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, 1999

                                              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 Rd., 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
                                      ---


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.[ ]


                                       1
<PAGE>


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, 1999.  Based
on the last  sales  price of the Common  Stock on the  American  Stock  Exchange
("AMEX")  on  March  15,  2000  ($5.75),  the  aggregate  market  value  of  the
approximately   20,605,000   shares  of  the   voting   Common   Stock  held  by
non-affiliates was approximately  $118.5 million.  By the foregoing  statements,
the Registrant does not intend to imply that any of these officers, directors or
beneficial  owners are affiliates of the Registrant or that the aggregate market
value, as computed pursuant to rules of the Securities and Exchange  Commission,
is in any way  indicative  of the amount which could be obtained for such shares
of Common Stock.

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:

              31,387,228 shares of Common Stock, par value $.05 per
                  share, were outstanding as of March 15, 2000.

                       DOCUMENTS INCORPORATED BY REFERENCE

             Definitive Proxy Statement of nStor Technologies, Inc.
                   for the 2000 Annual Meeting of Stockholders
                           (incorporated in Part III)



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<PAGE>

                                     PART I

Item 1.   Business

GENERAL

nStor Technologies, Inc., through its operating subsidiaries, nStor Corporation,
Inc.  and  Andataco,   Inc.   (Andataco)  is  a  manufacturer  and  supplier  of
high-availability  (ability to remain on line and accessible),  high-performance
(ability  to  record  and  access  data  with the  greatest  amount of speed and
accuracy)  Internet storage and customized Storage Area Network (SAN) solutions,
including external RAID (Redundant Array of Independent  Disks) solutions,  tape
backup products and advanced  storage  management  software  solutions.  We were
incorporated as a Delaware corporation in 1959.

Our product line supports a variety of operating  systems,  including  Microsoft
Windows NT, Novell  NetWare,  IBM OS/2, Mac, SCO UNIX,  UnixWare,  SGI IRIX, Sun
Solaris,   and  Linux.  Our  product  line  utilizes  technology   architectures
including;  Fibre Channel,  Ultra2 LVD (Low Voltage  Differential),  SCSI (Small
Computer Systems  Interface),  Ultra SCSI, and Ultra160 SCSI. Our RAID solutions
provide  data  storage  solutions,   particularly  for  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 reseller and Original  Equipment  Manufacturer (OEM)
partners worldwide. With company-owned operations in the United States and Asia,
and strategic partners in Europe,  Latin America,  Canada and Australia,  we are
well  positioned  to meet  the  demanding  storage  requirements  of our  global
customers.

On  June 8,  1999,  we  purchased  approximately  76% of the  total  issued  and
outstanding common stock of Andataco from affiliates of W. David Sykes, the then
President  of  Andataco  (Mr.  Sykes),  for  $5.1  million,  in the form of 9.5%
subordinated  promissory  notes,  due in  2004.  As part of the  acquisition  of
Andataco,  we 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 our
Series F convertible  preferred stock convertible into an aggregate of 1,551,333
shares of our common stock based on a conversion  price of $3.00 per share,  and
three year warrants to purchase an additional 155,133 shares of our common stock
for $3.30 per share.

On November 2, 1999, we acquired the remaining  shares of Andataco  common stock
by merging Andataco with a wholly owned subsidiary,  which we organized for that
purpose.  In the merger,  we issued  approximately  924,000 shares of our common
stock,  with an aggregate value of $1,848,000,  to the Andataco  stockholders in
exchange  for the  remaining  shares of Andataco  common  stock.  The  aggregate
consideration  paid in the acquisition of 100% of Andataco totaled $14.4 million
representing  $12.8  million  in  purchase  consideration  and $1.6  million  in
transaction costs.

The  acquisition  of Andataco was  accounted  for using the  purchase  method of
accounting.  As a result, we have included the results of operations of Andataco
beginning from the respective dates of acquisition.  We believe that as a result
of the Andataco acquisition,  the comparative financial information prior to the
Andataco acquisition may not be meaningful.


                                       3
<PAGE>

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

Recent Developments

On January 10, 2000, we sold substantially all of the assets of our wholly-owned
subsidiary,  Borg Adaptive  Technologies,  including certain patented technology
referred  to  as  Adaptive  RAID,  to  a  wholly  owned   subsidiary  of  QLogic
Corporation,  for  $7.5  million  in cash  and we  expect  to  report  a gain of
approximately  $6.5  million  during the first  quarter of 2000.  As part of the
sale, we retained a perpetual license in and to the Adaptive RAID technology. We
do not anticipate that future  revenues will be materially  affected as a result
of this transaction.

Effective  January 17,  2000,  Mr.  Larry  Hemmerich  was  appointed  as our new
President and Chief Executive Officer and as a director.  Mr. Hemmerich replaces
Lawrence F.  Steffann who resigned as President and director  effective  January
14, 2000. From 1992 to 1997, Mr. Hemmerich served as Executive Vice President of
Data General and was  responsible  for the  development  and  management of Data
General's  Clariion  computer  storage  division.  Most recently,  Mr. Hemmerich
served as General  Manager  of the  Software  and SAN  Management  Operation  of
Hewlett-Packard's Enterprise Storage Business Unit.

On January  19,  2000,  we acquired  substantially  all of the assets of OneofUs
Company  Limited  (OneofUs)  for an  aggregate  purchase  price  of  $2,850,000,
consisting  of  $250,000  cash and  776,000  shares of our common  stock with an
aggregate value of $2,600,000  (based  approximately on the average market price
of our stock  during the ten (10)  trading  days ended  January 19,  2000).  The
shares  were  issued  to  three  selling  stockholders  pursuant  to  employment
agreements   and  to  a  fourth  selling   stockholder  in  connection   with  a
confidentiality,  noncompetition  and  nonsolicitation  agreement.  We agreed to
register  the  shares on a  Registration  Statement  on Form S-3.  OneofUs  is a
Taiwan-based,  privately-held  designer of high  performance  Fibre Channel RAID
controllers and storage solutions for open systems and the SAN market.

INDUSTRY

During recent years, the demand for increased  information  storage capacity has
grown dramatically.  Businesses today often rely on computing resources 7 days a
week,  24 hours a day.  This  increased  demand for  information  has  created a
growing market for companies that provide bundled or totally  integrated storage
products and services.  Fault-tolerant  storage management plays a vital part in
protecting  critical  data in every aspect of the economy.  The explosion of the
Internet/Intranet  and the  creation  of  millions  of web sites  worldwide  has
accelerated this need for available,  reliable data storage. The digital content
creation   and   multimedia   industry,   with  its  intense   storage/retrieval
requirements,  continually  requires larger reliable storage systems,  including
those used for photo  retouching,  video editing,  graphic designers and graphic
animation products. Libraries,  hospitals, law firms and government entities all
use document  imaging to store  millions of records each year and computer  data
storage systems must accommodate search requests quickly and consistently.

According to DataQuest,  a unit of Gartner  Group,  Inc.  that  provides  global
market research and consulting services for the information technology industry,
forecasted storage revenues are expected to surpass $32 billion in 2000, growing
at 43  percent  annually,  while  the SAN and  Network  Attached  Storage  (NAS)
segments are  projected to grow 95 percent.  DataQuest  adds that the demand for
storage capacity in terabytes (TBs) will grow at a compounded  annual rate of 81
percent through 2002.


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<PAGE>

Much of this  growth  comes  from  the  explosive  growth  associated  with  the
Internet/Intranet  and the  market's  shift  in  strategic  focus  from a server
centric  world to a storage  centric  world.  The digital  content  creation and
multimedia industry, with its intense storage/retrieval  requirements, also fuel
the demand for larger, more reliable storage solutions, including those used for
video/audio streaming,  video editing,  graphic design and animation.  This sets
the stage for focused  suppliers of SAN solutions to capture  large  segments of
this market.

Other  factors  contributing  to the growth of the industry  include:  the rapid
adoption of Windows NT,  migration of storage  into larger disk arrays,  and the
changing landscape in interface and connectivity of storage devices.  Currently,
UNIX and  Windows NT  operating  system  platforms  make up more than 80% of the
combined RAID revenue estimate.  Although UNIX provides a larger installed base,
Strategic Research Corporation estimates that more than 80% of all networks have
mixed operating systems.  The mixed operating system  environment,  coupled with
the rapidly  changing  storage  architectures,  supports the rapidly  increasing
demand for Windows NT.  Additionally,  the strong  growth rate in the Windows NT
operating  system  space has  accelerated  add-on  purchases  of  external  RAID
systems.

RAID technology is an effective tool to protect network  computer users from the
loss of critical  disk data.  We believe that RAID  subsystems  will continue to
play a  significant  role as the  preferred  method for data  storage in network
environments.   We  also  believe  that  we  are  well   positioned  to  provide
fault-tolerant  information  storage  systems to many segments of the market and
will be able to participate in the forecasted growth in the information  storage
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.

RAID TECHNOLOGY

RAID, a concept  developed in 1988 by a team of researchers  from the University
of California at Berkeley,  is an information  storage technology  consisting of
three or more disk drives working  together as one, using  proprietary  hardware
and software to achieve  extremely  fast data  transfer and  Input/Output  (I/O)
rates, high levels of redundancy and large storage capacities.

RAID  subsystems are able to achieve faster data transfer rates than  individual
disk drives  because of their  ability to spread data among all of the component
disk  drives  and  retrieve  data  from  all  of  the   component   disk  drives
simultaneously  at very fast  speeds.  They are also able to achieve  faster I/O
rates than individual disk drives because of their ability to spread I/O's among
all of the component disk drives.  (An I/O represents a  user-requested  read or
write (opening or saving) of data from the disk.)

Redundancy  refers to the  replication of certain data within the RAID subsystem
so that if one disk drive or other redundant component,  such as a power supply,
fails  within  the disk  array,  no data is lost and the  application  continues
uninterrupted.  In the event of such a  failure,  the  failed  component  can be
"hot-swapped"  for a new  component  (exchanged  without  system shut down).  By
linking together  multiple disk drives,  RAID subsystems  significantly  enhance
storage capacities.

The recent proliferation of Internet, video and multimedia applications, coupled
with the continued  installation  of  client/server-based  networks,  has placed
continuing  demand on disk storage  resources in terms of capacity,  performance
and  fault-tolerance.  The  RAID  technology  initially  introduced  in 1988 was
specifically  designed  to  improve  the  performance  and  fault  tolerance  of
disk-based  subsystems.  The algorithms and features of "first-generation"  RAID
products have been widely implemented.  However, since its introduction, many of
the technology's  initial  shortcomings and limitations still exist, such as the
inability to adapt to I/O workload and  dedicated  RAID levels,  complex  system
configuration  and performance  tuning,  performance  limitations as a result of
writing in one of the RAID levels  (RAID-5)  and  limited or no online  capacity
expansion.  With the  forecasted  growth in the  demand  for RAID  products,  we
believe a significant market opportunity exists for our  "next-generation"  RAID
products (see Current Product Offerings).


                                       5
<PAGE>


We historically  have been a provider of leading-edge  storage  products for the
Unix and Windows NT markets.  Over the longer term, however,  changing corporate
storage needs will require us to provide a more  comprehensive  set of solutions
than we offer today. We are moving from a  product-specific  background to a SAN
solution  orientation that relies more heavily on its software  components.  The
SAN  infrastructure  we  envision  incorporates  not only our  storage  hardware
products  and  complementary   third-party  peripherals,   but  also  derives  a
considerable portion of its value from nStor-developed  software.  We have begun
to develop these software components that we expect will facilitate  integration
of both  hardware  components  as well as  functions  such as  backup  and  data
replication into a single SAN solution.  However, there can be no assurance that
we will be  successful  in these  efforts  given the  possibility  of  increased
competition, the development of alternative technologies, and other factors.

PRODUCTS

        Product Strategy

Our  current  hardware  products  include  both  Fibre  Channel  and  SCSI-based
solutions. The nStor-designed Fibre Channel products include SES-compliant (SCSI
Enclosure Services)  enclosures that can hold up to 900 Gigabytes (GBs) (18 disk
drives)  in a 4U (7")  space,  that are  combined  with our Fibre  Channel  RAID
controllers to become the NexStor storage solution family.  We also engineer and
integrate  a  complete  line  of  SCSI-based  solutions  that  incorporates  our
enclosure  technology and are sold as either  RAID-ready  enclosures or complete
solutions integrated with third-party RAID controllers. Our software development
centers on AdminiStor,  a web-based storage management software solution that is
used to configure RAID  controllers,  monitor and report enclosure  status,  and
manage disk arrays.

Designed to reduce the cost of computer  system  ownership,  our  external  RAID
subsystems  employ hot swap  components,  advanced cooling systems and redundant
N+1   architecture   (N+1   Architecture)   to  improve  data   reliability  and
availability.  (N+1  Architecture  requires  the  minimum  number of  components
installed to support the system plus one additional hard drive as a backup.) Hot
swap drives,  power supplies and cooling fans eliminate single points of failure
within an individual  storage  device;  keeping data online and  available  when
needed.

