnel.  We utilize  specialized  testing  equipment and maintain an internal
test-engineering group to provide this product support.

BACKLOG

We manufacture our products based on a forecast of near-term demand and maintain
inventory  in advance of receipt of firm orders from  customers.  Shipments  are
generally  made  shortly  after  receipt of a firm order.  We have no  long-term
purchase commitments from our customers and, in general, customers may cancel or
reschedule orders on 30 days notice with little or no penalty.  As a result, our
backlog at any given time is not necessarily indicative of future sales levels.

There can be no assurances that orders from existing  customers will continue at
their  historical  levels,  that  we will be able  to  obtain  orders  from  new
customers,  or that  existing  customers  will not  develop  their  own  storage
solutions internally and as a result reduce or eliminate purchases.  Loss of one
or more of our principal customers,  or cancellation or rescheduling of material
orders  already  placed,  could  materially  and adversely  affect our operating
results.

RESEARCH AND DEVELOPMENT

We have three engineering centers to facilitate our product development. Each of
these  centers of  competency  is focused on a  different  aspect of our product
development strategy.


<PAGE> 10


Lake Mary,  Florida is the  competency  center for our enclosure  technology and
development.  In  addition  to  designing,  developing  and  testing our storage
enclosures,  engineers  in Lake  Mary  are  also  responsible  for  the  design,
development  and successful  integration of  controllers  (both  nStor-developed
controllers as well as third-party products) into our enclosure technology.  All
disk drive  compatibility  testing  with nStor's  product  lines (SCSI and Fibre
Channel) is conducted in Lake Mary.

San Diego,  California is the  competency  center for our  integrated  solutions
including an extensive SAN integration lab. Engineers in San Diego integrate the
total SAN and general storage  solutions that include  internally  developed and
third party  software  and hardware  components.  The SAN  interoperability  lab
focuses on SAN component  selection and validation,  integration and delivery of
end-user solutions as well as solution testing for all our SAN-related  products
and services.  In conjunction with the interoperability lab, San Diego hosts the
AdminiStor software development and testing.

Taipei,  Taiwan  is the  competency  center  for  the  development  of our  RAID
controller  technology and Fibre Channel drive firmware  qualification for these
controllers.

The information storage industry is subject to rapid  technological  change. Our
ability to compete successfully is largely dependent upon the timely development
and  introduction  of new products and our ability to anticipate  and respond to
change.  We use  engineering  design  teams that work with  marketing  managers,
application   engineers   and   customers   to  develop   products  and  product
enhancements.  Computer I/O interface  standards are maintained and an extensive
disk drive  qualification  program is in place to monitor  disk drives to ensure
the quality and performance of the disk drives  integrated into our disk arrays.
As part of our development strategy, we actively seek industry leaders with whom
we can initiate co-development activities in the hardware,  software and systems
businesses.

COMPETITION

The market for storage subsystems is subject to intense competition.  We compete
not only  with  other  enclosure  and disk  array  manufacturers,  but also with
manufacturers of proprietary, integrated computer systems and system integrators
who sell computer systems  containing  general purpose RAID subsystems,  most of
which may have  significantly  greater financial and technological  resources or
larger distribution capabilities than we do.

Certain  competitors  may offer their  products at lower sales prices than ours.
Accordingly, we must often compete on the basis of product quality,  performance
and reliability in specific applications.  Our continued ability to compete will
largely depend upon our ability to continue to develop high performance products
at competitive prices while continuing to provide superior technical support and
customer service. For a discussion of certain of our major competitors, see Risk
Factors - Intense Competition.

EMPLOYEES

As of February 28, 2002,  we employed 71 full-time  employees,  of which 27 were
involved in engineering,  product development and technical support, 13 in sales
and marketing, 22 in manufacturing and operations, and 9 in finance,  management
and administration.  This number of employees represents a significant reduction
in our  work  force  over  the past  year.  Our  employees  are not  covered  by
collective  bargaining  agreements  and there  have been no work  stoppages.  We
believe our employee relations are good.

We also believe that our future  success will largely depend upon our ability to
continue to attract, employ and retain competent qualified technical,  marketing
and management personnel.  Experienced personnel are in great demand and we must
compete  with other  technology  firms,  some of which may offer more  favorable
economic incentives to attract qualified personnel.


<PAGE> 11


RISK FACTORS

In addition to the various risks ordinarily attendant to investments in entities
in the technology industry,  certain other material risk factors relating to our
company  and its  business  present a  particularly  high  degree  of risk.  The
specific risks set forth below are not considered,  or deemed,  to be exhaustive
or definitive of all the material risks involved in our company's business.

        Recent Losses; Capital Needs

We have  experienced  negative  cash flows  from  operations  and have  suffered
substantial  net losses for the years ended December 31, 2001,  2000 and 1999 of
$14 million,  $21.9  million and $18.7  million,  respectively.  At December 31,
2001, we had an accumulated deficit of $96.3 million. There can be no assurances
that we will be able to achieve or  maintain  profitability  on a  quarterly  or
annual basis or that we will be able to achieve revenue growth.

Since January 1, 2001, and through  February 28, 2002, we obtained $20.5 million
of equity and debt financing  from private  investors.  Of these amounts,  $12.1
million was received from Maurice Halperin,  the Company's Chairman of the Board
since August 15, 2001 and a principal  stockholder,  or companies  controlled by
Mr.  Halperin  (collectively,  Mr.  Halperin),  consisting of $6 million in cash
received  between  August 2001 and November 2001, and $6.1 million in marketable
securities  received  in  November  2001 (see Note 3 to  Consolidated  Financial
Statements).  Through  February 28, 2002,  we have received $2.3 million in cash
from  the  sale  of a  portion  of  the  marketable  securities  (see  Note 6 to
Consolidated  Financial  Statements).  Equity and debt  financing  obtained from
January 2001 through February 28, 2002, also included $2.8 million from H. Irwin
Levy, our Vice Chairman of the Board and a principal  shareholder,  or companies
controlled  by  Mr.  Levy   (collectively,   Mr.  Levy).   Additional   cash  of
approximately  $7  million  was  obtained  during  January  2000  when  we  sold
substantially  all the  assets of our  wholly-owned  subsidiary,  Borg  Adaptive
Technologies, Inc.

We are currently  exploring  alternatives for raising  additional debt or equity
capital to finance  our  short-term  and  long-term  plans as well as  operating
deficits expected to be incurred until we begin to generate  positive  operating
cash flows.  However,  due to  conditions  in the  technology-related  financial
markets and other  uncertainties,  many of which are outside our control,  there
can be no assurances  that such required  additional  funds will be available on
terms acceptable to us, if at all, or that we will be able to generate  positive
cash flows from operating activities in the future.

        Inability to Comply with Financial Covenants

Since  the  fourth  quarter  of 2000,  we have not been in  compliance  with the
minimum  net worth and net income  covenants  under our bank line of credit.  On
February 4, 2002,  the bank advised us that the  outstanding  principal  balance
exceeded the borrowing  base by $1.1 million and demanded  immediate  payment of
the  over-advance.  The bank also  indicated that our non-bank  indebtedness  of
approximately  $4.7 million was incurred in violation of the loan agreement.  In
addition, effective February 4, 2002, the bank applied certain amendments to the
loan  agreement  and also advised us that it does not intend to renew the credit
facility when it matures in April 2002.  We are currently  seeking a replacement
lender,  but there is no  assurance  we will be  successful  in  obtaining a new
credit line  facility on terms  acceptable  to us, if at all. As of February 28,
2002, the outstanding balance of our bank line of credit was $1.3 million.


<PAGE> 12


        Fluctuations in Operating Results

We have experienced significant  period-to-period  fluctuations in our operating
results.  These  fluctuations are partially due to product design,  development,
manufacturing  and marketing  expenditures.  If significant  variations  were to
occur between  forecasts and actual orders with respect to our products,  we may
not be able to reduce our expenses  proportionately  and operating results could
be materially  adversely  affected.  Our revenues in any period are dependent on
the timing of product shipments,  the status of competing product introductions,
as well as the  availability  from suppliers of component parts required for our
products.  Like many other  technology  companies,  a  disproportionately  large
percentage  of sales  often  occur in the  closing  weeks  of each  period.  Any
forward-looking  statements  about  operating  results  made by  members  of our
management  will be  based  on  assumptions  about  the  likelihood  of  closing
anticipated  sales and other factors  management  considers  reasonable based in
part on knowledge of performance in prior periods. The failure to consummate any
of those sales may have a  disproportionately  negative  impact on our operating
results, due to our fixed costs, and may thus prevent  management's  projections
from being realized.

        Inability to Attract and Retain Qualified Employees

Our ability to provide high-quality  products on a timely basis requires that we
employ an adequate number of skilled engineers and technicians. Accordingly, our
ability to increase our  productivity and  profitability  will be limited by our
ability to attract and retain skilled personnel.  We may not be able to maintain
an adequate skilled labor force necessary to operate  efficiently and to support
our  growth  strategy  and our  labor  expenses  may  increase  as a result of a
shortage in the supply of skilled personnel.

        New Line of Products

During 2001,  we  introduced a number of new  products and are  encouraging  our
customers to migrate to this new product line. These activities  entail a number
of risks and  uncertainties,  all of which  could  have a material  and  adverse
affect on our  business.  Those risks and  uncertainties,  include,  but are not
limited to, the following:

  o customer  orders may be delayed while customers  evaluate new products;
  o the new line of products may contain unknown defects or "bugs";
  o customers may not purchase the new products; and
  o it will be more difficult to accurately predict future sales and financial
    performance.

        Rapid Technological and Customer Preference Changes

The open  systems data storage  market in which we operate is  characterized  by
rapid  technological  change,  frequent new product  introductions  and evolving
industry standards. Customer preferences in that market are difficult to predict
and changes in those  preferences  could  render our current or future  products
unmarketable.  The  introduction  by our  competitors of products  embodying new
technologies  and the  emergence  of new  industry  standards  could  render our
existing  products as well as our new  products  being  introduced  obsolete and
unmarketable.  For  example,  if  customers  were to turn away from open systems
computing, our revenues would decline dramatically.

Our  success  depends  upon our  ability to  address  the  increasing  technical
requirements  of  customers,  to enhance  existing  products  and to develop and
introduce,  on a timely basis, new competitive  products (including new software
and hardware and enhancements to existing  software and hardware) that keep pace
with technological  developments and emerging industry  standards.  If we cannot
successfully  identify,   manage,   develop,   manufacture  and  market  product
enhancements  or new products,  our business  will be  materially  and adversely
affected.


<PAGE> 13


        Intense Competition

The open systems data storage market is intensely  competitive.  We compete with
traditional   suppliers  of  computer  systems  such  as  Hewlett-Packard,   Sun
Microsystems,  IBM,  Compaq,  and Dell,  which market storage systems as well as
other  computer  products,  and which  recently  have  become  more  focused  on
marketing storage systems.  We also compete against  independent  storage system
suppliers  including,  but not limited to, EMC, including its Clariion division,
MTI  Technologies  and Dot Hill.  Major  competitors  in our  indirect  customer
business include Eurologic Systems, Xyratex and JMR Electronics.

Many of these  competitors are significantly  larger than our company,  and have
significantly  greater  financial,  technical,  marketing,  purchasing and other
resources  than we do, and as a result may be able to respond more  aggressively
to new or emerging technologies and changes in customer requirements,  or devote
greater  resources to the  development,  promotion  and sale of products than we
can, or to deliver competitive products at a lower end-user price.

Increased competition is likely to result in price reductions, reduced operating
margins and loss of market  share,  any of which  could have a material  adverse
effect on our  business,  operating  results or  financial  condition.  In fact,
competitive  pricing  pressures  have had, and may continue to have,  an adverse
effect on our revenues and earnings.

If we are unable to develop and market products to compete with our competitors'
products,  our business will be materially adversely affected.  In addition,  if
major customers who are also  competitors  cease purchasing our products so that
they can  concentrate  on sales of their own  products,  our  business  could be
materially adversely affected.

        Pending Litigation

In June and August 1996,  our company and two of our then  directors were served
with two  separate  complaints  filed in the  Supreme  Court of the State of New
York,  County of Nassau,  in which the plaintiffs  claim to have had contractual
and proprietary  interests in the prospect of a transaction to purchase  certain
net assets acquired by us. The plaintiffs seek  compensatory  damages,  punitive
damages,  and equitable  relief for alleged  interference  with the  plaintiffs'
alleged rights and for alleged breach of contract.  Our counsel believes that we
have good  defenses  to both  claims  and that we will not  incur  any  material
liability.  We are  not  aware  of  any  facts  that  would  support  any of the
plaintiffs'  claims  and,  accordingly,  we believe  that the claims are without
merit.

In February  2002,  W. David  Sykes,  our former  Executive  Vice  President  of
Marketing and Sales,  filed a complaint  against us in the Circuit Court of Palm
Beach County,  Florida,  in which Mr. Sykes claims he was wrongfully  terminated
under  provisions of his employment  agreement with us. We believe that we acted
in  accordance  with the  termination  provisions  of the  agreement and that no
further  compensation  or benefits are due to Mr. Sykes. We believe that we have
good defenses to the claim and that we will not incur any material liability.

        Lack of Long Term Contracts

We generally do not enter into long-term purchase commitments with our customers
and customers  generally  have certain rights to extend or to delay the shipment
of their orders, as well as the right to return products and cancel orders under
certain circumstances.  The cancellation or rescheduling of orders placed by our
customers,  or the return of  products  shipped to them,  could  materially  and
adversely affect our business.


<PAGE> 14


        Product Defects

Our open  system  data  storage  products  may  contain  undetected  software or
firmware  errors or hardware  failures when first  introduced or as new versions
are released.  We cannot be certain that,  despite  testing,  errors will not be
found in new products after commencement of commercial shipments.

Our standard  warranties provide that if a system does not function to published
specifications we will repair or replace the defective component without charge.
Significant warranty costs could have a material adverse effect on our business.

        Availability of Competing Products

In the United States, we sell our products both through a direct sales force and
through indirect sale channels.  Our OEMs, VARs and System  Integrators may also
carry  competing  product lines,  and could reduce or  discontinue  sales of our
products, which could have a material adverse effect on our operating results.

        A  Significant  Percentage  Of Our Expenses  Are Fixed Which May Affect
        Our  Operating Results

Our expense levels are based in part on our expectations as to future sales, and
a significant  percentage of our expenses are fixed, which limits our ability to
reduce expenses quickly in response to any revenue  shortfalls.  As a result, if
revenues  do  not  meet  our  revenue  projections,  operating  results  may  be
disproportionately  affected.  We may experience  revenue shortfalls for various
reasons, including:

     o    sudden  shortages of raw  materials or  fabrication,  test or assembly
          capacity  constraints  that lead our  suppliers to allocate  available
          supplies or capacity to other customers,  which, in turn, may harm our
          ability to meet our sales obligations; and
     o    the reduction, rescheduling or cancellation of customer orders.

In addition,  we typically  plan our  production  and inventory  levels based on
internal  forecasts of customer demand,  which is highly  unpredictable  and can
fluctuate substantially. From time to time, in response to anticipated long lead
times to obtain inventory and materials from our outside suppliers, we may order
materials in advance of anticipated  customer demand.  This advance ordering may
result in excess  inventory  levels or  unanticipated  inventory  write-downs if
expected orders fail to materialize.

        Lengthy Sales Cycles

Customer orders generally range in value from a few thousand dollars to hundreds
of  thousands  of dollars.  The length of time  between  initial  contact with a
potential  customer  and sale of a  product,  or  "sales  cycle",  also can vary
greatly and can be as long as twenty-four  months. This is particularly true for
the sale and installation of complex,  turnkey  solutions,  which often are sold
directly to end users.  Our  revenues are likely to be affected by the timing of
larger orders, which makes it difficult for us to predict such revenues. Revenue
for a period could be reduced if large orders  forecasted  for a certain  period
are  delayed or are not  realized.  Factors  that could  delay or defer an order
include:

     o    time needed for technical evaluation by customers;
     o    customer budget  restrictions and changes to budgets during the course
          of a sales cycle;
     o    customer internal review and testing procedures; and
     o    engineering  work  needed  to  integrate  a  storage  solution  with a
          customer's system.


<PAGE> 15


        Potential Infringement of Intellectual Property Rights

We rely on a combination  of trade  secrets,  copyrights,  trademarks,  patents,
domain names and employee and  third-party  nondisclosure  agreements to protect
our intellectual  property rights. The steps taken to protect our rights may not
be  adequate  to  prevent  misappropriation  of our  technology  or to  preclude
competitors  from  developing  products with  features  similar to our products.
Furthermore,  third parties may assert  infringement  claims  against us or with
respect to our products for which we have indemnification obligations to certain
of our customers.  Asserting our rights or defending against  third-party claims
could involve substantial expense, which could have a material adverse effect on
our  operating  results.  In the event a third party were  successful in a claim
that one of our products infringed the third party's  proprietary rights, we may
have to pay  substantial  damages or  royalties,  remove that  product  from the
marketplace or expend substantial amounts in order to modify the product so that
it no longer  infringes  such  proprietary  rights,  any of which  could  have a
material adverse effect on our operating results.

        Loss of Key Suppliers

We rely on other companies to supply certain key components of our products. Our
products  are  typically  designed to operate  with unique  components  that are
available  from a single  source.  For  example,  certain  of our  products  are
dependent upon RAID  controllers  designed by one of our suppliers.  Although we
can use other suppliers,  the delay in integrating  these parts into our systems
will  increase  product  costs.  Other  components,  while not  dependent on one
source,  may, from time to time, be in short supply or unavailable  for a period
of  time  while  alternative  sources  can be  identified.  Modification  to the
particular products,  requalification of the products with applicable regulatory
agencies,  and additional  testing to assure software and hardware is compatible
can result in lost or deferred revenue as well as higher product costs.

In addition,  we resell  subsystems,  software and  services  from others.  This
leaves  us  vulnerable  to  inadequate  supply,  uneven  allocation  in times of
shortage, delays in order fulfillment, and order cancellations.

        Concentrated Customer Base

We operate  predominantly  in one  business  segment,  open systems data storage
products,  including  external RAID subsystems.  In 2001, one customer accounted
for 12% of our net sales and in 1999, two customers  amounted to an aggregate of
26% of our net revenues.  In 2000,  no customers  accounted for more than 10% of
our net revenues.

An economic downturn in any industry or geographical area targeted by us, or the
loss of one or more customers, particularly a significant customer, could result
in a material decrease in revenues,  thereby materially  adversely affecting our
operating results.

        Narrow Market

Substantially  all of our revenues to date have been  concentrated  in the UNIX,
Windows  NT and  Windows  2000  marketplace.  A large  portion  of our  revenues
associated with versions of UNIX are manufactured by Sun Microsystems  (Sun). If
Sun were to change its policy of supporting open systems computing  environments
and if our products were thereby rendered  incompatible  with Sun products,  our
results of operations could be materially and adversely affected.


<PAGE> 16


        Volatile Stock Price

Our  common  stock has  experienced  in the past,  and could  experience  in the
future,  substantial  price  volatility  as a  result  of a number  of  factors,
including:

     o    quarter  to  quarter  variations  in actual or  anticipated  financial
          results;
     o    announcements by us, our competitors or our customers;
     o    government regulations; and
     o    developments in the information storage industry.

The stock  market has also  experienced  extreme  price and volume  fluctuations
which have  affected the market price of many  companies and which have at times
been  unrelated to the operating  performance  of the specific  companies  whose
stock is traded.  Broad  market  fluctuations,  developments  in the  technology
industry,  general  economic  conditions  and political  and current  events may
adversely affect the market price of our common stock.

In addition,  if our current security  holders sell  substantial  amounts of our
common stock,  including shares issued upon the exercise of outstanding  options
and warrants,  in the public market,  the market price of our common stock could
fall.

        Insufficient Funding

We have  expended and may be required to expend  substantial  funds for research
and development, and for other aspects of our business. Accordingly, we may need
or elect to raise additional  capital.  Our capital  requirements will depend on
many factors, including:

     o    the   problems,   delays,   expenses  and   complications   frequently
          encountered by technology companies;
     o    the  progress  of  our  research,   development  and  product  testing
          programs;  o the success of our sales and marketing programs;
     o    costs in filing,  prosecuting,  defending and  enforcing  intellectual
          property rights;
     o    the extent  and terms of any  collaborative  research,  manufacturing,
          marketing or other arrangements; and
     o    changes in  economic,  regulatory  or  competitive  conditions  or our
          planned business.

Estimates  about the adequacy of funding for our activities are based on certain
assumptions,  including the assumption  that research,  development  and testing
related to our products under  development  can be conducted at projected  costs
and within  projected  time frames and that such  products  can be  successfully
marketed.

