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 March 31, 2001

                                       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 April 30, 2001: 35,478,489




<PAGE> 2


                   nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS

                                                           Page
                                                          Number

PART I.   FINANCIAL INFORMATION

  Item 1.  Financial Statements (Unaudited)

     Consolidated Balance Sheets as of March 31,
       2001 and December 31, 2000                           3
     Consolidated Statements of Operations
       for the three months ended March 31,
       2001 and 2000                                        4
     Consolidated Statement of Stockholders'
       Deficit for the three months ended
       March 31, 2001                                       5
     Consolidated Statements of Cash Flows
       for the three months ended March 31,
       2001 and 2000                                        6-7
     Notes to Consolidated Financial Statements             8-13

  Item 2.  Management's Discussion and Analysis of
           Financial Condition and Results of Operations    14-18

  Item 3.  Quantitative and Qualitative Disclosures
           about Market Risk                                19


Part II.  OTHER INFORMATION

   Item 1.     Not Applicable                               19

   Item 2.     Recent Sales of Unregistered Securities
               and Use of Proceeds                          19

   Item 3. - Item 5  Not Applicable                         19

   Item 6.     Exhibits and Reports on Form 8-K             19


SIGNATURE                                                   20


<PAGE> 3


PART 1.  FINANCIAL INFORMATION

Item 1.  Financial Statements

                            nSTOR TECHNOLOGIES, INC.
                           CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)
                                   (unaudited)
                                                        Mar. 31,     Dec. 31,
                                                           2001        2000
             ASSETS                                     ---------   ---------
Current assets:
  Cash and cash equivalents                              $   914     $    37
  Accounts receivable, net of $308 and $402
    allowance for doubtful accounts                        3,967       4,395
  Inventories                                              4,583       5,174
  Prepaid expenses and other                               1,213       1,278
                                                         -------     -------
     Total current assets                                 10,677      10,884

Property and equipment, net of $4,809 and
  $4,583 accumulated depreciation                          2,114       2,384
Goodwill, net of $500 and $400
  accumulated amortization                                 2,297       2,397
Other assets                                                   4          57
                                                         -------     -------
                                                         $15,092     $15,722
                                                         =======     =======
             LIABILITIES
Current liabilities:
  Bank line of credit                                    $ 3,816     $ 4,086
  Other short-term loans, including
      $2,358 due to directors, net of discount             2,858           -
  Deferred revenue                                         2,218       2,400
  Accounts payable and other                               8,411       9,504
                                                         -------     -------
     Total current liabilities                            17,303      15,990

Long-term debt, including $1,150 and
      $1,658 due to director, net of discount              8,549       7,258
                                                         -------     -------
     Total liabilities                                    25,852      23,248
                                                         -------     -------

             STOCKHOLDERS' DEFICIT
Preferred stock, $.01 par; 1,000,000 shares
  authorized,  in order of preference:
   Convertible  (except Series G) Preferred
   Stock (aggregate  liquidation  value
   $1,000 per share) issued and outstanding
   at March 31, 2001 and December 31, 2000 -
   Series F, 722 shares;  Series D,
   2,000 shares; Series E, 3,500 shares;
   Series G, 2000 shares                                       -           -
Common stock, $.05 par; shares authorized 75,000,000;
  shares issued and outstanding, 35,478,489 at
  March 31, 2001 and December 31, 2000                     1,773       1,773
Additional paid-in capital                                71,925      71,529
Deficit                                                  (84,458)    (80,828)
                                                         -------     -------
     Total stockholders' deficit                         (10,760)     (7,526)
                                                         -------     -------
                                                         $15,092     $15,722
                                                         =======     =======

          See accompanying notes to consolidated financial statements.


