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, 2003

                                       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.)


                6190 Corte Del Cedro, Carlsbad, California 92009
                    (Address of principal executive offices)

                                 (760) 683-2500
                         (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 _____

Indicate  by check mark  whether  the  Registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act): Yes ______   No X


         Number of shares outstanding of the Registrant's Common Stock,
          par value $.05 per share, as of April 30, 2003: 153,091,995


<PAGE> 2


                    nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS


                                                                      Page
                                                                     Number
PART I.  FINANCIAL INFORMATION

  Item 1.  Financial Statements

     Consolidated Balance Sheets as of March 31, 2003 (Unaudited)
        and December 31, 2002                                           3
     Consolidated Statements of Operations (Unaudited) for the
        three months ended March 31, 2003 and 2002                      4
     Consolidated Statement of Shareholders' Equity (Unaudited)
        for the three months ended March 31, 2003                       5
     Consolidated Statements of Cash Flows (Unaudited) for the
        three months ended March 31, 2003 and 2002                      6
     Notes to Consolidated Financial Statements (Unaudited)          7-19

  Item 2.  Management's Discussion and Analysis of Financial
               Condition and Results of Operations                  19-24

  Item 3.  Quantitative and Qualitative Disclosures about
               Market Risk                                             24

  Item 4.  Controls and Procedures                                     24


Part II.  OTHER INFORMATION

   Item 1.     Legal Proceedings                                       24

   Item 2.     Changes in Securities and Use of Proceeds               24

   Item 3.     Defaults upon Senior Securities                         24

   Item 4.     Submission of Matters to a Vote of Security Holders     24

   Item 5.     Other Information                                       24

   Item 6.     Exhibits and Reports on Form 8-K                        25

               SIGNATURE                                               26

               CERTIFICATIONS                                       27-28


<PAGE> 3


PART 1  -  FINANCIAL INFORMATION

Item 1.  Financial Statements

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

                                                            Mar. 31,
                                                              2003      Dec. 31,
                                                           (unaudited)    2002
             ASSETS                                         ---------  ---------
Current assets:
  Cash and cash equivalents                                   $   299   $   293
  Accounts receivable, net                                        730       934
  Inventories                                                   1,407     1,079
  Prepaid expenses and other                                      284       224
                                                              -------   -------
     Total current assets                                       2,720     2,530

Property and equipment, net of $118 and $88 of
  accumulated depreciation                                        309       303
Goodwill and other intangible assets, net of $1,113
  and $1,021 in accumulated amortization                       11,460    11,349
                                                              -------   -------
                                                              $14,489   $14,182
                                                              =======   =======
             LIABILITIES
Current liabilities:
  Bank line of credit                                         $   229   $   200
  Other borrowings                                              7,046     4,684
  Accounts payable and other                                    2,566     3,177
  Deferred revenue                                              1,112     1,401
                                                              -------   -------
     Total current liabilities                                 10,953     9,462

Long-term debt                                                      -     3,100
                                                              -------   -------
     Total liabilities                                         10,953    12,562
                                                              -------   -------

             SHAREHOLDERS' EQUITY
Preferred stock, $.01 par; 1,000,000 shares authorized;
  0 shares issued and outstanding                                   -         -
Common stock, $.05 par; 230,000,000 shares
  authorized; 153,091,995 and 142,076,947 shares issued
  and outstanding at March 31, 2003
  and December 31, 2002, respectively                           7,654     7,103
Deferred stock compensation                                      (597)        -
Additional paid-in capital                                    105,444   101,847
Deficit                                                      (108,965) (107,330)
                                                              -------   -------
     Total shareholders' equity                                 3,536     1,620
                                                              -------   -------
                                                              $14,489   $14,182
                                                              =======   =======


          See accompanying notes to consolidated financial statements.


<PAGE> 4


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

                                                        Three Months
                                                       Ended March 31,
                                                    --------------------
                                                      2003         2002
                                                    -------      -------

Sales                                                $2,334       $1,559
Cost of sales                                         1,473        1,675
                                                     ------       ------
     Gross margin (loss)                                861         (116)
                                                     ------       ------
Operating expenses:
  Selling, general and administrative                 1,339        1,530
  Research and development                              590          737
  Amortization of non-cash deferred stock
    compensation (1)                                    233            -
  Depreciation and amortization                         122          243
                                                     ------       ------
     Total operating expenses                         2,284        2,510
                                                     ------       ------
Loss from operations                                 (1,423)      (2,626)

Realized losses on marketable securities                  -       (1,329)
Fair value of option granted to customer                  -         (670)
Interest expense                                       (240)        (137)
Other income (expense), net                              28          (40)
                                                     ------       ------
Net loss                                            $(1,635)     $(4,802)
                                                     ======       ======

Basic and diluted net loss per common share         $(  .01)     $(  .04)
                                                     ======       ======

Weighted average number of common shares
  considered outstanding, basic and diluted       142,566,505  114,940,708
                                                  ===========  ===========


--------
(1) If amortization of non-cash  deferred stock  compensation  were not reported
separately,  the compensation expense would be included in selling,  general and
administrative.


          See accompanying notes to consolidated financial statements.


