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                ANNUAL REPORT FOR SMALL BUSINESS ISSUERS SUBJECT
                     TO THE 1934 ACT REPORTING REQUIREMENTS

                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              --------------------

                                  FORM 10-KSB

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

                  For the fiscal year ended December 31, 2001
                                            -----------------
                                       or

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

            For the transition period from _________ to ___________

                         Commission File Number 0-28483

                           Pinnacle Data Systems, Inc.
              ---------------------------------------------------
              (Exact name of small business issuer in its charter)

             Ohio
-------------------------------                         31-1263732
(State or other jurisdiction of             -----------------------------------
 incorporation or organization)             (I.R.S. Employer Identification No.)

  6600 Port Road, Groveport, Ohio                         43125
  --------------------------------                      ---------
(Address of principal executive offices)                (Zip Code)

                Issuer's telephone number:  (614) 748-1150
                                           ----------------

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Securities registered under Section 12(b) of the Exchange Act:

     Title of each class                  Name of each exchange on which
                                                    registered

Common Shares, without par value              American Stock Exchange
--------------------------------              -----------------------

Securities registered under Section 12(g) of the Exchange Act:

                                      None
                                      ----

     Indicate by check mark whether the Issuer (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 Issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

          Yes  X    No ___
              ---

     Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]

     State Issuer's revenues for its most recent fiscal year. $22,672,483
                                                              -----------

     The aggregate market value of the voting and non-voting common equity
held by non-affiliates, computed on the basis of the closing sale price on the
American Stock Exchange of the common shares as of March 1, 2002, was
$4,824,355.

     On March 1, 2002, the Issuer had outstanding 5,493,504 common shares
without par value, which is the Issuer's only class of common equity.

                      Documents Incorporated by Reference
                      -----------------------------------

Portions of the Registrant's Definitive Proxy Statement to be filed for its
2002 Annual Meeting of Shareholders are incorporated by reference into Part III
of this Annual Report on Form 10-KSB.

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                                TABLE OF CONTENTS

PART I........................................................................1

  ITEM 1.   DESCRIPTION OF BUSINESS...........................................1
  ITEM 2.   DESCRIPTION OF PROPERTY..........................................11
  ITEM 3.   LEGAL PROCEEDINGS................................................12
  ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............12

PART II......................................................................13

  ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.........13
  ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........14
  ITEM 7.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................21
  ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
              ACCOUNTING AND FINANCIAL DISCLOSURE............................45

PART III.....................................................................46

  ITEM 9    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
              COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT..............46
  ITEM 10.  EXECUTIVE COMPENSATION...........................................46
  ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...46
  ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................46
  ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.................................47

SIGNATURES...................................................................52

                                      -i-

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS. Portions of this Annual
Report on Form 10-KSB (including information incorporated by reference) include
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The words "believe," "expect," "anticipate,"
"estimate," "project," and similar expressions, among others, identify
"forward-looking statements", which speak only as of the date the statement was
made. Such forward-looking statements are subject to risks, uncertainties and
other factors, which could cause actual results to materially differ from those
projected, anticipated or implied. The most significant of such risks,
uncertainties and other factors are described in Item 6 of this Form 10-KSB. We
undertake no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events, or otherwise.

                                     PART I

ITEM 1.        DESCRIPTION OF BUSINESS

BACKGROUND

We design, assemble and sell computer products and provide computer repair and
other related services primarily to Original Equipment Manufacturers (OEMs) in
the telecommunication, medical system, process control and computer industries.
During 2001, we reported revenue of approximately $22.7 million, a net loss of
approximately $690,000, and total assets of approximately $9.3 million.
Approximately 80% of our 2001 revenue was generated from product sales and
approximately 20% was generated from services.

Our products are custom-designed to meet the special computer system
requirements of our customers that cannot be met by off-the-shelf products
alone. We help customers by engineering, designing, manufacturing, assembling,
modifying and integrating computer equipment to meet customers' particular
needs. Many of our products are based on high performance computer processor
technology and circuit board products manufactured by Sun Microsystems, Inc.
(Sun), one of the world's largest producers of computer components and systems.
We combine Sun's products and other vendor off-the-shelf computer peripherals
with technologies that we engineer and develop, such as customized circuit
boards, enclosures, power supplies and other engineered components and
software, into finished products. In our largest volume products, Sun
off-the-shelf products constitute approximately 40-55% of the product's total
components cost, other vendor off-the-shelf peripheral products such as power
supplies and disk drives constitute another approximately 18-22%, and 25-35% is
constituted by products we design and develop, and modify or manufacture. These
percentages vary from product to product. By leveraging our experience in
engineering and integrating our internally developed products with Sun's
off-the-shelf board technology, we are able to offer solutions with minimal
non-recurring engineering (product design) charges. Our finished product is a
turnkey, application-specific computer circuit board or system that is imbedded
into our customer's finished product. See "Products."

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We also offer complete after-the-sale service and support for other OEM's
products, as well as our own, including repair, logistics, and product
end-of-life management services. We provide depot repair services for advanced
technology systems, printed circuit board assemblies, other computer
peripherals and components, where the damaged or malfunctioning equipment is
sent to our "depot" for repair. We do not provide any repairs outside of our
facilities. Our repair capabilities are extensive. However, we primarily repair
Sun or Hewlett-Packard Co. (H-P) UNIX-based processors, systems based on them
and related components. We also manage "advanced-exchange" repair programs for
Sun and H-P, where we send out a replacement part from the OEM's inventory
stocked at our facility, overnight when necessary, and receive the
malfunctioning part back, usually, within a few days. We repair the
malfunctioning part and place it back into the OEM's inventory at our facility.
In addition to providing Sun repair services, we also partner with Sun in the
distribution of both repairable and consumable (new and less expensive to
replace than repair) Sun replacement parts to Sun customers using an online
information management system connecting our two companies. Additional revenue
is generated from the sale of spare parts and components. Our end-of-life
product management service allows our customers to maximize their investment in
technology by providing continued support for products no longer supported by
the original manufacturer. This allows OEMs to eliminate or delay the
engineering and software development charges required to integrate new
technology into their products. For example, many other OEMs' products include
Sun components. When Sun stops manufacturing those components, the OEM is left
without a source for parts needed to continue to build or repair its products.
We provide the parts, either new or refurbished. See "Services."

We consider our product and service segments to be complementary. When the
economy and capital spending for new equipment declines, repairs on equipment
already in the field increases. In addition, we believe the services we offer
provide a competitive advantage in selling our products. We can offer the
purchasers of our products a more complete answer to their system needs by
providing not only the product, but also its service and support after the
sale. Likewise, new product development provides us with a competitive
advantage in selling repair services. Product development and engineering
activities keep us current with the latest technology and how to repair it.

Almost all of our products are based on Sun's SPARC architecture. If, for any
reason, Sun or its products began to experience significant difficulties in the
market place, in operations or otherwise, it could materially and adversely
affect our business.

We believe that our relationship with Sun provides a significant advantage to
us. We have contracts with Sun under which Sun provides us with proprietary
designs for its products, or which enable us to utilize and sell Sun circuit
board technology, operating systems or other software to our customers. In
1997, we were accepted into the Sun Microelectronics Partners Program. As a
member of this program, our personnel make marketing calls on Fortune 500
companies with Sun sales representatives to provide complete technology
solutions to mutual customers. In March 1999, we entered into a Repair Services
Agreement with Sun under which we provide repair and testing services on Sun
circuit boards and related components, and maintain an inventory for Sun of
repaired boards and components. We also provide streamlined distribution of
these components and parts to Sun Enterprise Service Division's stocking

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locations, field engineers or customers using the online information management
system connecting the two companies.

We are a much smaller company than Sun. In the four quarters ending December
30, 2001, Sun reported revenue of approximately $14 billion, over 600 times
greater than our current level of annual revenue. While we are relatively
insignificant to Sun, we are significantly dependent upon our relationship with
Sun. In 2001, approximately 31% of our total sales were directly to Sun. Those
sales to Sun were approximately 18% of our product sales and approximately 86%
of our service sales. Additionally, we have entered into license agreements
with Sun, pursuant to which we sell products and services to third parties,
which aggregated to approximately 19% of total sales, 24% of product sales, in
2001. In the same period, approximately 14% of our purchases of inventory were
made directly from Sun. For information about the various contracts we have
with Sun, and the amount of revenue generated under each agreement. See
"Contractual Relationships with Sun Microsystems, Inc. and its Affiliates."

If all of our relationships with Sun were to end, our operations would be
materially adversely affected, particularly in the short term. However, we
would continue to sell our products to OEMs, and we would continue to provide
repair and other services to H-P, other OEMs, third party maintenance
organizations and end-users. Also, we are currently and would continue to
pursue providing repair-related services to other OEMs. We believe a complete
severing of all Sun relationships unlikely, because those relationships are so
diverse, and, to a great degree, independent of one another. In addition,
because of the size and breadth of the services provided, we believe it would
take several months for Sun to implement a replacement vendor or vendors to
provide our services.

We are a corporation, incorporated in the State of Ohio in March 1989.

DEVELOPMENT OF THE BUSINESS DURING RECENT YEARS

Service Developments: During the last five years, the focus of our repair
--------------------
services has shifted from providing repairs for Third Party Maintainers (TPMs)
to providing repairs for OEMs. We have also become an integral part of Sun's
repair system through our partnering under Sun's Virtual Logistics Network
(VLN).

In 1996, we began providing depot repair services to OEMs. In early 1997, we
entered into a joint venture as a minority partner of LogistixPDSi Services in
Northern California to provide repair services to the OEM marketplace. In
connection with this venture, we established a repair depot facility within the
headquarters of the majority partner in Fremont, California. The joint venture
entity was not successful and losses occurred during 1997.

In November 1997, we were offered an opportunity to establish a dedicated
repair depot for Sun in California. We terminated our participation in the
joint venture, hired the joint venture employees and established a facility
within the distribution center of Sun. In late 1998, in anticipation of
accepting a larger role in Sun's service business model, we closed the
California facility and consolidated our operations in Columbus, Ohio.

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In January 1999, we became a phase one implementation partner with Sun in Sun's
Virtual Logistics Network (VLN), a real-time spare/repair parts supply chain
management system. While continuing to provide repair services to Sun, we began
providing inventory management, order fulfillment and logistics management
services to Sun. Later in 1999, we received a meritorious performance supplier
award from Sun for our participation in the VLN program.

In September 2001, we entered into a service agreement with H-P and began a
program to provide board-level depot repair, testing and diagnostics and supply
chain management services for H-P UNIX desktop workstations worldwide.

Product Developments: Prior to 1997, our products consisted of a variety of
--------------------
circuit boards and assemblies that we re-engineered and manufactured to meet
customers' particular needs. These products were typically embedded into our
customers' proprietary products.

In 1997 and 1998, we began designing, integrating and manufacturing custom
computer systems for OEMs. We developed and manufactured products for a
relatively large number of customers. These products involved varying levels of
components that were designed and developed by us, as well as wide ranges of
technology.

In late 1999 and 2000, we focused our efforts on narrower ranges of products
for niche markets to achieve greater leverage of our technological developments
and to focus on larger systems with higher percentages of components or
configurations that we designed and developed. We made significant additions to
our engineering staff to develop products for the future. During 2000, the size
of the orders for computer systems increased. The number of product customers
generating revenues of at least $100,000 declined from 14 in 1999 to 11 in
2000. However, the 6 largest product customers in 1999 generated sales of
approximately $6.3 million, where the 6 largest customers in 2000 generated
sales of $18.2 million.

In 2001, new product development focused on the telecommunications industry.
The TS1000, originally developed for Alcatel SA (Alcatel), a $22 billion
international telecommunications equipment provider, was introduced as a
product for the telecommunications industry at large. Sales of the TS1000 to
Alcatel in 2001 were 26% of total sales and 32% of product sales for the year.
The TS1350 and Blueswitch products were introduced in December 2001, positioned
to be the first in a line of next generation blade computing products for
networking and telecommunications applications. In 2001, the six largest
customers generated sales of $20.9 million.

