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, 2000

                                       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 $.05 per share (Common  Stock),  was the only class of
voting common equity of the Registrant  outstanding on December 31, 2000.  Based
on the last  sales  price of the Common  Stock on the  American  Stock  Exchange
(AMEX)  on  March  30,  2001  ($  .79),  the  aggregate   market  value  of  the
approximately   21,854,000   shares  of  the   voting   Common   Stock  held  by
non-affiliates was approximately $17.3 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 ____                    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:

              35,478,489 shares of Common Stock, par value $.05 per
              share, were outstanding as of April 16, 2001.


                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Definitive Proxy Statement of nStor Technologies, Inc.
                   for the 2001 Annual 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. is a manufacturer  and supplier of highly  integrated
enterprise-class  storage solutions for computing  operations including external
RAID (Redundant Array of Independent  Disks)  solutions,  a complete set of SCSI
(Small Computer Systems Interface),  tape backup and advanced storage management
software  solutions.  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 2K, Novell NetWare, IBM OS/2, Mac, SCO UNIX, UnixWare, SGI IRIX, Sun
Solaris, and Linux, and utilizes technology architectures such as Fibre Channel,
Ultra2 LVD (Low Voltage Differential),  SCSI, Ultra SCSI, and Ultra160 SCSI. Our
RAID   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 a direct  sales force in the United  States and
through a global network of resellers and Original Equipment  Manufacturer (OEM)
partners.  With  company-owned  operations  in the United  States and Asia,  and
strategic partners in Europe and Australia, we believe we are well positioned to
meet the demanding storage requirements of our global customers.


SIGNIFICANT AND RECENT EVENTS

Significant  events during 2000 and through April 16,2001 include the following:
o    In January 2000,  Larry Hemmerich,  a computer  storage  industry  veteran,
     became our President and Chief Executive Officer.  Substantially all of the
     members  of  our  current  executive   management  team  were  subsequently
     recruited by Mr. Hemmerich.
o    In  January  2000,  we  sold  all  of  the  assets  of  our  Borg  Adaptive
     Technologies subsidiary (Borg) for net cash proceeds of $7 million.
o    In  January  2000,  we  acquired  substantially  all the  assets of OneofUs
     Company  Limited  (OneofUs),  a Taiwan-based  designer of high  performance
     fibre  channel  controllers  and  storage  solutions  for the open  systems
     market,  for  an  aggregate  purchase  price  of  $2,850,000,   principally
     consisting of shares of our common stock.
o    During the first quarter of 2000,  we completed the  relocation of our Lake
     Mary, Florida manufacturing operations to San Diego, California.
o    Beginning  in the second  half of 2000,  we began to  transition  our older
     legacy  products  to  our  newer,  state-of-the-art  technology  solutions,
     centered on our NexStor 2U  (3.5-inches  high) storage  enclosures and RAID
     systems designed to hold up to twelve 1-inch disks.
o    During  January 2001, we reduced our overall  workforce in connection  with
     the  restructuring  of our  sales  and  marketing  efforts  to focus on the
     potential sales growth in the OEM and Channel business. Since October 2000,
     we have signed  agreements  with various new OEM's,  Value-Added  Resellers
     (VARs) or system integrators.

<PAGE> 4

o    Between  January 1, 2000 and March 27, 2001,  we received  cash proceeds of
     $4.4  million  from  private  investors  in the  form  of debt  and  equity
     financing.
o    Effective  April 12, 2001,  holders of all of our  long-term  notes payable
     totaling  $11.9 million as of that date,  have verbally  agreed to exchange
     their notes for $11.9 million of convertible preferred stock.

For a more detailed  discussion of these  developments,  please see Management's
Discussion and Analysis of Financial Condition and Results of Operations.

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  World  Wide  Web  at  http://
www.nStor.com.

INDUSTRY

The  demand  for   increased   information   and  storage   capacity  has  grown
dramatically.  A  significant  growth  in  Internet  users has  resulted  in the
creation of millions of new web sites. Environments that have traditionally been
paper-intensive such as insurance, healthcare,  education, law institutions, 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.

     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 Storage Area Networks (SAN) and Network
Attached  Storage (NAS)  environments,  the two fastest  growing  sectors in the
marketplace.  To successfully compete in this aggressive market,  companies need
innovative  products,   strong  integration  expertise,  and  excellent  support
services.

     According to International  Data  Corporation  (IDC), a leading provider of
technology  intelligence,  industry  analysis and market data, total spending on
disk  storage  will  reach  $53.3  billion  by 2004  with over $35  billion,  or
approximately  67%,  consisting of SAN and NAS based  revenues.  This represents
exceptionally  strong  growth  when  comparing  the $2.9  billion in SAN and NAS
revenue realized in 1999, or the $6.7 billion realized in 2000, a year over year
increase  of 136%.  The RAID  solutions  market is  growing at a rapid rate with
total  revenues of $21.5 billion in 2000, an increase of 28% from 1999. In light
of these historical numbers and the resulting  estimated growth rates in SAN and
NAS revenues for the next  four-years,  the overall storage sector is poised for
substantial growth.


WHAT IS RAID TECHNOLOGY?

Developed in 1988 by a team of researchers  from the University of California at
Berkeley,  RAID is an information storage technology consisting of three or more
disk drives working together as one. Through the use of proprietary hardware and
software,  RAID configurations achieve extremely fast data transfer speeds, high
input/output  (I/O) rates, and incorporate  distinctive  levels of redundancy to
protect large pools of data.


<PAGE> 5

RAID storage  solutions  outperform  individual disk solutions  because of their
ability to  simultaneously  spread and retrieve data among multiple,  high speed
disk drives.  The popularity of RAID-based storage solutions is not only derived
from increased  performance,  but also increased data  protection.  Typical RAID
solutions  incorporate data replication,  dual sets of components,  and advanced
cooling  systems.  Should any aspect of the RAID solution fail,  whether it is a
disk drive,  controller,  or power  supply,  it can quickly and  efficiently  be
"hot-swapped" with a replacement component without interrupting user operability
or data security.

We believe that RAID subsystems will continue to be the preferred method of data
storage in  networked  environments.  As  corporations  transition  from  direct
attached  storage  solutions to a centralized  solution,  we see our current and
emerging RAID products as highly  applicable to the challenges faced by multiple
industries.  We believe  our NexStor  Fibre  product  line and the NexStor  SCSI
product  line  currently  under  development  are   well-positioned  to  provide
fault-tolerant  storage  systems to many segments of the market,  allowing us to
participate in the growth in the RAID solutions market. However, there can be no
assurance that we will be successful in these efforts due to the  possibility of
increased competition,  the development of alternative  technologies,  and other
factors.


PRODUCT STRATEGY

During 2000, we completed our transition  from older product  designs to our new
NexStor 3000 2U (3.5 inches) product line which we believe continues to lead the
industry in terms of rack space  density.  The new  product  line is offered for
Fibre Channel,  SCSI, and  Fibre-to-SCSI  environments.  These storage solutions
feature fully redundant, hot-swappable components and support for the industry's
fastest  10,000  and  15,000 RPM  (resolutions  per  minute)  disk  drives.  The
NexStor's  advanced  design and  capability  are  targeted to the  mid-range  to
enterprise  computing  environment.  The NexStor products designed by us include
SES-compliant  (SCSI  Enclosure  Services)  modules  that  can  store  up to 584
Gigabytes  (GB) 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 1.44 Terabytes (TB) in that same amount of space.

Our current hardware  products include SAN-ready Fibre RAID and RAID-ready Fibre
JBOD (just a bunch of disks)  storage  solutions.  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.  We plan further
development of our SCSI product line and anticipate adding 8-bay and 12-bay SCSI
RAID  solutions  as well as a 12-bay JBOD  module to round out our NexStor  SCSI
product line.

To compliment our NexStor product line, our software team released a new version
of our  AdminiStor  software in March 2000.  The new  AdminiStor  is 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
alerts to individuals, groups or pagers) for both Windows and Unix environments,
allowing users to manage data from anywhere in the world.


CURRENT PRODUCT OFFERING

NexStor 3150/3250 and 802F / 1202F - Fibre Channel RAID

Flagship Fibre Channel products include the SAN-ready 3150 and 3250 complimented
by the RAID-ready 802F and 1202F. The NexStor 3150 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
9.1 TB of storage within 56 inches of space.  With the anticipated  introduction
of new disk drive technology later this year, the maximum capacity will increase
to 22.3 TB within the same 56 inches.  The NexStor 3150 and 802F product  series
is targeted at sectors such as data warehousing and seismic analysis.


<PAGE> 6

The NexStor 3250 is the newly  introduced  12-bay  module,  accommodating  up to
twelve 1-inch drives and offering higher  performance  through increased spindle
count.  It scales up to 432 GB in 3.5 inch increments and provides 33% more disk
drives in the same space as the 8-bay series. The NexStor 3250 can connect up to
seven  additional  1202F JBOD modules  behind a single set of RAID  controllers,
reaching a maximum  capacity of 3.5 TB of storage within 28 inches of space. The
NexStor 3250 and 1202F are designed for intense I/O applications that prioritize
performance over capacity such as Online Transaction Processing (OLTP), database
and video editing.

NexStor 802S/1202S  - SCSI JBOD (RAID-ready)

The  NexStor  802S is our  first  Ultra  160  JBOD  product  and  serves  as the
foundation for future RAID and 12-bay Ultra SCSI designs.  It accommodates up to
eight 1.6 or 1-inch drives and offers up to 584 GB of data storage. As mentioned
previously,  we anticipate expanding the NexStor SCSI family to include complete
SCSI RAID solutions in both the 8-bay and 12-bay  modules.  With a large part of
the  storage  market  still  using  SCSI,  the  NexStor  802S and  1202S  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.

AdminiStor

AdminiStor  Plus  is the  latest  version  of our  storage  solution  management
software.  It is  JAVA-based  and  provides  heterogeneous  support for multiple
platforms.  Through the use of AdminiStor,  storage  systems up to and including
SAN architecture can be managed from any point in the world utilizing a standard
web-connection.   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.

Backup Tape Solutions

We offer our clients a range of tape backup  systems to  compliment  our primary
storage  solutions.  Included in this range are the newly introduced Linear Tape
Open (LTO) and Super Digital Linear Tape (SDLT) technologies.

Technical Service

We  continue  to  offer a range  of  full-time  service  and  support  programs,
providing customers with a variety of on-site and help-desk support services. We
offer five days a week,  nine hours a day (5x9) or seven days a week, 24 hours a
day (7x24), as well as next day depot replacement. During 2000, we also expanded
our service  organization  to include a Professional  Services  department  that
focuses on subsystem storage integration with existing infrastructures.

SAN Solutions

As an alternative to server-attached  storage,  networked storage  architectures
have been gaining popularity. In fact, some industry analysts estimate that more
than 80% of the world's  external  storage will be SAN-attached by 2003. This is
because  SANs  provide the  scalability,  accessibility,  and  manageability  to
satisfy present and future business computing requirements.

We  continue  to  develop,  test,  and  install  high  availability  SAN storage
solutions. In addition to our SAN-ready Fibre products, we also offer pre-tested
and certified switches and routers necessary for a complete SAN architecture. We
expect our new NexStor product line to further strengthen our ability to provide
clients with complete, high performance, and price-competitive SAN solutions.

<PAGE> 7

As storage needs 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 also believe the addition of
our  Professional  Services  department  and the  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  patents,   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,  Andataco,  WEB STORAGE MANAGER, and "for the
life of your  data".  We have  trademarks  pending on the  following:  GigaSTOR,
Estorage,  SANStor,  and SAN-SATIONAL.  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 a direct sales force to users in the
United  States and  through a global  network of  reseller  and OEM  partners in
Europe,  northern Asia, Pacific Rim and Australia. We sell our products directly
to end users through our field sales  organization  and indirectly  through OEMs
and  volume  channels  such as Systems  Integrators  and Value  Added  Resellers
(VARs).

Our direct product sales to end users through our field sales  organization  was
our primary sales channel in 2000 and 1999,  representing  approximately  75% of
total sales during both years.  Service  contracts,  principally with end users,
represented  11% and 6% during  2000 and 1999,  respectively.  Our direct  sales
organization, including the supporting system engineers, is arranged by specific
geographical  territories,  based  on  our  primary  revenue  opportunities.  To
maximize our  visibility  within each  territory,  the regional  manager,  sales
representatives  and sales engineers are located in the respective  territories.
No direct sales  customer  accounted for more than 10% of net sales during 2000.
In 1999, one direct sales customer, Intel, accounted for 11% of net sales.

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  the OEM  channel  sales  provides
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.


<PAGE> 8

Sales to OEMs and other  indirect  sales  accounted for 14% and 19% of our sales
for 2000 and 1999,  respectively.  No indirect customer  accounted for more than
10% of net sales in 2000. In 1999,  one OEM customer,  Silicon  Graphics  (SGI),
accounted for 15% of net sales.

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,  technical distributors 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  the  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, active regional, national and international tradeshow
participation, and aggressive public relations.


TECHNICAL SUPPORT AND CUSTOMER SERVICE

We  provide  support  from  order  entry  to 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 believe that our ability to provide prompt and reliable technical support has
enhanced our marketing efforts. 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 support to all OEM's,
volume channel partners (resellers and integrators) and end users.

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  and for drives and tapes used in
our  storage  solutions.  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  on-site
service for our products for a fee, including 24-hour service, seven days a week
or 9-hour  service,  five  days a week,  for which we  contract  primarily  with
third-party service providers. In addition, we offer a Depot Express program for
certain of our  products.  Depot  Express  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.
Incident Depot Express provides  expedited  shipment for failed  components on a
per-incident  basis, based upon availability.  This is a non-contracted  service
and does not  require a charge at the time of the  original  purchase.  A fee is
charged only if a component fails and a replacement is shipped out.