To satisfy our capital requirements, we may seek to raise funds in the public or
private capital markets.  Our ability to raise additional funds in the public or
private  markets  will be  adversely  affected  if the results of our ongoing or
future  research  and  development  programs  are  not  favorable.  We may  seek
additional   funding  through  corporate   collaborations  and  other  financing
vehicles.  Such funding may not be  available,  or if  available,  it may not be
available on acceptable  terms.  If adequate funds are not available,  we may be
required  to curtail  our  operations  significantly,  or we may be  required to
obtain funds through arrangements with future  collaborative  partners or others
that may require us to relinquish  rights to some or all of our  technologies or
products  under  development.  If we  are  successful  in  obtaining  additional
financing,  the  terms of the  financing  may have the  effect  of  diluting  or
adversely  affecting  the  holdings  or the rights of the  holders of our common
stock.


<PAGE> 17


        Our  Auditor's  Have  Expressed  Substantial  Doubt as to Our Ability to
        Continue as a "Going Concern"

The auditors'  reports for our consolidated  financial  statements for the years
ended  December 31, 2001 and 2000,  state that because we are not in  compliance
with certain financial  covenants under our existing bank facility and given our
recurring  operating losses and our continued  experience of negative cash flows
from operations,  there is substantial  doubt about our ability to continue as a
going  concern.  A  "going-concern"  opinion  indicates  that although  there is
substantial   doubt,   the  financial   statements   have  been  prepared  on  a
going-concern  basis and do not include any  adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and  classification  of  liabilities  that may result  from the  outcome of this
uncertainty.

        Maintenance of American Stock Exchange (AMEX) Listing

If we fail to  continue  to satisfy  the  maintenance  criteria  for listing our
common stock on the AMEX, the AMEX may delist our common stock from trading. The
Company has received  correspondence from AMEX requesting certain information in
this regard and expects to be able to satisfy  the AMEX  requirements.  However,
there is no  assurance  that our common  stock  will  continue  to  satisfy  the
requirements for listing on the AMEX.  Delisting of our common stock may have an
adverse impact on the market price and liquidity of our common stock.

Item 2.  Properties

Our principal executive,  administrative, sales and manufacturing activities are
located  in  approximately  42,400  square  feet  of  facilities  in San  Diego,
California. The present annual base rent for our San Diego facility is $331,000.
The space is occupied under a lease  agreement with an entity owned by Mr. Sykes
and expires in March 2003.

We lease approximately  18,000 square feet of office and warehouse space in Lake
Mary,  Florida,  under a lease agreement that expired in February 2002 and which
is currently on a month-to-month basis. We expect to relocate into significantly
reduced  space.  The annual  base rent of our  current  space was  approximately
$119,000.

We believe our existing  facilities are adequate to meet future needs.  See Note
16 to Consolidated  Financial Statements for information regarding the Company's
obligations under its facilities leases.

Item 3.  Legal Proceedings

In June 1996, Jack Ehrenhuas, Mark Schindler, Eugene Stricker, Amnon Damty, Ehud
Mendelson  and Susan Felton filed a Complaint in the Supreme  Court of the State
of New York, County of Nassau, against us and Michael Wise, our then Chairman of
the Board and a current  director.  The plaintiffs claim to have contractual and
proprietary  interests in the prospect of a transaction to purchase  certain net
assets acquired by us and seek compensatory damages plus punitive damages.

In August 1996, The Nais  Corporation,  Mark Schindler,  Eugene Stricker,  Amnon
Damty,  Ehud  Mendelson  and Susan  Felton  filed a Complaint  in the same Court
making similar allegations against one of our subsidiaries,  its then president,
R. Daniel Smith,  and a company  controlled by Mr.  Smith.  In this action,  the
plaintiffs seek compensatory damages plus punitive damages for alleged breach of
contract.

Both cases are  currently in discovery.  Our counsel  believes that we have good
defenses to both claims and that we will not incur any  material  liability.  We
are unaware of any facts that would support any of the  plaintiffs'  claims and,
accordingly, we believe that the claims are without merit.


<PAGE> 18


In February  2002,  W. David  Sykes,  our former  Executive  Vice  President  of
Marketing and Sales,  filed a complaint  against us in the Circuit Court of Palm
Beach County,  Florida,  in which Mr. Sykes claims he was wrongfully  terminated
under  provisions of his employment  agreement with us. We believe that we acted
in  accordance  with the  termination  provisions  of the  agreement and that no
further  compensation  or benefits are due to Mr. Sykes. We believe that we have
good defenses to the claim and that we will not incur any material liability.

From time to time, we are subject to legal  proceedings and other claims arising
in the ordinary  course of business.  In our opinion,  we are not a party to any
litigation  the  outcome of which  would have a material  adverse  effect on our
business or operations.

Item 4.  Submission of Matters to a Vote of Security Holders

We did not submit any  matters to the vote of our  security  holders  during the
fourth quarter of fiscal 2001.


<PAGE> 19


                                     PART II

Item 5.  Market for Our Common Equity and Related Stockholder Matters

Our common  stock is traded on the  American  Stock  Exchange  (AMEX)  under the
symbol NSO. The following  table sets forth the high and low sales prices of our
common stock for each quarter  during the years ended December 31, 2001 and 2000
as reported by AMEX.  During that period, we did not pay dividends on our common
stock and we do not expect to pay any dividends in the near future.

                                      Market Price Range
                                     --------------------
        2001                           High         Low
        ----                         --------    --------
     First quarter                   $ 2.00      $  .60
     Second quarter                     .90         .30
     Third quarter                      .58         .35
     Fourth quarter                     .49         .23



        2000
        ----
     First quarter                   $ 6.87      $ 2.37
     Second quarter                    5.25        2.50
     Third quarter                     3.44        1.75
     Fourth quarter                    2.69         .81



As of February 28, 2002, we had 114,603,144  shares of common stock  outstanding
and approximately 1,768 holders of record of such stock.

Recent Sales of Unregistered Securities and Use of Proceeds

In  January  2002,  in  connection  with the Halco  Investment,  we  issued  the
following:  (i) 750,000 shares of our common stock in satisfaction of a $300,000
note  payable to H. Irwin Levy;  (ii) 39 million  shares of our common  stock to
Halco for the conversion of our Series K Convertible  Preferred stock;  (iii) an
aggregate of  20,877,435  shares of our common stock upon the  conversion of our
Series E, Series H and Series I Convertible  Preferred  Stock;  (iv)  12,993,072
shares as an  inducement  for the holders of those series of preferred  stock to
convert;  and (v) 3,263,618  shares of our common stock in  satisfaction of $1.5
million of accrued dividends(see Note 3 to Consolidated Financial Statements).

In February 2002, we issued  446,776 shares of our common stock in  satisfaction
of  approximately  $138,000  in accrued  dividends  on our Series D  Convertible
Preferred  Stock,  which was  previously  converted into common stock in October
2001.

All of the foregoing  issuances were exempt from registration under Section 4(2)
of the Act.


<PAGE> 20


Item 6.  Selected Financial Data

         (dollars in thousands, except per share data)

The following table summarizes certain selected consolidated  financial data for
the five years ended December 31, 2001.

Certain amounts for years prior to 2001 have been reclassified to conform to the
2001 presentation.  These  reclassifications  had no impact on operating results
previously  reported.  The  selected  financial  data has been  derived from our
audited consolidated  financial statements and is qualified by reference to, and
should be read in conjunction  with, the Consolidated  Financial  Statements and
Notes thereto and "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations", included elsewhere in this report:

<TABLE>

<CAPTION>
                                                                      Year Ended December 31,
                                    ----------------------------------------------------------------------------------------
                                        2001               2000              1999(3)              1998               1997
                                    ------------       ------------       ------------       ------------       ------------
<S>                                 <C>                <C>                <C>                <C>                <C>
Sales ...........................   $     17,886       $     40,197       $     41,089       $     18,026       $     26,244
Gross margin ....................          2,049              9,872              9,763              2,768              4,783

Net loss ........................        (13,958)(1)        (21,921)(2)        (18,704)(4)        (10,407)            (7,886)

Net loss available to
  common stock ..................        (18,518)(5)        (22,606)           (19,938)           (11,888)            (7,886)

Basic and diluted net loss
  per common share ..............           (.41)              (.69)              (.89)              (.63)              (.42)

Weighted average number of common
  shares considered outstanding,
  basic and diluted .............     44,832,503         32,789,832         22,505,084         18,888,911         18,670,477

At end of year:

Total assets.....................         11,968             15,722             34,041             14,128             16,762

Long-term debt ..................          3,600              7,258              6,329              7,043              1,504

Shareholders' equity (deficit) ..            487             (7,526)             6,273              3,150              5,037

</TABLE>
------------
(1)  Includes  extraordinary  gains of $.9  million  ($.02  per  basic and fully
diluted share).

(2)  Includes  charge of $12  million for  impairment  of  unamortized  goodwill
related to an acquisition completed in 1999 and gain of $5.6 million on the sale
of assets.

(3) Includes results of operations of Andataco  beginning June 1999, as a result
of the  acquisition  of  Andataco,  which was  accounted  for using the purchase
method of accounting.

(4)  Includes  charge of $4.6 million for  impairment  of  unamortized  goodwill
related  to an  acquisition  completed  in 1996  and  extraordinary  loss of $.5
million ($.02 per basic and diluted share).

(5)  Includes  non-cash  charge of $3 million  for  the  induced  conversion  of
convertible preferred stock.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Forward-Looking Statements

With  the  exception  of  the  discussion  regarding   historical   information,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  and  other   discussions   elsewhere  in  this  Form  10-K  contain
forward-looking   statements.  Such  statements  inherently  involve  risks  and
uncertainties  that could cause  actual  results to differ  materially  from the
forward-looking  statements.  Factors  that would  cause or  contribute  to such
differences  include, but are not limited to, our inability to increase sales to
current customers and to expand our customer base,  continued  acceptance of our
products in the  marketplace,  our  inability to improve the gross margin on our
products,  competitive  factors,  dependence upon third-party vendors, and other
risks  detailed in our periodic  report filings with the Securities and Exchange
Commission.


<PAGE> 21


Risks and uncertainties inherent in forward-looking  statements include, but are
not  limited  to,  our  future  cash  flows and  ability  to  obtain  sufficient
financing,  timing and volume of sales orders,  our ability to increase sales to
current  customers and to expand our customer  base,  level of gross margins and
operating  expenses,  lack of market  acceptance or demand for our new products,
price  competition,  conditions  in the  technology  industry and the economy in
general,  as well as  legal  proceedings.  The  economic  risk  associated  with
material cost fluctuations, inventory obsolescence and the ability to manage our
inventories  through  procurement and  utilization of component  materials could
have  a  significant  impact  on  future  results  of  operations  or  financial
condition.  Historical  results are not necessarily  indicative of the operating
results for any future period.

Subsequent  written and oral  forward-looking  statements  attributable to us or
persons  acting on our behalf  are  expressly  qualified  in their  entirety  by
cautionary  statements  in this Form 10-K and in other reports we filed with the
Securities and Exchange  Commission.  The following discussion should be read in
conjunction  with the  Consolidated  Financial  Statements and the Notes thereto
included elsewhere in this report.

Overview

We are a  designer,  developer  and  manufacturer  of  direct  attached  and SAN
(Storage  Area Network)  ready data storage  enclosures  and Storage  Management
Software  for  computing  operations.  Our  product  line  supports a variety of
operating systems,  including Windows NT and Windows 2000,  Solaris,  Linux, SGI
IRIX and Macintosh platforms.  Designed for storage-intensive  environments such
as the Internet or other mission-critical applications, our products are offered
in Fibre Channel, Fibre-to-SCSI and SCSI architectures.

Our activities in the information  storage industry have evolved through several
acquisitions,  the first of which occurred in June 1996 when we acquired certain
assets associated with the computer storage business in Lake Mary,  Florida from
Seagate  Peripherals,  Inc. In December 1996, we acquired  substantially all the
net  assets  of  Parity  Systems,  Inc.  In June  and  July  1999,  we  acquired
approximately 76% of the outstanding common stock of Andataco,  Inc., located in
San Diego,  California,  and in November  1999, we acquired the remaining 24% of
Andataco.   In  early  2000,   we  completed  the  transfer  of  our  Lake  Mary
manufacturing  operations  to our San Diego  facility  and  moved our  corporate
headquarters to San Diego. As a result of the 1999  acquisition of Andataco,  we
believe that  comparisons  between 2000 and 1999 may not be  meaningful  because
Andataco's  operating  results were not included in our  consolidated  financial
statements until June 1999.

In January 2000,  we acquired  substantially  all the assets of OneofUs  Company
Limited,  a  Taiwan-based,  privately  held designer of high  performance  Fibre
Channel  RAID  controllers  and storage  solutions  for open systems and the SAN
Market. In addition, in January 2000, we sold substantially all of the assets of
a  wholly-owned  subsidiary  (Borg  Adaptive  Technologies,  Inc.)  which we had
acquired in April 1998,  principally  consisting of certain patented  technology
referred to as Adaptive RAID, to a subsidiary of QLogic Corporation.

Going-Concern

With  respect  to our  consolidated  financial  statements  for the years  ended
December 31, 2001 and 2000, we have received a "going-concern"  opinion from our
auditors.  As more fully  described in the notes to the  consolidated  financial
statements, our recurring operating losses, our continued experience of negative
cash flows from  operating  activities,  the fact that we are not in  compliance
with certain  covenants  and  provisions  of our existing bank facility and have
been  advised  that the bank  does not  intend  to renew  that  facility,  raise
substantial  doubt  about  our  ability  to  continue  as  a  going  concern.  A
"going-concern"  opinion indicates that although there is substantial doubt, the
financial  statements  have been  prepared on a  going-concern  basis and do not
include  any   adjustments  to  reflect  the  possible  future  effects  on  the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.


<PAGE> 22


Results of Operations

The following table sets forth certain operating data as a percentage of sales.

                                                     Year Ended December 31,
                                                  -----------------------------
                                                  2001        2000        1999
                                                  ----        ----        ----
Sales ......................................       100%        100%        100%
Cost of sales ..............................        89          75          76
                                                  ----        ----        ----
Gross margin ...............................        11          25          24

Selling, general and administrative ........        58          40          37
Research and development ...................        20           9           7
Depreciation and amortization ..............         9          11           8
Impairment of goodwill .....................        --          30          11
                                                  ----        ----        ----
Loss from operations .......................       (76)        (65)        (39)
Gain on sale of Borg assets ................        --          14          --
Interest expense and other items, net ......        (7)         (3)         (4)
                                                  ----        ----        ----
Loss before extraordinary items ............       (83)        (54)        (43)
Extraordinary gains (losses) ...............         5          --          (1)
                                                  ----        ----        ----
Net loss ...................................       (78)%       (54)%       (44)%
                                                  ====        ====        ====

Comparison of Years Ended December 31, 2001 and 2000

For the year ended  December 31, 2001,  we reported a net loss of $14 million as
compared to a net loss of $21.9  million for the year ended  December  31, 2000.
Results of operations for 2001 include net  extraordinary  gains of $.9 million,
consisting of $1.3 million of gains from negotiated  discounts on purchases from
vendors, less a $.4 million  extraordinary loss on debt extinguishment.  Results
for 2001 also include losses on marketable securities  (principally  unrealized)
of $.8  million.  Results  of  operations  for 2000  include  a net gain of $5.6
million  from  the  sale of Borg  assets  and a charge  of $12  million  for the
impairment of unamortized goodwill.

Sales

Sales for 2001 were  $17.9  million as  compared  to $40.2  million  in 2000,  a
decrease of $22.3 million or 55%.

The  significant  decrease  reflects the  transition  from our older  technology
legacy  products  to our  technology  products  centered  around our  NexStor 2U
storage  enclosures and RAID systems as well as the economic  downturn which has
caused  customer  delays in acquiring  technology  and other capital  equipment.
During  2001,  we began to expand our  indirect  channel  business and shift our
sales and marketing  strategy to provide greater  technical  marketing and sales
support to our indirect sales function. As part of that strategy,  since January
2001,  we have  significantly  reduced our direct  sales  personnel  and related
costs, and are currently  focusing our direct sales force to targeted markets as
well as existing customers.


<PAGE> 23


During 2001, direct,  indirect and service revenues represented 43%, 35% and 22%
of our sales revenues,  compared to 75%, 14% and 11% in 2000. In August 2001, we
sold  substantially  all of our  service  business;  accordingly,  we expect our
service  revenues for 2002 to be  insignificant.  The higher service revenues in
2001 relates to the recognition as revenue of the remaining unamortized deferred
revenues following the sale of the service business.

Cost of Sales / Gross Margins

Gross margins  decreased from 25% in 2000 to 11% in 2001.  Gross margins in both
periods  were  adversely  affected by the level of fixed  costs  inherent in our
operations as compared with  significantly  lower than expected  sales levels as
well as  increases  in  inventory  reserves  due to obsolete  inventory  of $2.5
million and $1.6 million in 2001 and 2000,  respectively.  Our gross margins are
dependent,  in part, on product mix,  which  fluctuates  from time to time.  Our
material costs are subject to  fluctuations  experienced  during business cycles
that create shortages and excess supplies of some critical  components,  thereby
creating increases and decreases in prices.

Selling, General and Administrative Expenses (SG&A)

SG&A  decreased to $10.4  million in 2001 from $16.2  million in 2000.  The $5.8
million  decrease is primarily  the result of our overall  work force  reduction
discussed  under "Sales".  We expect these costs to continue to decrease  during
2002 as a direct result of recent further reductions in our overall workforce.

Research and Development

Research and development  expenses amounted to $3.6 million in 2001, as compared
to $3.5  million in 2000.  Amounts in both years  reflect the costs  incurred to
develop our NexStor 3000 and 4000 2U product lines. We believe that considerable
future  investments  in  research  and  development  will be  required to remain
competitive.

Research  and  development  costs are  expensed  as incurred  and may  fluctuate
considerably  from time to time  depending on a variety of factors.  These costs
are  incurred  substantially  in  advance  of  related  revenues,  or in certain
situations, may not result in generating revenues.

Depreciation and Amortization / Impairment of Goodwill

Depreciation  and  amortization  decreased  to $1.6  million  in 2001  from $4.5
million in 2000. The decrease was due to reduced amortization resulting from the
fourth  quarter 2000  write-down of $12 million of goodwill which was determined
to have been impaired because of our projected  inability to generate sufficient
future operating income from the assets acquired in the Andataco acquisition.

In July 2001,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No. 142 (SFAS 142),  Goodwill  and  Intangible
Assets,  which  revises the  accounting  for purchased  goodwill and  intangible
assets.  Under SFAS 142,  goodwill and intangible  assets with indefinite  lives
will no longer be amortized and will be tested for impairment annually. SFAS 142
is effective for fiscal years  beginning  after December 15, 2001,  with earlier
adoption  permitted.  The Company expects its implementation of SFAS 142 in 2002
will result in the discontinuation of amortization of unamortized  goodwill with
a  carrying  amount  of  approximately  $2  million  as of  December  31,  2001.
Amortization for the year ended December 31, 2001 amounted to $.4 million.


<PAGE> 24


Other Income, Net

Other income, net amounted to $.4 million in 2001,  primarily  consisting of the
reversal of previously recorded  liabilities which were determined in 2001 to no
longer be due,  partially offset by a write-off of certain assets related to our
Taiwan facility. In 2000, other income was not significant.

Interest Expense

Interest  expense  decreased $.4 million to $.9 million in 2001. The decrease is
primarily  attributable to decreased lower average borrowings and lower interest
rates.

Income Taxes

We have  recorded a 100%  valuation-allowance  for  deferred  income tax assets,
which,  more likely than not,  will not be  realized  based on recent  operating
results.

Net Loss Available to Common Stock

        Preferred Stock Dividends

During 2001 and 2000,  with the exception of our Series K Preferred  Stock,  all
classes of our  convertible  preferred  stock  required  dividends at 8%-10% per
annum. Preferred stock dividends increased by $.9 million to $1.6 million during
2001  principally  due to the  issuance  of $2  million  and  $11.9  million  of
preferred stock in December 2000 and April 2001, respectively,  partially offset
by the automatic  conversion of $3 million and $2 million of preferred  stock to
common stock in July 2000 and October 2001, respectively. In connection with the
Halco  Investment,   which  closed  in  November  2001,  all  of  our  remaining
convertible  preferred  stock and accrued  dividends  thereon were  converted to
common stock.

        Induced Conversion of Convertible Preferred Stock

In November 2001, as a result of inducement shares issued in connection with the
conversion  of our  convertible  preferred  stock as a  condition  to the  Halco
investment (see Note 3 to Consolidated Financial  Statements),  we recorded a $3
million  non-cash  charge  to  arrive at net loss  available  to  common  stock,
representing the fair value of the inducement shares issued.  The fair value was
based on $.23 per share,  the price paid by Halco for its purchase of 39 million
shares of our common stock.

Comparison of Years Ended December 31, 2000 and 1999

For the year ended December 31, 2000, we reported a net loss of $21.9 million as
compared to a net loss of $18.7  million for the year ended  December  31, 1999.
Results of operations  for 2000 include a net gain of $5.6 million from the sale
of the Borg assets and a charge of $12 million for the impairment of unamortized
goodwill.  Results of operations for 1999 include an  extraordinary  loss of $.5
million  on  extinguishment  of debt  and a  charge  of $4.6  million  from  the
impairment of unamortized goodwill.