Organizational Developments: In early 1999, we entered into a 10-year lease for
---------------------------
56,000 square feet of space for our operations in a building located in a
foreign-trade zone in Groveport, Ohio, a suburb of Columbus. In January 2000,
we amended our lease to expand the amount of square feet under lease to
approximately 113,000. We sold the building in which operations were
previously housed.

In early 2001, we undertook an internal departmental reorganization. We
realigned our divisions along the service and product business segments. Our
chief operating officer became the vice president of the service group. The
vice president of sales and marketing became the vice

                                      4

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president of the product group. The intent of the reorganization was to
increase the focus and efficiency of the respective groups.

BACKGROUND OF INDUSTRY

OEMs in the telecommunications, medical systems, process control and enterprise
markets embed advanced technology systems in their products to enhance
functionality and performance. OEMs select a platform for their products based
on the performance and availability required by the application. Management
believes that OEMs who choose Sun's SPARC platform make this decision based on
the speed of the Sun processor technology and the stability of the UNIX
operating system. Management further believes that the reliability and speed of
Sun processors combined with the stability of Sun's Solaris operating systems
provides excellent performance and system availability.

To fully integrate these systems into their products, OEMs often have special
requirements that cannot be met by off-the-shelf products manufactured by Sun.
Traditionally, these companies modified off-the-shelf components to meet their
specific needs, utilizing either in-house engineering resources or outside
engineering firms to create custom system configurations. In doing so, these
OEMs incurred significant non-recurring engineering (NRE) charges to cover
development costs. As the pace of technology has increased and competition has
intensified in these markets, OEMs are now less willing to incur the time and
expense required to develop custom systems. Instead, they are looking for
sources, such as us, that can provide application-specific systems and products
with minimal engineering development time and expense. We believe OEMs will
continue to look for ways to reduce product development time and cost without
compromising their ability to customize technology to their application.

At the same time, there is a growing base of OEM products built around
technology that is no longer being supported by the manufacturer. These OEMs
are faced with having to modify software and reconfigure their product to
incorporate new technology that does not enhance their systems' performance
simply because their existing technology is no longer being supported by the
manufacturer. As a result, OEMs are looking for ways to extend the life of
their current technology. Some of these OEMs contract with entities to provide
end-of-life management, which may include manufacturing and/or repair of the
products no longer supported or manufactured by the OEM.

There has been a trend during the last several years towards outsourcing in the
electronics repair industry, which we believe will continue in the future. We
believe that this is due to: (1) the desire of OEMs to focus resources on their
primary business, (2) the accelerated pace of new product introductions
necessary for OEMs to keep pace with competition, and (3) the need to reduce
costs, which can be accomplished by converting fixed costs of an internal
service department into variable costs by outsourcing the service.

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PRODUCTS

Our products include complete systems, specially designed products, including
boards and attach cards, and software. Complete systems include fully
integrated hardware and software from multiple sources. We resell some hardware
and software manufactured by Sun and other OEMs.

In certain cases, an OEM will outsource the design and manufacture of a product
to us, which we will manufacture under the customer's private label. Our
expertise in engineering, various computing technologies, manufacturing system
and board level products, and service after the sale allows the OEM to reduce
costs and improve its return on assets. Our contract manufacturing services
primarily involve products which have high engineering, technical and test
content, and low to medium production requirements. Most of our orders for
custom engineering and manufacturing services are from large OEM customers of
Sun. These customers want to use the Sun Solaris operating system software on
workstations, data servers or other computer systems incorporated into their
products. However, those hardware products are not manufactured and sold by Sun
in the same form or fit, or with the all the functionality, the OEM requires to
be built into their product. We design and engineer form, fit and function
modifications to Sun component boards and systems to fit the customers' needs
and manufacture the custom product for the customer. Some of our products use
commercially available parts configured to produce the desired function. In
other cases, they contain components or functions conceived and developed by
our engineering staff.

We also develop new products for niche markets; mostly component boards and
systems for telecommunications equipment providers. These products are usually
commissioned by Sun, or its OEM customer base, and are based on Sun's SPARC
technology and the expertise we've developed over the years working with them
on custom products through Sun's Master Value-Added Integrator (MVAI) Program.

Some of the systems we develop and manufacture are described as "high
availability" (HA) systems. An HA system has redundant system components with
sophisticated failover software. HA systems continue to operate despite the
failure of any component by instantly transferring system functions to a
redundant backup component in the system. HA systems are required in the
telecommunications industry since near 100% reliability of service is a minimum
industry standard.

Component products that we develop allow OEMs to more fully integrate SPARC
technology into their products. These products include power supplies,
specially modified motherboards, transition cards and I/O boards.

There is research and development in connection with designing these new
products. During 2001 and 2000, we incurred $1,368,151 and $1,127,339,
respectively, for research and development. These expenses were not paid
directly by our customers, but are typically recouped over time as part of the
cost of the developed products sold to customers.

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We are a SunSoft Master Distributor and are authorized to provide our customers
with the right to use Solaris, Sun Microsystem's UNIX operating system. We also
resell failover software as part of our HA systems.

SERVICES

We repair products that have been developed, manufactured, marketed and sold by
other OEMs, which generally have a well-established and installed customer
base, as well as our own products. We also provide warehousing and logistics
services that support these OEMs' service and support programs.

Depot Repair Services: We provide OEMs, TPMs and end-users who maintain their
---------------------
own equipment the opportunity to outsource repairs of their proprietary
products or products produced for them by third parties. The entity that is
actually providing the maintenance service in the field will place an order
with us for the repair of defective components or parts. The time of completion
of the repair will be scheduled, with higher charges for shorter time frame
repairs. We offer our customers a choice of 5-day and 15-day repair and return
services. We also maintain an extensive inventory of spare components and offer
the ability to provide replacement components or parts overnight from our
existing inventory in exchange for defective components or parts, which are
then repaired and replaced in our inventory. Our electronic technicians
diagnose, repair and test components or parts shipped in for repair. Since
inception, we have specialized in the repair of hardware manufactured by Sun. A
comparable program was started in 2001 to service H-P UNIX-based workstations
worldwide. These systems are typically high-end workstations able to perform
multi-tasking functions.

Sun Logistics Management Services: In August 1999, we entered into an agreement
---------------------------------
with Sun to provide test and repair services and inventory and logistics
management services to Sun's Enterprise Services Division. Under this program,
the Virtual Logistics Network (VLN), we are partnering with Sun to provide
streamlined distribution of Sun components and parts to Sun customers using an
online information management system that connects the two companies. We also
provide management and logistics services to other vendors/partners of Sun that
participate in the VLN.

H-P Virtual Supplier Program: In September 2001, we entered into agreements
----------------------------
with H-P to provide test and repair services for H-P UNIX-based workstations
worldwide. Under these agreements, we are also partnering with H-P in the
Virtual Supplier program (VS) to provide streamlined distribution of H-P
components and parts to H-P customers using an online information management
system that connects the two companies.

Spare Parts Sales: Our spare parts capabilities enhance the efficiency of our
-----------------
other service offerings. However, we also sell repaired parts, new parts, and
reclaimed parts to others providing repair services. New components are often
difficult to obtain and costly to purchase in small quantities. We use, repair,
and, therefore, can provide a wide variety of parts at a significant discount
compared to the cost of comparable new parts. We either supply the spare

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parts from our own inventory when we have a surplus of a particular part or
component, or we acquire the requested parts from brokers or other suppliers of
used equipment. At times, we will dismantle damaged and/or discarded equipment
to obtain usable components. We maintain an inventory consisting primarily of
Sun components and parts.

End-of-Life Management: End-of-life management services bring together our
----------------------
board design and manufacturing, parts stocking and repair capabilities to
extend the life of technology that is no longer supported by the manufacturer.
We will enter into an end of life service contract with our OEM customers,
which may include depot repair of installed technology, as well as acquisition
or manufacture of products that have been discontinued by the manufacturer
(end-of-life).

Extended Warranty Services. In 1992, we began initial marketing efforts to
--------------------------
provide customers with extended warranty support services. Generally, we extend
warranty of an OEM's product for a fixed fee. We develop warranty programs
specifically tailored to meet a customer's needs with the goal of fulfilling as
many of the customer's repair needs as required.

CONTRACTUAL RELATIONSHIPS WITH SUN MICROSYSTEMS, INC. AND ITS AFFILIATES

In August 1999, we entered into an agreement with Sun Microsystems, Inc. to
provide its Enterprise Services Division test, repair, inventory and logistics
management services. The agreement has a one-year term and renews automatically
for additional one-year terms. In 2001, we generated approximately $3.9 million
of revenue from this agreement, or approximately 17% of total revenue and 86%
of service revenue. We consider this agreement to be of critical importance to
our future viability, and consider it to be a basis for future growth of the
service segment. See "Services - Sun Microsystems Logistics Management
Services."

We design and sell products under various technology license agreements with
Sun. Three of the license agreements are of material importance to our
viability. It is not possible to cite the respective operating earnings
contributions of the products sold under the three license agreements, as we do
not allocate labor and overhead costs to individual products. Consequently, the
respective revenue contributions are cited below. If any of these agreements is
terminated, it would significantly impede our ability to perform our design and
manufacturing services.

In May 1999, we entered into a Reference Design License Agreement with Sun
Microelectronics (SME), a division of Sun Microsystems, Inc., pursuant to which
we are licensed to develop, manufacture and sell products based upon and using
the Sun AXmp technology. The license enables us to use this Sun technology in
our custom-designed and manufactured products. We generated revenue from these
products of approximately $3.6 million in 2000 and $5.8 million in 2001
(approximately 17% and 32% of total product revenue, respectively). Training
and support fees amounting to $40,000 were paid in connection with the license.
This license agreement was for an original term of seven years expiring in May
2006. The license automatically renews for one-year periods unless written
notice of non-renewal is given by either party before the current term ends.
The license can also be terminated earlier upon default by either party as
defined in the Agreement.

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In October 1997, we entered into a Development and Manufacturing License
Agreement with Sun Microelectronics (SME), a division of Sun Microsystems,
Inc., pursuant to which we are licensed to develop, manufacture and sell
products based upon and using the Sun PCI card and Open Boot PROM technology.
The license enables us to use this Sun technology in our custom-designed and
manufactured products. We generated revenue from these products of
approximately $7.1 million in 2000 and $1.8 million in 2001 (approximately 34%
and 10% of total product revenue, respectively). We do not anticipate that we
will develop any new products based on the technology licensed under this
agreement, although we will continue to sell products that we have developed
under this license. Consequently, the importance of this license to us is
likely to decline in future years. This license agreement was for an original
term of three years expiring in October 2000. However, the license
automatically renews for one-year periods unless written notice of non-renewal
is given by either party before the current term ends. The license can also be
terminated earlier upon default by either party as defined in the Agreement.
The license has been automatically renewed for an additional one-year term
expiring October 2002.

In May 1994, we entered into a microprocessor platform design license agreement
with Sun Microsystems Computer Corporation, acting through its SPARC Technology
Business Division, pursuant to which we are licensed to develop, manufacture
and sell products based upon and utilizing the Sun SPARC microprocessor
technology. The license enables us to use this Sun technology in our
custom-designed and manufactured products. We generated revenue from these
products of approximately $2.4 million in 2000 and $2.5 million in 2001
(approximately 12% and 14% of total product revenue, respectively). The
technology of this license is utilized in customer projects that began prior to
1997. It has not been utilized in any new customer projects since 1996. We do
not anticipate that we will develop any new products based on the technology
licensed under this agreement, although we will continue to sell products that
we have developed under this license. Consequently, the importance of this
license to us is likely to decline in future years. A license fee in the amount
of $35,000 was paid in full upon execution of the license. This license
agreement was for a term of 7 years and expired in 2001, but was renewed for
one year and will continue to be subject to automatic renewal for one-year
periods unless either party gives notice of non-renewal. The license can be
terminated earlier upon default. The license has been automatically renewed for
an additional one-year term expiring in 2002.