In April 2000 we  announced  the  introduction  of a new  family of SAN  storage
solutions  including  the NexStor 802F and the NexStor  3150.  Both new products
have the  capacity  to hold eight disk  drives in less than 3 1/2 inches (2U) of
data  center  rack  space,  making  it what we  believe  to be the most  compact
enterprise-level storage system on the market today.

The NexStor  802F  accepts  1-inch or 1.6-inch  Fibre  Channel  disk drives in a
compact 2U  enclosure  for standard  19-inch  racks,  yielding  almost twice the
storage  capacity  in the same space as  competitive  alternatives.  The NexStor
3150, a storage solution that integrates  Fibre Channel RAID controllers  within
the same enclosure  utilizes  additional 802F's for scalability and creates what
we believe to be the most compact  fault-tolerant,  SAN-ready enterprise storage
system on the market today.  We are now  accepting  orders for the NexStor 802F,
with the first customer  shipment planned by the end of the second quarter.

        Current Product Offerings

In addition to  nStor-developed  products,  a strategic  reseller agreement with
EMC/Clariion allows our customers access to an expanded range of solutions.  Our
line of high performance, high availability storage solutions includes:

NexStor.  The NexStor  family is our Fibre  Channel  product  which  consists of
combinations  of  our   high-performance,   active/active   Fibre  Channel  RAID
controllers and NexStor Fibre Channel enclosures.

NexStor 2000/2050 - Fibre Channel RAID

The NexStor family features the  performance  benefits of Fibre Channel with the
ability to move data at up to 200MB/s  (megabytes  per second).  This product is
available with either single (NexStor 2000) or dual (NexStor 2050) Fibre Channel
RAID controllers.


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<PAGE>

NexStor 18F - JBOD

The NexStor 18F Fibre Channel JBOD (Just a Bunch of Disks) Storage  Solution has
fault-tolerant features. In addition to Fibre Channel (200MB/s), the NexStor 18F
has   dual-loop    performance   which   produces   a   storage   solution   for
Internet/Intranet  servers,  on-line transaction  processing,  document imaging,
data  warehousing  and digital  video and  multimedia  systems.  The NexStor 18F
accommodates  up to 18 Fibre  Channel  disk  drives  in a single  4U  enclosure,
providing room for 900GB using currently available disk drive technology.

The NexStor 18F supports both a JBOD configuration or an optional single-loop or
dual-loop Fibre Channel RAID  controller.  Our NexStor 18F enclosure  features a
cable-less,  passive dual Fibre Channel Arbitrated Loop backplane (to which many
of  the  storage  devices  are  connected)  engineered  to  incrementally  boost
performance and availability  through a modular design.  The air-plenum  cooling
design provides support for 7,200 RPM (rotations per minute) and 10,000 RPM disk
drives,  as well as support  for the higher  capacity  50GB disk  drives.  Other
system features include data transfer rates up to 200MB/s, support for up to 126
storage  devices,  dual power cords,  support for cable  lengths up to 30 meters
utilizing a copper interface or up to 10 kilometers  utilizing fibre optics, and
redundant,  hot-swappable disk drives,  fans, power supplies and loop resiliency
circuits.

GigaRAID.  Our  GigaRAID  family  consists of  mid-range  active/active,  highly
scalable  solutions,  as well  as  entry-level  RAID  solutions,  based  on SCSI
architecture.  The  GigaRAID/AA  is suited for  Internet,  digital  video/audio,
seismic  and other  application  areas  that need to scale up to 5TB in a single
data center, while the GigaRAID/LS is for entry-level  environments that require
up to 1.2TB of fault-tolerant storage.

GigaRAID/AA - RAID

The GigaRAID/AA  offers  active/active  RAID  controllers  for fault  tolerance,
performance up to 80MB/s and the ability to scale up to 3TB. This product can be
used for large-block sequential applications and mission-critical environments.

The   GigaRAID/AA   is  a   high-performance   RAID  array  that   combines  the
fault-tolerant  benefits of RAID with proactive storage management.  GigaRAID/AA
provides  visual,  audible and  electronic  alarms  signaling  potential  system
failures  allowing  system  administrators  the  opportunity  to  repair  faulty
components before affecting critical business information.  Providing capacities
of up to 1.08TB per base system,  each  GigaRAID/AA  system  includes  single or
dual-active  controllers  and  is  available  in  deskside  tower  or  rackmount
enclosures. GigaRAID/AA's microprocessor coupled with its cable-less chassis can
provide   for  a  full   range  of   application   types,   including   imaging,
video-on-demand, bulk storage or on-line transactions.

GigaRAID/LS - RAID

Our GigaRAID/LS  provides a  cost-effective  SCSI RAID solution that is scalable
from 9GB to 1.2TB in a single rackmount or deskside tower enclosure. It includes
a single Ultra2 LVD RAID controller that supports up to 128MB of  battery-backed
cache for increased performance and data protection.


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<PAGE>

The  GigaRAID/LS  is suited  for the  environments  typically  found in  smaller
Internet Service Providers (ISPs),  dedicated application servers, file servers,
digital video/audio delivery systems, as well as general technology users.

Each  GigaRAID/LS  module begins with up to eight 9GB,  18GB,  36GB or 50GB disk
drives. Expansion modules provide up to 1.2TB of high-performance storage.

GigaSTOR. Our GigaSTOR family consists of general-purpose  storage products that
provide support for the Ultra2 LVD and Ultra160 SCSI products.

GigaSTOR/8000+ - RAID-Ready (JBOD)

The GigaSTOR/8000+ is a Ultra160 SCSI RAID-Ready storage solution which provides
transfer rates up to 160MB/s and is compatible  with existing  single-ended  and
high voltage differential Host Bus Adapters (HBAs). The GigaSTOR/8000+  provides
performance in  throughput-intensive  environments  such as digital  video/audio
streaming and multi-node servers.

Administor.  AdminiStor(R)  5.0 is the latest  version of our  Internet  storage
solution  software  for  storage   configuration,   management  and  monitoring.
Optimized for  Application  Service  Providers  (ASPs),  ISPs,  co-location  and
e-commerce  sites,  AdminiStor  5.0 uses the  power of the  Internet  to  access
high-end storage solutions including SANs from anywhere in the world.

Backup.  We offer a range of tape  backup  systems  to  complement  our  primary
storage solutions.

Technical  Service.  We offer a range of full-time service and support programs,
providing customers with a variety of on-site and help-desk plans.

SAN   Solutions.   We  design  and  install  SAN   solutions.   In  addition  to
nStor-developed  storage products, we also offer SAN components such as switches
and routers that have been pre-tested and certified.

We are  continuing  development  of Fibre  Channel  and SAN  solutions  as these
capabilities evolve into new standards.  Since this is newer technology,  we are
working  closely  with a select  group of  interoperability  partners to develop
complete SAN solutions that incorporate  compatible storage backup,  replication
and networking capabilities.

As storage  continues to  proliferate,  the space required to house that storage
becomes a premium.  As a result,  we are  developing  a variety of  space-saving
systems that we expect will, using currently  available disk drives,  support up
to 600GB of storage within a 2U (3.50 inch) enclosure. As capacity in the 1-inch
disk drive family increases, more storage can fit within this small space.

We also  anticipate  that Fibre  Channel,  both from an  interface as well as an
interconnect  technology,  will continue to rise in  importance.  We believe our
acquisition of OneofUs, and its associated Fibre Channel RAID controller product
line,  strengthens  our  ability  to  provide a  complete  SAN  solution.  These
enhancements,  combined with improvements to the AdminiStor  storage  management
software product and nStor-developed  Fibre Channel storage  subsystems,  should
enable us to continue  offering SAN  solutions  that meet the  price/performance
requirements the market demands. 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.


                                       8
<PAGE>

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 the following
trademarks and copyrights:

        nStorTM
        AdminiStor(R)
        GigaRAID(R)
        Enterprise Storage Packaging(R)
        RAID Lite(R)
        RAPID-Tape(R)
        Smart Cabinet(R)
        StorViewTM
        nTeraTM
        nVantageTM
        DirectStorTM
        For the life of your data(R)

There can be no  assurance  that the steps  taken to protect  our rights will be
adequate  to  prevent   misappropriation   of  our  technology  or  to  preclude
competitors  from  developing  products with  features  similar to our products.
Although we believe our  products and other  proprietary  rights do not infringe
the proprietary rights of others, there can be no assurance that, in the future,
third parties will not 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.  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 business.

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, Asia, Latin America, Canada and Australia. We sell our products directly
to end users through our field sales  organizations  and indirectly  through two
channels:  (i) OEMs and (ii) volume channel,  consisting of systems integrators,
technical distributors and value added resellers ("VARs").

Our direct  sales to end users  through  our field  sales  organization  was our
primary sales channel in 1999 representing over 80.6% of total sales. Our direct
sales organization is arranged by specific geographical territories,  each being
assigned a regional  manager,  multiple  district  managers as well as an inside
account  managers  (ISAMs).  To maximize our visibility  within each  territory,
regional and district  managers are located within their respective  territories
and are supported by  corporate-based  ISAMs.  One direct sales customer,  Intel
Corporation, accounted for 11% of net sales for 1999.

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.  We  believe  the OEM  channel  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.  OEMs are  strategic in nature and therefore
require unique sales  strategies and support.  OEM sales  accounted for 19.4% of
our sales for the year ended December 31, 1999.


                                       9
<PAGE>

One OEM customer,  Silicon Graphics, Inc. (SGI) accounted for 15.1% of net sales
for 1999 and two OEM customers,  Discreet Logic and Intergraph Corp.,  accounted
for  27% and  13%,  respectively,  of net  sales  for  1998  and  11%  and  10%,
respectively, of net sales for 1997.

Our products are frequently  packaged by our volume channel customers as part of
a complete data  processing  system or combined  with other  storage  devices to
deliver a storage subsystem.

The sales model for product  distribution in Europe,  the  Asia/Pacific-Rim  and
Latin America is similar to the volume channel domestic model, utilizing systems
integrators, technical distributors and VARs.

Each sales channel is supported by complementary  pricing and margin structures.
We believe this  strategy  allows us and our customers to  effectively  sell and
market our products across  multiple  channels while still  maintaining  channel
integrity.

Our  sales  organization  sells  directly  to end  users,  recruits  new  OEM's,
distributors and resellers,  supports  existing  resellers,  markets products to
OEMs and system integrators and participates in trade shows.

Our marketing plan utilizes a variety of programs to promote and develop new and
expanding  markets for our product line and to support the sales  strategy.  The
focal  points of this plan  include  the  supply  of highly  focused  collateral
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 products that are  manufactured  by a third party.  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 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.


                                       10
<PAGE>

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.

MANUFACTURING AND SUPPLIERS

Our manufacturing operations are currently located in San Diego, California.  In
December 1999, we began the process of transferring our manufacturing operations
from Lake Mary, Florida to San Diego, California.  The transfer of manufacturing
operations  was completed in early March 2000.  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. Furthermore, 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.

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.


                                       11
<PAGE>

RESEARCH AND DEVELOPMENT

We  have  three  engineering  centers  to  facilitate  our  product  development
including our center in Taipei, Taiwan which we acquired from OneofUs in January
2000.  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.

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  nStor-created  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 all our RAID
controller  technology and Fibre Channel drive firmware  qualification for these
controllers. The strategic location of this facility also provides access to the
engineering and manufacturing industrial complex in Asia for added resources.

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.

Aggregate  research and development  costs incurred were $3 million for the year
ended  December 31, 1999,  and $2.6 million for each of the years ended December
31, 1998 and 1997.

COMPETITION

The market for all levels of RAID 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.


                                       12
<PAGE>

EMPLOYEES

As of February 29, 2000, we employed 165 full-time  employees,  of which 41 were
involved in engineering,  product development and technical support, 59 in sales
and marketing, 38 in manufacturing and operations, and 27 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.

Item 2.  Properties

Our principal  executive,  administrative  and sales  activities  are located in
approximately  42,400 square feet of facilities  in San Diego,  California.  The
present  annual base rent for our San Diego  facility is $331,000.  The space is
occupied under a lease  agreement with an entity owned by Mr. Sykes,  an officer
of the Company until March 6, 2000, after which date he was no longer affiliated
with the Company. The lease expires in March 2003.

We lease approximately  40,000 square feet of office and warehouse space in Lake
Mary,  Florida,  under lease agreements for 22,000 square feet and 18,000 square
feet,  which expire in April 2000 and February  2002,  respectively,  at present
annual base rents of  approximately  $149,000 and  $119,000,  respectively.  The
Company does not plan to renew the lease agreement for 22,000 square feet, which
expires in April 2000.

We  distribute  products  through a network of 12 sales  offices  worldwide.  We
believe the existing  facilities are adequate to meet future needs.  See Note 12
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 ("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.  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.


