SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549


                                    FORM 10-Q


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

                For the quarterly period ended September 30, 2002

                                       OR

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

          For the transition period from ___________ to ______________

                         Commission File Number: 0-8354

                            nSTOR TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its Charter)


                 Delaware                                   95-2094565
                 --------                                   ----------
      (State of other jurisdiction of                    (I.R.S. Employer
       incorporation or organization)                   Identification No.)


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

                                  (858)453-9191
                         (Registrant's telephone number)


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 _____

         Number of shares outstanding of the Registrant's Common Stock,
          par value $.05 per share, as of October 31, 2002: 142,076,947


<PAGE> 2


                    nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION
                                                                     Page
                                                                    Number
                                                                    ------
  Item 1.      Financial Statements

        Consolidated Balance Sheets as of September 30,
          2002 (Unaudited) and December 31, 2001                         3
        Consolidated Statements of Operations
          (Unaudited) for the three and nine months
          ended September 30, 2002 and 2001                              4
        Consolidated Statement of Stockholders'
          Equity (Unaudited) for the nine months
          ended September 30, 2002                                       5
        Consolidated Statements of Cash Flows
          (Unaudited) for the nine months ended
          September 30, 2002 and 2001                                  6-7
        Notes to Consolidated Financial Statements
          (Unaudited)                                                 8-19


  Item 2.  Management's Discussion and Analysis of
             Financial Condition and Results of Operations           19-23


  Item 3.  Quantitative and Qualitative Disclosures about
           Market Risk                                                  23


  Item 4.  Controls and Procedures                                      23


Part II.  OTHER INFORMATION

  Item 1. - Item 5.   Not Applicable                                    24

  Item 6.   Exhibits and Reports on Form 8-K                            24


SIGNATURE                                                               25


CERTIFICATIONS                                                       26-27


<PAGE> 3


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements


                            nSTOR TECHNOLOGIES, INC.
                           CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)

                                                    September 30,
                                                        2002       December 31,
         ASSETS                                     (unaudited)         2001
         ------                                     -----------    ------------
Current assets:
  Cash and cash equivalents                            $   655        $   857
  Accounts receivable, net                               1,701          1,925
  Inventories                                              437          1,364
  Marketable securities                                      -          4,255
  Prepaid expenses and other                               343            211
                                                       -------        -------
     Total current assets                                3,136          8,612

Property and equipment, net of $6,259 and
  $5,641 in accumulated depreciation                       706          1,367
Goodwill and other intangible assets, net of
  $930 and $808 in accumulated amortization             11,140          1,989
                                                       -------        -------
                                                       $14,982        $11,968
         LIABILITIES                                   =======        =======
         -----------
Current liabilities:
  Bank lines of credit                                 $   200        $ 2,991
  Other borrowings                                       4,408          1,100
  Accounts payable and other                             3,198          3,790
  Deferred revenue                                       1,610              -
                                                       -------        -------
     Total current liabilities                           9,416          7,881

Long-term debt                                           3,100          3,600
                                                       -------        -------
     Total liabilities                                  12,516         11,481
                                                       -------        -------
         STOCKHOLDERS' EQUITY
        ---------------------
Preferred stock, $.01 par; 1,000,000 shares authorized;
  Series L convertible preferred  stock, 1,000 and 0
  shares outstanding at September 30, 2002 and
  December 31, 2001, respectively                            -              -
Common stock, $.05 par; 200,000,000 shares authorized;
  137,549,920 and 114,603,144 shares issued and
  outstanding at September 30, 2002 and December
  31, 2001, respectively                                 6,877          5,729
Additional paid-in capital                             102,143         94,104
Deficit                                               (106,554)       (99,346)
                                                       -------        -------
     Total stockholders' equity                          2,466            487
                                                       -------        -------
                                                       $14,982        $11,968
                                                       =======        =======

          See accompanying notes to consolidated financial statements.


<PAGE> 4


<TABLE>
<CAPTION>

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



                                                  Three Months             Nine Months
                                               Ended September 30,     Ended September 30,
                                               -------------------     -------------------
                                                 2002      2001          2002       2001
                                                   (unaudited)             (unaudited)
                                               ------     ------       -------     -------
<S>                                            <C>        <C>          <C>         <C>
Sales                                          $3,494     $4,016       $7,504      $14,187
Cost of sales                                   2,084      2,617        6,110       10,172
                                               ------     ------       ------      -------
     Gross margin                               1,410      1,399        1,394        4,015
                                               ------     ------       ------      -------
Operating expenses:
  Selling, general and administrative           1,278      2,344        3,923        8,460
  Research and development                      1,035        825        2,422        2,796
  Depreciation and amortization                   392        401          985        1,252
                                               ------     ------       ------      -------
     Total operating expenses                   2,705      3,570        7,330       12,508
                                               ------     ------       ------      -------
     Loss from operations                      (1,295)    (2,171)      (5,936)      (8,493)

Realized losses on marketable securities            -          -       (1,123)           -
Fair value of option granted to customer            -          -         (670)           -
Other income, net                                 866      1,072          949          723
Interest expense, net                            (171)       (80)        (428)        (734)
                                               ------     ------       ------      -------
Net loss before preferred stock dividends        (600)    (1,179)      (7,208)      (8,504)

Preferred stock dividends                           -       (486)           -       (1,115)
                                               ------     ------       ------      -------
Net loss applicable to common shareholders    ($  600)   ($1,665)     ($7,208)     ($9,619)
                                               ======     ======       ======      =======

Basic and diluted net loss per common
  share                                       ($  .00)   ($  .05)     ($  .06)    ($   .27)
                                               ======     ======       ======      =======
Weighted average number of common shares
  used in per share computation, basic
  and diluted                             137,549,920  35,719,022   124,574,356 35,599,196
                                          ===========  ==========   =========== ==========

</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE> 5


<TABLE>
<CAPTION>
                            nSTOR TECHNOLOGIES, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                             (dollars in thousands)


                                                    Preferred       Addi-
                                 Common Stock          Stock       tional
                              ------------------  --------------   Paid-In
                                Shares    Amount  Shares  Amount   Capital  Deficit      Total
                              ---------- -------  ------ -------   -------  -------    -------
<S>                          <C>         <C>      <C>    <C>       <C>      <C>        <C>
Balances, December
 31, 2001                    114,603,144  $5,729       -  $    -   $94,104 ($ 99,346)  $  487

Issuance of common stock:
  Acquisition of 100% of
   common stock of Stonehouse
   Technologies, Inc.
   ("Stonehouse")             22,500,000   1,125                     5,850              6,975
  In payment of accrued
   dividends on Series D
   convertible preferred
   stock                         446,776      23                       116                139

Issuance of Series L
  convertible preferred
  stock in connection with
  acquisition of Stonehouse                        1,000       -     1,403              1,403

Fair value of option granted
  to customer                                                          670                670

Net loss for the nine months
  ended September 30, 2002                                                    (7,208)  (7,208)
                              ---------- -------  ------  ------   -------  --------   ------
Balances, September 30,
 2002 (unaudited)            137,549,920  $6,877   1,000   $   -  $102,143 ($106,554)  $2,466
                             =========== =======  ======  ======  ======== ==========  ======

