SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549


                                    FORM 10-Q

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

                For the quarterly period ended September 30, 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 October 31, 2001: 37,719,022


<PAGE> 2


                    nSTOR TECHNOLOGIES, INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
                                                                    Page
                                                                   Number

  Item 1.      Financial Statements

        Consolidated Balance Sheets as of September 30,
          2001 (Unaudited) and December 31, 2000                         3
        Consolidated Statements of Operations
          (Unaudited) for the three and nine months
          ended September 30, 2001 and 2000                              4
        Consolidated Statement of Stockholders'
          Deficit (Unaudited) for the nine months
          ended September 30, 2001                                       5
        Consolidated Statements of Cash Flows
          (Unaudited) for the nine months ended
          September 30, 2001 and 2000                                  6-7
        Notes to Consolidated Financial Statements
          (Unaudited)                                                 8-14


  Item 2.  Management's Discussion and Analysis of

             Financial Condition and Results of Operations           14-20


  Item 3.  Quantitative and Qualitative Disclosures about
           Market Risk                                                  20


Part II.  OTHER INFORMATION                                          20-21


SIGNATURE                                                               22


<PAGE> 3


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

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

                                                        September 30,
                                                            2001        Dec. 31,
         ASSETS                                           (unaudited)      2000
         ------                                           -----------   --------
Current assets:
  Cash and cash equivalents                                $   782      $    37
  Accounts receivable, net of $1,094 and $402
    in allowance for doubtful accounts                       2,366        4,395
  Inventories, net                                           4,395        5,174
  Prepaid expenses and other                                   632        1,278
                                                           -------      -------
     Total current assets                                    8,175       10,884

Property and equipment, net of $5,374 and
  $4,583 in accumulated depreciation                         1,594        2,384
Goodwill, net of $704 and $400 in
   accumulated amortization                                  2,093        2,397
Other assets                                                   332           57
                                                           -------      -------
                                                           $12,194      $15,722
         LIABILITIES                                       =======      =======
         -----------
Current liabilities:
  Bank line of credit                                      $ 2,531      $ 4,086
  Other borrowings                                           5,850           -
  Deferred revenue                                           1,514        2,400
  Accounts payable and other                                 6,623        9,504
                                                           -------      -------
     Total current liabilities                              16,518       15,990

Long-term debt                                                  -         7,258
                                                           -------      -------
     Total liabilities                                      16,518       23,248
                                                           -------      -------
         STOCKHOLDERS' DEFICIT
         ---------------------
Preferred stock, $.01 par; 1,000,000 shares authorized,
 in order of preference:
  Convertible (except for Series G) preferred stock
   (aggregate liquidation value $1,000 per share) issued
   and outstanding at September 30, 2001 and December 31,
   2000, respectively - Series H, 5,100 and 0 shares;
   Series F, 0 and 722 shares; Series I, 9,092 and 0
   shares; Series D, 2,000 shares; Series E, 3,500
   shares; and Series G, 0 and 2,000 shares                      -            -
Common stock, $.05 par; 75,000,000 shares authorized;
 35,719,022 and 35,478,489 shares issued and outstanding
 at September 30, 2001 and December 31, 2000, respectively   1,785        1,773
Additional paid-in capital                                  84,338       71,529
Deficit                                                    (90,447)     (80,828)
                                                           -------      -------
     Total stockholders' deficit                            (4,324)      (7,526)
                                                           -------      -------
                                                           $12,194      $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             Nine Months
                                     Ended September 30,     Ended September 30,
                                    -------------------     -------------------
                                       2001      2000         2001        2000
                                        (unaudited)             (unaudited)
                                     ------     ------      -------     -------

Sales                                $4,016     $9,508      $14,187     $32,913
Cost of sales                         2,617      7,070       10,172      23,511
                                     ------     ------      -------     -------
     Gross profit                     1,399      2,438        4,015       9,402
                                     ------     ------      -------     -------
Operating expenses:
  Selling and marketing               1,110      2,421        4,748       7,195
  General and administrative          1,234      1,419        3,712       5,313
  Research and development              825        876        2,796       2,498
  Depreciation and amortization         401      1,129        1,252       3,391
                                     ------     ------      -------     -------
     Total operating expenses         3,570      5,845       12,508      18,397
                                     ------     ------      -------     -------
     Operating loss                  (2,171)    (3,407)      (8,493)     (8,995)

Gain on sale of assets of Borg
  Adaptive Technologies (Note 5)         -          -            -        5,575
Other (expense) income, net             (10)      (294)           3          87
Interest expense                        (80)      (327)        (734)       (941)
                                     ------     ------      -------     -------
Net loss before extraordinary gains
 and preferred dividends             (2,261)    (4,028)      (9,224)     (4,274)

Extraordinary gains from debt
  extinguishment (net of tax of $0)   1,082         -           720         -
                                     ------     ------      -------     -------
Net Loss                             (1,179)    (4,028)      (8,504)     (4,274)

Preferred stock dividends              (486)      (143)      (1,115)       (546)
                                     ------     ------      -------     -------
Net loss applicable to common
  shareholders                      ($1,665)   ($4,171)    ($ 9,619)    ($4,820)
                                     ======     ======      =======     =======

Basic and diluted net loss per
 common share:
  Loss before extraordinary gains  ($   .08)   ($   .12)   ($   .29)   ($   .15)
  Extraordinary gains                   .03           -         .02           -
                                    -------     -------     -------     -------
  Net loss per common share        ($   .05)   ($   .12)   ($   .27)   ($   .15)
                                    =======     =======     =======     =======

Weighted average number of common
  shares used in per share
  computation, basic and diluted  35,719,022  34,696,761  35,599,196  31,978,121
                                  ==========  ==========  ==========  ==========


          See accompanying notes to consolidated financial statements.