<PAGE> 9

MANUFACTURING AND SUPPLIERS

Our manufacturing operations are currently located in San Diego, California. Our
products  are  assembled  from  components  and  prefabricated  parts,  such  as
controllers, cabinets, multiple disk drives and power supplies, manufactured and
supplied by others.  We work  closely  with a group of  regional,  national  and
international suppliers,  which are carefully 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 not  available off the
shelf, and are specifically designed by us 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  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 as needed may
cause a reduction in our sales volume.

We have no long-term supply contracts. There can be no assurance 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 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 assurance  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.

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.


<PAGE> 10

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.

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  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  all  levels  of  storage  subsystems  is  subject  to  intense
competition.  We compete not only with other disk array manufacturers,  but also
with  manufacturers  of  proprietary,  integrated  computer  systems  and system
integrators  which  sell  computer  systems   containing  general  purpose  RAID
subsystems,   some  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 we do;
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 March 31, 2001,  we employed  140  full-time  employees,  of which 49 were
involved in engineering,  product development and technical support, 40 in sales
and marketing, 30 in manufacturing and operations, and 21 in finance, management
and  administration.  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.


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 to or deemed to be exhaustive
or definitive of all the material risks involved in our company's business.

<PAGE> 11

        Recent Losses; Capital Needs

We have  experienced  net losses for the fiscal  years ended  December 31, 2000,
1999 and 1998 of $21.9 million,  $18.7 million and $10.4 million,  respectively.
At December 31, 2000, we had an accumulated deficit of $80.8 million.  There can
be no assurance 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.

In late 1997, our management  determined  that amounts  available under our bank
line of credit  would not be  sufficient  to satisfy our cash  requirements  and
that, as a result,  additional debt and/or equity  financing would be necessary.
During  the  period  beginning  in late 1997 and  ending on March 31,  2001,  we
obtained  approximately $36.1 million from private investors through the sale of
our convertible  preferred stock and common stock,  the issuance of subordinated
and other notes and the exercise of warrants  and options to purchase  shares of
our common stock. In May 2000, we entered into a Common Stock Purchase Agreement
with  Wishmasters  Limited.  The agreement  establishes an equity line of credit
wherein  Wishmasters  committed  up to $15 million to purchase  our common stock
over a twelve month period at a discount to the market  price.  Between May 2000
and March 2001,  Wishmasters purchased 508,857 shares of our common stock for $1
million.  On January 10, 2000,  we sold  substantially  all of the assets of our
wholly-owned subsidiary, Borg Adaptive Technologies, for $7 million cash, net of
approximately $500,000 of transaction costs.


        Inability to Comply with Financial Covenants

From time to time,  prior to 2000,  we were unable to comply with certain of the
financial  covenants  of our bank  lines of credit  and had  requested  that our
lenders  forbear  from  exercising  the  remedies  available  to them under such
circumstances. In each such case, our bank agreed with our request.

During the first  quarter of 2000,  we were not in  compliance  with the minimum
tangible net worth covenant of our principal credit facility. On March 29, 2000,
the lender  agreed to waive the default for both  periods.  Effective  April 14,
2000, we agreed with the lender to amend  certain  terms of the credit  facility
including  an increase in the  interest  rate to prime plus 1.5% and new minimum
net  worth  and  net  income  covenants  on  a  consolidated  basis.  All  other
significant  provisions  of the credit  facility  remain the same.  The  amended
agreement was executed on September 14, 2000.  Since the fourth quarter of 2000,
we have not been in  compliance  with the new  minimum  net worth and net income
requirements and are in technical default under the compliance provisions of the
bank line of credit.  We are currently in  discussions  with the lender to amend
the  financial  covenants;  however,  there can be no assurance  that we will be
successful in amending the financial  covenants or finding a replacement  lender
who will provide  financing to us on acceptable  terms.  If we are successful in
amending the financial covenants,  there is no assurance that we will be able to
maintain compliance with these covenants in the future.

<PAGE> 12

        Fluctuations in Operating Results

We have experienced significant  period-to-period  fluctuations in our operating
results.   These   fluctuations   are  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 adversely  affected.  Our revenues in any quarter 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
quarterly  sales  often  occur  in  the  closing  weeks  of  each  quarter.  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,   given  our  relatively  high  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.  We are  continuing  to
encourage our customers to move from our various legacy products to our new line
of products. 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 existing
products as well as 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  increasingly  sophisticated
needs 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 storage system 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, Xyratec 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  shares,  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.


        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
some  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

Storage system products like those that we offer may contain undetected software
errors or 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 can range in value from a few thousand dollars to over a million
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 three to 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 quarter
could be reduced if large orders forecasted for a certain quarter are delayed or
are not realized. Factors that could delay or defer an order include:

     o    time needed for technical evaluations 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 controllers designed by one of our suppliers. Although we can use
other  suppliers,  the delay in integrating  these parts into our solutions 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 contract terminations.


        Concentrated Customer Base

We operate predominantly in one business segment, information storage solutions,
including  external RAID  subsystems.  In past years, a large  percentage of our
revenues  came  from the  sale of  products  to a small  number  of  significant
clients.  Sales to two customers,  Silicon  Graphics (SGI), an OEM, and Intel, a
direct sales  customer,  accounted  for 15% and 11%,  respectively,  of our 1999
revenues.

During the second  quarter of 1999,  we entered into an OEM  agreement to supply
high-performance  RAID storage  enclosures to SGI, a major server  manufacturer.
The initial term of the arrangement was expected to be for three years.  Between
May and October  1999,  sales to SGI totaled  approximately  $6 million.  In the
third  quarter of 1999,  SGI  decided  to phase out their  Windows NT product to
which our storage systems were attached. As a direct result, actual shipments to
SGI after October 1999 were minimal.

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.


<PAGE> 16

        Narrow Market

Substantially  all of our revenues to date have been  concentrated  in the UNIX,
Windows  NT and  Windows  2K  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.


        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 computer  storage and technology  industry and the
          economy in general.

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


        Insufficient Funding

We have expended and will continue to be required to expend substantial funds to
continue  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
relating 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

        Shares Eligible for Future Sale by Current Security Holders

If our current security  holders sell  substantial  amounts of our common stock,
including shares issued upon the exercise of outstanding options and warrants or
the conversion of outstanding  preferred stock, in the public market, the market
price of our common stock could fall. Restrictions under the securities laws and
certain lock-up  agreements limit the number of shares of common stock available
for sale in the  public  market.  Substantially  all of the shares of the common
stock  (35,478,489  shares as of March 30,  2001) are  freely  tradable  without
restriction or further registration under the Securities Act, unless such shares
are held by our  "affiliates"  as that  term is  defined  in Rule 144  under the
Securities  Act. As of March 30, 2001,  the number of shares held by  affiliates
was  13,624,586.  Common  stock  (including  shares  issuable on the exercise of
outstanding  options and warrants or the  conversion  of  outstanding  preferred
stock) held by officers and directors are deemed  restricted  securities  within
the meaning of Rule 144. Restricted  securities may be sold in the public market
only if they have been  registered  under the  Securities  Act or if their sales
qualify  under Rule 144 or another  available  exemption  from the  registration
requirements of the Securities Act.


        Potential Dilution; Reduction of Stock Price

The shares issuable to Wishmasters  pursuant to an equity line of credit will be
issued  at a 7%  discount  to the  average  daily  price  of our  common  stock.
Accordingly,  the  shares of common  stock  then  outstanding  will be  diluted.
Depending  on the price per share of our common  stock,  we may need to register
additional  shares for resale to access the full amount of financing  available,
which could have a further dilutive effect on the value of our common stock.

If we sell shares of our common stock to Wishmasters pursuant to the equity line
of credit and then  Wishmasters  sells the common stock,  our common stock price
may decrease  due to the  additional  shares in the market.  As the price of our
common  stock  decreases,  and if we decide to draw down on the  equity  line of
credit,  we will be required  to issue more  shares of our common  stock for any
given dollar amount invested by Wishmasters, subject to a designated minimum put
price specified by us. This may encourage short sales, which could place further
downward pressure on the price of our common stock.

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

The auditor's  report for our  consolidated  financial  statements  for the year
ended  December  31,  2000  states 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 the financial statements
have been  prepared  assuming  we will  continue as a  going-concern  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> 18

      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.
There is no  assurance  that our common  stock  will  continue  to  satisfy  the
requirements for listing on the AMEX. Delisting of our commons 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 W. David
Sykes, a former officer of the Company. The lease 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 expires in February 2002, at a base
rent of approximately $119,000.

We distribute products through a network of thirteen sales offices worldwide. We
believe our existing  facilities are adequate to meet future needs. See Notes 12
and 13 of  the  Notes  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.

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 2000.


<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, 2000 and 1999
as reported by AMEX.  During that  period,  we did not pay any  dividends on our
common stock and we do not expect to pay any dividends in the near future.


                                      Market Price Range
                                     --------------------

        2000                           High         Low
        ----                         --------    --------
     First quarter                    $6.875      $2.375
     Second quarter                    5.250       2.500
     Third quarter                     3.438       1.750
     Fourth quarter                    2.688       0.813



          1999
          ----
     First quarter                    $3.938      $2.000
     Second quarter                    3.500       2.000
     Third quarter                     3.000       1.938
     Fourth quarter                    4.500       1.563



       As  of  March  30,  2001,  we  had  35,478,489  shares  of  common  stock
outstanding and approximately 1,760 holders of record of such stock.


Recent Sales of Unregistered Securities and Use of Proceeds

In  December  2000,  we  issued  142,858  shares  of our  common  stock  in full
satisfaction of a $250,000 note payable.

In December 2000, we issued 2,000 shares of our Series G Preferred  Stock to Mr.
Levy in satisfaction of $2 million of borrowings.

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


Item 6.  Selected Financial Data
         (dollars in thousands, except per share data)

The following table summarizes certain selected consolidated  financial data for
the years ended  December  31, 2000,  1999,  1998,  and 1997,  for the two month
transition  period ended  December 31, 1996,  and for the year ended October 31,
1996.  In November  1996, we changed our fiscal year from October 31 to December
31, effective with the calendar year beginning January 1, 1997.


<PAGE> 20

Certain amounts for years prior to fiscal 2000 have been reclassified to conform
to the 2000  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>

                                                                                          Two Months
                                               Year Ended December 31,                       Ended          Year Ended
                                -----------------------------------------------------     December 31,      October 31,
                                  2000          1999(3)         1998           1997           1996            1996(6)
                                --------       --------       --------       --------     ------------      ----------
<S>                           <C>            <C>            <C>            <C>            <C>            <C>

Sales                            $40,197        $41,089        $18,026        $26,244         $4,739          $5,619
Gross profit                       9,872          9,763          2,768          4,783          1,348           2,072
(Loss) income from operations   (26,291)(1)    (16,501)(4)     (9,491)        (7,521)          (105)             115

Net (loss) income               (21,921)(2)    (18,704)(5)    (10,407)        (7,886)           (43)          12,798

Net (loss) income available
  to common stock               (22,606)       (19,938)       (11,888)        (7,886)           (43)          12,798

Basic and diluted net (loss)
  income per common share          (.69)          (.89)          (.63)          (.42)          (.00)            .73

Average number of common
 shares outstanding           32,789,832     22,505,084     18,888,911     18,670,477     18,670,477     17,606,477

At end of period:

Total assets                      15,722         34,041         14,128         16,762        20,067          15,677

Long-term debt                     7,258          6,329          7,043          1,504           516             510

Shareholders' (deficit) equity   (7,526)          6,273          3,150          5,037        12,817          12,390

<FN>
(1)  Includes  charge of $12  million for  impairment  of  unamortized  goodwill
related to an acquisition completed in 1999 and $1.4 million for a write-down of
obsolete inventory.

(2)  Includes  gain of $5.6  million  on the  sale of  assets  of Borg  Adaptive
Technologies, Inc., a wholly-owned subsidiary.

(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 $6.4  million  related  to  impairment  of  unamortized
goodwill  attributable  to an  acquisition  completed in 1996,  a write-down  of
obsolete inventory and employment termination costs.

(5)  Includes  extraordinary  loss of $.5  million  ($.02 per basic and  diluted
share).

(6) Prior to June 1996, our only assets consisted of securities received in 1992
in exchange for substantially  all of our operating assets.  During that period,
our only  activities  consisted of monitoring  those  securities  and evaluating
potential business opportunities.  The 1996 net income principally consists of a
$12  million  gain  from the  sale of those  securities  and  also  includes  an
extraordinary gain of $.6 million ($.03 per basic and diluted share).
</FN>
</TABLE>


<PAGE> 21

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 are based on current expectations subject to
uncertainties  and other  factors which may involve known and unknown risks that
could  cause  actual  results  of  operations  to differ  materially  from those
projected or implied. Further, certain forward-looking statements are based upon
assumptions about future events which may not prove to be accurate.

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,  level of gross  margins  and
operating  expenses,  lack of market  acceptance  or demand for our new  product
lines, price competition,  conditions in the technology industry and the economy
in general,  as well as legal  proceedings.  The economic risk  associated  with
materials cost  fluctuations  and inventory  obsolescence  is significant to our
company.   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 filing.


Overview

We are a  manufacturer  and  supplier  of  highly  integrated,  enterprise-class
storage  solutions for computing  operations that include Windows NT and Windows
2K, UNIX and Linux platforms.  Designed for storage-intensive  environments such
as the Internet or other  mission-critical  applications,  our products  include
Fibre Channel  storage  enclosures,  in addition to a complete set of SCSI, tape
and storage management solutions.

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 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 period to period
comparisons 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,  including  certain patented  technology  referred to as
Adaptive RAID, to a subsidiary of QLogic Corporation for $7.5 million.

Beginning  January 2000 with the  placement of Larry  Hemmerich as our President
and  Chief  Executive  Officer,  we  have  recruited  substantially  all  of our
executive management team within the past year.