<PAGE> 4


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


                                                   Three Months
                                                  Ended March 31,
                                                --------------------
                                                  2001       2000
                                                    (unaudited)
                                                ---------  ---------

Sales                                            $ 6,218    $12,540
Cost of sales                                      4,505      8,969
                                                 -------    -------
     Gross profit                                  1,713      3,571
                                                 -------    -------
Operating expenses:
  Selling, general and administrative              3,308      4,497
  Research and development                         1,079        616
  Depreciation and amortization                      483      1,116
                                                 -------    -------
     Total operating expenses                      4,870      6,229
                                                 -------    -------
     Loss from operations                         (3,157)    (2,658)

Gain on sale of assets of Borg Adaptive
  Technologies (Note 5)                                -      5,575
Interest and other income                             38         31
Interest expense                                    (326)      (298)
                                                 -------    -------
Net (loss) income                                 (3,445)     2,650

Preferred stock dividends                           (185)      (211)
                                                 -------    -------
Net (loss) income available to
  common stockholders                           ($ 3,630)   $ 2,439
                                                 =======    =======
Net (loss) income per share:

  Basic                                         ($   .10)   $   .08
                                                 =======    =======
  Dilutive                                      ($   .10)   $   .07
                                                 =======    =======

Shares used in computing net income (loss) per share:

  Basic                                       35,478,489 29,556,462
                                              ========== ==========
  Dilutive                                    35,478,489 40,118,016
                                              ========== ==========


          See accompanying notes to consolidated financial statements.


<PAGE> 5


                            nSTOR TECHNOLOGIES, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
                             (dollars in thousands)

                                       Preferred     Addi-
                      Common Stock       Stock       tional
                   ----------------- -------------  Paid-In
                     Shares   Amount Shares Amount  Capital   Deficit    Total
                   ---------- ------ ------ ------  -------  ---------  --------

Balances, December

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

Common stock
  warrants issued
  in connection
  with borrowings                                       396                 396

Preferred stock
 dividends                                                       (185)     (185)

Net loss for the
 three months ended
 March 31, 2001                                                (3,445)   (3,445)
                   ---------- ------ ------ ------  -------  --------- ---------
Balances, March 31,
 2001 (unaudited)  35,478,489 $1,773 8,222  $   -   $71,925  ($84,458) ($10,760)
                   ========== ====== ====== ======  =======  ========= =========


                 See accompanying notes to consolidated financial statements.


<PAGE> 6


                            nSTOR TECHNOLOGIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                                              Three Months
                                                             Ended March 31,
                                                          --------------------
                                                            2001       2000
                                                              (unaudited)
                                                          ---------  ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (loss) income                                       ($ 3,445)  $  2,650
  Adjustments to reconcile net (loss) income to
  net cash used in operating activities:
      Gain on sale of assets of Borg Adaptive
        Technologies                                            -      (5,575)
      Gain on disposal of assets                               (34)        -
      Depreciation                                             383        473
      Amortization of goodwill                                 100        643
      Amortization of deferred financing costs                  28         -
      Provision for losses on accounts receivable               -          15
      Changes in assets and liabilities (net of effects
        from acquisition):
        Decrease (increase) in accounts receivable             428       (337)
        Decrease (increase) in inventories                     928       (273)
        Decrease in prepaid expenses and other                 118        205
        Decrease in accounts payable and other              (1,612)    (1,978)
                                                           --------   --------
Net cash used in operating activities                       (3,106)    (4,177)
                                                           --------   --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Net proceeds from sale of assets of
    Borg Adaptive Technologies                                  -       7,013
  Cash paid for acquisition                                     -         (68)
  Additions to property and equipment                          (79)      (148)
                                                           --------   --------
Net cash (used in) provided by investing activities            (79)     6,797
                                                           --------   --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net (repayments) borrowings on bank line of credit          (270)        89
  Additions to other borrowings                              4,392         -
  Repayment on other borrowings                                 -      (1,585)
  Proceeds from exercise of stock options and warrants          -       1,096
  Cash paid for preferred stock dividends                      (60)      (258)
                                                           --------   --------
Net cash provided by (used in) financing activities          4,062       (658)
                                                           --------   --------
Net increase in unrestricted cash and cash
  equivalents during the period                                877      1,962

Unrestricted cash and cash equivalents at the
  beginning of the period                                       37        650
                                                          ---------   --------
Unrestricted cash and cash equivalents at the
  end of the period                                       $    914   $  2,612
                                                          =========   ========


<PAGE> 7

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

                                                             Three Months
                                                            Ended March 31,
                                                          -------------------
                                                            2001       2000
                                                              (unaudited)
                                                          --------   ---------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during period for:
    Interest                                              $   225     $   279
                                                          =======     =======

NON-CASH INVESTING ACTIVITIES:
  Acquisition:
   Fair value of assets acquired                          $    -      $ 2,944
   Liabilities assumed or incurred                             -         (276)
   Common stock issued                                         -       (2,600)
                                                          -------     -------
   Cash paid                                              $    -      $    68
                                                          =======     =======


          See accompanying notes to consolidated financial statements.


