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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-QSB



|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



For the quarterly period ended September 30, 2005



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
|- | ---------------------------------------------------------------



For the transition period from
 to



Commission file number: 1-16103



PINNACLE DATA SYSTEMS, INC.

(Exact
name of small business issuer as specified in its charter)



|                                                              |  |                                 
|------------------------------------------------------------- |  | --------------------------------
|Ohio                                                          |  | 31-1263732                      
|(State or other jurisdiction ofincorporation or organization) |  | (IRS EmployerIdentification No.)



6600 Port Road,
Groveport, Ohio 43125

(Address of principal executive offices)



(614) 748-1150

(Issuers Telephone Number)



No change

(Former name, former address and former fiscal year, if changed since last reports)



Check whether the issuer (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No ̈



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).    Yes ̈No  x



APPLICABLE ONLY TO CORPORATE ISSUERS



State the number of shares outstanding of each of the issuers classes of common equity,
as of the latest practicable date: 5,964,956 common shares, without par value, as of November 9, 2005



Transitional Small Business Disclosure Format (Check one):    Yes ̈No  x



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PINNACLE DATA SYSTEMS, INC.

INDEX



|               |  |                                                                                            |  |         
|-------------- |  | ------------------------------------------------------------------------------------------ |  | --------
|               |  |                                                                                            |  | Page No.
|PART I         |  | FINANCIAL INFORMATION                                                                      |  | 3       
|               |  |                                                                                           
|Item 1.        |  | Financial Statements                                                                       |  | 3       
|               |  |                                                                                           
|               |  | Balance SheetsSeptember 30, 2005 and December 31, 2004                                     |  | 3-4     
|               |  |                                                                                           
|               |  | Statements of IncomeOne and three quarters ended September 30, 2005 and September 25, 2004 |  | 5       
|               |  |                                                                                           
|               |  | Statements of Cash FlowsThree quarters ended September 30, 2005 and September 25, 2004     |  | 6-7     
|               |  |                                                                                           
|               |  | Notes to Financial Statements                                                              |  | 8-17    
|               |  |                                                                                           
|Item 2.        |  | Managements Discussion and Analysis or Plan of Operation                                  |  | 18-26   
|               |  |                                                                                           
|Item 3.        |  | Controls and Procedures                                                                    |  | 27      
|               |  |                                                                                           
|PART II        |  | OTHER INFORMATION                                                                          |  | 28      
|               |  |                                                                                           
|Item 6.        |  | Exhibits                                                                                   |  | 28-30   
|               | 
|SIGNATURES     |  | 31                                                                                        
|               | 
|CERTIFICATIONS |  | 32-35                                                                                     



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PART I. - FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------



PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



BALANCE SHEETS



|                                                                                   |  |                   |            |                  |   |           
|---------------------------------------------------------------------------------- |  | ----------------- | ---------- | ---------------- | - | ----------
|                                                                                   |  | September 30,2005 |            | December 31,2004
|                                                                                   |  | (Unaudited)       |            |                 
|ASSETS                                                                             |  |                   |            |                  |   |           
|CURRENT ASSETS                                                                     |  |                   |            |                  |   |           
|Cash                                                                               |  | $                 | 152,339    |                  | $ | 15,068    
|Accounts receivable, net of allowance for doubtful accounts of $70,000 and $20,000 |  |                   | 11,133,350 |                  |   | 4,398,251 
|Inventory                                                                          |  |                   | 9,335,065  |                  |   | 4,080,202 
|Other prepaid expenses                                                             |  |                   | 313,029    |                  |   | 239,720   
|Refundable income taxes                                                            |  |                   | 150,901    |                  |   | 171,248   
|Deferred income taxes                                                              |  |                   | 477,000    |                  |   | 477,000   
|                                                                                   |  |                   |            |                  |   |           
|                                                                                   |  |                   | 21,561,684 |                  |   | 9,381,489 
|                                                                                   |  |                   |            |                  |   |           
|PROPERTY AND EQUIPMENT                                                             |  |                   |            |                  |   |           
|Leasehold improvements                                                             |  |                   | 325,187    |                  |   | 309,920   
|Furniture and fixtures                                                             |  |                   | 389,743    |                  |   | 382,935   
|Computer equipment and related software                                            |  |                   | 2,712,001  |                  |   | 2,481,919 
|Shop equipment                                                                     |  |                   | 585,694    |                  |   | 568,223   
|                                                                                   |  |                   |            |                  |   |           
|                                                                                   |  |                   | 4,012,625  |                  |   | 3,742,997 
|Less accumulated depreciation and amortization                                     |  |                   | 3,140,584  |                  |   | 2,772,203 
|                                                                                   |  |                   |            |                  |   |           
|                                                                                   |  |                   | 872,041    |                  |   | 970,794   
|                                                                                   |  |                   |            |                  |   |           
|OTHER ASSETS                                                                       |  |                   | 180,896    |                  |   | 22,566    
|                                                                                   |  |                   |            |                  |   |           
|                                                                                   |  | $                 | 22,614,621 |                  | $ | 10,374,849
|                                                                                   |  |                   |            |                  |   |           



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



3



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##### Table of Contents

PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



BALANCE SHEETS



|                                                                                                                              |  |                   |            |                  |   |           
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | ---------------- | - | ----------
|                                                                                                                              |  | September 30,2005 |            | December 31,2004
|                                                                                                                              |  | (Unaudited)       |            |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                          |  |                   |            |                  |   |           
|                                                                                                                              |  |                  
|CURRENT LIABILITIES                                                                                                           |  |                   |            |                  |   |           
|Line of credit                                                                                                                |  | $                 | 8,002,913  |                  | $ | 2,525,020 
|Accounts payable                                                                                                              |  |                   | 5,890,338  |                  |   | 2,176,746 
|Accrued expenses:                                                                                                             |  |                   |            |                  |   |           
|Wages, payroll taxes and benefits                                                                                             |  |                   | 951,949    |                  |   | 295,681   
|Other                                                                                                                         |  |                   | 1,149,127  |                  |   | 207,398   
|Unearned revenue                                                                                                              |  |                   | 250,418    |                  |   | 13,822    
|                                                                                                                              |  |                   |            |                  |   |           
|                                                                                                                              |  |                   | 16,244,745 |                  |   | 5,218,667 
|                                                                                                                              |  |                   |            |                  |   |           
|LONG-TERM LIABILITIES                                                                                                         |  |                   |            |                  |   |           
|Deferred income taxes                                                                                                         |  |                   | 101,000    |                  |   | 101,000   
|                                                                                                                              |  |                   |            |                  |   |           
|                                                                                                                              |  |                   | 101,000    |                  |   | 101,000   
|                                                                                                                              |  |                   |            |                  |   |           
|                                                                                                                              |  |                   | 16,345,745 |                  |   | 5,319,667 
|                                                                                                                              |  |                   |            |                  |   |           
|COMMITMENTS AND CONTINGENCIES                                                                                                 |  |                   |           |                  |   |          
|                                                                                                                              |  |                   |            |                  |   |           
|STOCKHOLDERS EQUITY                                                                                                          |  |                   |            |                  |   |           
|Preferred stock; no par value; 4,000,000 shares authorized; no shares issued or outstanding                                   |  |                   |           |                  |   |          
|Common stock; no par value; 25,000,000 shares authorized; 5,964,956 and 5,628,806 shares issued and outstanding, respectively |  |                   | 2,738,385  |                  |   | 2,266,482 
|Additional paid-in capital                                                                                                    |  |                   | 737,271    |                  |   | 543,095   
|Retained earnings                                                                                                             |  |                   | 2,793,220  |                  |   | 2,245,605 
|                                                                                                                              |  |                   |            |                  |   |           
|                                                                                                                              |  |                   | 6,268,876  |                  |   | 5,055,182 
|                                                                                                                              |  |                   |            |                  |   |           
|                                                                                                                              |  | $                 | 22,614,621 |                  | $ | 10,374,849
|                                                                                                                              |  |                   |            |                  |   |           