CONTRACTUAL RELATIONSHIPS WITH HEWLETT-PACKARD

In September 2001, we entered into Divisional Services and Direct Connect VS
Supplier Services Agreements with H-P to provide test, repair, and logistics
management services for H-P UNIX-based workstations worldwide. The Division
Services Agreement has a three-year term expiring August 2004. The Direct
Connect VS Supplier Agreement has a one-year term expiring August 2003. These
agreements may be extended for additional one year periods, provided that both
parties mutually agree in writing at least 60 days prior to the expiration of
the then-current term. We consider this agreement to be very important to our
future and a basis for future growth of the service segment. See "Services -
H-P Virtual Supplier Program."

CONTRACTUAL RELATIONSHIPS WITH ALCATEL SA

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In February 2001, we entered into an agreement with Alcatel USA Inc. (Alcatel),
owned by Alcatel Alsthom S.A., headquartered in France, to develop and be the
exclusive provider of the product now sold as the TS1000 for a period expiring
in June 2004. The agreement automatically renews for one-year periods unless
written notice of non-renewal is given by either party before the current term
ends. There are no volume commitments in the agreement. Alcatel would not
authorize an announcement of the agreement until their requirements for market
testing and acceptance were met. In December 2001, the company and Alcatel
announced the Agreement and Alcatel's decision to sell the TS1000 as a
strategic component of Alcatel's Intelligent Network product line. We consider
this agreement to be very important to our product strategy and a basis for
future growth of the product segment. See "Product Developments."

SALES AND MARKETING

We focus our marketing efforts on large OEMs and on TPMs. We have not
traditionally maintained a field sales organization. In recent years, we
utilized independent manufacturers' representative firms to generate sales
opportunities. However, in 2000 and 2001, we hired a direct field sales force
of three, with offices in the Columbus, Ohio (central U.S.), Los Angeles,
California (western U.S.), and Boston, Massachussettes (eastern U.S.),
metropolitan areas. During 2001, five customers represented approximately 87%
of sales. Our largest customer in 2001, Sun, accounted for approximately 31% of
sales during 2001. Our second largest customer, Alcatel SA, accounted for
approximately 26% of sales during 2001. During 2000, we had revenue from three
customers that represented approximately 63% of sales. Our largest customer in
2000, Bayer Diagnostics, accounted for approximately 28% of our sales.

COMPETITION

Competition for our custom-designed products come from three primary sources:
(1) other companies that provide similar design and manufacturing services
based on Sun technologies, (2) off-the-shelf products of competing
technologies, and (3) custom-designed products based on competing technologies.

We, like a number of our product competitors, target the telecommunications
industry due to its long term growth history and the future opportunity we
believe this market offers. We are also active in the medical systems, and
process control markets. We believe we differentiate ourselves from the
competition through the strength of our close relationships with our very large
OEM customers (Sun, H-P, Alcatel and others), our ability to offer and deliver
complete turnkey product/service solutions in relatively short development
cycles, our unique product set and our full service-after-the-sale offering.
However, many of our competitors are more established and have substantially
greater technical, manufacturing, marketing and financial resources to develop
and market new products.

Primary competitive factors in the repair industry are price, quality and scope
of repair services (in-house expertise). We compete with the in-house repair
centers of OEMs, TPMs and contract manufacturers for repair and end-of-life
service programs. While we believe we offer a cost-

                                      10

<PAGE>

effective repair solution to OEMs and TPMs and, therefore, believe these
entities are our primary potential customers, there is no assurance that these
entities will choose to outsource their repair needs. These entities could also
choose to compete directly with us for the services of unrelated OEMs and TPMs,
and for end-users. In addition, we also compete with a number of similar
independent organizations. Many of the OEMs, TPMs and contract manufacturers
with which we compete have significantly greater manufacturing, financial,
technical and marketing resources. Similarly, some of the independent depot
repair businesses may generate significantly more revenues and may also have
greater resources with which to compete.

INTELLECTUAL PROPERTY

Since our products are based on existing technologies and custom-designed
components generally developed under agreements with specific customers, the
company currently owns no patents and has no patents pending. Federal trade and
service mark applications were filed for "Pinnacle Data Systems" and the logo
"PDSi" in 2001.

GOVERNMENT REGULATION

Certain facets of our operations involve the use of substances regulated under
various federal, state and local laws governing the environment. The liability
for environmental remediation and related costs can be significant, although
the company has not incurred any to this date. Consequently, environmental
costs and environmental regulations are not presently material to our
operations or financial position. Similarly, no other federal, state or local
laws or regulations materially impact our operations or financial position.

EMPLOYEES

As of March 1, 2002, we had a total of 99 employees, 97 of whom were full-time.
None of our employees are subject to collective bargaining agreements, and we
consider our relationship with our employees to be very good.

ITEM 2.        DESCRIPTION OF PROPERTY

We lease approximately 113,000 square feet of office, warehouse, laboratory and
production space in a building located at 6600 Port Road, Groveport, Ohio. We
entered into a ten-year lease commencing May 1, 1999. We have the option to
extend the term of the lease for an additional five years. The building is in
good condition. We believe that this space is adequate for the foreseeable
future. We believe that there is additional space for lease in this building,
if we need additional space. See Item 6, Management Discussion and Analysis.

Our current policy is not to invest in real estate or interests in real estate.
We do not invest in real estate mortgages or securities of entities primarily
engaged in real estate activities.

ITEM 3.        LEGAL PROCEEDINGS

We are not currently a party to any legal proceedings.

                                      11

<PAGE>

ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of shareholders during the fourth quarter
of 2001.

                                      12

<PAGE>

                                    PART II

ITEM 5.        MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     (a)  Market Information. Since September 7, 2000, our common stock has
          ------------------
traded on the American Stock Exchange under the stock symbol "PNS." Set forth
below is the range of high and low sales prices of the common shares on the
American Stock Exchange during the four quarters of 2001 and the last two
fiscal quarters of 2000, beginning on September 7, 2000.

                                                        Range of Sales Prices
                                                        ---------------------
                                                             High     Low
                                                             ----     ---
Fiscal Year 2001
      Fourth quarter (ended December 31)..................  $2.00    $1.06
      Third quarter (ended September 30)..................   2.00     0.85
      Second quarter (ended June 30)......................   3.50     1.75
      First quarter (ended March 31)......................   5.13     2.60

Fiscal Year 2000
      Fourth quarter (ended December 31)..................  $7.38    $3.00
      Third quarter (from September 7 to September 30)....   6.19     4.13

From April 1996 until September 6, 2000, our common stock traded on the OTC
Bulletin Board under the stock symbol "PNDS." Set forth below is the range of
high and low bid prices for our common stock during the first three quarters of
2000 through September 6, 2000.

                                                              Bid Prices
                                                              ----------
                                                             High     Low
                                                             ----     ---
Fiscal Year 2000
      Third quarter (through September 6).................  $6.13    $3.00
      Second quarter (ended June 30)......................   3.84     1.86
      First quarter (ended March 31)......................   3.75     0.81

The foregoing bid prices were obtained from the National Quotation Bureau Pink
Sheets and reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not represent actual transactions.

     (b)  Holders. On March 1, 2002, there were 86 holders of record of the
          -------
Shares. Most of the Shares not held by officers and directors are held in
street name.

     (c)  Dividends. During the past five years, we have not paid cash
          ---------
dividends. Payments of dividends are within the discretion of our board of
directors. In addition, under the

                                      13

<PAGE>

terms of a loan agreement with a bank, we are prohibited from declaring or
paying dividends to common shareholders and from redeeming stock from
shareholders.

ITEM 6.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Financial
Statements and Notes contained herein.

This annual report, including the following sections contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. The words "believe," "expect," "anticipate," "estimate," "project,"
and similar expressions identify forward-looking statements that speak only as
of the date thereof. Investors are cautioned that such statements involve risks
and uncertainties that could cause actual results to differ materially from
historical or anticipated results due to many factors. Such factors include,
but are not limited to, adverse changes in general economic conditions,
including adverse changes in the specific markets for our products and
services, adverse business conditions, decreased or lack of growth in the
computing industry, adverse changes in customer order patterns, including any
decline or change in product orders from large customers like the four
customers that made up approximately 80% of our revenue during 2001, increased
competition, any adverse change in Sun Microsystems' business or our
relationship with Sun, around whose computing platforms a large portion of our
business is based, lack of acceptance of new products, pricing pressures, lack
of adequate financing to take advantage of business opportunities that may
arise, lack of success in technological advancements, risks associated with our
new business practices, processes and information systems, and other factors.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make judgments, assumptions and estimates that affect the amounts
reported in the Financial Statements and accompanying notes. Note 1 to the
Financial Statements in the Annual Report on this Form 10-KSB for the year
ended December 31, 2001 describes the significant accounting policies and
methods used in the preparation of the Financial Statements. Estimates are used
for, but not limited to, the accounting for allowance for doubtful accounts and
inventory reserves. Actual results could differ from these estimates. The
following critical accounting policies are impacted significantly by judgments,
assumptions and estimates used in the preparation of the Financial Statements.

The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts due us could be adversely affected.

                                      14

<PAGE>

Inventory purchases and commitments are based upon future demand forecasts. If
there is a sudden and significant decrease in demand for our products or there
is a higher risk of inventory obsolescence because of rapidly changing
technology and customer requirements, we may be required to increase our
inventory allowances and our gross margin would be adversely affected.

OVERVIEW

We are a leading provider of application-specific, high-density hardware
solutions and global service and support for the world's leading OEMs in the
telecommunications, medical systems and enterprise markets. Specializing in the
engineering, manufacturing and repair of powerful, reliable and scalable
Unix-based hardware platforms, we offer a broad range of innovative board and
system-level data transmission products supported by comprehensive product
lifecycle management programs encompassing depot repair, advanced exchange,
contact center support and end-of-life control.

We began to experience the impact of the global economic slowdown in the second
quarter of 2001 and its effect continued through the rest of the year in the
form of reduced product orders. We expect the slowdown to continue to impact
results throughout 2002 as our OEM customers continue to work off inventory and
wait for end-user capital spending to regain momentum before resuming normal
order patterns, particularly in regard to upgrading their technology
infrastructure.

We leave 2001 behind and enter 2002 shifting our focus and resources towards
providing more repair and logistics services to more customers. When the
economy spurs our markets into additional capital spending, we can, and will
shift or add more resources to products. In the meantime, many of our
technicians who were building products are now repairing boards. Our product
sales and support people have been trained in our service offerings and are
actively working to win new OEM repair business.

The focus is on immediate and long-term growth in earnings for our
shareholders, whether that is in products or services, and that may not
necessarily equate to a bigger top line sales number for the company in 2002.
We are committed to a return to profitability in 2002. We started 2002 reducing
our employee count by 10%, cutting contracted services and related fees to a
minimum and economizing throughout the company. If our OEM customer orders
continue at the current pace, additional cost reductions similar to these may
be required to attain our goal of returning to profitability in 2002.

The following discussions and analyses are for the quarter and year ended
December 31, 2001 compared to the quarter and year ended December 31, 2000.

SALES

Sales for the fourth quarter and year of 2001 and 2000 were as follows:

($ thousands)          Fourth Qtr       %             Year           %
                    ---------------             -----------------
                    2001     2000     Change     2001      2000    Change

Total company       $5,132   $7,279      -29%   $22,672   $25,316     -10%
Product              4,013    6,260      -36%    18,118    21,048     -14%
Service              1,119    1,019       10%     4,554     4,268       7%

                                      15

<PAGE>

In the fourth quarter of 2001, the OEM customer base for product sales
continued to place orders cautiously, slightly increasing from the third
quarter. Compared to the fourth quarter of 2000, sales to the three largest
product customers for that period were down 47% in the 2001 quarter. Growing
and new customer programs partially offset those declines. For the year 2001,
product sales were down only 14%, because of record product sales in the first
quarter of 2001.

Fourth-quarter service sales in 2001 were up compared to 2000, partially
because we began providing repair services to H-P pursuant to a new agreement
signed in the third quarter. Previously, almost all service sales were to Sun.
We expect revenue from the H-P agreement to ramp up to an annual run rate of
between $3 million and $4 million in 2002. The 2001 increase in service sales
also resulted in part from fulfillment and logistics services provided to Sun
in the first half of the year. We do not believe the current economic
conditions have significantly impacted on-going repair sales.

