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 June 30, 2002

                                       OR

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

            For the transition period from __________ to __________


                         Commission File Number: 0-8354


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


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


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


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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
requirements for the past 90 days. Yes X No____


Number of shares  outstanding of the  Registrant's  Common Stock, par value $.05
per share, as of July 31, 2002: 137,549,920


<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 June 30, 2002
           (uaudited) and December 31, 2001                              3
         Consolidated Statements of Operations
           (unaudited) for the three and six months
           ended June 30, 2002 and 2001                                  4
         Consolidated Statement of Shareholders'
           Equity (uaudited) for the six months
           ended June 30, 2002                                           5
         Consolidated Statements of Cash Flows
           (unaudited) for the six months ended
           June 30, 2002 and 2001                                      6-7
         Notes to Consolidated Financial Statements
           (unaudited)                                                8-19

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

Item 3.  Quantitative and Qualitative Disclosures about
         Market Risk                                                    23


Part II. OTHER INFORMATION                                           23-24

SIGNATURE                                                               24


<PAGE> 3


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

                            nSTOR TECHNOLOGIES, INC.
                          CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)
                                                          June 30,
                                                             2002       Dec. 31,
         ASSETS                                          (unaudited)      2001
         ------                                          -----------    --------
Current assets:
  Cash and cash equivalents                                 $   654     $   857
  Marketable securities                                           -       4,255
  Accounts receivable, net                                    2,661       1,925
  Inventories                                                   292       1,364
  Prepaid expenses and other                                    421         211
                                                            -------     -------
    Total current assets                                      4,028       8,612

Property and equipment, net of $5,955 and
  $5,641 accumulated depreciation                               969       1,367
Goodwill and other intangible assets, net of
  $842 and $808 accumulated amortization                     11,241       1,989
                                                            -------     -------
                                                            $16,238     $11,968
                                                            =======     =======
        LIABILITIES
        -----------
Current liabilities:
  Bank lines of credit                                        $ 650     $ 2,991
  Other borrowings                                            3,409       1,100
  Accounts payable and other                                  4,211       3,790
  Deferred revenue                                            1,802           -
                                                            -------     -------
    Total current liabilities                                10,072       7,881

Long-term debt                                                3,100       3,600
                                                            -------     -------
    Total liabilities                                        13,172      11,481
                                                            -------     -------
        SHAREHOLDERS' EQUITY
        --------------------
Preferred stock, $.01 par; 1,000,000 shares authorized;
  Series L Convertible Preferred Stock, 1,000 and 0
  shares issued and outstanding at June 30, 2002
  and December 31, 2001, respectively                             -           -
Common stock, $.05 par; 200,000,000 shares authorized;
  137,549,920 and 114,603,144 shares issued and
  outstanding at June 30, 2002 and December 31, 2001,
  respectively                                                6,877       5,729
Additional paid-in capital                                  102,143      94,104
Deficit                                                    (105,954)    (99,346)
                                                            -------     -------
    Total shareholders' equity                                3,066         487
                                                            -------     -------
                                                            $16,238     $11,968
                                                            =======     =======

          See accompanying notes to consolidated financial statements.


<PAGE> 4


<TABLE>
<CAPTION>

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


                                                Three Months                Six Months
                                                Ended June 30,             Ended June30,
                                             --------------------      --------------------
                                               2002        2001         2002         2001
                                                 (unaudited)                (unaudited)
                                             -------      -------      -------      -------
<S>                                          <C>          <C>          <C>          <C>
Sales                                        $ 2,451      $ 3,953      $ 4,010      $10,171
Cost of sales                                  2,351        3,050        4,026        7,555
                                             -------      -------      -------      -------
Gross margin (loss)                              100          903          (16)       2,616
                                             -------      -------      -------      -------
Operating expenses:
  Selling, general and administrative          1,115        2,808        2,645        6,116
  Research and development                       650          892        1,387        1,971
  Depreciation and amortization                  350          368          593          851
                                             -------      -------      -------      -------
    Total operating expenses                   2,115        4,068        4,625        8,938
                                             -------      -------      -------      -------
Loss from operations                          (2,015)      (3,165)      (4,641)      (6,322)
Realized gains (losses) on marketable
  securities                                     206            -       (1,123)           -
Fair value of option granted to customer           -            -         (670)           -
Interest expense                                (120)        (328)        (257)        (654)
Other (expense) income, net                      (14)         (25)         (54)          13
                                             -------      -------      -------      -------
Net loss before preferred stock dividends
  and extraordinary gain (loss)               (1,943)      (3,518)      (6,745)      (6,963)
Extraordinary gain (loss) from debt
  extinguishment (net of tax of $0)              137         (362)         137         (362)
                                             -------      -------      -------      -------
Net loss                                      (1,806)      (3,880)      (6,608)      (7,325)
Preferred stock dividends                          -         (444)           -         (629)
                                             -------      -------      -------      -------
Net loss applicable to common stock         ($ 1,806)    ($ 4,324)    ($ 6,608)    ($ 7,954)
                                             =======      =======      =======      =======
Basic and diluted net loss per
  common share:
  Loss before extraordinary gain (loss)     ($   .01)    ($   .11)    ($   .06)    ($    21)
  Extraordinary gain (loss)                      .00     (    .01)         .00        ( .01)
                                             -------      -------      -------      -------
Net loss per common share                   ($   .01)    ($   .12)    ($   .06)    ($   .22)
                                             =======      =======      =======      =======
Weighted average number of common
 shares used in per share computation,
 basic and diluted                        120,983,986    35,597,434  117,979,041   35,538,290
                                          ===========    ==========  ===========   ==========