</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE> 6


                            nSTOR TECHNOLOGIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                                           Nine Months
                                                       Ended September 30,
                                                       -------------------
                                                         2002        2001
                                                     (unaudited) (unaudited)
                                                      ---------   ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                            ($7,208)    ($8,504)
  Adjustments to reconcile net loss to net
   cash provided (used) by operating activities:
    Proceeds from the sale of marketable
      securities                                        3,132           -
    Realized losses on the sale of marketable
      securities                                        1,123           -
    Other income                                         (949)       (723)
    Fair value of option granted to customer              670           -
    Depreciation                                          863         947
    Provision for inventory obsolescence                  (52)        891
    Provision for uncollectable accounts                   77         797
    Amortization of goodwill and other intangible
      assets                                              122         304
    Amortization of deferred costs                          -         235
    Changes in assets and liabilities, net of
     effects from acquisition:
      Decrease in accounts receivable                   1,765       1,232
      Decrease in inventories                             979         225
      (Increase) decrease in prepaid expenses and other   (31)        385
      Decrease in deferred revenue, accounts
       payable and other                                 (351)     (3,799)
                                                       ------      ------
Net cash provided (used) by operating activities          140      (8,010)
                                                       ------      ------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Additions to property and equipment                    (121)       (123)
  Cash acquired in acquisition                            298           -
                                                       ------      ------
Net cash provided (used) by investing activities          177        (123)
                                                       ------      ------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net (repayments) borrowings on bank line of credit   (2,991)     (1,555)
  Additions to other borrowings                         2,472      10,242
  Issuance of preferred stock                               -         250
  Cash paid for preferred stock dividends                   -         (59)
                                                       ------      ------
Net cash (used) provided by financing activities         (519)      8,878
                                                       ------      ------
Net (decrease) increase in cash and cash
  equivalents during the period                          (202)        745

Cash and cash equivalents at the beginning
  of the period                                           857          37
                                                       ------      ------
Cash and cash equivalents at the end of
  the period                                           $  655      $  782
                                                       ======      ======

          See accompanying notes to consolidated financial statements.


<PAGE> 7


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

                                                             Nine Months
                                                        Ended September 30,
                                                      -----------------------
                                                          2002        2001
                                                      (unaudited) (unaudited)
                                                      ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during period for interest                 $    235     $    406
                                                       ========     ========

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:

  Non-Cash Investing Activities:
    Acquisition:
      Fair value of assets acquired                    $ 11,081     $      -
      Liabilities assumed or incurred                    (3,001)           -
      Common stock issued                                (8,378)           -
                                                       --------     --------
          Cash acquired                               ($    298)    $      -
                                                       ========     ========

  NON-CASH FINANCING ACTIVITIES:
    Issuance of preferred stock in satisfaction
      of borrowings                                    $      -     $ 11,870
                                                       ========     ========

          See accompanying notes to consolidated financial statements.


<PAGE> 8


                            nSTOR TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Basis of Presentation

In the opinion of management,  the unaudited  consolidated  financial statements
furnished  herein include all adjustments  necessary for a fair  presentation of
the results of  operations  for the interim  periods  presented.  These  interim
results of operations are not  necessarily  indicative of results for the entire
year. The consolidated  financial  statements contained herein should be read in
conjunction  with  the  consolidated  financial  statements  and  related  notes
contained in the Company's  Form 10-K, as amended,  for the year ended  December
31, 2001.

The accompanying  unaudited consolidated financial statements have been prepared
in  accordance  with  generally  accepted  accounting   principles  for  interim
financial  information and with the  instructions to Form 10-Q and Article 10 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes required for complete financial statements.

Business

nStor Corporation, Inc., ("nStor"), a wholly-owned subsidiary of the Company, is
a designer,  developer  and  manufacturer  of external  data storage  solutions,
including  high density  storage  enclosures,  storage  management  software and
controller  technology.  The  Company's  product  line  supports  a  variety  of
operating  systems,  including  Windows NT and Windows 2000,  Unix,  Linux,  and
Macintosh.  Designed for storage intensive  environments such as the Internet or
other  mission-critical  applications,  the  Company's  products  are offered in
various  architectures,  including Fibre Channel,  Fibre-to-SCSI (Small Computer
Systems Interface), and SCSI.

In June 2002, the Company acquired Stonehouse Technologies, Inc. ("Stonehouse" -
see Note 2 to Consolidated  Financial  Statements).  Stonehouse is a provider of
telecommunications  software and services  solutions that help large enterprises
manage their  communications  expenses,  assets and processes.  These  solutions
include a suite of modular  applications  and consulting  services,  which allow
enterprises  to  manage  voice,  data  and  wireless  services  by  providing  a
systematic  approach to automate  order  processing,  monitor  expenses,  manage
vendor invoices, track asset inventory and allocate costs.

Going Concern

The accompanying  consolidated  financial statements have been prepared assuming
that the  Company  will  continue  as a going  concern.  This  contemplates  the
realization of assets and the  satisfaction  of liabilities in the normal course
of business. The Company has experienced  substantial net losses of $14 million,
$21.9 million and $18.7 million for the years ended December 31, 2001,  2000 and
1999,  respectively,  and $7.2 million for the nine months ended  September  30,
2002.  In addition,  the Company has negative  working  capital at September 30,
2002. These matters,  among others,  raise substantial doubt about the Company's
ability to continue as a going concern.

However,  since  2001 the  Company  has  devoted  substantial  efforts  to:  (i)
streamline its operations; (ii) establish the foundation for generating positive
cash flow and operating profits;  and (iii) obtain sufficient financing to cover
its working capital needs.


<PAGE> 9


Since 2001, the Company has significantly reduced its direct sales personnel and
related costs as part of its strategy to expand the Company's  indirect customer
channel base (original  equipment  manufacturers  (OEMs),  resellers and systems
integrators).  Further personnel reductions have been implemented to reflect the
Company's lower sales levels, the Company's recent  outsourcing  described below
and to provide certain cost efficiencies.

In July  2002,  the  Company  entered  into a contract  with  Varian,  Inc.  for
outsourcing the production of the Company's 4000S Series of storage  enclosures.
The 4000 product  family is  currently  being  expanded to become the  Company's
universal  storage  enclosure  offering.  The  Company  began to  phase  out its
manufacturing  facility,  located  in San  Diego,  California,  during the third
quarter of 2002 and  effective  September  30, 2002,  completed the phase out of
that  facility.   The  outsourcing  agreement  has  resulted  in  a  significant
improvement in the Company's  operating margins by lowering  manufacturing costs
and overall operating costs.

From  January 1, 2001  through  October 31,  2002,  the Company  obtained  $21.2
million of equity and debt financing from private investors, principally Maurice
Halperin,  the  Company's  Chairman  of the Board  since  August 15,  2001 and a
principal  shareholder,  or companies  controlled by Mr. Halperin  (collectively
"Mr.  Halperin"),  and H. Irwin Levy, the Company's  Vice-Chairman of the Board,
Chief Executive Officer and a principal shareholder,  or companies controlled by
Mr. Levy  (collectively,  "Mr.  Levy").  In  addition,  in  connection  with the
Company's outsourcing contract, Mr. Levy provided collateral for a bank to issue
a $1 million letter of credit for the benefit of Varian.

During  February  2002, the Company's bank lender advised that it did not intend
to renew the Company's credit facility.  As of July 30, 2002, the Company repaid
the loan in full.  In August 2002,  the Company  entered  into an Agreement  For
Purchase  of Accounts  with a financial  institution  (the  "Purchaser"),  which
provides for a $750,000 line of credit under which the Company may sell customer
invoices to the Purchaser (see Note 6 to Consolidated Financial Statements). The
Company is currently attempting to obtain additional financing;  however,  there
can be no assurance  that it will be successful in obtaining  such  financing on
terms acceptable to the Company, if at all.

On June 7, 2002, the Company  acquired 100% of the outstanding  capital stock of
Stonehouse Technologies, Inc. (see Note 2 to Consolidated Financial Statements).

The Company  believes that it has sufficient cash and other financial  resources
to effectively  operate until it achieves  positive cash flows from  operations;
however, there is no assurance that the Company will be able to achieve positive
cash  flows in the future or that  additional  financial  resources  will not be
required.

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

Revenue Recognition

     nStor

Revenues  from  the  sale of  storage  products  are  recognized  as of the date
shipments are made to customers, net of an allowance for returns.

     Stonehouse

Revenues from computer software sales are recognized when persuasive evidence of
a  sales  arrangement  exists,  delivery  and  acceptance  of the  software  has
occurred,  the price is fixed or determinable,  and collectability is reasonably
assured.  Consulting  revenues  are  recognized  when  services  are  performed.
Revenues on  long-term  development  contracts  are deferred at time of sale and
using the  percentage-of-completion  method  are  recognized  based  upon  hours
incurred as a percentage  of estimated  total  hours.  Maintenance  revenues for
customer  support and product  updates are  deferred at the time of sale and are
included  in income on a  straight-line  basis over the term of the  maintenance
agreement, generally for one year.