GROSS PROFIT

Gross profit for the fourth quarter and year of 2001 and 2000 were as follows:

($ thousands)          Fourth Qtr       %           Year             %
                   -----------------          -----------------
                    2001     2000     Change    2001      2000     Change

Total company       $1,003   $1,745     -43%    $4,420    $6,388      -31%
Product                828    1,282     -35%     3,365     4,603      -27%
Service                175      463     -62%     1,055     1,785      -41%

The gross profit margin percentage for the fourth quarter and year of 2001 and
2000 were as follows:

($ thousands)      Fourth Qtr            Year
                  ------------        ----------
                  2001    2000        2001  2000

Total company      20%     24%         19%   25%
Product            21%     20%         19%   22%
Service            16%     45%         23%   42%

The fourth quarter gross profit margin on product sales in 2001 improved by a
fraction of a percent compared with the same quarter in 2000, due to product
sales mix and despite an increase in inventory reserves of approximately
$112,000. There were no reserves recorded in the fourth quarter of 2000 for
product inventory. For the year 2001, the decline in gross margin on product
sales compared to 2000 was the result of the lost volume leverage, economic
pressure on pricing and increased inventory reserves.

In the fourth quarter of 2001, the major factor in the decline of the gross
profit margin on service sales was an increase of approximately $158,000 in
inventory reserves. No reserves were recorded on service inventory in the
fourth quarter of 2000. Without the reserves, the gross profit margin in the
fourth quarter of 2001 would have been approximately 30 percent, still lower
than the 2000 quarter. However, direct labor and other related service costs
were higher in 2001 as a result of ramping up the new repair and logistics
program for H-P. For the year 2001, in addition to the fourth quarter factors,
the decline in the

                                      16

<PAGE>

gross profit margin for service sales was a combination of some temporary lower
margin distribution work in 2001 and a significant amount of higher margin
non-recurring engineering work in 2000.

SELLING, GENERAL AND ADMINISTRATIVE (SG&A), RESEARCH AND DEVELOPMENT (R&D) AND
INTEREST EXPENSES

SG&A, R&D and interest expenses for the fourth quarter and year of 2001 and
2000 were as follows:

($ thousands)         Fourth Qtr           %              Year             %
                --------------------              --------------------
                   2001        2000      Change      2001      2000      Change

SG&A expense        $760       $1,019     -25%       $3,823     $3,414      12%
R&D expense          340          359      -5%        1,368      1,127      21%
Interest expense      52           78     -34%          352        229      53%
Total expense      1,152        1,456     -21%        5,543      4,770      16%

In the fourth quarter of 2001, the decline in SG&A expenses was primarily
attributable to management's decisions to forego all employee bonuses and to
not contribute matching funds to the 401K profit sharing plan for 2001. For the
2001 year, the increase in SG&A expenses for the year resulted primarily from
the strategic expansion of the product sales force. R&D expenses also increased
to fund the strategic development of new products. A cost reduction program
implemented in January 2002 is expected to continue new product development,
but at a lower level, focusing on what are believed to be the highest potential
opportunities with the highest probability of market success. It is also
intended to return SG&A and R&D expenses to pre-2001 levels until sales and
gross profit increases require and will cover the additional cost, or financing
is obtained to fund additional growth opportunities. On March 6, 2002 we issued
a press release correcting the SG&A and R&D expense totals that were previously
announced in a press release issued on February 20, 2002. A total of $664,392
of expenses that were included as R&D expenses in the earlier release should
have been attributed to SG&A.

In the fourth quarter of 2001, interest expense was lower due to decreased use
of the credit line compared to the same quarter in 2000. For the year 2001,
increased use of the credit line to fund higher levels of inventory and
receivables in the first half resulted in higher interest expense compared to
2000. End-of-year 2000 inventory buys to support then higher sales volume
requirements and to obtain better pricing, and the abrupt slowdown of shipments
in the second quarter, resulted in significantly higher inventory levels
through much of the third quarter of 2001. However, inventory was sold off and
declined each quarter in 2001, resulting in inventory dropping under 2000
levels by the fourth quarter of 2001. Monthly interest rates paid on the line
of credit decreased during both years, from 8.15% to 3.90% in 2001, and from
9.25% to 8.5% in 2000.

INCOME TAXES AND NET INCOME/(LOSS)

Income/(loss) before taxes, income taxes and net income/(loss) for the fourth
quarter and year of 2001 and 2000 were as follows:

                                      17

<PAGE>

($ thousands)              Fourth Qtr        %              Year            %
                      -------------------            --------------------
                        2001       2000    Change     2001        2000    Change

Income/(loss) before
 income taxes           ($149)     $289     -152%   ($1,123)      $1,618   -169%
Income taxes              (56)       86     -165%      (433)         604   -172%
Net income/(loss)         (93)      203     -146%      (690)       1,014   -168%

Earnings/(loss) per share for the fourth quarter and year of 2001 and 2000 were
as follows:

($ thousands)            Fourth Qtr        %              Year            %
                    -------------------            -------------------
                     2001      2000      Change    2001      2000      Change
Basic EPS            ($0.02)    $0.04      -145%    ($0.13)    $0.20     -163%
Fully diluted EPS    ($0.02)    $0.03      -151%    ($0.13)    $0.18     -171%

Weighted average number of shares outstanding:
Basic               5,480,454   5,353,011                5,460,394   5,065,521
Fully diluted       5,480,454   6,076,112                5,460,394   5,719,486

Net income before taxes declined approximately $438,000 in the fourth quarter
of 2001 compared to the fourth quarter of 2000. The combination of lower sales
and gross profit margins resulted in a decline of approximately $742,000, which
was offset by approximately $304,000 in lower expenses and loss on disposals.
Net income before taxes fell approximately $2.74 million for the year 2001,
compared to 2000. The year decline was split between lower sales and gross
profit margins (approximately $1.97 million) and increased expenses to grow the
company (approximately $0.77 million).

LIQUIDITY AND CAPITAL RESOURCES

A summary of changes in current assets for three months and year is as follows:

($ thousands)           12/31/01    9/30/01     % Change    12/31/00    % Change

Accounts receivable       $3,211      $2,957         9%       $5,374     -40%
Inventory                  3,536       5,011       -29%        8,518     -58%
Other current assets       1,029       1,087        -5%          417     147%
Total                      7,776       9,055       -14%       14,309     -46%

A summary of changes in current liabilities for three months and year is as
follows:

($ thousands)           12/31/01     9/30/01     % Change   12/31/00    % Change

Line of credit            $4,372      $4,424          -1%     $4,803        -9%
Accounts payable             674       1,263         -47%      5,431       -88%
Other current liab.          584         813         -28%        936       -38%
Total                      5,630       6,500         -13%     11,170       -50%

Despite losses in the fourth quarter of 2001, operating activities generated
cash of $370,496.  The $93,007 loss recorded in the fourth quarter included
material non-cash transactions.  Depreciation expense was $136,603, and an
increase of inventory reserves, a non-cash charge to cost of goods sold, was
$208,543.  The $56,000 negative income tax benefit accrual in the fourth
quarter was also a non-cash transaction,

                                      18

<PAGE>

resulting in an increase to refundable income taxes, a short term asset. We
reduced inventory through sales by $1,108,992, excluding the effects of
inventory reserve increases, which allowed us to reduce accounts payable and
accrued expenses by $806,542.

During the year of 2001, $884,725 of cash was generated by operating
activities. Inventory was reduced by $4,227,225 and accounts receivable was
reduced by $2,155,965. $5,093,682 of that cash was used to pay down accounts
payable and accrued expenses. The $4,227,225 reduction of inventory, net of
reserves, represents a decrease of over 50% of the inventory balance at
December 31, 2000.

We used $243,605 of cash generated by operating activities in the fourth
quarter of 2001 and $384,024 over the year to purchase equipment, including
computers and software. A major portion of the fourth quarter expenditures was
to start up repair services for H-P.

We used $51,773 of cash generated by operating activities in the fourth quarter
of 2001 to pay down the line of credit from $4,423,461 to 4,371,688. The line
of credit is the primary source of non-operational funding. The line had a
limit of the lower of $7 million or percentages of eligible accounts
receivables and inventory during 2001, and had a variable interest rate of
0.85% below prime. The interest rate on the line of credit declined from 8.65%
at the beginning of 2001 to 3.90% at December 31, 2001.

We lease our operating facility under an operating lease in which we have an
obligation to pay rent through 2009. See Note 6 to the financial statements
contained herein. Except for that operating lease, we have not entered into any
off-balance sheet transactions in 2001 and 2000.

The company maintains a bank line of credit with KeyBank National Association
(KeyBank). The line is payable on demand and is collateralized by a "Blanket
Lien" on all assets of the Company. The amount available under the line of
credit is subject to borrowing base restrictions and other financial covenants
as outlined in the agreement. In addition, the agreement restricts the payment
of cash dividends.

On March 7, 2002, the terms of the bank line of credit with KeyBank were
amended to reflect the company's near term borrowing needs and the company's
credit risk as rated by KeyBank. The amount available under the line has been
reduced from $7,000,000 to $6,000,000 and is due and renewable by July 31,
2002. The interest rate has been increased from the prime rate less .85% to the
prime rate.

The aforementioned borrowing base on the line of credit is calculated as 85% of
eligible accounts receivable and 50% of inventory value, net of reserves. That
calculation represents the maximum amount that can be drawn on the line of
credit. In the near term, that number is not expected to exceed $6,000,000. The
unused capacity on the line (the excess of the borrowing base calculation over
the amount drawn) ranged from a high of $1,634,808 at June 30, 2001 to a low of
$128,471 at December 31, 2001. As the line of credit is our primary source of
financing, it is critical to our short-term liquidity. To maintain a sufficient
borrowing base to meet our needs and meet the covenant requirements of the
line, we must maintain sales and gross profit levels with minimum inventory on
hand, and effectively manage cash flow from collections to payments.
Significant delays or loss of customer orders, or delayed customer payments,
could severely impact our ability to meet our short-term financial obligations.
Inventory reductions also reduce our borrowing base, thereby limiting our
capacity for short-term borrowing. This would include reductions in inventory
due to changes in the valuation of our inventory and the setting of appropriate
inventory reserves to reflect changes in technology or reduced customer
requirements.

Additional financing will be needed to support the future growth plans of the
company. The search for financing continues. However, economic factors have
greatly decreased the availability and increased the

                                      19

<PAGE>

cost of financing for our industry and hampered our progress in this area. The
slowdown in product sales and our recent losses have shifted our focus to
attaining additional service business and returning to profitability. As we
make progress in these areas, and/or the demand for products returns, we expect
to increase our efforts to obtain further financing.