</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE> 5


<TABLE>
<CAPTION>

                            nSTOR TECHNOLOGIES, INC.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                             (dollars in thousands)
                                   (unaudited)

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

Issuance of common stock:
  Acquisition of 100% of
    common stock of Stonehouse
    Technologies, Inc.
    ("Stonehouse")               22,500,000      1,125                            5,850                    6,975

  Satisfaction of accrued
    dividends on Series D
    convertible preferred stock     446,776         23                              116                      139

Issuance of Series L
  Convertible Preferred
  Stock in connection with
  acquisition of Stonehouse                               1,000         -         1,403                    1,403

Fair value of option granted
  to customer                                                                       670                      670

Net loss for the six
 months ended June 30, 2002                                                                    (6,608)    (6,608)

                                -----------    -------   ------    ------      --------      --------     ------
Balances, June 30, 2002         137,549,920    $ 6,877    1,000    $    -      $102,143     ($105,954)    $3,066
                                ===========    =======   ======    ======      ========      ========     ======

</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE> 6


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

                                                           Six Months
                                                         Ended June 30,
                                                      ---------------------
                                                         2002        2001
                                                      ---------   ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                              ($ 6,608)   ($ 7,325)
Adjustments to reconcile net loss to net cash
  provided (used) by operating activities:
    Proceeds from the sale of marketable securities      3,132           -
    Realized loses on the sale of marketable
      securities                                         1,123           -
    Fair value of option granted to customer               670           -
    Depreciation                                           558         650
    Provision for inventory obsolescence                   273           -
    Extraordinary (gain) loss from debt extinguishment    (137)        362
    Provision for uncollectable accounts                    77           -
    Amortization of goodwill and intangible assets          35         201
    Amortization of deferred financing costs and other       -         242
    Changes in assets and liabilities, net of
      effects from acquisition:
        Decrease in accounts receivable                    638       1,154
        Decrease in inventories                            799         796
        (Increase) decrease in prepaid expenses
          and other                                       (109)        264
        Decrease in deferred revenue, accounts
          payable and other                                191      (1,024)
                                                       --------    -------
Net cash provided (used) by operating activities           642      (4,680)
                                                       --------    -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Additions to property and equipment                      (75)        (73)
  Cash acquired in acquisition                             298           -
                                                       --------    -------
Net cash provided (used) by investing activities           223         (73)
                                                       --------    -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net repayments on bank line of credit                 (2,541)       (964)
  Additions to other borrowings                          1,473       5,641
  Issuance of preferred stock                                -         250
  Cash paid for preferred stock dividends                    -         (60)
                                                       --------    -------
Net cash (used) provided by financing activities        (1,068)      4,867
                                                       --------    -------
Net (decrease) increase in cash and cash
  equivalents during the period                           (203)        114

Cash and cash equivalents at the
  beginning of the period                                  857          37
                                                       --------    -------
Cash and cash equivalents at the
  end of the period                                    $   654     $   151
                                                       ========    =======

          See accompanying notes to consolidated financial statements.


<PAGE> 7


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

                                                             Six Months
                                                           Ended June 30,
                                                      -----------------------
                                                         2002        2001
                                                      ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during period for interest                 $    146     $    348
                                                       ========     ========

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:

  Non-Cash Investing Activities:
    Acquisition:
      Fair value of assets acquired                    $ 11,027     $      -
      Liabilities assumed or incurred                    (2,947)           -
      Common and preferred stock issued                  (8,378)           -
                                                       --------     --------
          Cash acquired                               ($    298)    $      -
                                                       ========     ========

  NON-CASH FINANCING ACTIVITIES:

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

          See accompanying notes to consolidated financial statements.


<PAGE> 8


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

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Basis of Presentation

In the opinion of management,  the unaudited  consolidated  financial statements
furnished  herein  include  all   adjustments,   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, as amended, for the year ended December 31, 2001.

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

Going Concern

The accompanying  consolidated  financial statements have been prepared assuming
that the  Company  will  continue  as a going  concern.  This  contemplates  the
realization of assets and the  satisfaction  of liabilities in the normal course
of business. The Company has experienced  substantial net losses of $14 million,
$21.9 million and $18.7 million for the years ended December 31, 2001,  2000 and
1999, respectively,  and $6.6 million for the six months ended June 30, 2002. In
addition,  the Company has  negative  working  capital at June 30,  2002.  These
matters,  among others,  raise  substantial doubt about the Company's ability to
continue as a going concern.

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

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

In July  2002,  the  Company  entered  into a contract  with  Varian,  Inc.  for
outsourcing  the production of the Company's  4000 Series of products.  The 4000
product family will be expanded later in 2002 to become the Company's  universal
product  offering.  The Company  expects  this  agreement to result in immediate
improvements in its operating margins by lowering manufacturing costs as well as
reducing overall operating costs. The Company's current manufacturing  facility,
located in San Diego, California, is scheduled to be phased out during the third
quarter of 2002.


