---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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



For the quarterly period ended September 27, 2003



| ̈ | 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)



|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 5,539,796 common shares, without par value, as of October 20, 2003.



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



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



BALANCE SHEETS



|                                                                                      |  | September 27, 2003 |           | December 31, 2002
|------------------------------------------------------------------------------------- |  | ------------------ | --------- | -----------------
|                                                                                      |  | (Unaudited)        |           |                  
|ASSETS                                                                                |  |                    |           |                  
|CURRENT ASSETS                                                                        |  |                    |           |                  
|Cash                                                                                  |  | $                  | 60,188    |                  
|Accounts receivable, net of allowance for doubtful accounts of $15,000                |  |                    | 3,500,581 |                  
|Inventory                                                                             |  |                    | 1,920,837 |                  
|Other prepaid expenses                                                                |  |                    | 142,953   |                  
|Deferred income taxes                                                                 |  |                    | 514,000   |                  
|                                                                                      |  |                    |           |                  
|                                                                                      |  |                    | 6,138,559 |                  
|                                                                                      |  |                    |           |                  
|PROPERTY AND EQUIPMENT                                                                |  |                    |           |                  
|Leasehold improvements                                                                |  |                    | 234,081   |                  
|Furniture and fixtures                                                                |  |                    | 333,260   |                  
|Computer equipment and related software                                               |  |                    | 2,341,494 |                  
|Shop equipment                                                                        |  |                    | 460,150   |                  
|                                                                                      |  |                    |           |                  
|                                                                                      |  |                    | 3,368,985 |                  
|Less accumulated depreciation and amortization                                        |  |                    | 2,175,308 |                  
|                                                                                      |  |                    |           |                  
|                                                                                      |  |                    | 1,193,677 |                  
|                                                                                      |  |                    |           |                  
|OTHER ASSETS                                                                          |  |                    |           |                  
|Deposits                                                                              |  |                    | 20,385    |                  
|License agreement, less accumulated amortization of $29,078 and $18,528, respectively |  |                    | 13,122    |                  
|                                                                                      |  |                    |           |                  
|                                                                                      |  |                    | 33,507    |                  
|                                                                                      |  |                    |           |                  
|                                                                                      |  | $                  | 7,365,743 |                  
|                                                                                      |  |                    |           |                  



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



-2-



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



BALANCE SHEETS



|                                                                                                                              |  | September 27, 2003 |           | December 31, 2002
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | -----------------
|                                                                                                                              |  | (Unaudited)        |           |                  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                          |  |                    |           |                  
|CURRENT LIABILITIES                                                                                                           |  |                    |           |                  
|Line of credit                                                                                                                |  | $                  | 1,536,774 |                  
|Current portion of long-term debt                                                                                             |  |                    |          |                  
|Current portion of capital lease obligation                                                                                   |  |                    | 4,138     |                  
|Accounts payable                                                                                                              |  |                    | 1,350,289 |                  
|Accrued expenses:                                                                                                             |  |                    |           |                  
|Wages, payroll taxes and benefits                                                                                             |  |                    | 283,497   |                  
|Income taxes                                                                                                                  |  |                    | 480       |                  
|Other                                                                                                                         |  |                    | 74,493    |                  
|Unearned revenue                                                                                                              |  |                    | 88,119    |                  
|                                                                                                                              |  |                    |           |                  
|                                                                                                                              |  |                    | 3,337,790 |                  
|                                                                                                                              |  |                    |           |                  
|LONG-TERM LIABILITIES                                                                                                         |  |                    |           |                  
|Deferred income taxes                                                                                                         |  |                    | 93,000    |                  
|                                                                                                                              |  |                    |           |                  
|                                                                                                                              |  |                    | 93,000    |                  
|                                                                                                                              |  |                    |           |                  
|                                                                                                                              |  |                    | 3,430,790 |                  
|                                                                                                                              |  |                    |           |                  
|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; 5,535,796 and 5,518,870 shares issued and outstanding,
respectively |  |                    | 2,167,656 |                  
|Additional paid-in capital                                                                                                    |  |                    | 502,095   |                  
|Retained earnings                                                                                                             |  |                    | 1,265,202 |                  
|                                                                                                                              |  |                    |           |                  
|                                                                                                                              |  |                    | 3,934,953 |                  
|                                                                                                                              |  |                    |           |                  
|                                                                                                                              |  | $                  | 7,365,743 |                  
|                                                                                                                              |  |                    |           |                  