<PAGE> 22

With  respect  to our  consolidated  financial  statements  for the  year  ended
December 31, 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  operations  and  the  fact  that  we are not in  compliance  with  certain
financial  covenants  under our existing bank facility raise  substantial  doubt
about our ability to  continue as a going  concern.  A  "going-concern"  opinion
indicates  that the financial  statements  have been  prepared  assuming we will
continue as a  going-concern  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.


Results of Operations

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

                                             Year Ended December 31,
                                     ------------------------------------
                                        2000          1999         1998
                                     ---------     ---------    ---------
Sales                                   100%          100%         100%
Cost of sales                            75            76           85
                                        ----          ----         ----
Gross profit                             25            24           15

Selling, general and administrative      40            37           46
Research and development                  9             7           14
Depreciation and amortization            11             8            8
Write-down of goodwill                   30            11            -
                                        ----          ----         ----
Loss from operations                    (65)          (39)         (53)
Gain on sale of Borg assets              14             -            -
Interest expense and other, net          (3)           (4)          (5)
                                        ----          ----         ----
Loss before extraordinary item          (54)          (43)         (58)
Extraordinary loss from debt
  extinguishment                          -            (1)           -
                                        -----         -----       -----
Net loss                                (54)%         (44)%       (58)%
                                        =====         =====       =====

Comparison of Fiscal Years Ended December 31, 2000 and December 31, 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 Borg (see Note 3 to Consolidated  Financial Statements) and the impairment of
unamortized  goodwill in the amount of $12 million  (see Note 1 to  Consolidated
Financial  Statements).  Results of operations for 1999 include an extraordinary
loss of $.5  million  on  extinguishment  of debt  (see  Note 6 to  Consolidated
Financial Statements) and the impairment of unamortized goodwill of $4.6 million
(see Note 1 to Consolidated Financial Statements).


Sales

Sales for the year ended  December  31,  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 have  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 new NexStor 2U
(3.5" high) 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> 23

During  2000,  our revenues  consisted  of $30.2  million in direct sales to end
users, $5.6 million in indirect sales to OEMs,  value-added resellers (VARs) and
other channel  business and $4.4 million in service  revenues.  We have recently
experienced  significant  growth in our indirect customer base and since October
2000, have entered into various agreements with domestic and international OEM's
and resellers.  We expect further expansion of our indirect  business,  which we
anticipate will provide a significant  new source of revenues.  In order to take
advantage of the opportunities  available in the indirect business channels,  we
have  recently  shifted  our sales and  marketing  strategy  to provide  greater
technical,  marketing and sales support to our indirect sales function.  As part
of this strategy,  since January 2001 we have reduced our direct sales personnel
and related costs, and have begun to refocus our direct sales team to designated
markets  such  as the  Federal  Government  and  companies  in the  oil  and gas
industries  as well as existing  large  customers.  During the first  quarter of
2001, the Company's total sales were approximately $6.2 million.


Cost of Sales/Gross Margin

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

For the year ended  December  31,  2000,  selling,  general  and  administrative
expenses  increased to $16.2  million (40% of sales) from $15.3  million (37% of
sales)  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. We expect these costs to decrease during fiscal 2001 as a direct result of
the  reduction  in  our  overall  workforce  in  January  2001  as  part  of the
restructuring of our sales and marketing efforts discussed under "Sales".


Research and Development

Research and development  expenses for the year ended December 31, 2000 amounted
to $3.5 million,  representing 9% of sales, as compared to $3 million,  or 7% of
sales, 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 product line as well as the  inclusion of a full year of
expenses  related to the  Andataco  acquisition.  We believe  that  considerable
future  investments  in  research  and  development  will be  required to remain
competitive  and we expect these  expenses  will  continue to increase in future
periods.


<PAGE> 24

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  substantially  incurred  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  for the year ended
December 31, 2000 from $3.4 million in 1999.  These increases were 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 inability to generate future operating income
from the assets acquired in the Parity acquisition.

During  the  fourth  quarter  of 2000  (see  Note 16 to  Consolidated  Financial
Statements),  we recorded a goodwill  write-down of  approximately  $12 million.
This  write-down  eliminated  all  unamortized  goodwill  related  to  the  1999
acquisition  of Andataco.  The Andataco  goodwill  was  determined  to have been
impaired because of our 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 on the $5.1
million note issued in connection  with the Andataco  acquisition as compared to
seven months of interest in 1999.

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.

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.

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.

Comparison of Fiscal Years Ended December 31, 1999 and December 31, 1998

We reported a net loss of $18.7 million for the year ended  December 31, 1999 as
compared to a net loss of $10.4 million for the year ended December 31, 1998.


<PAGE> 25

Results of  operations  for fiscal 1999  included an  extraordinary  loss of $.5
million  on  extinguishment  of  debt  (see  Note  6 to  Consolidated  Financial
Statements)  and a write-down of  unamortized  goodwill for  approximately  $4.6
million (see Note 1 to Consolidated Financial Statements).

Sales

Sales for the year ended December 31, 1999 were $41.1 million as compared to $18
million  during  the  preceding  year,  an  increase  of $23.1  million  or 128%
primarily resulting from the acquisition of Andataco in June 1999. This increase
was  partially  offset by delays  in the  market  introduction  of  certain  new
generation  products and our  elimination  of  non-storage  related  businesses,
including memory and integrated systems divisions (approximately $2.1 million in
1998).

During the second  quarter of 1999,  we entered into an OEM  agreement to supply
high-performance  RAID storage  enclosures to SGI, a major server  manufacturer.
The initial term of the arrangement was expected to be for three years.  Between
May and October  1999,  sales to SGI totaled  approximately  $6 million.  In the
third  quarter  of 1999,  SGI made the  decision  to phase out their  Windows NT
product to which our storage systems were attached.  As a direct result,  actual
shipments to SGI subsequent to October 1999 were minimal.  SGI accounted for 15%
of our net sales for 1999.  Two OEM  customers,  Discrete  Logic and  Intergraph
Corp., accounted for 27% and 13%, respectively, of 1998 net sales.

Cost of Sales/Gross Margin

Gross margin for 1999  increased to 24% from 15% for 1998.  Contributing  to the
improved  gross margins were the Andataco  product sales and the  utilization of
Andataco's  sales channels to market our products.  During 1999 and 1998,  gross
margins reflect  write-downs due to obsolete inventory amounting to $1.5 million
and $1.4 million,  respectively.  Our gross margins are  dependent,  in part, on
product mix which fluctuates from time to time.

Selling, General and Administrative Expenses

Selling,  general and  administrative  costs for 1999 increased to $15.3 million
(37% of sales) from $8.3  million  (46% of sales) for 1998.  This  increase  was
primarily the result of the acquisition of Andataco,  which was partially offset
by a reduction in operating expenses at our Lake Mary location. The reduction in
expenses at that  location was  primarily  attributable  to the  elimination  of
expenses associated with the integrated system division that was sold in October
1998. The most significant  increase in 1999 expenses resulted from compensation
and related  benefits of  additional  employees  brought  about by the  Andataco
acquisition.

Research and Development

Research and development expenses for 1999 amounted to $3 million,  representing
7% of sales as compared to 1998 when expenses were $2.6 million or 14% of sales.

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  substantially  incurred  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 $3.4  million  for 1999 from $1.4
million for 1998,  principally due to the  acquisition of Andataco,  which added
$1.1  million of  amortization  of goodwill and $.8 million of  depreciation  in
1999.


<PAGE> 26

During  the  fourth  quarter  of 1999  we  recorded  a  goodwill  write-down  of
approximately $4.6 million. This write-down eliminated all remaining unamortized
goodwill  related to the 1996  acquisition  of Parity.  The Parity  goodwill was
determined  to have been impaired  because of our  inability to generate  future
operating income from the assets acquired in the Parity acquisition.

Interest Expense

Interest  expense in 1999  increased  $1.1  million over 1998 as a result of the
acquisition   of  Andataco  which   significantly   increased  our  net  average
borrowings.

Income Taxes

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

Preferred Stock Dividends

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 we  recorded  $.3  million as an  embedded
dividend  attributable to the beneficial conversion privilege of certain classes
of our convertible preferred stock as compared to $1.2 million in 1998.

In  addition,  for  the  year  ended  December  31,  1999,  all  classes  of our
convertible  preferred stock required cumulative  dividends at 8% and aggregated
$.9 million as compared to $.3 million in 1998. The increase was principally due
to additional issuances of preferred stock in 1999.


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 suffered  substantial
recurring net losses of $21.9  million,  $18.7 million and $10.4 million for the
years ended  December  31,  2000,  1999 and 1998,  respectively,  have  negative
working  capital and a  shareholders'  deficit at December 31, 2000,  and are in
default under our existing bank credit  facility.  These matters,  among others,
raise substantial doubt about our ability to continue as a going concern.

In early  2000,  in an  effort  to bring us to  profitability,  we  successfully
recruited a new executive  management team.  During most of 2000, our management
team formulated and implemented our current product strategy centered around our
NexStor 2U line of Storage  Area Network  (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 the second half of the year,  the decline in revenues of our older
products exceeded the increase in sales of our newer technology solutions, which
contributed to our operating loss.

However,  we have recently  experienced  growth in our indirect customer channel
base (original equipment  manufacturers (OEMs), value added resellers (VARs) and
system integrators). Since October 2000, we have entered into various agreements
with domestic and international OEMs, VARs and system integrators.  In addition,
we have  received  indications  of  approval  from a number  of  other  indirect
customers.  In 2000,  indirect sales represented a small percentage of our total
sales   revenues.   In  an  effort  to  capitalize  on  this  growth  trend  and
simultaneously  reduce  operating  costs,  we  recently  shifted  our  sales and
marketing  strategy to provide an emphasis on our indirect  sales  function.  As
part of this  strategy,  since  January  2001,  we have reduced our direct sales
personnel  and related  costs,  and have begun to focus our direct sales team to
certain designated markets.  Our operating results are expected to be positively
affected by an increase in indirect sales;  however,  there is no assurance that
an increase will occur.


<PAGE> 27

Historically,  we have been successful in securing significant amounts of equity
and debt  financing  to  support  our  operating  deficits.  Since late 1997 and
through  April 16,  2001,  we obtained net cash  proceeds of $36.1  million from
private  investors,  including  $4.4 million  since  December 31, 2000. Of these
amounts,  $12.4  million was  received  from H. Irwin Levy,  our 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.  (see  Note  3 to
Consolidated Financial Statements).

Effective  April 12, 2001,  holders of all of our notes payable  totaling  $11.9
million (including  $110,000 in accrued interest) on that date,  verbally agreed
to exchange  their notes for Series H and Series I Convertible  Preferred  Stock
(the  "Exchange")  with a stated value of $11.9 million  (including $3.6 million
held by Mr. Levy). If the Exchange is completed,  as of April 12, 2001, our only
outstanding debt, other than our trade payables and other operating liabilities,
will  consist  of our Bank Line of Credit,  and our  shareholder's  equity  will
increase by $11.9 million. On April 12, 2001, our Series G Preferred Stock (held
by Mr.  Levy) with a stated  value of $2 million  was  converted  into  Series I
Convertible Preferred Stock with a stated value of $2 million.

The Series H and I  Convertible  Preferred  Stock  accrues  dividends at 10% per
annum,  payable  quarterly,  and is convertible  into shares of our common stock
based on a fixed conversion price of $.72 per share, the closing market price on
the date prior to the Exchange.

We are currently  exploring various  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. We expect to be able to obtain sufficient funds to satisfy
our  working  capital  needs  during  the  next  twelve  months,   as  presently
contemplated.  However,  due to conditions in the  technology-related  financial
markets and other  uncertainties,  many of which are outside our control,  there
can be no assurance  that such  required  additional  funds will be available on
terms  acceptable to management,  if at all, or that we will be able to generate
positive cash flows from operations in the future.

Our revolving  credit  facility  (Bank Line of Credit)  provides for  borrowings
based on the lesser of $10 million or: (i) 85% of eligible accounts  receivable,
as defined,  plus (ii) the lesser of $1.75 million or 23% of eligible inventory,
as defined. Effective April 14, 2000, interest under the Bank Line of Credit was
increased  from prime plus .5% to prime (9.5% at December  31,  2000) plus 1.5%.
The Bank Line of Credit  matures in April 2002,  requires a facility fee of .25%
based on the  average  unused  portion  of the  maximum  borrowings,  contains a
default  interest  rate  provision of an  additional  2%, is  collateralized  by
substantially all of our assets,  and provides for certain financial  covenants,
including  minimum net worth and net income  requirements.  As of  December  31,
2000, the outstanding balance of the Bank Line of Credit was $4.1 million and an
additional approximately $.5 million was available based on eligible collateral.


<PAGE> 28

At December 31, 2000, we were not in  compliance  with our minimum net worth and
net income covenants under our Bank Line Of Credit and are in technical  default
under the compliance provisions. We are currently in discussions with the lender
to amend those covenants.  Although management believes we will be successful in
these discussions, there can be no assurance of this success nor that management
will be successful in obtaining a replacement lender with acceptable terms if we
are not successful.

On May 4, 2000,  we entered into an agreement  with a private  investment  group
granting us a one-year $15 million equity line or equity draw down facility. The
agreement  does not  obligate  us to draw any of the  funds.  Once per draw down
period, we may 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
will provide to us and the number of shares that we will issue to the investment
group in return  for that money is  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 receives a 7% discount to the
market price for the 22-day period and we receive the settled amount of the draw
down less a 4% fee payable to the placement  agent.  As of December 31, 2000, we
have  issued  508,857  shares of common  stock and  received  $1  million in net
proceeds pursuant to this agreement.

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 by operating  activities amounted to $9.4 million and $5.3 million
for the  years  ended  December  31,  2000  and  1999,  respectively.  The  most
significant  use of cash for both  fiscal  years  was our loss  from  operations
(before depreciation,  amortization and other non-cash items) of $6.1 million in
2000 and $8.1 million in 1999. The most significant  source of cash for 2000 was
the reduction of accounts receivable of $2.1 million, which was more than offset
by a $2.9  million  increase  in  inventories  and a $2.8  million  decrease  in
accounts  payable  and other  liabilities.  The 1999 loss  from  operations  was
partially  offset by a $1.5 million  decrease in inventories,  and a $.6 million
decrease in accounts receivables.