<PAGE> 8



                            nSTOR TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

               Principles of Consolidation

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

        Basis of Presentation

In the opinion of management,  the unaudited  consolidated  financial statements
furnished  herein  include  all   adjustments,   consisting  only  of  recurring
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 for the year ended December 31, 2000.

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.

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 incurred net losses of $21.9 million, $18.7 million and
$10.4  million  for  the  years  ended   December  31,  2000,   1999  and  1998,
respectively,  and $3.4  million  for the  quarter  ended  March  31,  2001.  In
addition,  the Company has negative working capital and a shareholders'  deficit
at March 31, 2001. These matters,  among others,  raise  substantial doubt about
the Company's ability to continue as a going concern.

In early 2000, in an effort to bring the Company to  profitability,  the Company
successfully recruited a new executive management team. During most of 2000, the
management team formulated and implemented its current product strategy centered
around  its  NexStor  2U line of  SAN-ready  storage  solutions.  This  strategy
included the transition from the Company's older  technology  legacy products to
the newer  technology  solutions,  which the Company began shipping in the third
quarter of 2000.  During the  second  half of the year and the first  quarter of
2001,  the decline in revenues of the  Company's  older  products  exceeded  the
increase in sales of its newer technology  solutions,  which  contributed to the
Company's operating losses.

However,  the Company has recently  experienced  growth in its indirect customer
channel base (original equipment  manufacturers  (OEM's),  value added resellers
(VARs) and system integrators). Since October 2000, the Company has entered into
various  agreements  with  domestic  and  international  OEM's,  VARs and system


<PAGE> 9


integrators  and has  received  indications  of approval  from a number of other
indirect  customers.  In 2000,  indirect sales represented a small percentage of
the Company's  total sales  revenues.  In an effort to capitalize on this growth
trend and  simultaneously  reduce  operating  costs,  the Company  recently  has
shifted its sales and marketing strategy to provide an emphasis on the Company's
indirect  sales  function.  As part of this  strategy,  since January 2001,  the
Company has reduced its direct sales personnel and related costs,  and has begun
to focus its direct  sales team to certain  designated  markets.  The  Company's
operating  results  are  expected  to be  positively  affected by an increase in
indirect sales; however, there is no assurance that an increase will occur.

Historically, the Company has been successful in securing significant amounts of
equity and debt financing to support its operating deficits. Since late 1997 and
through May 16, 2001,  the Company  obtained net cash  proceeds of $36.4 million
from private investors, including $4.7 million since December 31, 2000. Of these
amounts,  $12.5 million was received from H. Irwin Levy, the Company's  Chairman
of the Board and a principal  shareholder,  or companies  controlled by Mr. Levy
(collectively,  Mr.  Levy).  Additional  cash of  approximately  $7 million  was
obtained during January 2000 when the Company sold  substantially all the assets
of its wholly-owned subsidiary, Borg Adaptive Technologies,  Inc. (see Note 5 to
Consolidated Financial Statements).

Effective  April 12, 2001,  holders of all our non-bank  notes payable  totaling
$11.9 million (including  $110,000 in accrued interest) on that date,  exchanged
their notes for convertible preferred stock with a stated value of $11.9 million
(see Note 3 to Consolidated Financial Statements). Accordingly, as of that date,
the  Company's  shareholder's  equity  increased  by $11.9  million and the only
outstanding  debt,  other than trade payables and other  operating  liabilities,
consisted of the Compnay's revolving bank asset based credit facility.

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

        Business

The Company is engaged as a  manufacturer  and  supplier of highly  intergrated,
high-density  storage  solutions for computing  operations that support multiple
operating platforms, including Windows NT, Windows 2000, Solaris, Linux, SGI and
MAC. Designed for storage  intensive  environments such as the Internet or other
mission-critical  applications,  the  Company's  products  are  offered in Fibre
Channel, Fibre-to-SCSI (Small Computer System Interface) and SCSI architectures.