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



-3-



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



STATEMENTS OF OPERATIONS



|                                             |  | For the Quarter Ended |           | For the Three Quarters Ended |  
|-------------------------------------------- |  | --------------------- | --------- | ---------------------------- | -
|                                             |  | September 27,2003     |           | September 28,2002            |  
|                                             |  | (unaudited)           |           | (unaudited)                  |  
|SALES                                        |  |                       |           |                              |  
|Product sales                                |  | $                     | 3,538,844 |                              | $
|Service sales                                |  |                       | 1,652,734 |                              |  
|                                             |  |                       |           |                              |  
|                                             |  |                       | 5,191,578 |                              |  
|                                             |  |                       |           |                              |  
|COST OF SALES                                |  |                       |           |                              |  
|Product sales                                |  |                       | 2,556,112 |                              |  
|Service sales                                |  |                       | 1,116,562 |                              |  
|                                             |  |                       |           |                              |  
|                                             |  |                       | 3,672,674 |                              |  
|                                             |  |                       |           |                              |  
|GROSS PROFIT                                 |  |                       | 1,518,904 |                              |  
|                                             |  |                       |           |                              |  
|OPERATING EXPENSES                           |  |                       |           |                              |  
|Selling, general and administrative          |  |                       | 1,241,355 |                              |  
|Research and development                     |  |                       | 43,758    |                              |  
|                                             |  |                       |           |                              |  
|                                             |  |                       | 1,285,113 |                              |  
|                                             |  |                       |           |                              |  
|INCOME/(LOSS) FROM OPERATIONS                |  |                       | 233,791   |                              |  
|                                             |  |                       |           |                              |  
|OTHER EXPENSE                                |  |                       |           |                              |  
|Interest expense                             |  |                       | 21,692    |                              |  
|                                             |  |                       |           |                              |  
|INCOME/(LOSS) BEFORE INCOME TAXES            |  |                       | 212,099   |                              |  
|                                             |  |                       |           |                             
|INCOME TAX EXPENSE/(BENEFIT )                |  |                       | 90,000    |                              |  
|                                             |  |                       |           |                              |  
|NET INCOME/(LOSS)                            |  | $                     | 122,099   |                              | $
|                                             |  |                       |           |                              |  
|BASIC INCOME/(LOSS) PER COMMON SHARE         |  | $                     | 0.02      |                              | $
|                                             |  |                       |           |                              |  
|FULLY DILUTED INCOME/(LOSS) PER COMMON SHARE |  | $                     | 0.02      |                              | $
|                                             |  |                       |           |                              |  



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



Three Quarters
Ended September 27, 2003 and September 28, 2002



|                                                                                         |  | 2003        |            |   | 2002        |  
|---------------------------------------------------------------------------------------- |  | ----------- | ---------- | - | ----------- | -
|                                                                                         |  | (Unaudited) |            |   | (Unaudited) |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                     |  |             |            |   |             |  
|Net income/(loss)                                                                        |  | $           | 376,286    |   |             | $
|                                                                                         |  |             |            |   |             |  
|Adjustments to reconcile net income/(loss) to net cash provided by operating activities: |  |             |            |   |             |  
|Depreciation and amortization                                                            |  |             | 429,122    |   |             |  
|Inventory reserves                                                                       |  |             | 196,311    |   |             |  
|Loss on disposal of equipment                                                            |  |             | (12,800    | ) |             |  
|(Increase)/decrease in assets:                                                           |  |             |            |   |             |  
|Accounts receivable                                                                      |  |             | (1,412,889 | ) |             |  
|Inventory                                                                                |  |             | 449,397    |   |             |  
|Prepaid expenses and other assets                                                        |  |             | 179,247    |   |             |  
|Refundable income taxes                                                                  |  |             |           |   |             |  
|Increase/(decrease) in liabilities:                                                      |  |             |            |   |             |  
|Accounts payable                                                                         |  |             | 571,367    |   |             |  
|Accrued expenses and taxes                                                               |  |             | (147,776   | ) |             |  
|Unearned revenues                                                                        |  |             | 88,119     |   |             |  
|                                                                                         |  |             |            |   |             |  
|Total adjustments                                                                        |  |             | 340,098    |   |             |  
|                                                                                         |  |             |            |   |             |  
|Net cash provided by operating activities                                                |  |             | 716,384    |   |             |  
|                                                                                         |  |             |            |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                     |  |             |            |   |             |  
|Purchases of property and equipment                                                      |  |             | (108,441   | ) |             |  
|Proceeds from sale of property and equipment                                             |  |             | 27,000     |   |             |  
|                                                                                         |  |             |            |   |             |  
|Net cash used in investing activities                                                    |  |             | (81,441    | ) |             |  
|                                                                                         |  |             |            |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                     |  |             |            |   |             |  
|Net change in line of credit                                                             |  |             | (565,095   | ) |             |  
|Principal payments on long-term debt                                                     |  |             | (33,333    | ) |             |  
|Principal payments on capital lease obligation                                           |  |             | (18,621    | ) |             |  
|Proceeds from stock options exercised                                                    |  |             | 6,000      |   |             |  
|Other proceeds from shareholders                                                         |  |             | 589        |   |             |  
|                                                                                         |  |             |            |   |             |  
|Net cash used in financing activities                                                    |  |             | (610,460   | ) |             |  
|                                                                                         |  |             |            |   |             |  