        Investing Activities

Net cash provided by investing  activities  for the year ended December 31, 2000
amounted to $5.9 million principally due to $7 million in net cash proceeds from
the Borg sale. Cash used for  acquisitions  totaled $.3 million and $1.4 million
during 2000 and 1999,  respectively.  Cash used for  purchases  of property  and
equipment was $.9 million and $.8 million during 2000 and 1999, respectively.

        Financing Activities

Net cash  provided by financing  activities  for 2000  amounted to $2.9 million,
principally consisting of $1.5 million in net borrowings,  $1.2 million from the
exercise of stock options and warrants, and $1 million from our equity draw down
facility.  Net cash provided by financing  activities  for 1999 amounted to $7.9
million, and primarily consisted of net borrowings of $3.3 million, $2.0 million
from the  issuance of  convertible  preferred  stock and $3.5  million  from the
issuance of common  stock  (including  $2.5  million  from the exercise of stock
options and warrants). During both years, we paid $.8 million in preferred stock
dividends.


<PAGE> 29

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 2001.


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> 30


Item 8.  Financial Statements and Supplementary Data

Table of Contents to Consolidated Financial Statements

                                                                  Page

    Report of Independent Certified Public Accountants             31

    Consolidated Financial Statements:

     Balance sheets - December 31, 2000 and 1999                   32

     Statements of Operations - Year Ended
        December 31, 2000, 1999 and 1998                           33

     Statements of Shareholders' (Deficit) Equity -
        Year Ended December 31, 2000, 1999 and 1998              34-36

     Statements of Cash Flows - Year Ended
        December 31, 2000, 1999 and 1998                         37-38

     Notes to Consolidated Financial Statements                  39-59

    Report of Independent Certified Public Accountants             60


FINANCIAL  STATEMENT  SCHEDULES.  The following financial statement schedules of
nStor  Technologies,  Inc. for the years ended December 31, 2000,  1999 and 1998
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    61-63

   Schedule II - Valuation and Qualifying Accounts                 64


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> 31


                   REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS




To the Board of Directors of
   nStor Technologies, Inc.


We  have  audited  the  accompanying   consolidated   balance  sheets  of  nStor
Technologies,  Inc. and subsidiaries (the "Company") as of December 31, 2000 and
1999,  and the related  consolidated  statements  of  operations,  shareholders'
(deficit)  equity and cash flows for each of the three 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 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  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 1999, and the results of their
operations  and their cash flows for each of the three 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  loses  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, except as to
Paragraph four of Note 6 and
Note 15, which are as of March 27, 2001


<PAGE> 32


                   nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                   =========================================
                             (dollars in thousands)
                                  December 31,
                                                              -----------------
     ASSETS                                                     2000      1999
     ------                                                   -------   -------
Current assets:
  Cash and cash equivalents                                  $    37    $   673
  Accounts receivable                                          4,395      7,326
  Inventories                                                  5,174      6,288
  Prepaid expenses and other                                   1,278      1,614
                                                              -------   -------
        Total current assets                                  10,884     15,901

Property and equipment, net of $4,583 and
  $2,932 in accumulated depreciation                           2,384      3,476
Goodwill and other intangible assets, net of
  $400 and $1,311 in accumulated amortization                  2,397     14,533
Other non current assets                                          57        131
                                                             -------    -------
                                                             $15,722    $34,041
     LIABILITIES                                             =======    =======
     -----------
Current liabilities:
  Bank line of credit                                        $ 4,086    $ 5,111
  Director loans                                                   -      1,585
  Convertible notes                                                -        629
  Deferred revenue                                             2,400      2,426
  Accounts payable and other                                   9,504     11,688
                                                             -------    -------
        Total current liabilities                             15,990     21,439

Long-term debt:
  Notes payable                                                5,600      6,329
  Director loans                                               1,658          -
                                                             -------    -------
        Total liabilities                                     23,248     27,768
                                                             -------    -------
Commitments, contingencies and subsequent events

     SHAREHOLDERS' (DEFICIT) EQUITY
     ------------------------------
Preferred stock, $.01 par; 1,000,000 shares authorized,
 in order of preference:
  Convertible (except for Series G) preferred stock
   issued and outstanding as of December 31, 2000
   and 1999, respectively:  Series F, 722 and 4,054,
   aggregate liquidation  value  $722  and  $4,054;
   Series  A,  0  and  1,667,  aggregate liquidation
   value $0 and $1,000; Series C, 0 and 3,000,
   aggregate liquidation value $0 and $3,000;
   Series D, 2,000 and 2,700,  aggregate liquidation
   value $2,000 and $2,700;  Series E, 3,500 in 2000
   and 1999,  aggregate  liquidation value $3,500;
   Series G, 2,000 and 0, aggregate liquidation value
   $2,000 and $0                                                  -          -
Common stock, $.05 par; 75,000,000 shares authorized;
  35,478,489 and 26,517,824 shares issued and outstanding
  at December 31, 2000 and December 31, 1999, respectively     1,773      1,331
Additional paid-in capital                                    71,529     63,164
Deficit                                                      (80,828)   (58,222)
                                                             --------   --------
Total shareholders' (deficit) equity                          (7,526)     6,273
                                                             --------   --------
                                                             $15,722    $34,041
                                                             ========   ========



      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,
                                              ------------------------------
                                                 2000        1999      1998
                                              ---------  ---------  --------
Sales                                          $40,197    $41,089   $18,026
Cost of sales                                   30,325     31,326    15,258
                                               --------   --------  --------
     Gross profit                                9,872      9,763     2,768
                                               --------   --------  --------
Operating expenses:
  Selling, general and administrative           16,232     15,340     8,335
  Research and development                       3,504      2,981     2,572
  Depreciation and amortization                  4,468      3,355     1,352
  Impairment of goodwill                        11,959      4,588       -
                                               --------   --------  --------
Total operating expenses                        36,163     26,264    12,259
                                               --------   --------  --------
Loss from operations                           (26,291)   (16,501)   (9,491)

Gain on sale of assets of Borg Adaptive
  Technologies                                   5,575          -         -
Other income                                        84        313        71
Interest expense                                (1,289)    (2,051)     (987)
                                               --------   --------  --------
Loss before preferred dividends
  and extraordinary loss                       (21,921)   (18,239)  (10,407)

Extraordinary loss from debt
  extinguishment (net of tax of $0)                 -        (465)       -
                                               --------   --------  --------
Net loss                                       (21,921)   (18,704)  (10,407)

Preferred stock dividends                         (685)      (902)     (263)
Embedded dividend attributable to
  beneficial conversion privilege
  of Convertible Preferred Stock                    -        (332)   (1,218)
                                               --------  ---------  --------
Loss available to common stock                ($22,606)  ($19,938) ($11,888)
                                               ========  =========  ========
Basic and diluted net loss per common share:
  Loss before extraordinary loss               ($  .69)   ($  .87)  ($  .63)
  Extraordinary loss                                 -       (.02)        -
                                               --------  ---------  --------
  Net loss per common share                    ($  .69)   ($  .89)  ($  .63)
                                               ========  =========  ========
Average number of common shares
  outstanding, basic and diluted             32,789,832 22,505,084 18,888,911
                                             ========== ========== ==========

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


<PAGE> 33
<TABLE>
<CAPTION>


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


                                                               Preferred          Addi-
                                     Common Stock                Stock            tional
                                 ---------------------     -----------------     Paid-in
                                   Shares       Amount     Shares    Amount      Capital     Deficit    Total
                                 ----------     ------     ------   --------     --------   ---------  -------
<S>                              <C>            <C>        <C>      <C>          <C>        <C>        <C>

Balances, January 1, 1998        18,670,477     $  934          -    $    -      $ 30,499   $(26,396)  $ 5,037

Issuance of convertible
 preferred stock in connection
 with:
   Private placements, less
     $272 of issuance costs                                 6,200         -         5,928                5,928
   Satisfaction of borrowings,
     less $9 of issuance costs                              3,667         -         2,991                2,991

Redemption of convertible
 preferred stock, including
 $120 of redemption cost (a)                              (2,300)         -       (2,420)              (2,420)

Issuance of common stock in
 connection with:
   Conversion of convertible
     preferred stock                394,949         18      (200)         -          (18)                    -
   Exercise of warrants           1,449,999         73                              1,602                1,675

Preferred stock dividends                                                                       (263)    (263)

Embedded dividend attributable
 to beneficial conversion
 privilege of convertible
 preferred stock                                                                    1,218     (1,218)

Common stock option and warrants
 issued in connection with:
   Long-term debt                                                                     427                  427
   Acquisition                                                                        148                  148
   Director compensation                                                               34                   34

Net loss for the year
 ended December 31, 1998                                                                     (10,407) (10,407)
                                 ----------      -----      -----      -----      -------    -------- --------
Balances, December 31, 1998      20,515,425      1,025      7,367         -        40,409    (38,284)    3,150

</TABLE>


<PAGE> 34
<TABLE>
<CAPTION>


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


                                                               Preferred          Addi-
                                     Common Stock                Stock            tional
                                 ---------------------     -----------------     Paid-in
                                   Shares       Amount     Shares    Amount      Capital     Deficit    Total
                                 ----------     ------     ------   --------     --------   ---------  -------
<S>                              <C>            <C>        <C>      <C>          <C>        <C>        <C>
Issuance of convertible preferred
 stock in connection with:
   Private placement, less
     $16 of issuance costs                                  3,500          -        3,484                3,484
   Acquisition of Andataco,
     less $21 of issuance costs                             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:
   Long-term debt                                                                     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,
      less $87 of issuance
      cost                          508,857         25                                936                  961
   Satisfaction of borrowings       439,154         22                              1,228                1,250
   Commitment related to
     executive termination          123,479          -                                  -                    -

</TABLE>

<PAGE> 36

<TABLE>
<CAPTION>

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


                                                               Preferred          Addi-
                                     Common Stock                Stock            tional
                                 ---------------------     -----------------     Paid-in
                                  Shares        Amount     Shares    Amount      Capital     Deficit    Total
                                 ----------     ------     ------   --------     --------   ---------  -------
<S>                              <C>            <C>        <C>      <C>          <C>        <C>        <C>
Issuance of preferred stock
 in satisfaction of borrowings
 from director                                              2,000          -        2,000                2,000

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)
                                 ==========     ======     ======      =====      =======   ========= ========
<FN>

(a) In connection  with the redemption of Series B Convertible  Preferred  Stock
during 1998,  $1 million of the  remaining  Series B was  exchanged for Series C
Convertible  Preferred  Stock.  During July 2000,  3,000  shares of the Series C
Convertible Preferred Stock were converted into 3,000,000 shares of common stock
under an automatic conversion feature.
</FN>
</TABLE>


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


<PAGE> 37


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

                                                      Years Ended December 31,
                                                   -----------------------------
                                                      2000      1999      1998
CASH FLOWS FROM OPERATING ACTIVITIES:              --------- --------- ---------
  Net loss                                         ($21,921) ($18,704) ($10,407)
  Adjustments to reconcile net loss to
    net cash used by operating activities:
      Gain on sale of assets of Borg Adaptive
       Technologies                                  (5,575)         -         -
      Depreciation and amortization                   4,468      3,355     1,352
      Impairment of goodwill                         11,959      4,588         -
      Loss on extinguishment of debt                      -        465         -
      Provision for inventory obsolescence            3,988        306     1,354
      Provision for uncollectible accounts receivable   912        954       837
      Amortization of deferred compensation               -        171        44
      Amortization of deferred loan costs                21        621       140
      Minority interest in net loss of
        consolidated subsidiary                           -        130         -
      Changes in assets and liabilities,
        net of effects from acquisition:
          Decrease in accounts receivable             2,108        640       564
          (Increase)decrease in inventories          (2,875)     1,459     (805)
          Decrease (increase) in prepaid expenses
           and other                                    293        334     (112)
          (Decrease)increase  in accounts payable
             and other liabilities                   (2,807)       403   (3,453)
                                                     -------   -------   -------
Net cash used by operating activities                (9,429)    (5,278) (10,486)
                                                     -------   -------   -------
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)    (379)
  Additions to property and equipment                  (853)      (767)    (456)
                                                     -------    -------  -------
Net cash provided (used) by investing activities      5,867     (2,139)    (835)
                                                     -------    -------  -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net repayments from revolving bank credit
    facilities                                       (1,025)    (2,590)  (1,507)
  Additions to other borrowings                       4,858      7,075    10,803
  Repayments on other borrowings                     (2,285)    (1,200)  (3,424)
  Issuance of convertible preferred
    stock in private placements                           -      1,962     5,928
  Redemption of convertible preferred stock               -          -   (2,420)
  Issuance of common stock, net of issuance cost        961      1,000         -
  Proceeds from exercise of stock options and
   warrants                                           1,178      2,519     1,675
  Decrease in restricted cash and cash equivalents        -          -       503
  Cash paid for preferred stock dividends              (761)      (823)    (151)
                                                     -------    -------  -------
  Net cash provided by financing activities           2,926      7,943    11,407
                                                     -------    -------  -------
Net (decrease) increase in cash and cash
  equivalents during the year                          (636)       526        86

Cash and cash equivalents at beginning of year          673        147        61
                                                      ------    ------    ------
Cash and cash equivalents at end of year              $   37    $  673    $  147
                                                      ======    ======    ======


<PAGE> 38

                   nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     =====================================
                           (in thousands) (concluded)
                                                       Years Ended December 31,
                                                     ---------------------------
                                                       2000      1999     1998
                                                     --------  --------  -------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
  Cash paid during period for interest               $ 1,297   $   941   $  807
                                                     =======   =======   =======
NON-CASH INVESTING ACTIVITIES:
  Acquisitions:
    Fair value of assets acquired                    $ 2,938   $30,527    $ 527
    Liabilities assumed and incurred                     (45)  (16,667)      -
    Notes issued                                          -     (5,100)      -
    Series F Convertible Preferred Stock issued           -     (4,654)      -
    Common stock issued or committed                  (2,600)   (2,534)      -
    Warrant issued to seller                              -       (200)    (148)
                                                     -------   -------  -------
      Cash paid                                      $   293   $ 1,372  $   379
                                                     =======   =======  =======

  Modification of stock options and warrants
  in connection with the Sale of Borg Adaptive
  Technologies                                       $   818   $    -   $    -
                                                     =======   =======  =======

NON-CASH FINANCING ACTIVITIES:

Issuance of common stock in satisfaction
    of borrowings                                    $ 1,250   $ 6,840  $    -
                                                     =======   =======  =======
Issuance of preferred stock in satisfaction
    of borrowings                                    $ 2,000   $ 1,500  $ 2,991
                                                     =======   =======  =======
Deferred loan costs arising from issuance
    of warrants under loans                          $    -    $   791  $   427
                                                     =======   =======  =======

Embedded dividend attributable to beneficial
 conversion privilege of Convertible
    Preferred Stock:
      Series B                                       $    -    $    -   $ 1,045
      Series A                                            -        181      173
      Series E                                            -        151       -
                                                     -------   -------  -------
                                                     $    -    $   332  $ 1,218
                                                     =======   =======  =======

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


<PAGE> 39

                   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.