<PAGE> 5


                    nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                             (dollars in thousands)
                                   (unaudited)
<TABLE>
<CAPTION>

                                                        Deferred    Addi-
                                      Common Stock        Stock     tional
                                  --------------------   Compen-   Paid-In
                                    Shares      Amount   sation     Capital  Deficit    Total
                                  -----------  -------  --------   -------- ---------  -------
<S>                               <C>           <C>        <C>     <C>      <C>        <C>
Balances, December 31, 2002       142,076,947   $7,103     $   -   $101,847 $(107,330) $ 1,620

Issuance of common stock in
  satisfaction of convertible
  note and accrued interest        11,015,048      551                2,754              3,305

Deferred stock compensation                                 (830)       830                  -

Amortization of deferred stock
  compensation                                               233                           233

Fair value of warrants issued
 in connection with borrowings                                           13                 13

Net loss for the three months
  ended March 31, 2003                                                         (1,635)  (1,635)
                                  -----------   ------     -----   -------- ---------   ------
Balances, March 31, 2003          153,091,995   $7,654     $(597)  $105,444 $(108,965)  $3,536
                                  ===========   ======     =====   ======== =========   ======

</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE> 6


                    nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                                                  Three Months
                                                                 Ended March 31,
                                                                ---------------
                                                                 2003     2002
                                                                  (unaudited)
                                                                ------   ------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                     ($1,635) ($4,802)
  Adjustments to reconcile net loss to net cash
   (used in) provided by operating activities:
    Proceeds from the sale of marketable securities                  -    2,926
    Realized losses on the sale of marketable securities             -    1,329
    Fair value of option granted to customer                         -      670
    Capitalized software costs                                    (203)       -
    Amortization of deferred stock compensation expense            233        -
    Depreciation and amortization                                  122      243
    Other                                                           31      104
    Changes in assets and liabilities:
      Decrease in accounts receivable                              274      693
     (Increase)decrease in inventories                            (443)     429
     (Increase)decrease in prepaid expenses and other              (60)      91
     (Decrease) increase in deferred revenue, accounts payable
          and other liabilities                                   (618)     559
                                                                ------   ------
Net cash (used in) provided by operating activities             (2,299)   2,242
                                                                ------   ------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Additions to property and equipment                              (36)     (59)
                                                                ------   ------
Net cash used in investing activities                              (36)     (59)
                                                                ------   ------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds (net repayments) of revolving credit facilities          29   (2,012)
  Additions to other borrowings                                  2,667        -
  Repayments on other borrowings                                  (355)       -
                                                                ------   ------
Net cash provided by (used in) financing activities              2,341   (2,012)
                                                                ------   ------
Net increase in cash and cash equivalents during the period          6      171
Cash and cash equivalents at the beginning of the period           293      857
                                                                ------   ------
Cash and cash equivalents at the end of the period              $  299   $1,028
                                                                ======   ======

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during period for interest                          $   41   $  126
                                                                ======   ======

NON-CASH FINANCING ACTIVITIES:
  Issuance of common stock in satisfaction of borrowings and
   accrued interest                                             $3,305   $    -
                                                                ======   ======


          See accompanying notes to consolidated financial statements.


<PAGE> 7


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

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Principles of Consolidation

The   consolidated   financial   statements   include  the   accounts  of  nStor
Technologies,  Inc. ("nStor") 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, 2002.

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.

        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  negative  cash flows from  operating
activities,  declining  sales,  and recurring net losses of $1.6 million for the
three  months  ended March 31, 2003 and $8 million and $14 million for the years
ended December 31, 2002 and 2001,  respectively.  Declining sales have reflected
the global  reduction in business demand for technology  products.  In addition,
the Company has negative  working  capital of $8.2 million as of March 31, 2003,
which  reflects  borrowings  of $4 million  from the  Company's  Chairman of the
Board, Chief Executive Officer and a significant  shareholder,  and $1.7 million
from a second  significant  shareholder.  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 increasing  future
sales  revenues and  generating  positive cash flow and operating  profits;  and
(iii) obtain sufficient financing to cover its working capital needs.

These  efforts  include a significant  reduction in the  Company's  direct sales
personnel and other costs as part of its strategy to provide greater emphasis on
indirect customer channels (original equipment  manufacturers (OEMs),  resellers
and system  integrators  (SIs))  and to provide  certain  cost  efficiencies  in
response to the Company's lower sales levels.  Significant  cost reductions have
been achieved  from  outsourcing  the  manufacturing  of the  Company's  storage
enclosure  products  since  mid 2002 and from the  relocation  of the  Company's
executive and business  headquarters to a more economical  facility in Carlsbad,
California in December 2002. The outsourcing contract has produced a significant
improvement in gross margins by lowering  manufacturing  costs, and also allowed
the Company to reduce its overall  operating  costs,  principally as a result of
the phase out of the  Company's  manufacturing  facility  during  the 2002 third
quarter.


<PAGE> 8


Since  January 1, 2001 and through  April 30,  2003,  the Company  obtained  $25
million of equity and debt financing from private  investors.  Of these amounts,
(i) $12.1  million was received in 2001 from  Maurice  Halperin,  the  Company's
Chairman  of  the  Board  until  his  death  in  April  2003,  and  a  principal
shareholder,   or  companies  controlled  by  Mr.  Halperin  (collectively  "Mr.
Halperin")  consisting  of $6  million in cash and $6.1  million  in  marketable
securities (see Note 3 to Consolidated Financial Statements);  (ii) $6.9 million
from H. Irwin Levy, the Company's current Chairman of the Board, Chief Executive
Officer  and a  principal  shareholder,  or  companies  controlled  by Mr.  Levy
(collectively,  "Mr.  Levy");  and (iii) $3.9  million from  Bernard  Marden,  a
shareholder  who  beneficially  owns in  excess of 10% of the  Company's  common
stock, or a trust controlled by Mr. Marden (collectively "Mr. Marden").

In addition, in connection with the Company's outsourcing contract, Mr. Levy has
provided  collateral  for a bank to issue a $1 million  letter of credit ("LC"),
subsequently reduced to $500,000,  for the benefit of the contractor (see Note 6
to Consolidated Financial Statements).