Sales

Sales for 2000 were  $40.2  million as  compared  to $41.1  million  in 1999,  a
decrease  of $.9  million  or 2%.  Although  2000  included a full year of sales
resulting from the Andataco acquisition as compared to seven months during 1999,
our overall sales  decreased  primarily as a result of the  transition  from our
older technology legacy products to newer technology solutions.

Our  current  line of products  is  centered  around our NexStor  3000 Series 2U
storage  enclosures  and RAID systems.  We began  shipping  these new generation
products in the third  quarter of 2000;  however,  during the second half of the
year,  the decline in revenues of our older  products  exceeded  the increase in
sales of our newer  technology  products.  Delays in  shipments  of both product
lines,  resulting  from  unexpected  supplier  issues,  which  have  since  been
resolved, also contributed to the revenue decline.


<PAGE> 25


Cost of Sales / Gross Margins

Gross margins  increased from 24% in 1999 to 25% in 2000.  Gross margins in both
periods were  adversely  affected by less than full  utilization  of  production
capacity  due to lower  than  expected  sales  levels  as well as  increases  in
inventory reserves due to obsolete inventory of $1.6 million and $1.5 million in
2000 and 1999,  respectively.  Our gross  margins  are  dependent,  in part,  on
product mix which fluctuates from time to time.

Selling, General and Administrative Expenses (SG&A)

SG&A  increased  to $16.2  million in 2000 from $15.3  million in 1999.  The $.9
million  increase is  primarily  the result of the  inclusion  in 2000 of a full
twelve months of expenses  related to the Andataco  acquisition,  as compared to
seven months included in 1999 operations,  partially offset by an approximate $1
million provision for uncollectable receivables in 1999.

Research and Development

Research and development  expenses amounted to $3.5 million in 2000, as compared
to $3 million in 1999.  During  January 2000, we sold  substantially  all of the
assets of our Borg subsidiary, which had contributed $.8 million to our research
and  development  expenses during 1999. The decline in costs resulting from this
sale was more than offset by  additional  costs  incurred in 2000 in  connection
with the development of our new NexStor 3000 Series 2U enclosures as well as the
inclusion of a full year of expenses related to the Andataco acquisition.

Research  and  development  costs are  expensed  as incurred  and may  fluctuate
considerably  from time to time  depending on a variety of factors.  These costs
are  incurred  substantially  in  advance  of  related  revenues,  or in certain
situations, may not result in generating revenues.

Depreciation and Amortization / Impairment of Goodwill

Depreciation  and  amortization  increased  to $4.5  million  in 2000  from $3.4
million in 1999.  This increase was primarily due to a full year of amortization
(over seven  years) of $14.7  million of goodwill  associated  with the Andataco
acquisition,  effective in June and November  1999, and $2.8 million of goodwill
(over seven years) associated with the January 2000 acquisition of the assets of
OneofUs,  partially  offset by reduced  amortization  resulting  from the fourth
quarter 1999  write-down of $4.6 million of goodwill  related to our 1996 Parity
acquisition. The Parity goodwill was determined to have been impaired because of
our projected  inability to generate sufficient future operating income from the
assets acquired in the Parity acquisition.

During  the fourth  quarter  of 2000,  we  recorded  a  goodwill  write-down  of
approximately $12 million.  This write-down  eliminated all unamortized goodwill
related to the 1999 Andataco  acquisition.  The Andataco goodwill was determined
to have been impaired because of our projected  inability to generate sufficient
future operating income from the assets acquired in the Andataco acquisition.

Interest Expense

Interest expense  decreased $.8 million to $1.3 million in 2000,  primarily as a
result of the  satisfaction  of  borrowings  of $6.5  million by the issuance of
common stock ($5.5 million in December 1999 and $1 million in April 2000).  This
reduction  was partially  offset by a full twelve months of interest  expense on
the $5.1 million note issued in  connection  with the  Andataco  acquisition  as
compared to seven months of interest expense in 1999.


<PAGE> 26


Income Taxes

We have  recorded a 100%  valuation-allowance  for  deferred  income tax assets,
which,  more likely than not,  will not be  realized  based on recent  operating
results.

Net Loss Available to Common Stock

        Preferred Stock Dividends

During 2000 and 1999, all classes of our  convertible  preferred  stock required
dividends at 8%-9% per annum. Preferred stock dividends decreased by $.2 million
to $.7 million  during 2000  principally  due to the conversion of $8 million of
preferred  stock to common  stock in 2000,  partially  offset by the issuance of
$8.2 million of preferred stock in June 1999.

        Embedded Dividend Attributable to Benefical Conversion Priviledge

During  1999,  we  recorded  $.3  million  as an  additional  embedded  dividend
attributable  to: (1) the fair value at the date of grant of warrants  issued in
connection  with the sale of Series E Convertible  Preferred Stock (based on the
Black-Scholes  option-pricing model) and (2) the beneficial conversion privilege
on Series A Convertible  Preferred Stock representing the difference between the
conversion  price and the  quoted  market  price of common  stock at the date of
issuance.

Liquidity and Capital Resources

The accompanying  consolidated  financial statements have been prepared assuming
that we will continue as a going concern.  This  contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.  As
shown in the consolidated  financial  statements,  we have experienced  negative
cash flows from operating activities and have suffered substantial recurring net
losses of $14  million,  $21.9  million  and $18.7  million  for the years ended
December  31, 2001,  2000 and 1999,  respectively.  In  addition,  we are not in
compliance  with certain  covenants and  provisions  under our revolving  credit
facility  which  expires on April 30, 2002 and have been  advised  that the bank
does not intend to renew the credit facility. These matters, among others, raise
substantial doubt about our ability to continue as a going-concern.

During most of 2000, our management  team formulated and implemented our current
product  strategy  centered  around our NexStor 3000 Series 2U line of SAN-ready
storage  solutions.  This  strategy  included  the  transition  from  our  older
technology  legacy products to the newer  technology  solutions,  which we began
shipping in the third quarter of 2000.  During 2001,  the decline in revenues of
our older  products  exceeded  the  increase  in sales of our  newer  technology
solutions. This decline in revenues combined with the recent decline in economic
and market conditions has significantly contributed to our operating losses.

During  2001,  we shifted our sales and  marketing  strategy to provide  greater
technical,  marketing and sales support to expand our indirect customer channel.
As part of this strategy,  since January 2001, we have significantly reduced our
direct sales personnel and related costs, and are currently  focusing our direct
sales team to targeted markets and existing customers.

Since January 1, 2001, and through  February 28, 2002, we obtained $20.5 million
of equity and debt financing  from private  investors.  Of these amounts,  $12.1
million was received from Maurice Halperin,  the Company's Chairman of the Board
since August 15, 2001, and a principal  stockholder  or companies  controlled by
Mr.  Halperin  (collectively,  Mr.  Halperin),  consisting of $6 million in cash
received  between  August 2001 and November 2001, and $6.1 million in marketable
securities  received  in  November  2001 (see Note 3 to  Consolidated  Financial
Statements).  From  November  2001 through March 2002, we received $4 million in
cash  from  the  sale  of  all  of  the  marketable  securities  (see  Note 6 to
Consolidated  Financial  Statements).  Equity and debt  financing  obtained from
January 2001 through  February 28, 2002 also included $2.8 million from H. Irwin
Levy, our Vice Chairman of the Board and a principal  shareholder,  or companies
controlled  by  Mr.  Levy   (collectively,   Mr.  Levy).   Additional   cash  of
approximately  $7  million  was  obtained  during  January  2000  when  we  sold
substantially  all the  assets of our  wholly-owned  subsidiary,  Borg  Adaptive
Technologies, Inc.


<PAGE> 27


As of December 31, 2001,  our revolving  credit  facility  (Bank Line of Credit)
provided  for  borrowings  based on the  lesser of $10  million  or:  (i) 85% of
eligible accounts receivable,  as defined, plus (ii) the lesser of $1.25 million
or 20% of eligible inventory, as defined (collectively, the Borrowing Base). The
Bank Line of Credit which matures in April 2002,  provides for interest at prime
plus 2 1/2%, requires a facility fee of .25% based on the average unused portion
of the maximum borrowings, is collateralized by substantially all of our assets,
and provides for certain  financial  covenants,  including minimum net worth and
net income  requirements.  Since the fourth quarter of 2000, we have not been in
compliance  with the minimum net worth and net income  covenants  under our Bank
Line Of Credit.  On February 4, 2002,  the bank advised us that the  outstanding
principal balance exceeded the Borrowing Base by $1.1 million and that they were
demanding  immediate payment of the  over-advance.  The bank also indicated that
our  non-bank  indebtedness  of  approximately  $4.7  million  was  incurred  in
violation of the loan agreement.  In addition,  effective  February 4, 2002, the
bank  applied  the  following  amendments  to the Bank  Line of  Credit:  (1) an
increase in the interest rate to prime plus 3.5%,  (2) a decrease in the overall
facility to $3.5 million;  and (3) a reduction in the inventory  borrowing limit
to  $900,000  with  further  reductions  of 2% of eligible  inventory  per week,
effective  February 12, 2002.  The bank has also advised that it does not intend
to renew the Bank Line of Credit. We have begun to seek a replacement lender but
there is no  assurance  that we will be  successful  in  obtaining  a new credit
facility on terms  acceptable  to us, if at all. As of February  28,  2002,  the
outstanding balance of the Bank Line of Credit was $1.3 million.

We are currently  exploring  alternatives for raising  additional debt or equity
capital to finance  our  short-term  and  long-term  plans as well as  operating
deficits expected to be incurred until we begin to generate  positive  operating
cash flows.  However,  due to  conditions  in the  technology-related  financial
markets and other uncertainties, many of which are beyond our control, there can
be no assurances that such required  additional funds will be available on terms
acceptable  to us, if at all, or that we will be able to generate  positive cash
flows from operating  activities in the future.  We currently have  insufficient
liquidity to fund our operating needs for the next twelve months.

The consolidated  financial statements do not include any adjustments to reflect
the possible future effects on the  recoverability  and classification of assets
or the  amounts  and  classification  of  liabilities  that may result  from our
inability to continue as a going concern.

Cash Flow Results

        Operating Activities

Net cash used in operating activities amounted to $10.3 million and $9.4 million
for 2001 and 2000, respectively. The most significant use of cash for both years
was our loss  from  operations  (before  depreciation,  amortization  and  other
non-cash  items) of $8.1 million in 2001 and $6.1  million in 2000.  During 2001
and 2000,  we used cash of $5.2 million and $2.8 million,  respectively,  in the
reduction  of  deferred  revenue,  accounts  payable and other  liabilities.  In
addition,  in 2000,  we used $2.9  million  to  increase  inventories.  The most
significant  source of cash was the  reduction  of accounts  receivable  of $1.2
million in 2001 and $2.1 million in 2000.

        Investing Activities

Net cash used in investing  activities amounted to $.2 million in 2001. Net cash
provided by investing activities amounted to $5.9 million in 2000. Cash used for
purchases of property and equipment was $.2 million and $.9 million  during 2001
and 2000,  respectively.  Cash  provided in 2000 of $7 million was from the Borg
sale.


<PAGE> 28


        Financing Activities

Net cash provided by financing  activities  for 2001 amounted to $11.3  million,
principally  consisting  of borrowings  from private  investors of $11.2 million
(including  $3.3  million from Mr. Levy and $5 million from Halco) of which $6.9
million was satisfied by issuing convertible preferred stock and $.3 million was
satisfied  by issuing  common  stock.  An  additional  $1.2  million of cash was
provided in 2001 by issuing  convertible  preferred  stock to private  investors
(including $1 million from Halco). Net cash provided by financing activities for
2000  amounted to $2.9  million,  principally  consisting of $2.6 million in net
borrowings from private  investors  (including $2.1 million from Mr. Levy), $1.2
million from the exercise of stock options and warrants, and $1 million from our
equity draw down  facility.  During  2001 and 2000,  we paid $.1 million and $.8
million,  respectively,  in preferred  stock dividends and had net repayments on
our Bank Line of Credit of $1.1 million and $1 million, respectively.

Effect of Inflation

During recent years, inflation has not had an impact on our operations and we do
not expect that it will have a material impact in 2002.

Item 7a.  Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk for changes in interest  rates relates  primarily to
our variable rate Bank Line of Credit.


<PAGE> 29


Item 8.  Financial Statements and Supplementary Data

Table of Contents to Consolidated Financial Statements

                                                                            Page

Report of Independent Certified Public Accountants .....................      30

Report of Independent Certified Public Accountants .....................      31

Consolidated Financial Statements:

 Balance Sheets - December 31, 2001 and 2000 ...........................      32

 Statements of Operations - Years Ended
    December 31, 2001, 2000 and 1999 ...................................      33

 Statements of Shareholders' Equity (Deficit)
    Years Ended December 31, 2001, 2000 and 1999 .......................   34-35

 Statements of Cash Flows - Years Ended
    December 31, 2001, 2000 and 1999 ...................................   36-37

 Notes to Consolidated Financial Statements ............................   38-60

Report of Independent Certified Public Accountants .....................      61

Report of Independent Certified Public Accountants .....................      62


FINANCIAL  STATEMENT  SCHEDULES.  The following financial statement schedules of
nStor  Technologies,  Inc. for the years ended December 31, 2001,  2000 and 1999
are filed as part of this Report on the page number so  indicated  and should be
read  in  conjunction  with  the  Consolidated  Financial  Statements  of  nStor
Technologies, Inc.:

Schedule I - Condensed Financial Information of Registrant .............   63-65

Schedule II - Valuation and Qualifying Accounts ........................      66


Schedules  not listed above are omitted  because they are not  applicable or are
not required or the information  required to be set forth therein is included in
the Consolidated Financial Statements or Notes thereto.


<PAGE> 30


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors of
   nStor Technologies, Inc.


We  have  audited  the   accompanying   consolidated   balance  sheet  of  nStor
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 2001, and
the related consolidated statements of operations, shareholders' equity and cash
flows  for the year  ended  December  31,  2001.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  Those  standards  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.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of nStor Technologies,
Inc.  and  subsidiaries  as of  December  31,  2001,  and the  results  of their
operations  and  their  cash  flows  for the year  ended  December  31,  2001 in
conformity with accounting principles generally accepted in the United States of
America.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has significant recurring losses,
minimal working  capital,  serious  liquidity  concerns,  minimal  shareholders'
equity,  and is in default under its existing  credit  facility.  These matters,
among others, raise substantial doubt about the Company's ability to continue as
a going  concern.  Management's  plans  in  regard  to  these  matters  are also
described in Note 1. The accompanying  consolidated  financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

The  consolidated   financial   statements  of  nStor  Technologies,   Inc.  and
subsidiaries  as of December  31, 2000 and 1999 were  audited by other  auditors
whose report dated  February 9, 2001,  except as to Paragraph four of Note 6 and
Note 15,  which are as of March 27,  2001,  and  included in this Form 10-K,  on
those statements included an explanatory  paragraph  describing  conditions that
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern.

                                                 /S/ Swenson Advisors, LLP
                                                     Swenson Advisors, LLP


San Diego, California
April 4, 2002


<PAGE> 31


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors of
   nStor Technologies, Inc.


We  have  audited  the   accompanying   consolidated   balance  sheet  of  nStor
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 2000, and
the related  consolidated  statements  of  operations,  shareholders'  (deficit)
equity and cash flows for the each of the two years in the period ended December
31, 2000. These consolidated  financial statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audits 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.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of nStor Technologies,
Inc.  and  subsidiaries  as of  December  31,  2000,  and the  results  of their
operations  and their cash  flows for each of the two years in the period  ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated   financial  statements,   the  Company  has  suffered  substantial
recurring  losses  from  operations,   has  a  working  capital  deficiency,   a
shareholders'  deficit and is in default  under its  existing  credit  facility.
These matters, among others, raise substantial doubt about the Company's ability
to continue as a going  concern.  Management's  plans in regard to these matters
are also described in Note 1. The accompanying consolidated financial statements
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.

                                                     /S/ BDO SEIDMAN, LLP
                                                     BDO SEIDMAN, LLP


Costa Mesa, California
February 9, 2001


<PAGE> 32


nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
=========================================
(dollars in thousands)
                                                                 December 31,
                                                              -----------------
     ASSETS                                                     2001       2000
     ------                                                  -------    -------
Current assets:
  Cash and cash equivalents ............................     $   857    $    37
  Marketable securities ................................       4,255         --
  Accounts receivable, net .............................       1,925      4,395
  Inventories ..........................................       1,364      5,174
  Prepaid expenses and other ...........................         207      1,278
                                                             -------    -------
        Total current assets ...........................       8,608     10,884

Property and equipment, net of $5,641 and
  $4,583 in accumulated depreciation ...................       1,367      2,384
Goodwill and other intangible assets, net of
  $808 and $400 in accumulated amortization ............       1,989      2,397
Other non-current assets ...............................           4         57
                                                             -------    -------
                                                             $11,968    $15,722
                                                             =======    =======
     LIABILITIES
     -----------
Current liabilities:
  Bank line of credit ..................................     $ 2,991    $ 4,086
  Other borrowings .....................................       1,100         --
  Accounts payable and other ...........................       3,790      9,504
  Deferred revenue .....................................          --      2,400
                                                             -------    -------
        Total current liabilities ......................       7,881     15,990

Long-term debt .........................................       3,600      7,258
                                                             -------    -------
        Total liabilities ..............................      11,481     23,248
                                                             -------    -------
Commitments, contingencies and subsequent events

     SHAREHOLDERS' EQUITY (DEFICIT) (Note 3)
     ------------------------------
Preferred stock, $.01 par; 1,000,000 shares
 authorized, in order of preference:
  Convertible (except for Series G)
  preferred stock assumed issued and
  outstanding as of December 31, 2001 and 2000,
  respectively:
  Series F, 0 and 722, aggregate liquidation
  value $0 and $722; Series D, 0 and 2,000,
  aggregate liquidation value $0 and $2,000;
  Series E, 0 and 3,500, aggregate liquidation
  value $0 and $3,500; Series G, 0 and 2,000,
  aggregate liquidation value $0 and $2,000 ............          --         --
Common stock, $.05 par; 200,000,000 shares
  authorized; 114,603,144 and 35,478,489
  shares assumed issued and outstanding at
  December 31, 2001 and 2000, respectively .............       5,729      1,773
Additional paid-in capital .............................      94,104     71,529
Deficit ................................................     (99,346)   (80,828)
                                                             -------    -------
Total shareholders' equity (deficit)....................         487     (7,526)
                                                             -------    -------
                                                             $11,968    $15,722
                                                             =======    =======


        See Report of Certified Public Accountants and accompanying notes
                      to consolidated financial statements


<PAGE> 33


nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
=============================================
(dollars in thousands, except per share data)

                                                   Years Ended December 31,
                                              ---------------------------------
                                                   2001        2000        1999
                                               --------    --------    --------
Sales ......................................   $ 17,886    $ 40,197    $ 41,089
Cost of sales ..............................     15,837      30,325      31,326
                                               --------    --------    --------
     Gross  margin .........................      2,049       9,872       9,763
                                               --------    --------    --------
Operating expenses:
  Selling, general and administrative ......     10,354      16,232      15,340
  Research and development .................      3,579       3,504       2,981
  Depreciation and amortization ............      1,622       4,468       3,355
  Impairment of goodwill ...................         --      11,959       4,588
                                               --------    --------    --------
Total operating expenses ...................     15,555      36,163      26,264
                                               --------    --------    --------
Loss from operations .......................    (13,506)    (26,291)    (16,501)

Gain on sale of assets of Borg Adaptive
  Technologies .............................         --       5,575          --
Realized and unrealized losses on
  marketable securities, net ...............       (811)         --          --
Other income, net ..........................        402          84         313
Interest expense ...........................       (912)     (1,289)     (2,051)
                                               --------    --------    --------
Loss before preferred stock dividends,
  extraordinary items and inducement
  conversion ...............................    (14,827)    (21,921)    (18,239)

Extraordinary gains (losses) from debt
  extinguishment (net of tax of $0) ........        869          --        (465)
                                               --------    --------    --------
Net loss ...................................    (13,958)    (21,921)    (18,704)

Preferred stock dividends ..................     (1,560)       (685)       (902)
Induced conversion of convertible
  preferred stock ..........................     (3,000)         --          --
Embedded dividend attributable to
  beneficial conversion privilege
  of convertible preferred stock ...........         --          --        (332)
                                               --------    --------    --------
Net loss available to common stock .........   ($18,518)   ($22,606)   ($19,938)
                                               ========    ========    ========
Basic and diluted net loss per common share:

  Loss before extraordinary items ..........   ($   .43)   ($   .69)   ($   .87)
  Extraordinary gains (losses) .............        .02          --        (.02)
                                               --------    --------    --------
  Net loss per common share ................   ($   .41)   ($   .69)   ($   .89)
                                               ========    ========    ========
Weighted average number of common
  shares considered outstanding,
  basic and diluted (Note 3) ............... 44,832,503  32,789,832  22,505,084
                                             ==========  ==========  ==========


        See Report of Certified Public Accountants and accompanying notes
                      to consolidated financial statements


<PAGE> 34


nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
=========================================================
(dollars in thousands)