        Basis of Presentation

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
suffered  substantial  recurring net losses of $21.9 million,  $18.7 million and
$10.4  million  for  the  years  ended   December  31,  2000,   1999  and  1998,
respectively,  has  negative  working  capital  and a  shareholders'  deficit at
December 31, 2000,  and is in default under its existing  bank credit  facility.
These matters, among others, raise substantial doubt about the Company's ability
to continue as a going concern.

In early 2000, in an effort to bring the Company to  profitability,  the Company
successfully recruited a new executive management team. During most of 2000, the
management team formulated and implemented its current product strategy centered
around  its  NexStor  2u line of  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 the second half of the year, the decline in revenues of
the  Company's  older  products  exceeded  the  increase  in sales of its  newer
technology solutions, which contributed to the Company's operating loss.

However,  the Company has recently  experienced  growth in its indirect customer
channel base (original equipment  manufacturers  (OEM's),  value added resellers
(VARs) and system  integrators).  Since October 2000,  the Company has announced
that it has entered  into various  agreements  with  domestic and  international
OEM's,  VARs and system  integrators.  In  addition,  the Company  has  received
indications  of approval  from a number of other  indirect  customers.  In 2000,
indirect  sales  represented a small  percentage  of the  Company's  total sales
revenues.  In an effort to  capitalize  on this growth trend and  simultaneously
reduce operating costs, the Company recently has shifted its sales and marketing
strategy to provide an emphasis on the Company's  indirect  sales  function.  As
part of this  strategy,  since January 2001,  the Company has reduced its direct
sales personnel and related costs,  and has begun to focus its direct sales team
to certain designated  markets.  The Company's operating results are expected to
be positively  affected by an increase in indirect sales;  however,  there is no
assurance that an increase will occur.

Historically, the Company has been successful in securing significant amounts of
equity and debt financing to support its operating deficits. Since late 1997 and
through March 27, 2001, the Company  obtained net cash proceeds of $36.1 million
from private  investors,  including  $4.4 million,  principally  in  convertible
notes,  since  December 31, 2000. Of these  amounts,  $12.4 million was received
from H.  Irwin  Levy,  the  Company's  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  the  Company  sold  substantially  all  the  assets  of  its  wholly-owned
subsidiary,  Borg  Adaptive  Technologies,  Inc.  (see  Note  3 to  Consolidated
Financial Statements).


<PAGE> 40

The Company is currently  exploring various  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. The Company expects to be able to obtain  sufficient funds
to satisfy its working capital needs during the next twelve months, as presently
contemplated.  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.

As of December 31, 2000, the Company was not in compliance  with its minimum net
worth and net income  covenants under its existing bank credit  facility,  is in
technical  default,  and is  currently in  discussions  with the lender to amend
those  covenants.  Although  management  believes it will be successful in these
discussions,  there can be no assurance of this success nor that management will
be  successful in obtaining a replacement  lender with  acceptable  terms if the
Company is not successful.

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 engaged as a  manufacturer  and  supplier  of highly  integrated,
enterprise-class storage solutions for computing operations that include Windows
NT and Windows 2K, UNIX,  and Linux  platforms.  Designed for  storage-intensive
environments such as the Internet or other  mission-critical  applications,  the
Company's  products include Fibre Channel storage  enclosures,  in addition to a
complete  set of SCSI  (Small  Computer  Systems  Interface),  tape and  storage
management solutions.

        Cash and Cash Equivalents

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

        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 4 to
Consolidated Financial Statements).

        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. Revenue related to extended
warranty contracts is deferred and recognized over the period in which costs are
expected to be incurred,  based upon historical evidence, in performing services
under the contracts.  The Company also contracts 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  are recognized in the financial  statements in sales and
cost of goods sold, respectively, over the warranty period.


<PAGE> 41

        Warranty Costs

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


        Long-Lived Assets

The  Company  has  adopted  the  provisions  of SFAS  121,  "Accounting  for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of".
This  statement  requires  that  long-lived  assets  and  certain   identifiable
intangibles   be  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 and Other Intangible Assets

Intangible  assets,  substantially  goodwill,  are carried at cost and amortized
under the straight-line  method generally over seven years, the estimated useful
lives.  Goodwill  represents the excess cost of the acquired businesses over the
fair value of net assets acquired (see Notes 2 and 4 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 the fourth
quarters  of 2000  and  1999,  the  Company  recorded  goodwill  write-downs  of
approximately  $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 Parity  Systems,  Inc.
(Parity).  The  goodwill was  determined  to have been  impaired  because of the
Company's  inability to generate  sufficient  future  operating  income from the
assets  acquired  in those  acquisitions.  At  December  31,  2000,  unamortized
goodwill of $2.4 million was not considered to be impaired.


        Research and Development Costs

Research and development costs are expensed as incurred.


        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.


<PAGE> 42

        Net Loss Per Common Share ("EPS")

Basic EPS is calculated by dividing the loss available to common shareholders by
the weighted average number of common shares 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, 2000 and 1999,  outstanding  potentially  dilutive securities
included the following, respectively:  3,407,199 and 9,884,666 shares underlying
convertible  preferred stock;  4,549,610 and 4,622,997  shares  underlying stock
options;  2,575,133 and 1,949,972 shares underlying warrants; and 283,479 shares
underlying various other commitments for 1999.


        Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent assets and liabilities at the date of the financial  statements,  and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could materially differ from those estimates.


        Financial Instruments

SFAS 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, 2000 and 1999.

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 fair
value of the Company's current  borrowings and long-term debt 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 the fair value of current borrowings and long-term debt.


        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.


<PAGE> 43

        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

Effective April 1, 1998, the Company adopted  Statement of Financial  Accounting
Standards  No.  130,  "Reporting  Comprehensive  Income"  (SFAS  130).  SFAS 130
establishes  new 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.

        New Accounting Pronouncements

In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement
of  Financial  Accounting  Standards  ("SFAS") No. 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.

Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition", summarizes the
Securities  and  Exchange  Commission's  views on  applying  generally  accepted
accounting   principles  to  revenue   recognition   in  financial   statements.
Significant  views addressed relate to shipping terms,  customer  acceptance and
bundled service contracts.  Implementation is effective for the first quarter of
fiscal 2001. The Company believes that its current revenue recognition  policies
comply with SAB No. 101.

In March 2000, the FASB issued  Interpretation  NO 44 ("FIN 44") "Accounting for
Certain  Transactions  Involving Stock  Compensation",  which addresses  certain
accounting  issues  that  arose  under  the  previously  established  accounting
principles   relating  to  stock-based   compensation.   The  adoption  of  this
interpretation  did  not  have a  material  effect  on the  Company's  financial
position or results of operations.

(2)  ACQUISITIONS

    Andataco, Inc.

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 15 to Consolidated
Financial Statements).  Andataco was a developer,  manufacturer, and marketer of
high performance,  high availability  information storage solutions for the open
systems market.


<PAGE> 44

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  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 the fourth  quarter of 2000,  the Company  recorded an
impairment of all unamortized  goodwill related to the Andataco acquisition (see
Note 1 to Consolidated Financial Statements).

The  following  are  unaudited  pro  forma  results  of  operations  as  if  the
acquisition  of Andataco had occurred at the beginning of the fiscal years ended
December 31, 1999 and 1998 (in thousands except for per share data):


                                                December 31
                          ------------------------------------------------------
                                     1999                      1998
                          ------------------------------------------------------
                                          Pro Forma                   Pro Forma
                           Historical     Combined     Historical     Combined
                           ----------     ---------    ----------    -----------
Net Sales                  $  41,089      $ 65,338     $  18,026      $  95,545

Loss before preferred
  dividends and
  extraordinary loss       $ (18,239)     $(20,104)    $ (10,407)     $ (12,673)

Net loss available to
  common stock             $ (19,938)     $(22,110)    $ (11,888)     $ (14,956)

Basic and diluted
  net loss per share       $   (0.89)     $  (0.95)    $  (0.63)      $   (0.77)

Average number of common
  shares outstanding,
  basic and diluted        22,505,804    23,320,333    18,888,911     19,435,911

These pro forma results may not be indicative of the results of operations  that
would have been reported if the transaction had occurred as of these dates.

    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> 45

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) GAIN ON SALE OF ASSETS OF BORG  ADAPTIVE  TECHNOLOGIES

On January 10, 2000,  the Company sold  substantially  all of the assets of Borg
Adaptive  Technologies,  Inc., 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,  subject to the right of the Company to the use of all
intellectual  property for its own use. 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 and $.7 million in 1999 and 1998, respectively.

(4)  BALANCE SHEET COMPONENTS (in thousands)

Substantially  all assets are pledged as collateral for indebtedness (see Note 6
to Consolidated Financial Statements).
                                                      December 31,
                                                   -----------------
                                                     2000      1999
                                                   -------   -------
Accounts Receivable
     Trade receivables                             $ 4,610   $ 8,759
     Less allowance for doubtful accounts             (402)   (1,604)
                                                   -------   -------
                                                     4,208     7,155
     Other receivables                                 187       171
                                                   -------   -------
                                                   $ 4,395   $ 7,326
                                                   =======   =======
Prepaid Expenses and Other
     Prepaid service costs                         $ 1,175   $ 1,174
     Other                                             103       440
                                                   -------    ------
                                                   $ 1,278   $ 1,614
                                                   =======    ======
Inventories
     Raw materials                                 $ 3,784   $ 4,942
     Work-in-process                                   213       454
     Finished goods                                  1,177       892
                                                   -------   -------
                                                   $ 5,174   $ 6,288
                                                   =======   =======

During the fourth  quarter of 2000,  the Company  recorded a write-down  of $1.4
million  resulting  from a  re-valuation  of certain  inventory  (see Note 16 to
Consolidated Financial Statements).


<PAGE> 46


                                                      December 31,
                                                   -----------------
                                                     2000      1999
                                                   -------   -------
Property and Equipment
     Computer equipment                             $4,888   $ 4,075
     Computer software                                 770       770
     Leasehold improvements                            866       788
     Furniture, fixtures and office equipment          321       465
     Other                                             122       310
                                                   -------   -------
                                                     6,967     6,408
     Less accumulated depreciation                  (4,583)   (2,932)
                                                   -------   -------
                                                   $ 2,384   $ 3,476
                                                   =======   =======

Depreciation expense amounted to approximately $1.9 million and $1.8 million for
the years ended December 31, 2000 and 1999, respectively.


Goodwill and Other Intangible Assets
     Goodwill                                     $ 2,797   $15,497
     Intellectual assets                              -         347
                                                  --------  --------
                                                    2,797    15,844
     Less accumulated amortization                 (  400)   (1,311)
                                                  --------  --------
                                                  $ 2,397   $14,533
                                                  ========  ========

Amortization of goodwill and other  intangible  assets amounted to approximately
$2.6  million and $1.6  million for the years ended  December 31, 2000 and 1999,
respectively.  During the fourth quarter of 2000 and 1999, the Company  recorded
an  impairment of goodwill of $12 million and $4.6  million,  respectively  (See
Note 1 to Consolidated Financial Statements).


Accounts Payable and Other
     Accounts payable                              $ 6,402   $ 8,072
     Accrued expenses and other                      3,102     3,616
                                                  --------   --------
                                                   $ 9,504   $11,688
                                                  ========   ========


(5)     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 income  before income taxes
follows (dollars in thousands):


<PAGE> 47

                                               Years Ended December 31,
                                          ---------------------------------
                                            2000         1999        1998
                                          --------     --------    --------
Amount computed at federal statutory
  rate of 34%                             ($7,453)     ($6,359)    ($3,538)
Write-down of unamortized goodwill not
  deductible for tax                        4,065
Amortization of non-deductible in-
  tangible assets                             840          533          -
Expenses not deductible for tax
  purposes                                     62          159          79
Losses not deductible for tax purposes        425          158          -
Exercise of non-qualified stock options       (44)        (272)         -
Losses for which no current benefits
  are available                             2,105        5,781       3,459
                                         ---------     --------    --------
Provision for income taxes                 $   -      $     -       $   -
                                         =========     ========    ========


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

                                                         December 31,
                                                      -----------------
                                                        2000     1999
                                                      -------  --------
    Deferred tax assets:
       Net operating loss carryforwards               $14,128  $12,295
       Alternative minimum tax carryforwards              770      770
       Research and development credit
         carryforwards                                  1,244    1,422
       Depreciation and amortization                     (152)   1,571
       Allowance for doubtful accounts                    137      546
       Inventory and warranty reserves                  1,786      860
                                                      -------   -------
    Net deferred tax assets                            17,913   17,464
    Less valuation allowance                          (17,913) (17,464)
                                                      -------   -------
    Deferred taxes                                    $    -    $   -
                                                      =======   =======

At December 31, 2000 and 1999, 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, 2000, there were unused net operating loss carryforwards (the
"NOL's")  for regular  federal tax  purposes  of  approximately  $41 million and
approximately  $8.3  million for  California  tax  purposes  expiring  from 2012
through 2020 and 2001 through 2005,  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, 2000, 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 carryforwards and approximately $2 million of
the California NOL  carryforwards  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.