In August 2002,  the Company  entered into an Agreement For Purchase of Accounts
with a financial  institution,  providing  for a $750,000  line of credit  under
which the Company may sell customer  invoices to the financial  institution (see
Note 6 to Consolidated Financial Statements).

The Company is currently  exploring  alternatives for raising additional debt or
equity  capital  to  finance  its  short-term  and  long-term  plans  as well as
operating  deficits expected to be incurred until the Company 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.  At the  current  sales  level,  the  Company  has  insufficient
liquidity to fund its operating needs for the next twelve months;  however,  the
Company  believes that a reasonable  increase in its future sales revenues would
provide sufficient working capital to fund its operations during the next twelve
months.  There can be no  assurance,  however,  that the Company will be able to
realize an increase in sales revenues.

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.

        Business

The  Company,  through  its  wholly-owned  subsidiary  nStor  Corporation,  is a
designer,  developer  and  manufacturer  of  external  data  storage  solutions,
including high-density storage enclosures,  storage management software and RAID
(Redundant  Array  of  Independent   Disks)  controller   technology   ("Storage
Solutions"). 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  or other  mission-critical  applications,  the
Company's products are offered in Fibre Channel,  Fibre-to-SCSI  (Small Computer
Systems Interface), and SCSI architectures.


<PAGE> 9


In June  2002,  the  Company  acquired  Stonehouse  (see Note 2 to  Consolidated
Financial Statements).  Stonehouse is a provider of telecommunications  software
and services solutions ("Telemanagement  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.

        Revenue Recognition

               Storage Solutions

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

               Telemanagement Solutions

In accordance  with  provisions of the AICPA  Statement of Position  (SOP) 97-2,
Software Revenue Recognition,  and related accounting guidance, Software Revenue
Recognition,   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.

        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.

        Research and Development Costs ("R&D")

               Storage Solutions

R&D costs  associated  with our  Storage  Solutions  business  are  expensed  as
incurred.


<PAGE> 10


               Telecommunication Solutions

In  accordance  with  Statement  of  Financial   Accounting   Standard  No.  86,
"Accounting for the Costs of Computer  Software to be Sold,  Leased or Otherwise
Marketed",  R&D costs  associated  with the  creation of a software  product are
expensed as incurred until technological feasibility is established. Thereafter,
software  production  costs are  capitalized  until the product is available for
general release to customers.  Capitalized software costs are amortized over the
greater of (a) the straight-line  method over the remaining  estimated  economic
life of the product or (b) the ratio that current gross revenues for the product
bear to the total of current and  anticipated  future  gross  revenues  for that
product.  Amortization  begins when the product is available for general release
to customers.

        Net Loss Per Common Share ("EPS")

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

        Stock Options

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

Under the Company's  2001 Stock Option Plan (the "2001 Plan"),  stock options to
purchase up to 7.5 million  shares of the Company's  common stock were available
to be granted to officers,  directors, key employees and non-employees.  Options
granted under the 2001 Plan have a maximum term of ten years and generally  vest
over three years annually on an equal basis.

Upon  shareholder  approval of the 2001 Plan in January 2002, the Company ceased
granting  options  under its 1996 Stock  Option  Plan (the "1996  Plan") and all
shares  reserved for  issuance  under the 1996 Plan that had not yet been issued
were  cancelled.  The terms of options  previously  granted  under the 1996 Plan
continue to be governed by the 1996 Plan and the option agreements  currently in
effect for those options.

SFAS No. 123, "Accounting for Stock-Based Compensation", requires the Company to
provide pro forma information  regarding net income and earnings per share as if
compensation  cost for stock options  granted had been  determined in accordance
with the fair value based  method  prescribed  in SFAS No. 123. As  discussed in
Note  1  to   the   Consolidated   Financial   Statements,   Recent   Accounting
Pronouncements,  the Company adopted the disclosure  requirements under SFAS No.
148 regarding prominent disclosures in interim financial statements.

During the three  months  ended  March 31,  2003 and 2002,  options to  purchase
740,000 shares of common stock and 20,000 shares of common stock,  respectively,
were granted by the Company.  The Company estimates the fair value of each stock
option at the grant date by using the  Black-Scholes  option-pricing  model with
the following weighted-average assumptions used for grants:


<PAGE> 11


                                                     Three Months Ended
                                                March 31, 2003   March 31, 2002
                                                -------------------------------

Risk-free interest rates                         2.75%- 2.92%           4.37%
Expected lives (in years)                             5                  5
Expected volatility                             80.00%-82.51%          90.88%
Expected dividend yield                               0%                 0%

If the Company had elected to recognize  stock-based employee compensation costs
based on the fair value on the date of grant  consistent  with the provisions of
SFAS No. 123, as amended by SFAS No. 148, net loss available to common stock and
basic and diluted net loss per common  share  would have been  increased  to the
following amounts (in thousands, except per share):

                                             Three Months ended March 31,
                                            ------------------------------
                                                    2003       2002
                                                  --------   --------
  Net loss available to common stock:
    As reported                                   ($1,635)   ($4,802)
    Add total stock-based employee compensation
      expense using the fair value method         (   189)   (   182)
                                                   ------     ------
  Pro forma                                       ($1,824)   ($4,984)
                                                  =======     ======
  Basic and diluted net loss per common share:
    As reported                                     ($.01)     ($.04)
    Pro forma                                       ($.01)     ($.04)

        Recent Authoritative Pronouncements

In December 2002, the Financial  Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based  Compensation-  Transition and Disclosure",
an amendment to SFAS No. 123,  "Accounting  for  Stock-Based  Compensation"  and
Accounting   Principles  Board  ("APB")  Opinion  No.  28,  "Interim   Financial
Reporting".  SFAS No. 148 provides for alternative  methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based  employee  compensation.  In  addition,  SFAS No. 148 (i) amends the
disclosure  provisions of SFAS No. 123 to require prominent disclosure about the
effects on reported net income of an entity's  accounting  policy decisions with
respect to stock-based employee compensation; and (ii) amends APB Opinion No. 28
to require  disclosure  about those  effects in interim  financial  information.
Provisions  of SFAS No. 148 relating to amendments to SFAS No. 123 are effective
for  financial  statements  for fiscal  years  ending  after  December 31, 2002.
Provisions of SFAS No. 148 relating to amending APB Opinion No. 28 are effective
for financial  reports for interim periods beginning after December 15, 2002. In
January 2003, the Company  adopted the disclosure  requirements of SFAS No. 148.
The adoption of the  disclosure  provisions  of this  statement  will not have a
material effect on the Company's financial position or results of operations.