<PAGE> 5

<TABLE>

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

                                                    Preferred       Addi-
                                 Common Stock         Stock        tional
                              ------------------  --------------   Paid-In
                                Shares    Amount  Shares  Amount   Capital  Deficit    Total
                              ---------- -------  ------ -------   -------  -------   -------
<S>                           <C>        <C>      <C>    <C>       <C>      <C>       <C>
Balances, December
 31, 2000                     35,478,489 $ 1,773   8,222  $    -   $71,529 ($80,828) ($ 7,526)

Issuance of Convertible
  Preferred Stock:

   Series I in exchange for
    Series G                                          57       -        57                 57
   Series I and Series H in
    satisfaction of borrowings,
    net of issuance costs                         11,885       -    11,870             11,870
   Series I for cash                                 250       -       250                250

Conversion of Series F
   Convertible Preferred
    Stock                        240,533      12    (722)      -       (12)                 -

Common stock warrants issued
   in connection with borrowings                                       554                554

Common stock option granted in
   Connection with Separation
   Agreement                                                            90                 90

Preferred stock dividends                                                    (1,115)   (1,115)

Net loss for the nine months
 ended September 30, 2001                                                    (8,504)   (8,504)
                              ---------- -------  ------  ------   -------  -------   -------
Balances, September 30,
 2001 (unaudited)             35,719,022 $ 1,785  19,692  $    -   $84,338 ($90,447) ($ 4,324)
                              ========== =======  ======  ======   =======  =======   =======

</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE> 6


                            nSTOR TECHNOLOGIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                                           Nine Months
                                                       Ended September 30,
                                                       -------------------
                                                         2001        2000
                                                     (unaudited) (unaudited)
                                                      ---------   ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                            ($ 8,504)   ($4,274)
  Adjustments to reconcile net loss to net
    cash used by operating activities:
      Gain on sale of assets of Borg Adaptive
       Technologies                                         -      (5,575)
      Depreciation                                         947      1,472
      Provision for inventory obsolescence                 891        100
      Provision for losses on accounts receivable          797         32
      Extraordinary gain from debt extinguishments        (720)        -
      Amortization of goodwill                             304      1,918
      Amortization of deferred costs                       235         21
      Changes in assets and liabilities, net of
        effects from acquisition:
          Decrease in accounts receivable                1,232        750
          Decrease (increase) in inventories               225     (2,119)
          Decrease in prepaid expenses and other           382        103
            Decrease in deferred revenue, accounts
            payable and other                           (3,799)      (772)
                                                       -------    -------
Net cash used by operating activities                   (8,010)    (8,344)
                                                       -------    -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Net proceeds from sale of assets of Borg Adaptive
    Technologies                                            -       7,013
  Additions to property and equipment                     (123)      (641)
  Cash paid for acquisition                                 -        (293)
                                                       -------    -------
Net cash (used) provided by investing activities          (123)     6,079
                                                       -------    -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net (repayments) borrowings on bank line of credit    (1,555)       510
  Additions to other borrowings                         10,242      1,650
  Repayment on other borrowings                             -      (1,685)
  Issuance of preferred stock                              250         -
  Proceeds from exercise of stock options
    and warrants                                            -       1,177
  Issuance of common stock, net of transaction costs        -         701
  Cash paid for preferred stock dividends                  (59)      (679)
                                                       -------    -------
Net cash provided by financing activities                8,878      1,674
                                                       -------    -------
Net increase (decrease) in unrestricted cash
  and cash equivalents during the period                   745       (591)

Unrestricted cash and cash equivalents at the
  beginning of the period                                   37        650
                                                       -------    -------
Unrestricted cash and cash equivalents at the
  end of the period                                    $   782    $    59
                                                       =======    =======

          See accompanying notes to consolidated financial statements.


<PAGE> 7


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

                                                             Nine Months
                                                        Ended September 30,
                                                      -----------------------
                                                          2001        2000
                                                      (unaudited) (unaudited)
                                                      ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during period for interest                 $    406     $    829
                                                       ========     ========

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:

  Non-Cash Investing Activities:
    Acquisition:
      Fair value of assets acquired                    $      -     $  2,938
      Liabilities assumed or incurred                         -          (45)
      Common stock issued                                     -       (2,600)
                                                       --------     --------
          Cash paid                                    $      -     $    293
                                                       ========     ========

  NON-CASH FINANCING ACTIVITIES:
    Issuance of common stock in satisfaction of
      borrowings                                       $      -     $  1,000
                                                       ========     ========

    Issuance of preferred stock in satisfaction
      of borrowings                                    $ 11,870     $      -
                                                       ========     ========


          See accompanying notes to consolidated financial statements.