<PAGE> 10


        Use of Estimates

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


        Reclassifications

Certain items in the consolidated financial statements as of March 31, 2000 have
been   reclassified   to   conform   with  the   current   presentation.   These
reclassifications had no impact on operating results previously reported.

        Net Income (Loss) Per Common Share ("EPS")

Basic EPS is calculated  by dividing the net income  (loss)  available to common
stock by the weighted  average number of shares  outstanding  during the period.
Diluted EPS includes the effect of potentially dilutive  securities.  During the
three months ended March 31, 2001, the effect of including  potentially dilutive
securities would have been antidilutive. Accordingly, basic and dilutive EPS for
that period are the same.  The  calculation  of diluted EPS for the three months
ended March 31, 2000 follows (in thousands except per share data):

Net income available to common stock                         $      2,439
Preferred stock dividends                                             211
                                                              -----------
Net income available to common stock
  plus assumed conversions, diluted                          $      2,650
                                                              ===========

Weighted average shares                                            29,556
Weighted common stock equivalents                                  10,562
                                                              -----------
Total weighted average shares, diluted                             40,118
                                                              ===========

Net income per share, diluted                                 $       .07
                                                              ===========

As of April 30, 2001,  outstanding  potentially dilutive securities consisted of
(in thousands):

     Convertible preferred stock                                   23,118
     Stock options                                                  4,262
     Warrants                                                       2,679
                                                               ----------
     Total                                                         30,059
                                                               ==========


<PAGE> 11


(2)  GOODWILL

Goodwill,  representing the excess of the cost of an acquired  business over the
fair value of net assets  acquired,  is carried at cost and amortized  under the
straight line method over seven years.  Management periodically reviews goodwill
to determine if an impairment has occurred.  Among various considerations,  this
process  includes  evaluating  recoverability  based  upon cash flow  forecasts.
During the fourth quarter of 2000, the Company recorded a write-down of goodwill
of $12  million,  which was  determined  to have been  impaired  because  of the
Company's  projected  inability to generate  sufficient  future operating income
from the assets acquired in a 1999 acquisition.  At March 31, 2001,  unamortized
goodwill of $2.3  million was not  considered  to be impaired.  Amortization  of
goodwill  amounted to $100,000 and $643,000 for the three months ended March 31,
2001 and 2000, respectively.


(3)  BORROWINGS

  Revolving Credit Facility (Bank Line of Credit)

The Company's Bank Line of Credit provided for borrowings based on the lesser of
$10 million or: (i) 85% of eligible accounts receivable,  as defined,  plus (ii)
the lesser of $1.75  million or 23% of  eligible  inventory,  as  defined,  bore
interest at prime (8% at March 31, 2001) plus 1.5%,  was  scheduled to mature in
April 2002 and was  collateralized by substantially all of the Company's assets.
The Bank Line of Credit also 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
the minimum net worth and net income  requirements and was in technical  default
under the compliance provisions of the Bank Line of Credit.

In May 2001, the lender has verbally agreed, in principle,  to waive the default
and the Company  agreed with the lender to amend  certain terms of the Bank Line
of Credit,  including a reduction in the maximum availability to $5 million, new
minimum net worth and net income covenants, and an increase in the interest rate
to prime plus 2.5%.In addition,  the amount of borrowings based on inventory was
reduced to the lesser of $1.25 million or 22% of eligible inventory, as defined.
All other  significant  provisions  of the Bank Line of Credit are  expected  to
remain the same. The Company is in discussions  with the lender to finalize this
amendment.

As of March 31,  2001,  the  outstanding  balance of the Bank Line of Credit was
$3.8  million  and an  additional  $333,000  was  available  based  on  eligible
collateral.

    Other Borrowings

At March 31, 2001,  the Company's  other  borrowings  consisted of $11.4 million
(net of $369,000  unamortized  discount)  with interest  ranging from 8%-10% per
annum,  including $3.4 million (net of $167,000 unamortized discount) due to Mr.
Levy.  Of this amount,  $2.9 million was scheduled to mature by January 2002 and
was classified as current on the  accompanying  consolidated  balance sheet, and
$8.5  million  was  scheduled  to  mature  in 2003 and 2004  and  classified  as
long-term.