                                       13
<PAGE>

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

The information  required by this item is included under Item 4 in our Form 10-Q
dated November 15, 1999 and is incorporated herein by reference.

                                     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, 1999 and 1998
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

                                     --------------------
        1999                           High         Low
        ----                         --------    --------

     First quarter                   3-15/16      2
     Second quarter                  3-1/2        2
     Third quarter                   3            1-15/16
     Fourth quarter                  4-1/2        1-9/16


         1998

     First quarter                    2-1/16       1-9/16
     Second quarter                   1-9/16       1
     Third quarter                       7/8          3/8
     Fourth quarter                    2-5/8         7/16


       As  of  March  15,  2000,  we  had  31,387,228  shares  of  common  stock
outstanding and approximately 1,782 holders of record of such stock.

Recent Sales of Unregistered Securities and Use of Proceeds

On March 30,  1999,  we issued  645,000  shares of our common  stock  (including
395,000  shares to Mr. H. Irwin Levy, the Chairman of the Board of Directors and
a major shareholder (Mr. Levy), in satisfaction of approximately $1.3 million of
long-term debt.

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

On June 8, 1999, we issued 3,500 shares of Series E Convertible Preferred Stock,
of which 1,500 shares were in  satisfaction  of $1.5 million of borrowings  from
Mr. Levy,  and  three-year  warrants to purchase an aggregate of 116,667  shares
(including  50,000  shares to Mr.  Levy) of our common stock at a price of $3.30
per share. Issued to three private investors, the Series E Convertible Preferred
Stock, with a stated value of $1,000 per share,  requires quarterly dividends at
the following  annual rates: 8% during the first year, 9% during the second year
and 10% thereafter,  and is convertible into shares of our common stock based on
a fixed conversion price of $3.00 per common share.


                                       14
<PAGE>

As part of the  acquisition  of  Andataco,  we issued  4,654  shares of Series F
Convertible  Preferred Stock to Mr. Sykes,  the then President of Andataco.  The
shares of Series F Convertible  Preferred  Stock,  with a stated value of $1,000
per share,  are  convertible  into  shares of our common  stock based on a fixed
conversion price of $3.00 per common share.  The Series F Convertible  Preferred
Stock requires quarterly  dividends at the following annual rates: 8% during the
first year, 9% during the second year and 10% thereafter.

In  December  1999,  we  issued  1,878,462  shares of our  common  stock in full
satisfaction of approximately $5.5 million of notes payable. As a result of this
settlement,   we  recognized  a  $.5  million   extraordinary   loss  from  debt
extinguishment.

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, 1999,  1998 and 1997, for the two month  transition
period ended  December 31,  1996,  and for the years ended  October 31, 1996 and
1995.  In November  1996, we changed our fiscal year from October 31 to December
31, effective with the calendar year beginning January 1, 1997.

Certain amounts for years prior to fiscal 1999 have been reclassified to conform
to the 1999  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 October 31,
                                  --------------------------------   December 31,  ----------- ----------
                                    1999(1)     1998       1997        1996          1996(4)     1995(4)
                                  --------   ---------   ---------   ------------  ---------   ---------
<S>                               <C>        <C>         <C>         <C>           <C>        <C>

Sales                             $41,089     $18,026     $26,244       $4,739       $5,619           -
Gross profit                        9,763       2,768       4,783        1,348        2,072           -
(Loss) income from operations     (16,501)(2)  (9,491)     (7,521)        (105)         115           -
Net (loss) income                 (18,704)(3) (10,407)     (7,886)         (43)      12,798         (61)
Net (loss) income available
  to common stock                 (19,938)    (11,888)     (7,886)         (43)      12,798         (61)
Basic and diluted net (loss)
  income per common share            (.89)       (.63)       (.42)        (.00)         .73        (.00)

Average number of common
 shares outstanding            22,505,084   18,888,911  18,670,477  18,670,477   17,606,477  17,600,477

At end of period:

Total assets                       34,041       14,128     16,762       20,067       15,677      12,054

Long-term debt                      6,329        5,305      1,504          516          510         476

Shareholders' equity                6,273        3,150      5,037       12,817       12,390      10,932

</TABLE>

----------
(1) 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.

(2)  Includes  charge of $6.4  million  related to a  write-off  of  unamortized
goodwill  attributable  to an  acquisition  completed  in 1996,  a write-off  of
obsolete inventory and employment termination costs.

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

(4) In 1995 and through  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).




                                       15
<PAGE>

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  high-availability,  high-performance
Internet  storage  and  customized  SAN  solutions,   including   external  RAID
solutions,  tape  backup  products  and  advanced  storage  management  software
solutions for a variety of operating  systems  including,  UNIX,  Windows NT and
Linux.

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 RAID 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 and in November 1999, we acquired the
remaining  24% of  Andataco.  As a result of the  acquisition  of  Andataco,  we
believe that period to period  comparisons  for the year ended December 31, 1999
may not be meaningful.  In addition,  due to the fact that Andataco's  operating
results were not included in our  consolidated  financial  statements until June
1999, we expect that many of the components of our future operating results will
increase significantly in fiscal 2000.

In January,  2000,  we sold  substantially  all of the assets of a  wholly-owned
subsidiary  which we had  acquired in April  1998,  including  certain  patented
technology referred to as Adaptive RAID, to a wholly-owned  subsidiary of QLogic
Corporation for $7.5 million.  We do not anticipate that future revenues will be
materially affected as a result of this transaction.


                                       16
<PAGE>

Results of Operations

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

                                                     Year Ended December 31,
                                                ------------------------------
                                                  1999        1998        1997
                                                  ----        ----        ----
Sales ......................................       100%        100%        100%
Cost of sales ..............................        76          85          82
                                                  ----        ----        ----
Gross profit ...............................        24          15          18
Selling, general and
  administrative ...........................        37          46          34
Research and
  development ..............................         7          14          10
Depreciation and
  amortization .............................         8           8           3
Write-down of Goodwill .....................        11          --          --
                                                  ----        ----        ----
Loss from operations .......................       (39)        (53)        (29)
Interest expense and other, net ............         4           5          --
                                                  ----        ----        ----
Loss before extraordinary item .............       (43)        (58)        (29)


Extraordinary loss from debt
  extinguishment ...........................         1          --          --
                                                  -----       -----       ----
Net loss ...................................       (44%)       (58%)       (29%)
                                                  =====       =====       ====

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 net loss of $10.4 million for the year ended December 31, 1998.

Results of  operations  for fiscal 1999  included an  extraordinary  loss of $.5
million  on  extinguishment  of  debt  (see  Note  6 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%.  The
primary  factor for the increase was the  acquisition  of Andataco in June 1999,
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 have been  minimal  and are not
expected to increase in the near future.  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.


                                       17
<PAGE>

Cost of Sales/Gross Profit

Gross profit for the year ended  December 31, 1999 increased to 24% from 15% for
the year ended  December 31, 1998.  Contributing  to the improved  gross margins
were the Andataco product sales and the utilization of Andataco's sales channels
to market our  products.  Our gross margins are  dependent,  in part, on dynamic
market pricing and on product mix which fluctuate from time to time.

Selling, General and Administrative Expenses

Selling,  general and administrative  costs for the year ended December 31, 1999
increased  to $15.3  million (37% of sales) from $8.3 million (46% of sales) for
the year ended  December 31, 1998.  This increase is 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
is primarily  attributable  to the  elimination of expenses  associated with the
integrated  system division which 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 acquisition of Andataco.

Research and Development

Research and development  expenses for the year ended December 31, 1999 amounted
to $3 million,  representing  7% of sales as compared to the year ended December
31, 1998 when expenses were $2.6 million or 14% of sales.  During  January 2000,
we sold  substantially  all of the  assets  of our  Borg  Adaptive  Technologies
subsidiary,  which had  contributed  $.8 million and $.6 million to our research
and  development  expenses  during  1999 and 1998,  respectively.  Decreases  in
research and development expenses in 2000 as a result of this sale, however, are
expected to be  partially  offset by  additional  investments  in  research  and
development which we believe will be required to remain competitive.

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

Depreciation and Amortization / Write-down of Goodwill

Depreciation  and  amortization  increased  to $3.4  million  for the year ended
December  31,  1999 from $1.4  million  for the year ended  December  31,  1998,
principally  due to the  acquisition  of  Andataco,  which added $1.1 million of
amortization of goodwill and $.8 million of depreciation in 1999.

During  the  fourth  quarter  of 1999  (see  Note 15 to  Consolidated  Financial
Statements),  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  Systems,  Inc  (Parity).  The Parity  goodwill was
determined to have been impaired because of the Company's  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
(see Note 5 to Consolidated Financial Statements).


                                       18
<PAGE>

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 (see Note
9 to Consolidated Financial Statements).

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.

Comparison of Fiscal Years Ended December 31, 1998 and December 31, 1997

We reported a net loss of $10.4 million for the year ended  December 31, 1998 as
compared to a net loss of $7.9 million from the year ended December 31, 1997.

Sales

Sales for the year ended December 31, 1998 were $18 million as compared to $26.2
million  during the preceding  year, a decrease of $8.2 million or 31%.  Factors
contributing to this sales decline included:  (i) delays in customer  deliveries
and in some cases, missed sales orders in early 1998, caused by our inability to
meet customer  production  schedules brought about by our cash flow difficulties
at that time; (ii) lost sales  opportunities while reorganizing and training our
sales force under new executive sales management; and (iii) entering 1998 with a
significantly  lower  balance  of  sales  orders  than  were in  place as of the
beginning of 1997.  Another  significant  factor was a $3.8 million  decrease in
non-storage  related  product sales,  including  memory  products and enterprise
resource planning  manufacturing  software, as a result of our decision to phase
out our non-storage related businesses.

Cost of Sales/Gross Profit

Gross profit  decreased to 15% for the year ended December 31, 1998,as  compared
to 18% for the previous year. Our gross profit is dependent, in part, on product
mix which fluctuates from time to time. The decline in gross profit is primarily
due to a decreased  sales  level of products  with  overall  higher  margins and
certain cash flow difficulties which limited our ability to purchase products in
the most cost efficient manner.  Excluding additions to inventory reserves,  the
overall gross profit for 1998 would have been 23% as compared to 24% for 1997.


                                       19
<PAGE>

Operating Expenses

Selling, General and Administrative Expenses

Selling,  general and  administrative  expenses were $8.3 million (46% of sales)
and $8.9 million (34% of sales) for the years ended  December 31, 1998 and 1997,
respectively.  The $.6 million  decrease is principally  attributable to overall
reduced  spending  levels  resulting  from  planned cost  reductions,  primarily
advertising  and travel,  which were  implemented as a result of the lower sales
levels.  Selling,  general and  administrative  costs as a  percentage  of sales
increased 12% during 1998 principally attributable to the level of certain fixed
costs we incurred while sales levels declined.

Research and Development

Research and development  expenses were $2.6 million for the year ended December
31, 1998 and remained  relatively  unchanged from the preceding year. Certain of
these expenses decreased as a result of the continued  integration of previously
acquired  engineering   activities.   This  decrease  was  offset  by  increased
engineering  staffing  and related  overhead of $.6 million  resulting  from the
acquisition in April 1998 of Borg Adaptive  Technologies,  and increased project
costs in connection with the development of new products.

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  sales,  or  in  certain
situations, may not ultimately generate sales.

Depreciation and Amortization

Depreciation and amortization  increased $.6 million for the year ended December
31, 1998 as compared to 1997,  primarily due to additions to test  equipment and
computer software.

Interest Expense

Interest  expense  in 1998  increased  $.7  million  over  1997 as a result of a
significant  increase in net average  borrowings  and the  amortization  of loan
costs in connection with certain indebtedness.

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

During 1998 we recorded $1.2 million as an embedded dividend attributable to the
beneficial  conversion privilege of certain of our preferred stock. In addition,
for the year ended December 31, 1998, all classes of our  convertible  preferred
stock required cumulative dividends at 8% and aggregated $.3 million.  There was
no preferred stock outstanding in 1997.


                                       20
<PAGE>

Liquidity and Capital Resources

Consolidated Statements of Cash Flows

        Operating Activities

Net cash used by operating activities amounted to $5.3 million and $10.5 million
for the  years  ended  December  31,  1999  and  1998,  respectively.  The  most
significant  use of cash for both  fiscal  years  was our loss  from  operations
(before  depreciation,  amortization and other non-cash items as well as changes
in assets and liabilities) of $8.2 million in 1999 and $6.7 million in 1998. The
1999 loss from  operations  was partially  offset by a $1.5 million  decrease in
inventories and a $.6 million decrease in accounts receivable. In 1998, net cash
used by operating  activities also reflected a $3.5 million decrease in accounts
payable and other liabilities and a $.8 million increase in inventories.