                                      20

<PAGE>

ITEM 7.        FINANCIAL STATEMENTS

                                      21

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                                FINANCIAL REPORT

                           DECEMBER 31, 2001 AND 2000

                                       22

<PAGE>

                           PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                                TABLE OF CONTENTS
--------------------------------------------------------------------------------
                                                                      Page
                                                                      ----
INDEPENDENT AUDITORS' REPORT                                           24

FINANCIAL STATEMENTS
 Balance Sheets                                                     25-26
 Statements of Operations                                              27
 Statements of Changes in Stockholders' Equity                         28
 Statements of Cash Flows                                           29-30
 Notes to Financial Statements                                      31-44

                                       23

<PAGE>

To the Board of Directors and Stockholders
Pinnacle Data Systems, Inc. (dba PDSi)
Columbus, Ohio

                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------

     We have audited the accompanying balance sheets of Pinnacle Data Systems,
Inc. (dba PDSi) as of December 31, 2001 and 2000, and the related statements of
operations, changes in stockholders' 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 Pinnacle Data Systems, Inc.
(dba PDSi) as of 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/ Hausser + Taylor LLP

Columbus, Ohio
February 5, 2002

                                       24

<PAGE>

                           PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                                 BALANCE SHEETS

                           DECEMBER 31, 2001 AND 2000
                           --------------------------

<TABLE>
<CAPTION>

                               ASSETS                              2001               2000
                               ------                              ----               ----
<S>                                                           <C>               <C>
CURRENT ASSETS
  Cash                                                       $      72,237     $       35,873
  Accounts receivable, net of allowance for doubtful
    accounts of $15,000 and $8,000, respectively                 3,210,935          5,373,900
  Inventory (Note 1)                                             3,535,779          8,517,925
  Other prepaid expenses                                           135,987            134,471
  Refundable income taxes                                          372,687               -
  Deferred income taxes (Note 8)                                   448,000            247,000
                                                              -------------     --------------
                                                                 7,775,625         14,309,169
                                                              -------------     --------------

PROPERTY AND EQUIPMENT (Notes 1 and 6)
  Leasehold improvements                                           215,689            189,389
  Furniture and fixtures                                           316,106            286,290
  Computer equipment and related software                        1,777,323          1,241,864
  Shop equipment                                                   410,999            305,809
  Vehicle                                                           21,846             21,846
                                                              --------------    --------------
                                                                 2,741,963          2,045,198
  Less accumulated depreciation and amortization                 1,295,975            871,368
                                                              --------------    --------------
                                                                 1,445,988          1,173,830
                                                              --------------    --------------

OTHER ASSETS
  Deposits                                                          21,885             18,112
  License agreement, less accumulated amortization of $4,861        30,139              -
                                                              --------------    --------------
                                                                    52,024             18,112
                                                              --------------    --------------

                                                             $   9,273,637     $   15,501,111
                                                              =============     ==============
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       25

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                                 BALANCE SHEETS

                           DECEMBER 31, 2001 AND 2000
                           --------------------------

<TABLE>
<CAPTION>

            LIABILITIES AND STOCKHOLDERS' EQUITY                 2001        2000
            ------------------------------------                 ----        ----
<S>                                                              <C>         <C>
CURRENT LIABILITIES
   Line of credit (Note 2)                                  $ 4,371,688  $  4,803,309
   Current portion of long-term debt (Note 3)                   133,333       138,459
   Current portion of capital lease obligation (Note 6)          24,827         -
   Accounts payable                                             674,179     5,431,070
   Accrued expenses:
     Wages and payroll taxes                                    223,449       322,284
     Employee benefits                                           59,593       169,748
     Income taxes                                                 -           168,634
     Other                                                      134,756        93,923
   Unearned service revenue                                       7,991        42,340
                                                             -----------  ------------
                                                              5,629,816    11,169,767
                                                             -----------  ------------

LONG-TERM LIABILITIES
   Long-term debt, less current portion (Note 3)                 33,334       166,667
   Capital lease obligation, less current portion (Note 6)       22,759         -
   Deferred income taxes (Note 8)                                42,000        41,000
                                                             -----------  ------------
                                                                 98,093       207,667
                                                             -----------  ------------
                                                              5,727,909    11,377,434
                                                             -----------  ------------

COMMITMENTS AND CONTINGENCIES (Notes 2, 3, and 6)                 -             -
                                                             -----------  ------------

STOCKHOLDERS' EQUITY (Notes 4 and 5)
   Preferred stock; no par value; 4,000,000 shares
     authorized; no shares issued or outstanding                  -             -
   Common stock; no par value; 25,000,000 and 10,000,000
     shares authorized; 5,483,204 and 5,394,504 shares
     issued and outstanding, respectively                     2,136,249     2,028,437
   Additional paid-in capital                                   501,506       497,506
   Retained earnings                                            907,973     1,597,734
                                                             -----------  ------------
                                                              3,545,728     4,123,677
                                                             -----------  ------------

                                                            $ 9,273,637  $ 15,501,111
                                                             ===========  ============

</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       26

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                            STATEMENTS OF OPERATIONS

                     YEARS ENDED DECEMBER 31, 2001 AND 2000
                     --------------------------------------

                                                        2001            2000
                                                        ----            ----
SALES
   Product sales                                   $ 18,118,202     $ 21,047,803
   Service sales                                      4,554,281        4,268,636
                                                    ------------     -----------
                                                     22,672,483       25,316,439
                                                    ------------     -----------
COST OF SALES
   Product sales                                     14,753,196       16,444,797
   Service sales                                      3,499,500        2,483,644
                                                    ------------     -----------
                                                     18,252,696       18,928,441
                                                    ------------     -----------

GROSS PROFIT                                          4,419,787        6,387,998
                                                    ------------     -----------
OPERATING EXPENSES
   Selling, general and administrative                3,823,051        3,413,792
   Research and development                           1,368,151        1,127,339
                                                    ------------     -----------
                                                      5,191,202        4,541,131
                                                    ------------     -----------

INCOME (LOSS) FROM OPERATIONS                          (771,415)       1,846,867
                                                    ------------     -----------

OTHER EXPENSE
   Interest expense                                     351,346          229,177
                                                    ------------     -----------

INCOME (LOSS) BEFORE INCOME TAXES                    (1,122,761)       1,617,690

INCOME TAXES (Note 8)                                  (433,000)         604,000
                                                    ------------     -----------

NET INCOME (LOSS)                                  $   (689,761)    $  1,013,690
                                                    ============     ===========

BASIC EARNINGS (LOSS) PER COMMON SHARE (Note 9)    $      (0.13)    $       0.20
                                                    ============     ===========

DILUTED EARNINGS (LOSS) PER COMMON SHARE (Note 9)  $      (0.13)    $       0.18
                                                    ============     ===========

The accompanying notes are an integral part of these financial statements.

                                       27

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                     Years Ended December 31, 2001 and 2000
                     --------------------------------------

<TABLE>
<CAPTION>

                                                      Common Stock
                                                 ----------------------
                                                                              Additional                     Total
                                                Outstanding                    Paid-In        Retained    Stockholders'
                                                  Shares         Amount        Capital        Earnings       Equity
                                                  ------         ------        -------        --------       ------
<S>                                               <C>          <C>            <C>           <C>           <C>

BALANCE - December 31, 1999                       4,874,804    $ 1,615,638    $  214,506    $  584,044    $ 2,414,188

   Options and warrants exercised                   519,700        412,799         -             -            412,799

   Tax benefits from employee stock option plans      -              -           283,000         -            283,000

   Net income                                         -              -             -         1,013,690      1,013,690
                                                 -----------    -----------    ----------    ----------    -----------

BALANCE - December 31, 2000                       5,394,504      2,028,437       497,506     1,597,734      4,123,677

   Options and warrants exercised                    88,700        107,812         -             -            107,812

   Tax benefits from employee stock option plans      -              -             4,000         -              4,000

   Net loss                                           -              -             -          (689,761)      (689,761)
                                                 -----------    -----------    ----------    ----------    -----------

BALANCE - December 31, 2001                       5,483,204    $ 2,136,249    $  501,506    $  907,973    $ 3,545,728
                                                 ===========    ===========    ==========    ==========    ===========

</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       28

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                            STATEMENTS OF CASH FLOWS

                     YEARS ENDED DECEMBER 31, 2001 AND 2000
                     --------------------------------------

<TABLE>
<CAPTION>

                                                                       2001               2000
                                                                       ----               ----
<S>                                                            <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                            $      (689,761)       $     1,013,690
                                                                ---------------        ---------------
  Adjustments to reconcile net income to net cash provided by
   (used in) operating activities:
    Depreciation and amortization                                      430,307                344,063
    Provision for doubtful accounts                                      7,000                 (2,000)
    Inventory reserves                                                 455,996                127,117
    Provision for deferred taxes                                      (200,000)               (88,000)
    Tax benefit from employee stock option plans                         4,000                283,000
    Loss on disposal of property and equipment                          -                      11,802
    (Increase) decrease in assets:
      Accounts receivable                                            2,155,965             (2,901,819)
      Inventory                                                      4,227,225             (6,010,467)
      Prepaid expenses and other assets                                 (5,289)                   569
      Refundable income taxes                                         (372,687)                 -
    Increase (decrease) in liabilities:
      Accounts payable                                              (4,756,891)             3,651,854
      Accrued expenses and taxes                                      (336,791)               194,298
      Unearned revenues                                                (34,349)               (18,913)
                                                                ---------------        ---------------
        Total adjustments                                            1,574,486             (4,408,496)
                                                                ---------------        ---------------
          Net cash provided by (used in) operating activities          884,725             (3,394,806)
                                                                ---------------        ---------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of property and equipment                                 (384,024)              (630,772)
                                                                ---------------        ---------------
          Net cash used in investing activities                       (384,024)              (630,772)
                                                                ---------------        ---------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Net proceeds from line of credit                                    (431,621)             3,503,309
  Principal payments on long-term debt                                (138,459)              (289,953)
  Long-term borrowings                                                    -                   400,000
  Principal payments on capital lease obligation                        (2,069)                -
  Proceeds from stock options exercised                                107,812                412,799
                                                                ---------------        ---------------
          Net cash provided by (used in) financing activities         (464,337)             4,026,155
                                                                ---------------        ---------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      29

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                            STATEMENTS OF CASH FLOWS

                     YEARS ENDED DECEMBER 31, 2001 AND 2000
                     --------------------------------------

                                              2001                  2000
                                              ----                  ----

INCREASE IN CASH                               36,364                  577

CASH - Beginning of year                       35,873               35,296
                                        ---------------       -------------

CASH - End of year                     $       72,237       $       35,873
                                        ==============       ==============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
 INFORMATION
    Interest paid                      $      354,541       $       225,099
                                        ==============       ===============

    Income taxes paid, net of refunds  $      308,321       $       422,587
                                        ==============       ===============

SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING TRANSACTIONS

     During 2001, the company capitalized $298,925 of inventory as computer
     equipment.

     During 2001, the Company entered into a capital lease to purchase
     equipment in the amount of $49,655.

     During 2000, the Company capitalized $42,706 of inventory as computer
     equipment.

The accompanying notes are an integral part of these financial statements.

                                      30

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                          NOTES TO FINANCIAL STATEMENTS

NOTE 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       A.  Nature of Business - Pinnacle Data Systems, Inc. (dba PDSi) (the
           Company) designs, manufactures and integrates SPARC-based board and
           system-level data transmission products for Original Equipment
           Manufacturers (OEMs). The Company also provides OEM board and
           component-level depot repair and worldwide support for electronic
           equipment such as computers, peripherals and printed circuit board
           assemblies.

       B.  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 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.

       C.  Fair Value of Financial Instruments - Carrying amounts of certain
           of the Company's financial instruments including cash, accounts
           receivable, accounts payable, and other accrued liabilities,
           approximate fair value because of their short maturities. The
           Company's line of credit and long-term debt approximate fair value
           as the interest rates on these obligations approximate the current
           prime rate.

       D.  Concentration of Credit Risk - Financial instruments, which
           potentially subjects the Company to a concentration of credit risk
           principally consist of accounts receivable. The Company grants
           credit to its customers, which are varied in terms of size,
           geographic location and financial strength. Customer balances are
           continually monitored to minimize the risk of loss.

           For 2001, the Company had four customers that generated revenues of
           approximately $7,101,000, $5,868,000, $2,621,000, and $2,544,000 or
           31%, 26%, 12%, and 11% respectively, of total revenue. In the
           statements of operations, approximately $4,012,000 of the revenues
           from these customers is included in service sales and $14,122,000 is
           included in product sales. In addition, these customers represented
           19%, 18%, 20%, and 12%, respectively, of accounts receivable at
           December 31, 2001.

           For 2000, the Company had three customers that generated revenues of
           approximately $7,111,000, $5,341,000, and $3,581,000 or 28%, 21%,
           and 14%, respectively, of total revenue. In the statements of
           operations, approximately $3,445,000 of the revenues from these
           customersis included in service sales and $12,588,000 is included in
           product sales. In addition, these customers represented 41%, 12%,
           and 11%, respectively, of accounts receivable at December 31, 2000.