<TABLE>

<CAPTION>
                                                                                                  Addi-
                                                 Common Stock            Preferred Stock         tional
                                           ------------------------   -----------------------    Paid-in
                                              Shares       Amount        Shares      Amount      Capital       Deficit       Total
                                           -----------   ----------   ----------   ----------   ----------   ----------    ---------
<S>                                        <C>           <C>          <C>          <C>          <C>          <C>           <C>
Balances, January 1, 1999 ...............   20,515,425   $    1,025        7,367   $       --   $   40,409   $  (38,284)   $  3,150

Issuance of convertible
 preferred stock in
 connection with:
  Private placement, net
   of issuance costs of $16 .............                                  3,500           --        3,484                    3,484
  Acquisition of Andataco, net
   of issuance costs of $21 .............                                  4,654           --        4,633                    4,633

Issuance of common stock
 in connection with:
  Satisfaction of borrowings ............    2,523,462          126                                  6,714                    6,840
  Exercise of options and
   warrants .............................    1,686,241           85                                  2,760                    2,845

  Conversion of convertible
   preferred stock ......................      200,000           10         (600)          --          (10)                      --
  Acquisition of Andataco ...............      924,118           46                                  1,802                    1,848
  Private placement .....................      500,000           25                                    975                    1,000
  Other .................................      168,578            8                                    338                      346

Committed common stock
 related to executive
 termination, 123,479 shares ............                         6                                    584                      590

Common stock options and
 warrants issued in connection with:
  Borrowings ............................                                                              791                      791
  Acquisition of Andataco ...............                                                              200                      200
  Non-employee compensation .............                                                              152                      152

Preferred stock dividends ...............                                                                          (902)       (902)

Embedded dividend attributable to
 beneficial conversion privilege
 of convertible preferred stock .........                                                              332         (332)         --

Net loss for the year
 ended December 31, 1999 ................                                                                       (18,704)    (18,704)

                                           -----------   ----------   ----------   ----------   ----------   ----------    --------
Balances, December 31, 1999 .............   26,517,824        1,331       14,921           --       63,164      (58,222)      6,273

Issuance of common stock
 in connection with:
  Conversion of convertible
   preferred stock ......................    6,477,467          324       (8,699)          --         (324)                      --
  Acquisition of assets of
   OneofUs ..............................      776,119           39                                  2,561                    2,600
  Exercise of options and
   warrants .............................      635,589           32                                  1,146                    1,178
  Equity line of credit,
   net of issuance costs of $87 .........      508,857           25                                    936                      961
  Satisfaction of borrowings ............      439,154           22                                  1,228                    1,250
  Executive termination .................      123,479           --                                     --                       --

Issuance of preferred stock
 in satisfaction of borrowings
 from director ..........................                                  2,000           --        2,000                    2,000

</TABLE>


<PAGE> 35


nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
=========================================================
(dollars in thousands) (concluded)


<TABLE>

<CAPTION>
                                                                                                  Addi-
                                                 Common Stock            Preferred Stock         tional
                                           ------------------------   -----------------------    Paid-in
                                              Shares       Amount        Shares      Amount      Capital       Deficit       Total
                                           -----------   ----------   ----------   ----------   ----------   ----------    ---------
<S>                                        <C>           <C>          <C>          <C>          <C>          <C>           <C>
Compensation expense resulting
 from modifications to stock
 options and warrants in
 connection with the sale of
 the assets of Borg Adaptive
 Technologies ...........................                                                              818                      818

Preferred stock dividends ...............                                                                          (685)       (685)

Net loss for the year
 ended December 31, 2000 ................                                                                       (21,921)    (21,921)

                                           -----------   ----------   ----------   ----------   ----------   ----------    --------
Balances, December 31, 2000 .............   35,478,489        1,773        8,222           --       71,529      (80,828)     (7,526)

Issuance of convertible
 preferred stock in
 connection with:
  Satisfaction of borrowings,
   net of issuance costs of $15 .........                                 11,942           --       11,927                   11,927
  Private placement                                                          250           --          250                      250
  Halco Investment, net of
   issuance costs of $28 ................                                  8,970           --        8,941                    8,941

Issuance of common stock in
 connection with:
  Conversion of Series D & F
   convertible preferred stock ..........    2,240,533          112       (2,722)          --         (112)                      --
  Halco Investment (issued
   January 11, 2002 upon
   shareholder  approval- Note 3)
   including conversion of
   Series H, I, & K convertible
   preferred stock ......................   76,884,122        3,844      (26,662)          --       (2,075)                   1,769

Common stock option and warrants
 issued in connection with:
  Borrowings ............................                                                              554                      554
  Other .................................                                                               90                       90

Preferred stock dividends ...............                                                                        (1,560)     (1,560)

Induced conversion of convertible
 preferred stock ........................                                                            3,000       (3,000)         --

Net loss for the year ended
 December 31, 2001 ......................                                                                       (13,958)    (13,958)
                                           -----------   ----------   ----------   ----------   ----------   ----------    --------
Balances, December 31, 2001 .............  114,603,144   $    5,729           --   $       --   $   94,104   $  (99,346)   $    487
                                           ===========   ==========   ==========   ==========   ==========   ==========    ========

</TABLE>


        See Report of Certified Public Accountants and accompanying notes
                      to consolidated financial statements


<PAGE> 36


nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
==========================================
(in thousands)

<TABLE>
<CAPTION>
                                                             Years Ended December 31,
                                                         --------------------------------
                                                           2001        2000        1999
                                                         --------    --------    --------
<S>                                                      <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss ...........................................   $(13,958)   $(21,921)   $(18,704)
  Adjustments to reconcile net loss to
    net cash used in operating activities:
      Gain on sale of assets of Borg Adaptive
       Technologies ..................................         --      (5,575)         --
      Depreciation and amortization ..................      1,622       4,468       3,355
      Impairment of goodwill .........................         --      11,959       4,588
      Extraordinary (gains) losses from debt
       extinguishments, net ..........................       (869)         --         465
      Provision for inventory obsolescence ...........      2,500       3,988         306
      Provision for uncollectible accounts receivable       1,069         912         954
      Proceeds from sales of marketable securities ...      1,047          --          --
      Realized and unrealized losses on marketable
        securities, net ..............................        811          --          --
      Other income ...................................       (627)         --          --
      Amortization of deferred loan costs and other ..        280          21         922
      Changes in assets and liabilities, net of
        effects from acquisitions:
          Decrease in accounts receivable ............      1,201       2,108         640
          Decrease (increase) in inventories .........        653      (2,875)      1,459
          Decrease in prepaid expenses
            and other ................................      1,090         293         334
          (Decrease)increase in deferred revenue,
            accounts payable and other liabilities ...     (5,152)     (2,807)        403
                                                         --------    --------    --------
Net cash used in operating activities ................    (10,333)     (9,429)     (5,278)
                                                         --------    --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Net proceeds from sale of assets of Borg Adaptive
    Technologies .....................................         --       7,013          --
  Cash paid for acquisitions, net of cash acquired ...         --        (293)     (1,372)
  Additions to property and equipment ................       (163)       (853)       (767)
                                                         --------    --------    --------
Net cash (used in) provided by investing activities ..       (163)      5,867      (2,139)
                                                         --------    --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net repayments of revolving bank credit
    facilities .......................................     (1,095)     (1,025)     (2,590)
  Additions to other borrowings ......................     11,249       4,858       7,075
  Repayments on other borrowings .....................         --      (2,285)     (1,200)
  Issuance of convertible preferred stock ............      1,221          --       1,962
  Issuance of common stock, net of issuance costs ....         --         961       1,000
  Proceeds from exercise of stock options and warrants         --       1,178       2,519
  Cash paid for preferred stock dividends ............        (59)       (761)       (823)
                                                         --------    --------    --------
Net cash provided by financing activities ............     11,316       2,926       7,943
                                                         --------    --------    --------
Net increase (decrease) in cash and cash
  equivalents during the year ........................        820        (636)        526

Cash and cash equivalents at beginning of year .......         37         673         147
                                                         --------    --------    --------
Cash and cash equivalents at end of year .............   $    857    $     37    $    673
                                                         ========    ========    ========

</TABLE>


<PAGE> 37


nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
=========================================
(in thousands) (concluded)

<TABLE>

<CAPTION>
                                                             Years Ended December 31,
                                                         --------------------------------
                                                           2001        2000        1999
                                                         --------    --------    --------
<S>                                                      <C>         <C>         <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
  Cash paid during period for interest ...............   $    504    $  1,297    $    941
                                                         ========    ========    ========
NON-CASH INVESTING ACTIVITIES:
  Acquisitions:
    Fair value of assets acquired ....................   $     --    $  2,938    $ 30,527
    Liabilities assumed and incurred .................         --         (45)    (21,767)
    Common stock, convertible preferred
     stock and warrants issued to sellers ............         --      (2,600)     (7,388)
                                                         --------    --------    --------
    Cash paid ........................................   $     --    $    293    $  1,372
                                                         ========    ========    ========
  Convertible preferred stock issued to Halco
   in exchange for marketable securities .............   $  6,113    $     --    $     --
                                                         ========    ========    ========
  Modifications to stock options and warrants
   in connection with the sale of assets of
   Borg Adaptive Technologies ........................   $     --    $    818    $     --
                                                         ========    ========    ========

NON-CASH FINANCING ACTIVITIES:

  Issuance of common and convertible preferred
   stock in satisfaction of borrowings, accrued
   dividends and accrued interest ....................   $ 15,568    $  3,250    $  8,340
                                                         ========    ========    ========
  Deferred loan costs arising from issuance
   of warrants under borrowings ......................   $    554    $     --    $    791
                                                         ========    ========    ========

</TABLE>


        See Report of Certified Public Accountants and accompanying notes
                      to consolidated financial statements


<PAGE> 38


nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Principles of Consolidation

The   consolidated   financial   statements   include  the   accounts  of  nStor
Technologies,   Inc.  and  all  wholly-owned  subsidiaries  (collectively,   the
"Company").   Significant  intercompany  balances  and  transactions  have  been
eliminated in consolidation.

        Liquidity and Going Concern

The accompanying  consolidated  financial statements have been prepared assuming
that the  Company  will  continue  as a going  concern.  This  contemplates  the
realization of assets and the  satisfaction  of liabilities in the normal course
of business. As shown in the consolidated financial statements,  the Company has
experienced  negative  cash flows from  operating  activities  and has  suffered
substantial  recurring  net  losses of $14  million,  $21.9  million,  and $18.7
million for the years ended December 31, 2001, 2000 and 1999,  respectively.  In
addition, the Company is not in compliance with certain covenants and provisions
under  its bank  credit  facility  and has been  advised  that the bank does not
intend  to renew  the  credit  facility.  These  matters,  among  others,  raise
substantial doubt about the Company's ability to continue as a going concern.

During most of 2000, the Company's  management  team  formulated and implemented
its current product strategy centered around its NexStor 2U line of Storage Area
Network (SAN) ready storage  solutions.  This strategy  included the  transition
from the Company's  older  technology  legacy  products to the newer  technology
solutions, which the Company began shipping in the third quarter of 2000. During
2001,  the decline in revenues of the  Company's  older  products  exceeded  the
increase in sales of its newer  technology  solutions.  This decline in revenues
combined  with  the  recent  decline  in  economic  and  market  conditions  has
significantly contributed to the Company's operating losses.

During 2001,  the Company  shifted its sales and  marketing  strategy to provide
greater technical,  marketing and sales support to expand the Company's indirect
customer channel base (original equipment  manufacturers  (OEMs),  resellers and
system integrators).  As part of this strategy,  since January 2001, the Company
has  significantly  reduced its direct sales personnel and related costs, and is
currently focusing its direct sales team to targeted markets as well as existing
customers.

Since January 1, 2001, and through February 28, 2002, the Company obtained $20.5
million of equity and debt financing from private  investors.  Of these amounts,
$12.1 million was received in 2001 from Maurice Halperin, the Company's Chairman
of the Board since  August 15, 2001 and a principal  shareholder,  or  companies
controlled  by Mr.  Halperin  (collectively  "Mr.  Halperin"),  consisting of $6
million in cash received  between August 2001 and November 2001 and $6.1 million
in marketable  securities  received in November 2001 (see Note 3 to Consolidated
Financial  Statements).  From  November  2001  through  March 2002,  the Company
received  $4 million in cash from the sale of all of the  marketable  securities
(see Note 6 to  Consolidated  Financial  Statements).  Equity and debt financing
obtained from January 2001 through  February 28, 2002 also included $2.8 million
from H. Irwin Levy,  the  Company's  Vice-Chairman  of the Board and a principal
shareholder,  or companies  controlled by Mr. Levy  (collectively,  "Mr. Levy").
Additional  cash of  approximately  $7 million was obtained in January 2000 when
the Company sold  substantially  all the assets of its wholly-owned  subsidiary,
Borg  Adaptive  Technologies,   Inc.  (see  Note  4  to  Consolidated  Financial
Statements).


<PAGE> 39


Since the fourth  quarter of 2000,  the Company has not been in compliance  with
its minimum net worth and net income  covenants under its bank credit  facility.
On February 4, 2002, the bank advised the Company that the outstanding principal
balance  exceeded  the  Company's  borrowing  base by $1.1  million and demanded
immediate  payment  of this  over-advance.  The  bank  also  indicated  that the
Company's  non-bank  indebtedness of approximately  $4.7 million was incurred in
violation of the loan agreement.  In addition,  effective  February 4, 2002, the
bank  applied  certain   amendments  to  the  loan  agreement  (see  Note  8  to
Consolidated  Financial  Statements)  and advised  the Company  that it does not
intend to renew the credit  facility when it matures in April 2002.  The Company
is currently seeking a replacement  lender;  however,  there can be no assurance
that it will be  successful  in  obtaining a new credit  line  facility on terms
acceptable to the Company,  if at all. As of February 28, 2002, the  outstanding
balance of the Bank Line of Credit was $1.3 million.

The Company is currently  exploring  alternatives for raising additional debt or
equity  capital  to  finance  its  short-term  and  long-term  plans  as well as
operating  deficits expected to be incurred until it begins to generate positive
operating  cash flows.  However,  due to  conditions  in the  technology-related
financial  markets  and  other  uncertainties,  many of which  are  outside  the
Company's control, there can be no assurance that such required additional funds
will be  available on terms  acceptable  to  management,  if at all, or that the
Company  will be able to generate  positive  cash flows from  operations  in the
future. The Company has insufficient  liquidity to fund it's operating needs for
the next twelve months.

The consolidated  financial statements do not include any adjustments to reflect
the possible future effects on the  recoverability  and classification of assets
or the  amounts  and  classification  of  liabilities  that may result  from the
inability of the Company to continue as a going concern.

        Business

The Company is a  designer,  developer  and  manufacturer  of  attached  and SAN
(Storage Area Network)  ready data  enclosures and Storage  Management  Software
used in storage solutions for computing operations.  Our product line supports a
variety of  operating  systems,  including  Windows  NT and  Windows  2000,  Sun
Solaris,  Linux,  SGI  IRIX  and  Macintosh.   Designed  for  storage  intensive
environments such as the Internet or other  mission-critical  applications,  the
Company's products are offered in Fibre Channel,  Fibre-to-SCSI  (Small Computer
Systems Interface), and SCSI architectures.

        Cash and Cash Equivalents

Cash and cash equivalents  consist of highly liquid investment  instruments with
original maturities, when purchased, of three months or less.

        Marketable Securities

In  accordance  with  Statement  of  Financial  Accounting  Standards  No.  115,
"Accounting  for  Certain  Investments  in  Debt  and  Equity  Securities,"  the
Company's  marketable  securities  are  classified  as  trading  securities  and
reported at fair value with unrealized gains and losses recognized in earnings.

        Inventories

Inventories,  consisting of raw materials,  work-in-process  and finished goods,
are stated at the lower of cost or market,  with cost being  determined based on
the first-in,  first-out  (FIFO)  method.  Reserves are recorded as necessary to
reduce  obsolete  inventory to  estimated  net  realizable  value (see Note 5 to
Consolidated Financial Statements).


<PAGE> 40


        Revenue Recognition

Revenue from the sale of products is  recognized  as of the date  shipments  are
made to customers,  net of an allowance for returns.  Prior to August 2001,  the
Company  contracted with outside vendors to provide services relating to various
on-site  warranties  which are offered for sale to customers;  on-site  warranty
revenues  and  amounts  paid in advance to outside  service  organizations  were
recognized  in the  financial  statements  in  sales  and  cost of  goods  sold,
respectively,  over the life of the  service  contracts.  In  August  2001,  the
Company  sold  substantially  all  of  its  servicing  business.  The  remaining
unamortized deferred revenue was recognized as revenue following the sale.

        Warranty Costs

A provision  is made for warranty  costs in excess of those  provided for by the
original equipment manufacturer.

        Long-Lived Assets

In accordance with the provisions of SFAS 121, "Accounting for the Impairment of
Long-Lived  Assets and for  Long-Lived  Assets to be  Disposed  Of",  long-lived
assets and certain identifiable intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by  comparison  of the  carrying  amount  of an asset to future  net cash  flows
expected to be generated by the asset.  If such assets are considered  impaired,
the  impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying  amount or fair value less costs to
sell.

        Property and Equipment

Property and equipment are stated at cost.  Depreciation  is provided  under the
straight-line  method over the estimated  useful lives,  principally five years.
Leasehold  improvements are amortized on a straight-line  basis over the shorter
of the useful life of the asset or the lease term.

        Goodwill

Goodwill is carried at cost and amortized  under the  straight-line  method over
seven years, the estimated useful life.  Goodwill  represents the excess cost of
the acquired  businesses over the fair value of net assets acquired (see Notes 2
and 5 to Consolidated  Financial  Statements).  Management  periodically reviews
goodwill  to  determine  if  an   impairment   has   occurred.   Among   various
considerations,  this process includes evaluating recoverability based upon cash
flow  forecasts.  During  2000  and  1999,  the  Company  recorded  charges  for
impairment  of goodwill of $12 million  and $4.6  million,  respectively.  These
write-downs  eliminated all remaining  unamortized  goodwill related to the 1999
acquisition  of Andataco,  Inc.  ("Andataco")  and the 1996  acquisition  of the
assets of Parity  Systems,  Inc.,  respectively.  The goodwill was determined to
have been  impaired  because of the  Company's  projected  inability to generate
sufficient   future   operating   income  from  the  assets  acquired  in  those
acquisitions.  At December 31, 2001, unamortized goodwill amounted to $2 million
(see Recent Authoritative Pronouncements).

        Research and Development Costs

Research and development costs are expensed as incurred.


<PAGE> 41


        Income Taxes

Income taxes are provided on the liability  method  whereby  deferred tax assets
and  liabilities  are recognized for the expected tax  consequences of temporary
differences   between  the  tax  bases  and  reported   amounts  of  assets  and
liabilities.  Deferred tax assets and liabilities are computed using enacted tax
rates  expected  to apply to  taxable  income  in the  years in which  temporary
differences are expected to be recovered or settled.  The effect on deferred tax
assets and liabilities from a change in tax rates is recognized in income in the
period that includes the enactment date.

The Company provides a valuation  allowance for certain deferred tax assets,  if
it is more likely than not that the Company will not realize tax assets  through
future operations.

        Net Loss Per Common Share ("EPS")

Basic EPS is  calculated  by dividing the net loss  available to common stock by
the weighted  average  number of common shares  considered  outstanding  for the
period, without consideration for common stock equivalents. Diluted EPS includes
the effect of potentially  dilutive securities.  For all periods presented,  the
effect  of  including   dilutive   securities  would  have  been   antidilutive.
Accordingly, basic and diluted EPS for all periods presented are the same.

As of December 31, 2001 and 2000,  outstanding  potentially  dilutive securities
included the following, respectively:  2,871,294 and 4,549,610 shares underlying
stock  options;   3,304,299  and  2,575,133  shares  underlying  warrants;   and
59,877,432  and  3,407,199  shares  underlying   convertible   preferred  stock.
Effective  January 11, 2002,  the Company  issued an aggregate of 76,884,122 new
common shares, (the "New Common Shares") pursuant to shareholder approval of the
Halco Investment (see Note 3 to Consolidated  Financial  Statements).  The Halco
Investment was completed on November 20, 2001, subject to shareholder  approval;
accordingly,  the  calculation  of basic and diluted  EPS  assumes  that the New
Common  Shares were issued as of November 20,  2001.  As part of the issuance of
the New Common  Shares,  all of the Company's  convertible  preferred  stock was
converted to common stock.

        Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America,  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 materially differ from those
estimates.

        Financial Instruments

Statement of Financial  Accounting  Standards  No. 107,  Disclosures  about Fair
Value of Financial  Instruments,  requires  disclosure of fair value information
about financial  instruments.  Fair value estimates  discussed  herein are based
upon  certain  market  assumptions  and  pertinent   information   available  to
management as of December 31, 2001 and 2000.