<PAGE> 48

(6)  BORROWINGS

Revolving Credit Facility ("Bank Line of Credit")

The Bank Line of Credit, as amended, provides for borrowings based on the lesser
of $10 million or: (i) 85% of eligible  accounts  receivable,  as defined,  plus
(ii) the  lesser of $1.75  million or 23% of  eligible  inventory,  as  defined.
Effective  April 14, 2000,  interest under the Bank Line of Credit was increased
from prime plus .5% to prime (9.5% at  December  31,  2000) plus 1.5%.  The Bank
Line of Credit  matures in April 2002,  requires a facility fee of .25% based on
the  average  unused  portion  of the  maximum  borrowings,  contains  a default
interest rate provision of 2%, 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,  2000,  the
outstanding   balance  of  the  Bank  Line  of  Credit  was  $4.1   million  and
approximately  $.5 million of  additional  borrowings  were  available  based on
eligible  collateral.  The weighted interest rate on the Bank Line of Credit was
10.2% and 8.7% for the years ended December 31, 2000 and 1999, respectively.

At December 31,  2000,  the Company was not in  compliance  with the minimum net
worth  and  net  income  requirements  and is in  technical  default  under  the
compliance  provisions  of the Bank Line of Credit.  The Company is currently in
discussions  with  the  lender  to amend  the  financial  covenants.  Management
believes it will be successful  in such  discussions,  however,  there can be no
assurance of this success nor that  management  would be successful in finding a
replacement lender with acceptable terms.


Director Loans

At December 31, 1999,  current  borrowings  included  $1.6 million due Mr. Levy,
which was paid off and  satisfied  in full in  January  2000.  Between  June and
December 2000, Mr. Levy advanced an additional  $4.4 million to the Company.  Of
these  amounts,  the  Company  repaid $.7 million  and  satisfied  $2 million by
issuing  2,000  shares of the  Company's  Series G  Preferred  Stock with a face
amount of $2 million  (see Note 10 to  Consolidated  Financial  Statements).  At
December 31, 2000,  long-term  debt included  $1.7 million due to Mr. Levy,  the
maximum amount available under a revolving basis with interest at 10% per annum,
payable  quarterly  and  scheduled  to mature on  January  31,  2002.  Aggregate
interest  expense paid to Mr. Levy was  $134,000,  $112,000 and $217,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.

Subsequent to December 31, 2000 and through March 27, 2001, Mr. Levy advanced an
additional $1.9 million.

At December 31, 1998, current  borrowings  included $.3 million due to Mr. Levy.
During 1999,  Mr. Levy  advanced an additional  $3.6 million to the Company.  Of
those amounts,  the Company  satisfied $.8 million by issuing  395,000 shares of
the Company's common stock and satisfied $1.5 million by issuing 1,500 shares of
the Company's  Series E Convertible  Preferred  Stock with a face amount of $1.5
million (see Note 10 to Consolidated  Financial Statements) leaving $1.6 million
due to Mr. Levy at December  31,  1999,  the maximum  amount  available  under a
revolving basis with interest at 10% per annum.

In  connection  with various  loans made to the Company by 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.


<PAGE> 49

Long-Term Debt

   Notes Payable

At December 31, 2000, notes payable included the following:  (i) $5.1 million in
promissory  notes  issued  to  affiliates  of Mr.  Sykes  (the  former  majority
shareholder of Andataco) in connection  with the Andataco  acquisition,  bearing
interest at 9.5% per annum, and scheduled to mature in June 2004; and (ii) a $.5
million  promissory note payable to a private  investor  bearing interest at 10%
per annum, payable quarterly and maturing on January 31, 2002.

In December  1999, the Company  issued  1,878,462  shares of its common stock in
full satisfaction 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;  42,308 shares
of common stock in full satisfaction of $.1 million due to a company  controlled
by Mark Levy,  Mr.  Levy's son and a director of the Company until January 2000;
42,308  shares of common  stock in full  satisfaction  of $.1  million  due to a
company  controlled by another  member of the Levy family;  and 84,615 shares of
common  stock in full  satisfaction  of $.3  million  due to  Bernard  Green,  a
director  of  the  Company  (Mr.  Green).  On  the  date  of  satisfaction,  the
unamortized  discount  on the notes was $.5  million,  which was  recorded as an
extraordinary  loss on  extinguishment  of debt.  The remaining  long-term  debt
amounted to $1.2 million at December 31,  1999,  bore  interest at 10% per annum
and was  scheduled to mature on September 5, 2001.  In April and December  2000,
those notes were  satisfied  in full by the  issuance  of 439,154  shares of the
Company's common stock.

In connection with the issuance of $5 million of long-term debt in 1998 and $1.8
million in 1999,  the  Company  issued  warrants to  purchase  2,266,666  shares
(600,000 in 1999 and 1,666,666 in 1998) of the Company's  common stock including
warrants to purchase  333,332 shares of the Company's  common stock to Mr. Levy;
warrants  underlying  41,666  shares to Mark Levy;  41,667  shares to  companies
controlled by another member of the Levy family; and 83,333 shares to Mr. Green.
The warrants  were valued  under the  Black-Scholes  option-pricing  model as of
their  respective  dates of issuance at an  aggregate  of $1.2  million and were
recorded as a discount to the  long-term  debt, of which  $21,000,  $582,000 and
$137,000  was  amortized  as interest  expense for the years ended  December 31,
2000, 1999 and 1998, respectively.


   Convertible Notes

Certain convertible notes with a face amount of $400,000 and accrued interest of
$229,000  matured in May 2000. The Company has, at various  times,  attempted to
locate the debtor.  The  Company has  reclassified  this  liability  to accounts
payable and other at December 31, 2000.



<PAGE> 50

   Maturities

Scheduled and estimated  maturities of the Company's  borrowings  are as follows
(in thousands):

           Years ending December 31,
                   2001                  $4,086
                   2002                   2,158
                   2003                       -
                   2004                   5,100
                   2005                       -
                                         ------
              Total payments             11,344
              Less current portion       (4,086)
                                         ------
              Long-Term portion          $7,258
                                         ======


(7)  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,  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  fiscal  2000,  no single
customer accounted for more than 10% of sales;  however,  during fiscal 1999 and
1998,  sales  to two  customers  accounted  for 15% and  11%,  and 27% and  13%,
respectively.  Sales to  geographic  areas other than the United States have not
been significant.


(8)   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.

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 or operations or cash flows.


<PAGE> 51

Executive Management

On January 20, 2000,  the Company  entered into a letter  agreement  with Harris
Ravine  (Mr.  Ravine),  the former  Chief  Executive  Officer  of the  Company's
Andataco subsidiary,  relating to the termination of his employment. Pursuant to
the  agreement,  the Company  issued 80,000 shares of common stock to Mr. Ravine
and paid him $10,000 in cash.

On January 26, 2000,  the Company  entered  into a  termination  agreement  with
Lawrence F. Steffann (Mr. Steffann), the Company's former President, relating to
the termination of his employment. Pursuant to the agreement, the Company issued
43,479 shares of common stock to Mr. Steffann and paid him approximately $27,000
in cash.

Effective  January 17, 2000,  Larry Hemmerich (Mr.  Hemmerich) was appointed the
Company's new President and Chief  Executive  Officer.  In connection  with this
appointment,  the Company entered into a two-year employment  agreement with Mr.
Hemmerich,  providing for an annual base salary of $325,000, a $125,000 bonus in
the first year and a bonus  based upon  meeting  certain  objectives  set by the
Board of Directors in the second year. On October 18, 2000,  the Company and Mr.
Hemmerich  agreed to extend the term of his employment  agreement to January 16,
2003. In connection  with the first year bonus, on January 17, 2001, the Company
issued a $125,000, 10% note to Mr. Hemmerich, payable on June 30, 2001.


(9)  COMMON STOCK

In January 2000, the Company issued 776,119 shares of the Company's common stock
as  part  of the  purchase  price  of  the  assets  of  OneofUs  (see  Note 2 to
Consolidated Financial Statements).

In January 2000, the Company issued 123,479 shares of the Company's common stock
in connection with severance agreements with former officers of the Company.

In  February  2000,  all  1,667  outstanding  shares of the  Company's  Series A
Convertible Preferred Stock were converted into 1,666,667 shares of common stock
at a  conversion  price  of $.60 per  share.  In  addition,  700  shares  of the
Company's  Series D  Convertible  Preferred  Stock were  converted  into 700,000
shares of common stock, also at a $1.00 per share.

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.  The agreement  does not obligate the Company to draw any of the
funds.  Once per draw down  period,  the  Company may 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 will provide to the Company and the number of
shares the Company will issue to the  investment  group in return for that money
is 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  receives a 7%  discount  to the  market  price for the 22-day
period and the Company  receives  the settled  amount of the draw down less a 4%
fee payable to the placement agent.

In connection with this 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  (see  Note 11 to the
Consolidated  Financial  Statements).

The Company registered for resale the securities to be sold pursuant to the draw
downs and warrants.


<PAGE> 52

As of December 31, 2000,  the Company had issued  508,857 shares of common stock
and  received  net  proceeds  of  approximately  $1  million  pursuant  to  this
agreement.   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 July 2000, 3,000 shares of the Company's Series C Convertible Preferred Stock
were  automatically  converted  into  3,000,000  shares  of  common  stock  at a
conversion price of $1.00 per share.

During fiscal 2000 and 1999, the Company issued 439,154 and 2,523,462  shares of
common stock,  respectively  (including  733,462 shares to Mr. Levy in 1999), in
full satisfaction of $1.3 million and $6.8 million, respectively, of debt.

During  fiscal  2000  and  1999,  3,332  and 600  shares,  respectively,  of the
Company's Series F Convertible Preferred Stock were converted into 1,110,800 and
200,000 shares, respectively, of common stock at a conversion price of $3.00 per
share.

During fiscal 2000 and 1999, the Company issued 635,589 and 1,686,241  shares of
common stock, respectively, on the exercise of stock options and warrants for an
aggregate amount of $1.2 million and $2.8 million, respectively.

In April 1999,  the Company  issued 500,000 shares of common stock and a warrant
to purchase an aggregate of 250,000  shares of common stock at a purchase  price
of $2.00 per share to a private investor, for $1 million in cash.

In November 1999, the Company  acquired the remaining  shares of Andataco common
stock  by  merging  Andataco  with a  wholly-owned  subsidiary,  which  had been
organized for that purpose.  In the merger, the Company issued 924,118 shares of
common  stock,  with  an  aggregate  value  of  $1.8  million,  to the  Andataco
shareholders  in exchange for the remaining  shares of Andataco common stock. As
part of the acquisition  cost of Andataco,  the Company issued 168,578 shares of
common stock to a financial advisor of Andataco.

With the  exception of 142,858  shares of common stock issued in December  2000,
all of the foregoing shares of common stock have been registered for resale.

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


(10)  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 and 1998, the Company  recorded $.3 million
and $1.2 million,  respectively, as an additional embedded dividend attributable
to the beneficial conversion privilege on its convertible preferred stock.

Series A

On July 7, 1998, the Company  borrowed $1 million from a private  investor under
an 8% Convertible Subordinated Debenture (the "Debenture"), payable on September
25, 1998, as extended. In September 1998, the Debenture was converted into 1,667
shares of the Company's 8% Convertible  Preferred Stock, Series A (the "Series A
Preferred Stock").


<PAGE> 53

The Series A  Preferred  Stock with a stated  value of $1 million as of December
31,  1999  accrued  dividends  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 was converted  into  1,666,667  shares of the Company's  common
stock (see Note 9 to the Consolidated Financial Statements).

Series B

Effective April 14, 1998, the Company  received $3.2 million in cash (net of $.3
million in issuance  costs),  including $1 million from Mr. Levy, from a private
placement of 8% convertible  preferred stock,  Series B (the "Series B Preferred
Stock").  The Series B Preferred  Stock was  convertible  into common stock,  on
various dates  through April 2000, at a conversion  price equal to the lesser of
$1.44  per  share  or 77% of the  market  price at the  date of  conversion.  At
closing, the Company issued warrants to purchase 280,000 shares of the Company's
common stock  (including  80,000 to Mr. Levy),  exercisable  at any time through
April 2001 at an exercise price of $1.50 per share.

In July and  September  1998,  $200,000 of the Series B Preferred  Stock held by
unrelated  private  investors was converted into 394,949 shares of the Company's
common stock.

On October 30, 1998, the Company redeemed $2.3 million of the Series B Preferred
Stock held by unrelated private investors for approximately $2.5 million in cash
(including  a premium of $.1 million and accrued  dividends  of $.1 million) and
warrants to purchase 300,000 shares of the Company's  common stock,  exercisable
upon issuance at $1.00 per share and expiring in October  2001.  In  conjunction
with this  redemption,  effective  October 28,  1998,  the Company  issued 1,000
shares of 8%  convertible  preferred  stock,  Series C (the  "Series C Preferred
Stock")  with a stated  value of $1 million in  exchange  for the  remaining  $1
million of Series B Preferred Stock which was held by Mr. Levy.

As a  result  of  these  two  transactions,  all  of the  Company's  convertible
preferred  stock  that was based on a  variable  conversion  price was  redeemed
either for cash or preferred stock.