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



4



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



STATEMENTS OF INCOME



|                                  |  |                       |            |                              |   |                   |  |                   |            |  |   |           
|--------------------------------- |  | --------------------- | ---------- | ---------------------------- | - | ----------------- |  | ----------------- | ---------- |  | - | ----------
|                                  |  | For the Quarter Ended |            | For the Three Quarters Ended
|                                  |  | September 30,2005     |            | September 25,2004            |   | September 30,2005 |  | September 25,2004
|                                  |  | (unaudited)           |            | (unaudited)                 
|SALES                             |  |                       |            |                              |   |                   |  |                   |            |  |   |           
|Product sales                     |  | $                     | 11,736,410 |                              | $ | 7,555,851         |  | $                 | 22,039,691 |  | $ | 22,760,147
|Service sales                     |  |                       | 2,534,079  |                              |   | 1,229,070         |  |                   | 6,667,954  |  |   | 4,352,039 
|                                  |  |                       |            |                              |   |                   |  |                   |            |  |   |           
|                                  |  |                       | 14,270,489 |                              |   | 8,784,921         |  |                   | 28,707,645 |  |   | 27,112,186
|                                  |  |                       |            |                              |   |                   |  |                   |            |  |   |           
|COST OF SALES                     |  |                       |            |                              |   |                   |  |                   |            |  |   |           
|Product sales                     |  |                       | 10,208,418 |                              |   | 6,396,364         |  |                   | 19,077,310 |  |   | 17,892,031
|Service sales                     |  |                       | 970,467    |                              |   | 864,083           |  |                   | 2,871,970  |  |   | 2,742,860 
|                                  |  |                       |            |                              |   |                   |  |                   |            |  |   |           
|                                  |  |                       | 11,178,885 |                              |   | 7,260,447         |  |                   | 21,949,280 |  |   | 20,634,891
|                                  |  |                       |            |                              |   |                   |  |                   |            |  |   |           
|GROSS PROFIT                      |  |                       | 3,091,604  |                              |   | 1,524,474         |  |                   | 6,758,365  |  |   | 6,477,295 
|                                  |  |                       |            |                             
|OPERATING EXPENSES                |  |                       | 2,463,525  |                              |   | 1,500,104         |  |                   | 5,734,647  |  |   | 4,940,394 
|                                  |  |                       |            |                              |   |                   |  |                   |            |  |   |           
|                                  |  |                       |            |                             
|INCOME FROM OPERATIONS            |  |                       | 628,079    |                              |   | 24,370            |  |                   | 1,023,718  |  |   | 1,536,901 
|                                  |  |                       |            |                              |   |                   |  |                   |            |  |   |           
|                                  |  |                       |            |                             
|OTHER EXPENSE                     |  |                       |            |                              |   |                   |  |                   |            |  |   |           
|Interest expense                  |  |                       | 86,955     |                              |   | 23,766            |  |                   | 148,103    |  |   | 78,419    
|                                  |  |                       |            |                              |   |                   |  |                   |            |  |   |           
|                                  |  |                       |            |                             
|INCOME BEFORE INCOME TAXES        |  |                       | 541,124    |                              |   | 604               |  |                   | 875,615    |  |   | 1,458,482 
|                                  |  |                       |            |                             
|INCOME TAX EXPENSE                |  |                       | 202,000    |                              |   |                  |  |                   | 328,000    |  |   | 598,000   
|                                  |  |                       |            |                              |   |                   |  |                   |            |  |   |           
|                                  |  |                       |            |                             
|NET INCOME                        |  | $                     | 339,124    |                              | $ | 604               |  | $                 | 547,615    |  | $ | 860,482   
|                                  |  |                       |            |                              |   |                   |  |                   |            |  |   |           
|                                  |  |                       |            |                             
|BASIC EARNINGS PER COMMON SHARE   |  | $                     | 0.06       |                              |   | 0.00              |  |                   | 0.09       |  |   | 0.15      
|                                  |  |                       |            |                              |   |                   |  |                   |            |  |   |           
|                                  |  |                       |            |                             
|DILUTED EARNINGS PER COMMON SHARE |  | $                     | 0.05       |                              |   | 0.00              |  |                   | 0.09       |  |   | 0.14      
|                                  |  |                       |            |                              |   |                   |  |                   |            |  |   |           



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



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



STATEMENTS OF CASH FLOWS



Three Quarters Ended September 30, 2005 and September 25, 2004



|                                                                                  |  |             |            |   |             |   |            |  
|--------------------------------------------------------------------------------- |  | ----------- | ---------- | - | ----------- | - | ---------- | -
|                                                                                  |  | 2005        |            |   | 2004        |  
|                                                                                  |  | (Unaudited) |            |   | (Unaudited) |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |             |            |   |             |   |            |  
|Net income                                                                        |  | $           | 547,615    |   |             | $ | 860,482    |  
|                                                                                  |  |             |            |   |             |   |            |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |             |            |   |             |   |            |  
|Depreciation and amortization                                                     |  |             | 368,782    |   |             |   | 425,859    |  
|Provision for doubtful accounts                                                   |  |             | 10,000     |   |             |   |           |  
|Inventory reserves                                                                |  |             | 283,920    |   |             |   | 178,374    |  
|Loss on disposal of equipment                                                     |  |             |           |   |             |   | (87        | )
|(Increase)/decrease in assets:                                                    |  |             |            |   |             |   |            |  
|Accounts receivable                                                               |  |             | (2,926,734 | ) |             |   | (713,848   | )
|Inventory                                                                         |  |             | (1,085,403 | ) |             |   | (2,659,757 | )
|Prepaid expenses and other assets                                                 |  |             | 29,485     |   |             |   | 64,123     |  
|Refundable income taxes                                                           |  |             | 214,524    |   |             |   |           |  
|Increase/(decrease) in liabilities:                                               |  |             |            |   |             |   |            |  
|Accounts payable                                                                  |  |             | (1,729,803 | ) |             |   | 1,443,816  |  
|Accrued expenses and taxes                                                        |  |             | (69,663    | ) |             |   | 69,594     |  
|Unearned revenues                                                                 |  |             | 58,207     |   |             |   | 19,100     |  
|                                                                                  |  |             |            |   |             |   |            |  
|Total adjustments                                                                 |  |             | (4,846,685 | ) |             |   | (1,172,826 | )
|                                                                                  |  |             |            |   |             |   |            |  
|Net cash used in operating activities                                             |  |             | (4,299,070 | ) |             |   | (312,344   | )
|                                                                                  |  |             |            |   |             |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |             |            |   |             |   |            |  
|Purchases of property and equipment                                               |  |             | (214,325   | ) |             |   | (222,394   | )
|Proceeds from acquisition                                                         |  |             | 124,518    |   |             |   |           |  
|Proceeds from sale of property and equipment                                      |  |             |           |   |             |   | 165        |  
|                                                                                  |  |             |            |   |             |   |            |  
|Net cash used in investing activities                                             |  |             | (89,807    | ) |             |   | (222,229   | )
|                                                                                  |  |             |            |   |             |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |             |            |   |             |   |            |  
|Net change in line of credit                                                      |  |             | 5,477,893  |   |             |   | 165,875    |  
|Payment of debt assumed in acquisition                                            |  |             | (2,281,457 | ) |             |   |           |  
|Outstanding checks in excess of funds on deposit                                  |  |             | 863,338    |   |             |   | 309,112    |  
|Principal payments on capital lease obligation                                    |  |             | (5,529     | ) |             |   |           |  
|Proceeds from stock options exercised                                             |  |             | 471,903    |   |             |   | 64,201     |  
|                                                                                  |  |             |            |   |             |   |            |  
|Net cash provided by financing activities                                         |  |             | 4,526,148  |   |             |   | 539,188    |  
|                                                                                  |  |             |            |   |             |   |            |  



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



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



STATEMENTS OF CASH FLOWS (CONTINUED)



Three Quarters Ended September 30, 2005 and September 25, 2004



|                                                                                  |  |             |           |             |   |        
|--------------------------------------------------------------------------------- |  | ----------- | --------- | ----------- | - | -------
|                                                                                  |  | 2005        |           | 2004       
|                                                                                  |  | (Unaudited) |           | (Unaudited)
|INCREASE IN CASH                                                                  |  |             | 137,271   |             |   | 4,615  
|CASH - Beginning of period                                                        |  |             | 15,068    |             |   | 11,997 
|                                                                                  |  |             |           |             |   |        
|CASH - End of period                                                              |  | $           | 152,339   |             | $ | 16,612 
|                                                                                  |  |             |           |             |   |        
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                  |  |             |           |             |   |        
|Interest paid                                                                     |  | $           | 119,179   |             | $ | 75,505 
|                                                                                  |  |             |           |             |   |        
|Income taxes paid, net of refunds                                                 |  | $           | 109,977   |             | $ | 556,577
|                                                                                  |  |             |           |             |   |        
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONS           |  |             |           |             |   |        
|Inventory capitalized as computer equipment.                                      |  | $           | 2,216     |             |   | 64,734 
|                                                                                  |  |             |           |             |   |        
|Income tax benefit from stock option plans credited to Additional paid-in-capital |  | $           | 194,177   |             | $ |       
|                                                                                  |  |             |           |             |   |        
|Assets and liabilities assumed in acquisition:                                    |  |             |           |             |   |        
|Accounts receivable                                                               |  | $           | 3,818,364 |             |   |        
|Inventory                                                                         |  |             | 4,455,597 |             |   |        
|Prepaid expenses                                                                  |  |             | 104,523   |             |   |        
|Computer equipment                                                                |  |             | 53,087    |             |   |        
|Other assets                                                                      |  |             | 157,000   |             |   |        
|                                                                                  |  |             |           |             |   |        
|Total assets                                                                      |  | $           | 8,588,571 |             |   |        
|                                                                                  |  |            
|Accounts payable                                                                  |  | $           | 4,580,055 |             |   |        
|Wages, payroll taxes and benefits                                                 |  |             | 563,626   |             |   |        
|Other accrued expenses                                                            |  |             | 1,109,562 |             |   |        
|Unearned revenue                                                                  |  |             | 178,389   |             |   |        
|Other debt                                                                        |  |             | 2,281,457 |             |   |        
|                                                                                  |  |             |           |             |   |        
|Total liabilities                                                                 |  | $           | 8,713,089 |             |   |        
|                                                                                  |  |             |           |             |   |        