<PAGE> 12


In November  2002,  the FASB issued  Interpretation  No. 45 (FIN),  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness of Others",  an  interpretation of SFAS No. 5, 57 and
107 and  rescission of FIN No. 34, which  addresses  disclosures to be made by a
guarantor in its interim and annual  financial  statements about its obligations
under certain guarantees that it has issued. Provisions of FIN No. 45 related to
recognition and initial  measurement are to be applied on a prospective basis to
guarantees issued or modified after December 31, 2002.  Provisions of FIN No. 45
related to disclosure  requirements  are  effective for financial  statements of
interim and annual  periods  ending  after  December  15,  2002.  The  Company's
adoption of this pronouncement in January 2003 did not have a material effect on
its financial position or results of operations.

In July 2002,  the FASB issued 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.

In April 2002, the FASB issued 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 meet the criteria of
APB Opinion No. 30, "Reporting the Results of Operations". The amendment of SFAS
No. 13 was  effective  for  transactions  occurring  on or after  May 15,  2002.
Although the  rescission of SFAS No. 4 was effective  January 1, 2003,  the FASB
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 no
longer meet the criteria as set forth under APB Opinion No. 30 and have reported
those  items  as  Other  Income  in  the  accompanying   consolidated  financial
statements.

(2) ACQUISITION

Terms of the Acquisition

On June 7, 2002, the Company  acquired 100% of the outstanding  capital stock of
Plano,  Texas based Stonehouse from Pacific  Technology Group,  Inc. ("PTG"),  a
subsidiary of Pacific USA Holdings Corp ("PUSA")(the "Acquisition").  See Note 1
to Consolidated Financial Statements for a description of the business conducted
by  Stonehouse.  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 22.5 million  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  additional
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, up to a maximum of 8,687,258
additional  common shares. At March 31, 2003, there was no basis for the Company
to record a liability related to the earn-out provision.


<PAGE> 13


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 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,  the  allocation  of the purchase  price  included
intangible  assets with an aggregate  fair value of $2.8 million and goodwill of
$6.5  million.  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) is subject
to an annual review for impairment in accordance with SFAS No. 142, Goodwill and
Other  Intangible  Assets,  adopted  by  the  Company  in  2002  (see  Note 5 to
Consolidated Financial Statements).

(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 an 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.

In  connection  with and as a condition to the Halco  Investment,  it was agreed
that  the  Series K  Preferred  Stock  was to be  automatically  converted  into
39,000,000  shares of the Company's  common stock (the "Halco  Common  Shares"),
based upon a conversion price of $.23 per share,  upon approval of the Company's
shareholders.  Shareholder  approval  was received in January 2002 at which time
the Company issued the Halco Common Shares.


<PAGE> 14


(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") with a quoted market value of
$5.2 million.

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 mid
March 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  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. As a result of
the 2002 first quarter ARL sales,  the Company  realized a loss of approximately
$1.3 million.

In April 2002, the Company received  $206,000 in cash proceeds from the exercise
of the Options,  which amount was realized as a gain on marketable securities in
the second quarter.

(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, "Goodwill and Other
Intangible  Assets",  which requires that goodwill and certain intangible assets
no longer be amortized,  but instead be tested at least annually for impairment.
Accordingly,  the Company  discontinued its  amortization of goodwill  effective
January 1, 2002.

During early 2003, 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, 2003.

As of March 31,  2003,  the  carrying  amount of goodwill  and other  intangible
assets was approximately $8.5 million and $2.5 million,  respectively,  of which
$6.5  million  of  goodwill  and $2.5  million  of other  intangible  assets  is
attributable to the Stonehouse Acquisition (see Note 2 to Consolidated Financial
Statements).  In  addition,  as of March 31, 2003,  the Company had  capitalized
$502,000  in  software  development  costs  associated  with its  Telemanagement
Solutions  business,  including  $202,000  during  the  first  quarter  of 2003.
Amortization  of  other  intangible   assets   attributable  to  the  Stonehouse
Acquisition  amounted to $92,000 for the three months  ended March 31, 2003.  No
amortization was reported for the three months ended March 31, 2002.


<PAGE> 15


(6)  BORROWINGS

  Revolving Credit Facilities

At March 31,  2003,  the  Company  had 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,  and which is
payable  upon  demand,  bearing  interest  at prime  plus 1% (5.25% at March 31,
2003).  Borrowings under the Stonehouse  Revolver are collateralized by accounts
receivable  and certain other assets of the Company's  Telemanagement  Solutions
business.  At March  31,  2003,  the  outstanding  principal  balance  under the
Stonehouse Revolver was $229,000.

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. The Agreement is  collateralized  by substantially all of the assets of the
Company's  Storage  Solutions  subsidiary.  At March 31, 2003,  the  uncollected
balance of customer  invoices  sold to the Purchaser  amounted to  approximately
$369,000. Interest expense related to this agreement amounted to $29,000 for the
three months ended March 31, 2003.

