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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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



For the quarterly period ended March 27, 2004



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



For the transition period from
 to



Commission file number: 1-16103



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PINNACLE DATA SYSTEMS, INC.

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



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Ohio                                                           |  | 31-1263732                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



6600 Port Road,
Groveport, Ohio 43125

(Address of principal executive offices)



(614) 748-1150

(Issuers Telephone Number)



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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                     5,547,796 common shares, without par value, as of May 12, 2004.



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

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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



BALANCE SHEETS



|                                                                                      |  |               |            |                  |   |          
|------------------------------------------------------------------------------------- |  | ------------- | ---------- | ---------------- | - | ---------
|                                                                                      |  | March 27,2004 |            | December 31,2003
|                                                                                      |  | (Unaudited)   |            |                 
|ASSETS                                                                                |  |               |            |                  |   |          
|                                                                                      |  |              
|CURRENT ASSETS                                                                        |  |               |            |                  |   |          
|Cash                                                                                  |  | $             | 53,063     |                  | $ | 48,345   
|Accounts receivable, net of allowance for doubtful accounts of $20,000                |  |               | 5,394,617  |                  |   | 5,126,632
|Inventory                                                                             |  |               | 3,124,633  |                  |   | 2,023,434
|Prepaid expenses                                                                      |  |               | 340,656    |                  |   | 197,270  
|Deferred income taxes                                                                 |  |               | 428,000    |                  |   | 428,000  
|                                                                                      |  |               |            |                  |   |          
|                                                                                      |  |               | 9,340,969  |                  |   | 7,823,681
|                                                                                      |  |               |            |                  |   |          
|PROPERTY AND EQUIPMENT                                                                |  |               |            |                  |   |          
|Leasehold improvements                                                                |  |               | 231,141    |                  |   | 226,693  
|Furniture and fixtures                                                                |  |               | 331,991    |                  |   | 331,991  
|Computer equipment and related software                                               |  |               | 2,300,218  |                  |   | 2,264,719
|Shop equipment                                                                        |  |               | 496,628    |                  |   | 494,857  
|                                                                                      |  |               |            |                  |   |          
|                                                                                      |  |               | 3,359,978  |                  |   | 3,318,260
|Less accumulated depreciation and amortization                                        |  |               | 2,373,908  |                  |   | 2,232,379
|                                                                                      |  |               |            |                  |   |          
|                                                                                      |  |               | 986,070    |                  |   | 1,085,881
|                                                                                      |  |               |            |                  |   |          
|OTHER ASSETS                                                                          |  |               |            |                  |   |          
|Deposits                                                                              |  |               | 20,385     |                  |   | 20,385   
|License agreement, less accumulated amortization of $36,111 and $32,595, respectively |  |               | 6,089      |                  |   | 9,606    
|                                                                                      |  |               |            |                  |   |          
|                                                                                      |  |               | 26,474     |                  |   | 29,991   
|                                                                                      |  |               |            |                  |   |          
|                                                                                      |  |              
|                                                                                      |  | $             | 10,353,513 |                  | $ | 8,939,553
|                                                                                      |  |               |            |                  |   |          



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



2



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



BALANCE SHEETS



|                                                                                                                              |  |               |            |                  |   |          
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ---------------- | - | ---------
|                                                                                                                              |  | March 27,2004 |            | December 31,2003
|                                                                                                                              |  | (Unaudited)   |            |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                          |  |               |            |                  |   |          
|                                                                                                                              |  |              
|CURRENT LIABILITIES                                                                                                           |  |               |            |                  |   |          
|Line of credit                                                                                                                |  | $             | 1,888,015  |                  | $ | 2,486,566
|Accounts payable                                                                                                              |  |               | 3,060,477  |                  |   | 1,902,047
|Accrued expenses:                                                                                                             |  |               |            |                  |   |          
|Wages, payroll taxes and benefits                                                                                             |  |               | 526,090    |                  |   | 351,778  
|Income taxes                                                                                                                  |  |               | 232,202    |                  |   | 7,379    
|Other                                                                                                                         |  |               | 167,715    |                  |   | 100,953  
|Unearned revenue                                                                                                              |  |               | 24,730     |                  |   |         
|                                                                                                                              |  |               |            |                  |   |          
|                                                                                                                              |  |               | 5,899,229  |                  |   | 4,848,723
|                                                                                                                              |  |               |            |                  |   |          
|LONG-TERM LIABILITIES                                                                                                         |  |               |            |                  |   |          
|Deferred income taxes                                                                                                         |  |               | 55,000     |                  |   | 55,000   
|                                                                                                                              |  |               |            |                  |   |          
|                                                                                                                              |  |               | 5,954,229  |                  |   | 4,903,723
|                                                                                                                              |  |               |            |                  |   |          
|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; 5,540,796 and 5,539,796 shares issued and outstanding, respectively |  |               | 2,173,271  |                  |   | 2,172,281
|Additional paid-in capital                                                                                                    |  |               | 502,095    |                  |   | 502,095  
|Retained earnings                                                                                                             |  |               | 1,723,918  |                  |   | 1,361,454
|                                                                                                                              |  |               |            |                  |   |          
|                                                                                                                              |  |               | 4,399,284  |                  |   | 4,035,830
|                                                                                                                              |  |               |            |                  |   |          
|                                                                                                                              |  | $             | 10,353,513 |                  | $ | 8,939,553
|                                                                                                                              |  |               |            |                  |   |          