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



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS



(UNAUDITED)



|Note 1. | Organization
|------- | ------------



Nature of Business - Pinnacle Data Systems, Inc. (dba PDSi) (the Company) provides product lifecycle service solutions to Original Equipment Manufacturers
(OEMs) in the medical, telecommunications, defense, imaging, industrial and computer equipment markets, among others. PDSi offers a full range of computer and computer-related product development and manufacturing services to increase product speed
to market and engineered product life, and to provide service and support to units in the field through comprehensive product lifecycle management programs encompassing depot repair, advanced exchange, contact center support and end-of-life control.



Effective August 15, 2005, the Company acquired the
assets and certain liabilities of GNP Computers, Inc. (GNP). The former GNP operations have been fully integrated as part of the Company. The acquired operations also include computer system design, manufacturing, and lifecycle management for
OEMs in a broad range of industries. The financial results of the acquired operations from the date of the acquisition are included in the financial results reported for the Company.



|Note 2. | Summary of Significant Accounting Policies
|------- | ------------------------------------------



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



Inventory at September 30, 2005 and December 31, 2004 was comprised of the following (net of inventory reserves):



|                                |  |           |           |            |   |          
|------------------------------- |  | --------- | --------- | ---------- | - | ---------
|                                |  | 9/30/2005 |           | 12/31/2004
|Component parts (raw materials) |  | $         | 6,427,441 |            | $ | 3,362,924
|Work-in-process                 |  |           | 1,533,163 |            |   | 369,937  
|Finished goods                  |  |           | 1,374,461 |            |   | 347,341  
|                                |  |           |           |            |   |          
|                                |  | $         | 9,335,065 |            | $ | 4,080,202
|                                |  |           |           |            |   |          



The carrying values of
component parts and finished goods represent average cost or managements estimate of its 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.



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



|Note 2. | Summary of Significant Accounting Policies (continued)
|------- | ------------------------------------------------------



The balance sheet as of September 30, 2005 and the statements of income and cash flows for the
three quarters ended September 30, 2005 and September 25, 2004 have been prepared by the Company without audit. In the opinion of management, all adjustments, which consist solely of normal recurring adjustments, necessary to present
fairly, in accordance with accounting principles generally accepted in the United States of America, the financial position, statements of income and changes in cash flows for all periods presented have been made.



Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed and omitted. These condensed financial statements should be read in conjunction with the financial statements and
notes thereto included in the Companys December 31, 2004 annual report on Form 10-KSB. The results of operations for the periods ended September 30, 2005 are not necessarily indicative of the results for the full year.



The Company accounts for employee and director stock options using the
intrinsic value method. Under this method, no compensation expense was recorded for the first three quarters of 2005 or 2004 because all stock options were granted at an exercise price equal to or greater than the fair market value of the
Companys stock on the date of the grant. If compensation expense for the Companys stock option grants had been determined based on their estimated fair value at the grant dates, the Companys net income and earnings per share for
the third quarter and three-quarter periods ending September 30, 2005 and September 25, 2004 would have been as follows:



|                                                                                                                                  |  |               |          |   |                |   |         |      |  |   |          |   |  |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | -------------- | - | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                                                                                                  |  | Third Quarter |          |   | Three Quarters |  
|                                                                                                                                  |  | 2005          |          |   | 2004           |   |         | 2005 |  |   | 2004     |  
|Net income, as reported                                                                                                           |  | $             | 339,124  |   |                | $ | 604     |      |  | $ | 547,615  |   |  | $ | 860,482  |  
|Deduct: total stock-based compensation expense determined under the fair value method for all awards, net of related tax
benefits |  |               | (266,050 | ) |                |   | (96,795 | )    |  |   | (472,750 | ) |  |   | (234,303 | )
|                                                                                                                                  |  |               |          |   |                |   |         |      |  |   |          |   |  |   |          |  
|Net income, pro forma                                                                                                             |  |               | 73,074   |   |                |   | (96,191 | )    |  |   | 74,865   |   |  |   | 626,179  |  
|Earnings per common share, basic:                                                                                                 |  |               |          |   |                |   |         |      |  |   |          |   |  |   |          |  
|As reported                                                                                                                       |  | $             | 0.06     |   |                | $ |        |      |  | $ | 0.09     |   |  | $ | 0.15     |  
|Pro forma                                                                                                                         |  | $             | 0.01     |   |                | $ | (0.02   | )    |  | $ | 0.01     |   |  | $ | 0.11     |  
|Earnings per common share, diluted:                                                                                               |  |               |          |   |                |   |         |      |  |   |          |   |  |   |          |  
|As reported                                                                                                                       |  | $             | 0.05     |   |                | $ |        |      |  | $ | 0.09     |   |  | $ | 0.14     |  
|Pro forma                                                                                                                         |  | $             | 0.01     |   |                | $ | (0.02   | )    |  | $ | 0.01     |   |  | $ | 0.10     |  



9



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##### Table of Contents

PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



|Note 2. | Summary of Significant Accounting Policies (continued)
|------- | ------------------------------------------------------



The Company divides its fiscal calendar into 4 periods or quarters. Starting in 2005, the
Company adopted a calendar fiscal schedule, with the four quarters of the year always ending on March 31, June 30, September 30, and December 31. Prior to 2005, the Company intended that each quarter consist of thirteen
weeks. The first quarter of each year began on January 1 and the fourth quarter ended on December 31. Depending on what day of the week January 1 fell, the first quarter might contain a few days less than thirteen full weeks and the
fourth quarter might contain a few days more than thirteen full weeks. The third quarter of 2005 ended on September 30 and contained 92 days. The third quarter of 2004 ended on September 25 and contained 91 days. The first three quarters
of 2005 contained 273 days and the first three quarters of 2004 contained 269 days.



In December 2003, the FASB issued FIN 46 (Revised), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from
other parties. FIN 46 requires a variable interest entity to be consolidated by a company, if that company is subject to a majority of the risk of loss from the variable interest entitys activities or entitled to receive a majority of the
entitys residual returns or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46
apply in the first fiscal year or interim period ending after December 15, 2004. The adoption of FIN 46 did not have a material impact on the Companys consolidated financial statements.



In December 2004, the FASB issued SFAS No. 123 (Revised), Shared Based
Payment. SFAS No. 123(R) replaces SFAS No. 123, Accounting for Stock Based Compensation, and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123 (R) requires compensation costs related to
share-based payment transactions to be recognized in the financial statements. Compensation costs will be recognized over the vesting period of the award. SFAS No. 123(R) is effective as of the beginning of the first annual reporting period
that begins after June 15, 2005. SFAS No. 123 (R) provides several options regarding its adoption. The Company has not determined the adoption method that it will select.



10



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##### Table of Contents

PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



|Note 2. | Summary of Significant Accounting Policies (continued)
|------- | ------------------------------------------------------



On November 10, 2005, the Company approved the acceleration of vesting of unvested stock options
previously awarded to employees and officers of the Company under various stock option plans effective November 17, 2005. As a result of this action, options to purchase approximately 1,186,000 shares of our common stock that would otherwise
have vested over the next one to four years became fully vested.



