Nstor Technologies Inc – ‘PRER14A’ on 8/28/02

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Revised Preliminary Proxy Solicitation Material   —   Schedule 14A
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: PRER14A     Revised Proxy Statement                              102    473K 
 2: EX-10       Exhibit 10.1 Amendment Ot 2001 Sop                     1      4K 

PRER14A   —   Revised Proxy Statement
Document Table of Contents

PRER14A
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SCHEDULE 14A
 INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

 Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934

 Filed by the Registrant [x]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:                                                      

[x] Preliminary proxy statement                                                 
[ ] Confidential, for Use of the Commission Only                                
(as permitted by Rule 14a-6(e)(2))                                  
[ ] Definitive proxy statement                                                  
[ ] Definitive Additional Materials                                             
[ ] Soliciting Material Pursuant to/section/240.14a-11(c) or /section/240.14a-12

nSTOR TECHNOLOGIES, INC.
------------------------
(Name of Registrant as Specified in Its Charter)

 (Name of Persons(s) Filing proxy statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):                              

[x] No fee required.                                                            

[ ] Fee computed on the table below per Exchange Act Rules 14a-6(i)(4) and      
0-11.                                                           

        (1) Title of each  class of  securities  to  which  transaction applies:
        (2) Aggregate  number  of  securities  to  which  transaction   applies:
        (3) Per unit price or other  underlying  value of  transaction  computed
            pursuant  to  Exchange  Act Rule 0-11 (set forth the amount on which
      the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:            
(5) Total fee paid:                                             

[ ] Fee paid previously with preliminary materials.                             

[ ] Check  box if  any part of the fee is offset as  provided  by  Exchange  Act
    Rule  0-11(a)(2)  and identify the filing for which the  offsetting  fee was
    paid  previously.  Identify the previous  filing by  registration  statement
number, or the Form or Schedule and the date of its filing.             

(1) Amount previously paid:                                     
(2) Form, Schedule or Registration Statement No.:               
(3) Filing Party:                                               
(4) Date:                                                       
(5) Filed:                                                      

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nSTOR TECHNOLOGIES, INC.
 10140 Mesa Rim Road
 San Diego, California 92121

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
 TO BE HELD ON OCTOBER 8, 2002
----------------------------------------

To the Stockholders of                                                          
nStor Technologies, Inc.                                                        

The board of directors  of nStor  Technologies,  Inc.  invites you to attend the
2002 annual meeting of  Stockholders  of nStor to be held on October 8, 2002, at
10:00 a.m., local time, at The Hilton Palm Beach Airport, 150 Australian Avenue,
West Palm Beach, Florida for the following purposes,  all of which are described
more completely in the accompanying proxy statement:                            

(1)  To approve the  issuance  of the  following  shares of our common  stock to
     Pacific  Technology  Group, Inc. in connection with our acquisition of 100%
     of the outstanding capital stock of Stonehouse  Technologies,  Inc. on June
     7,  2002:  (a)  4,527,027  shares  upon  the  conversion  of our  Series  L
     Convertible  Preferred  Stock,  and (b) up to 8,687,258  shares as earn-out
consideration;                                                        

(2)  To approve the issuance of shares of our common stock to Halco  Investments
     L.C., an entity controlled by Maurice  Halperin,  the chairman of our board
     of directors,  in connection with the potential  conversion of a $3,100,000
     promissory  note in order to  maintain  our listing on The  American  Stock
Exchange;                                                             

(3)  To approve the issuance of shares of our common stock to H. Irwin Levy, the
     vice-chairman of our board of directors and our chief executive officer, in
     connection with the potential  conversion of a $650,000  promissory note in
order to maintain our listing on The American Stock Exchange;         

(4)  To approve the issuance of up to 30,000,000 shares of our common stock upon
     the potential exercise of an option granted to Pacific Technology Services,
Inc.;                                                                 

(5)  To approve an amendment to our certificate of incorporation  increasing the
     number  of  authorized   shares  of  common  stock  from   200,000,000   to
230,000,000;                                                          

(6)  To amend  nStor's  2001 Stock  Option Plan to increase the number of shares
reserved for issuance under the Plan from 5,000,000 to 7,500,000;     

(7)  To elect five  persons to our board of  directors  to hold office until our
     next annual  meeting of  stockholders  or until their  successors  are duly
elected and qualified;                                                

(8)  To ratify the  re-appointment  of Swenson  Advisors LLP,  certified  public
accountants, as our independent auditors for 2002; and                

(9)  To  transact  such other  business as may  properly  come before the annual
meeting and any adjournments or postponements thereof.                

        Approval  of  proposals  2 and 3 is  conditioned  upon the  approval  of
proposal  5. If proposal 5 is not  approved,  proposals 2 and 3 will also not be
approved even if proposals 2 and 3 receive the requisite stockholder approval.  

        Current  stockholders  who own,  as of the  record  date,  shares of our
common stock representing  approximately 47% of our outstanding common stock, or
56% of our outstanding  common stock excluding shares held by Pacific Technology
Group,   Inc.  or  its  affiliates,   have  executed  proxies   instructing  the
proxyholders  to vote in favor of  proposals  1 and 4. As a result,  approval of
proposal 1 is assured.                                                          

        The board of  directors  has fixed the close of  business  on August 12,
2002 as the record date for determining  those  stockholders  entitled to notice
of, and to vote at, the annual  meeting and any  adjournments  or  postponements
thereof.                                                                        

        Whether or not you expect to be present,  please promptly mark, sign and
date the enclosed proxy and return it in the enclosed pre-addressed envelope. No
postage is required if mailed in the United States.                             

                                By Order of the board of directors
                        Orilla F. Floyd, Secretary
West Palm Beach, Florida                                                        
September 11, 2002                                                              

ALL STOCKHOLDERS ARE INVITED TO ATTEND THE MEETING IN PERSON. THOSE STOCKHOLDERS
WHO ARE  UNABLE TO ATTEND  ARE  RESPECTFULLY  URGED TO  EXECUTE  AND  RETURN THE
ENCLOSED  PROXY CARD AS PROMPTLY AS POSSIBLE.  STOCKHOLDERS  WHO EXECUTE A PROXY
CARD MAY  NEVERTHELESS  ATTEND THE  MEETING,  REVOKE  THEIR PROXY AND VOTE THEIR
SHARES IN PERSON.                                                               

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 TABLE OF CONTENTS

                                                                            Page

PURPOSES OF THE MEETING........................................................1

SUMMARY TERM SHEET.............................................................3

GENERAL INFORMATION ABOUT THE MEETING AND VOTING...............................5

FORWARD LOOKING STATEMENTS.....................................................7

OUTSTANDING VOTING SECURITIES AND VOTING RIGHTS................................7

SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS.................8

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934...........9

PROPOSALS.....................................................................10

MANAGEMENT....................................................................29

EXECUTIVE COMPENSATION........................................................33

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................37

OTHER BUSINESS................................................................39

INFORMATION CONCERNING STOCKHOLDER PROPOSALS..................................39

GENERAL.......................................................................40

ANNEX 1        QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED              
               JUNE 30, 2002................................................A1-1

ANNEX 2        CURRENT REPORT ON FROM 8-K/A FILED WITH THE SECURITIES           
               AND EXCHANGE COMMISSION ON AUGUST 13, 2002...................A2-1

ANNEX 3        AUDIT COMMITTEE CHARTER......................................A3-1

ANNEX 4        TEXT OF PROPOSED AMENDMENT TO CERTIFICATE                        
               OF INCORPORATION.............................................A4-1

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 2002 ANNUAL MEETING OF STOCKHOLDERS
OF
nSTOR TECHNOLOGIES, INC.
 -----------------------------

 PROXY STATEMENT

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

        This proxy statement is furnished in connection with the solicitation by
our board of  directors  of proxies  from the holders of our common  stock,  par
value $.05 per share,  for use at our 2002 annual meeting of our Stockholders to
be held at 10:00 a.m.,  local time, on October 8, 2002, at The Hilton Palm Beach
Airport,   150  Australian  Avenue,   West  Palm  Beach,   Florida,  or  at  any
adjournment(s)  or  postponement(s),  pursuant to the enclosed  Notice of Annual
Meeting of Stockholders.                                                        

        The  approximate  date that this proxy  statement and the enclosed proxy
are first being sent to stockholders is September 11, 2002.  Stockholders should
review the information  provided in this proxy statement in conjunction with our
Form 10-K,  as amended,  for the year ended  December  31, 2001.  Our  executive
offices are located at 10140 Mesa Rim Road, San Diego, California 92121, and our
telephone number is (858) 453-9191.                                             

 PURPOSES OF THE MEETING

        At the annual meeting,  our stockholders will consider and vote upon the
following matters:                                                              

     (1)  To approve the issuance of the following shares of our common stock to
          Pacific  Technology  Group, Inc. in connection with our acquisition of
          100% of the outstanding capital stock of Stonehouse Technologies, Inc.
          on June 7, 2002:  (a)  4,527,027  shares  upon the  conversion  of our
          Series L Convertible  Preferred  Stock, and (b) up to 8,687,258 shares
as earn-out consideration;                                  

     (2)  To approve  the  issuance  of shares of our common  stock  issuable to
          Halco  Investments  L.C.  ("Halco"),  an entity  controlled by Maurice
          Halperin,  the chairman of our board of directors,  in connection with
          the potential  conversion of a $3,100,000  promissory note in order to
     maintain our listing on The American Stock Exchange (the "AMEX");

     (3)  To approve  the  issuance  of shares of our  common  stock to H. Irwin
          Levy,  the  vice-chairman  of our  board of  directors  and our  chief
          executive  officer,  in connection with the potential  conversion of a
          $650,000 promissory note in order to maintain our listing on the AMEX;

     (4)  To approve the issuance of up to 30,000,000 shares of our common stock
          upon the potential exercise of an option granted to Pacific Technology
Services, Inc.;                                             

     (5)  To approve an amendment to our certificate of incorporation increasing
          the number of authorized  shares of common stock from  200,000,000  to
230,000,000;                                                

     (6)  To amend  nStor's  2001 Stock  Option Plan to  increase  the number of
          shares  reserved  for  issuance  under  the  Plan  from  5,000,000  to
7,500,000;                                                  

     (7)  To elect five  persons to our board of  directors to hold office until
          our next annual meeting of stockholders or until their  successors are
duly elected and qualified;                                 

     (8)  To ratify the re-appointment of Swenson Advisors LLP, certified public
accountants, as our independent auditors for 2002; and      

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     (9)  To transact such other business as may properly come before the annual
          meeting and any  adjournments  or  postponements  thereof.  We are not
          aware of any other  business,  which  will be voted upon at the annual
meeting.                                                    

        Approval  of  proposals  2 and 3 is  conditioned  upon the  approval  of
proposal  5. If proposal 5 is not  approved,  proposals 2 and 3 will also not be
approved even if proposals 2 and 3 receive the requisite stockholder approval.  

        Once you have completed the enclosed proxy,  sign and date the proxy and
mail it back to us in the  enclosed  envelope.  The  giving of a proxy  does not
preclude you from voting in person at the annual meeting.  Stockholders  have an
unconditional right to revoke their proxy at any time prior to exercise,  either
in person at the annual  meeting or by filing with our  Secretary at our offices
located at 100  Century  Boulevard,  West Palm  Beach,  Florida  33417 a written
revocation  or duly  executed  proxy  bearing  a later  date.  However,  no such
revocation will be effective  unless we receive written notice of the revocation
or a duly executed proxy bearing a later date at or prior to the annual meeting.

        We will bear the cost of  preparing,  assembling  and mailing this proxy
statement,  the notice of annual meeting of Stockholders and the enclosed proxy.
In  addition to the use of mail,  our  directors,  officers  and  employees  may
solicit  proxies  personally  and by  telephone.  Those  persons will receive no
compensation for soliciting  proxies other than their regular  compensation.  We
may request banks,  brokers and other  custodians,  nominees and  fiduciaries to
forward  copies  of the  proxy  material  to  their  principals  and to  request
authority for the execution of proxies.  We may reimburse such persons for their
expenses in so doing.                                                           

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Summary Term Sheet

        This summary describes the material terms of Proposal 1 that you will be
voting on at the annual meeting. Proposal 1 relates to the issuance of shares of
our common stock in connection with our acquisition of Stonehouse  Technologies,
Inc. It also  describes  the material  terms of our  acquisition  of  Stonehouse
Technologies,  Inc.  You will not be voting on the  acquisition,  which has been
completed,  but we are describing its material terms because the shares that are
the subject of Proposal 1 are issuable in connection  with the  acquisition.  To
better understand Proposal 1 and the acquisition, as well as the other proposals
that you are voting on at the annual  meeting,  you should  carefully  read this
entire document, its attachments and the other documents to which we refer.     

When did we acquire Stonehouse Technologies, Inc.?                              

        On June 7, 2002, we acquired  all of the  outstanding  capital  stock of
Stonehouse  Technologies,  Inc. and  Stonehouse  Technologies,  Inc.  became our
wholly-owned subsidiary. See "Proposal 1 - The Stonehouse Acquisition."         

What was the purchase price for Stonehouse Technologies, Inc.?                  

        In exchange for all the capital stock of Stonehouse Technologies,  Inc.,
on June 7, 2002 we issued 22,500,000 shares of our common stock and 1,000 shares
of our Series L Preferred  Stock to Pacific  Technology  Group,  Inc.,  the sole
shareholder of Stonehouse  Technologies,  Inc. In addition,  we are obligated to
issue up to 8,687,258 shares of common stock as additional  consideration in the
acquisition  (the  "Earn-Out  Shares")  to Pacific  Technology  Group,  Inc.  if
Stonehouse  Technologies,  Inc.'s  income before income taxes (as defined in the
stock purchase  agreement) exceeds $1,000,000 during the four quarters beginning
on October 1, 2002. See "Proposal 1 - The Stonehouse Acquisition."              

What are stockholders  being asked to vote on with respect to the acquisition of
Stonehouse Technologies, Inc.?                                                  

        Stockholders  are being asked to approve  the  issuance of shares of our
common  stock  upon  conversion  of the  Series L  Preferred  Stock we issued in
connection  with  our  acquisition  of  Stonehouse  Technologies,  Inc.  and the
issuance of Earn-Out  Shares,  to the extent we are  required to issue  Earn-Out
Shares.  The Series L Preferred Stock is not initially  convertible  into common
stock.  However,  we are asking you to approve the  conversion  of each share of
Series L Preferred Stock into 4,527.027 shares of common stock. In addition,  we
are asking you to approve  the  issuance of  Earn-Out  Shares if certain  income
thresholds  are  met by  Stonehouse  Technologies,  Inc.  See  "Proposal  1 -The
Stonehouse Acquisition."                                                        

Why do  stockholders  have to approve the  conversion  of the Series L Preferred
Stock and the issuance of the Earn-Out Shares?                                  

        We issued  22,500,000  shares of our common stock to Pacific  Technology
Group,  Inc. upon the closing of the  acquisition  of  Stonehouse  Technologies,
Inc., which represented approximately 19.6% of our outstanding common stock. The
rules of AMEX  require that our  stockholders  approve the issuance of more than
20% of our  common  stock in an  acquisition.  The  conversion  of the  Series L
Preferred  Stock  and  the  issuance  of  the  Earn-Out  Shares  will  represent
approximately  9.6%. Because the issuance of common stock upon conversion of the
Series L Preferred Stock and as Earn-Out Shares, when combined with the original
22,500,000  shares  we  issued  in  the  acquisition,  will  exceed  20%  of our
outstanding  shares, we are required to seek stockholder  approval before we can
issue those shares. See "Proposal 1 - Stockholder Approval Required."           

Why was  stockholder  approval not required for the  acquisition  of  Stonehouse
Technologies, Inc.?                                                             

        Under Delaware law,  stockholder approval was not required in connection
with the  acquisition.  The rules of AMEX did not require  stockholder  approval
because  we  issued  less than 20% of our  common  stock at the  closing  of the
transaction,  and the Series L  Preferred  Stock  cannot be  converted,  and the
Earn-Out Shares cannot be issued,  unless we obtain  stockholder  approval.  See
"Proposal 1 - Stockholder Approval Required."                                   

What is the board of directors' recommendation on how to vote?                  

        Our board of  directors  recommends  that you vote for the  approval  of
Proposal 1. See "Proposal 1 - Recommendation of the Board of Directors."        

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What effects will the proposed issuances of common stock have on stockholders?  

        The proposed  issuances of common stock upon  conversion of the Series L
Preferred  Stock and issuance of the Earn-Out  Shares will result in dilution in
the percentage  ownership  interest of our existing  stockholders.  We currently
have  137,549,920  shares of our common stock  outstanding.  If our stockholders
approve  Proposal  1, the  Series  L  Preferred  Stock  will be  converted  into
4,527,027  shares of our common stock and we may issue an  additional  8,687,258
shares of our common  stock as Earn-Out  Shares.  We will then have  150,764,205
shares outstanding,  and the common stock issued upon conversion of the Series L
Preferred Stock and as Earn-Out Shares will represent  approximately  8.76%. See
"Proposal 1 - Effect of Stock Issuances."                                       

        Pacific Technology Group,  Inc.,  which  was  the  owner  of  Stonehouse
Technologies,  Inc.  and  received  22,500,000  shares of common stock and 1,000
shares of the Series L Preferred  Stock in the  acquisition,  beneficially  owns
approximately 16.4% of our currently  outstanding common stock. In addition,  an
affiliate  of  Pacific  Technology  Group,  Inc.  has the  right to  receive  an
additional  30,000,000  shares  upon the  exercise of an option.  See  "Security
Ownership of Management and Certain Beneficial Owners."                         

Who is entitled to vote on Proposal 1?                                          

        Only the holders of shares of our common  stock are  entitled to vote on
Proposal  1. The  holders  of the  Series  L  Preferred  Stock  will not vote on
Proposal 1. Further,  under the rules of AMEX , Pacific  Technology  Group, Inc.
will not be able to vote the 22,500,000  shares of common stock it received upon
the completion of the acquisition of Stonehouse  Technologies,  Inc. in favor of
Proposal 1. See "Outstanding  Voting Securities and Voting Rights" and "Proposal
1 - Vote Required."                                                             

What vote is required to approve Proposal 1?                                    

        AMEX rules require that in order to approve the proposal, a  majority of
the votes cast by our stockholders, other than Pacific Technology Group, Inc. or
its affiliates, must approve the proposal. See "Proposal 1 - Vote Required."    

Have any stockholders agreed to vote in favor of Proposal 1?                    

        Current  stockholders  who own  approximately  56% of the  shares of our
common stock held by stockholders,  other than Pacific Technology Group, Inc. or
its affiliates,  have given their proxy  instructing the proxy holder to vote in
favor of  Proposal  1. As a result,  approval  of  Proposal  1 is  assured.  See
"Proposal 1 - The Stonehouse Acquisition."                                      

        In addition,  these  stockholders  entered into an agreement with us and
Pacific  Technology  Group, Inc. which provides that these  stockholders  cannot
sell,  pledge or otherwise  transfer 80% of their shares unless they first offer
to sell,  pledge or transfer such shares to Pacific  Technology Group, Inc. upon
the same terms. Further,  these stockholders have agreed to vote to elect to our
board of  directors  at our annual  meetings of  stockholders  two  designees of
Pacific USA Holdings Corp., the parent  corporation of Pacific Technology Group,
Inc. As of the date of this proxy statement,  Pacific USA Holdings Corp. has not
named its  designees.  This  stockholders'  agreement  terminates  when  Pacific
Technology  Group,  Inc.,  Pacific USA Holdings  Corp.  and their  affiliates no
longer own at least 5% of our common  stock.  See  "Proposal 1 - The  Stonehouse
Acquisition."                                                                   

What do I need to do now?                                                       

        First, read this proxy statement  carefully.  Then, as soon as possible,
you should submit your proxy by executing and returning the enclosed proxy card.
Your  shares  represented  by  proxy  will be  voted  in  accordance  with  your
directions.  If you submit a proxy, but have not specified any directions,  your
shares  will be  voted  FOR  approval  of all of the  proposals  in  this  proxy
statement, including proposal 1. See "Purposes of the Meeting."                 

Who can help answer my questions?                                               

        If you have any questions  concerning  Proposal 1, any other proposal or
the annual meeting,  if you would like additional  copies of the proxy statement
or if you will need special assistance at the meeting, please call Orilla Floyd,
our Secretary, at 561-640-3145.                                                 

        The summary  information  provided above in "question and answer" format
is merely a brief  description of material  information  contained in this proxy
statement.                                                                      

YOU SHOULD CAREFULLY READ THIS PROXY STATEMENT
(INCLUDING THE ATTACHMENTS) IN ITS ENTIRETY.

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 GENERAL INFORMATION ABOUT THE ANNUAL MEETING AND VOTING

Why did you send me this proxy statement?                                       

        We sent you this proxy statement and the enclosed proxy card because our
board of directors is soliciting  your proxy to vote at the 2002 annual  meeting
of  stockholders.  This proxy  statement  summarizes the information you need to
know to vote at the annual meeting on October 8, 2002, and at any adjournment of
the meeting,  for the purposes  indicated in the  accompanying  Notice of Annual
Meeting of Stockholders.  However,  you do not need to attend the annual meeting
to vote your  shares.  Instead,  you may  simply  complete,  sign and return the
enclosed proxy card.                                                            

        This proxy statement and the  accompanying  proxy card will be mailed to
stockholders on or about September 11, 2002.                                    

Who can vote?                                                                   

        You can vote your shares of common  stock if our  records  show that you
owned the  shares at the  close of  business  on  August  12,  2002.  A total of
137,549,920  shares of common stock can vote at the annual meeting.  You get one
vote for each share of common stock you own.                                    

How do I vote by proxy?                                                         

        Follow  the  instructions  on the  enclosed  proxy  card to vote on each
proposal to be  considered at the annual  meeting.  Sign and date the proxy card
and mail it back to us in the enclosed  envelope.  The proxyholders named on the
proxy  card will vote your  shares as you  instruct.  If you sign and return the
proxy card but do not vote on a proposal,  the proxyholders will vote for you on
that proposal. Unless you instruct otherwise, the proxyholders will vote FOR the
issuance  of common  stock in  connection  with the  acquisition  of  Stonehouse
Technologies,  Inc.,  FOR the  issuance  of common  stock upon  conversion  of a
$3,100,000  promissory note, FOR the issuance of common stock upon conversion of
a $650,000 promissory note, FOR the issuance of common stock upon exercise of an
option  granted to Pacific  Technology  Group,  Inc.,  FOR the  amendment to our
certificate of  incorporation to increase the number of authorized  shares,  FOR
the  amendment  to our 2001 Stock  Option  Plan,  FOR each of the five  director
nominees, FOR the ratification of the re-appointment of Swenson Advisors, LLP as
our  independent  auditors for 2002,  and will use their judgment to vote FOR or
AGAINST any other proposals to be considered at the meetings.                   

What if other matters come up at the annual meeting?                            

        The matters  described in this proxy  statement  are the only matters we
know will be voted on at the  annual  meeting.  If other  matters  are  properly
presented at the  meeting,  the  proxyholders  will vote your shares as they see
fit.                                                                            

Can I change my vote after I return my proxy card?                              

        Yes. At any time before the vote on a proposal, you can change your vote
either by giving our corporate  secretary a written  notice  revoking your proxy
card, signing,  dating and returning to us a new proxy card, or by attending the
annual  meeting  and  voting in  person.  We will  honor the proxy card with the
latest date.                                                                    

Can I vote in person at the annual  meeting  rather than by completing the proxy
card?                                                                           

        Although  we  encourage  you to  complete  and  return the proxy card to
ensure  that your vote is  counted,  you can attend the annual  meeting and vote
your shares in person.                                                          

What do I do if my shares are held in "street name"?                            

        If your  shares  are held in the name of your  broker or other  nominee,
that party should give you instructions for voting your shares.                 

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How are votes counted?                                                          

        We will hold the annual  meeting if holders of a majority  of the shares
of common  stock  entitled to vote  either sign and return  their proxy cards or
attend the annual  meeting.  If you sign and return your proxy card, your shares
will be counted to  determine  whether we have a quorum  even if you  abstain or
fail to vote on any of the proposals listed on the proxy card. A majority of the
outstanding shares will constitute a quorum at the meeting.                     

Who will count the votes?                                                       

        Mellon Investor Services  ("Mellon"),  our transfer agent, will tabulate
the  returned  proxy votes by mail and Mellon's  inspector of the election  will
tabulate the votes at the  meeting.  The  election  inspector  will treat shares
represented  by properly  signed and returned  proxies that reflect  abstentions
from  voting as shares that are  present  and  entitled to vote for  purposes of
determining the presence of a quorum on all matters.                            

Who pays for this proxy solicitation?                                           

        nStor. In addition to sending you these materials, some of our employees
may contact you by  telephone,  by mail, or in person.  None of these  employees
will  receive  any extra  compensation  for doing this.  We may request  persons
holding shares in their names for others to forward soliciting  materials to our
principals to obtain  authorization  for the  execution of proxies,  and we will
reimburse such persons for their expenses in so doing.                          

        You are requested,  regardless of the number of shares you hold, to sign
the proxy and return it promptly in the enclosed envelope.                      

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FORWARD LOOKING STATEMENTS

        With the exception of discussion regarding historical information,  this
proxy  statement   contains  or   incorporates   by  reference   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,  our inability to integrate
the operations of Stonehouse  into our operations and to obtain the  anticipated
benefits  of the  Stonehouse  acquisition,  acceptance  of our  products  in the
marketplace,  technological  obsolescence of our products,  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, our failure to remain listed on AMEX 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.                                        

 OUTSTANDING VOTING SECURITIES AND VOTING RIGHTS

        The board of directors  has set the close of business on August 12, 2002
as the record date for  determining  stockholders  entitled to notice of, and to
vote at,  the annual  meeting.  As of the record  date,  there were  137,549,920
shares of common stock issued and  outstanding,  all of which are entitled to be
voted at the annual meeting.  Each share of common stock is entitled to one vote
on each matter submitted to stockholders for approval at the annual meeting.    

        The  attendance,  in person or by proxy, of the holders of a majority of
the outstanding shares of common stock entitled to vote at the annual meeting is
necessary to constitute a quorum. Shares represented by proxies which are marked
"abstain" will only be counted for determining the presence of a quorum. For all
of the proposals,  except for the election of directors, an abstention will have
the effect of a negative vote. An abstention will have no effect on the election
of directors.                                                                   

        If you hold  your  shares  in  "street  name"  through a broker or other
nominee,  your  broker  or  nominee  may not be  permitted  to  exercise  voting
discretion with respect to some of the matters to be acted upon. Thus, if you do
not give your broker or nominee  specific  instructions,  your shares may not be
voted on those  matters and will have the effect of a negative  vote on proposal
5, and will not be counted in  determining  the number of shares  necessary  for
approval  of  the  remaining  proposals.  Shares  represented  by  such  "broker
non-votes" will, however, be counted in determining the presence of a quorum.   