<PAGE> 9


From January 1, 2001 through July 31, 2002,  the Company  obtained $20.8 million
of  equity  and debt  financing  from  private  investors,  principally  Maurice
Halperin,  the  Company's  Chairman  of the Board  since  August 15,  2001 and a
principal  shareholder,  or companies  controlled by Mr. Halperin  (collectively
"Mr.  Halperin"),  and H. Irwin Levy, the Company's  Vice-Chairman of the Board,
Chief Executive Officer and a principal shareholder,  or companies controlled by
Mr. Levy (collectively, "Mr. Levy").

During 2002,  the Company's  bank lender advised that it did not intend to renew
the Company's credit facility.  As of June 30, 2002, the outstanding  balance of
this facility had been reduced to $450,000, and as of July 30, 2002, was paid in
full. The Company is currently negotiating with a replacement lender and expects
to be able to complete a new bank credit  facility  during the third  quarter of
2002; however, there can be no assurance that it will be successful in obtaining
such a facility on terms  acceptable  to the  Company,  if at all. On an interim
basis,  effective in August 2002, the Company has been able to receive financing
based on 80% of qualified accounts receivable.

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

The Company  believes that it has sufficient cash and other financial  resources
to effectively  operate until it achieves  positive cash flows from  operations,
which is expected to occur during the second half of 2002; however,  there is no
assurance  that the Company will be able to achieve  positive  cash flows in the
future or that additional financial resources will not be required.

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

Business

nStor Corporation, Inc., ("nStor"), a wholly-owned subsidiary of the Company, is
a designer,  developer  and  manufacturer  of  attached  and SAN  (Storage  Area
Network) ready data enclosures and Storage  Management  Software used in storage
solutions  for  computing  operations.  The  Company's  product line  supports a
variety of  operating  systems,  including  Windows  NT and  Windows  2000,  Sun
Solaris,  Linux,  SGI  IRIX  and  Macintosh.   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
Systems Interface), and SCSI architectures.

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

Revenue Recognition

     nStor

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


<PAGE> 10


     Stonehouse

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

Use of Estimates

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

Reclassifications

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

Net Loss Per Common Share ("EPS")

Basic EPS is  calculated  by dividing the net loss  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 dilutive EPS for those periods are the same.

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

Recent Authoritative Pronouncements

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


<PAGE> 11


In April 2002, the FASB issued Statement of Financial Accounting Standard No.145
("SFAS  No.145"),  Rescission of SFAS No.4, 44, and 64, Amendment of SFAS No.13,
and Technical  Corrections.  SFAS No.145 rescinds SFAS No.4, Reporting Gains and
Losses from Extinguishment of Debt, SFAS No.44, Accounting for Intangible Assets
of Motor  Carriers,  and SFAS  No.64,  Extinguishments  of Debt Made to  Satisfy
Sinking-Fund Requirements. SFAS No.145 requires, among other things (i) that the
modification  of a lease that results in a change of the  classification  of the
lease from capital to operating  under the provisions of SFAS No.13 be accounted
for as a  sale-leaseback  transaction  and (ii) the reporting of gains or losses
from the early  extinguishment  of debt as extraordinary  items only if they met
the criteria of Accounting Principles Board Opinion No.30, Reporting the Results
of  Operations.  The  rescission of SFAS No.4 is effective  January 1, 2003. The
amendment of SFAS No.13 is effective for transactions  occurring on or after May
15, 2002.  Management is in the process of assessing the effect, if any, of this
pronouncement.

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

(2) ACQUISITION

Terms of the Acquisition

On June 7, 2002, the Company  acquired 100% of the outstanding  capital stock of
Stonehouse from Pacific  Technology Group, Inc. ("PTG"), a subsidiary of Pacific
USA  Holdings  Corp  ("PUSA")(the  "Acquisition").  The  purchase  price of $8.9
million, including approximately $500,000 in transaction costs, was based upon a
market  value of $.31 per share,  the average of the  Company's  closing  market
prices  for the four days  before  and after the terms of the  Acquisition  were
agreed to (April 30, 2002),  and consisted of the issuance of 22,500,000  shares
of the  Company's  common  stock and  1,000  shares  of the  Company's  Series L
Convertible  Preferred  Stock.  The  Series  L  Convertible  Preferred  Stock is
convertible  into  4,527,027  shares of common  stock,  subject to the Company's
shareholder  approval.  In  addition,  the Company is  obligated  to issue up to
8,687,258 shares of common stock based on an Earn-Out provision, as defined.

Under the Earn-Out  provision,  in the event pretax income (defined in the Stock
Purchase  Agreement as "Net Revenues") of Stonehouse  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  shares of the Company's common stock.
The issuance of such shares is subject to the Company's shareholder approval.