    Other Borrowings


<TABLE>
<CAPTION>

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

                                                                   March 31,    December 31,
                                                                  ---------     ------------
                                                                    2003           2002
                                                                  ---------     ------------
<S>                                                               <C>           <C>
Current:

Notes payable to Mr. Levy:
  Revolving promissory notes, interest at 8% per annum,
    payable at maturity, principally June 30, 2003                   $3,160          $2,748
  Convertible promissory notes, interest at 8%-10% per annum,
    payable at maturity, principally on June 14, 2003 (a)               850             650
                                                                     ------          ------
      Total due to Mr. Levy                                           4,010           3,398

Other convertible promissory notes payable to Mr. Marden and
  other private investors (b)                                         2,200             450

Other notes payable, interest principally at 8% per annum,
    maturing through November 2003                                      836             836

                                                                     ------          ------
                                                                     $7,046          $4,684
                                                                     ======          ======
Long-Term:

Halco Note, converted into common stock in March 2003 (c)            $    -          $3,100
                                                                     ======          ======
</TABLE>

        a) Mr. Levy's  convertible  notes include  $650,000  convertible  at the
Company's  option at any time prior to maturity  and after the date on which the
Company  receives  notice of  delisting  from AMEX,  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. The note was originally
collateralized  by  substantially  all of the  assets of the  Company's  Storage
Solutions  subsidiary;  however,  the collateral was relinquished by Mr. Levy in
March 2003.


<PAGE> 16


        The remaining  $200,000 of convertible notes was originally  convertible
at Mr.  Levy's option at any time prior to maturity into either (i) nStor common
stock at $.29 per share (the  closing  market  price on the date of the note) or
shares of Stonehouse  common stock at $.5625 per share.  In March 2003, Mr. Levy
agreed to relinquish his conversion rights into Stonehouse common stock.

        In  connection  with the  Company's  outsource  contract,  Mr.  Levy has
provided  collateral  for a bank to issue a $1 million LC for the benefit of the
contractor,  subsequently  reduced to $500,000  effective  April 15,  2003.  The
Company has agreed to  indemnify  Mr. Levy for any amounts paid by Mr. Levy as a
result of any  drawing  upon the LC. No amounts  have been drawn on the LC which
expires on August 15, 2003, as extended.

        b) At  December  31,  2002,  Mr.  Marden  was the  holder of a  $450,000
promissory  note,  which was payable  March 15,  2003,  was  convertible  at Mr.
Marden's  request at any time prior to  maturity  into  shares of the  Company's
common stock based on a fixed  conversion price of $.40 per share, and which was
collateralized  by  substantially  all of the  assets of the  Company's  Storage
Solutions  subsidiary.  In January and February  2003,  Mr. Marden  advanced the
Company an additional $700,000 under an 8% convertible promissory note which was
originally  convertible  at Mr.  Marden's  option at any time prior to maturity,
defined as thirty (30) days after  notice from Mr.  Marden that the  outstanding
principal is due, however,  such notice could not be made prior to July 1, 2003.
The note was  originally  convertible  into shares of (i) nStor  common stock at
$.29 per  share  (the  closing  market  price  on the date of the  note) or (ii)
Stonehouse  common  stock at $.5625 per share.  Effective  March 14,  2003,  Mr.
Marden committed to loan the Company an additional $1 million, and together with
the  aforementioned  $1.2  million in existing  notes  (including  approximately
$50,000 in accrued  interest)  (collectively,  the "Marden Notes"),  aggregating
$2.2 million,  agreed to new notes with the following  terms: (i) interest at 8%
per annum, payable quarterly,  (ii) convertible at any time prior to maturity on
April 1, 2004,  into shares of nStor common  stock at $.30 per share;  and (iii)
collateralized  principally by nStor's ownership  interest in Stonehouse and the
intellectual  property  and other  intangible  assets of the  Company's  Storage
Solutions business.  The closing market price of nStor common stock on March 14,
2003 was $.26. At March 31, 2003, $1.7 million was outstanding  under the Marden
Notes and $500,000 was outstanding  under loans from two other private investors
under the same terms as the Marden Notes.

        In connection  with certain  borrowings from Mr. Marden during 2003, the
Company  issued  warrants  to  purchase an  aggregate  of 125,000  shares of the
Company's common stock  exercisable upon issuance at $.25 per share and expiring
on December  31,  2005.  The  warrants  were valued  based on the  Black-Scholes
option-pricing  model as of the dates of issuance at an aggregate of $13,000 and
were recorded as a discount to the notes.

        c) 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
was  convertible  at the  Company's  option  at any time  prior to  maturity  on
November  20, 2006 and after the date on which the Company  received a notice of
delisting  from 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 was
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 Company's  common stock on the trading day immediately  prior to the date
of conversion.  Effective  March 28, 2003,  Halco  converted the New Halco Note,
plus  approximately  $200,000 of accrued interest,  into 11,015,048 newly issued
shares of common  stock  based upon a  conversion  price of $.30 per share.  The
closing market price of nStor common stock on March 27, 2003 was $.27 per share.


<PAGE> 17


 (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 Pacific Electric Wire & Cable Co., Ltd ("PEWC"), the
parent of PUSA. 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.  During the year ended February 28, 2003,
PEWC did not achieve the minimum purchase requirement.

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 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
(subsequently  adjusted to $600,000 in the fourth  quarter of 2002) based on the
Black-Scholes  option-pricing  model  and  other  provisions  of SFAS  No.  123,
"Accounting  for Stock Based  Compensation",  and related  EITF  guidance.  This
amount was recorded as an expense in the  accompanying  Statement of  Operations
for the three months ended March 31, 2002.  The option  expired  unexercised  on
November 30, 2002.