       E.  Revenue Recognition - Revenue from product sales is recognized
           upon shipment to customers. Revenue from service sales is generally
           recognized as services are provided. Services consist of: (i)
           repairing products manufactured by third parties, (ii) earning fees
           by warehousing replacement components and parts for manufacturers
           and managing the process by which their customers exchange defective
           components and parts for replacement components and parts; and (iii)
           service contracts with certain customers generally for six to twelve
           months; for which, revenue is deferred and recognized in income on a
           straight-line basis over the contract period.

                                      31

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                          NOTES TO FINANCIAL STATEMENTS

NOTE 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       F.  Inventories - Inventories are valued at average cost, not in
           excess of market.

           Inventory at December 31, 2001 and 2000 was comprised of the
           following:

                                             2001            2000
                                             ----            ----

Component parts (raw materials)       $  1,991,862     $  5,842,956
Work-in-process                            709,613        1,882,018
Finished goods                             834,304          792,951
                                       -----------      -----------
                                      $  3,535,779     $  8,517,925
                                       ===========      ===========

           The carrying values of component parts and finished goods
           represent management's estimate of their net realizable value.
           Such value is based on forecasts of product orders and
           repair/trade-in activity in the ensuing years. Such forecasts
           are based on historical information, known contracts, and
           management's expertise in computer hardware life cycles. The
           computer hardware industry is characterized by rapid
           technological advancement and change. In addition, during
           2001, the economy and computer hardware industry weakened.
           Should demand for the Company's products and repair/trade-in
           hardware prove to be significantly less than anticipated and
           if the current economic and industry conditions continue, the
           ultimate realizable value of such products could be
           substantially less than the amount shown in the balance sheet.
           At December 31, 2001 and 2000, the Company has provided
           reserves of approximately $774,000 and $318,000, respectively
           against the carrying value of inventory.

       G.  Statement of Cash Flows - For purposes of the statement of
           cash flows, the Company considers all short-term instruments
           purchased with a maturity of three months or less to be cash
           equivalents. There were no cash equivalents at December 31,
           2001 or 2000.

       H.  Property and Equipment - Property and equipment are recorded
           at cost. Depreciation and amortization is provided on the
           straight-line method for financial reporting purposes over the
           estimated useful lives of the respective assets. Expenditures
           for maintenance and repairs are charged to operations as
           incurred, while expenditures for additions and improvements
           are capitalized. The vehicle is depreciated over 3 years.
           Furniture and fixtures, computer equipment and related
           software, and shop equipment are depreciated over useful lives
           ranging from 3 to 7 years. Leasehold improvements are being
           amortized over the shorter of useful life or remaining lease
           term. Depreciation and amortization expense amounted to
           $430,307 and $344,063 for the years ended December 31, 2001
           and 2000, respectively.

       I.  Advertising - All of the Company's advertising costs are of
           the nondirect-response type. The Company expenses all
           advertising costs as incurred or at the time the advertising
           takes place.

       J.  Life Insurance - The Company has purchased, and is the
           beneficiary, of four term life insurance policies on key
           employees of the Company. The total amount of coverage at
           December 31, 2001 and 2000 was $12,250,000 and $3,250,000,
           respectively.

                                      32

<PAGE>

                           PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                          NOTES TO FINANCIAL STATEMENTS

NOTE 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

       K.  Stock-Based Compensation - The Company has implemented
           Statement of Financial Accounting Standards (SFAS) No. 123,
           "Accounting for Stock-Based Compensation". This standard
           encourages the adoption of the fair value-based method of
           accounting for employee stock options or similar equity
           instruments, but continues to allow the Company to measure
           compensation cost for those equity instruments using the
           intrinsic value-based method of accounting prescribed by
           Accounting Principles Board Opinion No. 25, "Accounting for
           Stock Issued to Employees." Under the fair value-based method,
           compensation cost is measured at the grant date based on the
           value of the award. Under the intrinsic value-based method,
           compensation cost is the excess, if any, of the quoted market
           price of the stock at the grant date or other measurement date
           over the amount the employee must pay to acquire the stock.
           The Company intends to continue the use of the intrinsic
           value-based method.

           As a result, this standard does not have any effect to the
           Company's financial statements other than to require
           disclosure of the pro forma effect on net income (loss) of
           using the fair value-based method of accounting. The Company
           has made the disclosures required by SFAS No. 123 as of
           December 31, 2001 and December 31, 2000 and for the years then
           ended. (see Note 5).

       L.  Research and Development - Research and development costs are
           charged to operations when incurred and are included in
           operating expenses.

       M.  Effects of Recent Accounting Pronouncements - In July 2001,
           the Financial Accounting Standards Board issued SFAS No. 142,
           "Goodwill and Other Intangible Assets." SFAS No. 142 requires
           intangible assets with indefinite lives not to be amortized.
           Rather, they are to be tested for impairment annually, but
           intangible assets with finite lives are subject to
           amortization over their remaining useful lives. SFAS No. 142
           is effective for all fiscal years beginning after December 15,
           2001. The adoption of SFAS No. 142 does not have a material
           effect on the Company's operating results or financial
           position at December 31, 2001 or in the foreseeable future. In
           October 2001, the FASB issued SFAS No. 144, "Accounting for
           the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
           SFAS 144 addresses financial accounting and reporting for the
           impairment or disposal of long-lived assets and discontinued
           operations. The adoption of SFAS No. 144 does not have a
           material effect on the Company's operating results or
           financial position at December 31, 2001 or in the foreseeable
           future.

       N.  Reclassifications - Certain insignificant amounts for the year
           2000 have been reclassified to conform with the 2001
           presentation.

NOTE 2.    LINE OF CREDIT

           At December 31, 2001 and 2000, the Company had a $7,000,000
           bank line of credit with monthly interest payments at prime
           (4.75% at December 31, 2001 and 9.50% at December 31, 2000)
           minus 0.85%. The Company is obligated for funds drawn against
           this line of credit in the amount of $4,371,688 and $4,803,309
           at December 31, 2001 and 2000, respectively.

                                      33

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                          NOTES TO FINANCIAL STATEMENTS

NOTE 2.    LINE OF CREDIT (Continued)

           The line is payable on demand and is collateralized by a
           "Blanket Lien" on all assets of the Company. The amount
           available under the line of credit is subject to borrowing
           base restrictions as outlined in the agreement. In addition,
           the agreement restricts the Company from paying cash dividends
           and from entering into additional debt agreements without
           prior consent of the bank. During 2001, the Company entered
           into a capital lease (Note 6) which was a violation of the
           debt covenants. The bank has waived this covenant as it
           pertains to this specific capital lease over its remaining
           term.

           On February 12, 2002, the Company accepted a commitment letter
           from the bank to enter into a new $6,000,000 bank line of
           credit agreement with monthly interest payments at prime. The
           line of credit is due no later than July 31, 2002, subject to
           renewal. In addition, the line is payable on demand and is
           collateralized by a "Blanket Lien" on all assets of the
           Company. The amount available under the line of credit is
           subject to borrowing base restrictions and other financial
           covenants as outlined in the agreement. In addition, the
           agreement restricts the payment of cash dividends.

NOTE 3.    LONG-TERM DEBT

           Following is a summary of long-term debt at December 31:

                                                          2001            2000
                                                          ----            ----

Prime (4.75% and 9.50%, at December 31,
2001 and 2000, respectively) minus .25%
note payable in monthly installments
of $12,627 including interest through
February 2003; collateralized by
substantially all assets of the Company.          $    166,667     $    300,000

3.9% vehicle loan, payable in monthly
installments of $401, including interest,
paid in full during 2001.                               -                 5,126
                                                   -----------      -----------

Total long-term debt                                   166,667          305,126
Less current portion                                   133,333          138,459
                                                   -----------      -----------

                                                  $     33,334     $    166,667
                                                   ===========      ===========

                                      34

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                          NOTES TO FINANCIAL STATEMENTS

NOTE 3.   LONG-TERM DEBT

          Aggregate maturities on long-term debt for the years ending after
          December 31, 2001 is as follows:

                                    2002                          $   133,333
                                    2003                               33,334
                                                                   ----------
                                                                  $   166,667
                                                                   ==========

NOTE 4.    STOCKHOLDERS' EQUITY

       A.  Authorized Shares - On May 23, 2001, the shareholders approved
           amendments to the Company's Articles of Incorporation to increase
           the authorized number of common shares from 10,000,000 to
           25,000,000. On June 24, 2000, the shareholders approved amendments
           to the Company's Articles of Incorporation to increase the
           authorized number of common shares from 5,000,000 to 10,000,000.

       B.  Preferred stock - On June 24, 2000, the shareholders authorized
           4,000,000 preferred shares. None of these shares were issued or
           outstanding at December 31, 2001 or 2000.

NOTE 5.    STOCK OPTIONS AND WARRANTS

           The Company adopted the Pinnacle Data Systems, Inc., 1995 Stock
           Option Plan (the Plan) on December 19, 1995. Any employee who is
           granted a discretionary option may purchase Company common stock
           over a ten-year period, at the fair market value at time of grant.
           (If the grantee owns more than 10% of the Company's stock at the
           time of the grant, the purchase price shall be at least 110% of the
           fair market value and the options expire five years from the date of
           grant.) The aggregate number of common shares of the Company, which
           could have been granted under the plan, was 1,200,000 shares. All
           incentive options available under the plan shall be granted by
           December 19, 2005. On February 16, 2000, the Board of Directors
           amended the Pinnacle Data Systems, Inc., 1995 Stock Option Plan,
           which was subsequently approved by the shareholders on June 24,
           2000, to increase the number of shares reserved for issuance
           pursuant to options to 2,400,000 common shares.

           On March 22, 2000, the Company adopted the Pinnacle Data Systems,
           Inc., 2000 Director Stock Option Plan (Director Plan) which was
           subsequently approved by the shareholders on June 24, 2000. Under
           the Directors Plan, 500,000 shares are reserved for issuance to
           Directors who are not employees of the Company (Outside Director).
           Any Outside Director who has been granted a discretionary option may
           purchase Company common stock over a ten-year period, at the fair
           market value at time of grant. Before the adoption of the Director
           Plan, previous issuance of stock options to Outside Directors were
           made by entering into individual stock option agreements.

           Although the Board of Directors has the authority to set other
           terms, the options are generally exercisable one year from the date
           of grant.

                                       35

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                          NOTES TO FINANCIAL STATEMENTS

NOTE 5.    STOCK OPTIONS AND WARRANTS (Continued)

           The following table is a summary of option activity:

<TABLE>
<CAPTION>

Stock Option Plan                              2001                     2000
-----------------                              ----                     ----
                                                      Weighted                 Weighted
Employee Stock Option                                 Average                  Average
---------------------                                 Exercise                 Exercise
Agreements                             Number          Price     Number         Price
----------                             ------          -----     ------         -----
<S>                                     <C>          <C>          <C>          <C>
  Outstanding, beginning of year          909,600    $  1.64      1,145,600    $  0.85
  Granted                                 290,250       2.28        231,400       3.95
  Exercised                                17,200       0.80        455,200       0.84
  Forfeited                                24,000       3.67         12,200       0.94
                                       -----------  -----------  -----------  ----------
  Outstanding, end of year              1,158,650    $  1.77        909,600    $  1.64
                                       ===========  ===========  ===========  ==========
</TABLE>

Exercise price range of options
  outstanding                              $0.63 to $5.25      $0.63 to $5.25

Director Stock Option
---------------------
Agreements
----------

<TABLE>
<S>                                       <C>        <C>          <C>          <C>
Outstanding, beginning of year            166,000    $  1.48        150,000    $  0.85
Granted                                    80,000       2.35         36,000       3.88
Exercised                                  16,000       1.03         20,000       1.03
Forfeited                                     -           -             -           -
                                       -----------  -----------  -----------  ----------
Outstanding, end of year                  230,000    $  1.81        166,000    $  1.48
                                       ===========  ===========  ===========  ==========
</TABLE>

Exercise price range of options
  outstanding                               $0.75 to $3.88      $0.75 to $3.88

                                       36

<PAGE>

                             PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                          NOTES TO FINANCIAL STATEMENTS

NOTE 5.    STOCK OPTIONS AND WARRANTS (Continued)

           The following table summarizes information concerning outstanding
           and exercisable options at December 31, 2001:

                                     Options Outstanding
                  ---------------------------------------------------------
  Range of                           Weighted-average       Weighted-average
  Exercise           Number         Remaining Contractual    Exercise Price
    Price           Outstanding        Life (in years)        Per Share
------------      ---------------      ------------------   ---------------
$ 0.63 - 0.97              560,200            5.01            $      0.76
$ 1.03 - 1.90              293,500            7.81                   1.26
$ 2.35 - 2.59              281,750            7.69                   2.41
$ 3.07 - 5.25              253,200            8.24                   3.91
                  ----------------      ------------------   --------------
  Total                  1,388,650            6.93            $      1.78
                  ================      ==================   ==============

                            Options Exercisable
                      ---------------------------------------
   Range of                                  Weighted-average
   Exercise              Number                Exercise Price
    Price              Exercisable              Per Share
-----------------     -----------------     -----------------
$ 0.63 - 0.97               560,200         $            0.76
$ 1.03 - 1.90               213,000                      1.05
$ 2.35 - 2.59               -                     -
$ 3.07 - 5.25               206,200                      3.95
                      -----------------     -----------------
  Total                     979,400          $           1.50
                      =================     =================

           At December 31, 2000, 808,400 outstanding options were exercisable.
           The weighted-average exercise price for outstanding options was
           $0.85 at December 31, 2000.