Reasons for the Acquisition

In an effort to improve  the  Company's  financial  condition  and future  sales
revenues,  the Company developed a strategic business  relationship with Pacific
Electric  Wire & Cable  Co.,  Ltd.  ("PEWC"),  the  parent  of  PUSA.  PEWC is a
Taiwan-based  corporation,  traded on the Taiwan Stock Exchange. As described in
Note 8 to the Consolidated  Financial  Statements,  effective March 1, 2002, the
Company entered into a Reseller  Agreement with another  subsidiary of PUSA, and
also granted an option to that  subsidiary  to purchase up to 30 million  common
shares at an exercise price of $.40 per share.  Subsequently,  the Company began
exploring  ways to further its  relationship  with PEWC by combining  nStor with
Stonehouse.

The Company  believes that the  Acquisition  will have a positive  impact on its
operating  results from a cash flow standpoint,  and will also contribute to the
Company's  operating  income during 2002.  Further,  Stonehouse has an expansive
customer  base,  including  major U.S.  corporations  and  government  agencies,
through  which  the  Company  believes  it will be able to market  its  computer
storage  products,  which in turn should have a positive impact on the Company's
operations.


<PAGE> 12


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

Accounting for the Acquisition

The  Acquisition  was accounted for under the purchase method of accounting with
assets acquired and liabilities  assumed recorded at estimated fair values as of
the  Acquisition  date in  accordance  with  Statement of  Financial  Accounting
Standards  No. 141  ("SFAS  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  after 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 $3.2 million and goodwill of $6.1  million.  Intangible
assets  with finite  useful  lives were  identified  as  follows:  (i)  customer
relationships ($2.3 million);  (ii) software  ($660,000);  and (iii) non-compete
agreement  ($255,000);  with  corresponding  useful lives of ten, five, and four
years, respectively. The excess of the purchase price over the fair value of net
assets acquired (goodwill) will be subject to an annual review for impairment in
accordance  with  Statement of  Financial  Accounting  Standards  No. 142 ("SFAS
142"), Goodwill and Other Intangible Assets, adopted by the Company in 2002 (see
Note 5 to Consolidated Financial Statements).

About Stonehouse

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

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


<TABLE>
<CAPTION>

                                      Three Months                              Six Months
                                      Ended June 30,                            Ended June 30,
                          --------------------------------------    -------------------------------------
                                 2002                2001                 2002               2001
                          --------------------------------------    -------------------------------------
                          Histor-     Pro      Histor-    Pro       Histor-    Pro     Histor-    Pro
                          ical(b)    forma      ical     forma      ical(b)   forma     ical     forma
                                    Combined           Combined(a)           Combined          Combined(a)
                          ------    --------   ------- ----------   ------   --------  ------- ----------
<S>                       <C>        <C>       <C>       <C>        <C>       <C>      <C>      <C>
Net sales                 $2,451     $3,350    $3,953    $5,528     $4,010    $6,824   $10,171  $13,356

Loss before preferred
 stock dividends and
 extraordinary gain
 (loss)                  ($1,943)   ($2,004)  ($3,518)  ($4,697)   ($6,745)  ($6,612)  ($6,963) ($8,340)

Net loss applicable
 to common stock         ($1,806)   ($1,867)  ($4,324)  ($5,412)   ($6,608)  ($6,475)  ($7,954) ($9,182)

Basic and diluted net
 loss per share          ($  .01)   ($  .01)  ($  .12)  ($  .09)   ($  .06)  ($  .05)  ($  .22)  ($  .16)

Weighted average number
 of common shares used
 in per share computa-
 tion, basic and
 diluted                  120,984    143,484    35,597    58,097    117,979   140,479    35,538    58,038

</TABLE>


<PAGE> 13


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

(b) Historical amounts include Stonehouse's results of operations for June 2002.

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

               Cash                                            $   298
               Accounts receivable                               1,554
               Prepaid expenses                                    101
                                                               -------
                      Total current assets                       1,953

               Property and equipment                               85
               Goodwill                                          6,113
               Other intangible assets                           3,174
                                                               -------
                      Total assets                             $11,325
                                                               =======

               Borrowings                                      $   200
               Accounts payable and other liabilities              556
               Deferred revenue                                  1,704
                                                               -------
                      Total liabilities                        $ 2,460
                                                               =======


(3) HALCO INVESTMENT

On November 20, 2001 (the "Closing Date"),  the Company  completed a transaction
in which Halco Investments L.C. (Halco),  a company  controlled by Mr. Halperin,
acquired a 34% equity interest in, and made certain loans to, the Company for an
aggregate  investment  of $12.1 million (the Halco  Investment).  On the Closing
Date,  Halco  acquired  8,970 shares of the  Company's  newly  created  Series K
Convertible Preferred Stock (the "Series K Preferred Stock"), with a face amount
of  $8,970,000,  and the Company  issued a $3.1  million,  5-year,  8% note (the
"Halco  Note").  Halco  invested  $6 million in cash and  marketable  securities
having a quoted  market value of $6.1  million,  based on the closing  price for
such securities on November 19, 2001.