        The  affirmative  vote of a majority  of votes cast by all  stockholders
entitled to vote at the meeting other than Pacific Technology Group, Inc. or its
affiliates will be required for approval of proposal 1. The affirmative  vote of
a majority  of votes cast by all  stockholders  entitled  to vote at the meeting
other than Maurice  Halperin or his affiliates  will be required for approval of
proposal 2. The affirmative vote of a majority of votes cast by all stockholders
entitled to vote at the meeting other than H. Irwin Levy or his affiliates  will
be required  for approval of proposal 3. The  affirmative  vote of a majority of
shares  entitled  to vote will be  required  for  approval  of  proposal  5. The
affirmative  vote of a plurality of the shares of common stock present in person
or  represented  by proxy and entitled to vote at the annual meeting is required
for the election of directors.  The affirmative vote of a majority of the shares
present,  in person or by proxy,  and  entitled to vote,  will be  required  for
approval of proposals 4 , 6 and 8.                                              

        Current  stockholders  who own,  as of the  record  date,  shares of our
common stock representing  approximately 47% of our outstanding common stock, or
56% of our outstanding  common stock excluding shares held by Pacific Technology
Group,   Inc.  or  its  affiliates,   have  executed  proxies   instructing  the
proxyholders  to vote in favor of  proposals  1 and 4. As a result,  approval of
proposal 1 is assured  since it requires the  affirmative  vote of a majority of
votes  cast by all  stockholders  entitled  to vote at the  meeting  other  than
Pacific Technology Group, Inc. or its affiliates for approval.                  

        A list of the stockholders  entitled to vote at the special meeting will
be available at our offices located at 100 Century  Boulevard,  West Palm Beach,
Florida  33417,  for a  period  of ten  days  prior to the  annual  meeting  for
examination by any stockholder.                                                 

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SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

        The following  table sets forth, as of June 30, 2002,  information  with
respect to the beneficial ownership of our common stock by (i) each person known
by us to beneficially  own more than 5% of the outstanding  shares of our common
stock,  (ii) our chief  executive  officer and other  executive  officers  whose
compensation  is  required  to be  disclosed  pursuant  to the  rules of the SEC
(collectively  referred to as the "Named  Officers")  and each of our directors,
and (iii) all of our directors and executive officers as a group.               
                                                                      Percent of
Name and Address of                    Amount and Nature of          Outstanding
Beneficial Owner                       Beneficial Ownership (1)         Shares  
------------------------------------   ------------------------      -----------

Pacific USA Holdings Corp.(2)                52,500,000                    31.3%
2740 North Dallas Parkway                                                       
Plano, TX  75093                                                                

Pacific Electric Wire &                                                         
 Cable Co., Ltd. (2)                         52,500,000                    31.3%
2740 North Dallas Parkway                                                       
Plano, TX  75093                                                                

Maurice A. Halperin                          42,077,844 (3)                30.6%
17890 Deauville Lane                                                            
Boca Raton, FL  33496                                                           

Pacific Technology Services, Inc.(2)         30,000,000                    17.9%
2740 North Dallas Parkway                                                       
Plano, TX 75093                                                                 

H. Irwin Levy                                23,635,093 (4)                17.0%
100 Century Blvd.                                                               
West Palm Beach, FL  33417                                                      

Pacific Technology Group, Inc. (2)           22,500,000                    16.4%
2740 North Dallas Parkway                                                       
Plano, TX 75093                                                                 

Bernard A. Marden                            12,604,788 (5)                 9.1%
1290 S. Ocean Blvd.                                                             
Palm Beach, FL 33480                                                            

Joel F. Brody                                       100 (6)                  -  

Roger H. Felberbaum                             172,500 (7)                  *  

Bernard R. Green                                361,348                      *  

Thomas L. Gruber                                250,000                      *  

Larry Hemmerich                                 605,585 (8)                  *  

M. Thomas Makmann                                  -                         -  

Michael L. Wise                                 666,412 (9)                  *  

Thomas G. Wrightson                             122,666                      *  

All executive officers and directors,        67,674,642                    48.6%
as a group (12 persons)                                                   

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------------- * Less than 1%                                                    

(1)  Unless otherwise  indicated,  each stockholder listed has the sole power to
     vote  and  direct  disposition  of the  shares  of  common  stock  shown as
     beneficially  owned by such  stockholder.  For  purposes of this  table,  a
     person or group of persons is deemed to have "beneficial  ownership" of the
     following  shares  which  such  person or group  has the  right to  acquire
     pursuant to options and warrants that are exercisable within 60 days of the
     date hereof: Pacific USA Holdings Corp., Pacific Electric Wire & Cable Co.,
     Ltd. and Pacific Technology Services,  Inc. - 30,000,000 shares; Mr. Levy -
     1,072,500 shares;  Mr. Marden - 537,500 shares;  Mr. Green - 80,000 shares;
     Mr. Felberbaum - 40,000 shares;  Mr. Hemmerich - 300,000 shares; Mr. Wise -
     212,000 shares;  Mr. Wrightson - 122,666 shares; and all executive officers
    and directors as a group - 1,716,164 shares. See "Executive Compensation".
(2)  Pacific  Electric  Wire & Cable  Co.,  Ltd.  is the parent  corporation  of
     Pacific USA  Holdings  Corp.,  which is the parent  corporation  of Pacific
     Technology  Services,  Inc. and Pacific Technology Group, Inc. and as such,
 may be deemed the beneficial owner of the shares held by such entities.
(3)  Includes 39,000,000 shares owned indirectly through Halco.                 
(4)  Includes 5,284,357 shares owned by corporations  controlled by Mr. Levy and
1,000 shares owned jointly with Mr. Levy's spouse.                    
(5)  Includes  2,888,391 shares owned indirectly by a trust for which Mr. Marden
is a trustee.                                                         
(6)  Represents shares held in a retirement account by Mr. Brody's spouse.      
(7)  Includes 7,500 shares held by Mr. Felberbaum's spouse.                     
(8)  Mr.  Hemmerich's  beneficial  ownership  is based on the last  Statement of
     Changes  in  Beneficial  Ownership  on Form 4  filed  by Mr.  Hemmerich  in
February 2002 for transactions that occurred in January 2002.         
(9)  Includes 143,002 shares owned  indirectly as follows,  as to which Mr. Wise
     disclaims beneficial  ownership:  92,602 shares owned by Mr. Wise's spouse,
and 50,400 shares owned jointly by Mr. Wise's spouse and his mother.  

COMPLIANCE WITH SECTION 16(a) OF
 THE SECURITIES EXCHANGE ACT OF 1934

        Section  16(a)  of the  Securities  Exchange  Act of 1934,  as  amended,
requires our directors and executive officers, and persons who own more than ten
percent of our outstanding common stock, to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock.  Such persons are
required by SEC  regulation  to furnish us with copies of all such  reports they
file.                                                                           

        To our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations that no other reports were required,
the officers,  directors and greater than ten percent  beneficial  owners of our
common stock have complied with all applicable Section 16(a) filing requirements
except as follows (due to administrative  oversights):  (i) Former President and
Chief  Executive  Officer Larry  Hemmerich did not file Statements of Changes in
Beneficial Ownership on Form 4 on a timely basis for (a) receiving 128 shares of
Series  I  Convertible  Preferred  Stock  in  April  2001 in  satisfaction  of a
promissory  note, (b) the cancellation in June 2001 of stock options to purchase
an aggregate of 1,250,000 shares of common stock, and (c) the grant in June 2001
of a stock  option to purchase  300,000  shares of common  stock;  (ii) H. Irwin
Levy, Vice Chairman of the Board and Chief Executive Officer did not timely file
a Statement  of Changes in  Beneficial  Ownership  on Form 4 for the issuance in
April 2001 of 4,604 shares of Series I Convertible  Preferred  Stock in exchange
for (a) convertible  promissory notes, (b) Series G Convertible Preferred Stock,
and (c) the  cancellation  of a warrant  to  purchase  500,000  shares of common
stock;  and (iii) Bernard A. Marden, a significant  stockholder,  did not timely
file  Statements  of  Changes  in  Beneficial  Ownership  on  Form 4 for (a) the
issuance in April 2001 of 1,263 shares of Series I Convertible  Preferred  Stock
in exchange for  convertible  promissory  notes,  (b) the October 2001 automatic
conversion  of Series D Convertible  Preferred  Stock into  1,000,000  shares of
common  stock,  and (c) the December  2001  purchase of 1,700 shares of Series H
Convertible Preferred Stock in a private transaction.                           

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 PROPOSALS

Proposal 1.    To  approve  the  issuance of the following  shares of our common
               stock to Pacific  Technology  Group,  Inc. in connection with our
               acquisition  of  100%  of  the   outstanding   capital  stock  of
               Stonehouse  Technologies,  Inc.  on June 7, 2002:  (a)  4,527,027
               shares  upon  conversion  of our Series L  Convertible  Preferred
             Stock and (b) up to 8,687,258 shares as earn-out consideration.

General                                                                         

        On June 7, 2002, we entered into a Stock Purchase  Agreement (the "Stock
Purchase  Agreement") with Stonehouse  Technologies,  Inc., a Texas  corporation
("Stonehouse"),  Pacific Technology Group, Inc. ("PTG"), the sole shareholder of
Stonehouse,  and Pacific USA Holdings  Corp., a Texas  corporation  and the sole
shareholder  of PTG  ("Parent").  Pursuant to the Stock Purchase  Agreement,  we
acquired  100% of the  outstanding  capital  stock of  Stonehouse  from PTG (the
"Stonehouse Acquisition"). Stonehouse is a provider of software and services for
communication  service  management  solutions that help  enterprises  manage and
control  telecommunications  expenses,  assets and processes. The purchase price
for the Stonehouse  Acquisition  consisted of the sum of the  following:  (i)(A)
22,500,000  shares of our  common  stock and (B)  1,000  shares of our  Series L
Convertible Preferred Stock ("Series L Preferred Stock"),  which were issued and
delivered to PTG at the closing of the Stonehouse  Acquisition and (ii) Earn-Out
Shares (as defined below), if any.                                              

        On June 7, 2002,  we filed  with the  Secretary  of State of  Delaware a
Certificate of Designation establishing the Series L Preferred Stock, consisting
of 1,000 shares with a stated value of $1,000 per share.  Each share of Series L
Preferred  Stock is initially  convertible  into 4,527.027  shares of our common
stock.  The  issuance  of the  common  stock  upon  conversion  of the  Series L
Preferred  Stock is  conditioned  on  stockholder  approval  of proposal 1. Upon
stockholder  approval,  the  Series L  Preferred  Stock  will  automatically  be
converted into 4,527,027 shares of common stock.                                

        If income before income taxes as defined in the Stock Purchase Agreement
("Net  Revenues") of Stonehouse  during the four consecutive  calendar  quarters
beginning on October 1, 2002 (the "Valuation  Period")  exceeds  $1,000,000,  we
will be  required  to issue to PTG that  number of  additional  shares of common
stock equal to the product of (i) 27.027,  subject to anti-dilution  adjustments
and (ii) the amount of Net Revenues in excess of $1,000,000,  up to a maximum of
8,687,258  shares of our common  stock (the  "Earn-Out  Shares")  within 45 days
after the expiration of the Valuation Period,  subject to extension in the event
of a dispute.  The issuance of the Earn-Out Shares is conditioned on stockholder
approval  of  proposal  1. If at the time we are  obligated  to issue all or any
portion of the Earn-Out  Shares,  we have not obtained  stockholder  approval of
such  issuance,  we will issue to PTG preferred  stock that will be  convertible
into the same  number  of  shares of common  stock  described  in the  preceding
sentence upon stockholder approval. In the event that prior to 30 days after the
expiration of the Valuation Period, we are, or Stonehouse is, acquired or merged
with anyone other than an affiliate or an affiliate of our  affiliates,  we will
immediately  prior to the  closing  of such  acquisition  or  merger,  issue the
Earn-Out  Shares or additional  preferred  stock  convertible  into the Earn-Out
Shares to PTG.                                                                  

Effect of Stock Issuances                                                       

        The proposed  issuances of common stock upon  conversion of the Series L
Preferred  Stock and issuance of the Earn-Out  Shares will result in dilution in
the percentage ownership interest of our existing  stockholders.  The conversion
of the Series L Preferred  Stock and the  Earn-Out  Shares  could  result in the
issuance of an additional 9.6% of our currently outstanding shares.             

Stockholder Approval Required                                                   

        Section 712 of the Listing  Standards,  Policies and Requirements of the
AMEX requires  stockholder approval prior to approving the listing of additional
shares to be issued in connection  with an acquisition of the stock or assets of
another company if the issuance of common stock or securities  convertible  into
common stock could result in an increase in our outstanding common shares of 20%
or more. We issued  22,500,000 shares of our common stock to PTG upon closing of
the Stonehouse  Acquisition  on June 7, 2002,  which  increased our  outstanding
shares by approximately  19.5%. As described above, upon stockholder approval of
proposal  1, we will  issue  PTG  4,527,027  shares  of our  common  stock  upon
conversion of the Series L Preferred Stock, and we may issue up to an additional
8,687,258 shares as Earn-Out Shares,  which will increase our outstanding shares
by an additional  9.6%.  Because we are issuing  shares of our common stock that
would result in an increase in our outstanding shares by more than 20%, the AMEX
requires approval by our stockholders,  other than PTG or its affiliates, of the
issuance of common stock to PTG upon  conversion of the Series L Preferred Stock
and as Earn-Out Shares.                                                         

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Vote Required                                                                   

        For this proposal to be approved in accordance with the  requirements of
AMEX, the affirmative  vote of a majority of the votes cast by our  stockholders
other than PTG or its  affiliates,  in person or by proxy, on this proposal 1 is
required.                                                                       

        Current  stockholders who own, as of the record date,  approximately 56%
of the shares of our common  stock held by our  stockholders,  other than PTG or
its  affiliates,  have executed  proxies  instructing the proxyholder to vote in
favor of this proposal 1. As a result, approval of proposal 1 is assured.       

Recommendation of the Board of Directors                                        

        The members of our board of directors  recommend that you vote "FOR" the
approval of proposal 1.                                                         

The Stonehouse Acquisition

Overview                                                                        

        The following  information about the Stonehouse  Acquisition is provided
in connection with Proposal 1 described above.  Stockholders are not being asked
to vote upon the Stonehouse Acquisition, which has already been consummated.    

        On June 7,  2002,  we entered  into the Stock  Purchase  Agreement  with
Stonehouse,  PTG and  Parent.  Pursuant  to the  Stock  Purchase  Agreement,  we
acquired 100% of the outstanding capital stock of Stonehouse from PTG on June 7,
2002 and Stonehouse became a wholly-owned subsidiary of ours. The purchase price
for the Stonehouse  Acquisition  consisted of the sum of the  following:  (i)(A)
22,500,000  shares of our  common  stock and (B)  1,000  shares of our  Series L
Preferred  Stock which were issued and  delivered  to PTG on June 7, 2002 at the
closing of the Stonehouse Acquisition and (ii) up to 8,687,258 Earn-Out Shares. 

Description of Series L Preferred Stock                                         

        Our  board  of  directors   is   authorized,   without   action  by  the
stockholders,  to issue up to 1,000,000 shares of preferred stock in one or more
series and to fix the rights and relative  preferences  thereof.  In  accordance
with this  authority,  the board of directors  created  1,000 shares of Series L
Preferred Stock with the rights and preferences described below.                

        Voting  Rights: Holders of the Series L Preferred Stock are not entitled
to vote on any  matters submitted to the holders of common stock.               

        Dividends:  Holders of the Series L  Preferred Stock are not entitled to
receive dividends.                                                              

        Liquidation  Rights and  Preferences:  Each share of Series L  Preferred
Stock has a  liquidation  preference  equal to its stated  value of $1,000.  The
liquidation preference is payable to the holders of the Series L Preferred Stock
upon the  liquidation,  dissolution  or  winding  up of nStor.  The  liquidation
preference may not be paid to the holders of the Series L Preferred  Stock until
the  payment  in full of (i) any  distribution  made with  respect  to any other
preferred  stock existing on, or issued after,  June 7, 2002 or (ii) any amounts
received  by  us  from  our   stockholders   (or  entities   controlled  by  our
stockholders) after the issuance of the Series L Preferred Stock for the purpose
of funding any deficiency in our working capital.                               

        Restricted  Actions:  We are not permitted to take the following actions
without the  approval  of a majority of the shares of Series L Preferred  Stock:
(i) complete any  reorganization or take any action, or fail to take any action,
which would adversely affect the rights of the holders of the Series L Preferred
Stock and (ii) amend our  certificate of  incorporation  if such amendment would
cancel or modify the  conversion  rights of the  Series L  Preferred  Stock.  In
addition,  we are not  permitted  to take any action that would dilute or impair
the rights of the holders of the Series L Preferred Stock.  Further,  we are not
permitted to consolidate or merge with any other person, or permit any person to
consolidate  or merge with us (if we are not the surviving  person),  unless the
other  person  expressly  assumes  and will be bound by all of the  terms of the
Series L Preferred Stock.                                                       

        Mandatory  Conversion:  The Series L  Preferred  Stock is not  initially
convertible  into  shares of our  common  stock.  The  holders  of the  Series L
Preferred  Stock do not have the right to convert the Series L  Preferred  Stock
into shares of common stock without the prior approval of the  stockholders.  If
the stockholders approve Proposal 1, each share of Series L Preferred Stock will
be automatically converted into 4,527.027 shares of common stock.               

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Background of the Stonehouse Acquisition                                        

        As  previously  reported in our filings with the SEC, we have received a
"going-concern"  opinion  from our  auditors  with  respect  to our most  recent
audited financial statements,  i.e., our financial statements for the year ended
December 31, 2001. As described more completely under "Certain Relationships and
Related  Transactions",  during the past several years our working capital needs
have  been  satisfied  primarily  by loans  or  investments  from our  principal
stockholders.  As a result  of our  adverse  financial  condition,  we  explored
various capital raising transactions with a variety of private investors.       

        In June,  2001, we began  discussions  with Parent and Pacific  Electric
Wire & Cable Co., Ltd.,  ("PEWC"),  the parent corporation of Parent, to discuss
PEWC making a potential  equity  investment in our company.  PEWC is a Taiwanese
corporation and is traded on the Taiwan Stock  Exchange.  During our discussions
with  principals  of PEWC,  we provided  Parent and PEWC with  detailed  written
materials about our company.                                                    

        On June 26,  2001,  we received  an  investment  proposal  from Halco to
acquire  an  approximately  49%  interest  in  our  company  for  $16.4  million
(including a $3 million loan). In connection with interim financing  provided by
Halco,  in August  2001,  our board of  directors  elected  Maurice  Halperin as
chairman of our board of directors. The Halco transaction was initially expected
to close in August 2002.                                                        

        From June through  early  October,  2001 we continued  discussions  with
PEWC. The discussions with PEWC contemplated the distribution of our products in
Asia, as well as PEWC making a potential equity investment in nStor. As a result
of our continuing negotiations with PEWC regarding a potential equity investment
by PEWC, we reached agreements with Maurice Halperin to defer the closing of the
Halco transaction until September 28, 2001 and, subsequently,  until October 31,
2001.                                                                           

        On October 23, 2001, we received a letter from Parent proposing to enter
into  a  strategic  business   relationship  with  our  company.   The  proposal
contemplated an international  distribution  agreement,  an equity investment in
our  company  and  certain  other  business  relationships  subject to terms and
conditions to be negotiated. The letter contemplated that these agreements could
be finalized by the week of November 12, 2001.  As a result of this proposal and
at our request,  Halco agreed to extend until  November 16, 2001 its  previously
announced offer to purchase an equity interest in nStor.                        

        We were unable to reach an agreement  with PEWC  regarding its making an
equity  investment in nStor, and accordingly,  on November 20, 2001 we completed
the stock purchase  transaction with Halco.  The terms of the Halco  transaction
were  modified from the original  proposal and provided  that Halco  purchase an
approximate  34% equity  interest in, and make certain loans to, our company for
an aggregate  investment of approximately  $12.1 million.  Pursuant to the Stock
Purchase Agreement dated November 20, 2001 between us and Halco, Halco purchased
8,970 shares of our Series K Convertible  Preferred  Stock with a face amount of
$8,970,000,  and we  issued a $3.1  million,  5-year,  8% note to  Halco.  Halco
invested $6 million in cash and marketable securities having a fair market value
(based on the closing market price for such  securities on November 19, 2001, as
reported on the New York Stock Exchange on which the securities  were traded) of
$6.1 million.                                                                   

        Although we were unable to reach an agreement  with PEWC  regarding  its
making an equity  investment  in nStor,  in an effort to improve  our  financial
condition  and  increase  our  potential  future  revenues,  we  continued to be
interested  in  developing  a  strategic  business  relationship  with PEWC.  As
described in Proposal 4, effective March 1, 2002, we (i) entered into a Reseller
Agreement with a subsidiary of Parent,  which granted that  subsidiary the right
to market and sell our products for a period of two years in Mainland  China and
Taiwan,  and (ii) granted that subsidiary an option to purchase up to 30,000,000
shares of our common  stock at an exercise  price of $0.40 per share.  Following
our entering into the Reseller Agreement, we began exploring ways to further our
relationship  with  PEWC  by  combining  our  company  with  Stonehouse,  also a
subsidiary of Parent.                                                           

        In this regard, in early March 2002, Mr. Levy and  representatives  from
PEWC and Stonehouse commenced negotiation on a non-binding letter of intent that
would memorialize  their mutual  understanding of the structure of a transaction
whereby we would acquire all of the capital stock of  Stonehouse.  At this time,
the parties'  negotiations focused on the form and amount of the purchase price.
Both parties  desired a transaction in which we would issue shares of our common
stock. Our board of directors was interested in pursuing a transaction with this
structure  since it would not require us to use any cash or incur any debt.  The
amount of the consideration was determined by arms-length  negotiations  between
the parties.  Factors in those negotiations  included  Stonehouse's  anticipated
cash flow from operations,  book value,  revenues and prospects and the price of
our common stock, as well as its high volatility and low trading volume.        

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        After several weeks of negotiations, and following consultation with our
respective boards and legal advisors, on March 21, 2002 we entered into a letter
of intent with Parent  regarding  the  acquisition  of  Stonehouse.  The parties
initially  agreed on a purchase price of approximately  $15,000,000,  subject to
our being satisfied with the projected cash flow from operations,  and agreed to
fix the number of shares of our common stock to be issued in the  acquisition at
35,714,285  shares,  based on the approximate  price of our common stock at that
time of $0.42. We also agreed to enter into an employment agreement with John E.
Gates, the chief executive officer of Stonehouse,  to become the chief operating
officer of nStor upon closing. Our board of directors did not seek an opinion of
an independent  financial advisor as to the fairness,  from a financial point of
view, of the acquisition, primarily due to the costs associated with obtaining a
fairness opinion.                                                               

        After  the  execution  of the  letter  of  intent,  we  commenced  a due
diligence  investigation of Stonehouse.  Representatives  of PTG and Stonehouse,
together with their counsel, and representatives of nStor met to discuss various
aspects of the proposed transaction.  As a result of these discussions,  our due
diligence review and a further analysis of applicable state laws and AMEX rules,
on April 30,  2002 the  parties  entered  into a term sheet  which  amended  and
supplemented  the letter of intent.  Based on our due diligence that showed that
Stonehouse's  cash flow from operations was less than  originally  disclosed and
that  there were  expenses  that could be  reduced  to  increase  cash flow,  we
required  that the purchase  price  consist of a fixed  portion and a contingent
portion.  The fixed  portion was valued at  $10,000,000  and  consisted of 1,000
shares of newly issued  convertible  preferred stock which was convertible  into
27,027,027  shares  of our  common  stock  at a price of $0.37  per  share  upon
stockholder approval.  The contingent portion of the purchase price consisted of
the issuance of up to an additional  8,687,258 Earn-Out Shares if certain income
levels (as described  above) were met by Stonehouse  following the  acquisition.
The  structure  of the  transaction  was altered to provide for the  issuance of
convertible  preferred  stock rather than common stock as provided in the letter
of intent so that we would not need to obtain stockholder  approval prior to the
acquisition under AMEX rules.                                                   

        The  term  sheet  provided  that  the  preferred  stock  would  have  no
preferential  or  accumulated  dividend  rights and would be  subordinate to any
funding provided to us by any of our stockholders (or any entity controlled by a
stockholder)  after the closing of the acquisition which was made to support our
negative cash flow through year-end. The term sheet further provided that at the
closing of the acquisition,  Stonehouse  would enter into a marketing  agreement
with Parent concerning the marketing of certain non-Stonehouse software.        

        Further,  the term sheet  provided  that John Gates  would  serve as the
chief executive officer of Stonehouse following the acquisition, rather than the
chief  operating  officer of nStor,  as  provided  in the  letter of intent.  In
addition, the term sheet provided that we, Parent and the Principal Stockholders
enter into the Stockholders'  Agreement, as described below. Also, Parent agreed
to lease to us a portion of Parent's current offices in Plano, Texas. On May 15,
2002, we publicly  announced  that we had entered into an agreement in principal
to acquire a privately-owned telecommunications company.                        

        After the  execution  of the term  sheet,  we  continued  to perform and
update  our due  diligence  while  drafts of the Stock  Purchase  Agreement  and
various ancillary agreements were distributed, reviewed and negotiated. Based on
further  analysis of AMEX rules and  discussions  with AMEX  staff,  the parties
agreed to issue 22,500,000 shares of common stock, or approximately 19.5% of our
outstanding  common stock,  and 1,000 shares of Series L  Convertible  Preferred
Stock at the closing.  The  conversion  of the Series L Preferred  Stock and the
issuance of the Earn-Out Shares was subject to stockholder  approval.  Among the
other matters  negotiated  were the  conditions to the parties'  obligations  to
close the acquisition, provisions related to indemnification of the parties, the
determination  of the liabilities and obligations to be assumed by us and Parent
in the acquisition, and the negotiation of certain related agreements.          

        After  several  weeks  of  further  negotiations  and  revisions  to the
documentation,  the  respective  boards  of  nStor  and PTG met,  and  following
detailed  discussions  regarding the terms of the Stock  Purchase  Agreement and
related  documents,  including  a summary  of the  representations,  warranties,
covenants, conditions,  termination events and termination consequences, as well
as  the  structure  of  the  proposed   transaction,   approved  the  Stonehouse
Acquisition  and  authorized  the  respective  officers  of  both  companies  to
undertake all acts necessary or desirable to effect the Stonehouse  Acquisition.
The parties then executed the Stock Purchase  Agreement  after the market closed
on Friday,  June 7, 2002 and publicly announced the transaction on Monday,  June
10, 2002.                                                                       

Purposes of the Stonehouse Acquisition                                          

        Our board of directors  determined  that the terms of the Stock Purchase
Agreement,   which  were  the  product  of  arm's  length  negotiations  between
representatives  of us  and  Stonehouse,  were  in  the  best  interests  of our
stockholders. In reaching this determination,  our board of directors considered
the following positive factors:                                                 

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o    we believe Stonehouse's anticipated positive cash flow from operations will
     have a  positive  impact  on our  operating  results  from both a cash flow
standpoint, and as a contribution to our operating income;            

o    Stonehouse   has  an  expansive   customer  base,   including   major  U.S.
     corporations and government  agencies,  through which we believe we will be
     able to market our computer storage  products,  which in turn should have a
positive impact on our revenues;                                      

o    we believe the Stonehouse  Acquisition will further our  relationship  with
     PEWC,  which will provide us with greater  opportunity to sell our products
in Asia;                                                              

o    as  previously  disclosed in our filings with the SEC, 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 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 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  and the  Stonehouse
     Acquisition is expected to assist us in this effort,  although there can be
no assurance that we will remain listed on AMEX;                      

o    the structure of the transaction which would not require us to use any cash
or incur any debt; and                                                

o    the ability to complete the transaction in a timely manner without the need
for regulatory or stockholder approval.                               