The respective carrying value of certain on-balance-sheet  financial instruments
approximated  their fair values.  These financial  instruments  include cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities.
Fair values were  assumed to  approximate  carrying  values for these  financial
instruments  since  they are short  term in nature  and their  carrying  amounts
approximate  fair  values or they are  receivable  or  payable  on  demand.  The
carrying value of the Company's marketable securities equals their quoted market
value.  The fair value of the Company's  borrowings  (current and  long-term) is
estimated  based upon quoted market prices for the same or similar  issues or on
the  current  rates  offered  to the  Company  for  debt of the  same  remaining
maturities. The carrying value approximates their fair value.


<PAGE> 42


        Dependence on Suppliers

The Company  has and will  continue  to rely on outside  vendors to  manufacture
certain  subsystems and  electronic  components  and  subassemblies  used in the
production  of  the  Company's  products.  Certain  components,   subassemblies,
materials and equipment  necessary for the manufacture of the Company's products
are obtained from a sole  supplier or a limited group of suppliers.  The Company
performs ongoing quality and supply evaluation reviews with its outside vendors.
Supply,  delivery  and  quality of  subsystems  and  electronic  components  and
subassemblies  have been adequate to fulfill customer orders and management does
not expect any vendor problems in the next twelve months.

        Reclassifications

Certain prior years'  amounts have been  reclassified  to conform to the current
year's presentations. These reclassifications had no impact on operating results
previously reported.

        Comprehensive Income

Statement of Financial  Accounting  Standards No. 130,  Reporting  Comprehensive
Income,  established rules for the reporting and display of comprehensive income
(loss) and its components in a full set of general-purpose financial statements.
The Company had no other comprehensive income (loss) for all periods presented.

        Recent Authoritative Pronouncements

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of  Financial  Accounting  Standards  ("SFAS")  No. 141 ("SFAS  141"),  Business
Combinations, which requires business combinations initiated after June 30, 2001
to be accounted for using the purchase method of accounting.  In addition,  SFAS
141  specifies the types of acquired  intangible  assets that are required to be
recognized and reported  separately  from goodwill.  The Company does not expect
SFAS 141 will have a material  impact on the  Company's  financial  position  or
results of operations.

In July 2001,  the FASB issued  SFAS No. 142 ("SFAS  142"),  Goodwill  and Other
Intangible  Assets,  which  addresses  how  intangible  assets that are acquired
individually  or with a group of other assets should be accounted for upon their
acquisition.  SFAS No. 142 also  addresses  how  goodwill  and other  intangible
assets should be accounted for after they have been initially  recognized in the
financial  statements.  SFAS 142 is effective for fiscal years  beginning  after
December 15, 2001, with earlier adoption  permitted.  Implementation of SFAS 142
in 2002 will  result  in the  discontinuation  of  amortization  of  unamortized
goodwill with a carrying amount of  approximately  $2 million as of December 31,
2001. Amortization for the year ended December 31, 2001 amounted to $.4 million.
The Company is currently assessing any impairment issues related to SFAS 142.

In October 2001,  the FASB issued SFAS No. 144 ("SFAS 144"),  Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 establishes the accounting
model  for  long-lived  assets  to be  disposed  of by sale and  applies  to all
long-lived assets,  including  discontinued  operations.  SFAS 144 requires that
those  long-lived  assets be measured  at the lower of  carrying  amount or fair
value  less  cost to sell,  whether  reported  in  continuing  operations  or in
discontinued  operations.  SFAS 144 is effective for financial statements issued
for fiscal years  beginning  after  December 15, 2001 and,  generally,  is to be
applied  prospectively.  The Company is currently  discussing the impact of SFAS
144. Previously, the Company accounted for long-lived assets under SFAS No. 121,
Accounting for the Impairment of Long-Lived  Assets and for Long-Lived Assets to
be Disposed of.


<PAGE> 43


In June 2000, the FASB issued SFAS No. 138 ("SFAS 138")  "Accounting for Certain
Derivative Financial Instruments and Hedging Activities",  which amends SFAS No.
133,  "Accounting for Derivative  Instruments and Hedging  Activities." SFAS No.
133  was  previously  amended  by  SFAS  No.  137,  "Accounting  for  Derivative
Instruments  and Hedging  Activities  - Deferral of the  Effective  date of FASB
Statement No. 133," which  deferred the effective date of SFAS No. 133 to fiscal
years commencing after June 15, 2000. The Company  currently does not engage in,
nor  does it  expect  to  engage  in,  derivative  or  hedging  activities  and,
accordingly, the Company anticipates there will be no impact to its consolidated
financial statements.

 (2)  ACQUISITIONS

    Andataco

On June 8, 1999, the Company purchased approximately 76% of the total issued and
outstanding  stock of Andataco from affiliates of W. David Sykes ("Mr.  Sykes"),
the then President of Andataco, for $5.1 million. The purchase price was paid in
the  form  of 9.5%  promissory  notes,  due on  June  17,  2004  (see  Note 8 to
Consolidated Financial Statements). Andataco was a developer,  manufacturer, and
marketer of high performance,  high availability  information  storage solutions
for the open systems market.

As part of the  acquisition  of  Andataco,  the Company also  acquired  from Mr.
Sykes,  a  promissory  note in the  original  principal  amount of $5.2  million
payable by Andataco to Mr. Sykes.  The purchase  price for the  promissory  note
was: $.5 million in cash;  4,654 shares of the  Company's  Series F  Convertible
Preferred  Stock  convertible  into an  aggregate  of  1,551,333  shares  of the
Company's common stock based on a fixed conversion price of $3.00 per share; and
three-year  warrants to purchase an additional  155,133  shares of the Company's
common  stock  for  $3.30  per  share  valued  at  $.2  million   based  on  the
Black-Scholes option-pricing model.

On November 2, 1999,  the Company  acquired the remaining  shares of Andataco by
exchanging approximately 924,000 shares of the Company's common stock (valued at
approximately  $1.8  million) for the  remaining  shares of common stock held by
Andataco shareholders.

The acquisitions,  with an aggregate purchase price of $14.4 million,  including
$1.6 million in acquisition  costs, were accounted for under the purchase method
of  accounting,  with  assets  acquired  and  liabilities  assumed  recorded  at
estimated fair values as of the respective acquisition dates. Effective with the
initial  acquisition  in June  1999,  the  operating  results of  Andataco  were
included in the Company's consolidated  financial statements.  The excess of the
purchase price over the fair value of net assets acquired (goodwill)  aggregated
approximately  $14.7 million and was being  amortized on a  straight-line  basis
over seven  years.  During  2000,  the  Company  recorded an  impairment  of all
unamortized  goodwill  related  to  the  Andataco  acquisition  (see  Note  1 to
Consolidated Financial Statements).

        OneofUs

On January 19, 2000,  the Company  acquired  substantially  all of the assets of
OneofUs  Company  Limited  ("OneofUs")  for an aggregate  purchase price of $2.9
million,  consisting  of $.3 million  cash and 776,119  shares of the  Company's
common  stock with an aggregate  value of $2.6 million  (based on the average of
the closing prices of the Company's stock during the ten (10) trading days ended
January 19, 2000). The shares were issued to four selling stockholders  pursuant
to   employment   agreements   or   a   confidentiality,    noncompetition   and
nonsolicitation agreement.  OneofUs was a Taiwan-based,  privately-held designer
of high  performance  Fibre Channel  controllers and storage  solutions for open
systems and the SAN market.


<PAGE> 44


The  acquisition  of OneofUs  was  accounted  for using the  purchase  method of
accounting with goodwill of $2.8 million recorded, which is being amortized on a
straight-line  basis over seven years.  The pro forma effect of this acquisition
was not material to the results of operations for all periods presented.

(3)  HALCO INVESTMENT

On November 20, 2001 (the "Closing Date"),  the Company  completed a transaction
in which Halco Investments L.C. (Halco),  a company  controlled by Mr. Halperin,
acquired a 34% equity interest in, and made certain loans to, the Company for an
aggregate  investment  of $12.1 million (the Halco  Investment).  On the Closing
Date,  Halco  acquired  8,970 shares of the  Company's  newly  created  Series K
Convertible  Preferred  Stock (the  "Series K Preferred  Stock" - see Note 13 to
Consolidated  Financial Statements),  with a face amount of $8,970,000,  and the
Company  issued a $3.1  million,  5-year,  8% note  (the  "Halco  Note").  Halco
invested $6 million in cash and  marketable  securities  having a quoted  market
value of $6.1  million,  based on the  closing  price  for  such  securities  on
November 19, 2001.

Mr. Halperin first  submitted an investment  proposal to the Company on June 26,
2001.  The Company  subsequently  negotiated the terms of the offer from July to
November 2001, during which time, Halco made short-term working capital loans to
the Company in the aggregate  amount of $5 million at an interest rate of 8% per
annum. Of that amount,  at the Closing Date, $3.1 million was converted into the
Halco Note and the  remaining  amount was  applied to the cash paid by Halco for
the Series K Preferred Stock. In connection with Mr. Halperin's proposal and the
interim financing  provided by Halco, on August 15, 2001, the Company's board of
directors  elected Mr.  Halperin as Chairman,  replacing the then Chairman,  Mr.
Levy, who became Vice Chairman and who is continuing to serve as Chief Executive
Officer of the Company.

In connection with and as conditions to the Halco Investment, it was agreed that
an aggregate of 76,884,122  common shares,  (the "New Common Shares") were to be
issued as follows:  (i) the Series K Preferred Stock,  owned by Halco, was to be
automatically  converted into 39,000,000  shares of the Company's  common stock,
based upon a conversion price of $.23 per share,  upon approval of the Company's
shareholders;  (ii)  all  of the  holders  of the  Company's  other  convertible
preferred stock (the "Other Preferred  Stock") agreed to convert their shares of
preferred stock into common stock (20,877,432 shares of common stock,  including
10,752,527  to Mr.  Levy);  (iii)  the  Company  and the  holders  of the  Other
Preferred  Stock  agreed to the  issuance  of: (a)  12,993,072  shares of common
stock, including 6,651,488 to Mr. Levy, to induce those holders to convert their
shares, all of which were entitled to periodic dividends,  into shares of common
stock,  which had never received a dividend (the "Inducement  Shares"),  and (b)
3,263,618  shares  of  common  stock,  including  1,658,064  to Mr.  Levy,  (the
"Dividend  Shares") in  satisfaction  of an aggregate of $1.5 million of accrued
dividends  (including  $.7 million to Mr. Levy) on the date of  conversion  (the
Inducement Shares and Dividend Shares were based upon a conversion price of $.45
per share);  and (iv) Mr.  Levy  agreed to the receipt of 750,000  shares of the
Company's  common  stock in exchange  for $.3 million owed by the Company to Mr.
Levy (the "Note Shares") based upon a conversion price of $.40 per share.

On the Closing  Date,  shareholders  who owned in excess of 50% of the Company's
voting stock  executed  proxies to vote in favor of the foregoing  transactions.
However, formal shareholder approval of the transactions was required before the
Company could issue the common stock  necessary for the conversion of the Series
K Preferred  Stock,  the Note  Shares,  the  Inducement  Shares and the Dividend
Shares,  and for an increase in the number of  authorized  common shares from 75
million to 200 million. On January 10, 2002,  shareholder  approval was received
and the  Company  issued the New  Common  Shares  effective  January  11,  2002.
Accordingly,  to appropriately  reflect the financial position of the Company in
the accompanying consolidated financial statements,  the foregoing transactions,
as shown in the  following  table,  were assumed to have occurred as of November
20, 2001, the Closing Date of the Halco Investment.


<PAGE> 45


<TABLE>
<CAPTION>

          Balances at January 10, 2002                                     New Common Shares
   (Considered Converted to New Common Shares                     Issued Effective January 11, 2002
             at December 31, 2001)                          (Considered Outstanding at December 31, 2001)
---------------------------------------------------   -----------------------------------------------------
                             Aggregate     Accrued                                                 Total
Preferred    Number of     Stated Value   Dividneds    Conversion   Inducement     Dividend      New Common
  Series      Shares            (in  thousands)         Shares         Shares       Shares         Shares
---------   -----------   -------------------------   -----------   -----------   -----------   -----------
<S>         <C>           <C>           <C>           <C>           <C>           <C>           <C>
   E              3,500   $     3,500   $       405     1,166,666     1,166,666       899,665     3,232,997
   H              5,100         5,100           383     7,083,333     4,250,000       850,776    12,184,109
   I              9,092         9,092           681    12,627,433     7,576,406     1,513,177    21,717,016
   K              8,970         8,970            --    39,000,000            --            --    39,000,000
                          -----------   -----------   -----------   -----------   -----------   -----------
                          $    26,662   $     1,469    59,877,432    12,993,072     3,263,618    76,134,122
                          ===========   ===========   ===========   ===========   ===========
Note Shares                                                                                         750,000
                                                                                                -----------
Total New Common Shares issued effective January 11, 2002                                        76,884,122

Common shares outstanding at December 31, 2001                                                   37,719,022
                                                                                                -----------
Common shares outstanding at January 11, 2002
 (considered outstanding at December 31, 2001)                                                  114,603,144
                                                                                                ===========

</TABLE>

In  accordance  with the SEC's staff  position on an EITF  pronouncement  (Topic
D-42) relating to induced conversions of preferred stock, the Company recorded a
$3 million  non-cash  charge to arrive at net loss  available to common stock in
2001,  representing the fair value of the Inducement  Shares. The fair value was
based on $.23 per share,  the price paid by Halco for its purchase of 39 million
shares of the Company's common stock.

(4)  GAIN ON SALE OF ASSETS OF BORG ADAPTIVE TECHNOLOGIES ("BORG")

On January 10, 2000, the Company sold substantially all of the assets of Borg, a
wholly-owned  subsidiary of the Company, to a wholly-owned  subsidiary of QLogic
Corporation,  for $7.5  million  cash (the "Borg  Sale").  The net book value of
assets sold totaled $.6 million and included  all of the  intellectual  property
rights relating to the Company's  Adaptive RAID (Redundant  Array of Independent
Disks)  technology,  including  software,  patents and  trademarks,  and certain
tangible assets, including test and office equipment and tenant improvements. In
connection  with the Borg Sale, the Company  recorded  transaction  costs of $.5
million and a gain of $5.6 million,  which is net of compensation expense of $.8
million resulting from modifications to certain stock options and warrants.  The
Borg division operating costs were $1 million in 1999.

(5)  BALANCE SHEET COMPONENTS (in thousands)

At December 31, 2001, substantially all assets (excluding marketable securities)
were  pledged  as  collateral  for  indebtedness  (see  Note  8 to  Consolidated
Financial Statements).

                                                                December 31,
                                                          ---------------------
                                                             2001          2000
                                                          -------       -------
Accounts Receivable
     Trade receivables .............................      $ 2,113       $ 4,610
     Less allowance for doubtful accounts ..........         (209)         (402)
                                                          -------       -------
                                                            1,904         4,208
     Other receivables .............................           21           187
                                                          -------       -------
                                                          $ 1,925       $ 4,395
                                                          =======       =======


<PAGE> 45


                                                                December 31,
                                                          ---------------------
                                                             2001          2000
                                                          -------       -------
Prepaid Expenses and Other
     Prepaid service costs .........................      $  --         $ 1,175
     Other .........................................          207           103
                                                          -------       -------
                                                          $   207       $ 1,278
                                                          =======       =======
Inventories
     Raw materials .................................      $   880       $ 3,784
     Work-in-process ...............................          361           213
     Finished goods ................................          123         1,177
                                                          -------       -------
                                                          $ 1,364       $ 5,174
                                                          =======       =======

During 2001 and 2000, the Company recorded  write-downs of $2.5 million and $1.4
million, respectively, resulting from a valuation of certain inventory (see Note
19 to Consolidated Financial Statements).

Property and Equipment
     Computer equipment ............................      $ 5,011       $ 4,888
     Computer software .............................          770           770
     Leasehold improvements ........................          866           866
     Furniture, fixtures and office equipment ......          325           321
     Other .........................................           36           122
                                                          -------       -------
                                                            7,008         6,967
     Less accumulated depreciation .................       (5,641)       (4,583)
                                                          -------       -------
                                                          $ 1,367       $ 2,384
                                                          =======       =======

Depreciation  expense  amounted to $1.2  million and $1.9  million for the years
ended December 31, 2001 and 2000, respectively.

Goodwill
       Goodwill ....................................      $ 2,797       $ 2,797
       Less accumulated amortization ...............        ( 808)         (400)
                                                          -------       -------
                                                          $ 1,989       $ 2,397
                                                          =======       =======

Amortization of goodwill  amounted to $.4 million and $2.6 million for the years
ended  December  31,  2001 and 2000,  respectively.  During  2000 and 1999,  the
Company  recorded charges for the impairment of goodwill of $12 million and $4.6
million, respectively (See Note 1 to Consolidated Financial Statements).

Accounts Payable and Other
Accounts payable ...................................      $ 1,780       $ 6,402
Accrued expenses and other
 current liabilities ...............................        2,010         3,102
                                                          -------       -------
                                                          $ 3,790       $ 9,504
                                                          =======       =======


<PAGE> 47


(6)   TRADING MARKETABLE SECURITIES

In connection with the Halco  Investment  (see Note 3 to Consolidated  Financial
Statements) on November 20, 2001,  the Company  received  marketable  securities
with a quoted  market value of $6.1  million,  including  approximately  434,000
shares of American  Realty  Investors  Inc.  ("ARL"),  a New York Stock Exchange
listed company, with a quoted market value of $5.2 million. Through December 31,
2001, the Company received net cash proceeds of $1,047,000  principally from the
sale  of all  of the  non-ARL  securities,  and  realized  a  gain  of  $86,000.
Unrealized  losses  at  December  31,  2001 on the  ARL  shares  were  $897,000,
resulting in a net loss of $811,000.

Due to ARL's low trading volume, the Company's ability to sell or borrow against
the ARL holdings had been  extremely  limited.  From November 2001 through 2002,
the  Company  had been able to sell only  56,300  shares in the  public  market,
generating cash proceeds of $442,000. To assist in funding the Company's working
capital  requirements,  in  February  and March  2002,  the Company and Mr. Levy
entered into agreements whereby Mr. Levy purchased 195,000 shares of ARL with an
aggregate  quoted value of $1,470,000 on the  respective  purchase  dates for an
aggregate  purchase  price of  $1,240,000.  In  connection  therewith,  Mr. Levy
granted the Company four month options to  repurchase  all or a portion of those
shares  based on the price Mr.  Levy paid plus 10% per annum.  In  February  and
March 2002, the Company sold 183,000 shares,  representing  all of its remaining
holdings in ARL, to Mr. Halperin for an aggregate  purchase price of $1,278,000,
which  approximated  ARL's quoted value on the respective  purchase  dates. As a
result of the 2002 ARL sales,  the  Company  will  realize a loss of  $2,054,000
during its first quarter.

(7)   INCOME TAXES

The  Company  accounts  for  income  taxes in  accordance  with SFAS 109,  which
requires  recognition  of deferred tax assets and  liabilities  for the expected
future tax  consequences  of events  that have been  included  in the  financial
statements  or tax  returns.  Under  the SFAS 109 asset  and  liability  method,
deferred tax assets and  liabilities  are  determined  based upon the difference
between the financial  statement and tax bases of assets and  liabilities  using
enacted  tax rates in  effect  for the  year(s)  in which  the  differences  are
expected to reverse.

A  reconciliation  of the provision  for income taxes to the amount  computed by
applying  the  statutory  federal  income tax rate to loss before  income  taxes
follows (dollars in thousands):

                                                    Years Ended December 31,
                                                -------------------------------
                                                   2001        2000        1999
                                                -------     -------     -------
Amount computed at federal statutory
  rate of 34% ..............................    $(4,745)    $(7,453)    $(6,359)
Impairment of goodwill not
  deductible for tax .......................         --       4,065          --
Non-deductible amortization of in-
  tangible assets ..........................        127         840         533
Expenses not deductible for tax
  purposes .................................         80          62         159
Losses not deductible for tax purposes .....        123         425         158
Exercise of non-qualified stock options ....         --         (44)       (272)
Losses for which no current benefits
  are available ............................      4,415       2,105       5,781
                                                -------     -------     -------
Provision for income taxes .................    $    --     $    --     $    --
                                                =======     =======     =======


<PAGE> 48


The tax effects of temporary  differences that gave rise to significant portions
of deferred tax assets are as follows (in thousands):

                                                      December 31,
                                                  -----------------------------
                                                      2001                 2000
                                                  --------             --------
Deferred tax assets:
   Net operating loss carryforwards ..........    $ 18,643             $ 14,128
   Alternative minimum tax carryforwards .....         770                  770
   Research and development credit
     carryforwards ...........................       1,244                1,244
   Depreciation and amortization .............       1,923                 (152)
   Allowance for doubtful accounts ...........           3                  137
   Inventory and warranty reserves ...........       1,587                1,786
                                                  --------             --------
Net deferred tax assets ......................      24,170               17,913
Less valuation allowance .....................     (24,170)             (17,913)
                                                  --------             --------
Deferred taxes ...............................    $     --             $     --
                                                  ========             ========

At December 31, 2001 and 2000, a 100%  valuation  allowance has been provided on
the total deferred income tax assets because it is more likely than not that the
net operating loss  carryforwards will not be realized based on recent operating
results.