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



3



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



STATEMENTS OF INCOME



Quarters Ended March
27, 2004 and March 29, 2003



|                                  |  |      |           |      |   |          
|--------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                  |  | 2004 |           | 2003
|SALES                             |  |      |           |      |   |          
|Product sales                     |  | $    | 5,429,462 |      |   | 2,202,876
|Service sales                     |  |      | 1,618,210 |      |   | 1,956,281
|                                  |  |      |           |      |   |          
|                                  |  |      | 7,047,672 |      |   | 4,159,157
|                                  |  |      |           |      |   |          
|COST OF SALES                     |  |      |           |      |   |          
|Product sales                     |  |      | 3,846,742 |      |   | 1,759,689
|Service sales                     |  |      | 923,843   |      |   | 1,159,549
|                                  |  |      |           |      |   |          
|                                  |  |      | 4,770,585 |      |   | 2,919,238
|                                  |  |      |           |      |   |          
|GROSS PROFIT                      |  |      | 2,277,087 |      |   | 1,239,919
|                                  |  |     
|OPERATING EXPENSES                |  |      | 1,641,482 |      |   | 1,094,415
|                                  |  |      |           |      |   |          
|INCOME FROM OPERATIONS            |  |      | 635,605   |      |   | 145,504  
|                                  |  |      |           |      |   |          
|OTHER EXPENSE                     |  |      |           |      |   |          
|Interest expense                  |  |      | 22,141    |      |   | 22,401   
|                                  |  |      |           |      |   |          
|INCOME BEFORE INCOME TAXES        |  |      | 613,464   |      |   | 123,103  
|                                  |  |     
|INCOME TAX EXPENSE                |  |      | 251,000   |      |   | 48,000   
|                                  |  |      |           |      |   |          
|NET INCOME                        |  | $    | 362,464   |      | $ | 75,103   
|                                  |  |      |           |      |   |          
|BASIC EARNINGS PER COMMON SHARE   |  | $    | 0.07      |      | $ | 0.01     
|                                  |  |      |           |      |   |          
|DILUTED EARNINGS PER COMMON SHARE |  | $    | 0.06      |      | $ | 0.01     
|                                  |  |      |           |      |   |          



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



4



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



STATEMENTS OF CASH FLOWS



Quarters Ended
March 27, 2004 and March 29, 2003



|                                                                                  |  |      |            |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | -------- | -
|                                                                                  |  | 2004 |            |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |      |            |   |      |   |          |  
|Net income                                                                        |  | $    | 362,464    |   |      | $ | 75,103   |  
|                                                                                  |  |      |            |   |      |   |          |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |            |   |      |   |          |  
|Depreciation and amortization                                                     |  |      | 145,046    |   |      |   | 140,876  |  
|Inventory reserves                                                                |  |      | 51,036     |   |      |   | 53,059   |  
|(Increase)/decrease in assets:                                                    |  |      |            |   |      |   |          |  
|Accounts receivable                                                               |  |      | (267,985   | ) |      |   | (585,455 | )
|Inventory                                                                         |  |      | (1,168,230 | ) |      |   | 104,227  |  
|Prepaid expenses and other assets                                                 |  |      | (143,386   | ) |      |   | 76,591   |  
|Increase/(decrease) in liabilities:                                               |  |      |            |   |      |   |          |  
|Accounts payable                                                                  |  |      | 1,158,430  |   |      |   | 329,684  |  
|Accrued expenses and taxes                                                        |  |      | 465,897    |   |      |   | (154,840 | )
|Unearned revenues                                                                 |  |      | 24,730     |   |      |   |         |  
|                                                                                  |  |      |            |   |      |   |          |  
|Total adjustments                                                                 |  |      | 265,538    |   |      |   | (35,858  | )
|                                                                                  |  |      |            |   |      |   |          |  
|Net cash provided by operating activities                                         |  |      | 628,002    |   |      |   | 39,245   |  
|                                                                                  |  |      |            |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |      |            |   |      |   |          |  
|Purchases of property and equipment                                               |  |      | (25,723    | ) |      |   | (12,409  | )
|                                                                                  |  |      |            |   |      |   |          |  
|Net cash used in investing activities                                             |  |      | (25,723    | ) |      |   | (12,409  | )
|                                                                                  |  |      |            |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |      |            |   |      |   |          |  
|Net change in line of credit                                                      |  |      | (598,551   | ) |      |   | 229,737  |  
|Principal payments on long-term debt                                              |  |      |           |   |      |   | (33,333  | )
|Principal payments on capital lease obligation                                    |  |      |           |   |      |   | (6,207   | )
|Proceeds from stock options exercised                                             |  |      | 990        |   |      |   |         |  
|                                                                                  |  |      |            |   |      |   |          |  
|Net cash provided by/(used) in financing activities                               |  |      | (597,561   | ) |      |   | 190,197  |  
|                                                                                  |  |      |            |   |      |   |          |  



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



5



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



STATEMENTS OF CASH FLOWS (CONTINUED)