 (8)  INCOME TAXES

The Company  accounts for income taxes in accordance with SFAS 109,  "Accounting
for  Income  Taxes",  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 No. 109
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  expected to apply to taxable income in the
years in which  temporary  differences  are expected to be recovered or settled.
The effect on deferred tax assets and liabilities  from a change in tax rates is
recognized in income in the period that includes the enactment date.

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

As of December 31, 2002 there were unused net operating loss  carryforwards (the
"NOL's") for regular federal income tax purposes of approximately  $70.5 million
and approximately $13.1 million for California tax purposes,  expiring from 2006
through 2022 and 2004 through 2013,  respectively.  In addition, the Company has
research and development tax credit carryforwards of approximately $1.6 million,
which  expire from 2003  through 2022 and in  conjunction  with the  Alternative
Minimum Tax ("AMT") rules, the Company has available AMT credit carryforwards of
approximately  $.8 million,  at December 31, 2002 which may be used indefinitely
to reduce regular federal income taxes.


<PAGE> 18


Under Internal Revenue Code Section 382, in connection with a 1999  acquisition,
the usage of  approximately  $8 million of federal  NOL's and  approximately  $2
million of California NOL's is limited  annually to  approximately  $.4 million.
Currently,  California has a moratorium on the usage of its NOL's.  The usage of
certain tax credit carryforwards is also subject to limitation.  In addition, in
connection  with the  Stonehouse  Acquisition,  the  usage of  approximately  $4
million of federal NOL's is limited annually to approximately $500,000.

At March 31, 2003 and December 31, 2002,  a 100%  valuation  allowance  has been
provided on the total deferred  income tax assets because it is more likely than
not that the NOL's will not be realized based on recent operating results.

(9)  SEGMENT INFORMATION AND SALES TO SIGNIFICANT CUSTOMERS

Prior  to  the  Stonehouse  Acquisition  in  June  2002,  the  Company  operated
predominantly  in one  business  segment,  Storage  Solutions.  Customers of the
Storage  Solutions  segment  include end users,  OEMs, SIs and VARs (Value Added
Resellers).

Following the Stonehouse Acquisition, the Company began operating under a second
business segment,  Telemanagement  Solutions.  Stonehouse offers  telemanagement
solutions  targeted  to  large  corporations,  educational  institutions,  state
governments and other large public, private and hybrid communications networks.

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 March 31, 2003, sales to two customers  accounted for 44% and
14%  of the  Company's  Storage  Solutions  sales  and  sales  to two  customers
accounted  for 30%  and 12% of the  Company's  Telemanagement  Solutions  sales.
During the three months ended March 31, 2002,  sales to two customers  accounted
for 27% and 17% of the Company's  Storage  Solutions sales. For the three months
ended March 31, 2003, Storage Solutions sales to geographic areas other than the
United  States   aggregated  20%  of  the  Company's   Storage  Solutions  sales
principally  in the Pacific rim.  For the three month  period in 2002,  sales to
geographic areas other than the United States were not significant.

Presented below for the three months ended March 31, 2003 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 Telemanagement Solutions
segment. Since the Acquisition occurred in June 2002, segment information is not
applicable for the 2002 period.

                                               Storage          Telemanagement
                                              Solutions           Solutions
                                              --------         ---------------
Total assets                                   $4,019               $10,470
Revenues                                       $1,187               $ 1,147
Gross margin                                   $  285               $   576
Net(loss) applicable to common stock          ($1,404)              $  (231) (a)

(a) Net of $233,000 of amortization of non-cash deferred stock compensation


<PAGE> 19


(10) DEFERRED STOCK COMPENSATION

In  connection  with an  employment  agreement  effective  as of March 1,  2003,
Stonehouse  expects  to  issue  certain  options  which  may  result  in its new
President holding a minority interest in Stonehouse.  The intrinsic value of the
options,  valued at $830,000, is based on the excess of the fair market value of
Stonehouse  common stock,  as determined by an independent  valuation firm, over
the  exercise  price  of the  options.  The  intrinsic  value  is  reflected  in
shareholders'  equity as a charge to deferred stock compensation  expense and is
being amortized over the vesting period of the options.


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

Forward-Looking Statements

With  the  exception  of  the  discussion  regarding   historical   information,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  contains  forward-looking  statements.  Such statements  inherently
involve  risks and  uncertainties  that  could  cause  actual  results to differ
materially  from the  forward-looking  statements.  Factors  that would cause or
contribute to such differences include, but are not limited to, our inability to
increase sales to current  customers and to expand our customer base,  continued
acceptance  of our  products  in the  marketplace,  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 report.

Overview

Since June 1996, we have been a designer,  developer and manufacturer of Storage
Solutions.  In June 2002, we entered the Telemanagement  Solutions business with
our acquisition of Stonehouse (See Note 2 to Consolidated Financial Statements).
Accordingly,  we believe  that the  comparison  between 2003 and 2002 may not be
meaningful in certain respects.


<PAGE> 20


                              Results of Operations

Three Months Ended March 31, 2003 vs. March 31, 2002

We incurred a net loss of $1.6 million for the three months ended March 31, 2003
as compared to a net loss of $4.8 million for the 2002 quarter.  Included in the
2003 net loss was a non-cash  charge of $233,000  for  amortization  of deferred
stock  compensation.  Included in the 2002 net loss was $1.3 million of realized
losses on marketable  securities and a $670,000  charge for the fair value of an
option granted to a customer.