The decision to accelerate the vesting of these options, which we believe to be in the best interest of our stockholders, was made primarily to reduce non-cash compensation expense that would have been recorded in future periods following
our application of FAS 123R. Because we accelerated these options, we expect to reduce our non-cash compensation expense related to these options by approximately $890,000 (pre-tax) between the first quarter of 2006 and 2009, based on estimated
value calculations using the Black-Scholes methodology.



|Note 3. | Line of Credit
|------- | --------------



At September 30, 2005, the Company had a bank line of credit with a limit of $11,000,000 and monthly interest payments at prime. The effective rate
was 6.75%. The Company was obligated for funds drawn against this line of credit in the amount of $8,002,913 and $2,525,020 at September 30, 2005 and December 31, 2004, respectively.



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 anticipation of its acquisition of GNP Computers, on August 9, 2005, 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 was increased to $11,000,000 from $6,000,000 and is
due and renewable by May 15, 2007. The borrowing base calculation on September 30, 2005 was the maximum $11,000,000, resulting in an unused capacity of $ 2,997,087. As of September 30, 2005, the Company was not in compliance with the
Total Debt to Tangible Net Worth covenant and KeyBank granted a waiver of the covenant for the quarter ended September 30, 2005.



11



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##### Table of Contents

PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



|Note 4. | Income Taxes
|------- | ------------



Income taxes for interim periods were computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to
ongoing review and evaluation by management.



|Note 5. | Stock Options
|------- | -------------



The Company adopted the Pinnacle Data Systems, Inc. 1995 Stock Option Plan on December 19, 1995. On May 5, 2005, the Company adopted the 2005
Equity Incentive Plan, which replaced the 1995 plan. During the two quarters ended September 30, 2005, the Companys stock option activities and weighted average exercise prices were as follows:



|                                |  |           |   |  |               |     
|------------------------------- |  | --------- | - |  | ------------- | ----
|                                |  | Shares    |   |  | ExercisePrice
|Outstanding, December 31, 2004  |  | 1,526,950 |   |  | $             | 2.00
|Granted                         |  | 1,023,500 |   |  | $             | 3.02
|Exercised                       |  | (336,150  | ) |  | $             | 1.37
|Forfeited                       |  | (64,100   | ) |  | $             | 3.95
|                                |  |           |   |  |               |     
|Outstanding, September 30, 2005 |  | 2,150,200 |   |  | $             | 2.09
|                                |  |           |   |  |               |     



Of the 1,023,500
options granted in 2005, 51,000 were granted under the 1995 plan, and 972,500 were granted under the 2005 plan. The fair value of options granted was estimated on the date of the grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for the three quarters ended September 30, 2005:



|                                        |  |       |  
|--------------------------------------- |  | ----- | -
|Risk-free interest rate                 |  | 4.22  | %
|Dividend yield                          |  | 0     | %
|Volatility factor                       |  | 71.46 | %
|Weighted average expected life in years |  | 8     |  



The options granted
during the two quarters had a weighted-average fair value of 2.08.



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##### Table of Contents

PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



|Note 6. | Earnings Per Common and Common Equivalent Share
|------- | -----------------------------------------------



Earnings per common and common equivalent share were computed by dividing net earnings by the weighted average number of shares of common stock
outstanding during the quarter



|                                                                |  |                                 |         |                                        |           |                  |   |                   |  |                     |         |                  |           |  |   |     
|--------------------------------------------------------------- |  | ------------------------------- | ------- | -------------------------------------- | --------- | ---------------- | - | ----------------- |  | ------------------- | ------- | ---------------- | --------- |  | - | ----
|                                                                |  | For the quarter ended 9/30/2005 |         | For the three quarters ended 9/30/2005
|                                                                |  | Income(Numerator)               |         | Shares(Denominator)                    |           | Per-Share Amount |   | Income(Numerator) |  | Shares(Denominator) |         | Per-Share Amount
|Basic EPS                                                       |  |                                 |         |                                        |           |                  |   |                   |  |                     |         |                  |           |  |   |     
|Income available to common shareholders                         |  | $                               | 339,124 |                                        | 5,940,957 |                  | $ | 0.06              |  | $                   | 547,615 |                  | 5,834,297 |  | $ | 0.09
|                                                                |  |                                 |         |                                        |           |                 
|Effect of Dilutive Securities                                   |  |                                 |         |                                        |           |                  |   |                   |  |                     |         |                  |           |  |   |     
|Options                                                         |  |                                 |         |                                        | 378,592   |                  |   |                   |  |                     |         |                  | 432,599   |  |   |     
|                                                                |  |                                 |         |                                        |           |                  |   |                   |  |                     |         |                  |           |  |   |     
|Diluted EPS                                                     |  |                                 |         |                                        |           |                  |   |                   |  |                     |         |                  |           |  |   |     
|Income available to common stockholders and assumed conversions |  | $                               | 339,124 |                                        | 6,319,549 |                  | $ | 0.05              |  | $                   | 547,615 |                  | 6,266,897 |  | $ | 0.09
|                                                                |  |                                 |         |                                        |           |                  |   |                   |  |                     |         |                  |           |  |   |     
|                                                                |  |                                
|                                                                |  | For the quarter ended 9/25/2004 |         | For the three quarters ended 9/25/2004
|                                                                |  | Income(Numerator)               |         | Shares(Denominator)                    |           | Per-Share Amount |   | Income(Numerator) |  | Shares(Denominator) |         | Per-Share Amount
|Basic EPS                                                       |  |                                 |         |                                        |           |                  |   |                   |  |                     |         |                  |           |  |   |     
|Income available to common shareholders                         |  | $                               | 604     |                                        | 5,587,377 |                  | $ | 0.00              |  | $                   | 860,482 |                  | 5,560,779 |  | $ | 0.15
|                                                                |  |                                 |         |                                        |           |                 
|Effect of Dilutive Securities                                   |  |                                 |         |                                        |           |                  |   |                   |  |                     |         |                  |           |  |   |     
|Options                                                         |  |                                 |         |                                        | 492,384   |                  |   |                   |  |                     |         |                  | 555,759   |  |   |     
|                                                                |  |                                 |         |                                        |           |                  |   |                   |  |                     |         |                  |           |  |   |     
|Diluted EPS                                                     |  |                                 |         |                                        |           |                  |   |                   |  |                     |         |                  |           |  |   |     
|Income available to common stockholders and assumed conversions |  | $                               | 604     |                                        | 6,079,761 |                  | $ | 0.00              |  | $                   | 860,482 |                  | 6,116,538 |  | $ | 0.14
|                                                                |  |                                 |         |                                        |           |                  |   |                   |  |                     |         |                  |           |  |   |     



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



|Note 7. | Operating Segments
|------- | ------------------



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.



|                              |  |                                         |            |              |   |           |  |   |            |   |  |   |           
|----------------------------- |  | --------------------------------------- | ---------- | ------------ | - | --------- |  | - | ---------- | - |  | - | ----------
|                              |  | Three Quarters Ended September 30, 2005
|                              |  | ProductSales                            |            | ServiceSales |   | Other     |  |   | Total     
|Sales                         |  | $                                       | 22,039,691 |              | $ | 6,667,954 |  | $ |           |   |  | $ | 28,707,645
|Gross profit                  |  |                                         | 2,962,381  |              |   | 3,795,984 |  |   |           |   |  |   | 6,758,365 
|Income from operations        |  |                                         | 555,279    |              |   | 3,073,556 |  |   | (2,605,117 | ) |  |   | 1,023,718 
|Depreciation and amortization |  |                                         | 177,805    |              |   | 86,111    |  |   | 104,866    |   |  |   | 368,782   
|Interest expense              |  |                                         |           |              |   |          |  |   | 148,103    |   |  |   | 148,103   
|Total assets                  |  |                                         | 17,813,780 |              |   | 2,532,878 |  |   | 2,267,963  |   |  |   | 22,614,621
|Capital expenditures          |  |                                         | 53,018     |              |   | 33,366    |  |   | 130,157    |   |  |   | 216,541   



|                              |  |                                         |            |              |   |           |  |   |            |   |  |   |           
|----------------------------- |  | --------------------------------------- | ---------- | ------------ | - | --------- |  | - | ---------- | - |  | - | ----------
|                              |  | Three Quarters Ended September 25, 2004
|                              |  | ProductSales                            |            | ServiceSales |   | Other     |  |   | Total     
|Sales                         |  | $                                       | 22,760,147 |              | $ | 4,352,039 |  | $ |           |   |  | $ | 27,112,186
|Gross profit                  |  |                                         | 4,868,117  |              |   | 1,609,178 |  |   |           |   |  |   | 6,477,295 
|Income from operations        |  |                                         | 2,642,248  |              |   | 889,602   |  |   | (1,994,949 | ) |  |   | 1,536,901 
|Depreciation and amortization |  |                                         | 203,810    |              |   | 93,424    |  |   | 128,625    |   |  |   | 425,859   
|Interest expense              |  |                                         |           |              |   |          |  |   | 78,419     |   |  |   | 78,419    
|Total assets                  |  |                                         | 8,311,965  |              |   | 1,590,428 |  |   | 1,932,991  |   |  |   | 11,835,384
|Capital expenditures          |  |                                         | 100,732    |              |   | 161,270   |  |   | 25,126     |   |  |   | 287,128   