Approvals Needed to Complete the Stonehouse Acquisition                         

        We were not required to obtain the approval of any regulatory  agency in
order to consummate the Stonehouse  Acquisition,  nor were we required to obtain
the approval of our stockholders under state law or AMEX rules.                 

Other Provisions of the Stock Purchase Agreement and Related Agreements         

        The  following  is a brief  summary of the  material  terms of the Stock
Purchase  Agreement.  The complete text of the Stock Purchase Agreement is filed
as an exhibit to our Current  Report on Form 8-K, filed with the SEC on June 21,
2002.                                                                           

        The parties  executed the Stock Purchase  Agreement on June 7, 2002. The
Stock Purchase Agreement contained customary representations and warranties from
the parties relating, among other things, to their organization, capitalization,
authority  relative  to the  Stock  Purchase  Agreement,  financial  statements,
material   contracts,   absence  of  undisclosed   liabilities   and  conflicts,
intellectual  property,  litigation,  contracts,  tax matters. In addition,  the
respective  obligations of the parties to consummate the Stonehouse  Acquisition
were   conditioned  on  the   satisfaction  or  occurrence  of  certain  closing
conditions,  including obtaining required approvals (if any),  delivering copies
of board  resolutions  approving the  transaction,  and that we deliver  certain
documents, including the following:                                             

o    a  Marketing  Agreement  providing  for the sale of certain  non-Stonehouse
software products;                                                    

o    a Stockholders' Agreement (as described below);                            

o    an  Employment  Agreement  providing  that  John  Gates  would be the chief
executive officer of Stonehouse;                                      

o    a Registration  Rights  Agreement  which requires that once we are eligible
     for  short-form  registration  under SEC rules,  we register for resale the
     shares of common  stock  issued or issuable to PTG in  connection  with the
     Stonehouse  Acquisition and the shares issuable upon the potential exercise
     of an option held by an affiliate of PTG, as  described  under  Proposal 4,
with the SEC;                                                         

o    an  irrevocable  proxy from  stockholders  who hold 56% of our  outstanding
     common stock,  other than PTG or its affiliates,  agreeing to vote in favor
of Proposals 1 and 4;                                                 

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o    the New Halco Note, as described in Proposal 2;                            

o    the Working Capital Agreement (as described below); and                    

o    a sublease agreement, executed by us providing that Parent would sublease a
portion of Parent's current offices in Plano, Texas.                  

    All of the closing  conditions  were met or waived,  and the acquisition was
consummated on June 7, 2002.                                                    

    The Stock Purchase  Agreement also contained certain  obligations of each of
the parties  that  continued  after the  consummation  of the  acquisition.  For
example,  the Stock Purchase  Agreement  requires us to (i) hold a stockholders'
meeting to approve  Proposals 1 and 4 and (ii) use our best efforts to cause the
common stock  issuable upon  conversion  of the Series L Preferred  Stock and as
Earn-Out  Shares to be listed on the AMEX.  The  listing  with the AMEX for such
shares was filed on June 13, 2002.                                              

The Stockholders' Agreement                                                     

        As a condition to closing the Stonehouse Acquisition,  effective June 7,
2002, we entered into a Stockholders' Agreement (the "Stockholders'  Agreement")
with  PTG and  certain  of our  stockholders  who,  following  the  issuance  of
22,500,000  of  our  shares  to  PTG  in  the   Stonehouse   Acquisition,   hold
approximately 47% of our outstanding  common stock  (collectively the "Principal
Stockholders").  The Stockholders' Agreement prohibits the sale, pledge or other
transfer of 80% of designated shares, as defined in the Stockholders' Agreement,
of our common stock held by the Principal  Stockholders  unless they first offer
to sell,  pledge or transfer such shares to PTG on the same terms.  In addition,
pursuant to the Stockholders' Agreement, each of the Principal Stockholders have
agreed to vote to elect to our board of directors at each of our annual meetings
of stockholders two designees of Parent reasonably  acceptable to such Principal
Stockholders.  As of the  date  hereof,  Parent  has  elected  not to  name  two
designees as nominees for our board of  directors  for the 2002 Annual  Meeting.
The Stockholders'  Agreement  terminates on the date on which PTG, Parent and/or
their respective affiliates cease to own at least 5% of our common stock.       

The Working Capital Agreement                                                   

        As a condition to the closing of the Stonehouse Acquisition,  we entered
into the Working Capital Assurance  Agreement (the "Working Capital  Agreement")
as of June 7, 2002  with  Hilcoast  Development  Corp.  ("Hilcoast"),  a company
controlled by H. Irwin Levy, the vice-chairman of the board of directors,  chief
executive  officer and a principal  stockholder of our company.  Pursuant to the
Working Capital  Agreement,  Hilcoast committed to loan, upon our demand, in the
event of a  working  capital  deficit,  an  aggregate  amount  not in  excess of
$1,250,000,  including  the amounts  previously  loaned to us by Hilcoast in the
amount of  $940,000,  as of June 7, 2002 for a period of 180 days from that date
at an interest rate of 8%.                                                      

Accounting Treatment of the Stonehouse Acquisition                              

        The Stonehouse  Acquisition  was accounted for under the purchase method
of accounting with assets acquired and liabilities assumed recorded at estimated
fair values as of the Stonehouse  Acquisition  date in accordance with Statement
of  Financial  Accounting  Standards  No. 141,  Business  Combinations,  and the
results  of  Stonehouse's  operations  included  in our  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
Stonehouse  Acquisition,  and included a valuation analysis of intangible assets
completed by an  independent  valuation  firm.  The excess of the purchase price
over the fair  value of net  assets  acquired  (goodwill)  will be  subject to a
review for  impairment on an annual basis and whenever  events or  circumstances
occur which  indicate  that  goodwill  might be  impaired,  in  accordance  with
Statement  of  Financial  Accounting  Standards  No.  142,  Goodwill  and  Other
Intangible Assets, adopted by us in 2002.                                       

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Selected Financial Data                                                         

The following table summarizes certain selected financial data of Stonehouse for
the five years ended December 31, 2001 (in thousands):                          

                                                        [Enlarge/Download Table]


                              Five Months                                                    
                                 Ended                  Year Ended December 31,              
                                 May 31,   ------------------------------------------------- 
                                  2002      2001       2000      1999       1998       1997  
                                 ------    ------     ------    ------     ------     ------ 
                                                                                             
Selected Operating Data:                                                                     

Revenues                         $2,814    $6,608     $7,270    $7,838     $8,728     $9,093 
Net income (loss)                   133    (2,830)(1)   (228)      114       (790)      (705)

Selected Balance Sheet Data:                                                                 

Total assets                      7,660     7,457      9,085     9,455     10,075     11,500 
Total liabilities                 2,996     2,926      2,664     2,807      3,947      4,582 
Stockholders' equity              4,664     4,531      6,421     6,648      6,128      6,918 


------------                                                                    
(1) The 2001 net loss reflects the  implementation  of a revised  business plan,
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.  Stonehouse  estimated  that  operating
expenses in excess of $3 million related to the discontinued  business plan were
incurred in 2001.                                                               

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 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS

        The  following  unaudited  pro forma  condensed  combined  statements of
operations reflect the Stonehouse  Acquisition.  The statements are derived from
and should be read in conjunction with our historical  financial  statements and
notes  thereto,  as presented in the our Form 10-Q for the six months ended June
30, 2002 (see Annex 1) and Annual  Report on Form 10-K,  as amended for the year
ended December 31, 2001,  which is being  delivered  with this proxy  statement.
They should also be read in conjunction with Stonehouse's  historical  financial
statements included in our current report on Form 8-K/A (see Annex 2).          

        The unaudited pro forma condensed combined  statements of operations for
the year ended December 31, 2001 and for the six months ended June 30, 2002 give
effect to the  Stonehouse  Acquisition  as if it had  occurred  as of January 1,
2001. The pro forma adjustments are based on management's  preliminary estimates
of the value of tangible and intangible  assets acquired,  including a valuation
of goodwill and certain  other  intangible  assets  performed by an  independent
valuation firm. However,  those estimates could change as additional information
becomes available or as additional events occur.                                

        The  unaudited  pro  forma  financial  information  is not  designed  to
represent and does not represent what the combined  results of operations  would
have been had the Stonehouse Acquisition been completed as of the dates assumed,
and is not intended to project the combined results of operations for any future
period.                                                                         

        As  shown  in  the  historical  Statement  of  Operations,  during  2001
Stonehouse  incurred a net loss of  $2,830,000,  which  represents a significant
decline in operating results from prior years. During 2000,  Stonehouse incurred
a net loss of  $228,000  and  during  1999,  Stonehouse  realized  net income of
$114,000. These amounts are net of depreciation and amortization of $320,000 and
$592,000,  respectively.  The 2001 loss reflects the implementation of a revised
business plan  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.  Stonehouse  estimates  that  operating
expenses in excess of $3 million related to the discontinued  business plan were
incurred in 2001.  The  unaudited  pro forma  condensed  combined  statement  of
operations for the year ended December 31, 2001 excludes the pro forma effect of
the operating expense  reductions  implemented during the fourth quarter of 2001
and in early 2002 as a result of the  discontinuation  of the business  plan, as
well as certain  additional  expense reductions that are expected to result from
the Stonehouse Acquisition.                                                     

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                                                        [Enlarge/Download Table]


                     UNAUDITED PRO FORMA CONDENSED COMBINED                              
                             STATEMENT OF OPERATIONS                                     
                          YEAR ENDED DECEMBER 31, 2001                                   
                  (dollars in thousands, except per share data)                          

                                      Historical (audited)               Pro Forma       
                                 -----------------------------    -----------------------
                                     nStor        Stonehouse                             
                                 Technologies    Technologies     Adjustments    Combined
                                 -----------------------------    -----------------------
                                                                                         
Sales                               $17,886         $ 6,608       $   -          $24,494 
Cost of sales                        15,837           3,699          (57)(a)      19,402 
                                                                     (77)(b)             
                                    -------         -------       ------         ------- 
    Gross  margin                     2,049           2,909          134           5,092 
                                    -------         -------       ------         ------- 
Operating expenses:                                                                      
  Selling, general                                                                       
    and administrative               10,354           4,604         (227)(a)      14,669 
                                                                     (62)(b)             
  Research and development            3,579             940            -           4,519 
  Depreciation and amortization       1,622             201          284 (a)       2,529 
                                                                     422 (c)             
                                    -------         -------       ------         ------- 
 Total operating expenses            15,555           5,745          417          21,717 
                                    -------         -------       ------         ------- 
Loss from operations                (13,506)         (2,836)        (283)        (16,625)
Realized and unrealized losses                                                           
  on marketable securities, net        (811)              -            -            (811)
Interest expense                       (912)              -            -            (912)
Other income, net                       402               6            -             408 
                                    -------         -------       ------         ------- 
Loss before preferred stock                                                              
  dividends, extraordinary                                                               
  items and induced conversion      (14,827)         (2,830)        (283)        (17,940)

Extraordinary gains from debt                                                            
  extinguishment                        869               -            -             869 
                                    -------         -------       ------         ------- 
Net loss                            (13,958)         (2,830)        (283)        (17,071)

Preferred stock dividends            (1,560)              -            -          (1,560)
Induced conversion of convertible                                                        
  preferred stock                    (3,000)              -            -          (3,000)
                                    -------         -------       ------         ------- 
Net loss available to                                                                    
  common stock                     ($18,518)       ($ 2,830)      ($ 283)       ($21,631)
                                    =======         =======       ======         ======= 
Basic and diluted net loss per                                                           
 common share:                                                                           
  Loss before extraordinary                                                              
   items                           ($   .43)                                    ($   .33)
  Extraordinary gains                   .02                                          .01 
                                    -------                                      ------- 
  Net loss per common share        ($   .41)                                    ($   .32)
                                    =======                                      ======= 
Weighted average number of                                                               
  common shares outstanding,                                                             
  basic and diluted              44,832,503                    22,500,000     67,332,503 
                                 ==========                    ==========     ========== 

        See accompanying notes to unaudited pro forma condensed combined                 
                           statements of operations.                                     

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                                                        [Enlarge/Download Table]

                     UNAUDITED PRO FORMA CONDENSED COMBINED                              
                             STATEMENT OF OPERATIONS                                     
                         SIX MONTHS ENDED JUNE 30, 2002                                  
                                   (unaudited)                                           
                  (dollars in thousands, except per share data)                          

                                          Historical                     Pro Forma       
                                -----------------------------    ----------------------- 
                                    nStor        Stonehouse                              
                                Technologies(1) Technologies(2)  Adjustments    Combined 
                                -----------------------------    ----------------------- 
                                                                                         
Sales                              $ 4,010         $ 2,814       $    -          $ 6,824 
Cost of sales                        4,026           1,473          (22)(a)        5,453 
                                                                    (24)(b)              
                                   -------         -------       ------          ------- 
     Gross (loss) margin               (16)          1,341           46            1,371 
                                   -------         -------       ------          ------- 
Operating expenses:                                                                      
  Selling, general and                                                                   
   administrative                    2,645             906          (12)(b)        3,539 
  Research and development           1,387             289            -            1,676 
  Depreciation and amortization        593              13           22 (a)          804 
                                                                    176 (c)              
                                  --------         -------       ------          ------- 
     Total operating expenses        4,625           1,208          186            6,019 
                                   -------         -------       ------          ------- 
(Loss) income from operations       (4,641)            133         (140)          (4,648)

Realized losses on marketable                                                            
  securities                        (1,123)              -                        (1,123)
Fair value of option granted                                                             
  to customer                         (670)              -            -             (670)
Interest expense                      (257)              -            -             (257)
Other expense, net                     (54)              -            -              (54)
                                   -------         -------       ------          ------- 
Net (loss) income before                                                                 
  preferred stock dividends                                                              
  and extraordinary items           (6,745)            133         (140)          (6,752)

Extraordinary gain from debt                                                             
  extinguishment                       137               -            -              137 
                                   -------         -------       ------          ------- 
Net (loss) income available                                                              
  to common stock                  ($6,608)          $ 133       ($ 140)         ($6,615)
                                   =======         =======       ======          ======= 
Basic and diluted net loss                                                               
  per common share                                                                       
   Loss before extraordinary items ($  .06)                                     ($   .05)
   Extraordinary gain                  .00                                           .00 
                                   -------                                       ------- 
                                   ($  .06)                                     ($   .05)
                                   =======                                       ======= 
Weighted average number of                                                               
  common shares outstanding,                                                             
  basic and diluted            117,979,041                    22,500,000     140,479,041 
                               ===========                    ==========     =========== 

(1)  Historical amounts for nStor Technologies  include  Stonehouse's results of
operations for June 2002.                                             

(2)  Historical  amounts  for  Stonehouse  Technologies  are for the five months
ended May 31, 2002.                                                   

See accompanying notes to unaudited pro forma condensed combined
statements of operations. 

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NOTE 1.    PRO FORMA ADJUSTMENTS                                                

The following are descriptions of the pro forma Stonehouse  Acquisition  related
adjustments,  identified  as (a) through (c),  which have been  reflected in the
accompanying Unaudited Pro Forma Condensed Combined Statements of Operations (in
thousands):                                                                     

a)   reclassification  of  depreciation  expense  included  in cost of sales and
     selling,   general  and   administrative   expenses  to  depreciation   and
amortization.                                                         
b)   reduction  in  historical  rent  expense  pursuant  to a new  lease for the
Stonehouse office facilities                                          
c)   amortization  of fair  value of  intangible  assets  acquired  based on the
following estimated useful lives:                                     

Customer relationships              ten (10) years
Software                            five (5) years
Non-compete agreements              four (4) years

 Information About Stonehouse Technologies, Inc.

General                                                                         

        Stonehouse  was  founded  in  1978  as an  independent  consulting  firm
providing  telemanagement solutions for the operators of both public and private
telecommunications  networks.  In  April  1996,  Stonehouse  was  acquired  by a
subsidiary of Parent.  As described  above, on June 7, 2002, we acquired 100% of
the capital stock of Stonehouse. Stonehouse's corporate headquarters are located
at 2740 North Dallas Parkway,  Suite 100, Plano,  Texas 75093, and its telephone
number is (972) 543-2100.  Stonehouse has regional offices in Florida,  Arkansas
and Virginia.                                                                   

        Stonehouse  provides  software  and  services  solutions  to help  large
enterprises  manage their  communications  expenses,  assets and processes.  Its
solutions include 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.  These  solutions  enable its customers to
realize  ongoing  cost  savings,   increase  management  control,   and  improve
productivity.                                                                   

        Stonehouse's integrated suite of applications,  MONIES(R) (Management of
Network Income, Expense, and Services), introduced in 1983, enables customers to
centralize the processing  and tracking of  communications  assets and expenses,
reduce billing  errors,  consolidate  inventory and invoice data, and streamline
internal ordering processes.                                                    

        Stonehouse's   professional   services   team   provides   installation,
integration,  training and consulting support. As customer  requirements expand,
Stonehouse  also offers turnkey managed  solutions from assuming  responsibility
for one  function,  such as billing  management,  to complete  outsourcing  of a
customer's communications operations.                                           

        Stonehouse's   applications   and   services   are   targeted  to  large
corporations  (greater than 1,000 employees),  educational  institutions,  state
governments and other organizations with large and complex public,  private, and
hybrid communications networks.  Stonehouse has licensed systems to more than 80
customers in the United States,  Mexico,  Canada,  Australia,  Saudi Arabia, and
Japan.  MONIES(R)  customers cover  industries and  organizations in government,
education,  finance,  petroleum  and  chemical,  transportation,  entertainment,
utilities,  and  telecommunications.  Stonehouse employs a direct sales force as
its primary source of distribution and augments this with informal  co-marketing
and other partnership arrangements.                                             

        As of  June  30,  2002,  Stonehouse  employed  38  full-time  equivalent
personnel, including 10 sales and marketing, 12 custom operations/outsourcing, 5
customer   care,   6  technology   services   and  5   executive,   finance  and
administrative.                                                                 

        Stonehouse  leases  approximately  9,000  square feet of office space in
Plano Texas under a sublease with PTG,  which  expires in June 2005.  Stonehouse
also leases approximately 3,000 square feet in Herndon Virginia under a sublease
which expires on October 31, 2002.                                              

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Proposal 2.    To  approve  the  issuance of shares of our common stock to Halco
               Investments L.C., an entity  controlled by Maurice Halperin,  the
               chairman  of our  board  of  directors,  in  connection  with the
               potential conversion of a $3,100,000  promissory note in order to
maintain our AMEX listing.                        

        As a condition to the closing of the Stonehouse  Acquisition,  we issued
an 8% Convertible Subordinated Promissory Note (the "New Halco Note") to Halco ,
an  entity  controlled  by  Maurice  Halperin,  the  chairman  of our  board  of
directors,  in the original principal amount of $3,100,000,  with interest at 8%
per annum. The New Halco Note replaces a promissory note dated November 20, 2001
that we issued to Halco in the original principal amount of $3,100,000.  The New
Halco  Note is  convertible  at our  option  at any time  prior to  maturity  on
November 20, 2006 and after the earlier of: (i) May 31, 2003 or (ii) the date on
which we receive a notice of delisting from the AMEX, in each case,  only to the
extent  deemed  necessary  to maintain  our listing on the AMEX,  at a per share
conversion  price equal to 85% of the  closing bid price of our common  stock on
the 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 the AMEX on the trading day immediately
prior to the date of conversion.                                                

Purpose of the Stock Issuance                                                   

        As described above, the AMEX has advised us that we are not currently in
compliance with the AMEX net worth listing standards. We can require that all or
a portion of the New Halco Note be  converted  in the event  there is a need for
additional  equity in order to maintain our AMEX  listing.  In the event the New
Halco Note is  converted,  this would  result in an increase in our net worth of
$3.1 million.                                                                   

Effect of Stock Issuance                                                        

        The proposed  issuance of common stock upon  conversion of the New Halco
Note  will  result in  dilution  in the  percentage  ownership  interest  of our
existing  stockholders.  Because the  conversion  price of the New Halco Note is
based on our market price at the time of conversion,  we are unable to determine
the actual number of shares of common stock issuable upon  conversion of the New
Halco Note.  If we required  the New Halco Note to be converted on June 7, 2002,
the New Halco Note would have been  convertible  into  approximately  14,761,905
shares, or 11% of our currently  outstanding  common stock. The number of shares
issuable upon  conversion of the New Halco Note could prove to be  significantly
greater if our stock price decreases.  Conversely, if our stock price increases,
the number of shares  issuable  upon the  conversion of the New Halco Note could
prove to be significantly less.                                                 

Stockholder Approval Required                                                   

        Section 711 of the Listing  Standards,  Policies and Requirements of the
AMEX requires  stockholder approval prior to approving the listing of additional
shares  pursuant  to  any  arrangement  under  which  controlling  stockholders,
officers,  directors or key  employees  may acquire  common stock or  securities
convertible  into common stock equal to 5% or more of the presently  outstanding
common  stock at a price  below  the  market  price at the  time  such  stock is
acquired.  As described  above,  the  conversion  price of the New Halco Note is
equal to a percentage of the market price at the time of  conversion,  which may
be less than the market  price at the time we issued  the New Halco Note  (which
was $0.25).  Based on the conversion  price equal to 85% of our closing price on
June 7,  2002,  the New  Halco  Note  would be  convertible  into  approximately
14,761,905 shares, or 11% of our currently  outstanding common stock. Because we
may be required to issue more than 5% of our  outstanding  common stock to Halco
at a price less than the market  price on the date of  issuance of the New Halco
Note,  the AMEX requires  approval by our  stockholders  other than Halco or its
affiliates.                                                                     

Vote Required                                                                   

        For this proposal to be approved in accordance with the  requirements of
the  AMEX,  the  affirmative  vote  of a  majority  of  the  votes  cast  by our
stockholders  other than Halco or its affiliates,  in person or by proxy, on the
proposal is required.                                                           

Recommendation of the Board of Directors                                        

        The disinterested  members of our board of directors  recommend that you
vote "FOR" the approval of proposal 2.                                          

        Approval of this proposal is  conditioned  upon the approval of proposal
5. If proposal 5 is not  approved,  this proposal 2 will not be approved even if
it receives the requisite stockholder approval.                                 

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Proposal 3.    To  approve  the  issuance  of shares  of our common  stock to H.
               Irwin Levy, the  vice-chairman  of our board of directors and our
               chief  executive  officer,  upon the  potential  conversion  of a
             $650,000 promissory note in order to maintain our AMEX listing.

        As described under "Certain Relationships and Related Transactions",  we
had outstanding borrowings payable to Mr. Levy at December 31, 2001 of $650,000,
with interest at 10% per annum,  which were  scheduled to mature on December 15,
2002. On June 14, 2002, our wholly-owned  subsidiary,  nStor  Corporation,  Inc.
,issued a 10% Convertible  Promissory Note to Mr. Levy in the original principal
amount of $650,000  (the "New Levy Note") to replace the  currently  outstanding
notes. In the event there is any need for additional equity in order to maintain
our AMEX listing after the full conversion of the New Halco Note, we can require
that all or a portion  of the New Levy Note be  converted.  The New Levy Note is
convertible  at our option at any time prior to  maturity  and after the date on
which we receive a notice of delisting from the AMEX,  only to the extent deemed
necessary to maintain our listing on the AMEX  following the full  conversion of
the New Halco Note, at a per share  conversion price equal to 85% of the closing
bid price of our common stock on the AMEX on the trading day  immediately  prior
to the date of conversion.                                                      

Purpose of the Stock Issuance                                                   

        As  described  above,  AMEX has advised us that we are not  currently in
compliance with the AMEX net worth listing standards.  In the event there is any
need for additional  equity in order to maintain our AMEX listing after the full
conversion  of the New Halco Note,  we can require  that all or a portion of the
New Levy Note be converted.                                                     

Effect of Stock Issuance                                                        

        The proposed  issuance of common stock upon  conversion  of the New Levy
Note  will  result in  dilution  in the  percentage  ownership  interest  of our
existing  stockholders.  Because  the  conversion  price of the New Levy Note is
based on our market price at the time of conversion,  we are unable to determine
the actual number of shares of common stock issuable upon  conversion of the New
Levy Note.  If we required  the New Levy Note to be converted on June 14, 2002 ,
the New Levy Note  would  have been  convertible  into  approximately  3,475,936
shares, or 2.5% of our currently  outstanding common stock. The number of shares
issuable upon  conversion  of the New Levy Note could prove to be  significantly
greater if our stock price decreases.  Conversely, if our stock price increases,
the number of shares  issuable upon  conversion of the New Levy Note could prove
to be significantly less.                                                       

Stockholder Approval Required                                                   

        Section 711 of the Listing  Standards,  Policies and Requirements of the
AMEX requires  stockholder approval prior to approving the listing of additional
shares  pursuant  to  any  arrangement  under  which  controlling  stockholders,
officers,  directors or key  employees  may acquire  common stock or  securities
convertible  into common stock equal to 5% or more of the presently  outstanding
common  stock at a price  below  the  market  price at the  time  such  stock is
acquired. As described above, the conversion price of the New Levy Note is equal
to a percentage of the market price at the time of conversion, which may be less
than the market price at the time we issued the New Levy Note (which was $0.22).
Based on the  conversion  price  equal to 85% of our  closing  price on June 14,
2002,  the New Levy  Note  would be  convertible  into  approximately  3,475,936
shares,  or 2.5% of our currently  outstanding  common stock.  Because we may be
required to issue more than 5% of our outstanding  common stock to Mr. Levy at a
price less than the market  price on the date of  issuance of the New Levy Note,
the AMEX  requires  approval  by our  stockholders  other  than Mr.  Levy or his
affiliates.                                                                     

Vote Required                                                                   

        For this proposal to be approved in accordance with the  requirements of
the  AMEX,  the  affirmative  vote  of a  majority  of  the  votes  cast  by our
stockholders  other than Mr. Levy or his  affiliates,  in person or by proxy, on
the proposal is required.                                                       

Recommendation of the Board of Directors                                        

        The disinterested  members of our board of directors  recommend that you
vote "FOR" the approval of proposal 3.                                          

        Approval of this proposal is  conditioned  upon the approval of proposal
5. If proposal 5 is not  approved,  this proposal 3 will not be approved even if
it receives the requisite stockholder approval.                                 