        Investing Activities

Net cash used by investing  activities for the years ended December 31, 1999 and
1998 amounted to $2.1 million and $.8 million. Cash used by investing activities
for  acquisitions  totaled  $1.4  million and $.4 million  during 1999 and 1998,
respectively.  Cash used for purchases of property and equipment was $.8 million
and $.5 million during 1999 and 1998, respectively.

        Financing Activities

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,  $1.0  million  from the issuance of
common stock and $2.5 million from the exercise of stock  options and  warrants.
Net cash provided by financing  activities  for 1998 amounted to $11.4  million,
principally consisting of $5.9 million in net borrowings,  $3.5 million from the
issuance of convertible  preferred  stock (net of  redemption)  and $1.7 million
from the exercise of stock options and warrants.

Asset Based Credit Facilities

Andataco Revolver

The Andataco Revolver 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.  The Andataco Revolver
currently  bears  interest at prime plus 1/2 percent (9.0% at December 31, 1999)
and  matures in April 2002.  We pay a facility  fee of .25% based on the average
unused portion of the maximum  borrowings.  Advances under the Andataco Revolver
are  collateralized  by  substantially  all  assets of  Andataco.  The  Andataco
Revolver  provides  for  certain   financial   covenants,   including   Andataco
maintaining  a certain  minimum  tangible net worth.  During the second  quarter
ended  June  30,  1999,  Andataco  was not in  compliance  with  that  financial
covenant;  however,  effective  July 13,  1999,  the lender  agreed to waive the
default,  subject to,  among other  things,  receipt from nStor of a $.5 million
capital contribution. On July 16, 1999, nStor contributed $.5 million in cash as
a capital  contribution  to Andataco.  As of December 31, 1999, the  outstanding
balance  under this  credit  facility  was $5.1  million and an  additional  $.2
million was available based on eligible collateral.

At February 29, 2000 and March 31, 2000, Andataco was not in compliance with the
minimum  tangible net worth covenant of the Andataco  Revolver.  Effective March
29, 2000,  the lender  agreed to waive the default for both  periods.  Effective
April 14,  2000 we have  agreed  with the lender to amend  certain  terms of the
Andataco  Revolver  including  the  following:  a change  in the  borrower  from
Andataco  to  nStor  Corporation,  Inc.,  another  wholly  owned  subsidiary; 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 Andataco Revolver are the same.

Effective  April 12, 2000,  Mr. Levy agreed to commit to a $2 million  revolving
line of credit  facility  to us,  which  bears  interest  at 10% per annum.  The
maturity date on this line of credit is the earlier of April 30, 2001 or when we
execute our amended Andataco Revolver.

 nStor Revolver


In January 2000, we paid off the  outstanding  balance and  terminated the nStor
revolving line of credit  agreement  (nStor  Revolver).  During fiscal 1999, the
nStor Revolver  provided for borrowings based on the lesser of $5 million or 80%
of eligible accounts  receivable,  as defined.  Interest was paid based on prime
plus 2%. Advances under the nStor Revolver were  collateralized by substantially
all of our assets (excluding those of Andataco), including $.5 million reflected
as Restricted Cash as of December 31, 1998. The balance under the nStor Revolver
as of December 1999 was $10,000.


                                       21
<PAGE>

Financing Activities

From late 1997  through  December 31,  1999,  we obtained  net cash  proceeds of
approximately  $25.2  million  (including  $11.7  million  during the year ended
December 31, 1999) from private  investors,  consisting of sales of  convertible
preferred  stock and common stock,  net  borrowings and the exercise of warrants
and options to purchase shares of our common stock.  Of these amounts,  Mr. Levy
or a company  controlled  by Mr.  Levy had  advanced or invested a net amount of
$8.4 million.

In  December  1999,  we  issued  1,878,462  shares of our  common  stock in full
satisfaction of $5.5 million of notes payable.  As a result of this  settlement,
we recognized a $.5 million extraordinary loss from debt extinguishment.

On January 10, 2000, we sold substantially all of the assets of our wholly-owned
subsidiary,  Borg Adaptive  Technologies,  including our patented  Adaptive RAID
technology, to a wholly-owned subsidiary of QLogic Corporation.  We received net
cash proceeds of approximately $7 million,  net of approximately  $.5 million of
transactions  costs,  of which $1.6 million was used to repay  short-term  notes
payable to Mr. Levy. As part of the sale, we retained a perpetual license in and
to the Adaptive RAID technology.  We do not anticipate that future revenues will
be materially affected as a result of this transaction.

We believe that amounts expected to be available under the Andataco Revolver and
our available cash balances,  principally as a result of the Borg sale,  will be
sufficient  to satisfy our working  capital  needs  during  2000,  as  presently
contemplated.  There  can be no  assurance  that we may not  require  additional
capital  beyond  our  current  forecasted  needs  nor that  any such  additional
required funds would be available on terms  acceptable to us, if at all, at such
time or times as required by us.

Effect of Inflation

During recent years,  inflation has not had an impact on the our  operations and
we do not expect that it will have a material impact in 1999.

Year 2000 Issue

As many computer  systems,  software  programs and other equipment with embedded
chips or processors  (collectively  referred to as Information Systems) use only
two digits rather than four to define the applicable year, they may be unable to
process  accurately  certain  data,  during or after the year 2000. As a result,
business and governmental  entities are at risk for possible  miscalculations or
systems  failures  causing  disruptions  in their business  operations.  This is
commonly  known as the Year 2000 (Y2K)  issue.  The Y2K issue  concerns not only
information  systems  used  solely  within a  company  but also  concerns  third
parties,  such as customers,  vendors and creditors,  using Information  Systems
that may interact with or affect a company's operations.

We have not experienced any material disruption in our business or operations as
a  result  of Y2K  issues.  However,  there  is no  assurance  that we will  not
experience interruptions in the future.


                                       22
<PAGE>

Item 7a.  Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk for changes in interest  rates relates  primarily to
our long-term debt obligations.

<PAGE>


Item 8.  Financial Statements and Supplementary Data

Table of Contents to Consolidated Financial Statements

                                                                  Page

    Report of Independent Certified Public Accountants             26

    Consolidated Financial Statements:

     Balance sheets - December 31, 1999 and 1998                   27

     Statements of Operations - Year Ended

        December 31, 1999, 1998 and 1997                           28

     Statements of Shareholders' Equity - Year Ended
        December 31, 1999, 1998 and 1997                         29-30

     Statements of Cash Flows - Year Ended

        December 31, 1999, 1998 and 1997                         31-32

     Notes to Consolidated Financial Statements                  33-50

    Report of Independent Certified Public Accountants             51


FINANCIAL  STATEMENT  SCHEDULES.  The following financial statement schedules of
nStor  Technologies,  Inc. for the years ended December 31, 1999,  1998 and 1997
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    52-54

   Schedule II - Valuation and Qualifying Accounts                 55


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.



                                       23
<PAGE>


               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  as of December 31, 1999 and 1998 and the
related  consolidated  statements of operations,  shareholders'  equity and cash
flows for each of the three years in the period ended  December 31, 1999.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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, 1999 and 1998, and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.

                                     BDO SEIDMAN, LLP


Costa Mesa, California
February 21, 2000, except
 as to the last two paragraphs
 of Note 14, which are as of
 April 14, 2000


                                       24
<PAGE>

                   nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                   =========================================
                             (dollars in thousands)
                                                                 December 31,
                                                              -----------------
     ASSETS                                                     1999      1998
     ------                                                   -------   -------
Current assets:
  Cash and cash equivalents:
    Restricted ...........................................    $    23   $    21
    Unrestricted .........................................        650       147
  Accounts receivable ....................................      7,326     2,462
  Inventories ............................................      6,288     3,028
  Prepaid expenses and other .............................      1,614       364
                                                              -------   -------
        Total current assets .............................     15,901     6,022

Restricted cash and other non current assets .............        131       500
Property and equipment, net of $2,932 and
  $1,252 in accumulated depreciation .....................      3,476     1,653
Goodwill and other intangible assets, net of
  $1,311 and $939 in accumulated amortization ............     14,533     5,953
                                                              -------   -------
                                                              $34,041   $14,128
     LIABILITIES                                              =======   =======
     -----------
Current liabilities:
  Bank lines of credit ...................................    $ 5,111   $    --
  Director loans .........................................      1,585       300
  Convertible notes ......................................        629        --
  Other borrowings .......................................         --       200
  Accounts payable and other .............................     14,114     3,435
                                                              -------   -------
        Total current liabilities ........................     21,439     3,935

Long-Term liabilities:
  Acquisition notes ......................................      5,100        --
  Notes payable ..........................................      1,229     4,713
  Bank line of credit.....................................         --     1,738
  Convertible notes ......................................         --       592
                                                              -------   -------
        Total liabilities ................................     27,768    10,978
                                                              -------   -------
Commitments, contingencies and subsequent events

     SHAREHOLDERS' EQUITY
     --------------------
Preferred stock, $.01 par; 1,000,000 shares authorized,
 in order of preference:
  Convertible  Preferred Stock;  Series F, 4,054 and 0
   issued and outstanding as of December 31, 1999 and
   1998, respectively,  aggregate  liquidation  value
   $4,054; Series A, 1,667 issued and outstanding,
   aggregate liquidation value $1,000;  Series C, 3,000
   issued and outstanding,  aggregate liquidation value
   $3,000; Series D, 2,700 issued and outstanding,
   aggregate liquidation value $2,700;  Series E, 3,500
   and 0 issued and outstanding as of December 31, 1999
   and 1998,respectively, liquidation value $3,500               --          --
Common stock, $.05 par; 75,000,000 shares
 authorized; 26,517,824 and 20,515,425
 shares issued and outstanding at December 31, 1999
 and December 31, 1998, respectively ...............          1,331       1,025
Additional paid-in capital .........................         63,164      40,409
Accumulated deficit ................................        (58,222)    (38,284)
                                                           --------     -------
        Total shareholders' equity .................          6,273       3,150
                                                           --------     -------
                                                           $ 34,041     $14,128
                                                           ========     =======

          See accompanying notes to consolidated financial statements.


                                       25
<PAGE>

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

                                                 Year Ended December 31,
                                             -----------------------------
                                                1999      1998       1997
                                                 --------   --------   --------
Sales .........................................  $ 41,089   $ 18,026   $ 26,244
Cost of sales .................................    31,326     15,258     21,461
                                                 --------   --------   --------
     Gross profit .............................     9,763      2,768      4,783
                                                 --------   --------   --------
Operating expenses:
  Selling, general and administrative .........    15,340      8,335      8,909
  Research and development ....................     2,981      2,572      2,618
  Depreciation and amortization ...............     3,355      1,352        777
  Write-down of goodwill ......................     4,588       --         --
                                                 --------   --------   --------
Total operating expenses ......................    26,264     12,259     12,304
                                                 --------   --------   --------
Loss from operations ..........................   (16,501)    (9,491)    (7,521)

Interest and other income .....................       313         71        120
Interest expense ..............................    (2,051)      (987)      (247)
                                                 --------   --------   --------
Loss before income tax ........................   (18,239)   (10,407)    (7,648)
Income tax expense ............................      --         --         (238)
                                                 --------   --------   --------
Loss before preferred dividends
  and extraordinary loss ......................   (18,239)   (10,407)    (7,886)

Extraordinary loss from debt
  extinguishment (net of tax of $0) ...........      (465)      --         --
                                                 --------   --------   --------

Net loss ......................................   (18,704)  (10,407)     (7,886)
                                                 --------   --------   --------
Preferred stock dividends .....................      (902)      (263)      --
Embedded dividend attributable to
  beneficial conversion privilege
  of Convertible Preferred Stock ..............      (332)    (1,218)      --
                                                 --------   --------   --------

Loss available to common stock ................  ($19,938)  ($11,888)  ($ 7,886)
                                                 ========   ========   ========

Basic and diluted net loss per common share:

  Loss before extraordinary loss ..............  ($   .87)  ($   .63)  ($   .42)
  Extraordinary loss ..........................      (.02)      --         --
                                                 --------   --------   --------
  Net loss per common share ...................  ($   .89)  ($   .63)  ($   .42)
                                                 ========   ========   ========

Average number of common shares
  outstanding, basic and diluted ..............22,505,084 18,888,911 18,670,477
                                               ========== ========== ==========

          See accompanying notes to consolidated financial statements.