Quarters Ended March 27, 2004 and March 29, 2003



|                                                                                                      |  |      |        |      |   |        
|----------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | -------
|                                                                                                      |  | 2004 |        | 2003
|INCREASE IN CASH                                                                                      |  |      | 4,718  |      |   | 217,033
|                                                                                                      |  |     
|CASH - Beginning of quarter                                                                           |  |      | 48,345 |      |   | 35,705 
|                                                                                                      |  |      |        |      |   |        
|CASH - End of quarter                                                                                 |  | $    | 53,063 |      | $ | 252,738
|                                                                                                      |  |      |        |      |   |        
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                                      |  |      |        |      |   |        
|Interest paid                                                                                         |  | $    | 22,097 |      | $ | 14,774 
|                                                                                                      |  |      |        |      |   |        
|Income taxes paid, net of refunds                                                                     |  | $    | 27,800 |      | $ | 63,500 
|                                                                                                      |  |      |        |      |   |        
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONS                               |  |      |        |      |   |        
|                                                                                                      | 
|During the first quarter of 2004, the Company capitalized $15,995 of inventory as computer equipment. |  |      |       
|                                                                                                      | 
|During the first quarter of 2003, the Company capitalized $5,480 of inventory as computer equipment.  |  |      |       



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



6



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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 products and technical services, encompassing the development and production of embedded (built-in) computer systems and components,
and the testing and repair of computer systems, components and peripherals, to Original Equipment Manufacturers (OEMs) in, among others, the aerospace computer, computer peripheral, data storage, digital-imaging, medical diagnostic, process-control,
and telecommunications equipment industries. PDSi offers a full range of 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.



Note 2. Summary of Significant Accounting Policies



The Company divides its fiscal calendar into 4 periods or quarters. It is intended that each quarter consist of thirteen weeks. The first quarter of each year
begins on January 1 and the fourth quarter ends on December 31. Depending on what day of the week January 1 falls, the first quarter may contain a few days less than thirteen full weeks and the fourth quarter may contain a few days more than
thirteen full weeks. The first quarter of 2004 ended on March 27 and contained 87 days. The first quarter of 2003 ended on March 29 and contained 88 days.



The balance sheets as of March 27, 2004 and December 31, 2003, and the statements of income and cash flows for the quarters ended March 27, 2004 and March 29, 2003 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.



7



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



Note 2. Summary of Significant Accounting Policies (continued)



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, 2003
annual report on Form 10-KSB. The results of operations for the period ended March 27, 2004 are not necessarily indicative of the results for the full year.



SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances), many of which were previously classified as equity. SFAS No. 150 is effective for interim periods beginning after June 15, 2003. In its October 2003 meeting, the FASB
decided to defer the effective date of certain provisions of SFAS No. 150. Management does not expect the adoption of this accounting pronouncement to have a material impact on the Companys consolidated financial statements.



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 is not expected to have a
material impact on the Companys consolidated financial statements.



8



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



Note 3. Stock Options



During the quarter ended March 27, 2004, the Companys stock options activity and weighted average exercise prices were as follows:



|                               |  |           |  |               |     
|------------------------------ |  | --------- |  | ------------- | ----
|                               |  | Shares    |  | ExercisePrice
|Outstanding, December 31, 2003 |  | 1,460,500 |  | $             | 1.91
|Granted                        |  | 25,000    |  |               | 1.90
|Exercised                      |  | 1,000     |  |               | 0.99
|Forfeited                      |  | 11,350    |  |               | 3.49
|                               |  |           |  |               |     
|Outstanding, March 27, 2004    |  | 1,473,150 |  | $             | 1.90
|                               |  |           |  |               |     



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 quarter of 2004 because all stock options were granted at an exercise price equal to 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 quarter ending March 27, 2004 would have been as follows:



|                                                                                                                                  |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                                                  |  | 2004 |         |   | 2003 |  
|Net income, as reported                                                                                                           |  | $    | 362,464 |   |      | $ | 75,103  |  
|Deduct: total stock-based compensation expense determined under the fair value method for all awards, net of related tax
benefits |  |      | (73,562 | ) |      |   | (20,447 | )
|                                                                                                                                  |  |      |         |   |      |   |         |  
|Net income, pro forma                                                                                                             |  | $    | 288,902 |   |      | $ | 54,626  |  
|                                                                                                                                  |  |      |         |   |      |   |         |  
|Earnings per common share, basic:                                                                                                 |  |      |         |   |      |   |         |  
|As reported                                                                                                                       |  | $    | 0.07    |   |      | $ | 0.01    |  
|Pro forma                                                                                                                         |  | $    | 0.05    |   |      | $ | 0.01    |  
|Earnings per common share, diluted                                                                                                |  |      |         |   |      |   |         |  
|As reported                                                                                                                       |  | $    | 0.06    |   |      | $ | 0.01    |  
|Proforma                                                                                                                          |  | $    | 0.05    |   |      | $ | 0.01    |  



9



---

PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



Note 3. Stock Options (continued)



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 quarter:



|                                        |  |       |  
|--------------------------------------- |  | ----- | -
|Risk-free interest rate                 |  | 4.41  | %
|Dividend yield                          |  | 0     | %
|Volatility factor                       |  | 84.05 | %
|Weighted average expected life in years |  | 9.0   |  



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. Profit Sharing and 401(k) Savings Plan



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



The Company, at its discretion, may match up to 100% of employee contributions up to 6% of wages deferred with an annual maximum contribution of $4,500 per employee. The
Company elected to make a 15% match of employee contributions in the first quarter of 2004 in the amount of approximately $9,000. The Company elected not to make matching contributions for the first quarter of 2003.