<PAGE> 8


                            nSTOR TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
                                   (unaudited)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Principles of Consolidation and Basis of Presentation

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

        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 $8.5 million for the nine months ended September 30, 2001. In
addition,  the Company has negative working capital and a stockholders'  deficit
at September 30, 2001.  These matters,  among others,  raise  substantial  doubt
about the Company's ability to continue as a going concern.

During most of 2000, the Company's  management  team  formulated and implemented
its current product strategy centered around its NexStor 2U line of Storage Area
Network  (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 2000 and the nine  months  ended  September  30,  2001,  the
decline in revenues of the  Company's  older  products  exceeded the increase in
sales of its newer technology solutions.  This decline in revenues combined with
the  recent  decline  in  economic  and  market   conditions  has  significantly
contributed to the Company's operating losses.

During 2001,  the Company  shifted its sales and  marketing  strategy to provide
greater  technical,  marketing and sales support to expand our indirect customer
channel base  (original  equipment  manufacturers  (OEMs),  resellers and system
integrators).  As part of this  strategy,  since January  2001,  the Company has
significantly  reduced its direct  sales  personnel  and related  costs,  and is
currently focusing its direct sales team to targeted markets as well as existing
large customers.  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.


<PAGE> 9


Historically, the Company has been successful in securing significant amounts of
equity and debt  financing to support its  operating  deficits.  Since late 1997
through  October 31,  2001,  the  Company  obtained  net cash  proceeds of $43.2
million from private investors, including $11.5 million since December 31, 2000.
Of these amounts,  (i)$14 million was received from H. Irwin Levy, the Company's
Vice Chairman of the Board and a principal stockholder,  or companies controlled
by Mr. Levy  (collectively,  Mr. Levy) and (ii) $8.1  million was received  from
Maurice A. Halperin,  the Company's  Chairman of the Board since August 15, 2001
(see Note 7 to Consolidated Financial Statements) or a company controlled by Mr.
Halperin  (collectively,  Mr.  Halperin).  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).

In June 2001, the Company  received an offer,  as amended,  from Mr. Halperin to
purchase an approximate 49% interest in the Company for an aggregate  investment
of $16.4 million  (including a $3.1 million loan  scheduled to be converted to a
five year loan) (see Note 7 to Consolidated Financial Statements). In connection
with this offer,  from August 14, 2001 through  October 31, 2001,  Mr.  Halperin
loaned  the  Company  $4.7  million  in  interim  financing  in the  form  of 8%
short-term notes. The transaction is scheduled to close by November 16, 2001, as
extended;  however,  there is no assurance  that the closing will occur.  If the
transaction  is  not  completed,   the  Company  will  be  required  to  explore
alternative  sources 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.  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

On October 23, 2001, the Company  received a proposal from a U.S.  subsidiary of
an Asian-based public company to enter into a strategic  business  relationship.
The proposal  contemplates an international  distribution  agreement,  an equity
investment in the Company and certain other business  relationships,  subject to
terms  and  conditions  to be  negotiated.  There  is  no  assurance  that  such
agreements will be completed on terms acceptable to management.

It is not intended that the Company will  complete  both of these  transactions;
however,  the  Company  is  dependent  upon  the  completion  of one of the  two
alternatives  to provide the working  capital needed until the Company begins to
generate positive cash flows. If neither  transaction is completed,  the Company
will be forced to pursue other alternatives;  however, there can be no assurance
that such alternatives  will be available on terms acceptable to management,  if
at all.

        Business

The Company is a  manufacturer  and  supplier of  integrated,  enterprise  class
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.  The Company also manufactures  storage  management  software and
complements its product offerings with SAN-ready solutions.

        Use of Estimates

The  preparation  of  consolidated   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 consolidated
financial  statements and the reported  amounts of revenues and expenses  during
the  reporting  period.  Actual  results  could  differ  materially  from  those
estimates.


<PAGE> 10


        Net Income (Loss) Per Common Share (EPS)

Basic EPS is calculated  by dividing the net income (loss)  applicable 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
nine  months  ended  September  30,  2001 and  2000,  the  effect  of  including
potentially   dilutive   securities  would  have  been  anti-dilutive  and  were
accordingly excluded from the calculation of diluted net loss per share.

As of October 31, 2001, outstanding potentially dilutive securities consisted of
(in thousands):

     Convertible preferred stock                                   20,877
     Stock options                                                  3,013
     Warrants                                                       3,304
                                                               ----------
     Total                                                         27,194
                                                               ==========

       New Accounting Pronouncements

In July 2001, the Financial  Accounting  Standards Board (FASB) issued Statement
of Financial  Accounting  Standards No. 141 (SFAS 141),  Business  Combinations,
which  eliminates  the pooling  method of accounting  for business  combinations
initiated  after June 30, 2001. In addition,  SFAS 141 addresses the  accounting
for  intangible  assets and goodwill  acquired in a business  combination.  This
portion of SFAS 141 is effective for business combinations  completed after June
30, 2001.  The Company  does not expect SFAS 141 will have a material  impact on
the Company's financial position or results of operations.