As of December 31, 2001, there were unused net operating loss carryforwards (the
"NOL's") for regular  federal tax purposes of  approximately  $54.8  million and
approximately  $11.5 million for  California  tax  purposes,  expiring from 2012
through 2021 and 2002 through 2011,  respectively.  In addition, the Company has
research and development tax credit carryforwards of approximately $1.2 million,
which  expire from 2002 through 2018 and, in  conjunction  with the  Alternative
Minimum Tax ("AMT") rules, the Company has available AMT credit carryforwards of
approximately  $.8 million at December 31, 2001, which may be used  indefinitely
to reduce regular federal income taxes.

The  acquisition of Andataco in 1999 caused a change in ownership for income tax
purposes. Under Internal Revenue Code Section 382, the usage of approximately $8
million  of  Andataco's  federal  NOL's  and  approximately  $2  million  of the
California  NOL's will be limited  annually to  approximately  $.4 million.  The
usage of  Andataco's  tax credit  carryforwards  is also  subject to  limitation
because of the change in ownership.

(8)  BORROWINGS

Revolving Credit Facility (Bank Line of Credit)

At  December  31,  2001,  the Bank Line of  Credit,  as  amended,  provided  for
borrowings  based on the lesser of $10 million or: (i) 85% of eligible  accounts
receivable, as defined, plus (ii) the lesser of $1.25 million or 20% of eligible
inventory,  as defined  (collectively,  the "Borrowing  Base"). The Bank Line of
Credit bore interest at prime (4.75% at December 31, 2001) plus 2.5%, matures in
April 2002,  requires a facility fee of .25% based on the average unused portion
of  the  maximum  borrowings,  is  collateralized  by  substantially  all of the
Company's  assets,  and  provides  for certain  financial  covenants,  including
minimum net worth and net income  requirements.  As of December  31,  2001,  the
outstanding balance of the Bank Line of Credit was $3 million.


<PAGE> 49


Since the fourth  quarter of 2000,  the Company has not been in compliance  with
the minimum net worth and net income requirements under the Bank Line of Credit.
On February 4, 2002, the bank advised the Company that the outstanding principal
balance  exceeded the  Borrowing  Base by $1.1  million and  demanded  immediate
payment of the over-advance. The bank also indicated that the Company's non-bank
indebtedness of approximately $4.7 million was incurred in violation of the loan
agreement.  In  addition,  effective  February  4, 2002,  the bank  applied  the
following amendments to the Bank Line of Credit: (1) an increase in the interest
rate to prime plus 3.5%, (2) a decrease in the overall facility to $3.5 million;
and (3) a reduction in the  inventory  borrowing  limit to $900,000 with further
reductions of 2% of eligible  inventory per week,  effective  February 12, 2002.
The bank  advised the Company  that it does not intend to renew the Bank Line of
Credit. The Company is currently seeking a replacement lender; however, there is
no assurance  that it will be successful  in obtaining a new credit  facility on
terms acceptable to the Company, if at all.

Other Borrowings

The Company's other borrowings consisted of the following (in thousands):
                                                                 December 31,
                                                              ------------------
                                                                2001        2000
                                                              ------      ------
Current:

Notes payable, interest at 10% per annum,
  maturing on December 15, 2002, including
  $650,000 to Mr. Levy .................................      $1,100      $   --
                                                              ======      ======

Long-term:

Halco Note, interest only at 8% per annum,
  payable quarterly, maturing
  on November 20, 2006 .................................      $3,100      $   --

Notes payable to affiliates of Mr. Sykes,
  interest only at 8% per annum, payable
  monthly, maturing on June 6, 2003 ....................         500          --

Notes payable to affiliates of Mr. Sykes in
  connection with Andataco acquisition,
  interest at 9% per annum (exchanged for
  Series H  Convertible Preferred Stock
  on April 12, 2001 (see below) ........................          --       5,100

Notes payable, interest at 10% per annum,
  payable quarterly, including $1,658 to
  Mr. Levy (exchanged for Series I Convertible
  Preferred Stock on April 12, 2001 (see
  below)) ..............................................          --       2,158
                                                              ------      ------
                                                              $3,600      $7,258
                                                              ======      ======

At December 31,  2000,  the  Company's  aggregate  borrowings  were $7.3 million
including  $1.7  million  owed to Mr. Levy at 10% per annum.  From  January 2001
through  March 31,  2001,  the  Company  borrowed  an  additional  $4.5  million
(including  $1.9 million from Mr. Levy),  of which $3.8 million  (including $1.3
million from Mr. Levy) was convertible  into the Company's common stock at $1.00
per share.  In connection with certain of this debt, the Company issued warrants
to purchase an aggregate of 1,137,500 shares (including  512,500 warrants to Mr.
Levy) of the Company's common stock, principally at $1.20 per share, exercisable
at issuance  and  expiring,  principally  on March 31, 2004.  The warrants  were
valued  based  on the  Black-Scholes  option-pricing  model  as of the  dates of
issuance  at an  aggregate  of $396,000  and were  recorded as a discount to the
notes.


<PAGE> 50


Effective April 12, 2001, holders of all of the Company's notes payable totaling
$11.9 million  (including accrued interest) on that date (including $3.6 million
due to Mr.  Levy)  exchanged  their notes for Series H and Series I  Convertible
Preferred Stock (see Note 13 to Consolidated Financial Statements) with a stated
value of $11.9 million.

From May 2001 through the closing of the Halco  Investment in November 2001, the
Company borrowed an additional $6.9 million,  including $5 million of short-term
borrowings from Halco and $1.45 million from Mr. Levy.  Effective on the Closing
Date of the Halco Investment,  (i) the $5 million of short-term  borrowings from
Halco was  satisfied by the  conversion  of $3.1 million into the Halco Note and
the  application  of $1.9  million to the amount  paid by Halco for the Series K
convertible  Preferred  Stock and (ii) the Company agreed to satisfy $.3 million
of borrowings  from Mr. Levy by issuing  750,000 shares of the Company's  common
stock  (see  Note 3 to  Consolidated  Financial  Statements).  In  addition,  in
December  2001,  Mr. Levy assigned $.5 million of his loans to affiliates of Mr.
Sykes in a private  transaction in which Mr. Levy purchased Series H Convertible
Preferred Stock with a face amount of $1.7 million from affiliates of Mr. Sykes.

In connection with certain  borrowings  during 2001, the Company issued warrants
to purchase an aggregate of 625,000 shares  (including  400,000  warrants to Mr.
Levy) of the Company's common stock at exercise prices ranging from $.45 to $.75
per share,  exercisable  at issuance and expiring on June 30, 2004. The warrants
were valued based on the Black-Scholes  option-pricing  model as of the dates of
issuance  at an  aggregate  of $155,000  and were  recorded as a discount to the
notes.

At December 31, 1999,  borrowings  included $1.6 million due to Mr. Levy,  which
was satisfied in full in January 2000.  Between June and December 2000, Mr. Levy
advanced an  additional  $4.4  million to the  Company.  Of those  amounts,  the
Company  repaid $.7 million and  satisfied  $2 million by issuing  shares of the
Company's Series G Preferred Stock with a face amount of $2 million (see Note 13
to Consolidated Financial Statements).

In  connection  with certain  borrowings  from Mr. Levy during  2000,  effective
December 29, 2000, the Company issued a warrant to Mr. Levy to purchase  200,000
shares of common stock,  exercisable immediately at $2.00 per share, expiring in
December 2003. The warrant was valued based on the Black-Scholes  option-pricing
model as of the date of issuance  at $87,500  and was  recorded as a discount to
the notes.

In April and December 2000,  borrowings amounting to $1.2 million were satisfied
in full by the issuance of 439,154 shares of the Company's common stock.

In  connection  with the issuance of $1.8  million of long-term  debt in January
1999,  the Company issued  warrants to purchase  600,000 shares of the Company's
common stock,  including  warrants to purchase  200,000  shares of the Company's
common  stock  to  Mr.   Halperin.   The  warrants  were  valued  based  on  the
Black-Scholes option-pricing model as of the date of issuance at an aggregate of
$.8 million and were recorded as a discount to the long-term  debt, of which $.4
million was amortized as interest  expense for the year ended December 31, 1999.
As  discussed  below,  the  remaining  unamortized  discount  of $.4 million was
recorded as an extraordinary  loss on  extinguishment  of debt when the debt was
satisfied in December 1999.

In March 1999, the Company  issued 645,000 shares of the Company's  common stock
in full satisfaction of $1.3 million of borrowings, consisting of 395,000 shares
of common stock to Mr. Levy in  satisfaction  of $.8 million of  borrowings  and
250,000 shares of common stock to Mr. Halperin in satisfaction of $.5 million of
borrowings.


<PAGE> 51


In December  1999, the Company  issued  1,878,462  shares of its common stock in
full  satisfaction of an aggregate of $5.5 million of long-term debt,  including
338,462  shares of common  stock in full  satisfaction  of $1 million due to Mr.
Levy. On the date of  satisfaction,  the aggregate  unamortized  discount on the
notes of $.5 million was recorded as an extraordinary  loss on extinguishment of
debt.

Interest paid to Mr. Levy was $0, $134,000, and $112,000 in 2001, 2000 and 1999,
respectively. Interest paid to Mr. Halperin was $81,000 in 2001.

   Maturities

Scheduled and estimated  maturities of the Company's  borrowings,  including the
Bank Line of Credit, are as follows (in thousands):

           Years ending December 31,
                   2002                  $4,091
                   2003                     500
                   2004                       -
                   2005                       -
                   2006                   3,100
                                         ------
              Total payments              7,691
              Less current portion       (4,091)
                                         ------
              Long-term portion          $3,600
                                         ======

(9)  EXTRAORDINARY GAINS

During  2001,  the  Company  recognized  $869,000  of  net  extraordinary  gains
consisting of $1,231,000 of extraordinary  gains from negotiated  discounts with
vendors,  less a  $362,000  extraordinary  loss,  representing  the  unamortized
discount on certain notes payable  exchanged for Series I Convertible  Preferred
Stock  effective   April  12,  2001  (see  Note  8  to  Consolidated   Financial
Statements).

During 1999, the Company recognized a $465,000 extraordinary loss,  representing
the  unamortized  discount on certain notes payable  exchanged for shares of the
Company's common stock in December 1999.

(10)  SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS

The Company operates predominantly in one business segment,  information storage
solutions.  The  Company's  customers  include  end  users,  original  equipment
manufacturers,   systems  integrators  and  value  added  resellers.   Financial
instruments  which  potentially  subject the Company to concentrations of credit
risk are primarily  accounts  receivable.  The Company  performs  ongoing credit
evaluations  of its  customers,  generally  requires no collateral and maintains
allowances  for potential  credit  losses and sales  returns.  During 2001,  one
customer  accounted for 12% of sales.  During 2000, no single customer accounted
for more than 10% of sales.  During 1999,  sales to two customers  accounted for
15% and 11% of total  sales.  Sales to  geographic  areas  other than the United
States have not been significant.


<PAGE> 52


(11)   COMMITMENTS AND CONTINGENCIES

Litigation

In June 1996, Jack Ehrenhuas, Mark Schindler, Eugene Stricker, Amnon Damty, Ehud
Mendelson  and Susan Felton filed a Complaint in the Supreme  Court of the State
of New York,  County of Nassau,  against the Company and Michael Wise,  its then
Chairman of the Board and  currently a director.  The  plaintiffs  claim to have
contractual  and  proprietary  interests  in the  prospect of a  transaction  to
purchase  certain  net assets  acquired  by the  Company  and seek  compensatory
damages plus punitive damages.

In August 1996, The Nais  Corporation,  Mark Schindler,  Eugene Stricker,  Amnon
Damty,  Ehud  Mendelson  and Susan  Felton  filed a Complaint  in the same Court
making  similar  allegations  against  a  subsidiary  of the  Company,  its then
president,  R. Daniel Smith (Mr. Smith),  and a company controlled by Mr. Smith.
In this action,  the plaintiffs seek compensatory  damages plus punitive damages
for alleged breach of contract.

Both cases are currently in discovery. Counsel for the Company believes that the
Company has good defenses to both claims and that it will not incur any material
liability.  The  Company is unaware of any facts that would  support  any of the
plaintiffs'  claims,  and accordingly,  the Company believes that the claims are
without merit.

In February 2002, Mr. Sykes filed a complaint in the Circuit Court of Palm Beach
County,  Florida,  against a subsidiary of the Company in which Mr. Sykes claims
he was  wrongfully  terminated  under  provisions  of the  employment  agreement
between  Mr.  Sykes  and the  subsidiary.  The  Company  believes  it  acted  in
accordance with the termination  provisions of the agreement and that no further
compensation or benefits are due to Mr. Sykes.  The Company believes that it has
good defenses to the claim and that it will not incur any material liability.

From time to time, the Company is subject to legal  proceedings and other claims
arising in the ordinary  course of business.  In the opinion of management,  the
Company  is not a party to any  litigation  the  outcome  of which  would have a
material adverse effect on its business, operations or cash flows.

(12)   COMMON STOCK

On May 4, 2000, the Company entered into an agreement with a private  investment
group  granting  the Company a one-year  $15 million  equity line or equity draw
down facility  ("Equity  Agreement").  The Equity Agreement did not obligate the
Company to draw any of the funds.  Once per draw down period,  the Company could
request a draw of up to $5 million,  subject to a formula based on average stock
price and average trading volume,  setting the maximum amount of any request for
any given draw. The amount of money that the  investment  group would provide to
the Company and the number of shares the Company  would issue to the  investment
group in return for that money was  settled  on a weekly  basis  during a 22 day
trading  period  following the draw request based on a formula as defined in the
stock purchase  agreement.  The  investment  group received a 7% discount to the
market price for the 22-day period and the Company  received the settled  amount
of the draw down less a 4% fee payable to the placement agent.

In connection  with the Equity  Agreement,  the Company  granted the  investment
group and the  placement  agent three year  warrants to purchase an aggregate of
220,000  shares of the Company's  common stock at an exercise price of $3.60 per
share,  representing  120% of the average of the closing prices of the Company's
common stock for the five trading days before May 9, 2000.

Effective  September 28, 2001, the Company terminated the Equity Agreement.  The
aggregate  number  of  common  shares  issued by the  Company  under the  Equity
Agreement   was  508,857   shares,   for  which  it  received  net  proceeds  of
approximately  $1 million,  all of which  occurred in 2000. In the  accompanying
Statement of Stockholders'  Equity, the approximate $87,000 of transaction costs
incurred to complete  this  agreement  has been  charged to  additional  paid-in
capital in 2000.

Pursuant to state law, the Company may be  restricted  from paying  dividends to
its holders of common stock under certain conditions.


<PAGE> 53


(13)  PREFERRED STOCK

EITF 98-5  addresses  accounting for preferred  stock which is convertible  into
common  stock at a discount  from the market  rate at the date of  issuance.  In
accordance with this EITF, a preferred  stock  dividend,  attributable to such a
beneficial conversion  privilege,  should be recorded for the difference between
the conversion  price and the quoted market price of common stock at the date of
issuance.  Accordingly,  during  1999,  the Company  recorded  $.3 million as an
additional embedded dividend attributable to the beneficial conversion privilege
on its convertible preferred stock.

Series A

The Series A Preferred Stock accrued dividends in 1999 and 2000 at 8% per annum,
payable quarterly, and was convertible into shares of the Company's common stock
based on a fixed conversion price of $.60 per share. On February 1, 2000, all of
the Series A Preferred Stock,  consisting of 1,667 shares with a stated value of
$1 million, was converted into 1,666,667 shares of the Company's common stock.

Series C

The Series C Preferred Stock accrued dividends in 1999 and 2000 at 8% per annum,
payable quarterly, and was convertible into shares of the Company's common stock
based on a fixed  conversion  price of $1.00 per share.  Effective July 7, 2000,
all of the Series C Preferred  Stock,  consisting  of 3,000 shares with a stated
value of $3 million held by Mr. Levy, was converted into 3,000,000 shares of the
Company's common stock in accordance with an automatic conversion requirement.

Series D

The Series D Preferred Stock accrued  dividends in 1999, 2000 and 2001 at 8% per
annum,  payable  quarterly,  and was  convertible  into shares of the  Company's
common stock based on a fixed  conversion  price of $1.00 per share. On February
1,  2000,  700  shares of the Series D  Preferred  Stock with a stated  value of
$700,000  was  converted  into 700,000  shares of the  Company's  common  stock.
Pursuant to an automatic  conversion  feature,  effective  October 28, 2001, the
remaining  2,000 shares with a stated value of $2,000,000  was converted  into 2
million shares of the Company's common stock.

Series E

In June 1999, the Company issued 3,500 shares of Series E Convertible  Preferred
Stock for $3.5  million in cash,  of which $1.5 million was in  satisfaction  of
borrowings  from Mr. Levy, and  three-year  warrants to purchase an aggregate of
116,667  shares  of the  Company's  common  stock at a price of $3.30  per share
(including  50,000 shares to Mr.  Levy).  The Series E Preferred  Stock,  with a
stated  value  of $3.5  million  as of  December  31,  2000,  accrued  quarterly
dividends at the following annual rates: 8% during the first year, 9% during the
second year and 10%  thereafter.  The Series E Preferred  Stock was  convertible
into shares of the Company's  common stock based on a fixed  conversion price of
$3.00 per share. In connection with the Halco  Investment,  on January 11, 2002,
all of the Series E Preferred  Stock was converted  into shares of the Company's
common stock (see Note 3 to Consolidated Financial Statements).

Series F

As part of the  acquisition  of Andataco in June 1999,  the Company issued 4,654
shares of Series F Convertible Preferred Stock to Mr. Sykes, with a stated value
of $4.7 million,  which  accrued  quarterly  dividends at the  following  annual
rates:  8% during the first year, 9% during the second year and 10%  thereafter.
The Series F Preferred  Stock was  convertible  into the Company's  common stock
based on a fixed  conversion  price of $3.00 per share.  During  2001,  2000 and
1999, 722, 3,332 and 600 shares, respectively,  representing all of the Series F
Preferred  Stock,  were  converted into 240,533,  1,110,800 and 200,000  shares,
respectively, of the Company's common stock.


<PAGE> 54


Series G

Effective December 29, 2000, the Company satisfied $2 million of borrowings from
Mr.  Levy by issuing  2,000  shares of Series G Preferred  Stock,  with a stated
value of $2 million.  The Series G Preferred  Stock  accrued  dividends  at 10%,
payable quarterly,  and was redeemable at the Company's option.  Attached to the
Series G  Preferred  Stock  was a  warrant  to  purchase  500,000  shares of the
Company's common stock at $1.50 per share, exercisable from July 1, 2001 through
December 31, 2003 (the  "Warrant").  The Warrant provided that if any portion of
the Series G Preferred Stock was redeemed by the Company prior to June 30, 2001,
a corresponding  pro-rata  portion of the Warrant would be cancelled.  Effective
April 12, 2001, the Series G Preferred  Stock and accrued  dividends  thereon of
$57,000 were exchanged for Series I Convertible  Preferred Stock,  with a stated
value of $2,057,000, and the Warrant was cancelled.

Series H

Effective  April 12, 2001,  the Company  satisfied $5.1 million of borrowings by
issuing  5,100  shares of Series H  Convertible  Preferred  Stock.  The Series H
Preferred  Stock had a stated value of $5.1  million,  accrued  dividends at 10%
annum,  payable  quarterly,  and was  convertible  into shares of the  Company's
common stock based on a fixed  conversion price of $.72 per share. In connection
with the Halco  Investment,  on January 11, 2002,  all of the Series H Preferred
Stock was  converted  into shares of the  Company's  common stock (see Note 3 to
Consolidated Financial Statements).

Series I

Effective  April 12,  2001,  the  Company  exchanged  $6,675,000  of  borrowings
(including  $3,550,000  from Mr. Levy),  $110,000 in accrued  interest,  and the
Series G  Preferred  Stock held by Mr.  Levy with a stated  value of  $2,057,000
(including accrued dividends) for 8,842 shares of Series I Convertible Preferred
Stock with a stated value of  $8,842,000.  On April 24, 2001, the Company issued
an additional 250 shares,  to a private  investor,  of Series I Preferred  Stock
with a stated  value of $250,000,  for $250,000 in cash.  The Series I Preferred
Stock had an aggregate  stated value of $9.1 million,  accrued  dividends at 10%
annum,  payable  quarterly,  and was  convertible  into shares of the  Company's
common stock based on a fixed  conversion price of $.72 per share. In connection
with the Halco  Investment,  on January 11, 2002,  all of the Series I Preferred
Stock was  converted  into shares of the  Company's  common stock (see Note 3 to
Consolidated Financial Statements).

Series K

On November 20, 2001,  the Company  issued 8,970 shares of Series K  Convertible
Preferred Stock to Halco as part of the Halco Investment for approximately  $2.9
million  in cash  and  $6.1  million  of  marketable  securities.  The  Series K
Preferred Stock had an aggregate stated value of $8,970,000, was not entitled to
receive  dividends and was convertible into shares of the Company's common stock
based on a fixed conversion price of $.23 per share. On January 11, 2002, all of
the Series K Preferred  Stock was converted into shares of the Company's  common
stock (see Note 3 to Consolidated Financial Statements).