                                       26
<PAGE>

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

<TABLE>
<CAPTION>

                                                      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, 1997        18,670,477 $ 934      -      -     $30,393     ($18,510) $12,817

Common stock option granted
 to outside directors                                                    61                    61

Common stock warrants issued
 in connection with borrowings                                           45                    45

Net loss for the year ended
 December 31, 1997                                                               (7,886)   (7,886)
                                ----------  ------   ----- ------   -------     -------   --------
Balances, December 31, 1997      18,670,477   934      -      -      30,499     (26,396)    5,037

Issuance of Convertible
 Preferred Stock in private
 placements:

  Series B, less $262
   of issuance cost                                 3,500     -       3,238                3,238
  Series D, less $10
   of issuance cost                                 2,700     -       2,690                2,690

Issuance of Convertible
 Preferred Stock in
 satisfaction of borrowings:

  Series A, less $5
   of issuance cost                                 1,667     -         995                  995
  Series C, less $4
   of issuance cost (a)                             2,000     -       1,996                1,996

Redemption of Convertible
 Preferred Stock, Series B,
 including $120 of
 redemption costs (a)                              (2,300)    -      (2,420)               (2,420)

Issuance of common stock in
 connection with:
   Conversion of Series B
     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:

   Series B                                                           1,045      (1,045)       -
   Series A                                                             173        (173)       -

Common stock warrants
 issued in connection with:
   Long-term debt                                                       427                   427
   Acquisition                                                          148                   148

Common stock options
 granted to outside
 directors                                                               34                    34

</TABLE>


                                       27
<PAGE>

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

<TABLE>
<CAPTION>

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

Issuance of Series E
 Convertible Preferred Stock
 in private placement, less
 $16 of issuance cost                                 3,500    -       3,484                  3,484

Issuance of Series F
 Convertible Preferred Stock
 for acquisition of Andataco,
 less $21 of issuance cost                            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 warrants issued
  in connection with:
   Long-term debt                                                        791                    791
   Acquisition                                                           200                    200

Common stock options
 granted to non-employees                                                152                    152

Preferred stock dividends                                                            (902)     (902)

Embedded dividend attrib-
 utable to beneficial con-
 version 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
                             ==========  ======   ===== ======       =======      ========  =======
</TABLE>

----------
(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.  At December 31, 1999 there
        were 3,000 shares  outstanding of Series C Convertible  Preferred  Stock
        with an aggregate stated value of $3 million.

          See accompanying notes to consolidated financial statements.




                                       28
<PAGE>

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

                                                            Year Ended December 31,
                                                         ------------------------------
                                                           1999       1998       1997
CASH FLOWS FROM OPERATING ACTIVITIES:                    --------   --------   --------
<S>                                                      <C>        <C>        <C>
  Net loss                                              ($18,704)  ($10,407) ($ 7,886)
  Adjustments to reconcile net loss to
    net cash used by operating activities:
      Depreciation and amortization                        3,355      1,352       777
      Write-down of goodwill                               4,588          -        -
      Loss on extinguishment of debt                         465          -        -
      Provision for inventory obsolescence                   306      1,354     1,450
      Provision for uncollectible accounts receivable        954        837       522
      Amortization of deferred compensation                  171         44        40
      Amortization of deferred loan costs                    621        140        27
      Deferred income                                         -          -        182
      Minority interest in net income of
        consolidated subsidiary                              130         -         -
      Changes in assets and liabilities, net of effects
        from acquisition:
          Decrease in accounts receivable                    640        564       338
          Decrease (increase) in inventories               1,459       (805)   (1,912)
          Decrease (increase) in prepaid expenses
           and other                                         311       (112)      (94)
          Increase (decrease) in accounts payable and
            other liabilities                                403     (3,453)      242
                                                          -------    -------   -------
Net cash used by operating activities                     (5,301)   (10,486)   (6,314)
                                                          -------    -------   -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Cash paid for acquisitions                              (1,372)      (379)       -
  Additions to property and equipment                       (767)      (456)   (1,453)
                                                          -------    -------   -------
Net cash used by investing activities                     (2,139)      (835)   (1,453)
                                                          -------    -------   -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net (repayments) proceeds from
    revolving bank credit facilities                      (2,590)    (1,507)    3,245
  Additions to other borrowings                            7,075     10,803       988
  Repayments on other borrowings                          (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 in private placement            1,000         -         -
  Proceeds from exercise of stock options and warrants     2,519      1,675        -
  Decrease (increase) in restricted
    cash and cash equivalents                                 -         503     (1,024)
  Cash paid for preferred stock dividends                   (823)      (151)         -
                                                          -------   -------   -------
  Net cash provided by financing activities                7,943     11,407     3,209
                                                          -------   -------   -------
Net increase (decrease) in unrestricted cash
  and cash equivalents during the year                        503        86    (4,558)
Unrestricted cash and cash equivalents at
   beginning of period                                        147        61     4,619
                                                          -------    -------   -------
Unrestricted cash and cash equivalents at end of period   $   650    $  147   $    61
                                                          =======    =======   =======
</TABLE>


                                       29
<PAGE>

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

<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                                         ----------------------------
                                                           1999      1998      1997
                                                         --------  --------  --------
<S>                                                      <C>       <C>       <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
   Cash paid during period for:

     Interest                                             $  941    $   807   $   140
                                                          =======   =======   =======
     Income taxes                                         $   -     $     3   $   238
                                                          =======   =======   =======
NON-CASH INVESTING ACTIVITIES:
  Acquisitions:
    Fair value of assets acquired                        $30,527    $   527   $    -
    Liabilities assumed                                  (16,667)        -         -
    Acquisition Notes issued                              (5,100)        -         -
    Series F Convertible Preferred Stock issued           (4,654)        -         -
    Common stock issued                                   (2,194)        -         -
    Common stock committed                                  (340)        -         -
    Warrant issued to seller                                (200)      (148)       -
                                                          -------   -------   -------
      Cash paid                                           $1,372    $   379   $    -
                                                          =======   =======   =======
NON-CASH FINANCING ACTIVITIES:

Issuance of common stock in satisfaction
    of borrowings                                         $ 6,840   $    -    $    -
                                                          =======   =======   =======
Issuance of Convertible Preferred
    Stock in satisfaction of

    borrowings                                            $ 1,500   $ 2,991   $    -
                                                          =======   =======   =======

  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   $    -
                                                          =======   =======   =======

Deferred loan costs arising from
    issuance of warrants under
    subordinated loans                                    $   791   $   427   $    45
                                                          =======   =======   =======

</TABLE>

          See accompanying notes to consolidated financial statements.


                                       30
<PAGE>

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


(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Principles of Consolidation and Basis of Presentation

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.

        Business

The Company is engaged as a  manufacturer  and  supplier  of  high-availability,
high-performance  Internet  storage and  customized  Storage Area Network  (SAN)
solutions,  including  external  RAID  (Redundant  Array of  Independent  Disks)
solutions,  tape  backup  products  and  advanced  storage  management  software
solutions  for the UNIX,  Windows NT and Linux  markets.  (UNIX,  Windows NT and
Linux are computer operating systems).

        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 3 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.

        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.


                                       31
<PAGE>

        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 7 to 15 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 3 to  Consolidated
Financial Statements).

During  the  fourth  quarter  of 1999  (see  Note 15 to  Consolidated  Financial
Statements),  the Company 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 Systems, Inc (Parity). The Parity goodwill was
determined to have been impaired because of the Company's  inability to generate
future operating income from the assets acquired in the Parity acquisition.

        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.

        Net Loss Per Common Share ("EPS")

Basic EPS is  calculated  by  dividing  the income  (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,  stock options and warrants would have
been antidilutive.  Accordingly, basic and diluted EPS for all periods presented
are equivalent.

As of December 31, 1999 and 1998,  outstanding  potentially  dilutive securities
include the following,  respectively:  4,622,997 and 2,946,500 shares underlying
stock options;  9,884,666 and 7,366,667 shares underlying  convertible preferred
stock;  1,949,972 and  1,761,667  shares  underlying  warrants;  160,000  shares
underlying  convertible  debt and 123,479 shares  underlying  commitments  under
severance agreements.


                                       32
<PAGE>

        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.

Management  believes that its projected income from operations and its bank line
of  credit  will be  sufficient  to meet the  Company's  capital  and  operating
requirements for the next twelve months. If sales are less than projected, or if
the Company is unable to generate adequate cash flow from its sales, the Company
may need to seek  additional  sources of capital  which may not be  available on
terms  acceptable  to the  Company  and/or  decrease  its  planned  capital  and
operating expenditures.

        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, 1999 and 1998.

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 12 months.

        Reclassifications

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

        Comprehensive Income

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.
All prior period data  presented has been restated to conform to the  provisions
of SFAS 130.  The  Company  had no other  comprehensive  income  (loss)  for all
periods presented.


                                       33
<PAGE>

        New Accounting Pronouncement

In June 1998, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
133 "Accounting for Derivative  Financial  Instruments and Hedging  Activities."
SFAS No. 133 establishes accounting and reporting standards requiring that every
derivative  instrument  (including  certain derivative  instruments  embedded in
other  contracts)  be  recorded  in the  balance  sheet as  either an asset or a
liability  measured at its fair value. SFAS No. 133 requires that changes in the
derivative's  fair value be  recognized  currently in earnings  unless  specific
hedge  accounting  criteria are met.  Special  accounting for qualifying  hedges
allows a derivative's  gains and losses to offset related  results on the hedged
item  in the  income  statement,  and  requires  that a  company  must  formally
document,  designate,  and assess the effectiveness of transactions that receive
hedge  accounting.  SFAS 133, as amended by SFAS No. 137, is effective for years
beginning after June 15, 2000. We have not yet quantified the impact of adopting
SFAS No. 133 on our financial  statements  and have not determined the timing of
or method of its adoption of SFAS No. 133. However,  SFAS No. 133 could increase
volatility in earnings and other comprehensive income.

(2)  ACQUISITIONS

    Andataco, Inc.

On June 8, 1999, the Company purchased approximately 76% of the total issued and
outstanding stock of Andataco, Inc. (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% subordinated  promissory notes. The principal
balance  of  the  notes  is due on  June  17,  2004.  Andataco  is a  developer,
manufacturer,  and marketer of high performance,  high availability  information
storage solutions for the open systems market.

As part of the  acquisition  of  Andataco,  the Company also  acquired  from Mr.
Sykes,  a  promissory  note in the  original  principal  amount of $5.2  million
payable by Andataco to Mr. Sykes.  The purchase  price for the  promissory  note
was: $.5 million in cash;  4,654 shares of the  Company's  Series F  convertible
preferred  stock  convertible  into an  aggregate  of  1,551,333  shares  of the
Company's  common  stock  based on a  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 acquisition,  with an aggregate  purchase price of $14.4 million,  including
$1.6 million in acquisition  costs,  was 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 have been
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 is being amortized on a straight-line basis over
seven years.

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):


                                       34
<PAGE>

                                     Year Ended 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 extra-
   ordinary 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        22,505,084   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, or
which may be reported in future periods.

(3)  BALANCE SHEET COMPONENTS (in thousands)

Substantially  all assets are pledged as collateral for indebtedness (see Note 5
to Consolidated Financial Statements).

                                                      December 31,
                                                    ---------------
                                                     1999     1998
                                                    ------   ------
Accounts Receivable

     Trade receivables                              $8,759   $2,964
     Less allowance for doubtful accounts           (1,604)    (502)
                                                    ------   ------
                                                     7,155    2,462
     Other receivables                                 171        -
                                                    ------   ------
                                                    $7,326   $2,462
                                                    ======   ======
Prepaid expenses and Other

     Prepaid service costs                          $1,174   $    -
     Other                                             440      364
                                                    ------   ------
                                                    $1,614   $  364
                                                    ======   ======
Inventories

     Raw materials                                  $4,942   $2,641
     Work-in-process                                   454       95
     Finished goods                                    892      292
                                                    ------   ------
                                                    $6,288   $3,028
                                                    ======   ======

                                       35
<PAGE>

Property and Equipment

     Computer equipment                             $4,075   $1,313
     Computer software                                 770      729
     Leasehold improvements                            788      332
     Furniture, fixtures and office equipment          465      288
     Other                                             310      243
                                                    ------   ------
                                                     6,408    2,905
     Less accumulated depreciation                  (2,932)  (1,252)
                                                    ------   ------
                                                    $3,476   $1,653
                                                    ======   ======

Depreciation  expense amounted to approximately $1.8 million and $.9 million for
the years ended December 31, 1999 and 1998, respectively.

Goodwill and Other Intangible Assets

     Goodwill                                      $15,497   $6,545
     Intellectual assets                               347      347
                                                    ------   ------
                                                    15,844    6,892
     Less accumulated amortization                  (1,311)    (939)
                                                    ------   ------
                                                   $14,533   $5,953
                                                    ======   ======

Amortization of goodwill and other  intangible  assets amounted to approximately
$1.6  million and $.5 million  for the years ended  December  31, 1999 and 1998,
respectively. During the fourth quarter of 1999, the Company recorded a goodwill
write-down of $4.6 million (See Note 1 to Consolidated Financial Statements).