In July 2001, the FASB issued  Statement of Financial  Accounting  Standards No.
142 (SFAS 142), Goodwill and Intangible Assets, which revises the accounting for
purchased  goodwill  and  intangible  assets.   Under  SFAS  142,  goodwill  and
intangible  assets with indefinite lives will no longer be amortized and will be
tested for impairment annually. SFAS 142 is effective for fiscal years beginning
after December 15, 2001, with earlier  adoption  permitted.  The Company expects
its  implementation  of SFAS 142 to  result  in  discontinuing  amortization  of
unamortized  goodwill with a carrying amount of $2.1 million as of September 30,
2001.  Amortization for the nine months ended September 30, 2001 amounted to $.3
million.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of  Long-Lived  Assets".  SFAS No. 144 requires  that those  long-lived
assets be measured  at the lower of  carrying  amount or fair value less cost to
sell, whether reported in continuing  operations or in discontinued  operations.
Therefore,  discontinued operations will no longer be measured at net realizable
value or include amounts for operating  losses that have not yet occurred.  SFAS
No. 144 is effective for financial  statements issued for fiscal years beginning
after  December 15, 2001 and,  generally,  is to be applied  prospectively.  The
Company  does not expect SFAS 144 will have a material  impact on the  Company's
financial position or results of operations.

(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  September  30,  2001,
unamortized  goodwill  of  $2.1  million  was  not  considered  to be  impaired.
Amortization  of goodwill  amounted to $.3 million and $1.9 million for the nine
months ended September 30, 2001 and 2000, respectively.


<PAGE> 11


(3) BORROWINGS

        Revolving Credit Facility (Bank Line of Credit)

The Company's Bank Line of Credit currently provides for borrowings based on the
lesser of $10 million or: (i) 85% of eligible accounts  receivable,  as defined,
plus (ii) the lesser of $1.25 million or 20% of eligible inventory,  as defined,
bears interest at prime (6.00% at September 30, 2001) plus 2.5%, is scheduled to
mature in April 2002 and is collateralized by substantially all of the Company's
assets.  The Bank Line of Credit also provides for certain financial  covenants,
including minimum net worth and net income requirements.

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

The lender and the  Company are  negotiating  an  amendment  to the Bank Line of
Credit which,  among other items,  would  provide that the maximum  availability
would be reduced to $5 million.  There can be no guarantee that the Company will
be  successful  in its  negotiations  with the  lender.  If the  Company  is not
successful, the Company will need to seek replacement financing which may not be
available  given the  Company's  history of losses,  existing  negative  working
capital and stockholders' deficit.

As of September 30, 2001, the outstanding balance of the Bank Line of Credit was
$2.5  million  and an  additional  $399,000  was  available  based  on  eligible
collateral.

        Other Borrowings/Extraordinary Gains

At September  30, 2001,  the  Company's  other  short-term  borrowings  of $5.85
million included (i)$1.9 million with interest at 10% per annum, including $1.45
million due to Mr.  Levy,  maturing on  December  31,  2001,  as  extended,  and
(ii)$3.95  million with interest at 8% per annum, due to Mr.  Halperin,  with $1
million due on demand and the remaining $2.95 million due November 15, 2001 (see
Note 7 to Consolidated Financial Statements).

In connection  with the $1.9 million 10% notes,  the Company issued  warrants to
purchase an aggregate of 625,000 shares (including 400,000 warrants to Mr. Levy)
of the Company's  common stock at exercise  prices ranging from $.45 to $.75 per
share,  exercisable at issuance and expiring on June 30, 2004. The warrants were
valued  based  on the  Black-Scholes  option-pricing  model  as of the  dates of
issuance  at an  aggregate  of $155,000  and were  recorded as a discount to the
notes.

At December 31, 2000,  the Company's  aggregate  long-term debt was $7.3 million
(including  $1.7 million due to Mr.  Levy).  Subsequent  to December and through
March 31, 2001, the Company borrowed an additional $4.5 million  (including $1.9
million from Mr. Levy), of which $3.8 million was convertible into the Company's
common stock at $1.00 per share.  In connection  with certain of this debt,  the
Company issued warrants to purchase an aggregate of 1,137,500 shares  (including
512,500  warrants to Mr. Levy) of the  Company's  common stock,  principally  at
$1.20 per share, exercisable at issuance and expiring,  principally on March 31,
2004. The warrants were valued based on the Black-Scholes  option-pricing  model
as of the dates of issuance at an aggregate  of $396,000 and were  recorded as a
discount to the notes.  Effective April 12, 2001, holders of the Company's notes
payable  totaling  $11.9  million on that date  (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,  during the  second  quarter of 2001,  the  Company  recorded a $.4
million   extraordinary   loss  from  debt   extinguishment,   representing  the
unamortized discount on the notes.


<PAGE> 12


During the third quarter of 2001, the Company recognized  extraordinary gains of
$1.1  million  from  negotiated   discounts  on  purchases  with  vendors.   The
extraordinary  loss on debt  extinguishment  and the  extraordinary  gains  from
discounts with vendors have been aggregated and reported as extraordinary  gains
from debt  extinguishment  of $.7 million during the nine months ended September
30, 2001.