10



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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 March 27, 2004
|                                                                |  | Income(Numerator)                    |         | Shares (Denominator) |           | Per-ShareAmount
|Basic EPS                                                       |  |                                      |         |                      |           |                 |   |     
|Income available to common shareholders                         |  | $                                    | 362,464 |                      | 5,540,244 |                 | $ | 0.07
|                                                                |  |                                      |        
|Effect of Dilutive securities                                   |  |                                      |         |                      |           |                 |   |     
|Options                                                         |  |                                      |         |                      | 449,786   |                 |   |     
|                                                                |  |                                      |         |                      |           |                 |   |     
|Diluted EPS                                                     |  |                                      |         |                      |           |                 |   |     
|Income available to common stockholders and assumed conversions |  | $                                    | 362,464 |                      | 5,990,030 |                 | $ | 0.06
|                                                                |  |                                      |         |                      |           |                 |   |     
|                                                                | 
|                                                                |  | For the Quarter Ended March 29, 2003
|                                                                |  | Income(Numerator)                    |         | Shares (Denominator) |           | Per-ShareAmount
|Basic EPS                                                       |  |                                      |         |                      |           |                 |   |     
|Income available to common shareholders                         |  | $                                    | 75,103  |                      | 5,518,870 |                 | $ | 0.01
|                                                                |  |                                      |        
|Effect of Dilutive securities                                   |  |                                      |         |                      |           |                 |   |     
|Options                                                         |  |                                      |         |                      | 221,227   |                 |   |     
|                                                                |  |                                      |         |                      |           |                 |   |     
|Diluted EPS                                                     |  |                                      |         |                      |           |                 |   |     
|Income available to common stockholders and assumed conversions |  | $                                    | 75,103  |                      | 5,740,097 |                 | $ | 0.01
|                                                                |  |                                      |         |                      |           |                 |   |     





11



---

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.



|                              |  |                              |           |               |       |           |  |   |           |   |  |   |           
|----------------------------- |  | ---------------------------- | --------- | ------------- | ----- | --------- |  | - | --------- | - |  | - | ----------
|                              |  | Quarter Ended March 27, 2004 |           |               | Total
|                              |  | ProductSales                 |           | Service Sales |       | Other     |  |  
|Sales                         |  | $                            | 5,429,462 |               | $     | 1,618,210 |  | $ |          |   |  | $ | 7,047,672 
|Gross profit                  |  |                              | 1,582,720 |               |       | 694,367   |  |   |          |   |  |   | 2,277,087 
|Income from operations        |  |                              | 1,067,353 |               |       | 268,601   |  |   | (700,349  | ) |  |   | 635,605   
|Depreciation and amortization |  |                              | 70,034    |               |       | 30,009    |  |   | 45,002    |   |  |   | 145,045   
|Interest expense              |  |                              |          |               |       |          |  |   | 22,141    |   |  |   | 22,141    
|Total assets                  |  |                              | 7,215,553 |               |       | 1,099,014 |  |   | 2,038,946 |   |  |   | 10,353,513
|Capital expenditures          |  |                              | 34,084    |               |       | 7,634     |  |   |          |   |  |   | 41,718    
|                              |  |                             
|                              |  | Quarter Ended March 29, 2003 |           |               | Total
|                              |  | ProductSales                 |           | Service Sales |       | Other     |  |  
|Sales                         |  | $                            | 2,202,876 |               | $     | 1,956,281 |  | $ |          |   |  | $ | 4,159,157 
|Gross profit                  |  |                              | 443,187   |               |       | 796,732   |  |   |          |   |  |   | 1,239,919 
|Income from operations        |  |                              | 94,617    |               |       | 442,008   |  |   | (391,120  | ) |  |   | 145,505   
|Depreciation and amortization |  |                              | 58,987    |               |       | 31,587    |  |   | 50,302    |   |  |   | 140,876   
|Interest expense              |  |                              |          |               |       |          |  |   | 22,401    |   |  |   | 22,401    
|Total assets                  |  |                              | 3,148,452 |               |       | 2,861,001 |  |   | 1,518,899 |   |  |   | 7,528,352 
|Capital expenditures          |  |                              | 12,465    |               |       | 5,424     |  |   |          |   |  |   | 17,889    



12



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



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



This quarterly report, including the following
sections contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, anticipate, estimate, project, and similar
expressions identify forward-looking statements that speak only as of the date thereof. Investors are cautioned that such statements involve risks and uncertainties that could cause actual results to differ materially from historical or anticipated
results due to many factors. Such factors include, but are not limited to, adverse changes in general economic conditions, including adverse changes in the specific markets for our products and services, adverse business conditions, decreased or
lack of growth in the computing industry, adverse changes in customer order patterns, including any decline or change in product orders from large customers like the six customers that make up approximately 79% of our revenue during the first
quarter of 2004, increased competition, any adverse change in our business or our relationship with major technology partners, around whose computing platforms a large portion of our business are based, lack of acceptance of new products, pricing
pressures, lack of adequate financing to take advantage of business opportunities that may arise, lack of success in technological advancements, risks associated with our new business practices, processes and information systems, and other factors.



The following discussions and analyses are for the quarter ended March 27,
2004 compared to the quarter ended March 29, 2003.



OVERVIEW



Pinnacle Data Systems, Inc.
(PDSi or the Company) provides products and technical services, encompassing the development and production of embedded (built-in) computer systems and components, and the testing and repair of computer systems, components
and peripherals, to Original Equipment Manufacturers (OEMs) in, among others, the aerospace computer, computer peripheral, data storage, digital-imaging, medical diagnostic, process-control, and telecommunications equipment industries. PDSi offers a
full range of 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. Our business model is a foundation of electronics repair and logistics programs (Services) that provide resources for the development and sale of high-potential PDSi-engineered
and manufactured embedded hardware solutions for specific customers and niche-industry applications (Products).