Accounts payable and other

     Accounts payable                              $ 8,072   $2,436
     Deferred revenue                                2,426       -
     Other                                           3,616      999
                                                    ------   ------
                                                   $14,114   $3,435
                                                    ======   ======


(4)     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):

                                       36
<PAGE>

                                              Year Ended December 31,
                                            1999         1998        1997
                                          --------     --------    --------
Amount computed at Federal statutory
  rate of 34%                             ($6,359)     ($3,538)    ($2,681)
Amortization of non-deductible
 intangible assets                            533           -           -
Expenses not deductible for tax
  purposes                                    159           79          51
Losses not deductible for tax purposes        158           -           -
Exercise of non-qualified stock options      (272)          -           -
Alternative minimum taxes                      -            -          238
Losses for which no current benefits
  are available                             5,781        3,459       2,630
                                         ---------     --------    --------
Provision for income taxes               $     -       $    -      $   238
                                         =========     ========    ========


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

                                                   December 31,
                                                  1999     1998
                                                 ------   ------
         Deferred tax assets:
           Net operating loss carryforwards     $12,295   $6,267
           Alternative minimum tax carryforward     770      332
           Research and development credit
             carryforward                         1,422      802
           Depreciation and amortization          1,571      148
           Allowance for doubtful accounts          546     (171)
           Inventory and warranty reserves          860     (222)
                                                 ------   ------
         Net deferred tax assets                 17,464    7,156
         Less valuation allowance               (17,464)  (7,156)
                                                 ------   ------
         Deferred taxes                          $   -    $   -
                                                 ======   ======



At December 31, 1999 and 1998, a 100% valuation  allowance has been provided on
the total deferred  income tax assets  because it is more  likely than  not that
loss  carryforwards  will not  be  realized  based on recent operating results.

As of December 31, 1999, there were unused net operating loss carryforwards (the
"NOL's")  for regular  federal tax  purposes  of  approximately  $36 million and
California tax purposes of approximately $4.7 million expiring from 2012 through
2019 and 2001 through 2004, respectively.  In addition, the Company has research
and development tax credit  carryforwards  of  approximately  $1.4 million which
expire from 2002 through 2019 and in conjunction  with the  Alternative  Minimum
Tax ("AMT")  rules,  the  Company  has  available  AMT credit  carryforwards  of
approximately  $.8 million at December 31, 1999, 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 carryforward and  approximately $2 million of
the California NOL carryforward  will be limited  annually to approximately  $.4
million.  The usage of  Andataco's  tax credit  carryforward  is also subject to
limitation because of the change in ownership.

For the year ended  December  31, 1997,  the  provision  for federal  income tax
expense of $.2 million represents AMT taxes paid during 1997.

                                       37
<PAGE>

(5)  BORROWINGS

     Bank Line of Credit

Andataco Revolver

The Andataco Revolver 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.  The Andataco Revolver
currently  bears  interest at prime plus 1/2 percent (9.0% at December 31, 1999)
and matures in April  2002.  Andataco  pays a facility  fee of .25% based on the
average  unused portion of the maximum  borrowings.  Advances under the Andataco
Revolver  are  collateralized  by  substantially  all  assets of  Andataco.  The
Andataco Revolver provides for certain financial  covenants,  including Andataco
maintaining a certain minimum working capital and tangible net worth. During the
second  quarter  ended June 30, 1999,  Andataco was not in  compliance  with the
financial  covenant regarding  tangible net worth;  however,  effective July 13,
1999,  the lender  agreed to waive the default,  subject to, among other things,
receipt  from nStor of a $.5 million  capital  contribution.  On July 16,  1999,
nStor contributed $.5 million in cash as a capital contribution to Andataco.  As
of December 31, 1999, the outstanding  balance of the Andataco Revolver was $5.1
million and an  additional  approximately  $.2 million  was  available  based on
eligible  collateral.  The weighted  interest rate on the Andataco  Revolver was
8.7% for the year ended December 31, 1999. See note 14 to consolidated financial
statements.


nStor Revolver

In January 2000, the Company paid off the outstanding balance and terminated the
nStor revolving line of credit agreement (nStor  Revolver).  During fiscal 1999,
the nStor Revolver  provided for borrowings based on the lesser of $5 million or
80% of eligible  accounts  receivable,  as defined.  Interest  was paid based on
prime plus 2% (10.5% at December  31,  1999).  The Company  paid a facility  fee
equal to 1% per annum on the total  facility of $5 million.  Advances  under the
nStor Revolver were  collateralized  by substantially  all assets of the Company
(excluding  those of Andataco),  including  $.5 million  reflected as Restricted
Cash as of  December  31,  1998.  The  balance  under the nStor  Revolver  as of
December 1999 was $10,000.  The weighted interest rate on the nStor Revolver was
10.0% and 10.1% for the years ended December 31, 1999 and 1998, respectively.

Notes Payable, Director Loans and Extraordinary Loss on Extinguishment of Debt

At December 31, 1998, current  borrowings  included $.3 million due to a company
controlled by H. Irwin Levy, a director and principal shareholder of the Company
(collectively,  Mr.Levy).  During 1999,  Mr. Levy  advanced an  additional  $3.6
million to the Company.  Of these 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
(see note 9 to Consolidated Financial Statements). At December 31, 1999, current
borrowings  included $1.6 million due to Mr. Levy, the maximum amount  available
under a revolving basis with interest at 10% per annum, due 30 days from demand.
Aggregate  interest expense paid to Mr. Levy was $149,000,  $217,000 and $27,000
for the years ended December 31, 1999, 1998 and 1997,  respectively.  In January
2000, the  promissory  note was  paid off and satisfied in full. See note 14  to
consolidated financial statements.


                                       38
<PAGE>

In December  1999, the Company  issued  1,878,462  shares of its common stock in
full satisfaction of $5.5 million of Notes Payable,  including 338,462 shares of
common stock in full satisfaction of $1 million of Notes Payable to Mr. Levy and
a  company  controlled  by Mr.  Levy;  42,308  shares  of  common  stock in full
satisfaction  of $.1 million of Notes  Payable to a company  controlled  by Mark
Levy, a Director of the Company  until  January  2000;  42,308  shares of common
stock  in full  satisfaction  of $.1  million  of  Notes  Payable  to a  company
controlled  by another  member of the Levy family;  and 84,615  shares of common
stock in full  satisfaction  of $.3 million of Notes Payable to Bernard Green, a
Director  of  the  Company  (Mr.  Green).  On  the  date  of  satisfaction,  the
unamortized  discount on the Notes Payable was $.5 million which was recorded as
an  extraordinary  loss on  extinguishment  of debt. The remaining Notes Payable
amounted to $1.3  million (net of $21,000 of  unamortized  discount) at December
31, 1999,  bear  interest at 10% per annum and mature on  September 5, 2001,  as
extended.

In connection  with the issuance of $5 million of Notes Payable 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
and a privately owned corporation  controlled by 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 Notes  Payable,  of which  $582,000 and  $137,000 was  amortized as interest
expense for the years ended December 31, 1999 and 1998, respectively.

     Acquisition Notes

In  connection  with the  acquisition  of Andataco  (See Note 2 to  Consolidated
Financial   Statements),   the  Company  issued  $5.1  million  in  subordinated
promissory notes to affiliates of Mr. Sykes (Acquisition Notes). The Acquisition
Notes bear interest at 9.5% per annum and become due in June 2004.

     Convertible Notes

The Company has issued certain convertible notes with a face amount of $400,000,
which have been discounted  based on an effective  interest rate of 12%, include
accrued  interest  of  $222,000  and  $214,000  at  December  31, 1999 and 1998,
respectively,  mature in 2000 and are convertible  into 160,000 shares of common
stock of the Company (based on one common share for each $2.50 of face amount).

Maturities

Scheduled and estimated maturities of the Company's borrowings are as follows:

             Years ending December 31,

                   2000                $ 7,325
                   2001                  1,229
                   2002                     -
                   2003                     -
                   2004                  5,100
                                       -------
               Total payments           13,654
               Less current portion      7,325
                                       -------
               Long-Term portion       $ 6,329
                                       =======


                                       39
<PAGE>

(6)  SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS

The Company operates predominantly in one business segment,  information storage
solutions,  including external RAID subsystems.  The Company's customers include
end  users,  original  equipment  manufacturers,  integrators  and  value  added
resellers.  Financial  instruments  which  potentially  subjects  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.  Sales to two customers accounted for 15% and 11%, 27% and 13%, and 11%
and 10% for the years ended December 31, 1999, 1998 and 1997,  respectively.  No
other  customer  accounted  for 10% or more of sales in any of the  three  years
presented.

Sales  to  geographic   areas  other  than  the  United  States  have  not  been
significant.

(7)  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.

(8)  COMMON STOCK

On March 30, 1999, the Company issued 645,000 shares of common stock  (including
395,000 shares to Mr. Levy) in  satisfaction  of  approximately  $1.3 million of
debt.

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, for $1 million in cash to a private investor.

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  approximately
924,000 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.

                                       40
<PAGE>

In December 1999, the Company  issued  1,878,462  shares of common stock in full
satisfaction of $5.5 million of Notes Payable.

Also in December 1999, 600 shares of the Series F Preferred Stock were converted
into 200,000 shares of common stock at a conversion price of $3.00 per share.

During fiscal year 1999, the Company issued  approximately  1,686,000  shares of
common  stock on the  exercise of stock  options and  warrants  for an aggregate
amount of $2.8 million.

(9)  8% CONVERTIBLE 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").

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.

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 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.

                                       41
<PAGE>

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

Series C

The Series C Preferred Stock with a stated value of $3 million (including the $1
million  that was  exchanged  for  Series B) as of  December  31,  1999  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 as of July
7, 2000  automatically  converts into the Company's common stock. Mr. Levy holds
all of the 3,000 outstanding shares of the Series C Preferred Stock.

Series D

During  October 1998,  the Company  received $2.7 million in cash from unrelated
private investors in a private placement 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 $2.7 million as of December 31, 1999,  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  within  three  years  from  the  date of  issuance  is
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.

Series E

In a private placement of its Series E Convertible Preferred Stock, (the "Series
E Preferred  Stock") in June 1999,  the  Company  issued  3,500  shares for $3.5
million,  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, 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,  the Company  issued  4,654 shares of
Series F  Convertible  Preferred  Stock (the "Series F Preferred  Stock") to Mr.
Sykes.  The  shares of Series F  Preferred  Stock,  with a stated  value of $4.7
million,  are  convertible  into the  Company's  common  stock  based on a fixed
conversion  price of $3.00 per share.  The Series F Convertible  Preferred Stock
requires quarterly  dividends at the following annual rates: 8% during the first
year, 9% during the second year and 10% thereafter. In December 1999, 600 shares
of the  Series F  Preferred  Stock were  converted  into  200,000  shares of the
Company's common stock. In January and February 2000, an additional 3,118 shares
of  Series F  Preferred  Stock  were  converted  into  1,039,300  shares  of the
Company's common stock.

                                       42
<PAGE>

(10)  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 ten years;
volatility  at 60% for 1999,  60% for 1998 and ranging from 57% to 60% for 1997,
and;  risk-free interest rates of 5.6% for 1999, 5.3% for 1998, and ranging from
5.7% to 6.79% for 1997.

Under the accounting provisions of SFAS 123, the Company's net loss and loss per
share,  for the years ended  December  31,  1999,  1998 and 1997 would have been
reduced  to the pro forma  amounts  indicated  below (in  thousands,  except per
share):

                                Year Ended  December 31,
                            ------------------------------
                              1999       1998       1997
                            --------   --------   --------
     Net loss:
       As reported          ($18,704)  ($10,407)  ($7,886)
       Pro forma            ($18,811)  ($10,836)  ($8,123)
     Loss per share:
       As reported             ($.89)     ($.63)   ($.42)
       Pro forma               ($.89)     ($.65)   ($.43)


                                       43
<PAGE>

Changes in options outstanding are summarized as follows:

                                                     Weighted-
                                                      Average
                                          Weighted-    Fair
                                           Average   Value Per
                                          Exercise    Share of
                                            Price     Options
                                 Shares   Per Share   Granted
                            (in thousands)
                                 ------   ---------  ---------
Balance, January 1, 1997         1,475        2.53
  Granted - equal to
    market value                   325        2.21       1.64
  Forfeited                        (35)       2.10
                                 -----
Balance, December 31, 1997       1,765        2.48
                                 -----
  Granted - equal to
    market value                   881        1.38       1.03
  Granted - exceeds
    market value                 1,160        1.14        .52
  Forfeited                       (860)       1.98
                                 -----
Balance, December 31, 1998       2,946(a)     1.67

  Granted - equal to
   market value                  3,453        2.23      1.60
  Exercised                       (818)       1.75
  Forfeited                       (958)       1.97
                                 -----
Balance, December 31, 1999       4,623
                                 =====

------------
 (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 to amend 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.

At December 31, 1999, 1998 and 1997, a total of 853,000,  1,189,000 and 705,000,
respectively,   of   the   outstanding   options   were   exercisable   with   a
weighted-average  exercise price of $2.20,  $2.31 and $2.91,  respectively,  per
share. The number of options available to grant under the Plan was 1,708,503 and
0 as of December 31, 1999 and 1998, respectively.