During the three and nine months ended  September  30, 2001,  $0 and $190,000 of
discount was amortized to interest expense, respectively.

(4) PREFERRED STOCK

At September 30, 2001,  the Company had four classes of preferred  stock (Series
D, E, H and I) with an  aggregate  stated  value  of  $19.7  million.  Series  D
Convertible  Preferred  Stock,  with an aggregate  stated value of $2 million at
September 30, 2001, accrued dividends at 8% per annum,  payable  quarterly,  and
was  converted  under an automatic  conversion  feature on October 29, 2001 into
2,000,000 shares of the Company's common stock based on a conversion price of $1
per share. Series E Convertible  Preferred Stock, with an aggregate stated value
of $3.5 million (including $1.5 million held by Mr. Levy) at September 30, 2001,
accrued  dividends  at 9%  through  June 7,  2001  and 10%  thereafter,  payable
quarterly,  and is  convertible  by the holder at any time into an  aggregate of
1,166,666  shares  (including  500,000  shares as to Mr. Levy) of the  Company's
common stock,  based on a conversion  price of $3 per share.  The Series H and I
Convertible  Preferred  Stock with an aggregate  stated value of $14.2  million,
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 conversion price of $.72 per share.

At December 31, 2000, the Company had two additional classes of preferred stock.
The Company's Series F Convertible  Preferred Stock,  with a stated value of $.8
million at December 31, 2000,  was converted into an aggregate of 240,533 shares
of the Company's common stock in May 2001. The Series G Preferred Stock,  with a
stated value of $2 million (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).

(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
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.


<PAGE> 13


(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  $41.5 million
and for California tax purposes of approximately $7.7 million expiring from 2006
through 2020 and 2001 through 2010,  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 utilization 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.  The NOL  carryforwards  may be
subject  to  further  limitation  as a result  of  recent  and  proposed  equity
transactions (see Note 1 and 3 to Consolidated Financial Statements).

At September 30, 2001 and December 31, 2000, a 100% valuation allowance has been
provided on the Company's deferred tax assets because it is more likely than not
that loss carryforwards will not be realized based on recent operating results.

(7) OFFER FROM PRIVATE INVESTOR

On June 26, 2001, the Company received an offer from Mr. Halperin to purchase an
approximate  45% equity  interest in the Company for $12 million (the  "Halperin
Offer").  Subsequently,  Mr.  Halperin  increased  the  amount  of the  proposed
investment  to  $16.4  million,  consisting  of $13.3  million  to  purchase  an
approximate  49% equity interest and a $3.1 million five year loan. The Halperin
Offer provides that the total  consideration will consist of approximately $10.6
million in cash and approximately $5.8 million in  freely-tradeable,  marketable
securities and requires the Company to cause all of its preferred  stock (except
Series H) to be converted  into common stock.  The closing of the Halperin Offer
is scheduled to occur on November 16, 2001,  as extended;  however,  there is no
assurance that the closing will occur. If the transaction is not completed,  the
Company  will  be  required  to  explore  alternative  sources  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. 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.

If the Halperin Offer is closed as  contemplated,  the Company will issue to Mr.
Halperin  Series J  Convertible  Preferred  Stock which will be  converted  into
shares of the Company's  common stock upon approval by the  stockholders  of the
Company  of (i) the  Halperin  Offer,  and (ii) an  increase  in the  number  of
authorized common shares of the Company from 75 million to 200 million.


<PAGE> 14


As of October 31,  2001,  Mr.  Halperin  had loaned the Company  $4.7 million in
interim  financing in the form of 8%  short-term  notes.  Of this  amount,  $3.1
million is scheduled to be converted  into a five-year,  8% term loan at closing
and $1.6 million applied to the amount Mr. Halperin pays for the 49% investment.

In connection with the Halperin Offer and the interim financing  provided by Mr.
Halperin,  on August 15, 2001 the Board elected Mr.  Halperin as Chairman of the
Board,  replacing then current Chairman,  Mr. Levy, who became Vice Chairman and
who is continuing to serve as Chief Executive Officer of the Company.

(8) SEGMENT INFORMATION

The Company operates predominantly in one business segment,  information storage
solutions.

(9)  SALES AND CUSTOMER INFORMATION

During the nine months ended  September  30, 2001 and 2000,  no single  customer
accounted for greater than 10% of the Company's sales.

Included in sales and cost of sales during the three months ended  September 30,
2001 is $.6  million  and $.3  million,  respectively,  related  to the  sale of
inventory to a customer that also purchased  substantially  all of the Company's
servicing  business  during that period.  The revenues and related cost from the
sale of the servicing  business have been deferred and are being recognized on a
straight  line  basis  through  June  2002.  Terms of the sale of the  inventory
included a note receivable from the buyer for $.4 million.