Series C

In September  and October 1998,  the Company  satisfied $2 million of borrowings
from Mr. Levy by issuing 2,000 shares of Series C Preferred  Stock with a stated
value of $2 million.  Together  with the $1 million of Series C Preferred  Stock
issued in exchange for Series B Preferred Stock, at December 31, 1999,  Series C
Preferred Stock,  with a stated value of $3 million accrued  dividends 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, the Company  converted the Series C Preferred Stock into 3,000,000
shares of the Company's common stock in accordance with an automatic  conversion
requirement(see Note 9 to Consolidated Financial Statements).

Series D

During  October 1998,  the Company  received $2.7 million in cash from unrelated
private  investors in a private  placement of 2,700 shares of its 8% convertible
preferred stock, Series D (the "Series D Preferred Stock"). Of this amount, $2.5
million was used in the redemption of the Series B Preferred Stock. The Series D
Preferred  Stock  with a stated  value of $2  million  and  $2.7  million  as of
December  31, 2000 and 1999,  respectively,  accrues  dividends at 8% per annum,
payable  quarterly,  is  convertible  into shares of the Company's  common stock
based on a fixed  conversion  price of $1.00  per  share,  and has an  automatic
conversion  feature in which each share not converted into the Company's  common
stock by October 28, 2001, will be automatically converted. On February 1, 2000,
$.7 million of the Series D Preferred Stock was converted into 700,000 shares of
the Company's common stock (see Note 9 to Consolidated Financial Statements).


<PAGE> 54

Series E

In a private placement in June 1999 of its Series E Convertible  Preferred Stock
(the  "Series E Preferred  Stock"),  the Company  issued  3,500  shares 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 and 1999,  requires  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 is convertible  into shares of the
Company's common stock based on a fixed conversion price of $3.00 per share.

Series F

As part of the  acquisition  of Andataco in June 1999,  the Company issued 4,654
shares of Series F Convertible  Preferred Stock (the "Series F Preferred Stock")
to Mr.  Sykes,  with an  original  stated  value of $4.7  million.  The Series F
Preferred Stock is convertible  into the Company's common stock based on a fixed
conversion price of $3.00 per share.  During fiscal 2000 and 1999, 3,332 and 600
shares, respectively,  of Series F Preferred Stock were converted into 1,110,800
and 200,000 shares, respectively,  of the Company's common stock. As of December
31, 2000 and 1999,  outstanding Series F Preferred Stock of $.7 million and $4.1
million,  respectively,  required  quarterly  dividends at the following  annual
rates: 8% during the first year, 9% during the second year and 10% thereafter.

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 "Warrants"). The Warrants provided that if any portion of
the Series G Preferred  Stock is redeemed by the Company prior to June 30, 2001,
a corresponding pro-rata portion of the warrant would be cancelled.


(11) 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 Option  Plan (the  "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  value on the date of grant over the  exercise
price.

Under the Plan, qualified and nonqualified stock options to purchase up to seven
million  shares of the  Company's  common  stock  may be  granted  to  officers,
directors,  key  employees  and  non-employees.  The maximum term of the options
granted under the Plan is ten years.  The stock  options  granted under the Plan
generally vest over three to five years annually on an equal basis.

SFAS No.123, "Accounting for Stock-Based Compensation",  requires the Company to
provide pro forma information  regarding net income and earnings per share as if
compensation  cost for stock options granted under the Plan, if applicable,  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 96% to 107% for 2000, and 60% for
1999 and 1998; and risk-free  interest rates ranging from 4.9% to 5.1% for 2000,
5.6% for 1999, and 5.3% for 1998.


<PAGE> 55

Under the accounting provisions of SFAS 123, the Company's net loss and loss per
share,  for the years ended  December  31,  2000,  1999 and 1998 would have been
reduced  to the pro forma  amounts  indicated  below (in  thousands,  except per
share):

                            Years Ended December 31,
                            ------------------------------
                              2000       1999       1998
                            --------   --------   --------
     Net loss attributable
      to common
      shareholders:
       As reported          ($22,606)  ($19,938)  ($11,888)
       Pro forma            ($24,112)  ($20,108)  ($12,317)
     Loss per share:
       As reported             ($.69)     ($.89)     ($.63)
       Pro forma               ($.73)     ($.89)     ($.65)

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, January 31, 1998        1,765           2.48
  Granted - exceeded
    market value                 1,160           1.14              .52
  Granted - equal to
    market value                   881           1.38             1.03
  Forfeited                       (860)          1.98
                                 ------         -----
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
                                 ------         -----
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
                                =======         =====

----------
(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 Plan. On November 1, 1999, the shareholders
of the Company  approved the amendment of the 1996 Stock Option Plan to increase
the number of shares  reserved  for  issuance  under the Plan from  2,500,000 to
7,000,000.


<PAGE> 56

At  December  31,  2000,  1999 and  1998,  a total of  1,371,000,  853,000,  and
1,189,000,  respectively,  of the outstanding  options were  exercisable  with a
weighted-average  exercise price of $2.29, $2.20, and $2.31,  respectively,  per
share.  The number of shares available to grant under the Plan was 1,378,140 and
1,708,503 as of December 31, 2000 and 1999, respectively.

The following table summarizes information about fixed stock options at December
31, 2000:
                                                                   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        2000          Life        Price       2000          Options
           (in thousands)                         (in thousands)
--------    -----------   -----------   --------  -----------     -----------
$ .50-$1.75       804       8.4 years     $1.35         414          $1.35
$1.81-$2.50     2,326       8.9 years     $2.24         722          $2.33
$2.56-$3.69     1,184       9.2 years     $3.09          35          $2.93
$4.00-$6.31       235       6.5 years     $4.13         200          $4.00
                -----       ---------     -----       -----          -----
                4,549       8.8 years     $2.40       1,371          $2.29
                =====       =========     =====       =====          =====

At December 31, 2000, the Company had outstanding warrants under which 2,575,133
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, January 31, 1998        555              $2.10-$2.35   $1,179,000

Warrants issued                4,324              $1.00-$2.35    5,691,000
Warrants exercised            (1,450)             $1.00-$1.50   (1,675,000)
Warrants canceled             (1,667)                $1.50      (2,500,000)
                            ----------            -----------   -----------
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
                            ==========            ============  ===========


<PAGE> 57

                              Number
                            of Shares
                            Subject to
        Expiration           Warrants         Exercise
           Date           (in thousands)        Price
        ----------        --------------      --------

      March 2001                333              $1.25
      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
      December 2003             500              $1.50
                            ---------
                              2,575
                            =========

As of December 31, 2000, the Company had reserved common stock for the following
purposes (in thousands):

         Convertible preferred stock             3,407
         1996 Stock Option Plan                  5,928(a)
         Stock warrants                          2,575
                                                ------
                                                11,910
                                                ======

----------
(a) Consists of options to purchase 4,549 shares which were outstanding,  and an
additional 1,379 shares available to grant under the Plan.


(12)  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
approximately $331,000 and $193,000 during the years ended December 31, 2000 and
1999, respectively, 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 Chief Financial Officer,  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.


<PAGE> 58

(13)  LEASES

The Company leases its operating  facilities under operating leases which expire
at various dates through March 2003. At December 31, 2000, future minimum rental
payments under  operating  leases that have initial or remaining terms in excess
of one year were as follows (in thousands):

                                       Total
                                     -------
                      2001            $  790
                      2002               538
                      2003               178
                                     -------
                                      $1,506
                                     =======

Rent expense was $871,000,  $790,000,  and $513,000 for the years ended December
31, 2000, 1999 and 1998, respectively.


(14)  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, 2000.


(15)  SUBSEQUENT EVENTS
     Borrowings

On January 16, 2001,  Mr. Levy loaned the Company $.6 million under a promissory
note bearing  interest at 10%,  payable  quarterly,  and maturing on January 31,
2002.  In February  and March  2001,  the Company  received an  additional  $3.8
million in cash from private  investors,  under  convertible  promissory  notes,
(including  $1.3  million  from  Mr.  Levy),  bearing  interest  at 8%,  payable
semi-annually  and  maturing  on March  31,  2003.  The  notes  are  convertible
immediately  into the  Company's  common  stock at $1.00 per  common  share.  In
connection  with these  notes,  the  Company  issued  warrants  to  purchase  an
aggregate of 937,500  shares  (including  312,500  shares to Mr.  Levy),  of the
Company's common stock at $1.20 per share,  exercisable at issuance and expiring
on March 31, 2004.


(16)  FOURTH QUARTER ADJUSTMENTS

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 re-valuation of certain inventory,  which included obsolete inventory and
components  associated  with products which the Company has recently  decided to
phase 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
re-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.


<PAGE> 59

(17) QUARTERLY RESULTS OF OPERATIONS (Unaudited)

The  following  is a summary of the  quarterly  operations  for the years  ended
December 31, 2000 and 1999 (in thousands).


2000                                Mar. 31     Jun. 30     Sept. 30     Dec. 31
----                             -----------------------------------------------

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) (b)(17,296)
Net income (loss)                 (a) 2,650      (2,896)     (4,028) (b)(17,647)
Income (loss) available to
  common stock                    (a) 2,439      (3,088)     (4,171) (b)(17,786)
Net income (loss) per
  common stock:
    Basic                            $  .08       ($.10)      ($.12)      ($.51)
    Diluted                          $  .07       ($.10)      ($.12)      ($.51)

1999
----
Sales                               $ 1,411     $ 9,398     $17,546     $12,734
Gross Profit                             88       1,232       5,015       3,428

Loss from operations                 (2,261)     (3,497)     (1,583)     (9,160)
Loss before preferred
  dividends and extraordinary
  loss                               (2,471)     (3,944)     (2,047)     (9,777)
Extraordinary loss                      -           -           -          (465)
Net loss                             (2,471)     (3,944)     (2,047)    (10,242)
Loss available to common stock       (2,690)     (4,358)     (2,353)    (10,537)
Net loss per common stock:
  Basic and diluted                  ($ .13)      ($.19)      ($.10)      ($.45)

----------
(a) Net income includes gain on sale of assets of Borg Adaptive  Technologies of
$5.6 million.

(b) See Note 16 regarding Fourth Quarter Adjustments.


<PAGE> 60

               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,  except as to Notes
6 and 15, which are as of March 27, 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  loses  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, except as to
Paragraph four of Note 6 and
Note 15, which are as of March 27, 2001


<PAGE> 61


                            nSTOR TECHNOLOGIES, INC.
            Schedule I--Condensed Financial Information of Registrant
                  Fiscal Years Ended December 31, 2000 and 1999

The following  represents the condensed  unconsolidated  balance sheet for nStor
Technologies,  Inc.  as of  December  31,  2000  and  1999,  and  the  condensed
unconsolidated  statements  of  operations  and  cashflows  for the years  ended
December 31, 2000 and 1999.

                     CONDENSED UNCONSOLIDATED BALANCE SHEETS
                                 (in thousands)

                                                             December 31,
ASSETS                                                    2000           1999
------                                                ----------     ----------
Current assets:
  Cash and cash equivalents                           $        8     $      466
  Prepaid expenses and other                                   -             79
                                                      ----------     ----------
Total current assets                                           8            545

Investments in and receivables from
  subsidiaries                                               579         14,945

Other non-current assets                                       -             68
                                                      ----------     ----------
                                                      $      587     $   15,558
                                                      ==========     ==========
LIABILITIES
-----------
Current liabilities:
   Borrowings                                         $    2,158     $    2,214
   Accounts payable and other                                855            742
                                                      ----------     ----------
Total current liabilities                                  3,013          2,956

Long-term debt                                             5,100          6,329
                                                      ----------     ----------
        Total liabilities                                  8,113          9,285
                                                      ----------     ----------

SHAREHOLDERS' EQUITY
--------------------
Preferred stock, $.01 par; 1,000,000 shares
 authorized, in order of preference:
  Convertible (except for Series G) preferred
   stock issued and outstanding as of
   December 31, 2000 and 1999, respectively:
   Series F, 722 and 4,054, aggregate
   liquidation  value  $722  and  $4,054;
   Series  A,  0  and  1,667,  aggregate
   liquidation value $0 and $1,000; Series C,
   0 and 3,000, aggregate liquidation
   value $0 and $3,000;  Series D, 2,000 and 2,700,
   aggregate liquidation value
   $2,000 and $2,700;  Series E, 3,500
   in 2000 and 1999,  aggregate  liquidation
   value $3,500; Series G, 2,000 and 0, aggregate
   liquidation value
   $2,000 and $0                                               -              -
Common stock, $.05 par; 75,000,000 shares
  authorized; 35,478,489 and 26,517,824 shares
  issued and outstanding at December 31, 2000
  and December 31, 1999, respectively                      1,773          1,331
Additional paid-in capital                                71,529         63,164
Deficit                                                  (80,828)       (58,222)
                                                       ----------     ----------
Total shareholders' (deficit) equity                      (7,526)         6,273
                                                       ----------     ----------
                                                       $      587     $   15,558
                                                       ==========     ==========


<PAGE> 62


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


                                                              Years Ended

                                                           2000          1999
                                                      -----------   -----------
Loss from investment in subsidiaries                    ($20,964)     ($16,137)

Other income                                                  44            92
Selling, general and administrative expense                  319           637
Interest expense                                             682         1,557
                                                      -----------   -----------
Loss before preferred dividends and
  extraordinary loss                                     (21,921)      (18,239)

Extraordinary loss from debt extinguishments
  (net of tax of $0)                                           -          (465)
                                                      -----------   -----------
Net loss                                                 (21,921)      (18,704)

Preferred stock dividends                                   (685)         (902)
Embedded dividend attributable to beneficial
  conversion privilege of convertible
  preferred stock                                              -          (332)
                                                      -----------   -----------
Loss available to common stock                          ($22,606)     ($19,938)
                                                      ============  ===========


<PAGE> 63


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

                                                                Years Ended
                                                            2000         1999
CASH FLOWS FROM OPERATING ACTIVITIES:                     ---------    ---------