                                       44
<PAGE>

The following table summarizes information about fixed stock options at December
31, 1999:

                                                                   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        1999          Life        Price       1999          Options
           (in thousands)                         (in thousands)
--------    -----------   -----------   --------  -----------     -----------

$.50-$1.75      1,783       8.9 years     $1.41         326          $1.09
$2.00-$2.69     2,595       9.3 years     $2.23         327          $2.20
$3.00-$4.00       245       7.4 years     $3.82         200          $4.00
                -----       ---------     -----       -----          -----
 $.50-$4.00     4,623       9.0 years     $1.99         853          $2.19
                =====       =========     =====        =====         =====


At December 31, 1999, the Company had outstanding warrants under which 1,949,972
shares of common stock could be acquired. Information relating to these warrants
is summarized as follows:

                             Number of
                              Shares                     Warrant Price
                          (in thousands)            Per Share      Total
                           -----------            ------------  -----------
Balance, January 1, 1997         500                 $2.10     $ 1,050,000

Warrants issued                   55                 $2.35         129,000
                            ---------                           ----------
Balance, December 31, 1997       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
                            =========                           ==========



                                       45
<PAGE>

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

      January 2000              30              $2.10
      October 2000              65              $2.35
      December 2000            400              $1.38
      March 2001               333              $1.25
      January 2002             600              $3.00
      April 2002               250              $2.00
      June 2002                272              $3.30
                             -----
                             1,950
                             =====

As of December 31, 1999, the Company had reserved common stock for the following
purposes (in thousands):

         Convertible preferred stock       9,885
         1996 Stock Option Plan            4,623
         Stock warrants                    1,950
         Severance agreements                123
         Convertible notes payable           160
                                          ------
                                          16,741
                                          ======


(11)  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  $193,000  during the year ended December 31, 1999 under the terms
of the lease agreement.

     Hilcoast Advisory Services, Inc. ("Advisor")

From July 1996 through  October  1997,  the Company  paid $6,000 per month,  and
commencing  again  in  October  1999,  began  paying  $5,000  per  month,   plus
reimbursement  of  out-of-pocket  expenses,  to 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 the
Advisor's parent.  Management  believes that the terms of this agreement were no
less  favorable  to the  Company  than those that would be  received  from other
sources.

(12)  LEASES

The Company leases its operating  facilities under operating leases which expire
at various dates through March 2003. At December 31, 1999, future minimum rental
payments under  operating  leases that have initial or remaining terms in excess
of one year were as follows (in thousands):

                                       46
<PAGE>

                       Due to       Due to
                    Non-related    Related
                       Party        Party           Total
                      --------     -------         -------
               2000   $   438       $  331         $   769
               2001       210          331             541
               2002       152          331             483
               2003        86           83             169
                      --------      ------          ------
                      $   886       $1,076         $ 1,962
                      =======      =======          ======


Rent expense was  $790,000,  $513,000 and $485,000 for the years ended  December
31, 1999, 1998 and 1997,  respectively  (see Note 11 to  Consolidated  Financial
Statements).

(13)  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, 1999.

(14) SUBSEQUENT EVENTS

   OneofUs Company Limited

On January 19, 2000,  the Company  acquired  substantially  all of the assets of
OneofUs  Company  Limited  for  an  aggregate   purchase  price  of  $2,850,000,
consisting  of $250,000 cash and 776,000  shares of the  Company's  common stock
with an aggregate value of $2,600,000  (based on the average market price of the
Company's  stock during the ten (10) trading days ended January 19,  2000).  The
shares  were  issued  to  three  selling  stockholders  pursuant  to  employment
agreements   and  to  a  fourth  selling   stockholder  in  connection   with  a
confidentiality,  noncompetition  and  nonsolicitation  agreement.  We agreed to
register  the  shares on a  Registration  Statement  on Form S-3.  OneofUs  is a
Taiwan-based,  privately-held  designer of high  performance  Fibre Channel RAID
controllers and storage  solutions for open systems and the Storage Area Network
market.

  Borg Adaptive Technologies, Inc.

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 assets
included all of the  intellectual  property rights relating to the Adaptive RAID
technology,  including  software,  patents and trademarks,  and certain tangible
assets, including test and office equipment and tenant improvements. The Company
expects to record a gain of  approximately  $6.5 million  from this  transaction
during the first quarter of fiscal year 2000.  The Borg division costs were $1.0
million and $.7 million in 1999 and 1998, respectively.

In connection  with the sale, the Company  retained a perpetual  license to use,
compile and modify the software  relating to the Adaptive  RAID  technology,  as
well  as a  license  to  distribute,  market  and  sublicense  the  software  in
conjunction with our storage products.

                                       47
<PAGE>

   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.

   Borrowings

At February  29,  2000  and  March  31,  2000,  Andataco  was  not in compliance
with the   minium tangible net worth covenant pursuant to the Andataco Revolver;
however, effective  March 29, 2000, the  lender agreed  to waive the default for
both  periods.  Effective  April 14, 2000, the Company and the lender  agreed to
amend certain terms of the Andataco Revolver including  the following:  a change
in  the  borrower  from  Andataco to the  Company;  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 Andataco Revolver
remain the same.

Effective  April 12, 2000,  Mr. Levy agreed to commit to a $2 million  revolving
line of credit facility to the  Company, which bears  interest at 10% per annum.
The maturity date on this line of  credit is the  earlier of  April 30,  2001 or
when the Company executes its amended bank line of credit.


(15) FOURTH QUARTER ADJUSTMENTS

During the fourth quarter of 1999, the Company recorded a write-down of 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 to San  Diego.  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.

(16) COMMITMENTS

The common  stock  issued to Mr.  Ravine  and Mr.  Steffann  in January  2000 in
connection  with  their  employment   termination  agreements  was  recorded  as
committed common stock as of December 31, 1999.


                                       48
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors of
  nStor Technologies, Inc.



The audits  referred to in our report dated  February 21, 2000, except as to the
last two paragraphs of note 14, which are as of April 14, 2000,  relating to the
consolidated  financial  statements  of  nStor  Technologies,  Inc.,  which  are
contained  in Item 8 of this Form 10-K  included  in the audit of the  financial
statement  schedules listed in the accompanying  index. The financial  statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial  statement  schedules based upon our
audits.

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

                                                          BDO Seidman, LLP



Costa Mesa, California
February 21, 2000, except
 as to the last two paragraphs
 of Note 14, which are as of
 April 14, 2000

                                       49
<PAGE>

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

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

                     CONDENSED UNCONSOLIDATED BALANCE SHEET

                                                (in thousands)

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

Investments in and receivables from subsidiaries .................       14,945
Other non-current assets .........................................           68
                                                                       --------
                                                                       $ 15,558
     LIABILITIES                                                        =======
     ----------
Current liabilities:
   Borrowings ....................................................     $  2,214
   Accounts payable and other ....................................          550
   Dividends payable .............................................          192
                                                                       --------
        Total current liabilities ................................        2,956

Notes payable ....................................................        6,329
                                                                       --------
        Total liabilities ........................................        9,285
                                                                       --------

     SHAREHOLDERS' EQUITY
     --------------------
Preferred stock, $.01 par; 1,000,000 shares authorized,
 in order of preference:
  Convertible  Preferred Stock;  Series F, 4,054
  and 0 issued and outstanding as of  December  31, 1999
  and 1998,  respectively,  aggregate  liquidation  value
  $4,054; Series A, 1,667 issued and outstanding,
  aggregate  liquidation value $1,000;  Series C, 3,000
  issued and outstanding,  aggregate  liquidation value
  $3,000; Series D, 2,700 issued and outstanding,
  aggregate  Liquidation value $2,700;  Series E, 3,500
  and 0 issued and  outstanding as of December 31, 1999
  and 1998, respectively, liquidation value $3,500 ...............         --
Common stock, $.05 par; 75,000,000 shares authorized;
 26,517,824 and 20,515,425 shares issued and outstanding
 at December 31, 1999 and December 31, 1998, respectively ........        1,331
Additional paid-in capital .......................................       63,164
Accumulated deficit ..............................................      (58,222)
                                                                       --------
        Total shareholders' equity ...............................        6,273
                                                                       --------
                                                                       $ 15,558
                                                                       ========



                                       50
<PAGE>

                            nSTOR TECHNOLOGIES, INC.
            CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
                  CONDENSED UNCONSOLIDATED STATEMENT OF INCOME
                                 (in thousands)


                                                                    Year Ended
                                                                    December 31,
                                                                         1999
                                                                     ----------
Loss from investment in subsidiaries ..........................        ($16,137)
Other income ..................................................              92
                                                                       --------
                                                                        (16,045)
Operating expenses:
  Selling, general and administrative .........................             637
                                                                       --------
Operating loss ................................................         (16,682)

Other expense:
  Interest expense ............................................           1,557
                                                                       --------
Loss before preferred dividends and
 extraordinary loss ...........................................         (18,239)

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

Preferred stock dividends .....................................            (902)
Embedded dividend attributable to
  beneficial conversion privilege
  of Convertible Preferred Stock ..............................            (332)
                                                                       --------
Loss available to common stock ................................        ($19,938)
                                                                       ========


                                       51
<PAGE>

                            nSTOR TECHNOLOGIES, INC.
            CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONCLUDED)
                CONDENSED UNCONSOLIDATED STATEMENT OF CASH FLOWS
                                 (in thousands)

                                                                     Year Ended
                                                                    December 31,
                                                                         1999
CASH FLOWS FROM OPERATING ACTIVITIES:                               ------------
  Net loss .......................................................     ($18,704)
  Adjustments to reconcile net loss to
    net cash used by operating activities:
      Amortization of deferred compensation costs ................          171
      Amortization of deferred loan costs ........................          620
      Loss on extinguishment of debt .............................          476
   Changes in assets and liabilities, net of effects
    from acquisition:
          Decrease in receivables from subsidiaries ..............        8,567
          Increase in prepaid expenses and other .................         (141)
          Increase in accounts payable and
            other liabilities ....................................          188
                                                                       --------
Net cash used by operating activities ............................       (8,823)
                                                                       --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Cash paid for acquisitions .....................................       (1,354)
                                                                       --------
Net cash used by investing activities ............................       (1,354)
                                                                       --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from other borrowings .................................        7,075
  Repayments on other borrowings .................................       (1,200)
  Issuance of Convertible Preferred Stock in private
   placements, net of costs ......................................        1,962
  Issuance of common stock in private placement ..................        1,000
  Proceeds from exercise of stock options and warrants ...........        2,519
  Cash paid for preferred stock dividends ........................         (823)
                                                                       --------
  Net cash provided by financing activities ......................       10,533
                                                                       --------
Net increase in unrestricted cash and cash equivalents
 during the year .................................................          356
Unrestricted cash and cash equivalents at beginning of
 period ..........................................................          110
                                                                       --------
Unrestricted cash and cash equivalents at end of period ..........     $    466
                                                                       ========


                                       52
<PAGE>

                            nSTOR TECHNOLOGIES, INC.
                 Schedule II-- Valuation and Qualifying Accounts
               Fiscal Years Ended December 31, 1999, 1998 and 1997


                                                Additions
                          Balance at  Additions Resulting             Balance at
                          Beginning    Charged    from                  End of
                           of Year    to Income  Merger   Deductions*    Year
                          ---------- --------- ---------- ----------- ----------
Allowance for Doubtful
 Accounts Receivable:
  1999.................. $ 502,000 $  954,000  $ 228,000  $   80,000  $1,604,000
  1998..................   500,000    837,000         --     835,000     502,000
  1997..................   550,000    522,000         --     572,000     500,000

Allowance for Inventory
 Obsolescence:
  1999.................. $ 428,000 $1,497,000  $2,085,000 $  591,000  $3,419,000
  1998.................. 1,839,000  1,354,000         --   2,765,000     428,000
  1997..................   902,000  1,450,000         --     513,000   1,839,000

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


                                       53
<PAGE>

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 2000 Annual Meeting of Stockholders,
which information is incorporated herein by reference.

Item 11.  Executive Compensation

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

Item 12. Security Ownership of Certain Beneficial Owners and Management

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

Item 13.  Certain Relationships and Related Transactions

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

                            PART IV

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

(a)  (1) Financial  Statements - See index to Consolidated  Financial Statements
     at page 25 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 58-62 of this Form 10-K.

(b) The  Registrant  filed reports on Form 8-K during the fourth quarter of
     1999 as follows:

     (i) A report on Form 8-K dated November 1, 1999 and filed November 5, 1999,
     reporting  under Item 2 - Acquisition or Disposition of Assets and Item 5 -
     Other Events, and Exhibits,  in which the Company announced its acquisition
     of the remaining 22.8% of the common stock of Andataco, Inc.