<PAGE> 12


Included in the long-term notes was $3.8 million issued during the first quarter
of 2001,  which was  convertible  into the  Company's  common stock at $1.00 per
share. In connection  with these notes,  the Company issued warrants to purchase
an aggregate of 937,500  shares  (including  312,500  shares to Mr. Levy) of the
Company's common stock at $1.20 per share,  exercisable at issuance and expiring
on  March  31,  2004.  The  warrants  were  valued  based  on the  Black-Scholes
option-pricing  model as of the date of issuance at an aggregate of $309,000 and
were recorded as a discount to the notes.

Effective  April 12, 2001,  holders of all the Company's  non-bank notes payable
totaling $11.9 million (including  $110,000 in accrued interest) exchanged their
notes (the  "Exchange")  for Series H and Series I Convertible  Preferred  Stock
(see Note 4 to Consolidated  Financial  Statements) with a stated value of $11.9
million (including $3.6 million held by Mr. Levy). Accordingly, as of that date,
the Company's shareholder's equity increased by $11.9 million.

As of March 31,  2001,  approximately  $28,000  of  discount  was  amortized  to
interest expense.


(4)  PREFERRED STOCK

At March 31, 2001, the Company had four classes of preferred stock (Series D, E,
F and G) with an  aggregate  stated  value of $8.2  million.  Series D preferred
stock,  with an aggregate stated value of $2 million at March 31, 2001,  accrues
dividends at 8% per annum,  payable  quarterly,  is convertible by the holder at
any time into an aggregate of 2,000,000  shares of the  Company's  common stock,
based on a conversion  price of $1 per share,  and has an  automatic  conversion
feature in which  each share not  converted  by  October  2001 is  automatically
converted into common stock.  Series E and F preferred stock,  with an aggregate
stated value of $4.2 million  (including $1.5 million held by Mr. Levy) at March
31, 2001,  accrues dividends at 9% through June 7, 2001 and 10% thereafter,  and
is convertible  by the holder at any time into an aggregate of 1,407,000  shares
(including  500,000 shares as to Mr. Levy) of the Company's common stock,  based
on a  conversion  price of $3 per  share.  Series  G  preferred  stock,  with an
aggregate  stated  value of $2  million at March 31,  2001  (held by Mr.  Levy),
accrued  dividends at 10%, payable quarterly and was redeemable at the Company's
option.  Attached  to the Series G  Preferred  Stock was a Warrant  to  purchase
500,000  shares of the  Company's  common stock at $1.50 per share,  exercisable
from July 1, 2001 through December 31, 2003 (the Warrant).  The Warrant provided
that if any portion of the Series G Preferred  Stock was redeemed by the Company
prior to June 30, 2001, a corresponding pro-rata portion of the Warrant would be
cancelled.  Effective  April 12, 2001, Mr. Levy exchanged the Series G Preferred
Stock and the Warrant  for Series I  Convertible  Preferred  Stock with a stated
value of $2.1 million (including $57,000 of accrued dividends).

The Series H and I Convertible  Preferred  Stock,  issued in April 2001,  accrue
dividends at 10% per annum, payable quarterly, and are convertible by the holder
into shares of the Company's  common stock based on a fixed  conversion price of
$.72 per share,  the closing market price on the date prior to the Exchange (see
Note 3 to Consolidated Financial Statements).


<PAGE> 13


(5)  GAIN ON SALE OF ASSETS OF BORG ADAPTIVE TECHNOLOGIES

On January 10, 2000,  the Company sold  substantially  all of the assets of Borg
Adaptive  Technologies,  Inc., a  wholly-owned  subsidiary of the Company,  to a
wholly-owned  subsidiary  of QLogic  Corporation,  for $7 million cash (the Borg
Sale). The net book value of assets sold totaled $.6 million and included all of
the  intellectual  property  rights  relating  to the  Company's  Adaptive  RAID
(Redundant Array of Independent Disks) technology,  including software,  patents
and trademarks, and certain tangible assets, including test and office equipment
and tenant  improvements,  subject to the right of the Company to the use of all
intellectual  property for its own use. In  connection  with the Borg Sale,  the
Company  recorded  transaction  costs of $.5 million and a gain of $5.6 million,
which is net of compensation expense of $.8 million resulting from modifications
to certain stock options and warrants.