<PAGE> 10


Use of Estimates

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

Reclassifications

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

Net Loss Per Common Share ("EPS")

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

Effective  January 11, 2002,  the Company  issued an aggregate of 76,884,122 new
common shares (the "New Common Shares") pursuant to shareholder  approval of the
Halco Investment (see Note 3 to Consolidated  Financial  Statements).  The Halco
Investment was completed on November 20, 2001, subject to shareholder  approval;
accordingly the calculation of basic and diluted EPS assumes that the New Common
Shares were issued as of November 20, 2001.

Recent Authoritative Pronouncements

In October 2001, the Financial  Accounting  Standards  Board (the "FASB") issued
Statement of Financial Accounting Standard No. 144 ("SFAS No. 144"),  Accounting
for the  Impairment  or Disposal of  Long-Lived  Assets.  SFAS No. 144  provides
guidance on the accounting for the impairment or disposal of long-lived  assets.
The  objectives  of  SFAS  No.  144  are  to  address  issues  relating  to  the
implementation  of SFAS No. 121,  "Accounting  for the  Impairment of Long-Lived
Assets and for Long-Lived  Assets to Be Disposed Of", and to develop a model for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired.  SFAS No. 144 was effective for the Company  commencing with its
2002  fiscal  year and had no  impact on the  Company's  financial  position  or
results of operations.

In April 2002, the FASB issued  Statement of Financial  Accounting  Standard No.
145 ("SFAS No. 145"),  Rescission  of SFAS No. 4, 44, and 64,  Amendment of SFAS
No. 13, and Technical  Corrections.  SFAS No. 145 rescinds SFAS No. 4, Reporting
Gains and  Losses  from  Extinguishment  of Debt,  SFAS No. 44,  Accounting  for
Intangible Assets of Motor Carriers,  and SFAS No. 64,  Extinguishments  of Debt
Made to Satisfy Sinking-Fund  Requirements.  SFAS No. 145 requires,  among other
things  (i) that the  modification  of a lease  that  results in a change of the
classification  of the lease from capital to operating  under the  provisions of
SFAS No.  13 be  accounted  for as a  sale-leaseback  transaction,  and (ii) the
reporting  of  gains  or  losses  from  the  early  extinguishment  of  debt  as
extraordinary items only if they met the criteria of Accounting Principles Board
Opinion  No. 30 ("APB  No.  30"),  Reporting  the  Results  of  Operations.  The
amendment of SFAS No. 13 is effective for transactions occurring on or after May
15, 2002.  Although the  rescission of SFAS No. 4 is effective  January 1, 2003,
the FASB has  encouraged  early  application  of the provisions of SFAS No. 145.
Effective  in the third  quarter of 2002,  the Company  adopted SFAS No. 145 and
determined  that gains and losses  previously  reported as  extraordinary  items
during 2002 and 2001 no longer  meet the  criteria as set forth under APB No. 30
and have reported those items as Other Income in the  accompanying  consolidated
financial statements.


<PAGE> 11


In July 2002, the FASB issued Statement of Financial Accounting Standard No. 146
("SFAS  No.  146"),  Accounting  for  Costs  Associated  with  Exit or  Disposal
Activities (effective January 1, 2003). SFAS No. 146 replaces current accounting
literature  and  requires  the  recognition  of costs  associated  with  exit or
disposal  activities  when  they  are  incurred  rather  than  at the  date of a
commitment  to an exit or disposal  plan.  The Company does not  anticipate  the
adoption  of  this  statement  will  have a  material  effect  on the  Company's
financial position or results of operations.


(2) ACQUISITION

Terms of the Acquisition

On June 7, 2002, the Company  acquired 100% of the outstanding  capital stock of
Stonehouse from Pacific  Technology Group, Inc. ("PTG"), a subsidiary of Pacific
USA  Holdings  Corp  ("PUSA")(the  "Acquisition").  The  purchase  price of $8.9
million,  including $541,000 in transaction costs, was based upon a market value
of $.31 per share,  the average of the Company's  closing  market prices for the
four days  before and after the terms of the  Acquisition  were agreed to (April
30, 2002),  and consisted of the issuance of 22,500,000  shares of the Company's
common stock and 1,000 shares of the Company's  Series L  Convertible  Preferred
Stock.  The Series L Convertible  Preferred Stock was convertible into 4,527,027
shares of common  stock,  subject to  shareholder  approval,  which was obtained
effective  October 8,  2002,  at which time the  common  shares  were  issued in
exchange for the Series L Convertible Preferred Stock. In addition,  the Company
is  obligated  to issue up to  8,687,258  shares  of  common  stock  based on an
Earn-Out provision,  whereby in the event Stonehouse's pretax income (defined in
the Stock Purchase  Agreement as "Net Revenues") exceeds $1 million for the four
consecutive  calendar quarters beginning on October 1, 2002, the Company will be
required to issue to PTG that number of additional  shares of common stock equal
to the product of 27.027 and the amount of Net Revenues in excess of $1 million.
The  potential  issuance  of such  shares  was also  approved  by the  Company's
shareholders on October 8, 2002.

Reasons for the Acquisition

In an effort to improve  the  Company's  financial  condition  and future  sales
revenues,  the Company developed a strategic business  relationship with Pacific
Electric  Wire & Cable  Co.,  Ltd.  ("PEWC"),  the  parent  of  PUSA.  PEWC is a
Taiwan-based  corporation,  traded on the Taiwan Stock Exchange. As described in
Note 7 to the Consolidated  Financial  Statements,  effective March 1, 2002, the
Company entered into a Reseller  Agreement with another  subsidiary of PUSA, and
also granted an option to that  subsidiary  to purchase up to 30 million  common
shares at an exercise  price of $.40 per share,  which  expires on November  30,
2002.  Subsequently,  the Company began  exploring  ways to further  develop its
relationship with PEWC by combining nStor with Stonehouse.

The Company  believed that the  Acquisition  would have a positive impact on its
operating  results  from a cash  flow  standpoint.  Further,  Stonehouse  has an
expansive  customer  base,  including  major U.S.  corporations  and  government
agencies,  through which the Company may be able to market its computer  storage
products,  which  in  turn  would  have  a  positive  impact  on  the  Company's
operations.

In addition,  the Company believed that the increase to its shareholders' equity
resulting from the Acquisition would assist the Company in its efforts to regain
compliance with the continued  listing  standards of the American Stock Exchange
(see  Management's  Discussion  & Analysis,  Liquidity  and Capital  Resources -
American Stock Exchange).


<PAGE> 12


Accounting for the Acquisition

The  Acquisition  was accounted for under the purchase method of accounting with
assets acquired and liabilities  assumed recorded at estimated fair values as of
the  Acquisition  date in  accordance  with  Statement of  Financial  Accounting
Standard No. 141 ("SFAS No.  141"),  Business  Combinations,  and the results of
Stonehouse's   operations  included  in  the  Company's  consolidated  financial
statements from the Acquisition date.  Allocation of the purchase price has been
made on a preliminary basis subject to adjustment should new or additional facts
about the business  become known over the ensuing  twelve  months  following the
Acquisition. Based on a valuation analysis completed by an independent valuation
firm during the third  quarter of 2002,  the  allocation  of the purchase  price
included  intangible  assets  with an  aggregate  fair  value  of  $2.8  million
(preliminarily  valued at $3.2 million as of June 30, 2002) and goodwill of $6.5
million  (preliminarily valued at $6.1 million as of June 30, 2002).  Intangible
assets  with finite  useful  lives were  identified  as  follows:  (i)  customer
relationships  (approximately $2 million);  (ii) software ($531,000);  and (iii)
non-compete agreement ($224,000),  with corresponding useful lives of ten, five,
and four years,  respectively.  The excess of the  purchase  price over the fair
value of net assets acquired  (goodwill) will be subject to an annual review for
impairment in accordance with Statement of Financial Accounting Standard No. 142
("SFAS No. 142"),  Goodwill and Other Intangible Assets,  adopted by the Company
in 2002 (see Note 5 to Consolidated Financial Statements).