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Proposal 4.    To approve the issuance of up to 30,000,000  shares of our common
               stock to Pacific  Technology Services,  Inc. upon  the  potential
exercise of an option.                            

        On March 1,  2002,  we granted an option to  purchase  up to  30,000,000
shares of our common  stock at an  exercise  price of $0.40 per share to Pacific
Technology  Services,  Inc.  ("PTS"),  a wholly owned subsidiary of Parent.  The
shares issuable upon exercise of the option would represent approximately 22% of
our currently  outstanding common stock. The option is immediately  exercisable,
in whole or in part, and expires on November 30, 2002.                          

        We granted the option in  connection  with our entering  into a Reseller
Agreement  with PTS  effective  as of March 1, 2002 and our  efforts  to develop
further  strategic  business  relationships  with  Parent  and  PEWC.  Under the
Reseller  Agreement,  PTS is a reseller of our products  for Mainland  China and
Taiwan for a period of two years.                                               

Effect of Stock Issuance                                                        

        The proposed issuance of common stock upon conversion of the option will
result in  substantial  dilution  in the  percentage  ownership  interest of our
existing stockholders.                                                          

Stockholder Approval Required                                                   

        The Stock  Purchase  Agreement  requires that we submit this proposal to
stockholders for approval.  If stockholders do not approve the issuance, we will
only issue the shares if we believe  it is in the  stockholders'  best  interest
taking into  consideration  the effect of the  non-issuance on our  relationship
with Parent and PEWC.                                                           

Vote Required                                                                   

        For this proposal to be approved,  the affirmative vote of a majority of
the shares present,  in person or by proxy, and entitled to vote on the proposal
is required.                                                                    

        Current  stockholders who own, as of the record date,  approximately 47%
of the  shares  of our  common  stock  have  executed  proxies  instructing  the
proxyholder to vote in favor of this proposal 4.                                

Recommendation of the Board of Directors                                        

        The members of our board of directors  recommend that you vote "FOR" the
approval of proposal 4.                                                         

Proposal 5.    To  approve  an  amendment to our  certificate  of  incorporation
               increasing  the number of  authorized  shares of our common stock
from 200,000,000 to 230,000,000.                  

        Our board of  directors  has  proposed  amending  Article  Fourth of our
certificate of incorporation to increase the number of authorized  shares of our
common stock from  200,000,000  to 230,000,000  shares.  The number of shares of
preferred stock will remain unchanged at 1,000,000 shares. The full text of this
proposed amendment is attached to this proxy statement as Annex 4.              

Purpose of the Increase in Authorized Shares                                    

        Of the  200,000,000  shares of common  stock  presently  authorized  for
issuance,  approximately  52,778,747 shares are unissued and unreserved.  On the
record date, we had 137,549,920  shares of common stock issued and  outstanding.
The following  chart  summarizes  (i) the number of common shares  necessary for
issuance  pursuant to the proposals  described in this proxy  statement and (ii)
the number of common shares reserved for issuance as described below.           

                                                          No. of Shares Issuable
                                                          ----------------------
Issuable upon conversion of Series L Preferred Stock                4,527,027   
Issuable as Earn-Out Shares                                         8,687,258   
Issuable upon exercise of New Halco Note                           14,761,905(1)
Issuable upon exercise of New Levy Note                             3,475,936(2)
Issuable upon exercise of option to PTS                            30,000,000   

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Additional shares issuable upon exercise of options                             
under our 2001 Stock Option Plan, as amended                      2,500,000 
                                                                ----------
  Total Shares Required Pursuant to Proposals 1-4, and 6        63,952,126
                                                                ----------
Issuable upon exercise of outstanding warrants as of                            
  June 30, 2002                                                     2,382,500(3)
Issuable upon exercise of outstanding stock options as of                       
  June 30, 2002                                                     2,328,833(3)
Issuable upon exercise of stock options under 2001 Stock                        
  Option Plan                                                       4,960,000(3)
                                                                ----------
  Total Shares Reserved for Issuance                             9,671,333
                                                                ----------
            Total                                               73,623,459
                                                                ==========
------------                                                                    
(1)     Represents  the number of shares  issuable  upon  conversion  of the New
        Halco Note based on a conversion  price equal to 85% of our market price
        as of June 7, 2002. The actual amount of shares may be more than or less
        than  this  amount,  depending  on  the  market  price  at the  time  of
conversion.                                                     

(2)     Represents the number of shares issuable upon conversion of the New Levy
        Note based on a conversion  price equal to 85% of our market price as of
        June 14, 2002. The actual amount of shares may be more than or less than
     this amount, depending on the market price at the time of conversion.

(3)     The exercise price of options and warrants  outstanding  as  of June 30,
        2002 exceeds the  market  price of our stock based on the closing market
price of $.23 on June 30, 2002.                                 

        As  described  above,  we will  require up to  63,952,126  shares of our
common stock (i) to issue stock upon conversion of the Series L Preferred Stock,
(ii) to issue Earn-Out  Shares,  (iii) to issue stock upon conversion of the New
Halco Note,  (iv) to issue stock upon  conversion  of the New Levy Note,  (v) to
issue stock upon exercise of option to PTS, and (vi) to issue additional  shares
upon exercise of options under our 2001 Stock Option Plan.  Further, we may have
to issue more shares than we anticipated  upon  conversion of the New Halco Note
and the New  Levy  Note if our  stock  price  declines.  Since  there  are  only
approximately 52,778,747 shares which are unissued and unreserved,  we will need
to increase the number of authorized shares to consummate these transactions.   

        In addition,  given that we may have to issue shares of our common stock
or  securities  convertible  into  our  common  stock  in the  future  to  raise
additional capital to effectively  operate our business,  our board of directors
believes  that our  authorized  common stock should be increased to  230,000,000
shares.  Adoption  of the  amendment  to our  certificate  of  incorporation  is
required in order for us to issue these shares.                                 

        Our board of  directors  believes  that it is in our best  interests  to
issue the shares described in this proxy statement and also have the flexibility
to issue additional shares of common stock or securities convertible into common
stock as needs may arise without further stockholder action,  unless required by
applicable  law,   regulation,   listing  requirements  or  our  certificate  of
incorporation. Except as set forth herein, we have no agreements, understandings
or plans for the  issuance  or use of the  additional  shares  of  common  stock
proposed to be authorized.  The  availability of additional  shares will enhance
our flexibility in connection  with possible  future actions,  such as corporate
mergers, stock dividends, stock splits, financings and other corporate purposes.
The board of directors will decide whether,  when and on what terms the issuance
of shares  of common  stock may be  appropriate  in  connection  with any of the
foregoing  purposes,  without  the  expense  and delay of a special  meeting  of
stockholders.                                                                   

        The  issuance  of  additional  shares of common  stock may,  among other
things,  have a dilutive  effect on  earnings  per share,  and on  stockholders'
equity and voting rights.  The issuance of additional  shares, or the perception
that additional shares may be issued, may also adversely affect the market price
of our common stock. Holders of our common stock have no preemptive rights.     

        The availability for issuance of additional  shares of common stock also
could have the effect of rendering more difficult or  discouraging an attempt to
obtain  control of us.  For  example,  the  issuance  of shares of common  stock
(within the limits  imposed by applicable law and the rules of any exchange upon
which the common  stock may be listed)  in a public or private  sale,  merger or
similar  transaction  would increase the number of outstanding  shares,  thereby
possibly  diluting the interest of a party  attempting to obtain  control of us.
The issuance of  additional  shares of common stock could also be used to render
more  difficult  a  merger  or  similar  transaction  even if it  appears  to be
desirable to a majority of stockholders.  Other than as set forth herein, we are
not aware of any efforts to obtain control of us.                               

        In sum, the board  believes that the increase in authorized  shares will
provide us with  sufficient  shares to issue the shares  described in this proxy
statement  and  enhance our  flexibility  to satisfy  our future  financing  and
capitalization needs.                                                           

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        Our board of directors may approve the issuance of additional  shares of
common stock only if the action is  permissible  under Delaware law and the AMEX
rules.  For example,  if our board of directors  were to approve the issuance of
our stock,  which resulted in an increase of 20% or more in the number of shares
of our common  stock  outstanding,  the AMEX  rules  would  require  stockholder
approval.                                                                       

Vote Required                                                                   

        The  affirmative  vote of the holders of not less than a majority of our
outstanding shares of capital stock entitled to vote is required for approval of
the amendment  increasing our  authorized  shares of common stock to 230,000,000
shares.                                                                         

Recommendation of the Board of Directors                                        

        The members of our board of directors  recommend that you vote "FOR" the
approval of proposal 5.                                                         

Proposal 6.    Amendment to nStor's 2001 Stock Option Plan                      

General                                                                         

        Our 2001 Stock  Option  Plan (the  "Plan")  was  adopted by our board of
directors on October 29, 2001, subject to stockholder  approval,  to provide for
the grant of  options  to  purchase  shares of  common  stock to our  employees,
directors and independent contractors. The Plan was approved by our stockholders
at a special meeting held on January 10, 2002.                                  

        We believe that stock  options are important to attract and to encourage
the continued employment and service of officers, other key employees, directors
and key independent contractors, by facilitating their acquisitions of an equity
interest in our company.  The  acquisition  and holding of an equity interest by
such persons aligns their interest with those of our stockholders.              

        Our board of directors has unanimously approved,  subject to stockholder
approval  at the annual  meeting,  an  amendment  to the Plan to  increase  from
5,000,000 to 7,500,000  the number of shares of our common stock  available  for
issuance.                                                                       

        The principal  provisions of the Plan are summarized below. Such summary
does not,  however,  purport to be complete  and is qualified in its entirety by
the terms of the Plan.                                                          

Summary of the 2001 Stock Option Plan                                           

In furtherance  of its purposes,  the 2001 Stock Option Plan  authorizes,  among
other things:                                                                   

o       the granting of incentive or nonqualified  stock options to purchase our
        common stock to persons  selected by our board of directors from a class
        of  our  employees,  directors,  officers  and  consultants,   including
        non-employees   who  render  valuable   contributions   to  our  company
(presently approximately 115 persons);                          

o       initial  grants of stock  options to  purchase  such number of shares of
        common stock as the board of directors may  determine,  to  non-employee
        directors  elected to the board by the  stockholders or appointed to the
board by the board, subsequent to January 10, 2002, and         

o       automatic  annual  grants  to  non-employee  directors,  effective  each
        anniversary  of those  directors'  appointment  to the  board,  of stock
options to purchase 20,000 shares each of common stock.         

        The  Plan  provides  that  it  is  to  be  administered  by a  committee
consisting of not less than two non-employee  directors  designated by our board
or, if a committee is not designated, then by the entire board.                 

        Except for the annual  grants to  non-employee  directors,  our board of
directors,  in its sole discretion  determine the persons to be awarded options,
the number of shares  subject to the  options and the  exercise  price and other
terms of the options. In addition, the Plan's administrators have full power and
authority to interpret the Plan, to establish,  amend, and rescind any rules and
regulations  relating to the Plan,  to  prescribe  the form of any  agreement or
instrument  executed  in  connection  with  the  Plan,  and to  make  all  other
determinations  necessary or advisable for the  administration  of the Plan. The
acts of our board of directors  with  respect to the Plan are final,  conclusive
and  binding  upon all  persons.  The Plan's  administrators,  however,  have no
discretion  with  respect to options  granted  pursuant to the annual  grants to
non-employee directors.                                                         

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        As originally  adopted, an aggregate of 5,000,000 shares of common stock
were reserved for issuance  upon exercise of options  granted under the Plan. If
this proposal is approved by our  stockholders,  the aggregate  number of shares
reserved for issuance upon the exercise of options  granted under the Plan would
be  increased  to  7,500,000.  The maximum  number of shares  subject to options
granted in any one calendar year to our employees  covered by Section  162(m) of
the Internal  Revenue Code is  1,500,000.  The shares  acquired upon exercise of
options granted under the Plan are authorized and issued shares of common stock.
Our  stockholders  have no  preemptive  rights to purchase or subscribe  for any
common stock by reason of the reservation and issuance of common stock under the
Plan. If any option  granted under the Plan expires or terminates for any reason
other than having been exercised in full, the unpurchased shares subject to that
option will again be available for issuance under the Plan.                     

Certain Terms and Conditions                                                    

        All grants of options under the 2001 Stock Option Plan must be evidenced
by a written option  agreement  between us and the grantee.  Such agreement must
contain  such  terms and  conditions  as the  Plan's  administrators  prescribe,
consistent with the Plan, including,  without limitation,  the number of shares,
the exercise  price,  term and any  restrictions  on the  exercisability  of the
options granted.                                                                

        Under the Plan,  the option  price per share of common  stock may be any
price determined by the Plan's  administrators at the time of grant; except that
the option price of an incentive  stock option granted under the Plan may not be
less than the fair market  value per share of common  stock on the date of grant
(or less than 110% of the fair market value for  stockholders  who own more than
10% of the company's  stock).  The term "fair market value" is defined under the
Plan as the average  high and low sale prices of the common stock as reported by
AMEX or such other exchange or over-the-counter market on which our common stock
is traded on the date of grant,  as  reported by the Wall  Street  Journal.  The
closing  price per share of our common stock as of the record  date,  August 12,
2002, as reported by AMEX was $.25.  The exercise price of an option may be paid
in cash, by certified check, or by a combination of the foregoing. Cash payments
will be used  for  general  corporate  purposes.  The  board  of  directors  (or
committee)  may provide,  but is not required to, that the exercise  price of an
option may be paid by delivery of already  owned shares of common stock having a
fair market value equal to the exercise price.                                  

        To the extent the board of directors provides that the exercise price of
an option may be paid by delivery of already owned shares of common stock having
a fair market value equal to the exercise price, the use of already owned shares
of common  stock  applies to payment  for the  exercise of an option in a single
transaction  and to the  "pyramiding"  of already  owned  shares in  successive,
simultaneous option exercises. In general, "pyramiding" permits an option holder
to start  with as little as one share of  common  stock and  exercise  an entire
option to the  extent  then  exercisable  (no  matter  what the number of shares
subject  thereto).  By utilizing  already owned shares of common stock,  no cash
(except for fractional share adjustments) is needed to exercise an option.      

        No  incentive  stock  option  granted  under the Plan is  assignable  or
transferable,  other  than by will or by the laws of descent  and  distribution.
Non-qualified  stock  options are  transferable  to the extent  permitted by our
board of directors and applicable  law.  During the lifetime of an optionee,  an
option is  exercisable  only by the optionee or its  permitted  transferee.  Our
board of directors determine the expiration date of an option at the time of the
grant,  but in no event may an option be exercised  after the  expiration  of 10
years from the date of grant. Options will vest in accordance with the terms set
forth in a written option  agreement  between us and the optionee.  Our board of
directors may, in its sole  discretion,  accelerate the date on which any option
may be exercised.  The board of directors  may provide,  but is not required to,
that each outstanding option will automatically  become exercisable in the event
of certain transactions,  including certain changes in control,  certain mergers
and reorganizations, and certain dispositions of substantially all our assets.  

        Unless otherwise provided for by our board of directors,  one year after
the  date  on  which  an  optionee's  employment  is  terminated  by  reason  of
retirement,  death, or permanent and total  disability (as defined in the Plan),
the  unexercised  portion of any  vested  options  granted  under the Plan shall
expire. Unless otherwise provided by the Plan's administrators,  the unexercised
portion of any  vested  options  granted  under the Plan will  automatically  be
terminated  thirty  days  after the date on which an  optionee's  employment  is
terminated  for any other reason,  other than  retirement,  death or disability,
provided,  however,  that if an optionee's employment is terminated for "cause,"
as defined in the Plan,  the  unexercised  portion  of any vested  options  will
automatically  be terminated  immediately on the date of the  termination of the
optionee's employment.                                                          

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        To prevent  certain  types of  dilution  of the rights of a holder of an
option, the Plan provides for appropriate adjustment of the number of shares for
which  options  may be  granted,  the number of shares  subject  to  outstanding
options  and the  exercise  price of  outstanding  options  in the  event of any
increase  or  decrease  in the  number of issued and  outstanding  shares of our
capital  stock  resulting  from  a  stock  dividend,  recapitalization,  merger,
reorganization  or other capital  adjustment.  The board has  discretion to make
appropriate  antidilution  adjustments to outstanding  options in the event of a
merger, consolidation or other reorganization.                                  

        The Plan will expire on October 29, 2011, and any option  outstanding on
such date will remain outstanding until it expires or is exercised. Our board of
directors may amend or terminate the Plan or any option at any time, without the
approval of the  stockholders,  provided  that any  amendment  may not adversely
affect  the  rights of an  optionee  under an  outstanding  option  without  the
optionee's consent. No such amendment may, without approval of our stockholders,
increase  the number of shares of common stock  reserved for issuance  under the
Plan or modify the  requirements  for  eligibility to receive  options under the
Plan.  In addition,  stockholder  approval is required for any  amendment to the
Plan if such stockholder approval is required by federal or state law.          

Federal Income Tax Consequences                                                 

        Our 2001 Stock  Option Plan is not  qualified  under the  provisions  of
Section  401(a) of the Internal  Revenue  Code,  nor is it subject to any of the
provisions of the Employee Retirement Income Security Act of 1974, as amended.  

Nonqualified Stock Options                                                      

        An optionee  granted a  nonqualified  stock  option  under the Plan will
generally  recognize,  at the date of exercise of such option,  ordinary  income
equal to the difference  between the exercise price and the fair market value of
the  shares of common  stock  subject to the  nonqualified  stock  option.  This
taxable  ordinary  income  will be  subject to  federal  income tax  withholding
requirements,  and we will be  entitled to a  deduction  for federal  income tax
purposes  equal to the amount of ordinary  income  recognized  by the  optionee,
provided that such amount constitutes an ordinary and necessary business expense
and is reasonable, and provided that either the optionee includes that amount in
his or her income, or we timely satisfy our reporting  requirements with respect
to that amount.                                                                 

        If an  optionee  exercises a  nonqualified  stock  option by  delivering
shares of our common stock,  the optionee will be taxed as described  above with
respect to the  exercise of the  nonqualified  stock  option as if he or she had
paid the exercise price in cash,  and we likewise  generally will be entitled to
an equivalent tax deduction.  The optionee,  however, will not recognize gain or
loss with respect to the exchange of such shares,  even if the fair market value
of those shares is different from the optionee's tax basis.  Provided a separate
identifiable stock certificate is issued therefore,  the optionee's tax basis in
that number of shares  received on such exercise which is equal to the number of
shares surrendered on such exercise will be equal to his or her tax basis in the
shares  surrendered,  and his or her  holding  period for such  number of shares
received  will  include  the  holding  period  for the shares  surrendered.  The
optionee's tax basis and holding period for the  additional  shares  received on
exercise of a  nonqualified  stock  option  paid for, in whole or in part,  with
shares will be the same as if the optionee had exercised the nonqualified  stock
option solely for cash.                                                         

Incentive Stock Options                                                         

        The Plan  provides  for the grant of stock  options  to  employees  that
qualify as "incentive  stock  options" as defined in section 422 of the Internal
Revenue Code.  Under the Code, an optionee  generally is not subject to ordinary
income tax upon the grant or exercise of an incentive stock option.  However, an
employee who exercises an incentive stock option by delivering  shares of common
stock previously  acquired pursuant to the exercise of an incentive stock option
is treated as making a  "disqualifying  disposition"  (as defined below) of such
shares if the employee delivers such shares before the expiration of the holding
period applicable to such shares. The applicable holding period is the longer of
two  years  from the date of grant or one year  from the date of  exercise.  The
effect of this provision is to prevent "pyramiding" the exercise of an incentive
stock option (i.e., the exercise of the incentive stock option for one share and
the use of that share to make successive exercises of the incentive stock option
until it is completely exercised) without the imposition of current income tax. 

        If,  subsequent  to the exercise of an incentive  stock option  (whether
paid for in cash or in shares),  the  optionee  holds the shares  received  upon
exercise for a period that exceeds two years from the date such incentive  stock
option  was  granted  or, if  later,  one year  from the date of  exercise,  the
difference (if any) between the amount realized from the sale of such shares and
their tax basis to the holder will be taxed as long-term capital gain or loss.  

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        In general,  if, after exercising an incentive stock option, an employee
disposes of the shares so acquired before the end of the required holding period
(as described in the  preceding  paragraph),  such  optionee  would be deemed to
receive  ordinary  income in the year of such  disposition in an amount equal to
the excess of the fair market value of the shares,  as of the date the incentive
stock option was exercised,  over the exercise price. Such an event is sometimes
referred to as a "disqualifying  disposition." If the disqualifying  disposition
is a sale or  exchange  that  would  permit a loss to be  recognized  under  the
Internal  Revenue  Code  (were a loss in fact to be  sustained),  and the  sales
proceeds  are less  than  the fair  market  value of the  shares  on the date of
exercise,  the optionee's  ordinary income would be limited to the gain (if any)
from the sale. If the amount realized upon  disposition  exceeds the fair market
value of the  shares on the date of  exercise,  the  excess  would be treated as
short-term or long-term  capital gain,  depending on whether the holding  period
for such shares exceeded one year.                                              

        The amount by which the fair market  value of the shares of common stock
acquired  pursuant to the  exercise of an  incentive  stock  option  exceeds the
exercise price of such shares under such option  generally will be treated as an
item of adjustment included in the optionee's alternative minimum taxable income
for purposes of the alternative  minimum tax for the year in which the option is
exercised.  If, however,  there is a disqualifying  disposition of the shares in
the year in which the option is  exercised,  there will be no item of adjustment
for purposes of the  alternative  minimum tax as a result of the exercise of the
option with respect to those shares. If there is a disqualifying  disposition in
a year after the year of exercise,  the income on the disqualifying  disposition
will not be  considered  income for purposes of the  alternative  minimum tax in
that subsequent  year. The optionee's tax basis for shares acquired  pursuant to
the  exercise of an incentive  stock  option will be  increased  for purposes of
determining  his or her  alternative  minimum  tax by the  amount of the item of
adjustment  recognized  with  respect to such  shares in the year the option was
exercised.                                                                      

        An income tax  deduction  is not allowed to the company  with respect to
the grant or exercise of an incentive stock option or the disposition, after the
required holding period  described  above, of shares acquired upon exercise.  In
the event of a disqualifying disposition, a federal income tax deduction will be
allowed  to the  company  in an  amount  equal  to  the  ordinary  income  to be
recognized by the optionee,  provided that such amount  constitutes  an ordinary
and necessary business expense to us and is reasonable,  and either the employee
includes  that amount in his or her income or the company  timely  satisfies its
reporting requirements with respect to that amount.                             

Equity Compensation Plan Information                                            

        The following table provides information about our common stock that may
be issued upon the  exercise of options,  warrants  and rights  under all of our
existing equity compensation plans as of June 30, 2001, including our 1996 Stock
Option Plan and our 2001 Stock Option Plan,  both of which have been approved by
our stockholders.                                                               

                                                        [Enlarge/Download Table]

                                                                                              (c)             
                                                                                      Number of Securities    
                                          (a)                      (b)              Remaining Available for   
                                Number of Securities to     Weighted Average      Future Issuance Under Equity
                                be Issued Upon Exercise    Exercise Price of            Compensation Plans    
                                of Outstanding Options,   Outstanding Options,        (excluding securities   
Plan Category                   Warrants and Rights (#)  Warrants and Rights ($)   reflected in column (a))(#)
-------------                   -----------------------  -----------------------  ----------------------------
                                                                                                              
Equity Compensation Plans                                                                                     
  approved by security holders          2,328,833                $2.51                  4,960,000 (1)         

Equity Compensation Plans not                                                                                 
  approved by security holders          2,382,500 (2)            $1.86                       -                
                                        ---------                                       ---------             
                                        4,711,333                                       4,960,000             
                                        =========                                       =========             


---------------                                                                 
1) Effective  December 31, 2001, our board of directors decided to cease issuing
options  to  purchase  our  common  stock  under  our 1996  Stock  Option  Plan.
Accordingly,  the number of securities  remaining  available for future issuance
under equity compensation plans represents shares remaining available for future
issuance under our 2001 Stock Option Plan, before stockholder  approval to amend
the Plan to  increase  the  number  of  authorized  shares  under  the Plan from
5,000,000 to 7,500,000.                                                         

2) Represents  outstanding  warrants  primarily  issued in  connection  with our
borrowings from private investors.                                              

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Vote Required                                                                   

        The affirmative vote of a majority of the votes present, in person or by
proxy, and entitled to vote is required to approve the amendment of the Plan.   

Recommendation of the Board of Directors                                        

        Our board of  directors  recommends  that you vote "FOR" the proposal to
approve and ratify the adoption of the amendment to our 2001 Stock Option Plan. 

Proposal 7.    Election of Directors:  Nominees                                 

        Our certificate of  incorporation  provides that the number of directors
constituting  our board of  directors  shall be not less than  three,  the exact
number of which shall be fixed from time to time by our board of directors.  The
board of  directors  has  fixed at seven  the  number  of  directors  that  will
constitute the board for the ensuing year.                                      

        Pursuant to the terms of the Stonehouse Acquisition,  Parent is entitled
to nominate two members of our board of  directors.  At the time of mailing this
proxy statement, Parent has not selected the two remaining nominees for election
to the board of directors.  Accordingly,  the two vacancies  will be filled with
Parent's  nominees  by the  affirmative  vote  of a  majority  of the  board  of
directors  after the annual meeting.  The directors  filling such vacancies will
serve for the ensuing year and until the successors are elected and qualified.  

        Messrs.  Roger H. Felberbaum,  Bernard R. Green,  Maurice  A. Halperin -
Chairman of the Board,  H. Irwin Levy - Vice  Chairman  and Michael L. Wise have
been  nominated  for  election  as our  directors.  Messrs.  Felberbaum,  Green,
Halperin, Levy and Wise are current members of the board of directors.          

        The board of directors has no reason to believe that any of the nominees
will refuse to act or be unable to accept election;  however,  in the event that
one or more of the  nominees  is  unable  to  accept  election  or if any  other
unforeseen contingencies should arise, each proxy that does not direct otherwise
will be voted for the remaining  nominees,  if any, and for such other person(s)
as may be designated by the board of directors.                                 

Vote Required                                                                   

        For this proposal to be approved, the affirmative vote of a plurality of
the  shares of common  stock  present  in  person  or  represented  by proxy and
entitled to vote at the annual meeting is required. You may vote in favor of all
the nominees or you may withhold your vote from any or all nominees.  Votes that
are withheld with respect to this matter will be excluded entirely from the vote
and will have no effect,  other than for purposes of determining the presence of
a quorum.                                                                       

Recommendation of the Board of Directors                                        

        The members of our board of directors  recommend that you vote "FOR" the
election of all the nominees for election as directors.                         