           The options outstanding at December 31, 2001 are exercisable
           through periods ranging from September 2002 through October 2011.

           Pro forma information regarding net income (loss) and earnings
           (loss) per share is required by SFAS No. 123, and has been
           determined as if the Company had accounted for its employee stock
           options under the fair value method of that Statement. As noted in
           Note 1.K., the Company is continuing to utilize the intrinsic
           value-based method for accounting for employee stock options or
           similar equity instruments; therefore, the Company has not recorded
           any compensation cost in the statements of operations for
           stock-based employee compensation awards.

                                       37

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                          NOTES TO FINANCIAL STATEMENTS

NOTE 5.    STOCK OPTIONS AND WARRANTS (Continued)

           For purposes of pro forma disclosures, the estimated fair value of
           the options is amortized to expense over the options' vesting
           period. The Company's pro forma income and earnings (loss) per share
           are as follows for the year ended:

<TABLE>
<CAPTION>
                                                                      2001             2000
                                                                      ----             ----
           <S>                                                     <C>            <C>
           Net income (loss) - as reported                         $   (689,761)  $   1,013,690
           Net income (loss) - pro forma                           $ (1,193,446)  $     730,480
           Basic earnings (loss) per common share-as reported      $       (.13)  $         .20
           Basic earnings (loss) per common share-pro forma        $       (.22)  $         .14
           Diluted earnings (loss) per common share - as reported  $       (.13)  $         .18
           Diluted earnings (loss) per common share - pro forma    $       (.22)  $         .13
           Weighted-average fair value of options granted
           during the year                                         $       2.30   $        3.93
</TABLE>

          The fair value of each option grant is estimated on the grant date
          using the Black-Scholes option pricing model with the following
          weighted average assumptions for the year ended:

                                              2001     2000
                                              ----     ----
Risk-free interest rate                       5.0%     5.6%
Dividend yield                                 0%       0%
Volatility factor                             73.40%   66.68%
Weighted average expected life in years        9.0      9.5

          The Black-Scholes option pricing model was developed for use in
          estimating the fair value of traded options that have no vesting
          restrictions and are fully transferable. In addition, option pricing
          models require input of highly subjective assumptions including the
          expected stock price volatility. The Company uses projected
          volatility rates which are based upon historical volatility rates
          trended into the future. Because the Company's stock options have
          characteristics significantly different from those traded options,
          and because changes in the subjective input assumptions can
          materially affect the fair value estimate, in management's opinion,
          the existing models do not necessarily provide a single measure of
          the fair value of the Company's options.

          Stock Warrants - As part of the April 1996 offering circular, the
          underwriter was granted warrants to purchase 100,000 shares of
          common stock at $1.38 per share. The warrants became exercisable in
          May 1997 and expired in April 2001. During 2001 and 2000, 55,500 and
          44,500 warrants, respectively were exercised.

                                       38

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                          NOTES TO FINANCIAL STATEMENTS

NOTE 6.    LEASES

           Operating
           ---------

           The Company leases its operating facility under an operating
           lease that expires in 2009.

           Minimum future lease payments under the operating lease as of
           December 31, 2001 are as follows:

  2002          $  495,233
  2003             517,080
  2004             568,274
  2005             589,216
  2006             589,216
Thereafter       1,374,838
                 ---------
                $4,133,857
                 =========

           Total rent charged to operations for operating leases and
           other month-to-month rental obligations for the years ended
           December 31, 2001 and 2000 amounted to $537,190 and $388,732,
           respectively.

           Capital
           -------

           During 2001, the Company entered into a capital lease to
           acquire shop equipment. The future minimum lease payments by
           year with the present value of such payments, as of December
           31, 2001 is as follows:

2002                                      $    26,814
2003                                           24,579
                                           -----------
Total minimum lease payments                   51,393
Less amount representing interest               3,807
                                           -----------
Present value of minimum lease payments        47,586
Less current portion                           24,827
                                           -----------
Long-term capital lease obligation        $    22,759
                                           ===========

           The equipment under capital lease is included in the
           accompanying balance sheet under the following captions:

                                December 31,
                                   2001
                                   ----
Shop equipment                 $      49,655
Less accumulated depreciation            591
                                ------------
Net book value                 $      49,064
                                ============

           Amortization of equipment under capital leases was $591 for 2001.

                                       39

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                          NOTES TO FINANCIAL STATEMENTS

NOTE 7.    PROFIT SHARING AND 401(K) SAVINGS PLAN

           The Company maintains a qualified cash or deferred
           compensation plan under section 401(k) of the Internal Revenue
           Code. The plan covers all employees age 21 or over with three
           months of service. Under the plan, employees may elect to
           defer from 1% to 12% of their salary, subject to Internal
           Revenue Code limits.

           The Company, at its discretion, may match up to 100% of
           employee contributions up to 6% of wages deferred with a
           maximum contribution $4,500 per employee. The Company elected
           not to make a matching contribution for 2001. The Company made
           a matching contribution of $76,098 for the year ended December
           31, 2000.

NOTE 8.    INCOME TAXES

           Deferred income taxes arise from temporary differences
           resulting from income and expense items reported for financial
           accounting and tax reporting purposes in different periods.
           Deferred taxes are classified as current or long-term,
           depending on the classification of the assets and liabilities
           to which they relate. Deferred taxes arising from temporary
           differences that are not related to an asset or liability are
           classified as current or long-term depending on the periods in
           which the temporary differences are expected to reverse.

           The components of the deferred tax asset (liability) consisted
           of the following at December 31:

                     2001           2000
                     ----           ----
Current:
   Federal      $    366,000   $    209,000
   State              55,000         26,000
   City               27,000         12,000
                 ------------   ------------
                $    448,000   $    247,000
                 ============   ============

Noncurrent:
   Federal      $    (36,000)  $    (35,000)
   State              (4,000)        (4,000)
   City               (2,000)        (2,000)
                 ------------    -----------
                $    (42,000)  $    (41,000)
                 ============    ===========

                                       40

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                          NOTES TO FINANCIAL STATEMENTS

NOTE 8.    INCOME TAXES (Continued)

           Net deferred tax assets in the accompanying balance sheets
           include the following components:

                                           2001               2000
                                           ----               ----
Assets
   Inventory reserves                     $    309,000   $    127,000
   Allowance for doubtful accounts               6,000          3,000
   Alternative minimum tax carryforward         16,000         -
   State net operating loss carryforward        20,000         -
   Uniform capitalization                       43,000         -
   Bonus accrual                                -              47,000
   Vacation accrual                             24,000         38,000
   Other                                        30,000         32,000
                                           -----------    -----------
                                          $    448,000   $    247,000
                                           ===========    ===========

Liabilities
   Depreciation                           $     42,000   $     41,000
                                           -----------    -----------
                                          $     42,000   $     41,000
                                           ===========    ===========

           The components of the tax expense (benefit) for the year ended
           December 31, were as follows:

                                              2001            2000
                                              ----            ----
Current:
   Federal                                $  (172,000)   $    626,000
   State                                      (61,000)         30,000
   City                                          -             36,000
                                           -----------    -----------
                                             (233,000)        692,000
                                           -----------    -----------

Deferred:
   Federal                                   (156,000)        (65,000)
   State                                      (29,000)        (15,700)
   City                                       (15,000)         (7,300)
                                           -----------    -----------
                                             (200,000)        (88,000)
                                           -----------    -----------

Total                                     $  (433,000)   $    604,000
                                           ===========    ===========

                                       41

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                         NOTES TO FINANCIAL STATEMENTS

NOTE 8.    INCOME TAXES (Continued)

           The following sets forth the differences between the provision
           for income taxes computed at the federal statutory rate of 34%
           and that reported for financial statement purposes:

                                                 2001           2000
                                                 ----           ----

Income tax provision at statutory rate      $  (382,000)    $    550,000
Add:
Tax effect of permanent differences              12,000            8,000
State income taxes, net of federal
  income tax provision                          (96,000)          34,000
Other, net                                       33,000           12,000
                                              -----------    ------------
Total income tax provision                  $  (433,000)    $    604,000
                                              ===========    ============

           The Company's income tax payable for federal, state, and local
           purposes has been reduced by the tax benefits associated with
           the exercise of employee stock options. The Company receives an
           income tax benefit calculated as the difference between the fair
           market value of the stock at the time of exercise and the option
           price, tax effected. These tax benefits were credited directly
           to additional paid-in capital, reduced taxes payable, and
           amounted to $4,000 and $283,000 for the years ended December 31,
           2001 and 2000, respectively.

NOTE 9.    EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE

           Earnings (loss) per common and common equivalent share were
           computed by dividing net income (loss) by the weighted average
           number of shares of common stock outstanding during the year. At
           December 31, 2000, the number of common shares was increased by
           the number of shares issuable on the exercise of outstanding
           stock options and warrants when the market price of the common
           stock exceeds the exercise price of the options and warrants.
           This increase in the number of common shares was reduced by the
           number of common shares that are assumed to have been purchased
           with the proceeds from the exercise of the options; those
           purchases were assumed to have been made at the average price of
           the common stock during that part of the year when the market
           price of the common stock exceeded the exercise price of the
           options. At December 31, 2001, all potential common stock is
           considered anti- dilutive due to the net loss.

                                       42

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                         NOTES TO FINANCIAL STATEMENTS

NOTE 9.    EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (Continued)

           The following data show the amounts used in computing earnings
           (loss) per share (EPS) and the effect on income and the
           weighted-average number of shares of dilutive potential common stock.

                                                  2001         2000
                                                  ----         ----
Income available to common stockholders
used in basic EPS and diluted EPS             $  (689,761)  $  1,013,690
                                               ===========   ===========
Weighted average number of common shares
used in basic EPS                               5,460,394      5,065,521

Effect of dilutive securities:
Stock options and warrants                           -           653,965
                                               -----------   -----------

Weighted number of common shares and
dilutive potential common stock used in
diluted EPS.                                    5,460,394      5,719,486
                                               ===========   ===========

           At December 31, 2000, all outstanding options and warrants were
           "in-the-money" and therefore were included in computing diluted
           EPS.

           For the second and third quarters of 2001, the Company reported
           loss per diluted share of $(0.05) and $(0.06), respectively.
           However, the loss per diluted share should have been reported to
           be the same as the loss per basic share, $(0.06) and $(0.07),
           respectively. Loss per diluted share is required to be
           calculated using outstanding shares only. No dilution effect
           should have been recognized due to the net losses in the second
           and third quarter.