About Stonehouse

Stonehouse, based in Plano, Texas, provides software and services solutions that
help  large  enterprises  manage  their  communications  expenses,   assets  and
processes.   These  solutions  include  a  suite  of  modular  applications  and
consulting services,  which allow enterprises to manage voice, data and wireless
services by  providing a  systematic  approach  to  automate  order  processing,
monitor expenses,  manage vendor invoices,  track asset inventory,  and allocate
costs.

The following  unaudited pro forma results of operations  assume the Acquisition
occurred at the  beginning of the nine months ended  September 30, 2002 and 2001
(in thousands, except per share data):

                                         2002                     2001
                              ------------------------   ----------------------
                                               Pro                      Pro
                              Historical(b)   forma      Historical    forma
                                             Combined                Combined(a)
                              -----------   ----------   ----------  ----------
Sales                             $7,504      $10,318      $14,187      $18,987

Net loss before preferred
  stock dividends                ($7,209)    ($ 7,229)    ($ 8,504)    ($11,530)

Net loss applicable to
  common shareholders            ($7,209)    ($ 7,229)    ($ 9,619)    ($12,586)

Basic and diluted net loss
  per common share               ($  .06)    ($   .05)    ($   .27)    ($   .22)

Weighted average number of
  common shares used in per
  share computation, basic
  and diluted                    124,574      137,514       35,599       58,099

(a) The 2001 pro  forma  combined  net loss  reflects  the  implementation  of a
revised  business  plan  by  Stonehouse,   beginning  in  February  2001,  by  a
newly-employed  business  team,  which  contemplated  substantial  increases  to
marketing,  sales and administrative  programs, in order to significantly expand
future revenues. Stonehouse subsequently determined that the new plan was not in
its best  interests and, as a result,  during the fourth  quarter of 2001,  this
plan was discontinued.  Stonehouse's  previous top executive reassumed the chief
executive  officer duties and the new business team and certain other  employees
were  terminated  in the  fourth  quarter  of 2001 or  early  2002.  Significant
operating  expenses related to the  discontinued  business plan were incurred in
2001.


<PAGE> 13


(b) Historical amounts include  Stonehouse's  results of operations for the four
months ended September 30, 2002.

The  following  table shows the amount  assigned to each of  Stonehouse's  major
assets and liabilities at the date of Acquisition (in thousands):

                             ASSETS
                             ------
               Cash                                     $   298
               Accounts receivable                        1,618
               Prepaid expenses                             101
                                                        -------
                      Total current assets                2,017

               Property and equipment                        89
               Goodwill                                   6,473
               Other intangible assets                    2,800
                                                        -------
                                                        $11,379
                                                         ======
                             LIABILITIES
                             -----------
               Bank line of credit                      $   200
               Accounts payable and other liabilities       556
               Deferred revenue                           1,704
                                                        -------
                      Total current liabilities           2,460

               Purchase Price                             8,919
                                                        -------
                                                        $11,379
                                                        =======


(3) HALCO INVESTMENT

On November 20, 2001 (the "Closing Date"),  the Company  completed a transaction
in which Halco Investments L.C. (Halco),  a company  controlled by Mr. Halperin,
acquired a 34% equity interest in, and made certain loans to, the Company for an
aggregate  investment  of $12.1 million (the Halco  Investment).  On the Closing
Date,  Halco  acquired  8,970 shares of the  Company's  newly  created  Series K
Convertible Preferred Stock (the "Series K Preferred Stock"), with a face amount
of  approximately $9 million and the Company issued a $3.1 million,  5-year,  8%
note (the  "Halco  Note").  Halco  invested  $6 million  in cash and  marketable
securities  having a quoted market value of $6.1  million,  based on the closing
price for such securities on November 19, 2001.

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


<PAGE> 14


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

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

<TABLE>
<CAPTION>

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

Note Shares                                                                               750,000
                                                                                      -----------
Total New Common Shares issued effective January 11, 2002                              76,884,122

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


(4)  TRADING MARKETABLE SECURITIES

In connection with the Halco  Investment  (see Note 3 to Consolidated  Financial
Statements) on November 20, 2001,  the Company  received  marketable  securities
with a quoted  market value of $6.1  million,  including  approximately  434,000
shares of American  Realty  Investors  Inc.  ("ARL"),  a New York Stock Exchange
listed company, with a quoted market value of $5.2 million. Unrealized losses at
December 31, 2001 on the ARL shares were $897,000.


<PAGE> 15


Due to ARL's low trading volume, the Company's ability to sell or borrow against
the ARL holdings had been  extremely  limited.  From November 2001 through March
19,  2002,  the Company  had been able to sell only 56,300  shares in the public
market, generating cash proceeds of $442,000. To assist in funding the Company's
working  capital  requirements,  in February  and March 2002,  the Company and a
company controlled by Mr. Levy, Hilcoast Development Corp. ("Hilcoast"), entered
into  agreements  whereby  Hilcoast  purchased  195,000  shares  of ARL  with an
aggregate quoted value of approximately $1.5 million on the respective  purchase
dates  for an  aggregate  purchase  price  of  approximately  $1.2  million.  In
connection  therewith,  Hilcoast  granted  the  Company  four-month  options  to
repurchase  all or a portion of those  shares based on the price  Hilcoast  paid
plus 10% per annum (the "Options"). In February and March 2002, the Company sold
183,000 additional shares, representing all of its remaining holdings in ARL, to
Mr.  Halperin for an aggregate  purchase  price of  approximately  $1.3 million,
which approximated ARL's quoted value on the respective purchase dates. In April
2002,  the Company  received  $206,000 in cash proceeds from the exercise of the
Options.  As a result of the ARL sales in 2002,  the Company  realized a loss of
$1.1  million  during the nine  months  ended  September  30,  2002,  net of the
$206,000 Options proceeds.


(5)  GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill,  representing the excess of the cost of an acquired  business over the
fair value of net assets acquired,  is carried at cost and, through December 31,
2001, was amortized under the straight line method over seven years.

Effective January 1, 2002, the Company adopted SFAS No. 142, which requires that
goodwill and certain  intangible  assets no longer be amortized,  but instead be
tested at least  annually  for  impairment.  Accordingly,  there was no goodwill
amortization  recognized  during the three and nine months ended  September  30,
2002,  as compared to $103,000 and $304,000 in the  corresponding  2001 periods,
respectively.

In accordance  with SFAS No. 142,  prior period  amounts are not permitted to be
restated.  A  reconciliation  of reported net loss to net loss  adjusted for the
exclusion  of  amortization  of  goodwill  for the three and nine  months  ended
September 30, 2001 follows (in thousands, except per share):

                                                     Three Month      Nine Month
                                                        Period           Period
                                                     ---------------------------
Reported net loss applicable to common
 shareholders                                          ($ 1,665)       ($ 9,619)
  Less goodwill amortization                                103             304
                                                     -----------     -----------
Adjusted net loss                                      ($ 1,562)       ($ 9,315)
                                                     ===========     ===========
Weighted average number of common shares
 outstanding                                          35,719,022      35,599,196
                                                     ===========     ===========
Basic and diluted net loss per common share
 as reported                                            ($ 0.05)        ($ 0.27)
                                                     ===========     ===========
Adjusted net loss per common share                      ($ 0.04)        ($ 0.26)
                                                     ===========     ===========

During 2002,  the Company  engaged an  independent  valuation firm to prepare an
impairment  analysis of the Company's  goodwill,  including goodwill acquired in
the Stonehouse  Acquisition.  Based on this analysis,  the Company's goodwill is
not  considered to be impaired as of January 1, 2002.  The Company  continues to
review the impact of SFAS No. 142 and will make any  necessary  adjustments,  as
appropriate.