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


<PAGE> 14


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

On the Closing  Date,  shareholders  who owned in excess of 50% of the Company's
voting stock  executed  proxies to vote in favor of the foregoing  transactions.
However, formal shareholder approval of the transactions was required before the
Company could issue the common stock  necessary for the conversion of the Series
K Preferred  Stock,  the Note  Shares,  the  Inducement  Shares and the Dividend
Shares,  and for an increase in the number of  authorized  common shares from 75
million to 200 million. On January 10, 2002,  shareholder  approval was received
and the  Company  issued the New  Common  Shares  effective  January  11,  2002.
Accordingly,  to appropriately  reflect the financial position of the Company in
the accompanying consolidated financial statements,  the foregoing transactions,
as shown in the  following  table,  were assumed to have occurred as of November
20, 2001, the Closing Date of the Halco Investment.

<TABLE>
<CAPTION>

          Balances at January 10, 2002                          New Common Shares
 (Considered Converted to New Common Shares            Issued Effective January 11, 2002
         at December 31, 2001)                   (Considered Outstanding at December 31, 2001)
----------------------------------------------   -------------------------------------------------
                        Aggregate     Accrued                                             Total
Preferred  Number of   Stated Value  Dividends   Conversion    Inducement   Dividend    New Common
  Series     Shares         (in thousands)         Shares        Shares      Shares      Shares
---------  ---------   -----------------------   ----------    ----------  ---------   -----------
<S>        <C>         <C>           <C>         <C>           <C>         <C>         <C>
   E         3,500       $ 3,500      $  405      1,166,666     1,166,666     899,665    3,232,997
   H         5,100         5,100         383      7,083,333     4,250,000     850,776   12,184,109
   I         9,092         9,092         681     12,627,433     7,576,406   1,513,177   21,717,016
   K         8,970         8,970           -     39,000,000             -           -   39,000,000
                        --------      ------     ----------    ----------   ---------  -----------
                         $26,662      $1,469     59,877,432    12,993,072   3,263,618   76,134,122
                        ========      ======     ==========    ==========   =========
Note Shares                                                                                750,000
                                                                                       -----------
Total New Common Shares issued effective January 11, 2002                               76,884,122

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

</TABLE>


<PAGE> 15


(4)  TRADING MARKETABLE SECURITIES

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

Due to ARL's low trading volume, the Company's ability to sell or borrow against
the ARL holdings had been  extremely  limited.  From November 2001 through March
19,  2002,  the Company  had been able to sell only 56,300  shares in the public
market, generating cash proceeds of $442,000. To assist in funding the Company's
working  capital  requirements,  in February  and March 2002,  the Company and a
company controlled by Mr. Levy, Hilcoast Development Corp. ("Hilcoast"), entered
into  agreements  whereby  Hilcoast  purchased  195,000  shares  of ARL  with an
aggregate  quoted value of $1,470,000 on the  respective  purchase  dates for an
aggregate  purchase  price of  $1,240,000.  In  connection  therewith,  Hilcoast
granted the Company  four-month  options to repurchase all or a portion of those
shares based on the price Hilcoast paid plus 10% per annum (the  "Options").  In
February  and  March  2002,   the  Company  sold  183,000   additional   shares,
representing  all of its  remaining  holdings  in ARL,  to Mr.  Halperin  for an
aggregate purchase price of $1,278,000, which approximated ARL's quoted value on
the respective  purchase dates. In April 2002, the Company received  $206,000 in
cash proceeds from the exercise of the Options.  As a result of the ARL sales in
2002,  the Company  realized a loss of $1.1 million  during the six months ended
June 30, 2002, net of a $206,000 gain during 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 142,  which requires that
goodwill and certain  intangible  assets no longer be amortized,  but instead be
tested at least  annually  for  impairment.  Accordingly,  there was no goodwill
amortization  recognized during the three and six months ended June 30, 2002, as
compared  to  $101,000  and  $201,000  in  the   corresponding   2001   periods,
respectively.  During 2002, the Company engaged an independent valuation firm to
prepare an impairment  analysis of the Company's  goodwill,  including  goodwill
acquired in the Stonehouse  Acquisition.  Based on this analysis,  the Company's
goodwill is not  considered  to be  impaired as of January 1, 2002.  The Company
continues  to  review  the  impact  of SFAS  142 and  will  make  any  necessary
adjustments, as appropriate.

As of June 30, 2002, the carrying amount of goodwill and other intangible assets
was  approximately  $8.1 million and $3.2 million,  respectively,  of which $6.1
million of goodwill and $3.2 million of other intangible assets were acquired in
June  2002  in  connection  with  the  Stonehouse  Acquisition  (see  Note  2 to
Consolidated Financial Statements).  Amortization of other intangible assets for
the three and six months ended June 30, 2002 was $35,000.


<PAGE> 16


(6)  BORROWINGS

  Revolving Bank Credit Facilities

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

Since the fourth  quarter of 2000,  the Company had not been in compliance  with
its minimum net worth and net income requirements under the Bank Line of Credit.
Effective  February 4, 2002,  the bank increased the interest rate to prime plus
3.5% and advised  the  Company  that it did not intend to renew the Bank Line of
Credit. As of June 30, 2002, the outstanding  balance of the Bank Line of Credit
had been  reduced to $450,000 and as of July 30,  2002,  the entire  outstanding
balance was repaid.  The Company is  currently  negotiating  with a  replacement
lender and expects to be able to complete a new bank credit  facility during the
third quarter of 2002; however, there is no assurance that it will be successful
in obtaining such a facility on terms acceptable to the Company, if at all.