                                                        [Enlarge/Download Table]

                                   MANAGEMENT                                                     

Our Directors and Executive Officers                                                              

        Set forth below is the name,  age,  position with us, the month and year                  
in which each was first appointed or elected an officer or director, and certain                  
other information with respect to each director and executive officer:                            

       Name               Age               Position                Director Since   Officer Since
-------------------       ---        -------------------------      --------------   -------------
                                                                                                  

Maurice A. Halperin        81        Chairman of the Board            August 2001          -      

H. Irwin Levy              76        Vice Chairman of the                                         
                                     Board and Chief Executive        1998 (1)         June 2001  
                                     Officer                                                      

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Guy Carbonneau             40        Vice President, Hardware                                     
                                     Engineering                         -             April 2002 

Roger H. Felberbaum        60        Director                         February 2000        -      

John E. Gates              64        Chief Executive Officer                                      
                                     and President of                                             
                                     Stonehouse Technologies             -             June 2002  

David L. Geene             50        Senior Vice President, Sales     April 2002                  
                                     and Marketing                                         -      

Bernard R. Green           83        Director                         May 1997             -      

Thomas L. Gruber           57        Acting President and                                         
                                     Chief Operating and                 -             2001 (2)   
                                     Financial Officer                                            

Jack Jaiven                56        Vice President, Treasurer           -             1999 (3)   

Bruce E. Menn              56        Vice President, Customer                                     
                                     Satisfaction                        -             April 2002 

Michael L. Wise            59        Director                         1989 (4)             (4)    

Thomas G. Wrightson        56        Vice President, Operations          -             March 2000 


----------------                                                                
(1)  Mr. Levy  previously  served as our Chairman of the Board of Directors from
1987 until July 1991 and from June 1998 until August 2001.            
(2)  Mr.  Gruber was  appointed  Vice  President,  Finance  and Chief  Financial
     Officer in August 2001. In February 2002,  Mr. Gruber was appointed  Acting
     President  and Chief  Operating  Officer,  retaining  his  Chief  Financial
Officer position.                                                     
(3)  Mr. Jaiven  previously served as Vice President and Chief Financial Officer
     from July 1989 until June 1991,  from January  1997 until  October 1997 and
from July 1999 until July 2001.                                       
(4)  Mr. Wise previously  served as our President from March 1989 until December
     1990 and from  October  1992 until July 1996.  He served as Vice  President
     from June 1998 to November 1999. He also served as Chairman of the board of
     directors  from July 1991 until June 1998 and Vice Chairman of the board of
directors from June 1998 until November 1999.                         

    The  terms of the  directors  will  expire  at the 2003  annual  meeting  of
stockholders.                                                                   

        Maurice A.  Halperin  has been a private  investor  for more than thirty
years and currently is the owner and President of two private companies,  one of
which is in the real estate development business,  and the second of which is in
the  hospitality  industry.  Mr.  Halperin has been active in the turn-around of
several unprofitable public companies in the past, including Empire of Carolina,
Deltona Corporation, and Clabir.                                                

        H. Irwin Levy has been Chairman of the Board and Chief Executive Officer
of  Hilcoast  Development  Corp.  ("Hilcoast"),  a real estate  development  and
management company, and certain affiliated companies, all of which are privately
held  businesses,  since August  1992.  Mr. Levy was Chairman of the Board of CV
Reit, Inc., a NYSE listed Real Estate Investment Trust ("CV Reit") from December
1997 until June 2000 at which time he became a director of Kramont Realty Trust,
successor  in merger to CV Reit.  Mr.  Levy also served as Chairman of the Board
and Chief  Executive  Officer  of CV Reit  from  1985  until  July  1992.  He is
currently of counsel to the West Palm Beach law firm of Levy Kneen Mariani LLC. 

        Guy  Carbonneau has been employed by us since June 1996 when we acquired
the net  assets of  Seagate  Peripherals.  Previously  Mr.  Carbonneau  had been
employed by Seagate and its  predecessor,  Conner  Storage  Systems  Group since
1992. Mr.  Carbonneau  has held various  management  and  development  positions
focused on research  and  development  for external  storage,  has over 20 years
experience  in the  computer  industry  and holds five US patents in the area of
computer storage and systems architectures.                                     

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        Roger H. Felberbaum is currently  Senior Vice President with Legg Mason,
a NYSE money  management  firm, and was most recently  Managing  Director at ING
Baring from  September  1997 until March 2001.  Previously,  Mr.  Felberbaum was
Senior Managing Director of Furman Selz from October 1983 until September 1997. 

        John E. Gates joined us in June 2002 in connection  with our  Stonehouse
Acquisition.  Mr.  Gates  previously  served as  President  and Chief  Executive
Officer  of  various  companies  affiliated  with  Pacific  USA  Holdings  Corp.
including  Stonehouse  since  March  1996.  Mr.  Gates  has  over  thirty  years
experience in technology business management.                                   

        David L. Geene was employed by Eurologic Systems from October 1996 until
April 2001,  where he held the  position of Senior Vice  President  of Sales and
Marketing  and  served as a member of the Board of  Directors.  From  April 1989
until  October  1996,  Mr.  Geene held  various  sales  positions  with  Digital
Equipment's  Storageworks  Division and Government  Sales Unit. Mr. Geene has 29
years experience in the computer industry.                                      

        Bernard  R.  Green was for more than  forty  years,  managing  or senior
partner of, or consultant to the accounting firm of Friedman,  Alpren & Green of
New York, New York and West Palm Beach,  Florida. Mr. Green previously served as
a director of Hilcoast from July 1992 until February 1997 and has been a private
investor for more than twenty years.                                            

        Thomas L.  Gruber,  a certified  public  accountant,  was most  recently
General  Manager for  Wireless  Power Group from April 1999 until March 2001 and
previously  from June 1992  until  March  1999,  President  and Chief  Executive
Officer  of  Signature  Holding  Corporation.  He has in excess of thirty  years
experience as an executive in various industries.                               

        Jack  Jaiven,  a  certified  public  accountant,  has  served  as a Vice
President  of  Hilcoast  since  July  1992 and as a Vice  President  of  Cenvill
Recreation,  Inc.  and various  affiliates  (real  estate  management  companies
affiliated  with Hilcoast) since May 1999. From October 1997 through April 1999,
he served  as  Executive  Vice  President  and  Treasurer  of Avatar  Retirement
Communities,  Inc., a wholly owned subsidiary of Avatar  Holdings,  Inc., a NYSE
listed real estate development company.                                         

        Bruce  E.  Menn  held  various  executive   management   positions  with
Printronix  from July 1988 to November 2000, and most recently held the position
of Vice  President of Customer  Support from August 1998 to November  2000.  Mr.
Menn  has  in  excess  of  thirty  years  experience  in  design,   development,
engineering and product management and customer support.                        

        Michael L. Wise  is  currently  Chairman  of  the  board  of  directors,
President and Chief Executive Officer of Netword,  Inc., a publicly held company
that  provides  a  utility  for  navigating  the  internet.  Mr.  Wise  has been
associated with our company in various  positions since 1986 and was the founder
of IMNET  Corporation  of Delaware  ("IMNET"),  which became a subsidiary of our
company in 1988. Mr. Wise served as President and Chairman of the Board of IMNET
from July 1986 to June 1990. Mr. Wise has a PhD in physics.                     

        Thomas G.  Wrightson  held  various  management  positions  with Storage
Technology  Corporation  from  December  1991  until  March  2000,  and was most
recently Director of Support Services Development and Management.  Mr. Wrightson
has in excess of twenty-five years of experience in information technology.     

Meetings and Committees of the Board of Directors                               

        During the year ended December 31, 2001, the board of directors held one
meeting (which was attended by each of our directors) and on five occasions took
action by unanimous written consent.                                            

        The board of  directors  has an Audit  Committee.  The Audit  Committee,
which held one meeting  during 2001,  is composed of Michael L. Wise and Bernard
R.  Green.  The  Audit  Committee  performs  its  duties  pursuant  to the Audit
Committee  Charter,  as amended,  a copy of which is attached as Annex 3 to this
Proxy  Statement  in the form in which it was adopted by the Audit  Committee on
April  16,  2001 and which  was  subsequently  reviewed  and  approved  again in
accordance with AMEX requirements at the March 18, 2002 Audit Committee meeting.
Both members of the Audit Committee  qualify as an "independent"  director under
the current listing  standards of the AMEX. The functions of the Audit Committee
are  described  in the  Audit  Committee  Charter  and  include  overseeing  the
financial  reporting process and the  effectiveness of our internal,  accounting
and financial controls,  and making  recommendations to the Board, including the
designation of independent auditors on an annual basis.                         

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Proposal 8.    To ratify the re-appointment  of Swenson Advisors LLP,  certified
       public accountants, as our independent auditors for 2002.

        The  firm  of  Swenson  Advisors  LLP   ("Swenson"),   certified  public
accountants,  served as our  independent  auditors  for the  fiscal  year  ended
December 31, 2001. Swenson has advised us that the firm does not have any direct
or indirect  financial  interest in us or any of our  subsidiaries,  nor has the
firm had any such interest in connection with us or our subsidiaries since their
engagement  in December  2001,  other than in its  capacity  as our  independent
auditors.  The  board of  directors  has  selected  Swenson  as our  independent
auditors for the fiscal year ending December 31, 2002. Although the Board is not
required to do so, it is submitting  its selection of our  independent  auditors
for  ratification at the annual meeting,  in order to ascertain the views of its
stockholders.  The  Board  will not be  bound  by the vote of the  stockholders;
however,  if the  selection  is not  ratified,  the Board would  reconsider  its
selection.  One or more  representatives of Swenson may be present at the annual
meeting,  will have the  opportunity to make a statement if they desire to do so
and will be available to respond to appropriate questions from stockholders.    

Recommendation of the Board of Directors                                        

        The board of  directors  recommends  that you vote "FOR" the approval of
proposal 8.                                                                     

Change of Auditors                                                              

        On December 11, 2001, we engaged Swenson as our  independent  certifying
accountants  for the fiscal year ending December 31, 2001. On November 30, 2001,
we notified BDO Seidman, LLP ("BDO") of their dismissal. BDO was the independent
certifying  accountants previously engaged to audit our financial statements for
the period ended December 31, 2000.                                             

        Our  engagement of Swenson and the dismissal of BDO were  recommended by
our audit  committee  and  approved  by our board of  directors.  During the two
fiscal years ended  December  31, 1999 and  December  31, 2000,  and through the
subsequent  interim period ended November 30, 2001,  there were no disagreements
with  BDO on  any  matter  of  accounting  principles  or  practices,  financial
statement disclosure or auditing scope or procedure,  which disagreements if not
resolved  to the  satisfaction  of BDO  would  have  caused  that  firm  to make
reference in  connection  with its report on our financial  statements  for such
years.                                                                          

        During the two fiscal  years ended  December  31, 1999 and  December 31,
2000,  and through the subsequent  interim  period ended  September 30, 2001, in
accordance  with Rule 304 (a) (1) (iv) and in conjunction  with the audit of our
financial  statements  for the  fiscal  year ended  December  31,  2000,  and in
conjunction  with the review of our financial  statements  for the quarter ended
September 30, 2001, there were no reportable events.                            

        We have authorized BDO to respond fully to all inquiries of Swenson. The
reports  of BDO on the  financial  statements,  as of and  for the  years  ended
December  31, 1999 and  December  31,  2000,  contained  no adverse  opinions or
disclaimers of opinion,  and were not modified or qualified as to audit scope or
accounting  principles,  but did  contain  modifications  as to our  ability  to
continue as a going concern for the year ended December 31, 2000.               

        We  requested  that BDO  furnish  a letter  to us  addressed  to the SEC
stating  whether or not it agreed with the above  statements.  A copy of the BDO
letter to the SEC, dated December 11, 2001, is filed as Exhibit 16.1 to the Form
8-K filed with the SEC on December 13, 2001.                                    

Fees                                                                            

        The following  table sets forth the aggregate  fees billed to us for the
fiscal year ended  December 31, 2001 by Swenson and BDO (for  services  rendered
prior to its dismissal):                                                        

Audit Fees                                 $78,000(1)           
Financial Information Systems Design                            
and Implementation Fees                  $     -            
All Other Fees                             $     -              
---------------                                                 
        (1)    Includes fees for the audit of our financial  statements  for the
               fiscal year ended  December 31, 2001 and the reviews of our Forms
10-Q for such year.                               

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                                                        [Enlarge/Download Table]


                             EXECUTIVE COMPENSATION                                                       

Summary Compensation Table                                                                                

        The  following  table sets forth for the years ended  December 31, 2001,                          
2000 and 1999, the  compensation  awarded to, earned by or paid to those persons                          
who were, during 2001, our Chief Executive Officer and the Named Officers.                                

                                                                            All            Securities     
         Name and                            Annual Compensation         Other Annual  Underlying Options/
    Principal Position          Year        Salary         Bonus         Compensation        SAR's (#)    
---------------------------     ----     ---------------------------     ------------  -------------------
                                                                                                          
H. Irwin Levy (1)               2001         -              -             $13,500             20,000      
  Chief Executive               2000         -              -             $16,500             20,000      
    Officer                     1999         -              -             $18,000             20,000      

Thomas L. Gruber                2001     $111,417(2)        -                -                  -         
  Acting President, Chief       2000         -              -                -                  -         
    Operating and Financial     1999         -              -                -                  -         
    Officer                                                                                               

M. Thomas Makmann (3)           2001     $193,115       $ 20,000             -                  -         
  Former President and          2000         -   (4)        -                -               175,000      
    Chief Operating Officer     1999         -              -                -                  -         

Larry Hemmerich                 2001     $164,582(5)        -                -               300,000(8)   
  Former President and          2000     $297,917(6)    $125,000(7)          -             1,250,000(8)   
    Chief Executive Officer     1999         -              -                -                  -         

Joel F. Brody (9)               2001     $136,667       $ 17,500             -                  -         
  Former Vice President,        2000     $ 47,834(10)   $ 17,500             -               105,000      
    Engineering                 1999         -              -                -                  -         

Thomas G. Wrightson             2001     $150,000           -                -                  -         
  Vice President,               2000     $114,231(11)       -             $26,046(12)       205,000       
    Operations                  1999         -              -                -                  -         


----------                                                                      
(1)  The  compensation  reported  represents  fees  earned in his  capacity as a
     Director and Vice Chairman of the Board (see Directors  Compensation).  Mr.
     Levy was appointed Chief Executive  Officer in June 2001 for which Mr. Levy
does not receive compensation.                                        
(2)  Represents  compensation  paid to Mr. Gruber  commencing April 2, 2001, the
first date Mr. Gruber was retained by us.                             
(3)  Mr. Makmann's employment with us ended February 14, 2002.                  
(4)  Mr. Makmann commenced employment with us on December 29, 2000.             
(5)  Represents salary paid to Mr. Hemmerich from January 1, 2001,  through June
     22, 2001, the date Mr.  Hemmerich's  employment with us ended pursuant to a
Separation Agreement (see Employment Agreements).                     
(6)  Represents  salary received by Mr. Hemmerich  commencing  January 17, 2000,
the first date Mr. Hemmerich became employed by us.                   
(7)  See the discussion under Employment  Agreements  regarding Mr.  Hemmerich's
2000 bonus.                                                           
(8)  Effective June 22, 2001,  pursuant to the Separation  Agreement  between us
     and Mr.  Hemmerich,  previously  granted  options  totaling  1,250,000 were
  cancelled and Mr. Hemmerich was granted a new option for 300,000 shares.
(9)  Mr. Brody's employment with us ended February 15, 2002.                    
(10) Represents  salary paid to Mr. Brody commencing  August 14, 2000, the first
date Mr. Brody was employed by us.                                    
(11) Represents  salary paid to Mr.  Wrightson  commencing  March 13, 2000,  the
first date Mr. Wrightson was employed by us.                          
(12) Represents certain relocation  expenses paid to Mr. Wrightson in connection
with his relocation efforts upon commencement of employment with us.  

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                                                        [Enlarge/Download Table]


Option Grants During Last Fiscal Year                                                                     

        The following table sets forth information regarding options to purchase                          
our common stock that were granted during fiscal 2001 to the Named Officers.  No                          
SARs were granted.                                                                                        

                             Individual Grants                                                            
                        -----------------------------                                                     
                        Number of        Percent of                                 Potential Realizable  
                        Securities     Total Options/                                 Value at Assumed    
                        Underlying         SARs                                     Annual Rates of Stock 
                         Options/        Granted to        Exercise                 Price Appreciation for
                           SARs          Employees         or  Base                      Option Term      
                         Granted         in Fiscal          Price       Expiration  ----------------------
                           (#)             2001             ($/sh)         Date       5%($)         10%($)
                        ----------     --------------     ----------    ----------  ----------------------
                                                                                                          
H. Irwin Levy              20,000            3%             $.40         10/08/11   $  13,031     $ 20,750
Thomas L. Gruber             -               -                -             -            -            -   
M. Thomas Makmann            -               -                -             -            -            -   
Larry Hemmerich           300,000           41%             $.45         06/22/06    $219,901     $350,155
Joel F. Brody                -               -                -             -            -            -   
Thomas G. Wrightson          -               -                -             -            -            -   


                                                        [Enlarge/Download Table]


Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value Table                     

        The following table sets forth certain information  concerning exercised                           
and unexercised stock options held by the Named Officers as of December 31, 2001                           
and the value of unexercised stock options as of December 31, 2001. No SARs have                           
been granted or are outstanding.                                                                           

                                                           Number of                Value of Unexercised   
                         Shares                     Unexercised Options at        In-the-Money Options at  
                        Acquired                    December 31, 2001 (#)         December 31, 2001 ($)(1) 
                           on         Value       --------------------------     --------------------------
Name                    Exercise     Realized     Exercisable  Unexercisable     Exercisable  Unexercisable
-------------------     --------     --------     -----------  -------------     -----------  -------------
                                                                                                           
H. Irwin Levy             -0-           -0-        160,000         20,000            -0-            -0-    

Thomas L. Gruber          -0-           -0-           -0-            -0-             -0-            -0-    

M. Thomas Makmann         -0-           -0-         58,333(2)     116,667(2)         -0-            -0-    

Larry Hemmerich           -0-           -0-        300,000           -0-             -0-            -0-    

Joel F. Brody             -0-           -0-         31,000(2)      74,000(2)         -0-            -0-    

Thomas G. Wrightson       -0-           -0-         64,333        140,667            -0-            -0-    


----------                                                                      
1)   The closing price for our common stock, as reported by AMEX on December 31,
     2001,  was $.28.  Since the  exercise  price  exceeds the closing  price at
     year-end,   none  of  the   exercisable  or   unexercisable   options  were
in-the-money at December 31, 2001.                                    

2)   Options for Mr.  Makmann and Mr.  Brody were  forfeited  in 2002  following
termination of employment.                                            

Compensation Committee Interlocks and Insider Participation                     

        Since we did not have a Compensation  Committee  during 2001, the entire
board of directors participated in deliberations concerning compensation paid to
our executive officers.                                                         

        Larry Hemmerich,  our former president and chief executive officer,  was
also a member of the board of directors until March 2002.                       

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Directors Compensation                                                          

        With the exception of Larry  Hemmerich,  none of our directors were also
our employees in 2001. Our non-employee directors are entitled to receive $1,500
for each directors'  meeting attended.  In addition,  during 2001,  non-employee
directors    earned    annual    compensation    in   the   form   of    monthly
management/consulting  and  board  fees  for  services  rendered  to us in their
respective capacities as directors as follows:  Roger H. Felberbaum,  Bernard R.
Green,  H.  Irwin  Levy and  Michael L. Wise,  - $13,500  each,  and  Maurice A.
Halperin - $4,000.                                                              

        Commencing in February 2000,  all of the then directors  agreed to defer
receipt of all compensation  earned until certain events occur. As a result,  no
directors'  fees have been paid since January 2000. Mr. Wise's  compensation  is
payable to Yadgim Partners, of which Mr. Wise's wife is a general partner.      

        Effective  January 10, 2002,  our  stockholders  approved our 2001 Stock
Option Plan and we ceased issuing  options under our 1996 Stock Option Plan. The
terms of any option  issued under the 1996 Stock Option Plan will continue to be
governed by the 1996 Stock  Option Plan and the option  agreement  currently  in
effect for such  option.  Pursuant  to our 1996 Stock  Option  Plan and our 2001
Stock  Option  Plan,  each  non-employee  director  is  automatically   granted,
effective each  anniversary  of said  director's  appointment  to the board,  an
option to purchase  20,000  shares of common stock at the then fair market value
of our common stock.                                                            

Employment Agreements                                                           

        We entered into an employment  agreement with Larry Hemmerich  effective
January 17, 2000, pursuant to which Mr. Hemmerich was employed as our President,
Chief  Executive  Officer  and  a  director.  The  agreement  provided  for  the
employment of Mr.  Hemmerich  through January 16, 2002, at an annual base salary
of $325,000.  The agreement  further  provided for a $125,000 cash bonus for the
first year of  employment,  and an  undetermined  bonus in year two based on the
achievement of certain performance objectives set by our board of directors. Mr.
Hemmerich was also granted  options to purchase  1,000,000  shares of our common
stock at $2.50 per share, with one-third vesting on January 17, 2001,  one-third
on July 17, 2001 and the remainder on January 17, 2002. The employment agreement
provided that 50% of Mr. Hemmerich's options would vest immediately in the event
we terminated his employment  without cause (as defined in the  agreement).  The
agreement  further provided that if Mr. Hemmerich  resigned his employment or we
terminated Mr.  Hemmerich for cause (as defined in the  agreement),  he would be
entitled to receive his base  compensation  through the date of  resignation  or
termination. In the case of voluntary resignation,  all unexercised options were
to expire 30 days from the date of  resignation  and in the case of  termination
for cause, all of the unexercised options were to terminate immediately.        

        On October  18,  2000,  we agreed to extend the term of Mr.  Hemmerich's
employment  agreement to January 16, 2003,  and made the following  revisions to
the  original  agreement:  (i) a bonus of $100,000 to be paid in January 2002 in
the event that during 2001 we experienced three consecutive  quarters of revenue
growth of not less than 5% of the previous quarter,  or in the event the closing
market  price of our common  stock was equal to or  exceeded  $5.00 per share on
December  31,  2001(which  conditions  did not  occur  and no bonus was paid for
2001);  (ii) Mr.  Hemmerich  was  granted an option to  purchase  an  additional
250,000  shares at $2.00 per share with 100%  vesting on January 16,  2003;  and
(iii) in the event of the sale of substantially all of our assets or a change in
control of more than 51% of our current  ownership,  100% of all options granted
would vest immediately.                                                         

        Effective  January 17, 2001, Mr. Hemmerich agreed to accept a promissory
note in the amount of $125,000 as payment for the bonus due to him for 2000,  as
outlined in his original employment agreement. The note bore interest at 10% per
annum,  payable  quarterly,  and was due thirty days from demand, but no earlier
than June 30, 2001.  Effective April 12, 2001, Mr.  Hemmerich agreed to exchange
his  $125,000  note and the  accrued  interest  of $2,900  for 128 shares of our
Series I  Convertible  Preferred  Stock  with a face  value of  $127,900,  which
accrued  quarterly  dividends at 10% per annum and was convertible  into 177,653
shares of our common stock based on a fixed  conversion price of $.72 per share.
Effective  with the Halco  Investment  (see  Certain  Relationships  and Related
Transactions  -  Loans  and or  Investments  Made  by  Directors  -  Maurice  A.
Halperin), in January 2002, the Series I Convertible Preferred Stock held by Mr.
Hemmerich and all accrued  dividends thereon were converted to 305,585 shares of
common stock,  including  106,594  Inducement Shares and 21,238 Dividend Shares.
"Inducement   Shares"  and  "Dividend   Shares"  are  defined   under   "Certain
Relationships and Related Transactions."                                        

        Effective June 22, 2001, under a Separation Agreement between us and Mr.
Hemmerich,  Mr.  Hemmerich  ceased to hold the  positions of President and Chief
Executive  Officer;  however,  he  continued  to be a  member  of the  board  of
directors and was retained as a consultant  for a period of six months at $5,000
per month. The Separation Agreement further provided for the cancellation of all
options  previously  granted to Mr.  Hemmerich  and the grant of a new option to
purchase  300,000  shares of our common stock at $.45 per share.  In March 2002,
Mr. Hemmerich resigned as a member of our board of directors.                   

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         Effective   June  26, 2001,  M.  Thomas   Makmann  was appointed as our
President  and Chief  Operating  Officer and H. Irwin Levy was  appointed  Chief
Executive Officer. Effective February 14, 2002, Mr. Makmann's employment with us
ended and Thomas L. Gruber was appointed  Acting  President and Chief  Operating
Officer.  None of these  individuals  were or are performing  their duties under
employment agreements.                                                          

Report on Executive Compensation                                                

        During  2001,  our  board of  directors  administered  the  compensation
program for executive officers.                                                 

        Executive  Compensation Policy - Our overall compensation  philosophy is
as follows:                                                                     

  * Attract and retain quality talent, which is critical to both our  short-term
and long-term success;                                                  

  * Foster a performance-oriented  environment, where compensation is based upon
    corporate  performance  as measured by  achievement  of short and  long-term
    objectives,   taking  into  account  economic   conditions  and  competitive
compensation levels;                                                    

  * Create a mutuality of interest between  executive  officers and stockholders
    through  compensation  structures  that  share  the  rewards  and  risks  of
strategic decision making; and                                          

  * Promote a cohesive,  team-oriented  ethic among members of senior management
    in order to maintain the  competitive  advantage of efficiently  integrating
diverse business capabilities.                                          

        The  board's  approach  to base  compensation  is to  offer  competitive
salaries  in  comparison  to those of other  computer  equipment  manufacturers.
Increases in base  compensation  are based on the competence and  performance of
our executives and take into account our performance as a company.              

        The board also believes that stock ownership enhances management's focus
on maximizing stockholder value. Consequently, we have also adopted an incentive
stock option plan for our officers and  employees.  The  administrators  of that
plan allocate options to employees,  including executive  officers,  based on an
evaluation of their relative levels of responsibility  for, and contribution to,
our  operating  results (in relation to our other  optionees)  and the number of
options then owned by the employee.                                             

        Our executive compensation program for 2001 generally consisted of three
components:  (i) monthly  consultant/management fees for non-salaried directors,
(ii) an annual salary for the executive officers and (iii) a long-term component
consisting of grants of stock options to non-salaried  directors/officers and to
salaried   officers.   See  "Directors   Compensation"  for  amounts  earned  by
non-salaried  directors  and a  discussion  regarding  automatic  annual  option
grants.                                                                         

        Mr. Hemmerich who served as our chief executive  officer until June 2001
was  compensated in accordance  with his employment  agreement.  See "Employment
Agreements".  Mr. Levy, who was appointed chief executive  officer in June 2001,
does not receive compensation for serving as our chief executive officer.       