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



|Note 8. | Pro-forma Combined Statement of Operations
|------- | ------------------------------------------



On August 12, 2005, we entered into an asset purchase agreement with GNP Computers, Inc. (GNP) and GNPs principal shareholder in which we
acquired all of the assets and assumed certain liabilities of GNP. The assets totaled approximately $8.7 million, of which $8.3 million was receivables and inventory. We also benefited from over 20 customers with similar profiles and expansion
opportunities as our existing business, from GNPs former sales office and production facility in suburban Los Angeles, California, an expanded international presence with an Asia-based sales office and customers in Asia and Europe, an expanded
product line including telecommunications platforms and application-specific devices, and additional technical and engineering expertise and capabilities. None of the acquired customers are under contractual obligation to us to meet minimum order
quantities. They could stop placing orders at any time. The liabilities assumed upon the acquisition consisted of a $2.3 million asset based line of credit, payables and other accrued liabilities of approximately $6.4 million, which included the
transaction fees for both parties. Simultaneously with the acquisition, we paid off the asset-based line of credit.



The market value of the assets was essentially equal to the total of the assumed liabilities and transaction expenses. As a result, no goodwill was
recorded on the transaction and no long term debt was assumed or incurred. The results of the operations of the California operation subsequent to August 15, 2005 are included in our statements of income.



The pro forma data is presented for informational purposes only and may not
necessarily reflect future results of operations or what the results of operations would have been had Pinnacle Data Systems, Inc. (the Company) and GNP Computers, Inc. (GNP) been operating as combined entities for the periods presented. The
unaudited pro forma combined statements of operations should be read in conjunction with historical financial statements, including the notes thereto, of the Company included in our Form 10-KSB for the year ended December 31, 2004, and the
historical financial statements included elsewhere in this Form 10-QSB.



The accompanying unaudited pro forma combined statements of operations are based on the historical financial statements of the Company and GNP after giving effect to its acquisition by the Company. The Company
completed the acquisition of substantially all of the assets and assumed certain liabilities of GNP on August 15, 2005.



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##### Table of Contents

PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



|Note 8. | Pro-forma Combined Statement of Operations (continued)
|------- | ------------------------------------------------------



The unaudited pro forma combined statements of operations for the quarter and three quarters ended
September 30, 2005 and for the quarter and three quarters ended September 25, 2004 are presented as if the acquisition of GNP had occurred on January 1, 2004.



|                                  |  |                                         |            |     |   |            |                      |  |   |         |   |           |   |  |   |            |  
|--------------------------------- |  | --------------------------------------- | ---------- | --- | - | ---------- | -------------------- |  | - | ------- | - | --------- | - |  | - | ---------- | -
|                                  |  | Quarter Ended September 30, 2005        |           
|                                  |  | Pinnacle                                |            | GNP |   |            | Pro FormaAdjustments |  |   |         |   | Pro Forma |  
|Sales                             |  | $                                       | 14,270,489 |     | $ | 3,021,993  |                      |  | $ | (2,592  | ) |           | a |  | $ | 17,289,890 |  
|Net income                        |  |                                         | 339,124    |     |   | (149,110   | )                    |  |   | 24,017  |   |           | b |  |   | 214,031    |  
|Diluted earnings per common share |  | $                                       | 0.05       |     |   |            |                      |  |   |         |   |           |   |  | $ | 0.03       |  
|                                  |  |                                         |            |     |   |            |                      |  |   |         |   |           |   |  |   |            |  
|                                  | 
|                                  |  | Three Quarters Ended September 30, 2005 |           
|                                  |  | Pinnacle                                |            | GNP |   |            | Pro FormaAdjustments |  |   |         |   | Pro Forma |  
|Sales                             |  | $                                       | 28,707,645 |     | $ | 14,948,993 |                      |  | $ | (2,592  | ) |           | a |  | $ | 43,654,046 |  
|Net income                        |  |                                         | 547,615    |     |   | (2,377,733 | )                    |  |   | 139,017 |   |           | b |  |   | (1,691,101 | )
|Diluted earnings per common share |  | $                                       | 0.09       |     |   |            |                      |  |   |         |   |           |   |  | $ | (0.28      | )
|                                  |  |                                         |            |     |   |            |                      |  |   |         |   |           |   |  |   |            |  
|                                  | 
|                                  |  | Quarter Ended September 25, 2004        |           
|                                  |  | Pinnacle                                |            | GNP |   |            | Pro FormaAdjustments |  |   |         |   | Pro Forma |  
|Sales                             |  | $                                       | 8,784,921  |     | $ | 5,753,824  |                      |  | $ |        |   |           | a |  | $ | 14,538,745 |  
|Net income                        |  |                                         | 604        |     |   | (1,137,419 | )                    |  |   | 161,565 |   |           | b |  |   | (975,250   | )
|Diluted earnings per common share |  | $                                       |           |     |   |            |                      |  |   |         |   |           |   |  | $ | (0.17      | )
|                                  |  |                                         |            |     |   |            |                      |  |   |         |   |           |   |  |   |            |  
|                                  | 
|                                  |  | Three Quarters Ended September 25, 2004 |           
|                                  |  | Pinnacle                                |            | GNP |   |            | Pro FormaAdjustments |  |   |         |   | Pro Forma |  
|Sales                             |  | $                                       | 27,112,186 |     | $ | 14,892,097 |                      |  | $ | (11,750 | ) |           | a |  | $ | 41,992,533 |  
|Net income                        |  |                                         | 860,482    |     |   | (4,353,348 | )                    |  |   | 569,017 |   |           | b |  |   | (2,923,849 | )
|Diluted earnings per common share |  | $                                       | 0.14       |     |   |            |                      |  |   |         |   |           |   |  | $ | (0.53      | )
|                                  |  |                                         |            |     |   |            |                      |  |   |         |   |           |   |  |   |            |  



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##### Table of Contents

PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



|Note 8. | Pro-forma Combined Statement of Operations (continued)
|------- | ------------------------------------------------------



Pro Forma Adjustments to the Combined Statements of Operations:



| | (a) | Sales  Eliminates sales that occurred between the Company and GNP.
| | --- | -------------------------------------------------------------------



| | (b) | Operating expenses  decrease in depreciation expense as a result of purchase accounting and elimination of gross profit on sales that occurred between the Company and GNP.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Note 9. | Subsequent Event
|------- | ----------------



On November 8, 2005, the Company gave notice to Roger Baar of termination of his employment in accordance with his employment agreement.
Mr. Baar had been the Chief Executive Officer and principal shareholder of GNP Computers, Inc. (GNP). The Company acquired the assets and assumed certain liabilities of GNP in August 2005. Upon the acquisition, the Company entered into an
at-will employment contract with Mr. Baar, in which he would serve as Vice President, Industry and Business Development. The agreement called for the Company to provide a two-month notice of termination, as well as a severance payment
equivalent to four-months salary. The termination will result in a charge to earnings in the fourth quarter of 2005 of approximately $130,000.



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis or Plan of Operation.
|------- | ----------------------------------------------------------



The following discussion should be read in conjunction with the Financial Statements and Notes contained herein. This quarterly report, including the following sections,
contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to, statements regarding an increase in the
Companys pipeline of future business, the Companys achievement of its financial growth and profitability goals, and the Companys sales, earnings and profitability expectations for the fourth quarter of 2005 and the 2006 fiscal
year. The words believe, expect, anticipate, estimate, project, should, plan or planning 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. These factors include
changes in general economic conditions, changes in the specific markets for the Companys products and services, adverse business conditions, changes in customer order patterns, increased competition, changes in the Companys business or
its relationship with major technology partners or significant customers, pricing pressures, lack of adequate financing to take advantage of business opportunities that may arise, lack of success in technological advancements, risks associated with
the Companys new business practices, processes and information systems, the discovery of information relating to the business of GNP Computers which would affect the viability of post-closing operations and the inability to overcome
integration issues relating to the GNP Computers transaction. The Company undertakes no obligations to publicly update or revise such statements. For more details, please refer to the Companys Securities and Exchange Commission filings,
including its most recent Annual Report on Form 10-KSB and quarterly reports on Form 10-QSB.