Stonehouse  has a revolving  bank credit  facility (the  "Stonehouse  Revolver")
under which  Stonehouse  may borrow up to $500,000,  payable  upon demand,  with
interest  at prime  plus 1%  (5.75%  at June 30,  2002).  Borrowings  under  the
Stonehouse  Revolver are collateralized by accounts receivable and certain other
assets of Stonehouse  and  guaranteed by PTG and PUSA. The Company has agreed to
use it's best  efforts to cause the  guarantees  to be released by  September 5,
2002 and has provided an indemnification to PTG and PUSA on their guarantees. At
June 30, 2002, the outstanding  principal balance under the Stonehouse  Revolver
was $200,000.

        Other Borrowings

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

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

Notes payable to Mr. Levy, interest
  ranging from 8%-10% per annum,
  maturing on various dates from
  December 2002 through June 2003 (b)          $2,123          $  650

Other notes payable, interest ranging
  from 8%-10% per annum, maturing on
  various dates from December 2002
  through June 2003 (c)                         1,286             450
                                               ------          ------
                                               $3,409          $1,100
                                               ======          ======
Long-term:

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

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


<PAGE> 17


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

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

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

(7)  EXTRAORDINARY GAIN (LOSS) FROM DEBT EXTINGUISHMENT

During the three and six months  ended June 30, 2002,  the Company  recognized a
$137,000  extraordinary gain from negotiated discounts with vendors.  During the
three and six months  ended June 30,  2001,  the Company  recognized  a $362,000
extraordinary  loss,  representing  the  unamortized  discount on certain  notes
payable exchanged for preferred stock.

(8)  FAIR VALUE OF OPTION GRANTED TO CUSTOMER

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

In  connection   with  its  efforts  to  develop  further   strategic   business
relationships  with  PEWC,  effective  March 1,  2002,  the  Company  granted  a
subsidiary  of PEWC an option to purchase up to thirty (30) million newly issued
shares of the  Company's  common  stock for a purchase  price of $.40 per share,
expiring on November 30, 2002.  The option was valued at $670,000 as of the date
of grant based on the Black-Scholes option-pricing model and other provisions of
SFAS 123 and related  EITF  guidance.  This amount was recorded as an expense in
the accompanying Statement of Operations for the six months ended June 30, 2002.


<PAGE> 18


(9) INCOME TAXES

The  Company  accounts  for  income  taxes in  accordance  with SFAS 109,  which
requires  recognition  of deferred tax assets and  liabilities  for the expected
future tax  consequences  of events  that have been  included  in the  financial
statements  or tax  returns.  Under  the SFAS 109 asset  and  liability  method,
deferred tax assets and  liabilities  are  determined  based upon the difference
between the financial  statement and tax bases of assets and  liabilities  using
enacted  tax rates in  effect  for the  year(s)  in which  the  differences  are
expected to reverse.

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

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

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

(10) SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS

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

Following the  Acquisition,  the Company began operating under a second business
segment, Telecommunication  Software/Services.  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 June 30, 2002,  sales to two customers  accounted for 40% and
15% of the Company's sales.  During the six months ended June 30, 2002, a single
customer  accounted for 34% of the Company's  sales. In the three and six months
ended June 30, 2001,  no single  customer  accounted for greater than 10% of the
Company sales.  Sales to geographic  areas other than the United States have not
been significant.

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


<PAGE> 19


                                         Storage      Telecommunication
                                        Solutions     Software/Services

                                     -------------   --------------------

Revenues                                 $ 2,028           $  423

Gross (loss) margin                      $   (96)          $  196

Net loss before preferred
 stock dividends and
 extraordinary gain                     ($ 1,931)         ($   12)

Net loss applicable
 to common stock                        ($ 1,794)         ($   12)


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

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

                              Results of Operations

For the three  months  ended June 30,  2002 and 2001,  we incurred a net loss of
$1.8  million  and $3.9  million,  respectively.  We incurred a net loss of $6.6
million  and $7.3  million  for the six  months  ended  June 30,  2002 and 2001,
respectively.  Included  in the net loss for the six months  ended June 30, 2002
were $1.1 million in realized losses on marketable securities, a $670,000 charge
for  the  fair  value  of  an  option  granted  to a  customer  and  a  $137,000
extraordinary  gain from debt  extinguishment.  Included in the net loss for the
three and six months ended June 30, 2001 was a $362,000  extraordinary loss from
debt extinguishment.


<PAGE> 20


Sales

Sales  for the three and six  months  ended  June 30,  2002  decreased  to $2.45
million and $4 million,  respectively,  from $3.95 million and $10.2 million for
the same periods in 2001,  respectively.  Included in sales for the 2002 periods
was $423,000  attributable to Stonehouse following our acquisition in June 2002.
The  significant  decrease in sales  reflects the economic  downturn,  which has
caused customer delays in purchasing technology and other equipment.  During the
six months  ended June 30,  2002,  sales  revenues  attributable  to our storage
business,  included  $1.5 million in direct sales to end users and $2 million in
indirect sales to OEMs, value-added resellers (VARs) and other channel business,
representing 42% and 56%, respectively. During the corresponding period in 2001,
direct,   indirect  and  service   revenues   represented   27%,  56%,  and  17%
respectively,  of our sales revenues.  In August 2001, we sold substantially all
of our service  revenue  business;  accordingly,  service  revenues for 2002 are
insignificant.