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

With  the   exception   of   discussions   regarding   historical   information,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  contains forward looking  statements.  Such statements are based on
information  currently available to management,  and we assume no obligations to
update any forward  looking  statements  since these  current  expectations  are
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, the closing of the Halperin Offer and/or the strategic  business
relationship,  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 of our new product lines, price competition,
conditions  in the  technology  industry and the economy in general,  as well as
legal proceedings. The economic risk associated with materials cost fluctuations
and  inventory  obsolescence  is  significant  to us. The  ability to manage our
inventories  and  deliver  products to our  customers  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.


<PAGE> 15


Subsequent  written and oral  forward  looking  statements  attributable  to the
company  or  persons  acting on its  behalf  are  expressly  qualified  in their
entirety by  cautionary  statements in this Form 10-Q and in other reports filed
by the company  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  integrated,  enterprise  class  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,  our products are offered in Fibre Channel,  Fibre-to-SCSI  (Small
Computer System Interface), and SCSI architectures.  We also manufacture storage
management   software  and  complement  our  product  offerings  with  SAN-ready
solutions.  We market  products  through a global  network  of OEMs,  resellers,
systems integrators and a direct sales force in the United States.

                              Results of Operations

For the three months ended  September  30, 2001 and 2000, we incurred net losses
of $1.2 million and $4.0 million,  respectively. The 2001 third quarter included
extraordinary  gains of $1.1  million  realized  from  negotiated  discounts  on
purchases with vendors.

We also  incurred net losses of $8.5 million and $4.3 million for the nine month
periods  ended  September 30, 2001 and 2000,  respectively.  The 2001 nine month
period  included  extraordinary  gains  of $.7  million,  net  of a $.4  million
extraordinary loss from debt extinguishment. The 2000 nine-month period included
a one-time  $5.6  million gain on sale of assets of Borg  recognized  during the
first quarter of 2000 (see Note 5 to Consolidated Financial Statements).

Sales

Net sales for the three and nine months ended September 30, 2001 decreased to $4
million and $14.2 million, respectively, from $9.5 million and $32.9 million for
the  comparative  periods  in  2000.  The  significant   decreases  reflect  the
transition from our older technology legacy products to our 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. During 2001, we experienced growth
in our indirect  customer base and plan to further  expand our indirect  channel
business,  which we believe will  provide a new source of revenues.  In order to
take advantage of the opportunities available in the indirect business channels,
we have 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 significantly reduced our direct sales personnel
and related costs, and are currently  focusing our direct sales team to targeted
markets as well as existing large customers.

During the nine months ended September 30, 2001, our sales revenues consisted of
$8.7  million in direct sales to end users,  $3.1  million in indirect  sales to
OEMs,  resellers and other channel business and $2.4 million in service revenues
representing 61%, 22% and 17%, respectively, of our sales revenues. For the year
ended December 31, 2000, direct,  indirect and service revenues represented 75%,
14%, and 11%,  respectively,  of our sales revenues.  Sales during the three and
nine months ended September 30, 2001 included $.6 million related to the sale of
inventory to a customer which also purchased  substantially all of our servicing
business during the quarter.


<PAGE> 16


Cost of Sales/Gross Margins

Gross margins were 35% and 28% for the three and nine months ended September 30,
2001, respectively, compared to 26% and 29% for the comparative periods in 2000.
The increase in gross margin  percentage  during the 2001 quarter was  primarily
due to decreased material costs,  partially offset by the effect of the level of
fixed costs  inherent in our  operations  as compared with  significantly  lower
sales revenues. Our gross margins are dependent,  in part, on material costs and
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 prices.

Operating Expenses

        Selling and Marketing

Selling and  marketing  expenses  decreased to $1.1 million and $4.7 million for
the three and nine months  ended  September  30, 2001,  respectively,  from $2.4
million and $7.2 million for the  comparative  periods in 2000,  representing  a
$1.3 million and $2.5 million decline for the respective periods.  The decreases
resulted  principally  from our overall  reduction  in  workforce as part of the
changes in our sales and marketing efforts discussed under "Sales".

        General and Administrative

General and  administrative  expenses decreased to $1.2 million and $3.7 million
for the three and nine months ended September 30, 2001, respectively,  from $1.4
million and $5.3 million for the comparative periods in 2000, representing a $.2
million and $1.6 million decline for the respective  periods.  The decreases are
primarily attributed to our overall reduction in workforce.

        Research and Development

Research and development expenses were $.8 million and $.9 million for the three
month periods  ended  September  30, 2001 and 2000,  respectively.  For the nine
month  periods  ended  September  30, 2001,  research and  development  expenses
increased to $2.8 million from $2.5 million for the  comparative  period in 2000
as a result of our  increased  efforts to  complete  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 immediate 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.

Depreciation and Amortization

Depreciation  and amortization for the three and nine months ended September 30,
2001 was $.4 million and $1.3 million, respectively, as compared to $1.1 million
and $3.4 million for  comparative  periods in 2000.  The  decreases  were 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.


<PAGE> 17


Interest Expense

Interest  expense  was $.1 million and $.7 million for the three and nine months
ended September 30, 2001, respectively,  compared to $.3 million and $.9 million
for the comparative periods in 2000,  representing  decreases of $.2 million for
each  comparative  period.  The decreases are  attributable  to a combination of
decreased lower average borrowings and substantially lower interest rates.