(6)  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, 2000, there were unused net operating loss carryforwards (the
"NOL's") for regular  federal income tax purposes of  approximately  $41 million
and for California tax purposes of approximately $8.3 million expiring from 2012
through 2020 and 2001 through 2005,  respectively.  In addition, the Company has
research and development tax credit carryforwards of approximately $1.2 million,
which  expire from 2002  through 2018 and in  conjunction  with the  Alternative
Minimum Tax ("AMT") rules, the Company has available AMT credit carryforwards of
approximately $.8 million,  at December 31, 2000, which may be used indefinitely
to reduce regular federal income taxes.

The usage of  approximately  $7.2 million of the federal NOL  carryforwards  and
approximately $2 million of the California NOL carryforwards is limited annually
to  approximately  $.4 million due to an  acquisition,  which caused a change in
ownership for income tax purposes.

At March 31, 2001 and December 31, 2000,  a 100%  valuation  allowance  has been
provided on the total deferred  income tax assets because it is more likely than
not that the NOL  carryforwards  will not be realized based on recent  operating
results.  Accordingly,  no income tax  provision  was required on the  Company's
pre-tax income for the three months ended March 31, 2000.

(7)  SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS

The Company operates predominantly in one business segment,  information storage
solutions.  During the three  months ended March 31,  2001,  no single  customer
accounted  for more than 10% of the  Company's  sales.  During the three  months
ended March 31, 2000, one customer  accounted for 11.4% of the Company's  sales.
Sales  to  geographic   areas  other  than  the  United  States  have  not  been
significant.


<PAGE> 14


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

With the exception of discussion regarding historical information, "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations"
contains  forward  looking  statements.  Such  statements  are based on  current
expectations  subject to uncertainties and other factors which may involve known
and  unknown  risks that could  cause  actual  results of  operations  to differ
materially  from those  projected or implied.  Further,  certain forward looking
statements are based upon assumptions about future events which may not prove to
be accurate.

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

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


Overview

We are a manufacturer and supplier of highly integrated enterprise-class storage
solutions for computing operations,  including external RAID (Redundant Array of
Independent  Disks)  solutions,  a complete set of SCSI (Small Computer  Systems
Interface),  tape backup and advanced storage management software solutions. Our
product line supports a variety of operating platforms, including Windows NT and
Windows 2000, Solaris, Linux SGI and MAC.


Three Months Ended March 31, 2001 vs. March 31, 2000

We incurred a net loss of $3.4 million for the three months ended March 31, 2001
as compared to net income of $2.7 million for the corresponding quarter in 2000.
The 2000 quarter  included a $5.6 million  gain on the Borg  Sale(see  Note 5 to
Consolidated Financial Statements).

Sales

Net  sales for the three  months  ended  March  31,  2001 were $6.2  million  as
compared  to $12.5  million  for the three  months  ended  March 31,  2000.  The
decrease  reflects the transition from our older  technology  legacy products to
our newer  technology  solutions  centered  around our new  NexStor 2U (3.5 inch
high)  storage  enclosures  and  RAID  systems  as well as the  recent  economic
downturn  which has caused  customer  delays in purchasing  technology and other
equipment.

<PAGE> 15


During the quarter ended March 31, 2001, our revenues  consisted of $3.9 million
in  direct  sales  to end  users,  $1.4  million  in  indirect  sales  to  OEMs,
value-added  resellers  (VARs) and other  channel  business  and $.9  million in
service  revenues.  We  have  recently  experienced  significant  growth  in our
indirect  customer  base and since  October  2000,  have  entered  into  various
agreements  with  domestic  and  international  OEM's and  resellers.  We expect
further expansion of our indirect  business,  which we anticipate will provide a
significant  new  source  of  revenues.  In  order  to  take  advantage  of  the
opportunities  available in the indirect  business  channels,  we have  recently
shifted our sales and marketing strategy to provide greater technical, marketing
and sales  support to our indirect  sales  function.  As part of this  strategy,
since January 2001 we have reduced our direct sales personnel and related costs,
and have begun to refocus our direct sales team to designated markets as well as
existing  large  customers.  We expect this shift to continue  during the second
quarter of 2001.