As of September 30, 2002, the carrying  amount of goodwill and other  intangible
assets was approximately $8.5 million and $2.7 million,  respectively,  of which
$6.5  million of  goodwill  and $2.7  million of other  intangible  assets  were
acquired in June 2002 in connection with the Stonehouse  Acquisition (see Note 2
to Consolidated Financial  Statements).  Amortization of other intangible assets
for the three and nine months ended September 30, 2002 was $92,000 and $122,000,
respectively.


<PAGE> 16


(6)  BORROWINGS

  Revolving Bank Credit Facilities

At December  31, 2001,  the Company had a revolving  bank credit  facility  (the
"Bank Line of Credit"),  which provided for borrowings  principally based on the
lesser of $10 million or 85% of eligible accounts  receivable.  The Bank Line of
Credit bore  interest at prime plus 2.5%,  was  scheduled to mature on April 30,
2002, was  collateralized  by  substantially  all of the Company's  assets,  and
provided for certain  financial  covenants,  including minimum net worth and net
income requirements.

Since the fourth  quarter of 2000,  the Company had not been in compliance  with
its minimum net worth and net income requirements under the Bank Line of Credit.
Effective  February 4, 2002,  the bank increased the interest rate to prime plus
3.5% and advised  the  Company  that it did not intend to renew the Bank Line of
Credit. As of July 30, 2002, the entire outstanding balance was repaid.

In August 2002,  the Company  entered into an Agreement For Purchase of Accounts
with a financial  institution  (the  "Purchaser")  which provides for a $750,000
line of credit  under  which  the  Company  may sell  customer  invoices  to the
Purchaser.  The  Purchaser  advances  80% of the net face  amount  of  qualified
invoices and remits the  remaining  20%, less its fees,  upon  collection of the
invoice in full.  The Company is obligated to repay the  Purchaser  for invoices
not paid within 90 days.  The  Purchaser's  fees are based on a rate of .07% per
day. At September 30, 2002, the uncollected balance of customer invoices sold to
the Purchaser amounted to approximately $255,000.

The Company is currently  attempting to obtain  additional  financing;  however,
there is no assurance  that it will be successful in obtaining such financing on
terms acceptable to the Company, if at all.

Stonehouse  has a revolving  bank credit  facility (the  "Stonehouse  Revolver")
under which  Stonehouse  may borrow up to the lesser of  $500,000  or  specified
percentages of eligible accounts receivable,  payable upon demand, with interest
at prime plus 1% (5.75% at September 30, 2002).  Borrowings under the Stonehouse
Revolver are  collateralized by accounts  receivable and certain other assets of
Stonehouse.  At September 30, 2002, the outstanding  principal balance under the
Stonehouse Revolver was $200,000.

  Other Borrowings

The Company's other borrowings consisted of the following (in thousands):

                                                  September 30,     December 31,
                                                       2002              2001
                                                  ------------      ------------
Current:

Notes payable to Mr. Levy, interest ranging
  from 8%-10% per annum, maturing on various
  dates from December 2002 through June
  2003 (b)(d)                                         $3,122           $  650

Other notes payable, interest ranging
  from 8%-10% per annum, maturing on various
  dates from December 2002
  through June 2003 (c)                                1,286              450
                                                      ------           ------
                                                      $4,408           $1,100
                                                      ======           ======
Long-term:

Note payable to Halco, interest at 8% per annum,
  maturing on November 20, 2006 (a)                   $3,100           $3,100

Other                                                      -              500
                                                      ------           ------
                                                      $3,100           $3,600
                                                      ======           ======


<PAGE> 17


(a) As a condition  to the closing of the  Stonehouse  Acquisition,  the Company
issued an 8% convertible  subordinated promissory note (the "New Halco Note") to
Halco in the principal  amount of $3.1 million.  The New Halco Note replaced the
Halco Note dated November 20, 2001, in the principal amount of $3.1 million (see
Note 3 to Consolidated Financial Statements).  The New Halco Note is convertible
at the  Company's  option at any time prior to maturity on November 20, 2006 and
after the  earlier  of: (i) May 31,  2002 or (ii) the date on which the  Company
receives a notice of delisting  from the AMEX, in each case,  only to the extent
deemed  necessary  to maintain  the  Company's  listing on AMEX,  at a per share
conversion  price equal to 85% of the closing bid price of the Company's  common
stock on AMEX on the trading day  immediately  prior to the date of  conversion.
The New Halco Note is convertible  at the holder's  option at any time after May
31, 2003 and prior to maturity at a per share  conversion price equal to 110% of
the closing bid price of the common Stock on AMEX on the trading day immediately
prior to the date of conversion.

(b) Effective June 14, 2002, the Company issued a 10%  convertible  subordinated
promissory note (the "New Levy Note") to Mr. Levy in the amount of $650,000. The
New Levy Note replaced three previously issued 10% notes,  aggregating  $650,000
and is convertible at the Company's option at any time prior to maturity on June
14,  2003 and  after  the date on  which  (i) the  Company  receives  notice  of
delisting  from AMEX, and (ii) the New Halco Note has been converted into shares
of the  Company's  common  stock and in each  case,  only to the  extent  deemed
necessary to maintain the Company's  listing on AMEX, at a per share  conversion
price equal to 85% of the closing bid price of the Company's common stock on the
trading day immediately prior to the date of conversion.

(c) The holder of a $450,000 note,  payable  December 15, 2002, has the right at
any time prior to  maturity,  to convert the note into  shares of the  Company's
common stock based on a fixed conversion price of $.40 per share.

(d) In  connection  with the  Company's  outsource  contract,  Mr. Levy provided
collateral  for a bank to issue a $1 million letter of credit for the benefit of
Varian. The letter of credit expires on March 15, 2003.


(7) FAIR VALUE OF OPTION GRANTED TO CUSTOMER

Effective  March 1, 2002, the Company  entered into a Reseller  Agreement with a
wholly-owned subsidiary of PEWC. The Agreement grants the subsidiary of PEWC the
right to market and sell the Company's products for a period of two (2) years in
Mainland  China and Taiwan on an exclusive  basis,  and in the United States and
Europe on a non-exclusive  basis.  The exclusivity  right is conditioned,  among
other items,  upon minimum  purchases by PEWC of $5 million through February 28,
2003 and $10 million during the subsequent year.

In  connection   with  its  efforts  to  develop  further   strategic   business
relationships  with  PEWC,  effective  March 1,  2002,  the  Company  granted  a
subsidiary  of PEWC an option to purchase up to thirty (30) million newly issued
shares of the  Company's  common  stock for a purchase  price of $.40 per share,
expiring on November 30, 2002.  The option was valued at $670,000 as of the date
of grant based on the Black-Scholes option-pricing model and other provisions of
Statement of Financial  Accounting  Standard No. 123, Accounting for Stock Based
Compensation,  and related  Emerging Issues Task Force ("EITF")  guidance.  This
amount was recorded as an expense in the  accompanying  Statement of  Operations
for the nine months ended September 30, 2002.


<PAGE> 18


(8) OTHER INCOME, NET

Other income, net of other expenses consisted of the following (in thousands):

                                          Three Months           Nine Months
                                       Ended September 30,   Ended September 30,
                                       -------------------   -------------------
                                         2002       2001       2002       2001
                                       -------    --------   -------    --------
Reduction in carrying value of
  liability to reflect the
  appropriate amount due                $ 627     $   -       $ 627     $   -
Reclassification of reserves
  previously required in connection
  with service contracts for which
  the Company no longer has an
  obligation                              239         -         239         -
Negotiated discounts with vendors          -       1,082        136      1,082
Loss on extinguishment of debt             -          -          -        (362)
Other(expenses)income, net                 -         (10)       (53)         3
                                       ------     ------     ------     ------
                                        $ 866     $1,072      $ 949     $  723
                                       ======     ======     ======     ======


(9) 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.