Sales

Net  sales for the three  months  ended  March  31,  2003 were $2.3  million  as
compared to $1.6  million for the three  months ended March 31, 2002, a $775,000
increase.  Included  in the 2003  sales  was $1.1  million  attributable  to our
Telemanagement  Solutions  business.  The $373,000 or 24% decline in our Storage
Solutions sales reflects the global economic  downturn which has caused customer
delays in acquiring  technology and other capital equipment.  During the quarter
ended March 31,  2003,  direct sales to end users  represented  13% of our sales
revenues  and indirect  sales to OEMs,  value-added  resellers  (VARs) and other
channel  business  represented 87% of our sales revenues.  During the 2002 first
quarter,  our direct sales  represented  25% of our sales  revenues and indirect
sales  represented  75% of  our  sales  revenues  (see  Note  9 to  Consolidated
Financial  Statements  for a  discussion  of  Segment  Information  and Sales to
Significant Customers).

Cost of Sales/Gross Margins

Gross margins  realized by our Storage  Solutions  business for the three months
ended  March 31, 2003  improved  to 24%  compared to a negative 7% for the three
months ended March 31,  2002.  This  improvement  reflects  significantly  lower
material costs attributable to the commencement during the 2002 third quarter of
(i) outsourcing the  manufacturing of our products and (ii) shipments of our new
4000 Series storage systems. Positive gross margins were not achieved during the
first quarter of 2002  primarily due to (i) economies of scale  attributable  to
the level of fixed costs inherent in our operations,  coupled with significantly
lower revenues,  and (ii) the price we paid for certain  materials in connection
with  our  3000  Series  storage  systems  prior  to  the  commencement  of  our
manufacturing outsource agreement for our 4000 Series.

Our  Telemanagement  Solutions  business  experienced a 50% gross margin for the
2003 period, which is relatively  consistent with gross margins realized in 2002
subsequent to our acquisition of Stonehouse in June 2002. Combined gross margins
for our Storage  Solutions  and  Telemanagement  Solutions  for the three months
ended March 31, 2003 amounted to 37%.

Our gross margins are dependent,  in part, on product mix which  fluctuates from
time to time. Our material costs are subject to fluctuations  experienced during
business  cycles  that create  shortages  and excess  supplies of some  critical
components, thereby creating increases and decreases in costs.


<PAGE> 21


Operating Expenses

        Selling, General and Administrative (SG&A)

Selling,  general and administrative expenses were $1.3 million and $1.5 million
for the three months ended March 31, 2003 and 2002,  respectively.  The $191,000
net decrease was the result of a $662,000  decrease in SG&A  attributable to our
Storage Solutions  business through our overall work force reduction and related
costs,  including  occupancy  expenses,  partially  offset by  $471,000  in SG&A
incurred by our Telemanagement Solutions business in 2003.

        Research and Development (R&D)

R&D  expenses  decreased  to $590,000 for the three months ended March 31, 2003,
from $737,000 for the 2002 period. This decrease was attributable to a reduction
in R&D costs  associated  with our  Storage  Solutions  business  following  the
development of our 4000 Series of storage systems.

R&D costs  associated  with our  Storage  Solutions  business  are  expensed  as
incurred. R&D costs incurred by our Telemanagement  Solutions business relate to
the development of our MONIESWeb(R) software and were expensed as incurred until
technological  feasibility was established in 2002.  Thereafter,  such costs are
being  capitalized  until the  product  is  available  for  general  release  to
customers,  expected in the second  quarter of 2003, at which time we will begin
to amortize capitalized software costs based on the greater of (i) the estimated
economic  life on the  straight-line  method,  or (ii) the  ratio  that  current
revenues  attributable  to  MONIESWeb(R)  revenues  bears to total  current  and
estimated future revenues for  MONIESWeb(R).  During the quarter ended March 31,
2003,  capitalized R&D costs associated with  MONIESWeb(R)  software amounted to
$202,000.

R&D costs may fluctuate considerably from time to time depending on a variety of
factors.  These costs are incurred substantially in advance of related revenues,
and in certain  situations,  may not result in generating  revenues.  We believe
that considerable  investments in R&D will be required to remain  competitive in
both our businesses.

        Depreciation and Amortization

Depreciation and  amortization  decreased to $122,000 for the three months ended
March 31, 2003,  from  $243,0000 for the 2002 period,  primarily the result of a
$219,000  decline in depreciation  expense for our Storage  Solutions  business,
partially offset by $92,000 of amortization of other intangible assets resulting
from  our  Stonehouse   acquisition  (See  Note  2  to  Consolidated   Financial
Statements).

Interest Expense

Interest expense increased to $240,000 for the three months ended March 31, 2003
from $137,000 for the 2002 quarter,  principally  attributable to higher average
borrowings (see Note 6 to Consolidated Financial Statements).


<PAGE> 22


                         Liquidity and Capital Resources

We have received a "going-concern"  opinion from our auditors for the last three
fiscal years ended  December 31, 2002. As more fully  described in Note 1 to the
Consolidated  Financial  Statements,  our recurring operating losses,  declining
sales,  negative  cash flows from  operating  activities  and  negative  working
capital  raise  substantial  doubt  about our  ability  to  continue  as a going
concern. A "going-concern"  opinion indicates that although there is substantial
doubt, the financial  statements have been prepared on a going-concern basis and
do not include any  adjustments  to reflect the possible  future  effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.

Since  2001  we  have  devoted   substantial  efforts  to:  (i)  streamline  our
operations;  (ii) establish the foundation for increasing  future sales revenues
and  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 Note 1 to Consolidated Financial Statements.

We are currently  exploring  alternatives for raising  additional debt or equity
capital to finance  our  short-term  and  long-term  plans as well as  operating
deficits expected to be incurred until we begin to generate  positive  operating
cash flows.  However,  due to  conditions  in the  technology-related  financial
markets and other  uncertainties,  many of which are outside our control,  there
can be no 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.  At the current sales level,
we have  insufficient  liquidity to fund our operating needs for the next twelve
months;  however,  we believe  that a  reasonable  increase in our future  sales
revenues would provide  sufficient working capital to fund our operations during
the next twelve months. There can be no assurance, however, that we will be able
to realize an increase in sales revenues.