In 2003, we focused our product development efforts on products with the highest potential for profitable sales during the economic recovery period (predominantly
customer-specific products) and cultivated long-term business relationships to provide product opportunities well into the future. In recognition of our technical expertise with Intel Corporation (Intel) products, we were awarded Intel Premier
Provider status in 2003. This immediately led to new product opportunities; some leveraging our Sun SPARC expertise by requiring the integration of the two companies technologies. Our broad engineering capabilities also landed us an agreement
to be



13



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the North American Reseller for Agilents Remote Management Diagnostics products; a relationship that resulted in
significant revenues in 2003 and that we expect to take to new levels in 2004 and beyond. As the economy expands and capital spending increases, sales of products we design and manufacture represent our largest opportunity for growth.



We have continued to devote significant effort to growing our service base by expanding the
number of active programs with both current and new Fortune Global 500 technology OEM customers. For example, successful repair programs for Hewlett-Packard (H-P) servers and tape library equipment over the past two years led to the award of
additional business in 2003, including the assembling and testing of new tape library units for H-P. We were also awarded a 2003 Sun Microsystems (Sun) Supplier Award for Meritorious Performance based on the repair service levels we provide Sun,
raising our status as a preferred supplier for additional Sun repair programs. This award already helped win additional Sun repair work in the first quarter of 2004.



We exited 2003 with improved top and bottom lines and entered 2004 with:



more large customers actively ordering products than at any other time in our history,



more direct referrals from Fortune Global 500 stalwarts in the computer industry than at any
time in our history,



more in-house experience selling and closing business
through these kinds of partnerships, and



more award-winning technical
capabilities than at any time in our history.



For the full year of 2004, we
expect increased sales in both products and services and continued profitability to result from our rather modest, but very effective, spending in marketing and sales of the past few years. To fuel additional growth in 2004 and beyond, our plans
include increasing our visibility in the marketplace by increasing the size of our marketing and sales team and making investments in our delivery infrastructure as required. Our past efforts have only begun to tap into the large markets for our
services and products.



On the product side of the business, our marketing and
sales efforts will continue to be on original equipment manufacturers (OEMs) in the medical diagnostic, commercial imaging, process control and telecommunications equipment industries-all very large markets that show definite signs of recovery. In
addition, we will aggressively market Agilents remote diagnostics products, which are generating interest in new design and build programs with both current and prospective OEM customers.



SALES



Sales for the first quarter of 2004 and 2003 were as follows:



|              |  |      |       |      |   |          |  |     |  
|------------- |  | ---- | ----- | ---- | - | -------- |  | --- | -
|($ thousands) |  | 2004 |       | 2003 |   | % Change | 
|Total company |  | $    | 7,048 |      | $ | 4,159    |  | 69  | %
|Product       |  |      | 5,430 |      |   | 2,203    |  | 146 | %
|Service       |  |      | 1,618 |      |   | 1,956    |  | -17 | %



14



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Product sales in the first quarter of 2004 were up 146% from the comparable period in 2003, as medical diagnostic,
digital imaging, remote management diagnostic, aerospace and telecommunications product shipments improved significantly over 2003. Current bookings, including a $4 million telecommunication order, are expected to result in record sales and
continued strong earnings for the second quarter. However, most of our customers continue to place orders or forecast requirements for only about three months at any given time, which continues to make it difficult to forecast product sales beyond
one quarter.



Service sales in the first quarter of 2004 resumed a sequential
quarter upward trend from $1.3 million in the fourth quarter of 2003, however, representing a 17% decrease from approximately $2.0 million for the first quarter in 2003. In the first half of 2003, the overlapping of significant in-coming and
out-going Hewlett-Packard Company repair programs were producing quarterly record service sales.



For the first quarter of 2004, the Company had four customers that generated revenues of approximately $2,108,000, $907,000, $712,000, and $693,000 or 30%, 13%, 10%, and 10% respectively, of total revenue. In the
statements of income, approximately $1,478,000 of the revenues from these customers is included in service sales and $2,935,000 is included in product sales. In addition, these customers represented 35%, 11%, 10%, and 4%, respectively, of accounts
receivable at March 27, 2004.



GROSS PROFIT



Gross profit for the first quarter of 2004 and 2003 was as follows:



|              |  |      |       |      |   |          |  |     |  
|------------- |  | ---- | ----- | ---- | - | -------- |  | --- | -
|($ thousands) |  | 2004 |       | 2003 |   | % Change | 
|Total company |  | $    | 2,277 |      | $ | 1,240    |  | 84  | %
|Product       |  |      | 1,583 |      |   | 443      |  | 257 | %
|Service       |  |      | 694   |      |   | 797      |  | -13 | %



The gross profit margin percentages
for 2004 and 2003 were as follows:



|              |  |      |   |  |      |  
|------------- |  | ---- | - |  | ---- | -
|              |  | 2004 |   |  | 2003 |  
|Total company |  | 32   | % |  | 30   | %
|Product       |  | 29   | % |  | 20   | %
|Service       |  | 43   | % |  | 41   | %



The gross profit margin percentage on
products increased in the 2004 quarter from the 2003 quarter on the increase in volume and the more profitable mix of products shipped in 2004. The improvement in the service sales gross profit margin reflects the fact that, while the overlapping of
repair programs in 2003 resulted in higher sales volume, the beginning and ending of those programs resulted in incremental costs that reduced margin percentages.