The following discussions and analyses are for the quarter and three-quarter periods ended September 30, 2005, compared to the comparable periods ended September 25, 2004.



OVERVIEW



Pinnacle Data Systems, Inc. (PDSi, the Company or we)
provides product lifecycle service solutions to Original Equipment Manufacturers (OEMs) in the medical, telecommunications, defense, imaging, industrial and computer equipment markets, among others. PDSi offers a full range of computer and
computer-related product development and manufacturing services to increase product speed to market and engineered product life, and to provide service and support to units in the field through comprehensive product lifecycle management programs
encompassing depot repair, advanced exchange, contact center support and end-of-life control.



On August 12, 2005, we entered into an asset purchase agreement with GNP Computers, Inc. (GNP) and GNPs principal shareholder in which we acquired all of the assets and assumed certain liabilities of GNP.
The assets totaled approximately $8.7 million, of which $8.3 million was receivables and inventory. We also benefited from over 20 customers with similar profiles and expansion opportunities as our existing business, from GNPs former sales
office and production facility in suburban Los Angeles, California, an expanded international presence with an Asia-based sales office and customers in Asia and Europe, an expanded product line including telecommunications platforms and
application-specific devices, and additional technical and engineering expertise and capabilities. None of the acquired customers are under contractual obligation to us to meet minimum order quantities. They could stop placing orders at any time.
The liabilities assumed upon the acquisition consisted of a $2.3 million asset based line of credit, payables and other accrued liabilities of approximately $6.4 million, which included the



18



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##### Table of Contents

transaction fees for both parties. Simultaneously with the acquisition, we paid off the asset-based line of credit. In order to facilitate the acquisition,
on August 9, 2005, we increased our asset-based line of credit with KeyBank NA to $11 million from $6 million.



The market value of the assets was essentially equal to the total of the assumed liabilities and capitalized transaction expenses. As a result, no goodwill was recorded
on the transaction and no long term debt was assumed or incurred. The results of the operations of the California operation subsequent to August 15, 2005 are included in our statements of income.



As a result of the acquisition and the expected organic growth of the combined organizations,
we anticipate another record sales year in 2006. We will continue evaluating viable acquisition opportunities that meet our established criteria, including strategic fit and accretive performance in less than a year. However, we are not currently
planning any additional acquisitions before the second half of 2006. Further integration of the two businesses and infrastructure development for growth in the future will occur simultaneously for about the next year. Over that period, we plan to
spend up to $1 million in those areas, mostly in information technology and systems, with about half of that amount being capitalized as fixed assets. We anticipate continuing profitability in the fourth quarter of 2005 and growing annual earnings
in the 2006 year.



We previously discussed, in our Managements Discussion
and Analysis or Plan of Operation in our Form 10-QSB for the quarter ended June 30, 2005, that on July 12, 2005, Silicon Graphics, Inc. (SGI), one of our significant repair customers, was having some financial difficulties and had
announced it had received notice of default from a holder of convertible subordinated debentures. SGI is a significant customer in that they represent 28% of all service sales in the first three quarters of 2005. In October, 2005, SGI closed on a
new $100 million credit facility. We believe that this new facility will greatly aid their liquidity and that they will continue making payments on their account. We further believe that our assets that are related to their program with us are not
currently subject to extraordinary levels of risk.



SALES



Sales for the third quarter and the first three quarters of
2005 and 2004 were as follows:



|              |  |               |        |      |                |          |  |     |      |  |      |        |          |   |        |  |    |  
|------------- |  | ------------- | ------ | ---- | -------------- | -------- |  | --- | ---- |  | ---- | ------ | -------- | - | ------ |  | -- | -
|              |  | Third Quarter |        |      | Three Quarters |         
|($ thousands) |  | 2005          |        | 2004 |                | % Change |  |     | 2005 |  | 2004 |        | % Change |  
|Total company |  | $             | 14,271 |      | $              | 8,785    |  | 62  | %    |  | $    | 28,708 |          | $ | 27,112 |  | 6  | %
|Product       |  |               | 11,737 |      |                | 7,556    |  | 55  | %    |  |      | 22,040 |          |   | 22,760 |  | -3 | %
|Service       |  |               | 2,534  |      |                | 1,229    |  | 106 | %    |  |      | 6,668  |          |   | 4,352  |  | 53 | %



The increases in product sales in the
third quarter and for the first three quarters were directly attributable to the acquisition of the GNP customers, which generated $4.6 million in product sales from August 15 through the end of the third quarter of 2005, resulting in a record
product sales total for the third quarter. Without the newly acquired customers, product sales would have declined by 6% in the third quarter and by 24% for the first three quarters. The declines in existing business from 2004 were the result of two
record product orders that were included in 2004 sales, one for a medical equipment manufacturer and another for a telecommunications equipment provider. Those two orders spanned the period from November 2003 to July 2004.



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The newly acquired customers generated $600,000 in service sales after August 15, 2005, contributing to the record
quarterly service sales total and to the increases from 2004 for the quarter and year to date. The increases were also attributable to a growth in the number of existing repair customers since 2004.



Aided by having the newly acquired customers for the entire quarter, we expect record total
sales in the fourth quarter of 2005. As discussed in the Overview of this section, we expect an annual sales record in 2006 due to the combination of growth of our original customer base and the newly acquired accounts.



For the first three quarters of 2005, we had three customers that generated revenues of
approximately $4.2 million, $3.2 million, and $2.8 million or 15%, 11%, and 10% respectively, of total revenue. In the statements of income, approximately $9.9 million of the revenues from these customers is included in product sales and $300,000 is
included in service sales. In addition, these customers represented 8%, 10%, and 10%, respectively, of accounts receivable at September 30, 2005. This degree of concentration is lower than in recent years and is the result of the growth of the
number of active customers both before the acquisition and as a result of the acquisition. While we continually seek new opportunities within our existing customers, we expect more growth to come from new customers, leading to increased customer
diversification.



GROSS PROFIT



Gross profit for the third quarter and the first three quarters of 2005 and 2004 was as
follows:



|              |  |               |       |      |                |          |  |     |      |  |      |       |          |   |       |  |     |  
|------------- |  | ------------- | ----- | ---- | -------------- | -------- |  | --- | ---- |  | ---- | ----- | -------- | - | ----- |  | --- | -
|              |  | Third Quarter |       |      | Three Quarters |         
|($ thousands) |  | 2005          |       | 2004 |                | % Change |  |     | 2005 |  | 2004 |       | % Change |  
|Total company |  | $             | 3,092 |      | $              | 1,525    |  | 103 | %    |  | $    | 6,758 |          | $ | 6,477 |  | 4   | %
|Product       |  |               | 1,528 |      |                | 1,160    |  | 32  | %    |  |      | 2,962 |          |   | 4,868 |  | -39 | %
|Service       |  |               | 1,564 |      |                | 365      |  | 328 | %    |  |      | 3,796 |          |   | 1,609 |  | 136 | %



The gross profit margin percentages
for 2005 and 2004 were as follows:



|              |  |               |   |  |                |   |  |      |   |  |      |  
|------------- |  | ------------- | - |  | -------------- | - |  | ---- | - |  | ---- | -
|              |  | Third Quarter |   |  | Three Quarters |  
|              |  | 2005          |   |  | 2004           |   |  | 2005 |   |  | 2004 |  
|Total company |  | 22            | % |  | 17             | % |  | 24   | % |  | 24   | %
|Product       |  | 13            | % |  | 15             | % |  | 13   | % |  | 21   | %
|Service       |  | 62            | % |  | 30             | % |  | 57   | % |  | 37   | %



The vast majority of the increase in
gross profit dollars on product sales in the third quarter came from the customers we acquired in the GNP acquisition. The gross profit dollars on existing product customers would have been slightly higher in the quarter. For the three quarters,
gross profit dollars on product sales are lower due to the lower sales volume and a lower margin mix of products than in 2004.



The increase in gross profit dollars on service sales in both the third quarter and the first three quarters of 2005 are attributable mostly to the growth in service
sales and the addition of the



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acquired customers. The increase in sales volumes led to a significant increase in operating leverage compared to the 2004 periods, resulting in higher
margin percentage on service sales.



We expect our gross profit dollars to
increase as a result of the expected increases in sales. Gross margin percentages vary from program to program, and results vary from quarter to quarter due to changes in the mix of program sales in a given quarter. Consequently, it is difficult to
predict how gross margin percentages will vary in the future.