Cost of Sales/Gross Margins

Gross margins decreased to 4% and 0% for the three and six months ended June 30,
2002,  respectively,  as compared  to 23% and 26% for the same  periods in 2001,
respectively.  Gross  margins for 2002 were  positively  affected by a 46% gross
margin  attributable  to  $423,000 of  Stonehouse  revenues  for June 2002.  The
decrease in gross  margin  percentage  was  primarily  due to economies of scale
attributable  to the level of fixed costs  inherent in our operations as well as
the  price  we paid  for  materials,  coupled  with  significantly  lower  sales
revenues.  Our gross  margins are  dependent,  in part,  on product  mix,  which
fluctuates from time to time.

See Note 1 to Consolidated  Financial Statements regarding expected future gross
margin  improvements  attributable  to a new  manufacturing  outsource  contract
effective in July 2002.

Operating Expenses

Selling, General and Administrative (SG&A)

Selling,  general and administrative expenses decreased to $1.1 million and $2.6
million for the three and six months  ended June 30,  2002,  respectively,  from
$2.8 million and $6.1 million for the same periods in 2001,  representing  a 60%
and 57% decline for each  period,  respectively.  The  significant  decrease was
primarily  the result of the  reduction  of our  overall  work force and related
costs (including  occupancy)  partially offset by an additional $173,000 in SG&A
costs resulting from the Stonehouse Acquisition in June 2002.

Research and Development

Research and development expenses for the three and six month periods ended June
30, 2002 were $650,000 and $1.4 million,  respectively,  as compared to $892,000
and $2  million  for the  same  periods  in 2001.  The  decrease  was  primarily
attributable  to costs  incurred in 2001 as a result of the  development  of our
4000 Series product line. We believe that  considerable  investments in research
and  development  will be required to remain  competitive  and expect that these
expenses will increase in future periods.

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


<PAGE> 21


Depreciation and Amortization

Depreciation  and  amortization for the three and six months ended June 30, 2002
was $350,000 and  $593,000,  respectively,  as compared to $368,000 and $851,000
for  2001,   respectively.   The  decrease  reflects  the   discontinuation   of
amortization of goodwill  pursuant to the  implementation  of SFAS 142 effective
January 1, 2002 (see Note 5 to Consolidated  Financial  Statements).  During the
three and six months ended June 30, 2001,  amortization of goodwill  amounted to
$101,000 and $201,000, respectively.

Interest Expense

Interest expense decreased to $120,000 and $257,000 for the three and six months
ended June 30, 2002,  from  $328,000 and  $654,000  for the  corresponding  2001
period.  This decrease is  attributable  to lower average  borrowings  and lower
interest rates.

Preferred Stock Dividends

Preferred  stock  dividends  were $444,000 and  $629,000,  for the three and six
months ended June 30, 2001,  respectively.  Effective  November 20, 2001, all of
the Company's then remaining convertible preferred stock was converted to common
stock pursuant to the Halco  Investment  (see Note 3 to  Consolidated  Financial
Statements). Accordingly, there were no preferred stock dividends in 2002.

The  Series  L  Convertible  Preferred  Stock  issued  in  connection  with  the
Stonehouse Acquisition in June 2002 is not entitled to receive dividends.

                         Liquidity and Capital Resources

The accompanying  consolidated  financial statements have been prepared assuming
that we will continue as a going concern.  This  contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.  We
incurred  net losses of $14  million,  $21.9  million and $18.7  million for the
years ended December 31, 2001, 2000 and 1999, respectively, and $6.6 million for
the six months  ended June 30,  2002.  In  addition,  we have  negative  working
capital at June 30, 2002. These matters,  among others,  raise substantial doubt
about our ability to continue as a going concern.

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

Consolidated Statements of Cash Flows

        Operating Activities

Net cash  provided by  operating  activities  amounted  to $642,000  for the six
months ended June 30, 2002. The most  significant  use of cash was our loss from
operations  (before changes in assets and  liabilities) of $877,000 (net of $3.1
million of cash proceeds from the sale of marketable securities), which was more
than offset by  reductions in accounts  receivable  ($638,000)  and  inventories
($799,000).  Inventory  reductions have been  effectuated in connection with our
new  manufacturing  outsource  contract in July 2002 (see Note 1 to Consolidated
Financial Statements).


<PAGE> 22


Net cash used by  operating  activities  for the six months  ended June 30, 2001
amounted to $4.7  million with the most  significant  use of cash being our loss
from operations (before changes in assets and liabilities) of $5.9 million.  The
operating  loss was offset by an  aggregate  reduction  in accounts  receivable,
inventories  and  prepayments of $2.2 million,  net of a $1 million  decrease in
account payable and other liabilities.

        Investing Activities

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

        Financing Activities

Net cash used in financing activities for the six months ended June 30, 2002 was
$1.1  million,  consisting  of a $2.5 million net  reduction of our Bank Line of
Credit, partially offset by $1.5 million of borrowings from Mr. Levy.