15



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OPERATING EXPENSES AND INTEREST EXPENSES



Operating expenses, including selling, general and administrative (SG&A), and research
and development (R&D), and interest expenses for the first quarter of 2004 and 2003 were as follows:



|                   |  |      |       |      |   |          |  |    |  
|------------------ |  | ---- | ----- | ---- | - | -------- |  | -- | -
|($ thousands)      |  | 2004 |       | 2003 |   | % Change | 
|Operating expenses |  | $    | 1,642 |      | $ | 1,094    |  | 50 | %
|Interest expense   |  |      | 22    |      |   | 22       |  | 0  | %
|                   |  |      |       |      |   |          |  |    |  
|Total expense      |  |      | 1,664 |      |   | 1,116    |  | 49 | %
|                   |  |      |       |      |   |          |  |    |  



For the first quarter of, 2004,
operating expenses, including selling, general and administrative (SG&A) expenses, increased due to costs directly tied to our increasing sales and profitability and investment in the companys growth. In the first quarter of 2004,
operating expenses were 72% of gross profit generated compared to 88% in the first quarter of 2003.



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 first quarter of 2004 was 41%, compared to 39% in 2003.



Income before taxes, income taxes and net income for the first quarter of 2004 and 2003 were as follows:



|                           |  |      |     |      |   |          |  |     |  
|-------------------------- |  | ---- | --- | ---- | - | -------- |  | --- | -
|($ thousands)              |  | 2004 |     | 2003 |   | % Change | 
|Income before income taxes |  | $    | 613 |      | $ | 123      |  | 398 | %
|Income taxes               |  |      | 251 |      |   | 48       |  | 423 | %
|                           |  |      |     |      |   |          |  |     |  
|Net income                 |  | $    | 362 |      | $ | 75       |  | 383 | %
|                           |  |      |     |      |   |          |  |     |  



Earnings per share for the first
quarter of 2004 and 2003 were as follows:



|                                               |  |      |           |      |   |           |  |     |  
|---------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | --- | -
|                                               |  | 2004 |           | 2003 |   | Change    | 
|Basic EPS                                      |  | $    | 0.07      |      | $ | 0.01      |  | 600 | %
|Fully diluted EPS                              |  | $    | 0.06      |      | $ | 0.01      |  | 500 | %
|                                               |  |      |          
|Weighted average number of shares outstanding: |  |      |           |      |   |           |  |     |  
|Basic                                          |  |      | 5,540,244 |      |   | 5,518,870 |  |     |  
|Fully diluted                                  |  |      | 5,990,030 |      |   | 5,740,097 |  |     |  



The improvement to net income in 2004
resulted directly from the increase in product sales.



16



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LIQUIDITY AND CAPITAL RESOURCES



A summary of changes in current assets for the quarter is as follows:



|                     |  |         |       |          |   |          |  |    |  
|-------------------- |  | ------- | ----- | -------- | - | -------- |  | -- | -
|($ thousands)        |  | 3/27/04 |       | 12/31/03 |   | % Change | 
|Accounts receivable  |  | $       | 5,394 |          | $ | 5,127    |  | 5  | %
|Inventory            |  |         | 3,125 |          |   | 2,023    |  | 54 | %
|Other current assets |  |         | 822   |          |   | 674      |  | 22 | %
|                     |  |         |       |          |   |          |  |    |  
|Total                |  | $       | 9,341 |          | $ | 7,824    |  | 19 | %
|                     |  |         |       |          |   |          |  |    |  



A summary of changes in current
liabilities for the quarter is as follows:



|                          |  |         |       |          |   |          |  |     |  
|------------------------- |  | ------- | ----- | -------- | - | -------- |  | --- | -
|($ thousands)             |  | 3/27/04 |       | 12/31/03 |   | % Change | 
|Line of credit            |  | $       | 1,888 |          | $ | 2,487    |  | -24 | %
|Accounts payable          |  |         | 3,060 |          |   | 1,902    |  | 61  | %
|Other current liabilities |  |         | 951   |          |   | 460      |  | 107 | %
|                          |  |         |       |          |   |          |  |     |  
|Total                     |  | $       | 5,899 |          | $ | 4,849    |  | 22  | %
|                          |  |         |       |          |   |          |  |     |  



During the first quarter of 2004,
$628,000 of cash was generated by operating activities. Net income before depreciation, and inventory reserve increases was $559,000. Additional cash was generated by increases in accounts payable of $1.2 million, and other current liabilities of
$491,000. The amount of cash generated by operating activities was reduced by an increase in accounts receivable of $268,000, an increase in inventory of $1.2 million and by an increase in prepaid expenses and other current assets of $144,000. The
increase in inventory was primarily attributable to a $4 million telecommunications order for large, complex units that require longer lead times for components and longer assembly times than most product sales. Shipments against that order started
in March and are expected to be completed by mid-year 2004. Accounts receivable increased because 56% of the quarters sales were shipped in March. The increased inventory purchases for the $4 million telecommunications order directly resulted
in the corresponding increase in accounts payable. The increased level of net income resulted in a corresponding increase to income taxes payable.



For the first quarter of 2004, we used $26,000 of cash generated by operating activities to purchase equipment, including computers and software. We also transferred
$16,000 of equipment to fixed assets from inventory.



We used the cash
generated by operations to pay down our line of credit by $599,000. However, we expect to use the line of credit to finance the additional inventory for the telecommunications order until payment is received from the customer. The terms of the order
afford protection against inventory risk.



The increase in other current assets
was primarily due to an accumulation of costs of a laboratory unit shipped in March as part of that large telecommunications order. By agreement with the customer, two laboratory units for testing and development included in the total order will be
unbilled individually, but included in the overall pricing of the other units. To properly match revenue and expenses, corresponding costs will also be allocated over the remainder of the units in the order.