Preferred Stock Dividends

During the three and nine months  ended  September  30,  2001,  dividends on our
preferred  stock increased to $.5 million and $1.1 million,  respectively,  from
$.1 million and $.5 million for  comparative  periods in 2000.  Preferred  stock
dividends,  principally at 10% per annum, increased during 2001 primarily due to
the  issuance of $2 million of  preferred  stock on December  29, 2000 and $11.9
million of preferred stock in April 2001 (see Note 4 to  Consolidated  Financial
Statements),  partially offset by the conversion of $3.0 million of the Series C
Convertible Preferred Stock to common stock in July 2000.

                         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 $8.5 million for
the nine months ended September 30, 2001. In addition,  we have negative working
capital and a stockholders' deficit at September 30, 2001. These matters,  among
others,  raise  substantial  doubt  about our  ability  to  continue  as a going
concern.

During most of 2000, our 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 2000 and the first nine
months 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.

During  2001,  we shifted our sales and  marketing  strategy to provide  greater
technical,  marketing and sales support to expand our indirect  customer channel
base (OEMs, resellers and system integrators).  As part of this strategy,  since
January  2001,  we have  significantly  reduced our direct sales  personnel  and
related  costs,  and are  currently  focusing  our direct sales team to targeted
markets as well as large  customers.  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.

Historically,  we have been successful in securing significant amounts of equity
and debt  financing to support our operating  deficits.  Since late 1997 through
October 31, 2001,  we obtained net cash  proceeds of $43.2  million from private
investors,  including an aggregate of $14 million from Mr. Levy and $8.1 million
from Mr. Halperin.  Of these amounts,  $11.5 million was received since December
31,  2000,  including  $3.5  million  from Mr.  Levy and $4.7  million  from Mr.
Halperin (see Note 7 to Consolidated Financial Statements).


<PAGE> 17


In June 2001, we received an offer, as amended, from Mr. Halperin to purchase an
approximate  49%  interest in our company for an aggregate  investment  of $16.4
million  (including a $3.1  million five year loan) (see Note 7 to  Consolidated
Financial  Statements).  In  connection  with this  offer,  from August 14, 2001
through  October  31,  2001,  Mr.  Halperin  loaned us $4.7  million  in interim
financing in the form of 8% short-term  notes.  Of this amount,  $3.1 million is
scheduled  to be converted  into a  five-year,  8% term loan at closing and $1.6
million  applied to the amount Mr.  Halperin  pays for the 49%  investment.  The
transaction  is scheduled to close by November 16, 2001,  as extended;  however,
there is no assurance  that the closing will occur.  If the  transaction  is not
completed,  we will be  required to explore  alternative  sources 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. 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

On  October  23,  2001,  we  received a proposal  from a U.S.  subsidiary  of an
Asian-based public company to enter into a strategic business relationship.  The
proposal  contemplates  an  international   distribution  agreement,  an  equity
investment in our company and certain other business  relationships,  subject to
terms  and  conditions  to be  negotiated.  There  is  no  assurance  that  such
agreements will be completed on terms acceptable to management.

It is not intended that the Company will  complete  both of these  transactions;
however,  the  Company  is  dependent  upon  the  completion  of one of the  two
alternatives  to provide the working  capital needed until the Company begins to
generate positive cash flows. If neither  transaction is completed,  the Company
will be forced to pursue other alternatives;  however, there can be no assurance
that such alternatives  will be available on terms acceptable to management,  if
at all.

Consolidated Statements of Cash Flows

        Operating Activities

Net cash used by operating  activities amounted to $8.0 million and $8.3 million
for the nine months ended  September 30, 2001 and 2000,  respectively.  The most
significant use of cash was our loss from  operations  (before changes in assets
and liabilities) of $6.1 million and $6.3 million, respectively. During 2001 and
2000,  we used  cash of $3.8  million  and  $.8  million,  respectively,  in the
reduction of accounts payable and other liabilities.  During 2000, an additional
significant  use of cash was an  increase in  inventories  in the amount of $2.1
million  (principally due to our investment in new products).  Cash was provided
by net  collections  of accounts  receivable of $1.2 million and $.8 million for
2001 and 2000, respectively.

        Investing Activities

Net cash used by investing  activities was $.1 million for the nine months ended
September 30, 2001.  Net cash  provided by investing  activities in 2000 of $6.1
million was  principally  due to $7 million in net cash  proceeds  from the Borg
Sale.

        Financing Activities

Net cash provided by financing  activities  for the nine months ended  September
30, 2001 amounted to $8.9 million and primarily consisted of borrowings of $10.2
million from private  investors  (including  $3.95 million from Mr. Halperin and
$3.3 million from Mr. Levy), of which $4.4 million was satisfied by the issuance
of  convertible  preferred  stock  in  April  2001,  partially  offset  by a net
reduction of our Bank Line of Credit of $1.6 million.


<PAGE> 19


Net cash provided by financing  activities  for the nine months ended  September
30,  2000 was $1.7  million  which  principally  consisted  of $1.2  million  in
proceeds  from the  exercise  of stock  options  and  warrants,  $.7  million in
proceeds from an equity draw down facility,  partially  offset by the payment of
$.7 million of preferred stock dividends.