<PAGE> 55


(14) STOCK OPTIONS AND WARRANTS

The Company applies APB Opinion 25,  "Accounting for Stock Issued to Employees",
and related interpretations in accounting for options granted to employees under
its stock option plan.  Under APB Opinion 25, if options are granted at exercise
prices less than fair market  value,  compensation  expense is recorded  for the
excess of the fair market values on the date of grant over the exercise price.

Under the Company's  1996 Stock Option Plan (the "1996 Plan"),  stock options to
purchase up to seven million shares of the Company's common stock were available
to be granted to officers,  directors,  key  employees  and  non-employees.  The
maximum term of the options  which have been granted  under the 1996 Plan is ten
years and generally vest over three years annually on an equal basis.

Effective  January 10, 2002, the Company's  stockholders  approved the Company's
2001 Stock Option Plan (the "2001 Plan"),  under which stock options to purchase
up to five  million  shares of the  Company's  common  stock may be issued for a
maximum term of ten years.  In connection with the 2001 Plan, the Company ceased
granting  options under the 1996 Plan and all shares reserved for issuance under
the 1996 Plan for stock  options  that have not yet been issued were  cancelled.
The terms of options  previously granted under the 1996 Plan will continue to be
governed  by the 1996 Plan and the  option  agreements  currently  in effect for
those options.

SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), requires the
Company to provide pro forma  information  regarding net income and earnings per
share as if  compensation  cost for stock options granted had been determined in
accordance with the fair value based method  prescribed in SFAS 123. The Company
estimates  the fair  value of each  stock  option at the grant date by using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions  used for grants:  no dividend yield;  expected lives of five to ten
years;  volatility  ranging from 90% to 111% for 2001, 96% to 107% for 2000, and
60% for 1999;  and risk-free  interest rates ranging from 3.1% to 3.8% for 2001,
4.9% to 5.1% for 2000, 5.6% for 1999.

If the Company had elected to recognize  stock-based employee compensation costs
based on the fair value on the date of grant  consistent  with the provisions of
SFAS No. 123, net loss  available to common stock and basic and diluted net loss
per  common  share  would  have been  increased  to the  following  amounts  (in
thousands, except per share):

                                                 Years Ended December 31,
                                         --------------------------------------
                                             2001          2000          1999
                                         ----------    ----------    ----------
Net loss available to common stock:
  As reported ........................   ($  18,518)   ($  22,606)   ($  19,938)
  Pro forma ..........................   ($  19,414)   ($  24,112)   ($  20,108)
Basic and diluted net loss
 per common share:
  As reported ........................   ($     .41)   ($     .69)   ($     .89)
  Pro forma ..........................   ($     .43)   ($     .73)   ($     .89)

Changes in options outstanding are summarized as follows:

                                                   Weighted-       Weighted-
                                                    Average         Average
                                                   Exercise      Fair Value Per
                                     Shares          Price      Share of Options
                                 (in thousands)    Per Share         Granted
                                 --------------   ----------    ----------------
Balance, December 31, 1998 ......     2,946(a)      $  1.67
  Granted - equal to
    market value ................     3,453            2.23        $   1.60
  Forfeited .....................      (958)           1.97
  Exercised .....................      (818)           1.75
                                    -------         -------


<PAGE> 56


Balance, December 31, 1999 ......     4,623            2.00
  Granted - equal to
    market value ................     1,657            2.78            2.08
  Granted - exceeded
    market value ................       724            2.10            1.36
  Forfeited .....................    (2,051)           1.91
  Exercised .....................      (404)           1.28
                                    -------         -------
Balance, December 31, 2000 ......     4,549            2.40
  Granted - exceeded
    market value ................       200            1.10             .59
 Granted - equal to
    market value ................       533             .69             .50
  Forfeited .....................    (2,411)           2.64
                                    -------         -------
Balance, December 31, 2001 ......     2,871         $  2.45
                                    =======         =======
-------
 (a) In June 1998, the Company  granted a conditional  Employee  Incentive Stock
Option to its then President,  Lawrence F. Steffann,  to purchase 750,000 shares
of the Company's  common  stock.  The grant was  conditional  because of the 2.5
million  share  limitation  under  the 1996  Plan.  On  November  1,  1999,  the
shareholders of the Company  approved the amendment of the 1996 Plan to increase
the number of shares reserved for issuance from 2,500,000 to 7,000,000.

At  December  31,  2001,  2000 and  1999,  1,906,915,  1,371,000,  and  853,000,
respectively,   of   the   outstanding   options   were   exercisable   with   a
weighted-average  exercise price of $1.89, $2.29, and $2.20,  respectively,  per
share. The number of shares available to grant under the 1996 Plan was 3,056,456
and  1,378,140  as of December 31, 2001 and 2000,  respectively.  As a result of
shareholder  approval of the 2001 Plan on January 10, 2002, all shares available
to be granted under the 1996 Plan were  cancelled  and on that date,  options to
purchase five million shares were available to grant under the 2001 Plan.

The following table summarizes information about fixed stock options at December
31, 2001:

                                                                      Weighted
                              Weighted                                Average
                  Number       Average     Weighted     Number        Exercise
               Outstanding    Remaining    Average    Exercisable     Price of
 Exercise      at Dec. 31,   Contractual   Exercise   at Dec. 31,    Exercisable
  Prices          2001           Life        Price       2001         Options
             (in thousands)                          (in thousands)
-----------  --------------  -----------   --------  --------------  -----------
$ .26-$1.00       549         6.3 years     $ .56        405            $ .57
$1.03-$2.00     1,206         8.2 years     $1.52        666            $1.47
$2.03-$2.94       701         6.9 years     $2.43        536            $2.35
$3.00-$3.35       190         8.0 years     $3.28         78            $3.19
$4.00-$5.44       225         5.3 years     $4.07        222            $4.05
                -----        ----------     -----      -----            -----
                2,871         7.3 years     $1.87      1,907            $1.89
                =====        ==========     =====      =====            =====


<PAGE> 57


At December 31, 2001, the Company had outstanding warrants under which 3,304,299
shares of common stock could be acquired. Information relating to these warrants
is summarized as follows:
                                        Number of           Warrant Price
                                         Shares      --------------------------
                                     (in thousands)   Per Share        Total
                                      -----------    ------------   -----------
Balance, December 31, 1998 ........         1,762    $1.00-$2.35    $ 2,695,000

Warrants issued ...................         1,122    $2.00-$3.30      3,197,000
Warrants exercised ................          (870)   $1.00-$2.10     (1,378,000)
Warrants expired ..................           (64)   $      2.10       (134,000)
                                      -----------    ------------   -----------
Balance, December 31, 1999 ........         1,950    $1.25-$3.30      4,380,000

Warrants issued ...................           920    $1.50-$3.60      1,942,000
Warrants exercised ................          (230)   $2.10-$3.00       (663,000)
Warrants expired ..................           (65)   $      2.35       (153,000)
                                      -----------    ------------   -----------
Balance, December 31, 2000 ........         2,575    $1.25-$3.60      5,506,000

Warrants issued ...................         1,562    $ .45-$1.20      1,455,000
Warrants expired ..................          (333)   $      1.25       (417,000)
Warrants canceled .................          (500)   $      1.50       (750,000)
                                      -----------    ------------   -----------
Balance, December 31, 2001 ........         3,304    $ .45-$3.60    $ 5,794,000
                                      ===========    ============   ===========

                                                Number of
                                             Shares Subject
                Expiration                     to Warrants        Exercise
                  Date                       (in thousands)       Priceds
              --------------                ----------------     ---------
              January 2002 ............            400           $    3.00
              April 2002 ..............            250           $    2.00
              June 2002 ...............            272           $    3.30
              December 2002 ...........            400           $    1.38
              May 2003 ................            220           $    3.60
              December 2003 ...........            200           $    2.00
              March 2004 ..............            937           $    1.20
              June 2004 ...............            625           $.45-$.75
                                              --------
                                                 3,304
                                              ========

The Company had reserved common stock for the following purposes (in thousands):

                                                       December 31,  January 10,
                                                           2001          2002
                                                       ------------  ----------
    1996 Plan:
     Options outstanding .............................     2,871          2,871
     Options available to grant ......................     3,057             --
                                                          ------         ------
      Total under 1996 Plan ..........................     5,928          2,871
                                                          ------         ------
    2001 Plan:
     Options outstanding .............................        --             --
     Options available to grant ......................        --          5,000
                                                          ------         ------
      Total under 2001 Plan ..........................        --          5,000
                                                          ------         ------
      Total options reserved .........................     5,928          7,871
                                                          ------         ------
    Warrants outstanding .............................     3,304          3,304
                                                          ------         ------
      Total options and warrant reserved .............     9,232         11,175
                                                          ======         ======


<PAGE> 58


(15)  RELATED PARTY TRANSACTIONS

     Syko Properties

The Company currently leases its San Diego corporate office from an entity owned
by Mr. Sykes,  an officer of the Company  until early 2000,  after which date he
was no longer affiliated with the Company. The Company paid this entity $331,000
in 2001 and  2000,  and  $193,000  during  1999  under  the  terms of the  lease
agreement.

     Hilcoast Advisory Services, Inc. ("Advisor")

Commencing in October 1999, the Company has been charged $5,000 per month,  plus
reimbursement  of  out-of-pocket  expenses,  from Advisor for certain  financial
consulting and administrative  services provided to the Company. Mr. Levy is the
Chairman of the Board,  Chief  Executive  Officer and a majority  shareholder of
Advisor's parent,  and Jack Jaiven,  the Company's Vice President and Treasurer,
is an officer of Advisor.  Management  believes that the terms of this agreement
were no less  favorable  to the Company  than those that would be received  from
other sources.

     Executive Management

Effective June 22, 2001, the Company and Larry Hemmerich ("Mr. Hemmerich"),  the
Company's  former  President  and  Chief  Executive  Officer,   entered  into  a
Separation Agreement in which Mr. Hemmerich's  employment ceased and he became a
consultant to the Company through December 31, 2001.  Pursuant to the Separation
Agreement,  previously  granted  options  to  purchase  1,250,000  shares of the
Company's  common stock were  terminated and replaced with an option to purchase
300,000  shares of common  stock at $.45 per  share.  The  option  was valued at
$90,000  based  on the  Black-Scholes  option-pricing  model  as of the  date of
issuance  and was expensed as  compensation  over the six month period for which
Mr. Hemmerich was a consultant to the Company.

In connection with Mr.  Hemmerich's 2000 bonus, on January 17, 2001, the Company
issued  a  $125,000,  10%  note to Mr.  Hemmerich,  payable  on June  30,  2001.
Effective  April 12, 2001,  Mr.  Hemmerich  exchanged  this note,  including the
accrued interest,  for Series I Convertible  Preferred Stock with a stated value
of $128,000,  convertible  into shares of the Company's  common stock based on a
fixed conversion price of $.72 per share. Effective with the Halco Investment in
November 2001, the Series I Convertible  Preferred  Stock held by Mr.  Hemmerich
and all accrued  dividends  thereon were  converted to 305,585  shares of common
stock,  including 106,594 Inducement Shares and 21,338 Dividend Shares (see Note
3 and 13 to Consolidated Financial Statements).

Mr. Hemmerich served as a director of the Company until March 2002.


(16)  LEASES

The Company leases its operating  facilities under operating leases which expire
at various dates through March 2003. At December 31, 2001, future minimum rental
payments under  operating  leases that have initial or remaining terms in excess
of one year were as follows (in thousands):

                                   Total

                                  -------
                      2002        $   331
                      2003             55
                                  -------
                                  $   386
                                  =======

Rent expense was  $831,000,  $871,000 and $790,000  during 2001,  2000 and 1999,
respectively.


<PAGE> 59


(17)  401(k) PLAN

The  Company's  401(k) Tax  Deferred  Savings Plan (the  "401(k)  Plan")  covers
substantially   all   employees   meeting   certain   minimum  age  and  service
requirements.  Company  contributions to the plan are determined by the Board of
Directors.  The  Company  has made no  contributions  to the  401(k)  Plan as of
December 31, 2001.

(18)  FOURTH QUARTER ADJUSTMENTS

During the fourth  quarter of 2001,  the Company  recorded a write-down  of $2.5
million resulting from a valuation of certain inventory, which included obsolete
inventory and components  associated  with products which the Company has phased
out.  Management was unable to reasonably  estimate the effect, if any, of these
adjustments on prior quarters in 2001.

During the fourth quarter of 2000, the Company recorded an impairment adjustment
to  unamortized  goodwill of $12 million (see Note 1 to  Consolidated  Financial
Statements).  The Company also recorded a write-down  of $1.4 million  resulting
from a valuation of certain  inventory,  which included  obsolete  inventory and
components associated with products which the Company had phased out. Management
was unable to reasonably  estimate the effect,  if any, of these  adjustments on
prior quarters in 2000.

During the fourth quarter of 1999, the Company recorded an impairment adjustment
to goodwill of $4.6 million (see Note 1 to Consolidated  Financial  Statements).
The Company also recorded a write-down of $.6 million resulting from a valuation
of  certain  inventory,   which  included  potentially  obsolete  inventory  and
transitional  issues associated with transferring the operational portion of the
business from Lake Mary, Florida to San Diego, California. Management was unable
to reasonably  estimate the effect,  if any, of certain of those  adjustments on
prior quarters in 1999 because of the timing of completion of the acquisition of
Andataco.

(19)  QUARTERLY RESULTS OF OPERATIONS (Unaudited)

The  following  is a summary of the  quarterly  operations  for the years  ended
December 31, 2001 and 2000 (in thousands).

2001                             Mar. 31     Jun. 30    Sept. 30     Dec. 31(b)
----                           -------------------------------------------------

  Sales .....................   $  6,218    $  3,953    $  4,016    $  3,699
  Gross profit (loss) .......      1,713         903       1,399      (1,966)

  Loss from operations ......     (3,157)     (3,165)     (2,171)     (5,013)
  Net loss ..................     (3,445)     (3,880)     (1,179)     (5,454)
  Net loss available
    to common stock .........     (3,630)     (4,324)     (1,665)     (8,899)
  Net loss per common share:
    Basic ...................   $   (.10)   $   (.12)   $   (.05)   $   (.12)
    Diluted .................   $   (.10)   $   (.12)   $   (.05)   $   (.12)

2000
----
  Sales .....................   $ 12,540    $ 10,865    $  9,508    $  7,284
  Gross profit ..............      3,571       3,296       2,438         567

  Loss from operations ......     (2,658)     (2,930)     (3,407)    (17,296)
  Net income (loss) .........  (a) 2,650      (2,896)     (4,028)    (17,647)
  Net income (loss) available
    to common stock .........  (a) 2,439      (3,088)     (4,171)    (17,786)
  Net income (loss) per
    common share:
      Basic .................   $    .08    $   (.10)   $   (.12)   $   (.51)
      Diluted ...............   $    .07    $   (.10)   $   (.12)   $   (.51)

----------
(a)  Includes $5.6 million gain on Borg Sale.

(b)  See Note 18 regarding Fourth Quarter Adjustments.


<PAGE> 60


(20)  SUBSEQUENT EVENT

Effective  March 1, 2002, the Company  entered into a Reseller  Agreement with a
wholly-owned  subsidiary  ("Pacific") of Pacific  Electric Wire & Cable Company,
Ltd. The  Agreement  grants  Pacific the right to market and sell the  Company's
products  for a period  of two (2)  years in  Mainland  China  and  Taiwan on an
exclusive basis,  and in the United States and Europe on a non-exclusive  basis.
The  exclusivity  right is conditioned  upon minimum  purchases by Pacific of $5
million  through  February 28, 2003 and $10 million during the subsequent  year,
and upon the parties  agreeing,  by the end of May 2002,  on  specific  purchase
prices to be paid by Pacific.

In  connection   with  its  efforts  to  develop  further   strategic   business
relationships with Pacific, effective March 1, 2002, the Company granted Pacific
a nine-month option to purchase up to thirty (30) million newly issued shares of
the Company's  common stock for a purchase price of $.40 per share,  expiring on
November  30,  2002.  The option will be valued as of the date of grant based on
the Black-Scholes option-pricing model and other provisions of SFAS 123.


<PAGE> 61


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors of
  nStor Technologies, Inc.



The audit  referred  to in our  report  dated  March 12,  2002  relating  to the
consolidated  financial  statements  of  nStor  Technologies,  Inc.,  which  are
contained  in Item 8 of this Form 10-K  included  the audit of the  consolidated
financial statement schedules listed in the accompanying index. The consolidated
financial   statement   schedules  are  the   responsibility  of  the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statement schedules based upon our audit.

In our opinion, such consolidated  financial statement schedules present fairly,
in all material respects, the information set forth therein.

The aforementioned consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has significant recurring losses,
minimal working  capital,  serious  liquidity  concerns,  minimal  shareholders'
equity,  and is in default under its existing  credit  facility.  These matters,
among others, raise substantial doubt about the Company's ability to continue as
a going  concern.  Management's  plans  in  regard  to  these  matters  are also
described in Note 1 to the aforementioned consolidated financial statements. The
aforementioned  consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

The  consolidated   financial   statements  of  nStor  Technologies,   Inc.  and
subsidiaries as of December 31, 2000 were audited by other auditors whose report
dated February 9, 2001, except as to Paragraph four of Note 6 and Note 15, which
are as of March 27, 2001,  and included in this Form 10-K,  on those  statements
included an explanatory  paragraph describing  conditions that raise substantial
doubt about the Company's ability to continue as a going concern.

                                                 /s/ Swenson Advisors, LLP
                                                     Swenson Advisors, LLP

San Diego, California
April 4, 2002


<PAGE> 62


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


To the Board of Directors of
  nStor Technologies, Inc.



The audits  referred to in our report  dated  February  9, 2001  relating to the
consolidated  financial  statements  of  nStor  Technologies,  Inc.,  which  are
contained  in Item 8 of this Form 10-K  included  the audit of the  consolidated
financial statement schedules listed in the accompanying index. The consolidated
financial   statement   schedules  are  the   responsibility  of  the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statement schedules based upon our audits.

In our opinion, such consolidated  financial statement schedules present fairly,
in all material respects, the information set forth therein.

The aforementioned consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated   financial  statements,   the  Company  has  suffered  substantial
recurring  losses  from  operations,   has  a  working  capital  deficiency,   a
shareholders'  deficit and is in default  under its  existing  credit  facility.
These matters, among others, raise substantial doubt about the Company's ability
to continue as a going  concern.  Management's  plans in regard to these matters
are  also  described  in  Note 1 to the  aforementioned  consolidated  financial
statements. The aforementioned  consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

                                                 /s/ BDO SEIDMAN, LLP
                                                 BDO SEIDMAN, LLP


Costa Mesa, California
February 9, 2001


<PAGE> 63


                            nSTOR TECHNOLOGIES, INC.
            Schedule I--Condensed Financial Information of Registrant
                  Fiscal Years Ended December 31, 2001 and 2000

The following  represents the condensed  unconsolidated  balance sheet for nStor
Technologies,  Inc.  as of  December  31,  2001  and  2000,  and  the  condensed
unconsolidated  statements  of  operations  and cash  flows for the years  ended
December 31, 2001 and 2000.