17



---

The line of credit, which is our primary source of operational and non-operational funding, is maintained with KeyBank
National Association (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 $5,000,000 as well as a sub-limit of $2,500,000 that
can be collateralized by inventory. That calculation represents the maximum amount that can be drawn on the line of credit at this time. The balance on the line of credit at March 29, 2003 was $1,888,000. The borrowing base on that date was the
maximum of $5,000,000, resulting in an unused capacity (the excess of the borrowing base calculation over the amount drawn) of $3,112,000. We were in compliance with all covenants of the line for the quarter ended March 27, 2004.



On November 26, 2003, the line of credit was renewed until May 15, 2005. The maximum limit
of the line was increased to $5,000,000 from $4,000,000, and the variable interest rate was decreased to prime from prime plus .25%. The terms of the line of credit were also made less restrictive.



In order to fund working capital to fulfill the second quarter customer product orders
referenced above, on May 7, 2004, we entered into an additional 120-day $2,000,000 term loan agreement with the bank. The intent and effect of the loan was to temporarily increase the limit of the line of credit from $5,000,000 to $7,000,000. The
$2,000,000 of proceeds from the term loan was applied to the outstanding line of credit balance, reducing its balance by $2,000,000. The incremental $2,000,000 loan has the same interest rate as the line of credit. For the duration of the term loan,
the collateralization and covenants of the two loans are combined as if they were one loan facility. The $2,500,000 inventory collateral sub-limit of the line of credit was increased to $3,500,000 for the duration of the term loan.



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 are
evaluating 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
being evaluated provide services similar to those of the Company 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 would get on their own); and that bring resources, in terms of people, processes and systems, that increase the scalability of the combined businesses.



18



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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.



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.



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, 2003 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.



RISK FACTORS



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,



19



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reduced margins, reduced levels of profitability, and loss of market share. If we are unable to 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 fact that 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 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.



Business interruptions could adversely affect our
business. Environmental regulations and costs could result in significant liabilities for us. Our credit rating is subject to downgrade. Our business may suffer if it is alleged or found that we have infringed the intellectual property rights of
others.



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. In addition, general macroeconomic and market conditions unrelated to our financial performance may also affect our stock price.



20



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Item 3. Controls and Procedures



Based on the evaluation of the Companys disclosure controls and procedures as of a date within 90 days of the filing date of 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 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.



21



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PART II  OTHER INFORMATION



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



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



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



22



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|            |  |                                                                                                                                       |  |                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                |  | If Incorporated by Reference, Document with which Exhibit was Previously Filed with the
SEC                 
|10(b)*      |  | Pinnacle Data Systems, Inc. 1995 Stock Option Plan dated December 19, 1995                                                            |  | Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on December 13, 1999.
|            |  |                                                                                                                                      
|10(c)       |  | Development and manufacturing license agreement between Pinnacle Data Systems, Inc. and Sun Microsystems, Inc. dated October 27, 1997 |  | Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on December 13, 1999.
|            |  |                                                                                                                                      
|10(d)       |  | Lease agreement between Pinnacle Data Systems, Inc. and Duke Realty Limited Partnership dated March 9, 1999                           |  | Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on December 13, 1999.
|            |  |                                                                                                                                      
|10(e)       |  | Repair services agreement between Pinnacle Data Systems, Inc. and Sun Microsystems, Inc. dated March 29, 1999                         |  | Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on December 13, 1999.
|            |  |                                                                                                                                      
|10(f)       |  | Reference Design License Agreement between Pinnacle Data Systems, Inc. and Sun Microsystems, Inc. dated May 11, 1999                  |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 20, 2002.           
|            |  |                                                                                                                                      
|10(g)       |  | First Lease Amendment between Pinnacle Data Systems, Inc. and Duke Realty Limited Partnership dated January 5, 2000                   |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 30, 2000.           
|            |  |                                                                                                                                      
|10(h)*      |  | Amendment No. 1 to Pinnacle Data Systems, Inc. 1995 stock option plan dated February 16, 2000                                         |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 30, 2000.           



23



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|            |  |                                                                                                                                       |  |                                                                                                  
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                |  | If Incorporated by Reference, Document with which Exhibit was Previously Filed with the
SEC      
|10(i)*      |  | Pinnacle Data Systems, Inc. 2000 Directors Stock Option Plan dated March 22, 2000                                                     |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 30, 2000.
|            |  |                                                                                                                                      
|10(j)       |  | Business Loan Agreement between Pinnacle Data Systems, Inc. and Key Bank National Association dated August 10, 2000                   |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 30, 2001.
|            |  |                                                                                                                                      
|10(k)*      |  | Employment agreement between Pinnacle Data Systems, Inc. and John D. Bair dated January 1, 2001                                       |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 30, 2001.
|            |  |                                                                                                                                      
|10(l)       |  | O.E.M. Supply Agreement between Pinnacle Data Systems, Inc. and Alcatel USA Sourcing L.P. dated February 12, 2001                     |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 20, 2002.
|            |  |                                                                                                                                      
|10(m)       |  | Divisional Service Agreement between Pinnacle Data Systems, Inc. and Hewlett-Packard Company dated September 1, 2001                  |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 20, 2002.
|            |  |                                                                                                                                      
|10(n)       |  | Direct Connect VS Supplier Services Agreement between Pinnacle Data Systems, Inc. and Hewlett-Packard Company dated September 1, 2001 |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 20, 2002.
|            |  |                                                                                                                                      
|10(o)*      |  | Employment agreement between Pinnacle Data Systems, Inc. and C. Robert Hahn dated September 1, 2001                                   |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 20, 2002.
|            |  |                                                                                                                                      
|10(p)*      |  | Employment agreement between Pinnacle Data Systems, Inc. and Michael R. Sayre dated September 1, 2001                                 |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 20, 2002.