                                       54
<PAGE>

                                  EXHIBIT INDEX

Exhibit
Number                           Description

     2.1  Purchase  Agreement,  dated as of  March 2,  1999,  by and  among  the
          registrant,  W.  David  Sykes and the Sykes  Children's  Trust of 1993
          dated November 22, 1993 (13)

     2.2  Amendment No. 1 to Purchase Agreement,  dated as of April 26, 1999, by
          and among the registrant,  W. David Sykes,  the Sykes Family Trust and
          the Sykes Children's Trust of 1993 dated November 22, 1993 (13)

     2.3  Amendment No. 2 to Purchase Agreement,  dated as of April 26, 1999, by
          and among the registrant,  W. David Sykes,  the Sykes Family Trust and
          the Sykes Children's Trust of 1993 dated November 22, 1993 (13)

     2.4  Merger  Agreement  dated as of  August  27,  1999 by and  among  nStor
          Technologies, Inc., NTI Acquisition Corp. and Andataco, Inc. (12)

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

     3.1  Restated  Certificate of Incorporation filed with State of Delaware on
          December 28, 1999 (8)

     3.2  By-laws of Registrant, as amended (6)

     3.3  Certificate  of  Elimination  of  the  Designation  of  the  Series  A
          Preferred Stock of Registrant (3)

     4.1  Form of Warrant  dated  January  26, 1999  issued in  connection  with
          Promissory Note dated January 26, 1999 between Registrant, (i) Herbert
          Gimelstob,  for 200,000  shares,  (ii) Maurice  Halperin,  for 200,000
          shares,  (iii)  Patricia  Auld,  for 100,000  shares and (iv) James P.
          Marden, for 100,000 shares (7)

     4.2  Certificate of Designation of Series A Convertible Preferred Stock (1)

     4.3  Certificate of Designation of Series B Convertible Preferred Stock (1)

     4.4  Form of Share Exchange Agreement dated June 9, 1998 between Registrant
          and  holders of the Series A  Preferred  Stock  whereby  such  holders
          exchanged  their Series A Preferred Stock for Series B Preferred Stock
          (3)

     4.5  Certificate of Designation of Series C Convertible Preferred Stock (1)

     4.6  Certificate of Designation of Series D Convertible Preferred Stock (1)

     4.7  Form of Warrant dated  September  22, 1998 issued in  connection  with
          extending certain  subordinated notes as follows: (i) Bernard Marden -
          333,334 shares; (ii) Herbert Gimelstob - 416,667 shares; (iii) Fairway
          Partnership - 333,334 shares; (iv) H. Irwin Levy - 166,666 shares; (v)
          Bernard Green - 83,333  shares;  (vi) Meyer  Capital - 83,333  shares;
          (vii) MLL Corp. - 166,666  shares;  (viii) JoJo Corp. - 41,666 shares;
          (ix) N&S Corp. - 41,667 shares (7)

     4.8  Subscription  Agreement  between  Registrant  and Maurice  Halperin in
          connection with Series A Convertible Preferred Stock (1)

                                       55
<PAGE>

     4.9  Registration  Rights Agreement between Registrant and Maurice Halperin
          in connection with Series A Convertible Preferred Stock (1)

     4.10 Form of Warrant  dated  October  28, 1998  issued in  connection  with
          Redemption of Series B Convertible Preferred Stock, between Registrant
          and (i) CPR (USA), Inc., 180,000 shares, (ii) LibertyView Fund, 23,400
          shares and (iii) LibertyView Plus Fund, 96,600 shares (1)

     4.11 Form of Subscription  Agreement  between  Registrant and H. Irwin Levy
          for loans made by H. Irwin Levy to Registrant which were exchanged for
          Series C Convertible Preferred Stock (1)

     4.12 Subscription  Agreement  between  Registrant and H. Irwin Levy for the
          exchange  of  Series  B  Convertible  Preferred  Stock  for  Series  C
          Convertible Preferred Stock (1)

     4.13 Registration Rights Agreement between Registrant and H. Irwin Levy for
          Series C Convertible Preferred Stock (1)

     4.14 Letter Agreement between Registrant and H. Irwin Levy regarding Series
          C Convertible Preferred Stock (1)

     4.15 Letter   Agreement   between   Registrant  and   LibertyView   Capital
          Management,  Inc. regarding the redemption of $2.3 million of Series B
          Convertible Preferred Stock (1)

     4.16 Letter   Agreement   between   Registrant  and   LibertyView   Capital
          Management,  Inc. regarding registration rights for warrants issued in
          connection with the redemption of $2.3 million of Series B Convertible
          Preferred Stock (1)

     4.17 Form of  Subscription  Agreement  for Series D  Convertible  Preferred
          Stock (1)

     4.18 Form  of  Registration  Rights  Agreement  for  Series  D  Convertible
          Preferred Stock (1)

     4.19 Restated Certificate of Incorporation of the Registrant, - see Exhibit
          3.1 above

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

     4.21 8%  Convertible  Subordinated  Debenture  dated June 7, 1998 issued by
          Registrant to Maurice Halperin, as amended on August 7, 1998 (2)

     4.22 Form of  Subscription  Agreement dated as of December 16, 1999, by and
          among the Registrant and certain noteholders (8)

     4.23 Nonqualified  Stock  Option  Agreement,  dated as of March  26,  1999,
          between the registrant and Norbert D. Witt (14)

     4.24 Certificate  of Designation  of Series E Convertible  Preferred  Stock
          (13)

     4.25 Certificate  of Designation  of Series F Convertible  Preferred  Stock
          (13)

     4.26 Warrant dated June 8, 1999, issued to W. David Sykes (13)

     4.27 Form of warrant,  dated June 8, 1999, issued to purchasers of Series E
          Convertible Preferred Stock (13)

     4.28 9.5%  Subordinated  Note,  dated  June 8,  1999,  issued  to the Sykes
          Children's Trust of 1993 (13)


                                       56
<PAGE>

     4.29 9.5% Subordinated Note, dated June 8, 1999, issued to the Sykes Family
          Trust (13)

     4.30 Registration  Rights  Agreement,  dated June 8, 1999,  by and  between
          nStor Technologies, Inc. and W.
          David Sykes (13)

     4.31 Form of Registration  Rights Agreement,  dated June 8, 1999, issued to
          the purchasers of Series E Convertible Preferred Stock (13)

     4.32 Form of Employee  Agreement  between the registrant and W. David Sykes
          (13)

     4.33 Letter Agreement, dated June 8, 1999, by and between H. Irwin Levy and
          W. David Sykes (13)

     10.1 Promissory  Note for $500,000 dated March 15, 1999 between  Registrant
          and Maurice Halperin (7)

     10.2 Promissory Note for $1 million dated March 1, 1999 between  Registrant
          and H. Irwin Levy (7)

     10.3 Form of Promissory Note dated January 26, 1999 between  Registrant and
          (i) Herbert Gimelstob  ($600,000),  (ii) Maurice Halperin  ($600,000),
          (iii) Patricia Auld ($300,000) and (iv) James P. Marden ($300,000) (7)

     10.4 Loan and  Security  Agreement  dated  August  3, 1998 by and among the
          Registrant, nStor Corporation, Inc. and Finova Capital Corporation (2)

     10.5 Form of Amended and Restated  Promissory Note dated September 22, 1998
          between  Registrant and Bernard  Marden,  Herbert  Gimelstob,  Fairway
          partnership and H. Irwin Levy (1)

     10.6 Security Agreement between Registrant and H. Irwin Levy dated July 31,
          1998 (1)

     10.7 Loan  Agreement  between  Registrant  and H. Irwin Levy dated July 31,
          1998 for $1.5 million (1)

     10.8 Employment Agreement between Registrant and Lawrence Steffann dated as
          of June 1, 1998 (7)

     10.9 Employee  Incentive  Stock Option  Agreement  between  Registrant  and
          Lawrence Steffann, dated as of June 1, 1998 (7)

    10.10 1996 Stock Option Plan, dated October 5, 1996. (6)

    10.11 Amended  and  Restated  Promissory  Note dated  March 5, 1998 between
          Registrant and H. Irwin Levy for $2 million (5)

    10.12 Amended and  Restated  Loan  Agreement  dated March 5, 1998 between H.
          Irwin Levy and Registrant, in the amount of $2 million. (5)

    10.13 Promissory  Note in the  amount  of $1  million  dated  March 5,  1998
          between Fairway Partnership and Registrant  (Duplicate notes were also
          executed  for the same amount  between  Registrant  and (i) Bernard A.
          Marden and (ii) Herbert Gimelstob.) (5)


                                       57
<PAGE>

    10.14 Amended and Restated  Security  Agreement  dated March 5, 1998 between
          H. Irwin Levy, Fairway Partnership,  Herbert Gimelstob, and Bernard A.
          Marden (collectively, referred to as "Secured Parties") (5)

    10.15 Collateral Assignment of Note, Loan Agreement,  Security Agreement and
          Security Instruments among Registrant and Secured Parties, dated March
          5, 1998. (5)

    10.16 Stock  Purchase   Agreement  dated  February  2,  1998  between  nStor
          Corporation,  Inc.  and  David  Stallmo,  Randy  K.  Hall  and  Gerald
          Hohoenstein (4)

    10.17 Form  of  amendment  to  Stock  Purchase   Agreement  at  10.16  (four
          amendments,  all of which  extended  the closing  date of the proposed
          transaction) (4)

    10.18 Software  License  Agreement dated as of January 10, 2000 by and among
          nStor Corporation, Inc. and QLogic Acquisition Corporation (9)

    10.19 Amendment to nStor Technologies, Inc. 1996 Stock Option Plan (10)

    10.20 Modification  dated  November  1, 1999,  of Demand Note dated July 15,
          1999 between Registrant and H. Irwin Levy (11)

    10.21 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) Patricia Auld ($300,000) and (iv) James P.
          Marden ($300,000) (11)

    10.22 Form of Amended  and  restated  Promissory  Note dated  September  22,
          1998,  between  Registrant  and  Bernard  Marden,  Herbert  Gimelstob,
          Fairway Partnership and H. Irwin Levy (11)

    10.23 Modification  dated  December  1, 1999,  of Demand Note dated July 15,
          1999 between Registrant and H. Irwin Levy

    10.24 Modification  dated  December 16, 1999,  of Demand Note dated July 15,
          1999 between Registrant and H. Irwin Levy

    10.25 Letter of  commitment  dated April 12, 2000 for $2 million between H.
          Irwin Levy and Registrant

    21    Subsidiaries of the Registrant

    23    Consent of BDO Seidman, LLP

    27    Financial Data Schedule

--------------
  (1)     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.

  (2)     Incorporated by reference to Exhibits  previously filed as Exhibits to
          Registrant's  Form 10-Q for the  quarter  ended June 30,  1998,  filed
          August 13, 1998.

  (3)     Incorporated by reference to Exhibits  previously filed as Exhibits to
          Registrant's  Amendment  No.1 to  Registration  Statement  on Form S-3
          filed on June 22, 1998.

  (4)     Incorporated by reference to Exhibits  previously filed as Exhibits to
          Registrants  Form 10-Q for the quarter ended March 31, 1998, filed May
          15, 1998.

  (5)     Incorporated by reference to Exhibits filed as Exhibits to Registrants
          Form 10-K for the year ended  December  31,  1997,  filed on April 15,
          1998.


                                       58
<PAGE>

  (6)     Incorporated by reference to Exhibits  previously filed as Exhibits to
          Registrant's Form 10-K dated January 27, 1997, filed January 28, 1997.

  (7)     Incorporated by reference to Exhibits  previously filed as Exhibits to
          registrant's  Form 10-K for the year  ended  December  31,  1998 dated
          April 12, 1999, filed April 15, 1999.

  (8)     Incorporated by reference to Exhibits  previously filed as Exhibits to
          registrant's Form S-3 dated and filed January 19, 2000.

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

  (10)    Incorporated by reference to Exhibits  previously filed as Exhibits to
          registrant's Form S-8 dated January 6, 2000, filed January 10, 2000.

  (11)    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.

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

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

  (14)    Incorporated by reference to Exhibits  previously filed as Exhibits to
          registrant's Form S-3 filed July 2, 1999.



                                       59
<PAGE>




                                          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
March 29, 2000             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
March 29, 2000        ___________________________________________
                      H. Irwin Levy, Chairman of the Board


                           /s/ Michael L. Wise
March 29, 2000        ___________________________________________
                      Michael L. Wise, Director


                           /s/ Bernard Green
March 29, 2000        ___________________________________________
                      Bernard Green, Director


                           /s/ Roger H. Felberbaum
March 29, 2000        ___________________________________________
                      Roger H. Felberbaum, Director


                           /s/ Larry Hemmerich
March 29, 2000        ___________________________________________
                      Larry Hemmerich, Chief Executive Officer
                       and Director

                           /s/ Jack Jaiven
March 29, 2000        ___________________________________________
                      Jack Jaiven, Principal Financial
                       Officer and Principal Accounting Officer