 Respectfully submitted,

 Roger H. Felberbaum
Bernard R. Green  
 Maurice A. Halperin
H. Irwin Levy     
Michael L. Wise   

Audit Committee Report                                                          

        The Audit Committee has (i) reviewed and discussed our audited financial
statements for the year ended December 31, 2001 with management;  (ii) discussed
with Swenson Advisors LLP, our independent auditors,  the matters required to be
discussed by Statement on Auditing  Standards No. 61 (such as the quality of our
accounting principles and internal controls); (iii) received written disclosures
and a  letter  from  Swenson  Advisors  LLP  regarding  independence  from us as
required by  Independence  Standards  Board  Standard No. 1, and discussed  with
Swenson  Advisors  LLP the  independence  of that firm.  Based on the review and
discussions  referred to in items (i) through (iii) above,  the Audit  Committee
recommended  to the board that the audited  financial  statements be included in
our annual report on Form 10-K for our year ended  December 31, 2001.  The board
of  directors  has  determined  that the  members  of the  Audit  Committee  are
independent of us.                                                              
                        Bernard R. Green
                       Michael L. Wise

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Performance Graph                                                               

        The  following  graph  compares the five-year  cumulative  return on our
common  stock to total  returns on the  Standard  and Poor's  Smallcap 600 Index
("S&P  Smallcap  600")  and a  component  peer  group  of  Standard  and  Poor's
Technology-500 ("S&P  Technology-500").  The graph assumes that the value of the
investment in our common stock, the S&P Smallcap 600 and the S&P  Technology-500
peer group was $100 on October 31, 1996, and that all dividends were reinvested.

Comparison of Five Year Cumulative Total Returns

Base                  
             Date                   December 31,
                          Oct. 31,   -----------------------------------------
                           1996     1997     1998     1999     2000     2001
Company/Index                $         $        $        $        $        $  
------------------------   -------   ------   ------   ------   ------   ------ 
nStor Technologies, Inc.     100      86.51   110.83    94.62    54.07    12.11 
S&P Smallcap  600            100     132.73   131.00   147.25   164.62   175.38 
Technology-500               100     142.59   246.65   431.96   259.39   197.76 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Loans and/or Investments Made by Directors                                      

Maurice A. Halperin                                                             

        On November 20, 2001 (the "Closing Date"), we completed a transaction in
which Halco acquired a 34% equity interest in, and made certain loans to, us for
an  aggregate  investment  of $12.1  million  (the "Halco  Investment").  On the
Closing  Date,  Halco  acquired  8,970  shares  of our  newly  created  Series K
Convertible  Preferred  Stock with a face amount of $9 million,  and we 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 us on June 26,
2001. We  subsequently  negotiated  the terms of the offer from July to November
2001,  during which time,  Halco made short-term  working capital loans to us 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  $1.9 million was applied to the cash paid by Halco for the Series
K Preferred Stock.                                                              

        In connection  with and as conditions  to the Halco  Investment,  it was
agreed that an aggregate of 76,884,122  common shares ("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 our common stock, based
upon a conversion  price of $.23 per share,  upon approval of our  stockholders;
(ii)  all of the  holders  of our  other  convertible  preferred  stock  ("Other
Preferred  Stock")  agreed to  convert  their  shares of  preferred  stock  into
20,877,432 shares of common stock ("Conversion  Shares");  (iii) our company and
the  holders  of the Other  Preferred  Stock  agreed  to the  issuance  of:  (a)
12,993,072  shares of common  stock 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  ("Inducement  Shares"),  and (b)
3,263,618  shares of common  stock  ("Dividend  Shares") in  satisfaction  of an
aggregate of $1.5 million of accrued  dividends 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 our
common  stock in exchange for  $300,000  owed by us to Mr. Levy ("Note  Shares")
based upon a conversion price of $.40 per share.                                

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        On the  Closing  Date,  stockholders  who  owned in excess of 50% of our
voting stock  executed  proxies to vote in favor of the foregoing  transactions.
However,  formal stockholder approval of the transactions was required before we
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,  stockholder  approval  was received and we
issued the New Common Shares effective January 11, 2002.                        

        In connection with the Stonehouse Acquisition on June 7, 2002, we issued
the New Halco  Note to Halco to  replace  the Halco  Note.  The terms of the New
Halco  Note are the same as the Halco  Note  except  that the New Halco  Note is
convertible into shares of our common stock. The New Halco Note (i) gives us the
right,  after the  earlier  of May 31,  2003,  or the date on which we receive a
notice of delisting from the AMEX,  and in each case,  only to the extent deemed
necessary  to maintain  our listing on the AMEX,  to convert all or a portion of
the  outstanding  balance of the New Halco Note into our common shares at 85% of
the  closing  bid  price on the  trading  day  immediately  prior to the date of
conversion,  and (ii) gives Halco the right,  after May 31, 2003, to convert all
or a portion  of the  outstanding  balance of the New Halco Note into our common
shares, at 110% of the closing bid price on the trading day immediately prior to
the date of conversion.                                                         

        In  connection  with the  Stonehouse  Acquisition  on June 7, 2002,  Mr.
Halperin and Halco agreed that,  (i) through June 7, 2004,  they will give PTG a
right of first refusal if they intend to sell,  pledge or transfer  nStor common
shares in excess of 20% of the nStor  shares  which they held as of June 7, 2002
(33,662,275 shares),  plus 80% of any shares acquired upon conversion of the New
Halco  Note,  and (ii) they will  vote to elect to our  board of  directors  two
designees of Parent,  reasonably  acceptable  to H. Irwin Levy and Halco,  until
Parent ceases to own at least 5% of our capital stock.                          

H. Irwin Levy                                                                   

        At December 31, 2000, our outstanding  borrowings  included $1.7 million
owed to H. Irwin Levy at 10% per annum. From January through March 31, 2001, Mr.
Levy or a company  controlled by Mr. Levy  (collectively,  Mr. Levy) advanced an
additional $1.9 million to us, of which $1.25 million was  convertible  into our
common stock at $1.00 per share.  In connection with $1.25 million of Mr. Levy's
first quarter 2001 advances,  we issued warrants to Mr. Levy to purchase 312,500
shares of our common  stock,  at $1.20 per share,  exercisable  at issuance  and
expiring,  principally  on March 31, 2004.  Effective  April 12, 2001,  Mr. Levy
exchanged all of his  outstanding  borrowings  ($3.6 million) in addition to his
10% Series G Preferred Stock with a face value of $2 million for 5,682 shares of
our Series I Convertible  Preferred  Stock with an aggregate  face value of $5.7
million  (including  $132,000  in  accrued  interest  and  dividends)  which was
convertible  into  7,891,416  shares  of our  common  stock,  based  on a  fixed
conversion  price of $.72 per share.  The Series I Convertible  Preferred  Stock
accrued dividends quarterly at 10% per annum.                                   

        From May through  September 2001, Mr. Levy advanced an additional  $1.45
million  under  revolving  promissory  notes at 10% per annum.  Effective on the
closing  date  of the  Halco  Investment,  we  agreed  to  satisfy  $300,000  of
indebtedness  to Mr.  Levy by issuing  750,000  shares of our common  stock.  In
addition,  in  December  2001,  Mr.  Levy  assigned  $500,000  of his  notes  to
affiliates  of W. David  Sykes,  a former  officer of nStor  (Mr.  Sykes),  in a
private  transaction  in which  Mr.  Levy  purchased  1,700  shares  of Series H
Convertible  Preferred  Stock  with a face value of $1.7  million.  The Series H
Convertible  Preferred Stock accrued  dividends  quarterly at 10% per annum. The
remaining  outstanding  borrowings  to Mr. Levy at December 31, 2001 amounted to
$650,000,  with  interest at 10% per annum,  payable  quarterly and scheduled to
mature on June 15, 2002, as extended. No interest or dividend payments were made
in cash to Mr. Levy during 2001.                                                

        In connection with the Halco  Investment,  Mr. Levy converted his Series
E, H and I Convertible  Preferred Stock in January 2002 and received  19,062,079
common  shares as follows:  10,752,527  shares as Conversion  Shares;  6,651,488
shares as Inducement Shares; and 1,658,064 shares as Dividend Shares.           

        Subsequent  to December  31, 2001 and through  July 31,  2002,  Mr. Levy
advanced $2.1 million to us under revolving promissory notes bearing interest at
8% per annum,  with $750,000  maturing  April 30, 2003 and  requiring  quarterly
interest  payments  and the  remaining  amount  maturing  December 31, 2002 with
interest due at maturity.                                                       

        In connection with the Stonehouse Acquisition, on June 7, 2002, Mr. Levy
and certain affiliated entities agreed that, (i) through June 7, 2004, they will
give PTG a right of first  refusal if they  intend to sell,  pledge or  transfer
nStor  common  shares in excess of 20% of the nStor shares which they held as of
June 7, 2002  (18,050,074  shares) and (ii) they will vote to elect to our board
of directors two designees of Parent reasonably acceptable to Mr. Levy and Halco
until Parent ceases to own at least 5% of our capital stock.                    

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        On June 14, 2002, our wholly-owned subsidiary, nStor Corporation,  Inc.,
issued the New Levy Note to replace  certain  notes  payable to Mr.  Levy in the
principal amount of $650,000. The terms of the New Levy Note are the same as the
prior notes payable except that the New Levy Note is convertible  into shares of
our common stock. The New Levy Note gives us the right,  after the date on which
we  receive  a notice of  delisting  from the AMEX,  only to the  extent  deemed
necessary to maintain our listing on the AMEX  following the full  conversion of
the New Halco Note,  to convert all or a portion of the  outstanding  balance of
the New Levy Note into our common  shares at 85% of the closing bid price on the
trading day immediately prior to the date of conversion.                        

Larry Hemmerich                                                                 

See Employment Agreements.                                      

Loans Made by 5% Stockholder                                                    

        From December 31, 2000 and through March 27, 2001,  Bernard Marden and a
trust  controlled  by Mr. Marden  (collectively,"  Mr.  Marden")  loaned us $1.3
million under  convertible  promissory  notes bearing  interest at 8% per annum,
payable  semi-annually and maturing on March 31, 2003. Effective April 12, 2001,
Mr.  Marden  agreed to  exchange  his notes  for  1,263  shares of our  Series I
Convertible Preferred Stock with a face value of $1.3 million (including $13,000
in accrued interest),  which was convertible into 1,753,724 shares of our common
stock  based  on a fixed  conversion  price  of $.72  per  share.  The  Series I
Convertible  Preferred Stock accrued dividends,  payable  quarterly,  at 10% per
annum.                                                                          

        In June 2001,  Mr. Marden  loaned us an  additional  $450,000 at 10% per
annum, payable monthly, and maturing December 15, 2002, as extended.  Mr. Marden
has the right to convert the  outstanding  principal  balance,  plus accrued but
unpaid  interest,  into our common stock based on a conversion price of $.40 per
share.                                                                          

        In connection with the Halco Investment, Mr. Marden converted his Series
E, H, and I Convertible  Preferred Stock in January 2002 and received  7,980,288
common  shares as follows:  4,448,168  shares as  Conversion  Shares;  2,802,212
shares as Inducement Shares; and 729,908 shares as Dividend Shares.             

        During 2001, we paid $44,261  in  interest  and dividend payments to Mr.
Marden.                                                                         

Hilcoast Advisory Services, Inc.                                                

        Since  October  1999,  we have  been  charged  $5,000  per  month,  plus
reimbursement of out-of-pocket  expenses,  from Hilcoast Advisory Services, Inc.
("Advisor")  for  certain  financial  consulting  and  administrative   services
provided  to us. Mr.  Levy is the  chairman  of the board,  and chief  executive
officer of  Advisor  and its parent  and a  majority  shareholder  of  Advisor's
parent,  Mr.  Halperin is a director of Advisor and its parent and Jack  Jaiven,
our Vice President and Treasurer, is an officer of Advisor and its parent. Since
February 2000, Advisor has agreed to defer receipt of these fees.               

        Management  believes  that  the  terms  of  the  foregoing  transactions
described  above  are fair and  reasonable  and as  favorable  to us as could be
obtained from unaffiliated third parties.                                       

OTHER BUSINESS

        The board  knows of no other  business  to be brought  before the annual
meeting.  If, however, any other business should properly come before the annual
meeting,  the persons  named in the  accompanying  proxy will vote proxies as in
their discretion they may deem appropriate,  unless they are directed by a proxy
to do otherwise.                                                                

INFORMATION CONCERNING STOCKHOLDER PROPOSALS

        Pursuant to Rule 14a-8  promulgated by the SEC, a stockholder  intending
to present a proposal to be included in our proxy  statement for our 2003 annual
meeting of  stockholders  must  deliver a proposal  in writing to our  principal
executive offices no later than May 15, 2003.                                   

        If a stockholder does not seek to have a proposal  included in the proxy
statement,  but  nevertheless  wishes to present a proper proposal at the annual
meeting,  and the proposal is received by us on or before May 15, 2003,  we will
provide information in the proxy statement relating to that annual meeting as to
the nature of the proposal and how persons  named in the proxy  solicited by our
board of directors intend to exercise their discretion to vote on the proposal. 

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 GENERAL

        Our Annual Report on Form 10-K, as amended,  for the year ended December
31, 2001 is enclosed  with this proxy  statement and  incorporated  by reference
hereto.  In addition,  our  Quarterly  Report on Form 10-Q for the quarter ended
June 30,  2002 is attached  to this proxy  statement  as Annex 1 and our Current
Report on Form  8-K/A  filed  with the SEC on August 13,  2002,  which  contains
financial statements of Stonehouse, is attached to this proxy statement as Annex
2.                                                                              

                                  By Order of the board of directors

                          Orilla F. Floyd, Secretary
West Palm Beach, Florida                                                        
September 11, 2002                                                              

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                                                                         ANNEX 1

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                                     

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 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      

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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.

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                            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)      
                                             -------      -------      -------      -------  
                                                                                             
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
                                          ===========    ==========  ===========   ==========


See accompanying notes to consolidated financial statements.

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                            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   
                                -----------   --------   -------   --------  -----------  ---------   ------- 
                                                                                                              
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 
                                ===========    =======   ======    ======     ========     ========    ====== 


See accompanying notes to consolidated financial statements.

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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.

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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.

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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.                                                                

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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.               

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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.                          

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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.                                                                     

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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):                                     

                                                        [Enlarge/Download Table]


                                      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)
                          ------    --------   ------- ----------   ------   --------  ------- ---------- 
                                                                                                          
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 


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(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.                                                         

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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.                             

                                                        [Enlarge/Download Table]


          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   
---------  ---------   -----------------------   ----------    ----------  ---------   -----------
                                                                                                  
   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
                                                                                       ===========


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(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.                       

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(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
                                    ======          ======

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(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.

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(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.                             

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                                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.                                                            

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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.                              

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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).                                                          

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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).                              

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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                                                                  

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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     

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                                                                         ANNEX 2

 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 8-K/A

 Current Report Pursuant to Section 13 or 15(d) of
 the Securities Exchange Act of 1934

 August 13, 2002
 ---------------
Date of Filing of Form 8-K

 March 1, 2002
 -------------
Date of Report (Date of earliest event reported)

nSTOR TECHNOLOGIES, INC.
------------------------
(Exact Name of Registrant as Specified in its Charter)

  DELAWARE                        0-8354                    95-2094565
   --------                        ------                    -----------
(State or other jurisdiction    (Commission File Number)        (IRS Employer   
      of incorporation)                                      Identification No.)

 10140 MESA RIM ROAD
 SAN DIEGO, CALIFORNIA 92121
 ---------------------------
(Address of principal executive offices)

(858) 453-9191
--------------
(Registrant's telephone number, including area code)

 N/A
 ---
 (Former name or former address, if changed since last report)

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This Form 8-K/A amends the information contained in Item 7 of the Form 8-K filed
by the Registrant with the Commission on June 21, 2002.                         

Item 7.  Financial Statements, Pro Forma Financial Information and Exhibits     

a)      Financial Statements of Business Acquired                               

        Report  of  Independent   Accountants  dated  March  22,  2002  and  the
        accompanying  balance  sheets of  Stonehouse  Technologies,  Inc.  as of
        December 31, 2001 and 2000,  and the related  statements of  operations,
        stockholders' equity and cash flows for the two years ended December 31,
2001 and 2000                                                   

        Balance  sheet of  Stonehouse  Technologies,  Inc. as of  March 31, 2002
        and the related  statements  of  operations and cash flows for the three
months ended March 31, 2002 (unaudited)                         

b)      Pro Forma Financial Information                                         

        nStor Technologies, Inc. and  Subsidiaries  Unaudited Proforma Condensed
Combined Financial Statements                                   

c)      Exhibits                                                                

None                                                            

SIGNATURES

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

                                              nStor Technologies, Inc.

                                     /s/ Jack Jaiven
                                                  ----------------------------
                                 Jack Jaiven
                                                  Vice President and Treasurer

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 Stonehouse Technologies, Inc.

 Report of Independent Accountants
 and

Financial Statements

 December 31, 2001 and 2000 and for the Years ended December 31, 2001 and 2000

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Independent Auditors' Report                                                    

To the Board of Directors of                                                    
Stonehouse Technologies, Inc.                                                   

We have audited the accompanying balance sheets of Stonehouse Technologies, Inc.
(the  "Company") as of December 31, 2001 and 2000 and the related  statements of
operations,  stockholder's equity and cash flows for the years then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.                                                                     

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.                                               

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Stonehouse  Technologies,  Inc.
at December 31, 2001 and 2000,  and the results of its  operations  and its cash
flows  for the  years  then  ended  in  conformity  with  accounting  principles
generally accepted in the United States of America.                             

/s/  BDO Seidman, LLP                                                           
Los Angles, California                                                          

March 22, 2002                                                                  

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 Stonehouse Technologies, Inc.
Balance Sheets

December 31,                                              2001           2000 
--------------------------------------------------------------------------------
Assets                                                                        

Current assets                                                                
        Cash                                           $  411,394   $  819,135
Accounts receivable, net of allowance for                     
doubtful accounts of $76,940 and $86,565,                 
          respectively                                  1,041,980    1,051,418
        Receivable from affiliate (Note 7)                313,344    1,298,596
        Inventory                                               -       18,780
        Prepaid expenses                                  108,306      160,136
 -------------------------------------------------------------------------------
Total current assets                                    1,875,024    3,348,065
 -------------------------------------------------------------------------------
Property and equipment, net (Note 3)                      177,534      130,516

Deferred tax asset (Note 5)                               524,394      524,394

Goodwill, net of accumulated amortization of $656,409                         
    and $455,156, respectively                          4,880,392    5,081,646
 -------------------------------------------------------------------------------
                                                       $7,457,344   $9,084,621
 ===============================================================================

Liabilities and Stockholder's Equity                                            

Current liabilities                                                           
        Accounts payable and accrued liabilities       $  860,211   $  600,407
        Deferred revenue                                1,861,077    2,060,603
        Payable to affiliates                               5,341        3,097
        Line of credit (Note 4)                           200,000            -
 -------------------------------------------------------------------------------
Total current liabilities                               2,926,629    2,664,107
 -------------------------------------------------------------------------------
Commitments and contingencies (Notes 8 and 9)                                 

Stockholder's Equity (Note 6)                                                 
Common stock - no par value; 25,000,000 shares                            
authorized 16,000,000 shares issued and                               
    outstanding                                                 -            -
  Additional paid-in capital                            7,567,139    6,627,139
   Accumulated deficit                                  (3,036,424)    (206,625)
 -------------------------------------------------------------------------------
Total stockholder's equity                              4,530,715    6,420,514
 -------------------------------------------------------------------------------
                                                       $7,457,344   $9,084,621
 ===============================================================================

                                 See accompanying notes to financial statements.

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 Stonehouse Technologies, Inc.
Statements of Operations

Years ended December 31,                              2001               2000   
--------------------------------------------------------------------------------
Revenues                                          $ 6,608,049       $ 7,269,550 

Cost of sales, including depreciation                                           
 of $57,444 and $107,531, respectively             3,698,892         4,083,705
--------------------------------------------------------------------------------
Gross margin                                        2,909,157         3,185,845 
--------------------------------------------------------------------------------
Operating expenses                                                              
 Other operating expenses                          2,630,993           902,924
 Sales and marketing expenses                      1,972,900         1,141,948
 Research and development                            939,776         1,188,944
 Goodwill amortization                               201,253           201,253
--------------------------------------------------------------------------------
                                                   5,744,922         3,435,069
--------------------------------------------------------------------------------
Operating loss                                     (2,835,765)         (249,224)

Other (income) and expense                                                      
  Interest expense                                          -               (38)
 Interest income                                       5,966            20,162
--------------------------------------------------------------------------------
                                                       5,966            20,124
--------------------------------------------------------------------------------
Loss before income taxes                           (2,829,799)         (229,100)

Income tax (benefit) (Note 5)                               -            (1,000)
--------------------------------------------------------------------------------
Net loss                                          $(2,829,799)      $  (228,100)
================================================================================

                                 See accompanying notes to financial statements.

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 Stonehouse Technologies, Inc.
 Statement of Stockholders' Equity

                         Additional     Retained
               Common      Paid-in      Earnings
                           Stock       Capital      (Deficit)      Total
 -------------------------------------------------------------------------------
Balance, January 1, 2000     $     -    $6,627,139   $    21,475    $6,648,614

 Net loss                           -             -      (228,100)     (228,100)
 -------------------------------------------------------------------------------
Balance, December 31, 2000         -     6,627,139      (206,625)    6,420,514

Contributed capital from                                                      
  Pacific USA                      -       920,000             -       920,000

Stock compensation due to                                                     
  issuance of warrants             -        20,000             -        20,000

 Net loss                           -             -    (2,829,799)   (2,829,799)
 -------------------------------------------------------------------------------
Balance, December 31, 2001   $     -    $7,567,139   $(3,036,424)   $4,530,715
================================================================================

                                 See accompanying notes to financial statements.

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 Stonehouse Technologies, Inc.
Statements of Cash Flows

Increase (Decrease) in Cash                                                     

Years ended December 31,                                 2001            2000   
--------------------------------------------------------------------------------
Cash flows from operating activities                                            

  Net loss                                           $(2,829,799)   $  (228,100)
Adjustments to reconcile net loss to net cash                               
provided by (used in) operating activities:                             
   Issuance of warrants for services rendered            20,000              -
   Depreciation and amortization                        287,191        320,077
    Deferred income taxes                                      -         (1,000)
Changes in operating assets and liabilities:                            
     Accounts receivable                                  9,438        551,057
     Receivable from affiliate                          987,496              -
     Inventory                                           18,780          9,280
     Prepaid expenses                                    51,830         45,204
      Accounts payable and accrued liabilities           259,804        (58,896)
      Deferred revenue                                  (199,526)       (78,542)
--------------------------------------------------------------------------------
Net cash provided by (used in) operating activities   (1,394,786)       559,080 
--------------------------------------------------------------------------------
Cash flows from investing activities                                            
  Purchase of property and equipment                    (132,955)       (67,852)
--------------------------------------------------------------------------------
Net cash used in investing activities                   (132,955)       (67,852)
--------------------------------------------------------------------------------
Cash flows from financing activities                                            
  Advances to affiliates, net                                  -         (5,232)
 Capital contributions                                  920,000              -
  Advances to parent                                           -     (1,298,596)
 Borrowings on line of credit                           200,000              -
--------------------------------------------------------------------------------
Net cash provided by (used in) financing activities    1,120,000     (1,303,828)
--------------------------------------------------------------------------------
Decrease in cash                                        (407,741)      (812,600)

Cash, beginning of year                                  819,135      1,631,735 
--------------------------------------------------------------------------------
Cash, end of year                                    $   411,394    $   819,135 
================================================================================
Supplementary disclosure of cash flow information                               
Cash paid for:                                                                
   Interest                                         $         -    $        38
================================================================================

                                 See accompanying notes to financial statements.

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 Stonehouse Technologies, Inc.
 Notes to Financial Statements

1.     Organization and Business                                                

       Stonehouse Technologies,  Inc. ("Stonehouse" or the "Company") is engaged
       in  the  design,  sale  (of  both  product  and  subscription   service),
       maintenance and support of  telecommunications  management software.  The
       Company also provides  consulting services and sells computer hardware in
       conjunction with software sales, primarily in the United States. On April
       1, 1996, all of the Company's  outstanding  capital stock was acquired by
       Pacific Technology Services,  Inc. ("PTS"), a wholly-owned  subsidiary of
       Pacific  Technology Group,  Inc. ("PTG"),  which is 100% owned by Pacific
       USA Holdings Corp.  ("Pacific  USA").  In March 2000, PTS sold 20% of its
       interest  in  the  Company  to  Venturelink  Holdings,  a  majority-owned
       subsidiary of Pacific USA. During 2001, PTS transferred its remaining 80%
       interest in the Company to PTG.  The ultimate  parent  company is Pacific
Electric Wire & Cable Company, Ltd. ("PEWC") based in Taiwan.     

       During  2001,  the  Company  experienced  significant  changes in its top
       management.  In connection  with these changes,  throughout most of 2001,
       the Company's expenses were significantly higher than normal, pursuant to
       the expansion plans implemented by new management.  Prior to December 31,
       2001,  the Company  determined  that these new plans were not in the best
       interest  of  the  Company.  As a  result,  the  Company's  previous  CEO
       reassumed the CEO duties and has committed to bring expenses in line with
revenues.                                                         

       The   Company's   management   believes   that   the   Company   will  be
       self-sustainable  in the near  future.  However,  the  Company's  parent,
       Pacific USA  Holdings  Corp,  is  substantially  dependent  on  continued
       financial  support from PEWC.  PEWC has  committed  to provide  continued
       financial  support  to  Pacific  USA  and  its  subsidiaries,   including
       Stonehouse,  for at least  another  year  and one day  from the  auditors
report date.                                                      

2.     Summary of Significant Accounting Policies                               

Revenue Recognition                                               

       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
pro-rata basis over the term of the maintenance agreement.        

Property and Equipment                                            

       Property and equipment are recorded at cost less accumulated depreciation
       and  amortization.  Depreciation  and  amortization  are  computed  on  a
       straight-line  basis over the  estimated  useful lives of the  respective
assets, ranging from three to seven years.                        

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Use of Estimates                                                  

       The  preparation  of financial  statements in conformity  with  generally
       accepted accounting  principles requires management to make estimates and
       assumptions  that affect the reported  amounts of assets and  liabilities
       and  disclosure of contingent  assets and  liabilities at the date of the
       financial  statements  and the reported  amounts of revenues and expenses
       during the period. Actual results could differ from those estimates.  The
       Company  reviews  all  significant   estimates  affecting  the  financial
       statements  on a recurring  basis and records the effect of any necessary
adjustments prior to their issuance.                              

Reclassification                                                  

       Certain  changes  in  classification  have been made to the prior  year's
       consolidated financial statements to conform to the current presentation.

Goodwill                                                          

       The  excess  of cost  over the  fair  value of net  assets  acquired  was
       recorded as  goodwill  and is  amortized  on a  straight-line  basis over
       thirty years. The Company assesses the  recoverability of this intangible
       asset by determining  whether the  amortization  of the goodwill  balance
       over its  remaining  life can be recovered  through  undiscounted  future
       operating  cash flows of the acquired  operation.  The amount of goodwill
       impairment,  if any, is measured  based on  projected  discounted  future
       operating  cash flows  using a discount  rate  reflecting  the  Company's
       average cost of funds. The assessment of the  recoverability  of goodwill
       will be  impacted  if  estimated  future  operating  cash  flows  are not
achieved.                                                         

Stock-Based Compensation                                          

       The  Company  accounts  for  employee  stock  options or  similar  equity
       instruments  in  accordance   with  Statement  of  Financial   Accounting
       Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS No.
       123"). SFAS No. 123 defines a  fair-value-based  method of accounting for
       employee  stock options or similar  equity  instruments.  This  statement
       gives  entities a choice to  recognize  related  compensation  expense by
       adopting the new fair-value method or to measure  compensation  using the
       intrinsic value method under Accounting  Principles Board Opinion No. 25,
       "Accounting  for Stock Issued to  Employees"  ("APB No. 25"),  the former
       standard. If the former standard for measurement is elected, SFAS No. 123
       requires  supplemental  disclosure  to show the  effect  of using the new
measurement criteria.                                             

       The  Company  currently  uses the  disclosure  standards  of SFAS 123 but
accounts for stock based compensation using APB 25.               