Cost of Sales/Gross Margins

Gross  margins  decreased  to 27.5% for the three months ended March 31, 2001 as
compared to 28.5% for the quarter  ended March 31,  2000.  The decrease in gross
margin  percentage was primarily due to economies of scale  attributable  to the
level of fixed costs inherent in our operations coupled with significantly lower
sales revenues.  Our gross margins are dependent,  in part, on product mix which
fluctuates from time to time.

Operating Expenses

        Selling, General and Administrative

Selling,  general and administrative expenses were $3.3 million and $4.5 million
for the three months ended March 31, 2001 and 2000, respectively,  a decrease of
$1.2 million.  Significant  components of this  reduction  include a $.4 million
decrease in selling and marketing costs,  primarily as a result of reduced sales
levels and the January 2001  reduction  in our overall  workforce as part of the
restructuring of our sales and marketing  efforts  discussed under "Sales",  $.5
million in general and  administrative  costs,  and $.3  million of  operational
costs incurred  during the first quarter of 2000  associated  with our Lake Mary
operations prior to relocating those operations to San Diego.

        Research and Development

Research and  development  expenses were $1.1 million for the three months ended
March 31, 2001 and $.6 million for the three months  ended March 31,  2000.  The
increase  was  attributable  to costs  incurred  as a result  of the  continuing
development  of  our  NexStor   product  line.  We  believe  that   considerable
investments in research and development  will be required to remain  competitive
and expect that these expenses will increase in future periods.

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


<PAGE> 16


        Depreciation and Amortization

Depreciation  and  amortization  was $.5 million and $1.1  million for the three
months  ended March 31, 2001 and 2000,  respectively.  The  decrease  was due to
reduced  amortization  resulting from the fourth quarter 2000  write-down of $12
million of goodwill  which was  determined to have been impaired  because of our
projected  inability to generate  sufficient  future  operating  income from the
assets acquired in a 1999 acquisition.

        Interest Expense

Interest expense for both the three months ended March 31, 2001 and 2000 was $.3
million.

        Preferred Stock Dividends

Preferred  stock  dividends  for both the three  months ended March 31, 2001 and
March 2000 were $.2 million.  We expect preferred stock dividends to increase in
future  periods  due  to the  April  12,  2001  exchange  of  $11.9  million  of
convertible  notes  payable  for a  similar  amount  of  Series  H and  Series I
Convertible Preferred Stock, which accrues dividends at 10% per annum.


                         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 $21.9  million,  $18.7  million and $10.4 million for the
years ended December 31, 2000, 1999 and 1998, respectively, and $3.4 million for
the quarter ended March 31, 2001. In addition,  we have negative working capital
and a  shareholders'  deficit at March 31, 2001.  These  matters,  among others,
raise substantial doubt about our ability to continue as a going concern.

In early  2000,  in an  effort  to bring us to  profitability,  we  successfully
recruited a new executive  management team.  During most of 2000, the management
team formulated and implemented our current product strategy centered around our
NexStor 2U line of  SAN-ready  storage  solutions.  This  strategy  included the
transition from our older  technology  legacy  products to the newer  technology
solutions,  which we began  shipping  in the third  quarter of 2000.  During the
second half of the year and the first  quarter of 2001,  the decline in revenues
of our older  products  exceeded the  increase in sales of our newer  technology
solutions, which contributed to our operating losses.

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


<PAGE> 17


Consolidated Statements of Cash Flows

        Operating Activities

Net cash used by operating  activities amounted to $3.1 million and $4.2 million
for the three months ended March 31, 2001 and 2000, respectively.  These amounts
included losses from operations (before changes in assets and liabilities) of $3
million and $1.8 million,  respectively.  During the 2001 quarter, cash provided
by the net  reduction  in  inventory of $.9 million was offset by a $1.6 million
reduction of accounts payable and other liabilities. During the 2000 quarter, we
used $2 million in cash,  principally  from the Borg  Sale,  to reduce  accounts
payable and other liabilities.

        Investing Activities

Net cash used by investing activities was $.1 million for the three months ended
March  31,  2001,  as  compared  to  $6.8  million  net  cash  provided  in 2000
principally from the Borg Sale.