24



---

|            |  |                                                                                                                                           |  |                                                                                                  
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                    |  | If Incorporated by Reference, Document with which Exhibit was Previously Filed with the
SEC      
|10(q)*      |  | Employment agreement between Pinnacle Data Systems, Inc. and Christopher L. Winslow dated September 1, 2001                               |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 20, 2002.
|            |  |                                                                                                                                          
|10(r)       |  | Amendment to Promissory Note between Pinnacle Data Systems, Inc. and Key Bank National Association dated February 21, 2002                |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 20, 2002.
|            |  |                                                                                                                                          
|10(s)       |  | First Amendment Agreement to Loan Agreement between Pinnacle Data Systems, Inc. and Key Bank National Association dated February 21, 2002 |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 20, 2002.
|            |  |                                                                                                                                          
|10(t)       |  | Second Amendment Agreement to Loan Agreement between Pinnacle Data Systems, Inc. and Key Bank National Association dated March 7, 2002    |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 20, 2002.
|            |  |                                                                                                                                          
|10(u)       |  | Third Amendment Agreement to Loan Agreement between Pinnacle Data Systems, Inc. and Key Bank National Association dated April 23, 2002    |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 28, 2003.
|            |  |                                                                                                                                          
|10(v)       |  | Fourth Amendment Agreement to Loan Agreement between Pinnacle Data Systems, Inc. and Key Bank National Association dated July 31, 2002    |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 28, 2003.
|            |  |                                                                                                                                          
|10(w)       |  | OEM Technology Partner agreement between Pinnacle Data Systems, Inc. and Sun Microsystems, Inc. dated August 1, 2002                      |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 28, 2003.



25



---

|            |  |                                                                                                                                       |  |                                                                                                  
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                |  | If Incorporated by Reference, Document with which Exhibit was Previously Filed with the
SEC      
|10(x)       |  | Amendment to Supplier Services Agreement between Pinnacle Data Systems, Inc. and Hewlett-Packard Company dated November 5, 2002       |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 28, 2003.
|            |  |                                                                                                                                      
|10(y)       |  | Renewal of Loan Agreement between Pinnacle Data Systems, Inc, and Key Bank National Association dated April 1, 2003                   |  | Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on May 14, 2003
|            |  |                                                                                                                                      
|10(z)       |  | Fifth Amendment Agreement to Loan Agreement between Pinnacle Data Systems, Inc. and Key Bank National Association dated May 12, 2003. |  | Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on May 14, 2003
|            |  |                                                                                                                                      
|10(aa)      |  | Business Loan Agreement between Pinnacle Data Systems, Inc. and KeyBank National Association dated November 26, 2003.                 |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 24, 2004.
|            |  |                                                                                                                                      
|10(ab)      |  | Promissory Note between Pinnacle Data Systems, Inc. and KeyBank National Association dated November 26, 2003.                         |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 24, 2004.
|            |  |                                                                                                                                      
|10(ac)      |  | Commercial Security Agreement between Pinnacle Data Systems, Inc. and KeyBank National Association dated November 26, 2003.           |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 24, 2004.
|            |  |                                                                                                                                      
|10(ad)      |  | Libor 1 Month Exhibit between Pinnacle Data Systems, Inc. and KeyBank National Association dated November 26, 2003.                   |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 24, 2004.



26



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|            |  |                                                                                                                                                                                      |  |                                                                                                  
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                               |  | If Incorporated by Reference, Document with which Exhibit was Previously Filed with the
SEC      
|10(ae)      |  | Amendment to Loan Agreement and Allonge to Variable Rate Promissory Note between Pinnacle Data Systems, Inc. and KeyBank National Association dated November 26, 2003.               |  | Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 24, 2004.
|            |  |                                                                                                                                                                                     
|10(af)      |  | Promissory Note between Pinnacle Data Systems, Inc. and KeyBank National Association dated May 7, 2004.                                                                              |  | 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 year quarter ended March 27, 2004. |  | 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 March 27, 2004.      |  | Contained herein.                                                                                
|            |  |                                                                                                                                                                                     
|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 March 27, 2004.      |  | Contained herein.                                                                                



27



---

|            |  |                                                                                                                                                                                 |  |                                                                                            
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                          |  | If Incorporated by Reference, Document with which Exhibit was Previously Filed with the
SEC
|            |  |                                                                                                                                                                                
|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 March 27, 2004. |  | Contained herein.                                                                          



| | (B) | Reports on Form 8-K.
| | --- | --------------------



On February 20, 2004, Pinnacle Data Systems, Inc. furnished a current report on Form 8-K under Item 12 of Form 8-K reporting the issuance of a news
release on February 18, 2004 announcing its earnings for the three-month period ending December 31, 2003.



28



---

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: May 13, 2004 |  | /s/ Michael R. Sayre                                               
|                   |  | Michael Sayre, Executive Vice President and Chief Financial Officer
|                   | 
|Date: May 13, 2004 |  | /s/ Thomas J. Carr                                                 
|                   |  | Thomas J. Carr, Controller                                         



29