As of December 31, 2001, there were unused net operating loss carryforwards (the
NOL's) for regular  federal income tax purposes of  approximately  $54.8 million
and for California  tax purposes of  approximately  $11.5 million  expiring from
2012 through 2021 and 2002 through 2011, respectively.  In addition, the Company
has research and  development tax credit  carryforwards  of  approximately  $1.2
million,  which  expire  from  2002  through  2018 and in  conjunction  with the
Alternative  Minimum  Tax (AMT)  rules,  the Company  has  available  AMT credit
carryforwards of approximately $800,000, at December 31, 2001, which may be used
indefinitely to reduce regular federal income taxes.

The usage of approximately $8 million of the NOL's and  approximately $2 million
of the California NOL's is limited annually to approximately  $400,000 due to an
acquisition,  which caused a change in ownership  for income tax purposes  under
Internal Revenue Code Section 382.

At September 30, 2002 and December 31, 2001, a 100% valuation allowance has been
provided on total  deferred  tax assets  because it is more likely than not that
the NOL's will not be realized based on recent operating results.


(10) SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS

Prior to the Acquisition in June 2002, the Company operated predominantly in one
business segment,  information  storage  solutions  ("Storage  Solutions").  The
Company's customers include end users, OEMs, systems integrators and value added
resellers.

Following the  Acquisition,  the Company began operating under a second business
segment, telecommunication software/services ("Telecommunications").  Stonehouse
offers  telemanagement  solutions  targeted to large  corporations,  educational
institutions,  state  governments  and other  large  public,  private and hybrid
communications networks.


<PAGE> 19


Financial  instruments,  which potentially subject the Company to concentrations
of credit risk, are primarily accounts receivable.  The Company performs ongoing
credit  evaluations  of its  customers,  generally  requires no  collateral  and
maintains  allowances for potential credit losses and sales returns.  During the
three months ended September 30, 2002,  sales to three  customers  accounted for
48%,  12% and 11% of the  Company's  Storage  Solutions  sales  and sales to one
customer accounted for 28% of  Telecommunications  sales. During the nine months
ended  September 30, 2002,  sales to two customers  accounted for 40% and 10% of
the Company's  Storage  Solutions sales and sales to one customer  accounted for
28% of  Telecommunications  sales.  In the three and nine months ended September
30,  2001,  no single  customer  accounted  for greater  than 10% of the Company
sales.  Sales to  geographic  areas  other than the United  States have not been
significant.

Presented  below for the three  and nine  months  ended  September  30,  2002 is
selected  financial  information  for the two  segments in which the Company now
operates (in thousands).  The Storage  Solutions  segment includes all corporate
revenues  and   expenses   except  those   specifically   attributable   to  the
Telecommunications segment. Since the Acquisition occurred in June 2002, segment
information is not applicable for the 2001 periods.

<TABLE>
<CAPTION>

                                             Three Months Ended                  Nine Months Ended
                                             September 30, 2002                  September 30, 2002
                                       ------------------------------    ------------------------------
                                        Storage                           Storage
                                       Solutions   Telecommunications    Solutions  Telecommunications(a)
                                       ---------   ------------------    --------   -------------------
<S>                                    <C>         <C>                   <C>        <C>
Revenues                                $2,197           $1,297            $5,784          $1,720
Gross margin                            $  717           $  693            $  505          $  890
Net loss applicable to common stock    ($  401)         ($  199)          ($7,032)        ($  176)

</TABLE>

(a) Includes  results of operations for Stonehouse for the four months since the
Acquisition in June 2002.


Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
           OF OPERATIONS

With  the   exception   of   discussions   regarding   historical   information,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  contains  forward-looking  statements.  Such statements  inherently
involve risks and uncertainties that could cause actual results of operations to
differ materially from the forward-looking statements.  Factors that would cause
or contribute to such differences include, but are not limited to, our inability
to  increase  sales to  current  customers  and to  expand  our  customer  base,
continued  acceptance of our products in the  marketplace,  timing and volume of
sales  orders,  our  inability  to  improve  the gross  margin on our  products,
material cost  fluctuations,  competitive  factors,  dependence upon third-party
vendors, our future cash flows and ability to obtain sufficient financing, level
of operating expenses,  conditions in the technology industry and the economy in
general,  legal  proceedings  and other risks  detailed in our  periodic  report
filings with the Securities and Exchange  Commission (SEC).  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-Q and in other  reports we file with the
SEC The following discussion should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this filing.

Results of Operations

For the three months ended  September  30, 2002,  net loss  applicable to common
shareholders  decreased to $600,000 from $1.7 million  during the  corresponding
quarter of 2001.  The 2002 third  quarter  included  Other  Income of  $866,000,
principally  consisting  of  a  reduction  in  the  carrying  value  of  certain
liabilities to reflect the  appropriate  amount due, and a  reclassification  of
certain reserves  previously  required in connection with service  contracts for
which the Company no longer has an obligation.  The 2001 third quarter  included
Other Income of $1.1 million  realized  from  negotiated  discounts on purchases
with vendors.


<PAGE> 20


We also incurred net losses  applicable to common  shareholders  of $7.2 million
and $9.6 million for the nine month periods  ended  September 30, 2002 and 2001,
respectively.  Included in the net loss for the 2002 nine month  period was $1.1
million in realized losses on marketable  securities,  and a $670,000 charge for
the fair value of an option granted to a customer,  partially offset by $949,000
in Other Income,  principally resulting from the aforementioned reduction in the
carrying value of certain liabilities and  reclassification of certain reserves.
The 2001 nine-month period included Other Income of $723,000 resulting from $1.1
million in negotiated discounts on purchases with vendors, partially offset by a
$362,000 loss from debt extinguishment.

Sales

Sales for the three and nine months ended  September 30, 2002  decreased to $3.5
million and $7.5  million,  respectively,  from $4 million and $14.2 million for
the same periods in 2001,  respectively.  Included in sales for the 2002 periods
was  $1.3  million  and  $1.7  million,   respectively,   attributable   to  our
Telecommunications  business  following our June 2002 Acquisition of Stonehouse.
The  significant  decrease in our Storage  Solutions  sales during the three and
nine month periods  reflects the economic  downturn,  which has caused  customer
delays in purchasing technology and other equipment.

During  the nine  months  ended  September  30,  2002,  indirect  sales to OEMs,
value-added  resellers (VARs) and other channel business  represented 65% of our
Storage  Solutions  revenues,  compared  to 33% for  direct  sales to end users.
During the corresponding period in 2001,  indirect,  direct and service revenues
represented 22%, 61%, and 17%, respectively, of our sales revenues. Sales during
the 2001  periods  included  $.6 million  related to the sale of  inventory to a
customer, who also purchased substantially all of our storage servicing business
in August 2001.  See also Note 10 to  Consolidated  Financial  Statements  for a
discussion of Sales to Significant Customers.

Cost of Sales/Gross Margins

Gross  margins  realized by our  Storage  Solutions  business  during both third
quarter  periods  remained  relatively  constant (33% for the 2002 third quarter
compared to 35% for the quarter ended September 30, 2001).  However, the current
quarter's gross margin  represents a substantial  improvement  over the 0% gross
margins realized during the first six months of 2002. This improvement  reflects
significantly  lower material costs attributable to the commencement  during the
current quarter of (i) shipments of our new 4000 Series storage systems and (ii)
outsourcing the  manufacturing  of our products,  in addition to the recovery of
certain  inventory  reserves  resulting from third quarter sales.  In connection
with  outsourcing  our  production,  our  manufacturing  facility  in San Diego,
California   was   phased  out   during   the  third   quarter   of  2002.   Our
Telecommunications  business  realized  gross  margins of 53% for the 2002 third
quarter  representing  a 5% increase over gross  margins  realized by Stonehouse
during 2002 prior to the June 2002 Acquisition.