Income Taxes                                                      

       Income  taxes are  accounted  for under the asset and  liability  method.
       Deferred tax assets and  liabilities  are  recognized  for the future tax
       consequences  attributable to differences between the financial statement
       carrying  amounts of existing assets and liabilities and their respective
       tax bases, and operating loss and tax credit carryforwards.  Deferred tax
       assets and  liabilities  are measured using enacted tax rates expected to
       be  recovered  or  settled.   The  effect  on  deferred  tax  assets  and
       liabilities  of a change  in tax  rates is  recognized  in  income in the
period that includes the enactment date.                          

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       The Company  files as part of a  consolidated  federal  income tax return
       with  Pacific  USA.  The Company and Pacific USA have  entered into a tax
       sharing  agreement  whereby  taxes are computed as if the Company filed a
       separate tax return. Such agreement allows Pacific USA to utilize all net
operating tax losses realized by the Company.                     

New Accounting Pronouncements                                     

       In June 2001, the Financial  Accounting  Standards  Board  finalized FASB
       Statements  No.  141,  Business  Combinations  (SFAS  141),  and No. 142,
       Goodwill and Other  Intangible  Assets (SFAS 142).  SFAS 141 requires the
       use of the purchase  method of  accounting  and  prohibits the use of the
       pooling-of-interests  method  of  accounting  for  business  combinations
       initiated  after June 30, 2001.  SFAS 141 also  requires that the Company
       recognize acquired  intangible assets apart from goodwill if the acquired
       intangible assets meet certain criteria. SFAS 141 applies to all business
       combinations  initiated  after June 30,  2001 and for  purchase  business
       combinations  completed on or after July 1, 2001. It also requires,  upon
       adoption of SFAS 142, that the Company reclassify the carrying amounts of
intangible assets and goodwill based on the criteria in SFAS 141. 

       SFAS 142 requires,  among other things, that companies no longer amortize
       goodwill,  but instead test goodwill for impairment at least annually. In
       addition, SFAS 142 requires that the Company identify reporting units for
       the  purposes of  assessing  potential  future  impairments  of goodwill,
       reassess the useful lives of other existing recognized intangible assets,
       and cease  amortization  of intangible  assets with an indefinite  useful
       life. An intangible asset with an indefinite useful life should be tested
       for  impairment in accordance  with the guidance in SFAS 142. SFAS 142 is
       required to be applied in fiscal years  beginning after December 15, 2001
       to all  goodwill and other  intangible  assets  recognized  at that date,
       regardless  of when those  assets  were  initially  recognized.  SFAS 142
       requires the Company to complete a transitional  goodwill impairment test
       six months from the date of  adoption.  The  Company is also  required to
       reassess the useful  lives of other  intangible  assets  within the first
interim quarter after adoption of SFAS 142.                       

       The Company has not  determined  the impact of adopting  SFAS 141 or SFAS
142.                                                              

       The  October  2001,  the FASB issued  SFAS No.  144,  Accounting  for the
       Impairment or Disposal of Long-Lived Assets. SFAS 144 requires that these
       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 144 is effective for
       financial statements issued for fiscal years beginning after December 15,
       2001  and,  generally,  are  to be  applied  prospectively.  The  Company
       believes the adoption of this statement  will have no material  impact on
its financial statements.                                         

3.     Property and Equipment                                                   

Property and equipment are summarized as follows at December 31:  

    December 31,                                        2001          2000
       -------------------------------------------------------------------------

      Office equipment                                 $  32,420     $  20,144
      Furniture and fixtures                              63,919        91,496
      Transportation equipment                            56,576        45,620
      Computer equipment and software                    217,556       641,162
      Leasehold improvements                               3,338             -
       -------------------------------------------------------------------------
                                                         373,809       798,422
       Accumulated depreciation and amortization         (196,275)     (667,906)
       -------------------------------------------------------------------------
                                                       $ 177,534     $ 130,516
       =========================================================================

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4.     Line of Credit                                                           

       The Company has a $500,000  revolving  line of credit with a bank payable
       upon demand, bearing interest at a rate of the bank's prime rate plus 1%.
       Amounts borrowed  pursuant to this line of credit are secured by accounts
       receivable  and certain other assets of the Company and are guaranteed by
       Pacific USA. The outstanding  principal at December 31, 2001 and 2000 was
       $200,000 and $0,  respectively,  with a  corresponding  interest  rate of
5.75%.                                                            

5.     Income Tax                                                               

       At December 31, 2001,  the Company has net operating  loss carry forwards
       of approximately  $4,182,000 for federal income tax purpose, which expire
through 2021.                                                     

       The tax effects of temporary  differences  that give rise to  significant
       portions of the deferred tax assets and  liabilities at December 31, 2001
       consisted of $1,421,965  primarily from net operating loss  carryforwards
       offset by a valuation allowance of $897,571,  resulting in a net deferred
tax asset of $524,394.                                            

       Based on the  ability of the Company to generate  future  taxable  income
       through  operations,  management  believes  more likely than not that the
       Company will realize the benefits of the net deferred tax asset in future
periods.                                                          

6.     Transactions in Stockholders' Equity                                     

       In February 2001, a  21.77226221-to-1  stock split in the form of a stock
       dividend was  approved by the Board of  Directors  of the Company,  which
       would have resulted in 5,000,000  common  shares issued and  outstanding.
       However,   rights  to  receive   1,000,000  common  shares  were  waived.
       Accordingly, only 4,000,000 shares were issued and outstanding after this
       split.  In February 2001, a 4-to-1 stock split was also  approved.  After
       these splits  (which were effected  through  stock  dividends to existing
       shareholders at the date of the split) and waivers, there were 16,000,000
       shares issued and  outstanding  and the prior year's common shares issued
and outstanding has been retroactively restated.                  

       In February  2001,  the  Company's  Board of  Directors  approved a stock
       option plan. The maximum number of shares that may be purchased  pursuant
       to the plan is  3,800,000.  Options  granted under the plan are generally
       considered  incentive stock options.  However, to the extent that options
       become  exercisable  by any  participant  for shares having a fair market
       value in excess of  $100,000,  the portion of such  options  that exceeds
       such  amount  will be treated as  non-statutory  stock  options.  Options
       granted under the plan vest in equal monthly  increments over a period of
       4 years,  with the first 3 months  vesting 90 days after the grant  date,
       and are  exercisable  for 7 years  after the date of grant at an exercise
price of $0.32 per share.                                         

       The following  table  summarizes the activity  under the Company's  stock
option plan:                                                      

                                                                   Price
                                                      Number       Per
   Year ended December 31, 2001                      of Shares     Share
       -------------------------------------------------------------------------
    Options outstanding, beginning of year                   -  $        -
       Granted                                       2,596,200        0.32
       Cancelled/expired                             1,546,140        0.32
       -------------------------------------------------------------------------
    Options outstanding, end of year                 1,050,060  $     0.32
       -------------------------------------------------------------------------
    Options exercisable, end of year                   511,556  $     0.32
       =========================================================================
    Weighted average fair value of options granted              $     0.10
       =========================================================================

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       All  outstanding  options  were  granted on February  19, 2001 and, as of
December 31, 2001, had a remaining contractual life of 6.13 years.

       The Company has elected to account for its stock-based compensation plans
       under APB No. 25 and has therefore  recognized no compensation expense in
       the  accompanying   consolidated  financial  statements  for  stock-based
       employee  awards granted as the exercise price for all employees  options
       was equal to the estimated  fair value of the  Company's  common stock on
       the date of grant.  Additionally,  the Company has computed for pro forma
       disclosure  purposes the value of all options granted during 2001,  using
       the  Black-Scholes  option  pricing  model  with the  following  weighted
average assumptions:                                              

              Risk free interest rate                                      5.23%
              Expected dividend yield                                          -
              Expected lives                                             5 years
              Expected volatility                                             0%

       If the Company had accounted for its stock-based compensation plans using
       a fair value method of accounting, the Company's net loss would have been
as follows for the year ended December 31, 2001:                  

Net loss:                                           
                 As reported                                       $ (2,829,799)
                 Pro forma                                         $ (2,869,177)

       The effects of applying SFAS No. 123 for providing pro forma  disclosures
       for 2001 are not likely to be  representative  of the effects on reported
       net loss for future  years,  because  options vest over several years and
additional awards generally are made each year.                   

7.     Related Party Transactions                                               

       In 2000, the Company provided funds to PTS,  resulting in a receivable of
       $1,298,596  at December 31, 2000. At December 31, 2001,  this  receivable
has been reduced to $313,344.                                     

       In March 2000,  PUSA entered  into a sale  leaseback  transaction,  which
       involved certain  subsidiary  assets,  including many fixed assets of the
       Company.   Management   has  elected  to  disclose  the  sale   leaseback
       transaction on the financials of PUSA, and continue to report these fixed
   assets and the related depreciation on the financials of the Company.

       In October 2000, the Company distributed its Monies - communications cost
       management   software  to  Pacific  USA.  There  was  no  carrying  value
associated with this software.                                    

8.     Benefit Plan                                                             

       The  employees of the Company are covered  under the Pacific USA Holdings
       Corp.  401(k)  Savings  Plan.  Upon  completion  of  certain  eligibility
       requirements,  employees  are  allowed to  contribute  up to 15% of their
       annual compensation.  The Company matches 50% of such contributions up to
       6%.  Contributions  by the  Company  totaled  $70,508  for the year ended
December 31, 2001.                                                

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9.     Commitments and Contingencies                                            

Leases                                                            

       The  Company   leases   office  space  and  office   equipment   under  a
       month-to-month   arrangement   with   Pacific   USA.   Rent  expense  was
       approximately $406,013 and $267,000 for the years ended December 31, 2001
and 2000, respectively.                                           

       The Company  leases  additional  office space  through  2002.  The future
minimum lease payments are $43,381 payable in 2002.               

Litigation                                                        

       The Company is involved in various  claims and legal  actions  arising in
       the  ordinary  course of  business.  In the  opinion of  management,  the
       ultimate  disposition  of these matters will not have a material  adverse
effect on the Company's consolidated financial position.          

10.    Concentrations                                                           

       Approximately  $2,789,266 and  $3,771,000 of the Company's  revenues were
       generated from three  customers  during 2001 and 2000,  respectively.  At
       December  31,  2001,  one customer  represents  approximately  24% of the
accounts receivable balance.                                      

       From time to time, the Company  maintains cash balances in excess of FDIC
       insured limits. The total cash balances are insured by the F.D.I.C. up to
       $100,000 per bank. The Company had cash balances on deposit that exceeded
       the balance insured by the F.D.I.C. in the amount of $405,632 at December
31, 2001.                                                         

11.    Subsequent Events (Unaudited)                                            

       Pacific  USA  signed a letter of intent  with  nStor  Technologies,  Inc.
       ("nStor"),  dated  March 21,  2002 and amended  April 30,  2002,  whereby
       Pacific USA intends to sell 100% of the  fully-diluted  capital  stock of
       the Company to nStor.  The purchase price will consist of 1,000 shares of
       preferred stock  convertible into 27,027,027 shares of nStor common stock
       (based on a fixed  stock  price of $0.37  per share and a total  purchase
       price of  $10,000,000)  plus  additional  common  shares,  not to  exceed
       8,687,258,  contingent  upon  future net  revenues  exceeding a specified
       "threshold  amount." The terms of the letter of intent are expected to be
finalized later in a formal acquisition agreement.                

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 Stonehouse Technologies, Inc.
Financial Statements
 (unaudited)
March 31, 2002 and for the three months ended March 31, 2002

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 Stonehouse Technologies, Inc.
 Balance Sheet
March 31, 2002
 (unaudited)
(dollars in thousands)

Assets                                                            
------                                                            
Current assets:                                                   
  Cash                                                     $   425
Accounts receivable, net of allowances                        
    for doubtful accounts of $77                             1,050
  Receivable from affiliate                                    397
  Prepaid expenses                                             125
                                                           -------
    Total current assets                                     1,997

Property and equipment, net                                    156
Deferred tax asset                                             524
Goodwill, net of accumulated amortization of $656            4,880
                                                           -------
                                                           $ 7,557
                                                           =======

Liabilities and Stockholders' Equity                              
------------------------------------                              
Current liabilities:                                              
Line of credit                                             $   200
Accounts payable and accrued liabilities                     1,004
Deferred revenue                                             1,564
Payable to affiliates                                           65
                                                           -------
  Total current liabilities                                  2,833
                                                           -------
Commitments and contingencies                                     

Stockholders' equity:                                             
Common stock - no par value:                                      
25,000,000 shares authorized; 16,000,000                      
  shares issued and outstanding                                  -
Additional paid-in capital                                   7,567
 Retained deficit                                            (2,843)
                                                           -------
     Total stockholder's equity                              4,724
                                                           -------
                                                           $ 7,557
                                                           =======

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 Stonehouse Technologies, Inc.
 Statement of Income
 Three Months Ended March 31, 2002
 (unaudited)
(in thousands)

Revenues                                                    $1,915
Cost of sales                                                  911
                                                           -------
   Gross margin                                              1,004
                                                           -------
Operating expenses                                                

  Sales and marketing expenses                                 276
  Research and development                                     196
  Other operating expenses                                     338
                                                           -------
                                                               810
                                                           -------
Operating income                                               194

Other (income) expense                                            
   Interest income                                               (3)
  Interest expense                                               3
                                                           -------
Income before income taxes                                     194
Income tax expense                                               -
                                                           -------
   Net income                                              $   194
                                                           =======

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 Stonehouse Technologies, Inc.
Statement of Cash Flow
 Three Months Ended March 31, 2002
 (unaudited)
(in thousands)

Cash flow from operating activities                               
  Net income                                               $   194
Adjustments to reconcile net income to net                    
cash provided by operating activities:                    
   Depreciation and amortization                                22
Changes in operating assets and liabilities:                
      Accounts receivable                                      293
       Prepaid expenses and other                               (16)
      Accounts payable and accrued liabilities                 143
       Deferred revenue                                        (297)
                                                           -------
      Net cash provided by operating activities                339
                                                           -------
Cash flow from financing activities                               
   Advances to affiliates, net                                 (325)
                                                           -------
  Net cash used in financing activities                        (325)
                                                           -------
Increase in cash                                                14
Cash, beginning of period                                      411
                                                           -------
Cash, end of period                                        $   425
                                                           =======

Supplementary disclosure of cash flow information:                
Cash paid for interest                                     $     3
                                                           =======

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Notes to Financial Statements (unaudited)                                       

1)      Business                                                                

        Stonehouse Technologies, Inc. ("Stonehouse" or the "Company") is engaged
        in  the  design,  sale  (of  both  product  and  subscription  service),
        maintenance and support of telecommunications  management software.  The
        Company also provides consulting services and sells computer hardware in
conjunction with software sales, primarily in the United States.

        During  2001,  the Company  experienced  significant  changes in its top
        management.  In connection with these changes,  throughout most of 2001,
        the Company's expenses were significantly  higher than normal,  pursuant
        to the expansion plans implemented by new management.  Prior to December
        31, 2001,  the Company  determined  that these new plans were not in the
        best interest of the company.  As a result,  the Company's  previous CEO
        reassumed  the CEO duties and has  committed  to bring  expenses in line
with revenues.                                                  

2)      Significant Accounting Policies                                         

Revenue Recognition                               

        Revenues  from  computer  software  sales  are  recognized in accordance
        with Statement of Position 97-2, Software  Revenue  Recognition, and are
        recognized  upon execution of a  contract  and shipment of the software,
        provided 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 pro-rata  basis over the
term of the maintenance agreement.                              

Goodwill                                          

        The  excess  of cost  over the fair  value of net  assets  acquired  was
        recorded as goodwill. Effective January 1, 2002, the Company implemented
        SFAS 142  which  discontinued the  amortization of  unamortized goodwill
(see Recent Authoritative Pronouncements).                      

Recent Authoritative Pronouncements               

        In June 2001, the Financial  Accounting  Standards  Board finalized FASB
        Statements  No. 141,  Business  Combinations  (SFAS  141),  and No. 142,
        Goodwill and Other  Intangible  Assets (SFAS 142). SFAS 141 requires the
        use of the purchase  method of  accounting  and prohibits the use of the
        pooling-of-interests  method of  accounting  for  business  combinations
        initiated  after June 30, 2001.  SFAS 141 also requires that the Company
        recognize acquired intangible assets apart from goodwill if the acquired
        intangible  assets  meet  certain  criteria.  SFAS  141  applies  to all
        business  combinations  initiated  after June 30, 2001 and for  purchase
        business  combinations  completed  on or  after  July 1,  2001.  It also
        requires,  upon  adoption of SFAS 142, that the Company  reclassify  the
        carrying amounts of intangible assets and goodwill based on the criteria
in SFAS 141.                                                    

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        SFAS 142 requires, among other things, that companies no longer amortize
        goodwill, but instead test goodwill for impairment at least annually. In
        addition,  SFAS 142 requires that the Company  identify  reporting units
        for the purposes of assessing  potential future impairments of goodwill,
        reassess  the  useful  lives of  other  existing  recognized  intangible
        assets,  and cease  amortization of intangible assets with an indefinite
        useful life. An intangible  asset with an indefinite  useful life should
        be tested for  impairment in  accordance  with the guidance in SFAS 142.
        SFAS 142 is  required  to be applied  in fiscal  years  beginning  after
        December 15, 2001 to all goodwill and other intangible assets recognized
        at that date, regardless of when those assets were initially recognized.

        The Company has not  determined  the impact of adopting SFAS 141 or SFAS
142.                                                            

3.      Bank Line of Credit                                                     

        The Company has a $500,000  revolving line of credit with a bank that is
        payable  upon demand,  and bears  interest at the bank's prime rate plus
        1%.  Amounts  borrowed  pursuant  to this line of credit are  secured by
        accounts  receivable  and  certain  other  assets of the Company and are
        guaranteed  by an affiliate of the Company,  Pacific USA Holdings  Corp.
        ("Pacific").  The  outstanding  principal at March 31, 2002 was $200,000
with an interest rate of 5.75%                                  

4.      Income Taxes                                                            

        At December 31, 2001,  the Company had net operating loss carry forwards
        (NOL's) of  approximately  $4 million for federal  income tax  purposes,
which expire through 2021.                                      

        The tax effects of temporary  differences  that gave rise to significant
        portions of the deferred tax assets and liabilities at December 31, 2001
        consisted  of $1.4  million  primarily  from NOL's offset by a valuation
        allowance of $.9  million,  resulting in a net deferred tax asset of $.5
        million.  Accordingly,  no income  tax  provision  was  required  on the
   Company's pre-tax income for the three months ended March 31, 2002.

5.      Subsequent Event                                                        

        On June 7, 2002,  100% of the  Company's  outstanding  capital stock was
        acquired  by nStor  Technologies,  Inc.  ("nStor")  pursuant  to a Stock
        Purchase Agreement between Pacific Technology Group, Inc., the Company's
        parent ("Parent"),  Pacific,  and nStor. The purchase price consisted of
        22,500,000  shares of nStor's  common  stock and 1,000 shares of nStor's
        convertible  preferred  stock,  which is convertible  into an additional
        4,527,027  shares of nStor common stock,  subject to approval by nStor's
        shareholders. nStor may also issue contingent consideration to Parent of
        up to  8,687,258  additional  shares of nStor  common  stock  based upon
future operating results of the Company.                        

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 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The  following  unaudited  pro forma  condensed  combined  financial  statements
reflect the Company's acquisition (the "Acquisition") on June 7, 2002 of 100% of
the outstanding capital stock of Stonehouse  Technologies,  Inc.  ("Stonehouse")
from Pacific Technology Group, Inc. ("Seller").  The purchase price consisted of
22,500,000  shares of the  Company's  common  stock and 1,000 shares of Series L
convertible  preferred  stock.  The  preferred  stock  is  convertible  into  an
additional 4,527,027 shares of the Company's common stock subject to shareholder
approval. The Company may also issue contingent consideration to Seller of up to
8,687,258  additional  shares of the  Company's  common  stock based upon future
operating  results of Stonehouse.  The statements are derived from and should be
read in conjunction with the historical  financial  statements and notes thereto
of the Company,  as presented in the  Company's  Form 10-Q for the quarter ended
March 31, 2002 and Annual Report on Form 10-K/A for the year ended  December 31,
2001.  They  should also be read in  conjunction  with  Stonehouse's  historical
financial statements, included elsewhere herein.                                

The Acquisition will be accounted for under the purchase method of accounting in
accordance with Statement of Financial  Accounting  Standards No. 141,  Business
Combinations,  with assets  acquired and  liabilities  assumed  recorded at fair
value, and Stonehouse's operating results included in the Company's consolidated
financial statements, effective as of the date of Acquisition.                  

The unaudited pro forma condensed combined statements of operations for the year
ended  December  31,  2001 and for the three  months  ended  March 31, 2002 give
effect to the  Acquisition  as if it had  occurred  as of January  1, 2001.  The
unaudited  pro forma  condensed  combined  balance  sheet as of March  31,  2002
assumes  the  Acquisition  was  consummated  on March  31,  2002.  The pro forma
adjustments  are based on  management's  preliminary  estimates  of the value of
tangible and intangible  assets acquired,  including a valuation of goodwill and
certain other  intangible  assets  performed by an independent  valuation  firm.
However,   those  estimates  could  change  as  additional  information  becomes
available or as additional events occur.                                        

The unaudited pro forma  financial  information is not designed to represent and
does not represent what the combined results of operations or financial position
would have been had the Acquisition been completed as of the dates assumed,  and
is not intended to project the  combined  results of  operations  for any future
period or the combined financial position as of any future date.                

As shown in the  historical  Statement  of  Operations,  during 2001  Stonehouse
incurred a net loss of  $2,830,000,  which  represents a significant  decline in
operating results from prior years. During 2000,  Stonehouse incurred a net loss
of $228,000 and during 1999,  Stonehouse realized net income of $114,000.  These
amounts are net of  depreciation  and  amortization  of $320,000  and  $592,000,
respectively.  The 2001 loss reflects the  implementation  of a revised business
plan  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.  Stonehouse  estimates  that  operating
expenses in excess of $3 million related to the discontinued  business plan were
incurred in 2001.  The  unaudited  pro forma  condensed  combined  statement  of
operations for the year ended December 31, 2001 excludes the pro forma effect of
the operating expense  reductions  implemented during the fourth quarter of 2001
and in early 2002 as a result of the  discontinuation  of the business  plan, as
well as certain  additional  expense reductions that are expected to result from
the Acquisition.                                                                

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UNAUDITED PRO FORMA CONDENSED COMBINED
 BALANCE SHEET
MARCH 31, 2002
 (unaudited)
(in thousands)

                                                        [Enlarge/Download Table]


                                          Historical                   Pro Forma      
                                -----------------------------  -----------------------
                                    nStor        Stonehouse                           
                                Technologies    Technologies   Adjustments    Combined
                                -----------------------------  -----------------------
                                                                                      
             ASSETS                                                                   
             ------                                                                   
Current assets:                                                                       
  Cash                             $ 1,028        $   425       $     -      $ 1,453  
  Accounts receivable, net           1,198          1,050             -        2,248  
  Receivable from affiliate              -            331             -          331  
  Inventories                          865              -             -          865  
  Prepaid expenses and other           120            125             -          245  
                                   -------        -------       -------      -------  
     Total current assets            3,211          1,931             -        5,142  

Property and equipment, net          1,183            156             -        1,339  
Deferred tax asset                       -            524          (524)(a)        -  
Goodwill and other intangible                                                         
  assets, net                        1,989          4,880        (4,880)(b)   11,533  
                                                                  9,544 (c)           
                                   -------        -------       -------      -------  
                                   $ 6,383        $ 7,491       $ 4,140      $18,014  
                                   =======        =======       =======      =======  
             LIABILITIES                                                              
             -----------                                                              
Current liabilities:                                                                  
  Borrowings                       $ 2,079        $   200       $     -      $ 2,279  
  Accounts payable and other         4,210          1,003           486 (d)    5,699  
  Deferred revenue                       -          1,564             -        1,564  
                                   -------        -------       -------      -------  
     Total current liabilities       6,289          2,767           486        9,542  

Long-term debt                       3,600              -             -        3,600  
                                   -------        -------       -------      -------  
     Total liabilities               9,889          2,767           486       13,142  
                                   -------        -------       -------      -------  

Shareholders' (Deficit) Equity      (3,506)         4,724        (4,724)(e)    4,872  
                                                                  8,378 (f)           
                                   -------        -------       -------      -------  
                                   $ 6,383        $ 7,491       $ 4,140      $18,014  
                                   =======        =======       =======      =======  


See accompanying notes to unaudited proforma condensed combined 
financial statements. 

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                                                        [Enlarge/Download Table]


                     UNAUDITED PRO FORMA CONDENSED COMBINED                              
                             STATEMENT OF OPERATIONS                                     
                          YEAR ENDED DECEMBER 31, 2001                                   
                  (dollars in thousands, except per share data)                          

                                      Historical (audited)               Pro Forma       
                                 -----------------------------    -----------------------
                                    nStor         Stonehouse                             
                                 Technologies    Technologies     Adjustments    Combined
                                 -----------------------------    -----------------------
                                                                                         
Sales                               $17,886         $ 6,608       $    -         $24,494 
Cost of sales                        15,837           3,699          (57)(g)      19,415 
                                                                     (64)(h)             
                                    -------         -------       ------         ------- 
    Gross  margin                     2,049           2,909          121           5,079 
                                    -------         -------       ------         ------- 
Operating expenses:                                                                      
  Selling, general                                                                       
    and administrative               10,354           4,604         (227)(g)      14,678 
                                                                     (53)(h)             
  Research and development            3,579             940            -           4,519 
  Depreciation and amortization       1,622             201          284 (g)       2,529 
                                                                     422 (i)             
                                    -------          ------       ------         ------- 
 Total operating expenses            15,555           5,745          426          21,726 
                                    -------         -------       ------         ------- 
Loss from operations                (13,506)         (2,836)        (305)        (16,647)
Realized and unrealized losses                                                           
  on marketable securities, net        (811)              -            -            (811)
Interest expense                       (912)              -            -            (912)
Other income, net                       402               6            -             408 
                                    -------         -------       ------         ------- 
Loss before preferred stock                                                              
  dividends, extraordinary                                                               
  items and induced conversion      (14,827)         (2,830)        (305)        (17,962)

Extraordinary gains from debt                                                            
  extinguishment                        869               -            -             869 
                                    -------         -------       ------         ------- 
Net loss                            (13,958)         (2,830)        (305)        (17,093)

Preferred stock dividends            (1,560)              -            -          (1,560)
Induced conversion of convertible                                                        
  preferred stock                    (3,000)              -            -          (3,000)
                                    -------         -------       ------         ------- 
Net loss available to                                                                    
  common stock                     ($18,518)       ($ 2,830)      ($ 305)       ($21,653)
                                    =======         =======       ======         ======= 
Basic and diluted net loss per                                                           
  common share:                                                                          
   Loss before extraordinary                                                             
    items                          ($   .43)                                    ($   .33)
   Extraordinary gains                  .02                                          .01 
                                    -------                                      ------- 
   Net loss per common share       ($   .41)                                    ($   .32)
                                    =======                                      ======= 
Weighted average number of                                                               
  common shares considered                                                               
  outstanding, basic and                                                                 
  diluted                        44,832,503                    22,500,000(f)  67,332,503 
                                 ==========                    ==========     ========== 


 See accompanying notes to unaudited proforma condensed combined
financial statements. 