OPERATING EXPENSES AND INTEREST EXPENSES



Operating expenses, including selling, general and administrative, research and development, and interest expenses for the third quarter and the first three quarters of 2005 and 2004 were as follows:



|                   |  |               |       |      |                |          |  |     |      |  |      |       |          |   |       |  |    |  
|------------------ |  | ------------- | ----- | ---- | -------------- | -------- |  | --- | ---- |  | ---- | ----- | -------- | - | ----- |  | -- | -
|                   |  | Third Quarter |       |      | Three Quarters |         
|($ thousands)      |  | 2005          |       | 2004 |                | % Change |  |     | 2005 |  | 2004 |       | % Change |  
|Operating expenses |  | $             | 2,464 |      | $              | 1,500    |  | 64  | %    |  | $    | 5,735 |          | $ | 4,940 |  | 16 | %
|Interest expense   |  |               | 87    |      |                | 24       |  | 263 | %    |  |      | 148   |          |   | 79    |  | 87 | %
|                   |  |               |       |      |                |          |  |     |      |  |      |       |          |   |       |  |    |  
|Total expense      |  |               | 2,551 |      |                | 1,524    |  | 67  | %    |  |      | 5,883 |          |   | 5,019 |  | 17 | %
|                   |  |               |       |      |                |          |  |     |      |  |      |       |          |   |       |  |    |  



For the third quarter, 76% of the
increase in operating expenses was related to the acquired operations. The balance of the increase came from expenses related to the acquisition, on-going investment in sales and marketing personnel, and profitability-based compensation, which
includes bonus and commission programs that increase and decrease with profits. Operating expenses were 17% of sales in both the 2005 and 2004 quarter.



For the three quarters, 92% of the increase in operating expenses came from the acquired operations. Operating expenses were 20% of sales in 2005, compared to 18% in
2004.



As stated in the Overview section, we intend to spend up to $1 million
over the next year starting with the fourth quarter of 2005, with approximately half of that being current expenses, to develop sales and support infrastructure, largely in the form of information technology and systems.



The increase in interest expense in the third quarter was due to the use of the line of
credit to finance the assets and liabilities of the acquisition. With our growth in the number of customers and in sales, we expect interest expense will be higher in the near future as we use the line of credit to support the additional accounts
receivable and inventory related to the higher sales.



INCOME TAXES AND NET INCOME



Income taxes for the interim periods
were computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. The effective tax rate for the third quarter and first three quarters of 2005 was 37%,
compared to 41% in the comparable periods of 2004.



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Income before taxes, income taxes and net income for the third quarter and the first three quarters of 2005 and 2004 were
as follows:



|                    |  |               |     |                |   |      |  |      |     |          |   |       |  |     |  
|------------------- |  | ------------- | --- | -------------- | - | ---- |  | ---- | --- | -------- | - | ----- |  | --- | -
|                    |  | Third Quarter |     | Three Quarters |  
|($ thousands)       |  | 2005          |     | 2004           |   | 2005 |  | 2004 |     | % Change |  
|Income before taxes |  | $             | 541 |                | $ | 1    |  | $    | 876 |          | $ | 1,458 |  | -40 | %
|Income taxes        |  |               | 202 |                |   |     |  |      | 328 |          |   | 598   |  | -45 | %
|                    |  |               |     |                |   |      |  |      |     |          |   |       |  |     |  
|Net income          |  |               | 339 |                |   | 1    |  |      | 548 |          |   | 860   |  | -36 | %
|                    |  |               |     |                |   |      |  |      |     |          |   |       |  |     |  



Earnings per share for the third
quarter and the first three quarters of 2005 and 2004 were as follows:



|                                               |  |               |           |                |   |           |  |      |           |  |   |          
|---------------------------------------------- |  | ------------- | --------- | -------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                               |  | Third Quarter |           | Three Quarters
|                                               |  | 2005          |           | 2004           |   | 2005      |  | 2004
|Basic EPS                                      |  | $             | 0.06      |                | $ | 0.00      |  | $    | 0.09      |  | $ | 0.15     
|Fully diluted EPS                              |  | $             | 0.05      |                | $ | 0.00      |  | $    | 0.09      |  | $ | 0.14     
|                                               |  |               |           |               
|Weighted average number of shares outstanding: |  |               |           |                |   |           |  |      |           |  |   |          
|Basic                                          |  |               | 5,940,957 |                |   | 5,587,377 |  |      | 5,834,297 |  |   | 5,560,779
|Fully diluted                                  |  |               | 6,319,549 |                |   | 6,079,761 |  |      | 6,266,897 |  |   | 6,116,538



The increase in net income in the
third quarter resulted from the increase in both product and service revenue, due in part to the acquired operations.



The decline in net income for the first three quarters of 2005 resulted from the decline in product revenue, the decline in profit margins on product sales, and a
reinvestment of profit in our growth programs as discussed in previous sections.



We anticipate continuing profitability in the fourth quarter of 2005 and growing annual earnings in 2006.



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LIQUIDITY AND CAPITAL RESOURCES



A summary of changes in current assets for the first three quarters is as follows:



|                     |  |         |        |          |   |          |  |     |  
|-------------------- |  | ------- | ------ | -------- | - | -------- |  | --- | -
|($ thousands)        |  | 9/30/05 |        | 12/31/04 |   | % Change | 
|Accounts receivable  |  | $       | 11,133 |          | $ | 4,398    |  | 153 | %
|Inventory            |  |         | 9,335  |          |   | 4,080    |  | 129 | %
|Other current assets |  |         | 1,093  |          |   | 903      |  | 21  | %
|                     |  |         |        |          |   |          |  |     |  
|Total                |  | $       | 21,561 |          | $ | 9,381    |  | 130 | %
|                     |  |         |        |          |   |          |  |     |  



A summary of changes in current
liabilities for the first three quarters is as follows:



|                          |  |         |        |          |   |          |  |     |  
|------------------------- |  | ------- | ------ | -------- | - | -------- |  | --- | -
|($ thousands)             |  | 9/30/05 |        | 12/31/04 |   | % Change | 
|Line of credit            |  | $       | 8,003  |          | $ | 2,525    |  | 217 | %
|Accounts payable          |  |         | 5,890  |          |   | 2,177    |  | 171 | %
|Other current liabilities |  |         | 2,352  |          |   | 517      |  | 355 | %
|                          |  |         |        |          |   |          |  |     |  
|Total                     |  | $       | 16,245 |          | $ | 5,219    |  | 211 | %
|                          |  |         |        |          |   |          |  |     |  



During the first three quarters of
2005, $4.3 million of cash was used in operating activities. Net income before depreciation and inventory reserve increases was $1.2 million. Cash was used by an increase in accounts receivable of $2.9 million and an increase in inventory of $1.1
million. Cash was generated by a decrease in prepaid expenses and other current assets of $244,000. Additional cash was used to reduce accounts payable by $1.7 million and other liabilities by $11,000. The increase in accounts receivable reflects
the higher revenue level of the third quarter of 2005 ($7.4 million in September) compared to the fourth quarter of 2004 ($3 million in December). The increased inventory total reflects purchases in the fourth quarter of 2004 to support two
multi-year customer programs that require a substantial investment in inventory. In both programs, agreements substantially reduce our risk of inventory loss and our revenue includes extra charges for carrying the inventory.



For the first three quarters of 2005, we used $214,000 of cash generated by operating
activities to purchase equipment, including computers and software. We also assumed $125,000 of cash balances in the acquisition.



We drew a net additional $5.5 million on our line of credit to provide the cash used by operations and fixed asset purchases and the acquisition.



The line of credit, which is our primary source of operational and non-operational funding,
is maintained with KeyBank N.A. (KeyBank) and is payable on demand and collateralized by substantially all of our assets. 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.



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. The line has an overall limit of



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$11,000,000 as well as a sub-limit of $5,500,000 that can be collateralized by inventory. That calculation represents the maximum amount that can be drawn on
the line of credit.



In anticipation of our acquisition of GNP, on
August 9, 2005, the terms of the bank line of credit with KeyBank were amended to reflect our near term borrowing needs and our credit risk as rated by KeyBank. The amount available under the line was increased to $11,000,000 from $6,000,000
and is due and renewable by May 15, 2007. The borrowing base calculation on September 30, 2005 was the maximum $11,000,000, resulting in an unused capacity of $ 2,997,087. As of September 30, 2005, we were not in compliance with the
Total Debt to Tangible Net Worth covenant and KeyBank granted a waiver of the covenant for the quarter ended September 30, 2005.