Gross  margins  realized by our Storage  Solutions  business for the nine months
ended September 30, 2002 decreased to 9% from 28% for the  corresponding  period
in 2001.  The decrease was primarily due to (i) economies of scale  attributable
to  the  level  of  fixed  costs  inherent  in  our  operations,   coupled  with
significantly  lower sales  revenues,  and (ii) the price we paid for  materials
prior  to the  introduction  of our new  4000  Series  storage  systems  and the
commencement of our manufacturing  outsource agreement.  Our  Telecommunications
business  experienced  a  52%  gross  margin  for  the  four  months  since  our
Acquisition.

Our gross margins are  dependent,  in part,  on material  costs and product mix,
which fluctuates from time to time.


<PAGE> 21


Operating Expenses

        Selling, General and Administrative

Selling,  general and  administrative  (SG&A) expenses decreased to $1.3 million
and $3.9  million  for the three  and nine  months  ended  September  30,  2002,
respectively,  from $2.3  million and $8.5 million for the same periods in 2001,
representing a $1.1 million and $4.5 million decline for the respective periods.
The significant  decrease resulted principally from the reduction of our overall
workforce and related costs (including occupancy),  partially offset by $601,000
in SG&A costs incurred by our  Telecommunications  business since the Stonehouse
Acquisition in June 2002.

        Research and Development

Research and development (R&D) expenses for the three months ended September 30,
2002 increased to $1 million from $825,000 for the 2001 third quarter, primarily
as a result of $307,000 in R&D expenses  attributable to our  Telecommunications
business.  For the nine months ended September 30, 2002, R&D expenses  decreased
to $2.4 million from $2.8 million in the 2001 period,  primarily attributable to
a decrease in costs  following the  development of our 4000 Series product line,
partially   offset   by   $330,000   in  R&D   expenses   attributable   to  our
Telecommunications business.

R&D 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

Depreciation  and amortization for the three and nine months ended September 30,
2002 was $392,000 and $985,000,  respectively,  as compared to $401,000 and $1.3
million  for the same  periods in 2001.  The  decrease  primarily  reflects  the
discontinuation of amortization of goodwill pursuant to the adoption of SFAS No.
142 effective January 1, 2002 (see Note 5 to Consolidated Financial Statements),
partially offset by amortization of $92,000 and $122,000, respectively, of other
intangible  assets of $2.8 million  resulting from the  Stonehouse  Acquisition.
During the three and nine months  ended  September  30,  2001,  amortization  of
goodwill amounted to $103,000 and $304,000 respectively.

Interest Expense

Interest  expense  amounted to $171,000  and $80,000 for the three  months ended
September  30, 2002 and 2001,  respectively.  The increase is  primarily  due to
higher  average  borrowings  for the  2002  period.  For the nine  months  ended
September 30, 2002, interest expense decreased to $428,000 from $734,000 for the
comparable 2001 period, primarily attributable to a combination of significantly
lower average borrowings and lower interest rates.

Preferred Stock Dividends

Preferred stock dividends were $486,000 and $1.1 million, for the three and nine
months ended September 30, 2001, respectively.  Effective November 20, 2001, all
of the Company's then  remaining  convertible  preferred  stock was converted to
common  stock  pursuant  to the Halco  Investment  (see  Note 3 to  Consolidated
Financial Statements).  Accordingly,  there were no preferred stock dividends in
2002.

The  Series  L  Convertible  Preferred  Stock  issued  in  connection  with  the
Stonehouse  Acquisition  in June 2002 was not entitled to receive  dividends and
was converted to common stock effective October 8, 2002,  following  approval by
our shareholders.


<PAGE> 22


Liquidity and Capital Resources

The accompanying  consolidated  financial statements have been prepared assuming
that we will continue as a going concern.  This  contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.  We
incurred  net losses of $14  million,  $21.9  million and $18.7  million for the
years ended December 31, 2001, 2000 and 1999, respectively, and $7.2 million for
the nine months ended September 30, 2002. In addition,  we have negative working
capital as of September 30, 2002. These matters, among others, raise substantial
doubt about our ability to continue as a going concern.

However,  since 2001 we have devoted  substantial efforts to: (i) streamline our
operations;  (ii) establish the foundation for generating positive cash flow and
operating  profits;  and (iii) obtain sufficient  financing to cover our working
capital  needs.  For a  description  of  these  efforts,  see  Notes  1 and 2 to
Consolidated Financial Statements.

Consolidated Statements of Cash Flows

        Operating Activities

Net cash  provided by  operating  activities  amounted to $140,000  for the nine
months ended  September 30, 2002. The most  significant use of cash was our loss
from  operations  (before  changes in assets and  liabilities)  of $2.2 million,
which  was more  than  offset  by cash  generated  from the net  collections  of
accounts receivable and net inventory  reductions of $2.7 million. Net cash used
by  operating  activities  amounted  to $8  million  for the nine  months  ended
September  30,  2001 with the most  significant  use of cash being our loss from
operations  (before  changes  in assets and  liabilities)  of $6.1  million.  In
addition,  we used cash of $3.8 million in the reduction of accounts payable and
other  liabilities,  which was partially  offset by net  collections of accounts
receivable of $1.2 million.

        Investing Activities

The most significant  component of net cash provided by investing activities for
the nine months ended  September 30, 2002 consisted of $298,000 of cash acquired
in the Stonehouse Acquisition.

        Financing Activities

Net cash used in financing  activities  for the nine months ended  September 30,
2002 was $519,000  consisting  of a $3 million net reduction of our Bank Line of
Credit, partially offset by $2.5 million of borrowings from Mr. Levy.

Net cash provided by financing  activities  for the nine months ended  September
30, 2001 amounted to $8.9 million and primarily consisted of borrowings of $10.2
million from private  investors  (including  $3.9 million from Mr.  Halperin and
$3.3 million from Mr. Levy), of which $4.4 million was satisfied by the issuance
of convertible preferred stock in April 2001, partially offset by a $1.6 million
net reduction of our Bank Line of Credit.

American Stock Exchange ("AMEX")

On May 28, 2002, we received  correspondence  from AMEX  regarding the potential
delisting  of our common  stock from AMEX due to our failure to meet  certain of
AMEX's continued listing standards,  related to minimum shareholders' equity and
our ability to continue  operations  and/or meet our obligations as they mature.
On June 26, 2002, we submitted a plan and supporting  documentation (the "Plan")
to AMEX to  demonstrate  our ability to regain  compliance.  On August 13, 2002,
AMEX  notified  us that it had  accepted  our Plan and  granted us an  extension
through  June 20,  2003  within  which we must  regain  compliance,  subject  to
periodic  review by AMEX's Staff.  Failure to make progress  consistent with the
Plan or to regain  compliance with the continued listing standards by the end of
the extension period could result in our being delisted. We believe that we will
be successful in regaining  compliance,  although there can be no assurance that
we will remain listed on AMEX.


<PAGE> 23


Critical Accounting Policies and Estimates

Revenues from the sale of products is  recognized  as of the date  shipments are
made to  customers,  net of an allowance  for returns.  Revenues  from  computer
software sales are  recognized  upon execution of a contract and shipment of the
software  provided  that the  product is accepted  by the  customer.  Consulting
revenues  are  recognized  when  services are  performed.  Revenues on long-term
development   contracts   are   deferred   at  time  of  sale,   and  using  the
percentage-of-completion  method are  recognized  based upon hours incurred as a
percentage of estimated total hours.  Maintenance  revenues for customer support
and product  updates are deferred at the time of sale and are included in income
on a straight-line basis over the term of the maintenance  agreement,  generally
for one year.

Our  preliminary  allocation  of the  Stonehouse  purchase  price  included $6.5
million in goodwill and $2.8 million in other  intangible  assets in  accordance
with SFAS No. 141. These values were based on a valuation  analysis completed by
an independent  valuation firm. In addition,  we have unamortized goodwill of $2
million  that arose from an  acquisition  in 2000.  Goodwill  will be tested for
possible  impairment at least on an annual basis in accordance with SFAS No. 142
(see Note 5 to Consolidated Financial Statements).