Bank Line of Credit

Our Bank Line of Credit currently provides for borrowings based on the lesser of
$10 million or: (i) 85% of eligible accounts receivable,  as defined,  plus (ii)
the lesser of $1.25  million or 20% of eligible  inventory,  as  defined,  bears
interest at prime (6.0% at September 30, 2001) plus 2.5%, is scheduled to mature
in April 2002 and is collateralized by substantially all of our assets. The Bank
Line of Credit also provides for certain financial covenants,  including minimum
net worth and net income requirements.

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

We are  negotiating  the terms of an amendment to the Bank Line of Credit which,
among other items, would provide that the maximum  availability would be reduced
to $5  million.  There can be no  guarantee  that we will be  successful  in our
negotiations  with the lender.  If we are not  successful,  we will need to seek
replacement  financing  which may not be available  given our history of losses,
existing negative working capital and stockholders' deficit.

As of September 30, 2001, the outstanding balance of the Bank Line of Credit was
$2.5  million  and an  additional  $399,000  was  available  based  on  eligible
collateral.

New Accounting Pronouncements

In July 2001, the Financial  Accounting  Standards Board (FASB) issued Statement
of Financial  Accounting  Standards No. 141 (SFAS 141),  Business  Combinations,
which  eliminates  the pooling  method of accounting  for business  combinations
initiated  after June 30, 2001. In addition,  SFAS 141 addresses the  accounting
for  intangible  assets and goodwill  acquired in a business  combination.  This
portion of SFAS 141 is effective for business combinations  completed after June
30, 2001. We do not expect SFAS 141 will have a material impact on our financial
position or results of operations.

In July 2001, the FASB issued  Statement of Financial  Accounting  Standards No.
142 (SFAS 142), Goodwill and Intangible Assets, which revises the accounting for
purchased  goodwill  and  intangible  assets.   Under  SFAS  142,  goodwill  and
intangible  assets with indefinite lives will no longer be amortized and will be
tested for impairment annually. SFAS 142 is effective for fiscal years beginning
after  December  15,  2001,  with  earlier  adoption  permitted.  We expect  our
implementation   of  SFAS  142  to  result  in  discontinuing   amortization  of
unamortized  goodwill with a carrying amount of $2.1 million as of September 30,
2001. Amortization for the nine months ended September 30, 2001, amounted to $.3
million.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of  Long-Lived  Assets".  SFAS No. 144 requires  that those  long-lived
assets be measured  at the lower of  carrying  amount or fair value less cost to
sell, whether reported in continuing  operations or in discontinued  operations.
Therefore,  discontinued operations will no longer be measured at net realizable
value or include amounts for operating  losses that have not yet occurred.  SFAS
No. 144 is effective for financial  statements issued for fiscal years beginning
after  December 15, 2001 and,  generally,  is to be applied  prospectively.  The
Company  does not expect SFAS 144 will have a material  impact on the  Company's
financial position or results of operations.


<PAGE> 20


                               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.


Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We  maintain  a  floating  interest  rate  Bank  Line of  Credit  ($2.5  million
outstanding  balance at  September  30,  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

Not Applicable

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

Not Applicable

Item 3.  Defaults Upon Senior Securities

Not applicable

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

Not applicable

Item 5.  Other Information

Not applicable


<PAGE> 21


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

(a)     Exhibits:

10.1 10% Subordinated Promissory Note for $150,000 dated August 7, 2001, between
     Registrant and H. Irwin Levy

10.2 10%  Subordinated  Promissory  Note for $200,000 dated  September 25, 2001,
     between Registrant and H. Irwin Levy

10.3 8%  Promissory  Note  for  $2,100,000,   dated  August  14,  2001,  between
     Registrant and Halco Investments, L.C.

10.4 8% Revolving  Credit Note for  $1,000,000,  dated August 14, 2001,  between
     Registrant and Halco Investments, L. C.

10.5 8%  Promissory  Note for  $1,275,000,  dated  September  10, 2001,  between
     Registrant and Halco Investments, L. C.

10.6 8% Promissory Note for $332,442, dated October 29, 2001, between Registrant
     and Halco Investments, L. C.

10.7 Letter  Agreement,  dated August 31, 2001,  extending  the maturity date of
     certain notes  previously  filed as exhibits to Registrant's  Form 10-Q for
     the quarter and six months ended June 30, 2001,  between  Registrant and H.
     Irwin Levy to December 31, 2001

10.8 Letter  Agreement,  dated August 31, 2001,  extending  the maturity date of
     note filed as exhibit to  Registrant's  Form 10-Q for the  quarter  and six
     months ended June 30, 2001,  between  Registrant  and The Charlotte  Marden
     1993 Trust to December 31, 2001

(b)     Reports on Form 8-K:

        The  Registrant was not required to file Form 8-K during the quarter for
        which this report is filed.


<PAGE> 22


                                    SIGNATURE

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

                             nSTOR TECHNOLOGIES, INC.
                                   (Registrant)

                              /s/ Jack Jaiven
November 8, 2001             ----------------------------
                             Jack Jaiven
                             Principal Accounting Officer