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                                                        [Enlarge/Download Table]


                     UNAUDITED PRO FORMA CONDENSED COMBINED                              
                             STATEMENT OF OPERATIONS                                     
                        THREE MONTHS ENDED MARCH 31, 2002                                
                                   (unaudited)                                           
                  (dollars in thousands, except per share data)                          

                                          Historical                     Pro Forma       
                                -----------------------------    ----------------------- 
                                   nStor         Stonehouse                              
                                Technologies    Technologies     Adjustments    Combined 
                                -----------------------------    ----------------------- 
                                                                                         
Sales                              $ 1,559         $ 1,915       $    -          $ 3,474 
Cost of sales                        1,675             911          (13)(g)        2,558 
                                                                    (15)(h)              
                                   -------         -------       ------          ------- 
     Gross (loss) margin              (116)          1,004           28              916 
                                   -------         -------       ------          ------- 
Operating expenses:                                                                      
  Selling, general and                                                                   
   administrative                    1,530             611           (8)(g)        2,124 
                                                                     (9)(h)              
  Research and development             737             196            -              933 
  Depreciation and amortization        243               -           21 (g)          369 
                                                                    105 (i)              
                                  --------         -------       ------          ------- 
     Total operating expenses        2,510             807          109            3,426 
                                   -------         -------       ------          ------- 
(Loss) income from operations       (2,626)            197          (81)          (2,510)

Realized losses on marketable                                                            
  securities                        (1,329)              -                        (1,329)
Fair value of option granted                                                             
  to customer                         (670)              -            -             (670)
Interest expense                      (137)             (3)           -             (140)
Other expense, net                     (40)              -            -              (40)
                                   -------         -------       ------          ------- 
Net (loss) income available                                                              
  to common stock                 ($ 4,802)        $   194      ($   81)        ($ 4,689)
                                   =======         =======       ======          ======= 
Basic and diluted net loss                                                               
  per common share                ($   .04)                                     ($   .03)
                                   =======                                       ======= 

Weighted average number of                                                               
  common shares considered                                                               
  outstanding, basic                                                                     
  and diluted                  114,940,708                    22,500,000(f)  137,440,708 
                               ============                   ==========     =========== 


 See accompanying notes to unaudited proforma condensed combined
financial statements. 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

NOTE 1.    PURCHASE PRICE                                                       

The Company  acquired  100% of the  outstanding  common stock of  Stonehouse  by
issuing (i) 22,500,000 shares of common stock, and (ii) 1,000 shares of Series L
Convertible  Preferred Stock which is convertible  into an additional  4,527,027
shares of common stock subject to shareholder  approval.  The purchase price was
calculated  assuming  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). The total purchase price is as
follows (in thousands):                                                         

Fair value of shares issued (including 4,527,027                                
shares of common stock issuable upon conversion                             
of the Series L Convertible Preferred Stock)                                
based on a market price of $.31 per share                        $ 8,378    

Estimated transaction costs:                                                    
Brokerage fees                                     336                      
Legal, accounting and other                        150               486    
                                             -----           -------
Total purchase price                                               $ 8,864      
                                                             =======

NOTE 2. ALLOCATION OF PURCHASE PRICE (in thousands)                             

Cash                                                               $   425      
Accounts receivable, net                                             1,050      
Receivable from affiliate                                              331      
Prepaid expenses and other                                             125      
Property and equipment, net                                            156      
Goodwill                                          $6,370                        
                          ------
Other intangible assets:                                                        
Customer relationships                           2,259                      
Software                                           660                      
Non-compete agreement                              255                      
                          ------
Total                                          3,174                    
                          ------

Total goodwill and other intangible assets                           9,544      

Current borrowings                                                    (200)     
Accounts payable, accrued expenses                                              
and other liabilities                                             (1,003)   
Deferred revenue                                                    (1,564)     
                                                              ------
Total purchase price                                               $ 8,864      
                                                              ======

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NOTE 3.    PRO FORMA ADJUSTMENTS                                                

The following are descriptions of the pro forma purchase  accounting entries and
other Acquisition related adjustments, identified as (a) through (i), which have
been  reflected  in the  accompanying  Unaudited  Pro Forma  Condensed  Combined
Balance  Sheet  and  Unaudited  Pro  Forma  Condensed  Combined   Statements  of
Operations (in thousands):                                                      

a)      elimination of Stonehouse's historical deferred tax asset               
b)      elimination of Stonehouse's historical goodwill                         
c)      recording  goodwill and other intangible  assets as part of the purchase
price allocation detailed in Note 2                             
d)      accrual of estimated transaction costs detailed in Note 2               
e)      elimination of historical shareholder's equity of Stonehouse            
f)      recording  issuance of common and preferred stock  based on an estimated
market value of $.31 per share                                  
g       reclassification of depreciation expense included in cost of  sales  and
        selling,   general  and  administrative  expenses  to  depreciation  and
amortization                                                    
h)      reduction in historical rent expense  pursuant  to a new  lease  for the
Stonehouse  office facilities                                   
i)      amortization of fair value of intangible assets acquired  based  on  the
following estimated useful lives:                               

Customer relationships       ten (10) years       
Software                     five (5) years       
Non-compete agreements       four (4) years       

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A3-1

                                                                         ANNEX 3
CHARTER OF THE
nSTOR TECHNOLOGIES, INC.
 AUDIT COMMITTEE
 ARTICLE 1

 PURPOSE

The purpose of the Audit  Committee (the  "Committee") of the board of directors
of nStor Technologies, Inc., (the "Corporation") is to provide assistance to the
board of directors in fulfilling  its  responsibility  to the  stockholders  and
investment  community relating to corporate  accounting,  reporting practices of
the  Corporation,  and the quality and  integrity  of  financial  reports of the
Corporation. In so doing, it is the responsibility of the Committee to establish
and maintain free and open communication between the directors,  the independent
auditors, and the financial management of the Corporation.                      

ARTICLE II

COMMITTEE MEMBERSHIP

2.1    Number of Committee Members.                             

        The authorized number of members of the Committee shall be three (3) and
must be independent of the Corporation and otherwise duly qualified as set forth
in Exhibit B. The board of  directors  may  designate  one or more  Directors as
alternate Committee members, who may replace any absent member at any meeting of
the Committee.                                                                  

2.2    Appointment and Term of Office of Committee Members.     

        Committee  members  shall be appointed by the board of directors to hold
office  until  replaced by a resolution  of the Board.  Each  Committee  member,
including  a member  elected to fill a  vacancy,  shall  hold  office  until the
expiration  of the term for which elected and until a successor has been elected
and qualified,  except in the case of the death, resignation, or removal of such
a member.                                                                       

2.3    Removal.                                                 

        The entire  Committee or any individual  Committee member may be removed
from office without cause by the affirmative  vote of a majority of the board of
directors of the Corporation.                                                   

 ARTICLE III

 COMMITTEE STRUCTURE

3.1    Chairman of the Committee.                               

        The Chairman of the Committee,  if such an officer be elected, shall, if
present,  preside at meetings of the  Committee  and  exercise  and perform such
other  powers  and duties as may from time to time be  assigned  by the board of
directors or as may be prescribed by this Charter. The Chairman of the Committee
shall be elected by resolution  of the board of  directors.  The Chairman of the
Committee  shall in all cases be an  independent  director.  In the  absence  or
disability  of the  Chairman  of the  Committee,  the board of  directors  shall
appoint an alternative Chairman to preside at the Committee meetings.           

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3.2    Secretary.                                               

        The Secretary shall keep or cause to be kept, at the principal executive
office of the  Corporation  or such other  place as the board of  directors  may
direct, a book of minutes of all meetings and actions of the Committee.         

ARTICLE IV

RESPONSIBILITIES

        In  carrying  out  its  responsibilities,  the  Committee  believes  its
policies  and  procedures  should  remain  flexible,  in order  best to react to
changing  conditions  and to ensure to the directors and  stockholders  that the
corporate   accounting  and  reporting  practices  of  the  Corporation  are  in
accordance with all requirements and are of the highest quality. Notwithstanding
the  foregoing,  the  following  duties  should be  performed at a minimum on an
annual or as needed basis.                                                      

4.1    Annual Duties.                                           

(a)     Obtain the full board of directors'  approval of this Charter and review
and reassess this Charter as conditions dictate.                

(b)     Review and  recommend to the  directors the  independent  auditors to be
selected to audit the financial statements of the Corporation.  

(c)     Have a clear  understanding  with  the  independent  auditors  that  the
        independent  auditors  are  ultimately   accountable  to  the  board  of
        directors and the Committee, as the stockholders'  representatives,  and
        that  the  board  of  directors  and the  Committee  have  the  ultimate
        authority in deciding to engage, evaluate, and if appropriate, terminate
their services.                                                 

(d)     Meet with the  independent  auditors  and  financial  management  of the
        Corporation  to  review  the  scope of the  proposed  audit  and  timely
        quarterly  reviews  for  the  current  year  and  the  procedures  to be
        utilized, the adequacy of the independent auditor's compensation, and at
        the  conclusion  thereof  review  such  audit or review,  including  any
comments or recommendations of the independent auditors.        

(e)     Review  with the  independent  auditors  and  financial  and  accounting
        personnel,   the  adequacy  and  effectiveness  of  the  accounting  and
        financial  controls of the Corporation,  and elicit any  recommendations
        for the improvement of such internal  controls or particular areas where
        new or more detailed  controls or procedures are  desirable.  Particular
        emphasis should be given to the adequacy of internal  controls to expose
        any payments, transactions or procedures that might be deemed illegal or
otherwise improper.                                             

(f)     Review  the  financial  statements  contained  in the  annual  report to
        stockholders  with management and the independent  auditors to determine
        that the  independent  auditors are satisfied  with the  disclosure  and
        content of the financial statements to be presented to the stockholders.

(g)     Review  with  financial  management  and the  independent  auditors  the
        results of their  timely  analysis of  significant  financial  reporting
        issues and practices,  including changes in, or adoptions of, accounting
        principles  and  disclosure  practices,  and discuss  any other  matters
required to be communicated to the Committee by the auditors.   

(h)     Review with  financial  management  and the  independent  auditors their
        judgments  about the  quality,  not just  acceptability,  of  accounting
        principles and the clarity of the financial disclosure practices used or
        proposed to be used, and  particularly,  the degree of aggressiveness or
        conservatism of the Corporation's  accounting  principles and underlying
        estimates,  and  other  significant  decisions  made  in  preparing  the
financial statements.                                           

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(i)     Report the  results of the annual  audit to the board of  directors.  If
        requested by the Board,  invite the  independent  auditors to attend the
        full board of directors  meeting to assist in  reporting  the results of
        the annual audit or to answer other directors' questions (alternatively,
        the other directors,  particularly the other independent directors,  may
        be invited to attend the Committee  meeting  during which the results of
the annual audit are received).                                 

(j)     Obtain from the independent auditors a written communication delineating
        all  their  relationships  and  professional  services  as  required  by
        Independence  Standards Board Standard No. 1,  Independence  Discussions
        with Committees.  In addition,  review with the independent auditors the
        nature and scope of any disclosed relationships or professional services
        and take,  or  recommend  that the board of directors  take  appropriate
action to ensure the continuing independence of the auditors.   

(k)     Review the report of the Committee in the annual report  to stockholders
        and  the  Annual  Report on  Form 10-K  disclosing  whether or  not  the
        Committee had reviewed and discussed with management and the independent
        auditors, as well as discussed within  the Committee (without management
        or the independent auditors present), the financial statements  and  the
        quality of accounting principles and significant judgments affecting the
        financial  statement.  In addition, disclose  the Committee's conclusion
        on  the  fairness  of  presentation  of  the  financial   statements  in
        conformity with  generally accepted accounting principles based on those
discussions.                                                    

(l)     Review  the  Corporation's  disclosure  in the proxy  statement  for its
        annual  meeting of  stockholders  that describes the Committee as having
        satisfied its responsibilities under this Charter for the prior year. In
        addition,  include  a copy of  this  Charter  in the  annual  report  to
        stockholders  or the proxy  statement at least  triennially  or the year
after any significant amendment to the Charter.                 

4.2    Duties as Needed.                                        

(a)     Review reports  received from  regulators and other legal and regulatory
        matters that may have a material  affect on the financial  statements or
related Corporation compliance policies.                        

(b)     Investigate any matter brought to its attention  within the scope of its
        duties with the power to retain outside  counsel for this purpose if, in
its judgment, that is appropriate.                              

 ARTICLE V

 INDEMNIFICATION

Every person who was or is a party to, or is  threatened  to be made a party to,
or is involved in any  action,  suit or  proceeding,  whether  civil,  criminal,
administrative  or  investigative,  by reason of the fact that he or a person of
whom  he is  the  legal  representative  is or  was a  Committee  member  of the
Corporation shall be indemnified and held harmless to the fullest extent legally
permissible  under the laws of the State of Delaware  from time to time  against
all expenses,  liability and loss, including attorneys' fees,  judgments,  fines
and amounts paid or to be paid in settlement, reasonably incurred or suffered by
him in connection  therewith.  Such right of indemnification shall be a contract
right, which may be enforced in any manner desired by such person.              

This   indemnification   is  intended  to  provide  at  all  times  the  fullest
indemnification  permitted  by the  laws  of  the  State  of  Delaware  and  the
Corporation  may purchase and maintain  insurance on behalf of any person who is
or was a Committee  member of the  Corporation  against any  liability  asserted
against  such person and  incurred  in any such  capacity or arising out of such
status,  whether  or not the  Corporation  would have  power to  indemnify  such
person.                                                                         

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ARTICLE VI

AMENDMENTS

This Charter and any  provision  contained  herein may be amended or repealed by
the board of  directors.  Whenever an amendment or a new Charter is adopted,  it
shall  be  copied  in the book of  minutes  with the  original  Charter.  If any
provision of this Charter is repealed, the provisions repealed, with the date of
the meeting at which the repeal was enacted or written consent was filed,  shall
be stated in said book.                                                         

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                                                                     EXHIBIT B

Professional Qualifications                                                     

Each of the  members  of the  Audit  Committee  must be  qualified  to read  and
understand  fundamental financial  statements,  including balance sheets, income
statements,  and cash  flow  statements  or become  qualified  to do so within a
reasonable  period of time  after  appointment  to the  Committee.  At least one
member of the  Committee  must have past  employment  experience  in  finance or
accounting,  requisite  professional  certification in accounting,  or any other
comparable experience or background which results in the individual's  financial
sophistication,  including being or having been a chief executive office,  chief
financial   officer  or  other   senior   officer   with   financial   oversight
responsibilities.                                                               

Independence                                                                    

Directors  with any of the following five  relationships  will not be considered
independent:  (1) employment by the Corporation or any of its affiliates for the
current year or any of the past three years;  (2) acceptance of any compensation
from the  Corporation  or any of its  affiliates in excess of $60,000 during the
previous fiscal year, other than compensation for Board service,  benefits under
a tax-qualified retirement plan, or non-discretionary  compensation;  (3) member
of the immediate  family of an individual who is, or has been in any of the past
three  years,  employed  by the  Corporation  or any  of  its  affiliates  as an
executive  officer;  (4)  partnership  in, or a  controlling  shareholder  or an
executive  officer  of,  any  for-profit  business  organization  to  which  the
Corporation made, or from which the Corporation  received,  payments (other than
those arising solely from  investments  in the  Corporation's  securities)  that
exceed five percent of the Corporation's or business organization's consolidated
gross revenues for that year, or $200,000, whichever is more, in any of the past
three years;  or (5)  employment as an executive of another  entity where any of
the Corporation's executives serve on that entity's compensation committee.     

One  director  who  is not  independent  and is  not a  current  employee  or an
immediate family member of such employee, may be appointed to the Committee,  if
the  Board,  under  exceptional  and  limited  circumstances,   determines  that
membership on the  Committee by the  individual is required by the best interest
of the Corporation and its  shareholders,  and the Board discloses,  in the next
annual  proxy  statement  subsequent  to such  determination,  the nature of the
relationship and the reasons for that determination.                            

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                                                                         ANNEX 4

TEXT OF PROPOSED AMENDMENT TO nSTOR'S CERTIFICATE OF                            

INCORPORATION                                                                   

The Certificate of Incorporation of nStor Technologies, Inc. is to be amended as
follows:                                                                        

1.  Article Fourth (a) thereof is amended in its entirety to read as follows:   

The total number of shares which the  Corporation  is authorized to issue is Two
Hundred and Thirty One Million  (231,000,000).  The Corporation is authorized to
issue two classes of shares to be designated,  respectively,  "Preferred  Stock"
and "Common  Stock." The number of shares of Preferred  Stock  authorized  to be
issued is One  Million  (1,000,000)  and the  number  of shares of Common  Stock
authorized  to be issued is Two Hundred and Thirty  Million  (230,000,000).  The
Preferred  Stock  shall have a par value of $.01 per share and the Common  Stock
shall have a par value of $.05 per share.  The aggregate par value of all shares
of  Preferred  Stock is  $10,000  and the  aggregate  par value of all shares of
Common Stock is $11,500,000.                                                    

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PROXY CARD

nSTOR TECHNOLOGIES, INC.                                                        
10140 Mesa Rim Road                                                             
San Diego, CA  92121                                                            

THIS PROXY IS SOLICITED ON BEHALF OF THE

COMPANY'S BOARD OF DIRECTORS

The undersigned holder of common stock of nStor  Technologies,  Inc., a Delaware
corporation (the  "Company"),  hereby appoints Jack Jaiven and H. Irwin Levy and
each  of  them,  as  proxies  for the  undersigned,  each  with  full  power  of
substitution,  for and in the name of the undersigned to act for the undersigned
and to vote,  as  designated  below,  all of the  shares of common  stock of the
Company that the  undersigned  is entitled to vote at the 2002 annual meeting of
Stockholders of the Company, to be held at 10:00 a.m., local time, on October 8,
2002, at The Hilton Palm Beach  Airport,  150  Australian  Ave, West Palm Beach,
Florida, and at any adjournment(s) or postponement(s) thereof.                  

(1)     To approve the issuance of the following shares of our  common  stock to
        Pacific Technology  Group, Inc.  in connection  with our  acquisition of
        100%  of the  outstanding capital stock of Stonehouse Technologies, Inc.
        on June 7, 2002:(a) 4,527,027 shares upon the conversion of our Series L
        Convertible Preferred Stock, and (b) up  to 8,687,258 shares as earn-out
consideration;                                                  

   [  ]  FOR         [  ]   AGAINST       [  ]   ABSTAIN

        The members of our board of directors  recommend that you vote "FOR" the
approval of Proposal 1.                                         

(2)     To  approve  the  issuance  of  shares  of our  common  stock  to  Halco
        Investments L.C., an entity controlled by Maurice Halperin, the Chairman
        of our board of directors,  in connection with the potential  conversion
        of a $3,100,000  promissory note in order to maintain our listing on The
American Stock Exchange;                                        

   [  ]  FOR         [  ]   AGAINST       [  ]   ABSTAIN

        The disinterested  members of our board of directors  recommend that you
vote "FOR" the approval of Proposal 2.                          

(3)     To approve the  issuance of shares of our common stock to H. Irwin Levy,
        the  vice-chairman  of our board of  directors  and our chief  executive
        officer,  in  connection  with the  potential  conversion  of a $650,000
        promissory  note in order to maintain our listing on The American  Stock
Exchange;                                                       

   [  ]  FOR         [  ]   AGAINST       [  ]   ABSTAIN

        The disinterested  members of our board of directors  recommend that you
vote "FOR" the approval of Proposal 3.                          

(4)     To approve the issuance of up to 30,000,000 shares of our common   stock
        upon the potential of an option granted to Pacific Technology  Services,
Inc.;                                                           

   [  ]  FOR         [  ]   AGAINST       [  ]   ABSTAIN

        The board of  directors  recommends  that you vote "FOR" the approval of
Proposal 4.                                                     

(5)     To approve an amendment to our certificate of  incorporation  increasing
        the  number of  authorized  shares of common  stock from  200,000,000 to
230,000,000;                                                    

   [  ]  FOR         [  ]   AGAINST       [  ]   ABSTAIN

        The members of our board of directors recommends that you vote "FOR" the
approval of Proposal 5.                                         

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(6)     To approve  and  ratify an  amendment  to our 2001 Stock Option  Plan to
        increase  the number of shares reserved for issuance under the Plan from
5,000,000 to 7,500,000.                                         

   [  ]  FOR         [  ]   AGAINST       [  ]   ABSTAIN

        The members of our board of directors recommends that you vote "FOR" the
approval of Proposal 6.                                       

(7)     To elect five persons to our board of directors to hold office until our
        next annual meeting of stockholders or until their  successors  are duly
elected and qualified as follows;                               

Roger H. Felberbaum                               
Bernard R. Green                                  
Maurice A. Halperin                               
H. Irwin Levy                                     
Michael L. Wise                                   

        [ ]    VOTE FOR all nominees  listed  above,  except  vote  withheld for
the following nominees (if any).                  
    ------------------------------------------------------
[  ]   VOTE WITHHELD for all nominees.                          

        The board of  directors  recommends  that you vote "FOR" the election of
all the nominees for election as directors.                     

(8)     To ratify the re-appointment of Swenson  Advisors LLP,  certified public
accountants, as our independent auditors for 2002; and          

   [  ]  FOR         [  ]   AGAINST       [  ]   ABSTAIN

        The board of  directors  recommends  that you vote "FOR" the approval of
Proposal 8.                                                     

(9)     To transact such other business as may  properly come before the  annual
meeting and any adjournments or postponements thereof.          

        Approval  of  Proposals  2 and 3 is  conditioned  upon the  approval  of
Proposal  5. If Proposal 5 is not  approved,  Proposals 2 and 3 will also not be
approved even if Proposals 2 and 3 receive the requisite stockholder approval.  

THIS PROXY, WHEN PROPERLY EXECUTED,  WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE  UNDERSIGNED  STOCKHOLDER.  IF NO DIRECTION  IS MADE,  THIS PROXY WILL BE
VOTED FOR THE ELECTION OF ALL NOMINEES  LISTED ABOVE AND FOR THE APPROVAL OF THE
REMAINING PROPOSALS.                                                            

The undersigned hereby acknowledges receipt of (i) the Notice of annual meeting,
(ii) the Proxy Statement, and (iii) the Company's Form 10-K, as amended, for the
year ended December 31, 2001.                                                   

Dated_________________________, 2002    

------------------------------------    
(Signature)       

------------------------------------    
(Signature if held jointly)     

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IMPORTANT:  Please sign exactly as your name appears hereon and mail it promptly
even  though you now plan to attend the  meeting.  When shares are held by joint
tenants,  both should sign.  When signing as attorney,  executor,  dministrator,
trustee or guardian,  please give full title as such. If a  corporation,  please
sign in full  corporate  name by president  or other  authorized  officer.  If a
partnership, please sign in partnership name by authorized person.              

PLEASE  MARK,  SIGN AND DATE  THIS  PROXY  CARD AND  PROMPTLY  RETURN  IT IN THE
ENVELOPE PROVIDED. NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES.         

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘PRER14A’ Filing		Date		First		Last			Other Filings
		10/29/11		30
		11/20/06		24		60
		6/7/04		41
		3/31/04		41					10-Q
		6/20/03		17		65
		6/14/03		60
		5/31/03		24		60
		5/15/03		42					10-Q,  8-K
		4/30/03		41					4
		3/31/03		42					10-Q
		2/28/03		60
		1/16/03		38
		1/1/03		54
		12/31/02		35		41			10-K,  10-K/A
		12/15/02		25		60
		11/30/02		26		60
		10/31/02		23
		10/8/02		2		100
		10/1/02		6		54
		9/11/02		2		43			DEF 14A
		9/5/02		59
Filed on:		8/28/02
		8/13/02		3		68			8-K/A
		8/12/02		2		29
		7/31/02		41		52
		7/30/02		52		59
		6/30/02		3		65			10-Q
		6/26/02		17		65
		6/21/02		17		69			8-K
		6/15/02		41
		6/14/02		25		67
		6/13/02		18
		6/10/02		16
		6/7/02		2		100
		5/31/02		22		60
		5/28/02		17		65
		5/18/02		67
		5/15/02		16		54			10-Q
		4/30/02		16		92
		4/12/02		67					8-K
		4/10/02		67					8-K
		3/31/02		69		91			10-Q
		3/22/02		69		71
		3/21/02		16		81
		3/19/02		58
		3/18/02		34
		3/1/02		15		68			8-K,  8-K/A
		2/15/02		36
		2/14/02		36		39
		2/4/02		59
		1/17/02		38
		1/16/02		38
		1/11/02		41		57			SC 13D
		1/10/02		28		57			DEFS14A,  PRES14A
		1/1/02		58		86
		12/31/01		4		101			10-K,  10-K/A,  DEF 14A,  NT 10-K,  PRE 14A
		12/15/01		78		87
		12/13/01		35					8-K
		12/11/01		35
		11/30/01		35					8-K
		11/20/01		15		64			8-K
		11/19/01		15		56
		11/16/01		15
		11/12/01		15
		10/31/01		15
		10/29/01		28
		10/23/01		15
		9/30/01		35					10-Q
		9/28/01		15					SC 13D
		8/15/01		52		56
		7/17/01		38
		7/1/01		78		86
		6/30/01		31		86			10-Q,  NT 10-Q
		6/26/01		15		56			SC 13D
		6/22/01		36		38
		4/16/01		34
		4/12/01		38		42
		4/2/01		36					NT 10-K
		3/31/01		41					10-Q,  NT 10-Q
		3/27/01		42
		2/19/01		80
		1/17/01		38
		1/1/01		20		88
		12/31/00		35		81			10-K,  10-K/A,  NT 10-K
		12/29/00		36
		10/18/00		38
		8/14/00		36
		3/13/00		36
		1/17/00		36		38
		1/1/00		74
		12/31/99		35		64			10-K,  DEF 14A,  NT 10-K
		10/31/96		40					10-K,  10-K/A,  DEF 14A
		4/1/96		76
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