NOTE 10.   OPERATING SEGMENTS

           The Company's reportable segments are Product and Service and
           are described in Item 1 of the Company's form 10KSB, including a
           discussion of principle markets and distribution. The other
           column listed below reflects items that are not allocated to
           segments. These items primarily represent assets and expenses
           for various administrative functions within the Company. The
           Company evaluates performance based on operating earnings of the
           reportable segments.

                                       43

<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                   (DBA PDSi)

                         NOTES TO FINANCIAL STATEMENTS

NOTE 10.   OPERATING SE GMENTS (Continued)

           Segment information for the years ended December 31, 2001 and
           2000, was as follows:

<TABLE>
<CAPTION>
                                                          2001
                                      ====================================================

                                           Product       Service        Other       Total
                                           -------       -------        -----       -----
           <S>                        <C>            <C>           <C>          <C>
           Sales                      $  18,118,202  $  4,554,281  $     -      $  22,672,483
           Gross profit                   3,365,006     1,054,781        -          4,419,787
           Operating earnings (loss)        195,393       236,547    (1,203,355)     (771,415)
           Depreciation and
           amortization                      80,676       242,028       107,603       430,307
           Interest expense                   -             -           351,346       351,346
           Total assets                   6,329,606     1,571,545     1,372,486     9,273,637
           Capital expenditures             379,482       203,045       150,077       732,604

</TABLE>

<TABLE>
<CAPTION>
                                                          2000
                                      ====================================================

                                           Product       Service       Other       Total
                                           -------       -------       -----       -----
           <S>                        <C>            <C>           <C>          <C>
           Sales                      $  21,047,803  $  4,268,636  $    -       $  25,316,439
           Gross profit                   4,603,006     1,784,992       -           6,387,998
           Operating earnings (loss)      1,988,640     1,001,086   (1,131,057)     1,858,669
           Depreciation and
           amortization                      72,353       217,060       54,650        344,063
           Interest expense                  -             -           229,177        229,177
           Total assets                  13,229,011     1,911,601      360,499     15,501,111
           Capital expenditures             315,212       114,890      243,376        673,478

</TABLE>

           Two segments were reported on Form 10QSB for Service in the
           first three quarters of 2001, Repair and Other service. For
           this 10KSB, for the year ended December 31, 2001, the two
           segments are combined, as in prior years, under Service. The
           Company does not believe the additional breakdown of the
           Service segment provided significant additional insight into
           the Company's operations for the readers of these financial
           statements.

                                       44

<PAGE>

ITEM 8.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

                                       45

<PAGE>

PART III

ITEM 9.        DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Information about our directors, nominees for directors and our executive
officers is incorporated by our proxy statement for our year 2002 annual
meeting of shareholders to be filed with the Securities and Commission pursuant
to Regulation 14A of the Exchange Act, under the Caption: "Proposal One:
Directors."

ITEM 10.       EXECUTIVE COMPENSATION

Incorporated by reference to our proxy statement for our year 2002 annual
meeting of shareholders, to be the Securities and Exchange Commission pursuant
to Regulation 14A of the Exchange Act, under the "Principal Holders of Voting
Securities" and "Proposal One: Election of Directors."

ITEM 11.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference to our proxy statement for our year 2002 annual
meeting of shareholders, to be the Securities and Exchange Commission pursuant
to Regulation 14A of the Exchange Act, under the "Executive Compensation."

ITEM 12.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information about certain relationships and related transactions is
incorporated by reference to our proxy statement for our year 2002 annual
meeting of shareholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the Exchange Act, under the Caption: "Proposal
One: Election of Directors".

                                       46

<PAGE>

ITEM 13.       EXHIBITS AND REPORTS ON FORM 8-K

        (a)    LISTING OF EXHIBITS. The following is a listing of Exhibits
               -------------------
either filed with this report or incorporated by reference:

                                              If Incorporated by Reference,
 Exhibit                                     Document with which Exhibit was
   No.         Description of Exhibit         Previously Filed with the SEC
   ---         ----------------------         -----------------------------

3(a)       Amended and restated             Registration Statement on Form 10-
           articles of incorporation        SB filed with the Securities and
                                            Exchange Commission on December
                                            13, 1999.

3(b)       Amendments to Amended and        Form SB-2 filed with the
           Restated Articles of             Securities and Exchange Commission
           Incorporation, adopted           September 21, 2000.
           June 26, 2000

3(c)       Amendment to the                 Quarterly Report on Form 10-QSB
           Company's Amended and            filed with the Securities and
           Restated Articles of             Exchange Commission on August 13,
           Incorporation adopted May        2001.
           23, 2001

3(d)       Amended and Restated Code        Registration Statement on Form 10-
           of Regulations                   SB filed with the Securities and
                                            Exchange Commission on December
                                            13, 1999.

3(e)       Amendment to Amended and         Annual Report on Form 10-KSB filed
           Restated Code of                 with the Securities and Exchange
           Regulations                      Commission on March 30, 2000.

3(f)       Amendments to Amended and        Form SB-2 filed with the
           Restated Code of                 Securities and Exchange Commission
           Regulations, adopted June        September 21, 2000.
           26, 2000

4          Instruments defining the         Form SB-2 filed with the
           rights of security               Securities and Exchange Commission
           holders, including               September 21, 2000.
           indentures

10(a)      Technology license               Registration Statement on Form 10-
           agreement between                SB filed with the Securities and
           Pinnacle Data Systems,           Exchange Commission on December
           Inc. and Sun                     13, 1999.
           Microsystems, Inc. dated
           May 12, 1994

                                      47

<PAGE>

                                              If Incorporated by Reference,
 Exhibit                                     Document with which Exhibit was
   No.         Description of Exhibit         Previously Filed with the SEC
   ---         ----------------------         -----------------------------

10(b)*     Pinnacle Data Systems,           Registration Statement on Form 10-
           Inc. 1995 Stock Option           SB filed with the Securities and
           Plan dated December 19,          Exchange Commission on December
           1995                             13, 1999.

10(c)      Development and                  Registration Statement on Form 10-
           manufacturing license            SB filed with the Securities and
           agreement between                Exchange Commission on December
           Pinnacle Data Systems,           13, 1999.
           Inc. and Sun Microsystems,
           Inc. dated October 27, 1997

10(d)      Lease agreement between          Registration Statement on Form 10-
           Pinnacle Data Systems,           SB filed with the Securities and
           Inc. and Duke Realty             Exchange Commission on December
           Limited Partnership dated        13, 1999.
           March 9, 1999

10(e)      Repair services agreement        Registration Statement on Form 10-
           between Pinnacle Data            SB filed with the Securities and
           Systems, Inc. and Sun            Exchange Commission on December
           Microsystems, Inc. dated         13, 1999.
           March 29, 1999

10(f)      Reference Design License         Contained herein.
           Agreement between
           Pinnacle Data Systems,
           Inc. and Sun
           Microsystems, Inc. dated
           May 11, 1999

10(g)      First Lease Amendment            Annual Report on Form 10-KSB filed
           between Pinnacle Data            with the Securities and Exchange
           Systems, Inc. and Duke           Commission on March 30, 2000.
           Realty Limited
           Partnership dated
           January 5, 2000

10(h)*     Amendment No. 1 to               Annual Report on Form 10-KSB filed
           Pinnacle Data Systems,           with the Securities and Exchange
           Inc. 1995 stock option           Commission on March 30, 2000.
           plan dated February 16,
           2000

                                      48

<PAGE>

                                              If Incorporated by Reference,
 Exhibit                                     Document with which Exhibit was
   No.         Description of Exhibit         Previously Filed with the SEC
   ---         ----------------------         -----------------------------

10(i)*     Pinnacle Data Systems,           Annual Report on Form 10-KSB filed
           Inc. 2000 Directors Stock        with the Securities and Exchange
           Option Plan dated March          Commission on March 30, 2000.
           22, 2000

10(j)      Business Loan Agreement          Annual Report on Form 10-KSB filed
           between Pinnacle Data            with the Securities and Exchange
           Systems, Inc. and Key            Commission on March 30, 2001.
           Bank National Association
           dated August 10, 2000

10(k)*     Employment agreement             Annual Report on Form 10-KSB filed
           between Pinnacle Data            with the Securities and Exchange
           Systems, Inc. and John D.        Commission on March 30, 2001.
           Bair dated January 1,
           2001

10(l)      O.E.M. Supply Agreement          Contained herein.
           between Pinnacle Data
           Systems, Inc. and Alcatel
           USA Sourcing L.P. dated
           February 12, 2001

10(m)      Divisional Service               Contained herein.
           Agreement between
           Pinnacle Data Systems,
           Inc. and Hewlett-Packard
           Company dated September
           1, 2001

10(n)      Direct Connect VS                Contained herein.
           Supplier Services
           Agreement between
           Pinnacle Data Systems,
           Inc. and Hewlett-Packard
           Company dated September
           1, 2001

10(o)*     Employment agreement             Contained herein.
           between Pinnacle Data
           Systems, Inc. and C.
           Robert Hahn dated
           September 1, 2001

10(p)*     Employment agreement             Contained herein.
           between Pinnacle Data
           Systems, Inc. and Michael
           R.

                                      49

<PAGE>

                                                 If Incorporated by Reference,
 Exhibit                                        Document with which Exhibit was
   No.         Description of Exhibit            Previously Filed with the SEC
   ---         ----------------------            -----------------------------

           Sayre dated September 1,
           2001

10(q)*     Employment agreement                Contained herein.
           between Pinnacle Data
           Systems, Inc. and
           Christopher L. Winslow
           dated September 1, 2001

10(r)      Amendment to Promissory             Contained herein.
           Note between Pinnacle
           Data Systems, Inc. and
           Key Bank National
           Association dated
           February 21, 2002

10(s)      First Amendment Agreement           Contained herein.
           to Loan Agreement between
           Pinnacle Data Systems,
           Inc. and Key Bank
           National Association
           dated February 21, 2002

10(t)      Second Amendment                    Contained herein.
           Agreement to Loan
           Agreement between
           Pinnacle Data Systems,
           Inc. and Key Bank
           National Association
           dated March 7, 2002

21         List of Subsidiaries                Contained herein

23         Independent Auditors' Consent       Contained herein

24         Powers of Attorney                  Contained herein

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

     *Executive Compensation Plans and Arrangements required to be filed
pursuant to Reg. 601(B)(10) of Regulation S-B.

No other exhibits are required to be filed herewith pursuant to Item 601 of
Regulation S-B.

                                       50

<PAGE>

         (b)   REPORTS ON FORM 8-K
               -------------------

         No Form 8-K reports were filed during the fourth quarter of the
         Company's fiscal year ended December 31, 2001.

         (c)   EXHIBITS
               --------

         The exhibits in response to this portion of Item 13 are submitted as a
         separate section of this report following the signatures.

                                       51

<PAGE>

                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                      PINNACLE DATA SYSTEMS, INC.

Date : March 20, 2002                 By /s/ John D. Bair
                                        -------------------------------
                                           John D. Bair, President

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signature                        Title                             Date
---------                        -----                             ----

/s/ John D. Bair               Chairman, President, Chief        March 20, 2002
-----------------------        Executive Officer and
John D. Bair                   Director (principal
                               executive officer)

/s/ Michael R. Sayre           Executive Vice President,         March 20, 2002
-----------------------        Chief Financial Officer,
Michael R. Sayre               and Treasurer,
                               (principal financial and
                               principal accounting officer)

C. Robert Hahn*                Vice President - Service Group,   March 20, 2002
-----------------------        and Director
C. Robert Hahn

Hugh C. Cathey*                Director                          March 20, 2002
-----------------------
Hugh C. Cathey

Paul H. Lambert*               Director                          March 20, 2002
-----------------------
Paul H. Lambert

Thomas M. O'Leary*             Director                          March 20, 2002
-----------------------
Thomas M. O'Leary

Robert V.R. Ostrander*         Director                          March 20, 2002
-----------------------
Robert V.R. Ostrander

*The undersigned, by signing his name hereto, does sign this document on
behalf of the person indicated above pursuant to a Power of Attorney duly
executed by such person.

By     /s/ John D. Bair                                     March 20, 2002
       ----------------
       John D. Bair,
       Attorney-in-Fact

                                       52