Net cash provided by financing activities for the six months ended June 30, 2001
amounted to $4.9 million and  primarily  consisted of borrowings of $5.6 million
from private  investors  (including  $2.7 million from Mr. Levy),  of which $4.4
million was satisfied by the issuance of  convertible  preferred  stock in April
2002 and $250,000 from the issuance of convertible  preferred  stock,  partially
offset by a net reduction of our Bank Line of Credit of $1 million.

        American Stock Exchange ("AMEX")

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

                   Critical Accounting Policies and Estimates

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

Our  preliminary  allocation  of the  Stonehouse  purchase  price  included $6.1
million in goodwill and $3.2 million in other  intangible  assets in  accordance
with SFAS 141. These values were based on a valuation  analysis  completed by an
independent  valuation  firm. In addition,  we have  unamortized  goodwill of $2
million  that arose from an  acquisition  in 2000.  Goodwill  will be tested for
possible  impairment at least on an annual basis in accordance with SFAS No. 142
(see Note 5 to Consolidated Financial Statements).


<PAGE> 23


The  preparation  of  financial   statements,   in  conformity  with  accounting
principles generally accepted in the United States,  requires management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting  period.  Actual results could differ from these estimates.
Results for the interim  periods  presented  in this report are not  necessarily
indicative of results that may be reported for any other  interim  period or for
the entire fiscal year.

Effect of Inflation

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


Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Currently  we do not  have  debt  that  is  tied  to  floating  interest  rates.
Therefore,  at this time we are not subject to risk  arising  from  increases in
interest rates.


Part II  -  OTHER INFORMATION

Item 1.  Legal Proceedings

Not Applicable


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

In connection with the Stonehouse Acquisition in June 2002, we issued 22,500,000
shares of common stock and 1,000 shares of Series L Convertible Preferred Stock,
which  is  convertible  into  4,527,027  shares  of  common  stock,  subject  to
shareholder approval.

All of the foregoing  issuances were exempt from registration under section 4(2)
of the Act.


Item 3.  Defaults Upon Senior Securities

Not applicable


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

Not applicable


<PAGE> 24


Item 5.  Other Information

Not applicable

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

(a)     Exhibits:

2.1  Stock Purchase  Agreement  dated June 7, 2002 by and among the  Registrant,
     Pacific USA Holdings Corp.,  Pacific  Technology Group, Inc. and Stonehouse
     Technologies, Inc. (3)

4.1  Certificate of Designation of Series L Convertible Preferred Stock (3)

4.2  Stockholders' Agreement dated June 7, 2002 by and among the Registrant,  H.
     Irwin Levy,  Hilcoast  Development  Corp., MLL Corp.,  Maurice A. Halperin,
     Halco Investments, L.C. and Pacific Technology Group, Inc. (3)

4.3  Registration  Rights  Agreement  dated June 7, 2002 between  Registrant and
     Pacific Technology Group, Inc. (3)

4.4  8% Convertible  Subordinated Promissory Note for $3,100,000,  dated June 7,
     2002, between Registrant and Halco Investments, L.C. (3)

10.1 Working  Capital  Assurance  Agreement   dated June 7, 2002, by and between
     Registrant and Hilcoast Development Corp. (3)

10.2 Employment  Agreement   dated  June 7,  2002,  between  John E.  Gates  and
     Stonehouse. (3)

10.3 Form of Agreement between Registrant and Hilcoast Development Corp. (2)

10.4 Promissory Note for $750,000  between  Registrant and Hilcoast  Development
     Corp., dated June 14, 2002 (1)

10.5 Promissory Note for $500,000  between  Registrant and Hilcoast  Development
     Corp., dated May 18, 2002 (1)

10.6 Convertible  Promissory Note for $650,000  between  Registrant and H. Irwin
     Levy, dated June 14, 2002. (1)

     (1)  Filed herewith.

     (2)  Incorporated by reference to the Exhibits previously filed as Exhibits
          to the Registrant's Form 8-K filed April 12, 2002.

     (3)  Incorporated by reference to the Exhibits previously filed as Exhibits
          to the Registrant's 8-K filed June 21, 2002.

(b)     Reports on Form 8-K:

A report on Form 8-K dated April 10, 2002 was filed  April 12,  2002,  reporting
under Item 2 - Disposition of Assets, in which the Registrant  reported the sale
of its remaining marketable securities.

A report on Form 8-K dated  March 1, 2002 was  filed  June 21,  2002,  reporting
under (i) Item 2 - Acquisition or Disposition of Assets, in which the Registrant
reported the acquisition of 100% of the outstanding  capital stock of Stonehouse
Technologies, Inc. on June 7, 2002, and (ii) Item 5 - Other Events, in which the
Registrant  reported (a) the grant of an option in March 2002 to an affiliate of
Stonehouse,  and (b) an employment  agreement in connection  with the Stonehouse
Acquisition.

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


                                    SIGNATURE

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

                             nSTOR TECHNOLOGIES, INC.
                                   (Registrant)

                                 /s/ Thomas L. Gruber

August 13, 2002           ---------------------------------
                           Thomas L. Gruber,
                           Acting President, Chief Operating
                           and Financial Officer