Consolidated Statements of Cash Flows

        Operating Activities

Net cash used in operating  activities for the three months ended March 31, 2003
amounted to $2.3 million and primarily consisted of $1.5 million from operations
(before  changes in assets and  liabilities),  a $618,000  reduction of deferred
revenue,  accounts  payable and other  liabilities,  and a $443,000  increase in
inventories.  Net cash  provided  by  operating  activities  in the 2002  period
amounted to $2.2 million and  consisted of $.5 million from  operations  (before
changes in assets and liabilities), including $2.9 million of cash proceeds from
the sale of  marketable  securities  and an  aggregate  of $1.7 million from the
reduction of accounts  receivable  and  inventories  and an increase in accounts
payable and other liabilities.

        Investing Activities

Net cash used by investing activities was insignificant during both periods.

        Financing Activities

Net cash provided by financing  activities  for the three months ended March 31,
2003 amounted to $2.3 million of net proceeds in borrowings from investors.  Net
cash used in  financing  activities  for the 2002 period  amounted to $2 million
from a net reduction in our revolving credit facility.


<PAGE> 23


American Stock Exchange (AMEX)

In May 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.
In June 2002, we submitted a plan and supporting  documentation  (the "Plan") to
AMEX to  demonstrate  our ability to regain  compliance.  In August  2002,  AMEX
notified us that it had accepted  our Plan and granted us an  extension  through
June 30, 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 stock 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.

                   Critical Accounting Policies and Estimates

Storage  Solutions  revenues are recognized as of the date shipments are made to
customers,  net of an allowance for returns.  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.

R&D costs  associated with our  Telemanagement  Solutions  business for software
production  are  expensed  as  incurred  until   technological   feasibility  is
established.  Thereafter,  software  production costs are capitalized  until the
product is available for general  release to customers.  Amortization  commences
only when the  product is  available  for  general  release  and is  recorded as
amortization  rather than R&D costs.  Capitalized  software  costs are amortized
over the greater of (i) the estimated economic life on the straight-line method,
or (ii) the ratio  that  current  revenues  for the  product  bears to the total
current and anticipated future revenues for the product.

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  Statement  of  Financial  Accounting  Standard  (SFAS) No.  141,  Business
Combinations.  These values were based on a valuation  analysis  completed by an
independent  valuation  firm.  In  addition,  we have  unamortized  goodwill  of
approximately  $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,  Goodwill and Other Intangible  Assets (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.


<PAGE> 24


                               Effect of Inflation

During recent years, inflation has not had an impact on our operations and we do
not expect that it will have a material impact in 2003.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We  maintain  a floating  interest  rate  revolving  credit  facility  ($229,000
outstanding  balance at March 31, 2003).  Therefore,  we are subject to a market
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.  It should be noted  that the  design of any system of
controls  is  based  in part  upon  certain  assumptions,  and  there  can be no
assurance that any design will succeed in achieving its stated goals.

(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.

Part II  -  OTHER INFORMATION

Item 1.  Legal Proceedings

Not applicable

Item 2.  Changes in Securities and Use of Proceeds

Effective March 28, 2003, Halco Investments,  LC converted its $3.1 million note
receivable  from us,  plus  approximately  $200,000  of accrued  interest,  into
11,015,048 newly issued shares of nStor common stock based on a conversion price
of $.30 per share.

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


<PAGE> 25


Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits:

     4.1  8% Convertible Promissory Note for $1.7 million, dated March 25, 2003,
          between Registrant and Bernard Marden.

     4.2  8%  Convertible  Promissory  Note for $500,000,  dated March 25, 2003,
          between Registrant and The Charlotte Marden 1993 Trust.

     4.3  Form  of  8%  Convertible   Promissory   Notes  for  $250,000  between
          Registrant and Alan Miller and WRS Advisors III LC.

     10.1 Security  Agreement  between   Registrants  and  Bernard  Marden,  The
          Charlotte Marden 1993 Trust, Alan Miller and WRS Advisors III LC.

     10.2 Second Amended and Restated Stock Pledge Agreement between  Registrant
          and Bernard Marden,  The Charlotte Marden 1993 Trust,  Alan Miller and
          WRS Advisors III LC.

     10.3 Letter Agreement between  Registrant and H. Irwin Levy dated March 20,
          2003 regarding amendments to a $200,000 8% Convertible Promissory Note
          dated February 19, 2003.

     10.4 Letter Agreement between  Registrant and H. Irwin Levy, dated April 1,
          2003 regarding  conversion into Registrant's common stock of debt owed
          by Registrant to Mr. Levy.

     10.5 Letter Agreement  between  Registrant and Hilcoast  Development  Corp.
          dated April 30, 2003 extending the maturity date of certain promissory
          notes.

     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 May 13, 2003.

     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 May 14,
          2003.


(b) Reports on Form 8-K:

        A report on Form 8-K dated  March 28,  2003 was filed on April 15,  2003
        reporting under Item 5 - Other Events in which  Registrant  reported the
        conversion  of a $3.1  million note  payable  into  Registrant's  common
        stock.


<PAGE> 26


                                    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 13, 2003           /s/  Thomas L. Gruber
                      -------------------------------------
                      Thomas L. Gruber, Acting President,
                      Chief Operating and Financial 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: May 13, 2003

/s/ Thomas L. Gruber
Thomas L. Gruber
Chief Financial Officer


<PAGE> 28


                                 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: May 13, 2003

/s/ H. Irwin Levy
H. Irwin Levy
Chief Executive Officer