  Net loss                                                ($21,921)    ($18,704)
  Adjustments to reconcile net loss to
    net cash used by operating activities:
      Gain on sale of assets of Borg Adaptive
        Technologies                                        (5,575)           -
      Amortization of deferred loan costs                       21          620
      Amortization of deferred compensation costs                -          171
      Loss of extinguishments of debt                            -          476
      Changes in assets and liabilities, net of
       effects from acquisition:
        Decrease in receivables from subsidiaries           16,684        8,567
        Decrease (increase) in prepaid expenses
         and other                                             147         (141)
        (Decrease) increase in accounts payable
         and other liabilities                                (485)         188
                                                          ---------    ---------
Net cash used by operating activities                      (11,129)      (8,823)
                                                          ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:

  Cash paid for acquisitions                                  (293)      (1,354)
  Net proceeds from sale of assets of Borg
    Adaptive Technologies                                    7,013            -
                                                          ---------    ---------
Net cash provided by investing activities                    6,720       (1,354)
                                                          ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:

  Proceeds from borrowings                                   4,858        7,075
  Repayments on borrowings                                  (2,285)      (1,200)
  Issuance of common stock, net of issuance cost               961        1,000
  Issuance of convertible preferred stock, net of costs          -        1,962
  Proceeds from exercise of stock options and warrants       1,178        2,519
  Cash paid for preferred stock dividends                     (761)        (823)
                                                          ---------    ---------
Net cash provided by financing activities                    3,951       10,533
                                                          ---------    ---------
Net decrease in cash and cash equivalents during
  the year                                                    (458)         356
Cash and cash equivalents at beginning of year                 466          110
                                                          ---------    ---------
Cash and cash equivalents at end of year                  $      8     $    466
                                                          =========    =========


<PAGE> 64


                            nSTOR TECHNOLOGIES, INC.
                 Schedule II-- Valuation and Qualifying Accounts
               Fiscal Years Ended December 31, 2000, 1999 and 1998
                                 (in thousands)


                                               Additions
                         Balance               Resulting                Balance
                            at      Additions    from                     at
                        Beginning    Charged    Merger/                 End of
                         of Year    to Income    Other    Deductions*    Year
                        ----------  ---------  ---------  -----------  ---------

Allowance for Doubtful
 Accounts Receivable:
  2000..................   $1,604     $  912      $  -       ($2,114)     $  402
  1999..................      502        954        228          (80)      1,604
  1998..................      500        837         -          (835)        502

Allowance for Inventory
 Obsolescence:

  2000..................   $3,419     $3,988      $  -       ($2,505)     $4,902
  1999..................      428        306      3,276         (591)      3,419
  1998..................    1,839      1,354         -        (2,765)        428


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


<PAGE> 65

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 2001 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.


<PAGE> 66


                                     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 30 of this Form 10-K.

               (2) Financial  statement  schedules have been omitted because
               they  are not  required,  or  because  the  information  required
               therein is set forth in the Consolidated  Financial Statements or
               the notes thereto.

               (3) Exhibits - See Exhibit Index at page 67-70 of this Form 10-K.


(b)            No reports were filed or amended by the Registrant during the
               fourth quarter of 2000.


<PAGE> 67


                                  EXHIBIT INDEX

Exhibit
Number                             Description

2.1  Asset Purchase Agreement, dated November 30, 1999, by and among Registrant,
     nStor Taiwan,  Inc.,  OneofUs Company  Limited and certain  shareholders of
     OneofUs (4)

2.2  Purchase Agreement,  dated March 2, 1999, by and among Registrant, W. David
     Sykes and the Sykes Children's Trust of 1993 dated November 22, 1993 (11)

2.3  Amendment No. 1 to Purchase  Agreement,  dated April 26, 1999, by and among
     Registrant, W. David Sykes, the Sykes Family Trust and the Sykes Children's
     Trust of 1993 dated November 22, 1993 (12)

2.4  Amendment No. 2 to Purchase  Agreement,  dated April 26, 1999, by and among
     Registrant, W. David Sykes, the Sykes Family Trust and the Sykes Children's
     Trust of 1993 dated November 22, 1993 (12)

2.5  Merger  Agreement,  dated August 27,  1999,  by and among  Registrant,  NTI
     Acquisition Corp. and Andataco, Inc. (11)

2.6  Asset  Purchase  Agreement,  dated  January  10,  2000,  by and among nStor
     Corporation,  Inc., Borg Adaptive  Technologies,  Inc., QLogic  Acquisition
     Corporation and QLogic Corporation (6)

3.1  Restated Certificate of Incorporation of Registrant, as amended (5)

3.2  Restated Bylaws of Registrant (14)

4.1  Form of Warrant, between Registrant and certain private investors(1)

4.2  Form of Subscription Agreement,  between Registrant and and certain private
     investors (1)

4.3  Form of  Registration  Rights  Agreement,  between  Registrant  and certain
     private investors (1)

4.4  Warrant to purchase 200,000 shares of common stock issued to H. Irwin Levy,
     dated December 29, 2000 (1)

4.5  Warrant to purchase 500,000 shares of common stock issued to H. Irwin Levy,
     dated December 29, 2000 (1)

4.6  Subscription Agreement,  dated December 29, 2000, between Registrant and H.
     Irwin Levy (1)

4.7  Certificate of Designation of Series G Preferred Stock (1)

4.8  Registration Rights Agreement,  dated December 29, 2000, between Registrant
     and H. Irwin Levy (1)

4.9  Warrant to purchase common stock issued to  Wishmasters,  dated May 9, 2000
     (3)

4.10 Warrant to purchase common stock issued to Ladenburg Thalmann, dated May 9,
     2000 (3)

4.11 Common Stock Purchase Agreement between  Registrant and Wishmasters,  dated
     May 4, 2000 (3)


<PAGE> 68

4.12 Registration Rights Agreement between Registrant and Wishmasters, dated May
     4, 2000 (3)

4.13 Form of  Warrant,  dated  January  26,  1999,  issued  in  connection  with
     Promissory Notes between Registrant and (i) Herbert Gimelstob,  for 200,000
     shares, (ii) Maurice Halperin,  for 200,000 shares, (iii) Patrice Auld, for
     100,000 shares and (iv) James P. Marden, for 100,000 shares (13)

4.14 Certificate of Designation of Series D Convertible Preferred Stock (9)

4.15 Certificate of Designation of Series E Convertible Preferred Stock (12)

4.16 Certificate of Designation of Series F Convertible Preferred Stock (12)

4.17 Form of Warrant,  dated  September  22,  1998,  issued in  connection  with
     extending  certain  subordinated  notes  (aggregate of 1,666,666  shares of
     which 333,334 remained unexercised at December 31, 2000) (13)

4.18 Form of Subscription Agreement for Series D Convertible Preferred Stock (9)

4.19 Form of Registration  Rights  Agreement for Series D Convertible  Preferred
     Stock (9)

4.21 By-Laws of Registrant, as amended -  see Exhibit 3.2 above.

4.20 Restated Certificate of Incorporation of Registrant - see Exhibit 3.1 above
     4.21 By-Laws of Registrant, as amended - see Exhibit 3.2 above

4.22 Form of  Subscription  Agreement,  dated  December 16,  1999,  by and among
     Registrant and certain noteholders (5)

4.23 Warrant, dated June 8, 1999, issued to W. David Sykes (12)

4.24 Form of  warrant,  dated June 8,  1999,  issued to  purchasers  of Series E
     Convertible Preferred Stock (12)

4.25 Registration  Rights Agreement,  dated June 8, 1999, between Registrant and
     W. David Sykes (12)

4.26 Form of Registration  Rights  Agreement,  dated June 8, 1999, issued to the
     purchasers of Series E Convertible Preferred Stock (12)

4.27 Form of Employee Agreement between Registrant and W. David Sykes (12)

4.28 Letter  Agreement,  dated June 8, 1999,  between H. Irwin Levy and W. David
     Sykes (12)

10.1 Form of 8% Convertible Subordinated Promissory Note, between Registrant and
     certain private investors (1)

10.2 Promissory Note for $1,050,000, dated November 15, 2000, between Registrant
     and MLL Corp. (replaced note at exhibit 10.10)(1)

10.3 Promissory Note for $500,000,  dated November 20, 2000,  between Registrant
     and Patrice Auld (1)

10.4 Promissory Note for $650,000,  dated December 29, 2000,  between Registrant
     and H. Irwin Levy (replaced note at exhibit 10.9) (1)

10.5 Promissory Note for $600,000,  dated January 16, 2001,  between  Registrant
     and H. Irwin Levy (1)


<PAGE> 69

10.6 Promissory Note for $125,000,  dated January 17, 2001,  between  Registrant
     and Larry Hemmerich (1)

10.7 Letter  Agreement,  dated October 18, 2000,  between  Registrant  and Larry
     Hemmerich, regarding revisions to Mr. Hemmerich's Employment Agreement (1)

10.8 Assumption  and Amendment  Agreement,  dated  September  14, 2000,  between
     Registrant and Wells Fargo Credit, Inc. (2)

10.9 Third Amended and Restated Line of Credit Note between Registrant and Wells
     Fargo Credit, Inc., dated September 14, 2000 (2)

10.10 Continuing Guaranty between Registrant and Wells Fargo Credit, Inc. (2)

10.11 Promissory Note, dated July 31, 2000, between Registrant and H. Irwin Levy
      in the amount of $2,500,000 (2)

10.12 Promissory  Note, dated October 11, 2000, between  Registrant and H. Irwin
      Levy in the amount of $2,550,000 (replaced note at exhibit 10.8) (2)

10.13 Promissory Note, dated October 11, 2000, between  Registrant and MLL Corp.
      in the amount of $750,000(2)

10.14 Revised  Employment  Agreement  between Registrant  and  Larry  Hemmerich,
      President and Chief Executive Officer of Registrant (2)

10.15 Escrow  Agreement  among  Registrant, Wishmasters  and  Epstein,  Becker &
      Green, P.C., dated May 4, 2000 (3)

10.16 9.5% Subordinated Note, dated June 8, 1999, issued to the Sykes Children's
      Trust of 1993 (12)

10.17 9.5% Subordinated  Note,  dated June 8, 1999,  issued to the Sykes  Family
      Trust (12)

10.18 Form of  Employment  Agreement  between  Registrant  and  Johan Olstenius,
      Stuart  Campbell and Fahim Ahmed in connection with the acquisition of the
      assets of OneofUs Company Limited (4)

10.19 Employment Agreement between Registrant and Larry Hemmerich (4)

10.20 Promissory Note for $500,000, dated March 15, 1999, between Registrant and
      Maurice Halperin (13)

10.21 Promissory Note for $1 million,  dated March 1, 1999,  between  Registrant
      and H. Irwin Levy (13)

10.22 Form of Promissory  Note,  dated January 26, 1999,  between Registrant and
      (i) Herbert Gimelstob ($600,000), (ii) Maurice Halperin ($600,000),  (iii)
      Patrice Auld ($300,000) and (iv) James P. Marden ($300,000) (13)

10.23 1996 Stock Option Plan, dated October 5, 1996 (14)

10.24 Software License  Agreement,  dated  January 10, 2000,  by and among nStor
      Corporation, Inc. and QLogic Acquisition Corporation (6)

10.25 Amendment to Registrant's 1996 Stock Option Plan (8)

10.26 Modification  dated November 1, 1999, of Demand Note, dated July 15, 1999,
      between Registrant and H. Irwin Levy (10)


<PAGE> 70

10.27 Form of Amended and Restated  Promissory  Note,  dated  January 29,  1999,
      between Registrant  and (i) Herbert  Gimelstob  ($600,000),  (ii)  Maurice
      Halperin ($600,000),(iii) Patrice Auld ($300,000) and (iv) James P. Marden
      ($300,000) (10)

10.28 Modification,  dated  December 1, 1999, of Demand Note dated July 15, 1999
      between Registrant and H. Irwin Levy (8)

10.29 Modification, dated  December 16, 1999, of Demand Note dated July 15, 1999
      between Registrant and H. Irwin Levy (8)

21   Subsidiaries of Registrant

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

2)   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.

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

4)   Incorporated  by  reference  to  Exhibits  previously  filed as Exhibits to
     Registrant's  Form 10-Q for the quarter ended March 31, 2000, filed May 15,
     2000.

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

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

7)   Incorporated  by  reference  to  Exhibits  previously  filed as Exhibits to
     Registrant's Form S-8 Registration Statement,  dated January 6, 2000, filed
     January 10, 2000.

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

9)   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.

10)  Incorporated  by  reference  to  Exhibits  previously  filed as Exhibits to
     Registrant's  Form 10-Q for the quarter  ended  September  30, 1999,  filed
     November 15, 1999.

11)  Incorporated  by  reference  to  Exhibits  previously  filed as Exhibits to
     Registrant's Form 8-K dated and filed November 5, 1999.

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

13)  Incorporated  by  reference  to  Exhibits  previously  filed as Exhibits to
     Registrant's  Form 10-K for the year ended  December 31, 1998,  filed April
     15, 1999.

14)  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.

<PAGE> 71


    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/ Larry Hemmerich
April 13, 2001             By:________________________________
                              Larry Hemmerich, Chief Executive
                              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/ H. Irwin Levy
April 16, 2001        ___________________________________________
                      H. Irwin Levy, Chairman of the Board


                           /s/ Michael L. Wise
April 16, 2001        ___________________________________________
                      Michael L. Wise, Director


                           /s/ Bernard Green
April 13, 2001        ___________________________________________
                      Bernard Green, Director


                           /s/ Roger H. Felberbaum
April 16, 2001        ___________________________________________
                      Roger H. Felberbaum, Director


                           /s/ Larry Hemmerich
April 13, 2001        ___________________________________________
                      Larry Hemmerich, Chief Executive Officer
                       and Director


                           /s/ Jack Jaiven
April 13, 2001        ___________________________________________
                      Jack Jaiven, Principal Financial
                      Officer and Principal Accounting Officer