        Financing Activities

Net cash provided by financing  activities  for the three months ended March 31,
2001 was $4.1 million  primarily  consisting  of $4.4 million of financing  from
private investors,  partially offset by a $.3 million reduction in our Bank Line
of Credit.  Net cash used for the three months ended March 31, 2000  amounted to
$.7  million  and  primarily  consisted  of the  repayment  of $1.6  million  of
borrowings from Mr. Levy,  partially offset by $1.1 million from the exercise of
stock options and warrants.

Bank Line of Credit

Our Bank Line of  Credit  provided  for  borrowings  based on the  lesser of $10
million or: (i) 85% of eligible accounts receivable,  as defined,  plus (ii) the
lesser of $1.75 million or 23% of eligible inventory,  as defined, bore interest
at prime (8% at March 31, 2001) plus 1.5%, was scheduled to mature in April 2002
and was  collateralized  by  substantially  all of our assets.  The Bank Line of
Credit also  provided for certain  financial  covenants,  including  minimum net
worth and net income requirements.

Since the fourth quarter of 2000, we had not been in compliance with the minimum
net worth and net income  requirements  and were in technical  default under the
compliance provisions of the Bank Line of Credit.

In May 2001, the lender has verbally agreed, in principle,  to waive the default
and we agreed with the lender to amend certain terms of the Bank Line of Credit,
including a reduction in the maximum availability to $5 million, new minimum net
worth and net income  covenants,  and an increase in the interest  rate to prime
plus 2.5%. In addition,  the amount of borrowings based on inventory was reduced
to the lesser of $1.25  million or 22% of eligible  inventory,  as defined.  All
other  significant  provisions of the Bank Line of Credit are expected to remain
the same.  We are  currently  in  discussions  with the lender to finalize  this
amendment.


<PAGE> 18


As of March 31,  2001,  the  outstanding  balance of the Bank Line of Credit was
$3.8  million  and an  additional  $333,000  was  available  based  on  eligible
collateral.

Financing Activities with Private Investors

Since late 1997 through May 16,  2001,  we have  obtained  net cash  proceeds of
$36.4 million from private investors,  including $12.5 million from Mr. Levy. Of
this amount,  $4.7 million was received  since  December 31, 2000,  including $2
million from Mr. Levy.

Effective April 12, 2001,  holders of all of our non-bank notes payable totaling
$11.9 million (including $110,000 in accrued interest) exchanged their notes for
Series H and Series I Convertible  Preferred  Stock with a stated value of $11.9
million,  including  $3.6 million  held by Mr. Levy (see Note 4 to  Consolidated
Financial Statements).  Accordingly, as of that date, our only outstanding debt,
other than trade payables and other operating liabilities, consisted of our Bank
Line of Credit, and our shareholder's equity increased by $11.9 million.

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


                               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 2001.


<PAGE> 19


Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We  maintain  a  floating  interest  rate  Bank  Line of  Credit  ($3.8  million
outstanding balance at March 31, 2001).  Therefore,  we are subject to a certain
amount of risk arising from increases to the prime rate.


Part II  -  OTHER INFORMATION

Item 1.  Legal Proceedings

On February  20,  2001, a former  supplier  filed a Complaint  against us in the
Eighteenth  Judicial Circuit of Brevard County,  Florida.  The Complaint alleges
that we owe the plaintiff  approximately  $526,000 plus interest  principally in
connection  with orders  cancelled in 1999. On April 16, 2001, we filed a Motion
to Dismiss.  We believe that the Complaint is without merit and that the outcome
will no have a material adverse effect on our operations.

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

During the three months ended March 31, 2001 we borrowed $3.8 million (including
$1.3 million from Mr. Levy) under  convertible  notes that were convertible into
our common stock at $1.00 per share.  In connection  with these notes, we issued
warrants to purchase an aggregate of 937,000 shares (including 312,500 shares to
Mr.  levy) of our common stock at $1.20 per share,  exercisable  at issuance and
expiring on March 31, 2004.  Effective  April 12, 2001, the notes were exchanged
for our Series I Convertible Preferred Stock.

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:

(b)     Reports on Form 8-K:

        We were not  required to file Form 8-K during the quarter for which this
        report is filed.


<PAGE> 20


                                    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)

May 18, 2001                /s/  Jack Jaiven
                          ----------------------------------------------
                          Jack Jaiven, Principal Financial and Principal
                          Accounting Officer