                     CONDENSED UNCONSOLIDATED BALANCE SHEETS
                                 (in thousands)

                                                               December 31,
ASSETS                                                      2001          2000
------                                                   -------        -------
Current assets:
  Cash and cash equivalents .....................        $   399        $     8
  Marketable securities .........................          4,255             --
                                                         -------        -------
Total current assets ............................          4,654              8

Investments in and receivables from
  subsidiaries ..................................           (243)           579
                                                         -------        -------
                                                         $ 4,411        $   587
                                                         =======        =======

LIABILITIES
-----------
Current liabilities:
   Borrowings ...................................        $    --        $ 2,158
   Accounts payable and other ...................            324            855
                                                         -------        -------
Total current liabilities .......................            324          3,013

Long-term debt ..................................          3,600          5,100
                                                         -------        -------
        Total liabilities .......................          3,924          8,113
                                                         -------        -------
SHAREHOLDERS' EQUITY
--------------------
Preferred stock, $.01 par; 1,000,000 shares
 authorized, in order of preference:
  Convertible   (except  for  Series  G)
   preferred stock assumed issued and
   outstanding as of December 31, 2001 and 2000,
   respectively:
   Series F, 0 and 722, aggregate liquidation value
   $0 and $722; Series D, 0 and 2,000,
   aggregate liquidation value $0 and $2,000;
   Series E, 0 and 3,500, aggregate
   liquidation value $0 and $3,500; Series G,
   0 and 2,000,aggregate liquidation
   value $0 and $2,000 ..........................             --             --
Common stock, $.05 par; 200,000,000 shares
 authorized; 114,603,144 and 35,478,489 shares
 assumed issued and outstanding at December 31,
 2001 and December 31, 2000, respectively .......          5,729          1,773
Additional paid-in capital ......................         94,104         71,529
Deficit .........................................        (99,346)       (80,828)
                                                         -------        -------
Total shareholders' equity (deficit) ............            487          7,526
                                                         -------        -------
                                                         $ 4,411        $   587
                                                         =======        =======


<PAGE> 64


                            nSTOR TECHNOLOGIES, INC.
            Schedule I--Condensed Financial Information of Registrant
                CONDENSED UNCONSOLIDATED STATEMENTS OF OPERATIONS
                                 (in thousands)


                                                               Years Ended
                                                               December 31,
                                                           2001          2000
                                                         --------      --------
Loss from investment in subsidiaries ...............     ($12,556)     ($20,964)

Other income .......................................          627            44

Realized and unrealized losses on
  marketable securities, net .......................         (811)           --
Selling, general and administrative expense ........         (214)         (319)
Interest expense ...................................         (642)         (682)
                                                         --------      --------
Loss before preferred dividends and
  extraordinary loss ...............................      (13,596)      (21,921)

Extraordinary loss from debt extinguishments
  (net of tax of $0) ...............................         (362)           --
                                                         --------      --------
Net loss ...........................................      (13,958)      (21,921)

Preferred stock dividends ..........................       (1,560)         (685)

Induced conversion of convertible
  preferred stock ..................................       (3,000)           --
                                                         --------      --------
Loss available to common stock .....................     ($18,518)     ($22,606)
                                                         ========      ========


<PAGE> 65


                            nSTOR TECHNOLOGIES, INC.
            Schedule I--Condensed Financial Information of Registrant
                CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

                                                                Years Ended
                                                                December 31,
                                                               2001        2000
                                                           --------    --------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss .............................................   ($13,958)   ($21,921)
  Adjustments to reconcile net loss to
    net cash used by operating activities:
      Gain on sale of assets of Borg Adaptive
        Technologies ...................................        --       (5,575)
      Proceeds from sales of marketable securities .....      1,047          --
      Realized and unrealized losses on
       marketable securities ...........................        811          --
      Other Income .....................................       (627)         --
      Amortization of deferred loan costs ..............        190          21
      Amortization of deferred compensation costs ......         90          --
      Loss of extinguishments of debt ..................        362          --
      Changes in assets and liabilities, net of
       effects from acquisition:
        Decrease in receivables from subsidiaries ......        934      16,684
        Decrease (increase) in prepaid expenses
         and other .....................................         --         147
        (Decrease) increase in accounts payable
         and other liabilities .........................        231        (485)
                                                           --------    --------
Net cash used by operating activities ..................    (10,920)    (11,129)
                                                           --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Cash paid for acquisitions ...........................         --        (293)
  Net proceeds from sale of assets of Borg
    Adaptive Technologies ..............................         --       7,013
                                                           --------    --------
Net cash provided by investing activities ..............         --       6,720
                                                           --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from borrowings .............................     10,149       4,858
  Repayments on borrowings .............................         --      (2,285)
  Issuance of common stock, net of issuance cost .......         --         961
  Issuance of convertible preferred stock, net of costs       1,221          --
  Proceeds from exercise of stock options and warrants .         --       1,178
  Cash paid for preferred stock dividends ..............        (59)       (761)
                                                           --------    --------
Net cash provided by financing activities ..............     11,311       3,951
                                                           --------    --------
Net increase (decrease) in cash and cash equivalents
  during the year ......................................        391        (458)
Cash and cash equivalents at beginning of year .........          8         466
                                                           --------    --------
Cash and cash equivalents at end of year ...............   $    399    $      8
                                                           ========    ========


<PAGE> 66

<TABLE>

                            nSTOR TECHNOLOGIES, INC.
                 Schedule II-- Valuation and Qualifying Accounts
               Fiscal Years Ended December 31, 2001, 2000 and 1999
                                 (in thousands)
<CAPTION>
                                                    Additions
                           Balance                  Resulting                  Balance
                              at       Additions      from                       at
                          Beginning     Charged      Merger/                   End of
                           of Year     to Income      Other     Deductions*     Year
                          ----------   ---------   ----------   -----------   ---------
<S>                       <C>          <C>         <C>          <C>           <C>
Allowance for Doubtful
 Accounts Receivable:
  2001                     $  402       $1,069       $  200       $(1,462)     $  209
  2000                      1,604          912           --        (2,114)        402
  1999                        502          954          228           (80)      1,604


Allowance for Inventory
 Obsolescence:
  2001                     $4,902       $2,500       $   --       $(3,057)     $4,345
  2000                      3,419        3,988           --        (2,505)      4,902
  1999                        428          306        3,276          (591)      3,419



---------
* Deductions represent amounts written off against the allowance, net of recoveries

</TABLE>


<PAGE> 67


Item 9.   Disagreement on Accounting and Financial Disclosure

Not Applicable

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

For information  concerning this item, see the text under the caption  "Election
of Directors" and  "Management"  in our definitive  Proxy  Statement (the "Proxy
Statement") to be filed with respect to our 2002 Annual Meeting of Stockholders,
which information is incorporated herein by reference.

Item 11.  Executive Compensation

For information  concerning this item, see the text and tables under the caption
"Executive  Compensation",  "Report  on  Compensation"  and the graph  under the
caption  "Performance  Graph"  in the  Proxy  Statement,  which  information  is
incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

For  information  concerning  this  item,  see the table  and text of  "Security
Ownership"  and  "Management"  in the  Proxy  Statement,  which  information  is
incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions

For information  concerning  this item, see the text under the caption  "Certain
Transactions" in the Proxy Statement,  which information is incorporated  herein
by reference.

                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules and
          Reports on Form 8-K

(a)  (1)       Financial  Statements  -  See  index  to  Consolidated  Financial
               Statements at page 29 of this Form 10-K.

     (2)       Financial Statement Schedule I - Condensed Financial  Information
               of Registrant - See pages 63 - 65.

     (3)       Financial  Statement  Schedule  II  -  Valuation  and  Qualifying
               Accounts - See page 66.

     (4)       Exhibits  - See Exhibit Index at page 69 - 72 of this Form 10-K.


(b)            The  Registrant  filed  reports  on  Form 8-K during  the  fourth
               quarter of 2000 as follows:

               (i) A report  on Form  8-K  dated  November  30,  2001 and  filed
               December  13,  2001,   reporting   under  Item  4  -  Changes  in
               Registrant's Certifying Accountant:


<PAGE> 68


                      a) On  December  11,  2001,  the  Registrant  engaged  the
               accounting  firm  of  Swenson  Advisors,  LLP  (Swenson)  as  its
               independent  certifying  accountants  for  the  remainder  of the
               fiscal year ending December 31, 2001.

                      b) On November  30,  2001,  the  Registrant  notified  BDO
               Seidman,  LLP (BDO) of their  dismissal.  BDO was the independent
               certifying   accountant   previously   engaged   to   audit   the
               Registrant's  financial  statements for the period ended December
               31, 2000.

                      c)  The   Registrant's   engagement  of  Swenson  and  the
               dismissal  of BDO  were  recommended  by the  Registrant's  Audit
               Committee and approved by the Registrant's Board of Directors.

                      d) During the two fiscal years ended December 31, 1999 and
               December  31, 2000,  and through the  subsequent  interim  period
               ended November 30, 2001, there were no disagreements  with BDO on
               any  matter of  accounting  principles  or  practices,  financial
               statement  disclosure  or  auditing  scope  or  procedure,  which
               disagreements  if not resolved to the  satisfaction  of BDO would
               have caused that firm to make  reference in  connection  with its
               report on the financial  statements  for the  Registrant for such
               years.

                      e) During the two fiscal years ended December 31, 1999 and
               December  31, 2000,  and through the  subsequent  interim  period
               ended  September 30, 2001, in accordance with Rule 304 (a)(1)(iv)
               and in conjunction with the audit of the  Registrant's  financial
               statements  for the fiscal year ended  December 31, 2000,  and in
               conjunction  with  the  review  of  the  Registrant's   financial
               statements for the quarter ended  September 30, 2001,  there were
               no reportable events.

                      f) The Registrant has  authorized  BDO  to  respond  fully
               to all inquiries of Swenson.

                         The  reports  of  BDO  on the  financial  statements as
               of and for the years ended  December  31, 1999 and  December  31,
               2000,  contained no adverse  opinions or  disclaimers of opinion,
               and  were  not  modified  or  qualified  as  to  audit  scope  or
               accounting  principles,  but did contain  modifications as to the
               Registrant's  ability to continue as a going concern for the year
               ended December 31, 2000.

                      g) The  Registrant  requested that BDO furnish a letter to
               the   Registrant   addressed  to  the   Securities  and  Exchange
               Commission  stating  whether  or not it  agreed  with  the  above
               statements. A copy of BDO's letter to the Securities and Exchange
               Commission,  dated December 11, 2001 was filed as Exhibit 16.1 to
               the Form 8-K

               (ii) A report  on Form 8-K  dated  November  20,  2001 and  filed
               November  28, 2001,  reporting  under Item 5 - Other  Events,  in
               which the  Registrant  announced the  completion of a transaction
               between the Registrant and Halco Investments, L.C.


<PAGE> 69


                                  EXHIBIT INDEX

Exhibit
Number                             Description

     2.1  Asset Purchase  Agreement,  dated January 10, 2000, by and among nStor
          Corporation,   Inc.,   Borg  Adaptive   Technologies,   Inc.,   QLogic
          Acquisition Corporation and QLogic Corporation (9)

     3.1  Restated Certificate of Incorporation of Registrant, as amended (8)

     3.2  Restated Bylaws of Registrant (12)

     4.1  Option  Agreement  to purchase up to thirty  million  shares of common
          stock granted to Pacific  Technology  Services,  Inc.,  dated March 1,
          2001 (1)

     4.2  Certificate of Designation of Series K Convertible Preferred Stock (2)

     4.3  Registration  Rights Agreement dated November 20, 2001 issued to Halco
          Investments L.C. (2)

     4.4  Warrant to purchase common stock issued to H.Irwin Levy, dated May 16,
          2001 (4)

     4.5  Warrant to purchase common stock issued to H.Irwin Levy, dated May 21,
          2001 (4)

     4.6  Warrant to purchase common stock issued to H.Irwin Levy, dated May 30,
          2001 (4)

     4.7  Warrant to purchase common stock issued to H.Irwin Levy, dated June 5,
          2001 (4)

     4.8  Warrant to purchase  common stock issued to The Charlotte  Marden 1993
          Trust, dated June 7, 2001 (4)

     4.9  Form of Warrant, between Registrant and certain private investors (5)

     4.10 Form of Subscription Agreement, between Registrant and certain private
          investors (5)

     4.11 Form of Registration Rights Agreement,  between Registrant and certain
          private investors (5)

     4.12 Warrant to purchase  200,000 shares of common stock issued to H. Irwin
          Levy, dated December 29, 2000 (5)

     4.13 Warrant to purchase  500,000 shares of common stock issued to H. Irwin
          Levy, dated December 29, 2000 (5)

     4.14 Subscription Agreement, between Registrant and H. Irwin Levy, dated
          December 29, 2000 (5)

     4.15 Certificate of Designation of Series G Preferred Stock (5)

     4.16 Registration  Rights Agreement,  between Registrant and H. Irwin Levy,
          dated December 29, 2000 (5)

     4.17 Warrant to purchase common stock issued to  Wishmasters,  dated May 9,
          2000 (7)

     4.18 Warrant to purchase common stock issued to Ladenburg  Thalmann,  dated
          May 9, 2000 (7)


<PAGE> 70


     4.19 Common Stock Purchase  Agreement,  between Registrant and Wishmasters,
          dated May 4, 2000 (7)

     4.20 Registration  Rights  Agreement,  between  Registrant and Wishmasters,
          dated May 4, 2000 (7)

     4.21 Certificate of Designation of Series D Convertible Preferred Stock(10)

     4.22 Certificate of Designation of Series E Convertible Preferred Stock(11)

     4.23 Certificate of Designation of Series F Convertible Preferred Stock(11)

     4.24 Restated Certificate of Incorporation of Registrant - see Exhibit 3.1

     4.25 By-Laws of Registrant, as amended - see Exhibit 3.2

     10.1 Letter Agreement, dated March 25, 2002, extending the maturity date to
          December  15,  2002,  of  certain  notes,   which  are  between  nStor
          Corporation, Inc. and H. Irwin Levy (1)

     10.2 Letter Agreement, dated March 25, 2002, extending the maturity date to
          December 15, 2002, of a note that is between nStor  Corporation,  Inc.
          and The Charlotte Marden 1993 Trust (1)

     10.3 Promissory  Note for  $3,100,000,  dated  November  20, 2001 issued to
          Halco Investments L.C. (2)

     10.4 Preferred Stock Purchase  Agreement,  dated November 20, 2001, between
          Registrant, Maurice A. Halperin and Halco Investments, L.C. (2)

     10.5 10% Subordinated  Promissory Note for $150,000,  dated August 7, 2001,
          between nStor Corporation, Inc. and H. Irwin Levy (3)

     10.6 10%  Subordinated  Promissory  Note for $200,000,  dated September 25,
          2001, between nStor Corporation, Inc. and H. Irwin Levy (3)

     10.7 8%  Promissory  Note for  $2,100,000,  dated August 14, 2001,  between
          Registrant and Halco Investments, L.C. (3)

     10.8 8%  Revolving  Credit  Note for  $1,000,000,  dated  August 14,  2001,
          between Registrant and Halco Investments, L.C. (3)

     10.9 8% Promissory Note for $1,275,000,  dated September 10, 2001,  between
          Registrant and Halco Investments, L.C. (3)

    10.10 8%  Promissory  Note for  $332,442,  dated  October 29, 2001,  between
          Registrant and
          Halco Investments, L.C. (3)

    10.11 Letter Agreement,  dated August 31, 2001,  extending the maturity date
          to December  31,  2001,  of certain  notes,  which are  between  nStor
          Corporation, Inc. and H. Irwin
          Levy (3)

    10.12 Letter Agreement,  dated August 31, 2001,  extending the maturity date
          to December 31,  2001,  of a note that is between  nStor  Corporation,
          Inc. and The Charlotte Marden 1993 Trust (3)

    10.13 Subordinated  Promissory  Note  for  $100,000,  dated  May  16,  2001,
          between nStor Corporation, Inc. and H. Irwin Levy (4)


<PAGE>


    10.14 Subordinated  Promissory  Note  for  $250,000,  dated  May  21,  2001,
          between nStor Corporation, Inc. and H. Irwin Levy (4)

    10.15 Subordinated  Promissory  Note  for  $375,000,  dated  May  30,  2001,
          between nStor Corporation, Inc. and H. Irwin Levy (4)

    10.16 Subordinated  Promissory Note for $75,000, dated June 5, 2001, between
          nStor Corporation, Inc. and H. Irwin Levy (4)

    10.17 Subordinated  Promissory  Note  for  $450,000,  dated  June  7,  2001,
          between nStor  Corporation,  Inc. and The Charlotte  Marden 1993 Trust
          (4)

    10.18 Subordinated  Promissory  Note for  $300,000,  dated  July  12,  2001,
          between nStor Corporation, Inc. and H. Irwin Levy (4)

    10.19 Letter Agreement,  dated June 29, 2001, extending the maturity date to
          August  31,  2001,   of  certain   notes,   which  are  between  nStor
          Corporation, Inc. and H. Irwin Levy (4)

    10.20 Letter Agreement,  dated June 29, 2001, extending the maturity date to
          August 31, 2001, of a note,  that is between nStor  Corporation,  Inc.
          and The Charlotte Marden 1993 Trust (4)

    10.21 Form  of  8%  Convertible   Subordinated   Promissory  Note,   between
          Registrant and certain private investors (5)

    10.22 Promissory  Note for  $1,050,000,  dated  November 15,  2000,  between
          Registrant and MLL Corp. (5)

    10.23 Promissory  Note  for  $500,000,  dated  November  20,  2000,  between
          Registrant and Patrice Auld (5)

    10.24 Promissory  Note  for  $650,000,  dated  December  29,  2000,  between
          Registrant and H. Irwin Levy (5)

    10.25 Promissory  Note  for  $600,000,   dated  January  16,  2001,  between
          Registrant and H. Irwin Levy (5)

    10.26 Promissory  Note  for  $125,000,   dated  January  17,  2001,  between
          Registrant and Larry
          Hemmerich (5)

    10.27 Assumption and Amendment Agreement,  dated September 14, 2000, between
          Registrant and Wells Fargo Credit, Inc. (6)

    10.28 Third  Amended and Restated Line of Credit Note,  dated  September 14,
          2000, between Registrant and Wells Fargo Credit, Inc. (6)

    10.29 Continuing  Guaranty between  Registrant and Wells Fargo Credit,  Inc.
          (6)

    10.30 Promissory  Note  for  $2,500,000,   dated  July  31,  2000,   between
          Registrant and H. Irwin Levy (6)

    10.31 Promissory  Note for  $2,550,000,  dated  October  11,  2000,  between
          Registrant and H. Irwin Levy (6)

    10.32 Promissory  Note  for  $750,000,   dated  October  11,  2000,  between
          Registrant and MLL Corp. (6)

    10.33 Escrow  Agreement,  dated May 4, 2000, among  Registrant,  Wishmasters
          and Epstein, Becker & Green, P.C. (7)


<PAGE> 72


    10.34 1996 Stock Option Plan, dated October 5, 1996 (13)

    10.35 Software  License  Agreement,  dated  January 10,  2000,  by and among
          nStor Corporation, Inc. and QLogic Acquisition Corporation (10)

    10.36 Amendment to Registrant's 1996 Stock Option Plan (14)

    11.01 Statement  Regarding  Computation  of Per Share  Earnings for the Year
          Ended December 31, 2001 (1)

    21    Subsidiaries of Registrant (1)

    23.1  Consent  of Independent Accountants dated  April 8,  2002,  signed  by
          Swenson Advisors, LLP (1)

    23.2  Consent  of Independent  Certified Public Accountants dated  April  5,
          2002, signed by BDO Seidman, LLP (1)

--------------
1)  Filed herewith.

2)  Incorporated  by  reference  to  Exhibits  previously  filed as  Exhibits to
    Registrant's Form 8-K dated November 20, 2001 and filed November 28,2001.

3)  Incorporated  by  reference  to  Exhibits  previously  filed as  Exhibits to
    Registrant's  Form 10-Q for the quarter  ended  September  30,  2001,  filed
    November 9, 2001.

4)  Incorporated  by  reference  to  Exhibits  previously  filed as  Exhibits to
    Registrant's Form 10-Q for the quarter ended June 30, 2001, filed August 17,
    2001.

5)  Incorporated  by  reference  to  Exhibits  previously  filed as  Exhibits to
    Registrant's  Form 10-K for year ended  December 31,  2000,  filed April 17,
    2001.

6)  Incorporated  by  reference  to  Exhibits  previously  filed as  Exhibits to
    Registrant's  Form 10-Q for the quarter  ended  September  30,  2000,  filed
    November 14, 2000.

7)  Incorporated  by  reference  to  Exhibits  previously  filed as  Exhibits to
    Registrant's Form S-3 Registration Statement, filed June 7, 2000.

8)  Incorporated  by  reference  to  Exhibits  previously  filed as  Exhibits to
    Registrant's Form S-3 Registration Statement, filed January 9, 2000.

9)  Incorporated  by  reference  to  Exhibits  previously  filed as  Exhibits to
    Registrant's Form 8-K dated and filed January 14, 2000.

10) Incorporated  by  reference  to  Exhibits  previously  filed as  Exhibits to
    Registrant's  Form 10-Q for the quarter  ended  September  30,  1998,  filed
    November 16, 1998.

11) Incorporated  by  reference  to  Exhibits  previously  filed as  Exhibits to
    Registrant's Form 8-K dated June 8, 1999, filed June 23, 1999.

12) Incorporated  by  reference  to  Exhibits  previously  filed as  Exhibits to
    Registrant's  Form 10-K for the year ended  October 31, 1996,  filed January
    28, 1997.

13) Incorporated  by  reference  to  Exhibits  previously  filed as  Exhibits to
    Registrant's Form 10-K for the year ended December 31, 1999, filed April 14,
    2000.


<PAGE> 73


        SIGNATURES

Pursuant to the requirements of Section 13 and 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                           nSTOR TECHNOLOGIES, INC.

                                 /s/ Thomas Gruber
April 5, 2002             By:_____________________________________
                             Thomas Gruber, Acting President,
                             Chief Operating and Financial Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.

                           /s/ Maurice A. Halperin
April 5, 2002         _____________________________________________
                      Maurice A. Halperin, Chairman of the Board


                           /s/ H. Irwin Levy
April 5, 2002         _____________________________________________
                      H. Irwin Levy, Vice Chairman of the Board and
                             Chief Executive Officer


                           /s/ Roger H. Felberbaum
April 5, 2002         _____________________________________________
                      Roger H. Felberbaum, Director


                           /s/ Bernard Green
April 5, 2002         _____________________________________________
                      Bernard Green, Director


                           /s/ Jack Jaiven
April 5, 2002         _____________________________________________
                      Jack Jaiven, Vice President and Treasurer


                           /s/ Michael L. Wise
April 5, 2002         _____________________________________________
                      Michael L. Wise, Director