The  preparation  of  financial   statements,   in  conformity  with  accounting
principles generally accepted in the United States,  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 differ from these estimates.
Results for the interim  periods  presented  in this report are not  necessarily
indicative of results that may be reported for any other  interim  period or for
the entire fiscal year.

Effect of Inflation

Inflation has not had an impact on our  operations  and we do not expect that it
will have a material impact in 2002.


Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have debt in the amount of $200,000 that is tied to floating  interest rates.
Therefore,  we are subject to a certain amount of risk arising from increases to
the prime rate.


Item 4.  CONTROLS AND PROCEDURES

(a) Within 90 days  prior to filing  this  report on Form 10-Q (the  "Evaluation
Date"),  our Chief Financial  Officer and Chief Executive  Officer evaluated our
disclosure  controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")).  Based on that evaluation,  these officers have concluded that as of the
Evaluation Date, our disclosure controls and procedures were effective in timely
alerting them to material information relating to us (including our consolidated
subsidiaries)  required to be included in our reports  filed or  submitted by us
under the Exchange Act.

(b) There have been no significant  changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the time
of such evaluation.


<PAGE> 24


Part II  -  OTHER INFORMATION

Item 1.  Legal Proceedings

Not Applicable


Item 2.  Recent Sales of Unregistered Securities and Use of Proceeds

Not Applicable


Item 3.  Defaults Upon Senior Securities

Not applicable


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

Not applicable


Item 5.  Other Information

Not applicable


Item 6.  Exhibits and Reports on Form 8-K:

(a) Exhibits:

           3.1     Certificate  of  Amendment  to the  Restated  Certificate  of
                   Incorporation  of Registrant filed with the State of Delaware
                   on October 9, 2002.

           3.2     Certificate  Eliminating  Reference  to  Series  of Shares of
                   Stock  from the  Restated  Certificate  of  Incorporation  of
                   Registrant filed October 9, 2002.

           3.3     Restated  Certificate of  Incorporation  of  Registrant filed
                   with the State of Delaware on October 9, 2002.

           99.1    Certification Pursuant to 18 U.S.C.  Section 1350, As Adopted
                   Pursuant to Section 906 of  the Sarbanes-Oxley  Act of  2002,
                   signed by Registrant's Chief Executive Officer, H. Irwin Levy
                   on November 12, 2002.

           99.2    Certification  Pursuant to 18 U.S.C. Section 1350, As Adopted
                   Pursuant to Section 906  of the  Sarbanes-Oxley  Act of 2002,
                   signed  by  Registrant's  Chief  Financial Officer, Thomas L.
                   Gruber on November 11, 2002.

    (b) Reports on Form 8-K:

           A report on Form 8-K dated  August  14,  2002 was filed on August 14,
           2002,  reporting  under  Item 7 -  Financial  Statements,  Pro  Forma
           Financial  Information  and  Exhibits in which the  Registrant  filed
           Officer   Certifications  dated  August  14,  2002  pursuant  to  the
           Sarbanes-Oxley Act of 2002.

           A report on Form 8-K/A dated March 1, 2002 was filed August 13, 2002,
           reporting  under Item 7 - Financial  Statements,  Pro Forma Financial
           Information and Exhibits, in which the Registrant reported historical
           financial statements of Stonehouse  Technologies,  Inc. and Pro Forma
           financial information.


<PAGE> 25


                                    SIGNATURE

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


                             nSTOR TECHNOLOGIES, INC.
                                   (Registrant)

                              /s/ Thomas L. Gruber
November 11, 2002            -------------------------------------
                             Thomas L. Gruber
                             Acting President, Chief Operating and
                             Financial Officer


<PAGE> 26


                                 CERTIFICATIONS

I, H. Irwin Levy, certify that:

1.         I  have  reviewed  this  quarterly  report  on  Form  10-Q  of  nStor
           Technologies, Inc.;

2.         Based on my  knowledge,  this  quarterly  report does not contain any
           untrue  statement of a material fact or omit to state a material fact
           necessary to make the statements made, in light of the  circumstances
           under which such statements were made, not misleading with respect to
           the period covered by this quarterly report;

3.         Based on my knowledge, the financial statements,  and other financial
           information included in this quarterly report,  fairly present in all
           material respects the financial condition,  results of operations and
           cash flows of the registrant as of, and for, the periods presented in
           this quarterly report;

4.         The registrant's other certifying  officers and I are responsible for
           establishing and maintaining  disclosure  controls and procedures (as
           defined in Exchange Act Rules  13a-14 and 15d-14) for the  registrant
           and we have:

               a) designed  such  disclosure  controls and  procedures to ensure
               that material information  relating to the registrant,  including
               its  consolidated  subsidiaries,  is made  known to us by  others
               within those  entities,  particularly  during the period in which
               this quarterly report is being prepared;

               b) evaluated the  effectiveness  of the  registrant's  disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this quarterly report (the "Evaluation Date"); and

               c) presented in this quarterly  report our conclusions  about the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date;

5.         The  registrant's  other  certifying  officers and I have  disclosed,
           based on our most recent evaluation, to the registrant's auditors and
           the audit  committee of  registrant's  board of directors (or persons
           performing the equivalent function):

               a) all  significant  deficiencies  in the design or  operation of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and

               b) any fraud,  whether or not material,  that involves management
               or  other   employees  who  have  a   significant   role  in  the
               registrant's internal controls; and

6.         The registrant's  other  certifying  officers and I have indicated in
           this quarterly report whether or not there were  significant  changes
           in internal  controls or in other  factors  that could  significantly
           affect  internal  controls  subsequent to the date of our most recent
           evaluation,   including  any   corrective   actions  with  regard  to
           significant deficiencies and material weaknesses.

Date: November 12, 2002
                                           /s/ H. Irwin Levy
                                         -----------------------
                                         H. Irwin Levy
                                         Chief Executive Officer


<PAGE> 27


                                 CERTIFICATIONS

I, Thomas L. Gruber, certify that:

1.         I  have  reviewed  this  quarterly  report  on  Form  10-Q  of  nStor
           Technologies, Inc.;

2.         Based on my  knowledge,  this  quarterly  report does not contain any
           untrue  statement of a material fact or omit to state a material fact
           necessary to make the statements made, in light of the  circumstances
           under which such statements were made, not misleading with respect to
           the period covered by this quarterly report;

3.         Based on my knowledge, the financial statements,  and other financial
           information included in this quarterly report,  fairly present in all
           material respects the financial condition,  results of operations and
           cash flows of the registrant as of, and for, the periods presented in
           this quarterly report;

4.         The registrant's other certifying  officers and I are responsible for
           establishing and maintaining  disclosure  controls and procedures (as
           defined in Exchange Act Rules  13a-14 and 15d-14) for the  registrant
           and we have:

               a) designed  such  disclosure  controls and  procedures to ensure
               that material information  relating to the registrant,  including
               its  consolidated  subsidiaries,  is made  known to us by  others
               within those  entities,  particularly  during the period in which
               this quarterly report is being prepared;

               b) evaluated the  effectiveness  of the  registrant's  disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this quarterly report (the "Evaluation Date"); and

               c) presented in this quarterly  report our conclusions  about the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date;

5.         The  registrant's  other  certifying  officers and I have  disclosed,
           based on our most recent evaluation, to the registrant's auditors and
           the audit  committee of  registrant's  board of directors (or persons
           performing the equivalent function):

               a) all  significant  deficiencies  in the design or  operation of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and

               b) any fraud,  whether or not material,  that involves management
               or  other   employees  who  have  a   significant   role  in  the
               registrant's internal controls; and

6.         The registrant's  other  certifying  officers and I have indicated in
           this quarterly report whether or not there were  significant  changes
           in internal  controls or in other  factors  that could  significantly
           affect  internal  controls  subsequent to the date of our most recent
           evaluation,   including  any   corrective   actions  with  regard  to
           significant deficiencies and material weaknesses.

Date: November 11, 2002
                                      /s/ Thomas L. Gruber
                                    -----------------------
                                    Thomas L. Gruber
                                    Chief Financial Officer