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 may be needed to support the future growth plans of the company. We have begun execution of an acquisition strategy that may be financed by the
issuance of additional common or preferred stock that has already been authorized by the shareholders. Those shares may be issued by approval of the Board of Directors. Acquisitions may also be financed with additional debt. Acquisitions being
evaluated provide services similar to our that are, or can be made, accretive in a short period of time; that bring large OEM customer relationships with potential additional business for the combined company (that neither company might get on their
own); and that bring resources, in terms of people, processes and/or systems, that increase the scalability of the combined businesses.



OFF-BALANCE SHEET ARRANGEMENTS



We have no off-balance sheet arrangements with any obligation under a guarantee contract, or a retained or contingent interest in assets or similar arrangement that
serves as credit, liquidity or market risk support for such assets, or any other obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument or arising out of a variable interest.



At any given point in time in the normal course of business, we have numerous
outstanding purchase orders with our vendors to purchase inventory for use in the products that we sell to our customers or to use in performing repair services for our customers. Such orders are not recorded as liabilities in our balance sheet
until the material is physically received from the vendors. We have no minimum purchase quantity requirements with any of our vendors.



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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 our Form 10-KSB for the year ended December 31, 2004 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.



For product sales, we recognize revenue upon
transference of the title to the products to the customer. For repair sales, we recognize revenue upon completion of the repair work and either shipment of the item back to the customer or, in the programs in which we also manage the customers
inventory on our site, when we return the repaired item to the customers finished goods inventory. For some repair and maintenance programs, the customer pays a flat fee that covers multiple fiscal periods. In those instances, we recognize
revenue over the fiscal periods covered by the billing on a pro-rata basis. Our inventory and logistics management programs are billed monthly, with revenue recognized upon billing. For non-recurring engineering projects, we recognize revenue on a
percentage-of-completion basis.



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 to us could be adversely affected.



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.



Various estimates were used in recording the acquisition of the assets and assumption of the liabilities of GNP Computers, Inc. Exact amounts of future payments for items
such as GNP taxes, interest and penalties, and for professional fees are not yet known. The exact amounts actually paid may be different from the estimates used in recording the transaction.



RISK FACTORS



Investors should carefully consider the risks described below before making an investment
decision. The risks and uncertainties described below are not the only ones facing the Company. Additional risks not presently known to us or that we currently believe are immaterial may also impair our business operations. If any of the following
risks actually occurs, our business, financial condition or operating results could be seriously impaired. This section should be read in conjunction with the Financial Statements and Notes thereto, and Managements Discussion and Analysis or
Plan of Operation contained in this quarterly report.



If we are unable to
compete effectively with existing or new competitors, the loss of our competitive position could result in price reductions, fewer customer orders, reduced revenues, reduced margins, reduced levels of profitability, and loss of market share. If we
are unable to



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manage our inventory, will not be able to satisfy customer demand. Our reliance on one or a few suppliers for inventory components could delay shipments and
increase our costs. Our future operating results depend on our ability to purchase a sufficient amount of components to meet the demands of our customers. Since we may order components from suppliers in advance of receipt of customer orders for our
products that include these components, we could face a material inventory risk. Our products may have quality issues that could adversely affect our sales and reputation. We are dependent on significant customers, as noted in the SALES
section above.



We depend on key employees and face competition in hiring and
retaining qualified employees. Recent and proposed regulations related to equity compensation could adversely affect our ability to attract and retain key personnel.



We expect our quarterly revenues, cash flows and operating results to fluctuate due to the large size and timing of some orders that can
materially affect our financial statements from quarter to quarter, either obscuring or presenting trends that do or do not exist. In addition, our quarterly sales have historically reflected a pattern in which a disproportionate percentage of such
quarters total sales occur in the last month and weeks and days of the quarter. This pattern also makes prediction of revenues, earnings and working capital for each financial period especially difficult and uncertain and increases the risk of
unanticipated variations in quarterly results and financial condition.



Our
stock price, like that of other technology companies, can be volatile. Our stock price can be affected by many factors such as quarterly increases or decreases in our earnings, speculation in the investment community about our financial condition or
results of operations, technological developments, or the loss of key management or technical personnel.



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|Item 3. | Controls and Procedures.
|------- | ------------------------



Based on the evaluation of the Companys disclosure controls and procedures as of the end of the period covered by this quarterly report, each of John D. Bair, the
Chief Executive Officer of the Company, and Michael R. Sayre, the Chief Financial Officer of the Company, have concluded that the Companys disclosure controls and procedures are effective in ensuring that information required to be disclosed
by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commissions rules
and forms.



There were no significant changes in the Companys internal
controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



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PART II  OTHER INFORMATION



|Item 6. | Exhibits.
|------- | ---------



Listing of Exhibits. The following is a listing of Exhibits either filed with this report or incorporated by reference:



|            |  |                                                                                                 |  |                                                                                                             
|----------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                          |  | If Incorporated by Reference, Document with which Exhibit was Previously Filed with the
SEC                 
|3(a)        |  | Amended and restated articles of incorporation.                                                 |  | Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on December 13, 1999.
|            |  |                                                                                                
|3(b)        |  | Amendments to Amended and Restated Articles of Incorporation, adopted June 26, 2000.            |  | Form SB-2 filed with the Securities and Exchange Commission September 21, 2000.                             
|            |  |                                                                                                
|3(c)        |  | Amendment to the Companys Amended and Restated Articles of Incorporation adopted May 23, 2001. |  | Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on August 13, 2001.       
|            |  |                                                                                                
|3(d)        |  | Amended and Restated Code of Regulations.                                                       |  | Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on December 13, 1999.
|            |  |                                                                                                
|3(e)        |  | Amendment to Amended and Restated Code of Regulations.                                          |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 30, 2000.           
|            |  |                                                                                                
|3(f)        |  | Amendments to Amended and Restated Code of Regulations, adopted June 26, 2000.                  |  | Form SB-2 filed with the Securities and Exchange Commission September 21, 2000.                             
|            |  |                                                                                                
|4           |  | Instruments defining the rights of security holders, including indentures.                      |  | Form SB-2 filed with the Securities and Exchange Commission September 21, 2000.                             



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|            |  |                                                                                                                                                                                           |  |                                                                                            
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                    |  | If Incorporated by Reference, Document with which Exhibit was Previously Filed with the
SEC
|10(ah)      |  | Industrial/Commercial Lease Agreement Between GNP Computers, Inc. and Foothill Technology Center, LLC dated January 17, 2003 (Assumed by Pinnacle Data Systems, Inc. on August 15,
2005.) |  | Contained herein.                                                                          
|            |  |                                                                                                                                                                                          
|10(ai)      |  | Third Amendment to Loan Agreement and Allonge to Promissory Note between KeyBank, NA. and Pinnacle Data Systems, Inc., dated August 9, 2005.                                              |  | Contained herein.                                                                          
|            |  |                                                                                                                                                                                          
|10(aj)      |  | Asset Purchase Agreement between Pinnacle Data Systems, Inc. and GNP Computers, Inc. and Roger Baar, dated August 12, 2005.                                                               |  | Contained herein.                                                                          
|            |  |                                                                                                                                                                                          
|31(a)       |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Quarterly Report on Form 10-QSB of Pinnacle Data Systems, Inc. for the quarter ended September 30, 2005.       |  | Contained herein.                                                                          
|            |  |                                                                                                                                                                                          
|31(b)       |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Quarterly Report on Form 10-QSB of Pinnacle Data Systems, Inc. for the quarter ended September 30, 2005.       |  | Contained herein.                                                                          



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|            |  |                                                                                                                                                                                     |  |                                                                                            
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                              |  | If Incorporated by Reference, Document with which Exhibit was Previously Filed with the
SEC
|32(a)       |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Quarterly Report on Form 10-QSB of Pinnacle Data Systems, Inc. for the quarter ended September 30,
2005. |  | Contained herein.                                                                          
|            |  |                                                                                                                                                                                    
|32(b)       |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Quarterly Report on Form 10-QSB of Pinnacle Data Systems, Inc. for the quarter ended September 30, 2005. |  | Contained herein.                                                                          



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SIGNATURES



In accordance with the requirements of
the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                        |  |  |  |                                                                       
|----------------------- |  |  |  | ----------------------------------------------------------------------
|                        |  |  |  |                                                                       
|                        |  |  |  | PINNACLE DATA SYSTEMS, INC.                                           
|                        |  | 
|Date: November 14, 2005 |  |  |  | /s/    MICHAEL R. SAYRE                                               
|                        |  |  |  | Michael R. Sayre, Executive Vice President and Chief Financial Officer
|                        |  | 
|Date: November 14, 2005 |  |  |  | /s/    THOMAS J. CARR                                                 
|                        |  |  |  | Thomas J. Carr, Controller                                            



31