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)



Three Quarters Ended September 27, 2003 and September 28, 2002



|                                                                                  |  | 2003 |         | 2002
|--------------------------------------------------------------------------------- |  | ---- | ------- | ----
|INCREASE/(DECREASE) IN CASH                                                       |  |      | 24,483  |     
|                                                                                  |  |     
|CASH - Beginning of period                                                        |  |      | 35,705  |     
|                                                                                  |  |      |         |     
|CASH - End of period                                                              |  | $    | 60,188  |     
|                                                                                  |  |      |         |     
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                  |  |      |         |     
|Interest paid                                                                     |  | $    | 67,545  |     
|                                                                                  |  |      |         |     
|Income taxes paid, net of refunds                                                 |  | $    | 328,963 |     
|                                                                                  |  |      |         |     
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONS           |  |      |         |     
|                                                                                  |  |     
|During 2003, the company capitalized $183,514 of inventory as computer equipment. |  |      |         |     
|                                                                                  |  |     
|During 2002, the company capitalized $136,227 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 technical services and solutions, 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 computer, computer peripheral, data
storage, medical diagnostic, digital-imaging, process-control, and telecommunications equipment industries. PDSi offers a full range of services to increase product speed to market, extend product life, and 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 the day of the week that 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 third quarter of 2003 ended on September 27 and contained 91 days. The third quarter of 2002 ended on September 28 and also contained 91 days. The first three quarters of 2003
contained 270 days and the first three quarters of 2002 contained 269 days.



The balance sheet as of September 27, 2003 and the statements of operations and cash flows for the quarter and three quarters ended September 27, 2003 and September 28, 2002 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, results of operations and changes in cash flows for all periods presented have been made.



Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed and omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Companys December 31, 2002 annual report on Form
10-KSB. The results of operations for the periods ended September 27, 2003 are not necessarily indicative of the results for the full year.



-7-



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



Note 2. Summary of Significant Accounting Policies (continued)



In November 2002, the FASB issued FASB Interpretation No. 45 (FIN
45), Guarantors Accounting and Disclosure, Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN 45
clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to the guarantors accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of FIN 45 are effective
for the current fiscal year, however are not significant to the Companys consolidated financial statements. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a guarantors year-end. The Company has no outstanding guarantees.



In January 2003, the FASB issued FIN 46, 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 initial adoption of this accounting pronouncement did not have a material impact on the Companys financial statements.



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. This statement is effective for financial instruments entered into or modified after May
31, 2003 and otherwise shall be effective for the Companys financial statements as of September 27, 2003. The initial adoption of this accounting pronouncement did not have a material impact on the Companys financial statements.



Certain insignificant amounts in the 2002 financial
information have been reclassified to conform with the 2003 presentation.



-8-



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



Note 3. Stock Options



During the three quarters ended September 27, 2003, the Companys stock options activity and weighted average exercise
prices were as follows:



|                                |  | Shares    |   |  | Weighted-average Exercise Price
|------------------------------- |  | --------- | - |  | -------------------------------
|Outstanding, December 31, 2002  |  | 1,268,650 |   |  | $                              
|Granted                         |  | 20,000    |   |  | $                              
|Exercised                       |  | (28,000   | ) |  | $                              
|Forfeited                       |  | (11,050   | ) |  | $                              
|                                |  |           |   |  |                                
|Outstanding, September 27, 2003 |  | 1,249,600 |   |  | $                              
|                                |  |           |   |  |                                



The Company accounts
for employee and director stock options using the intrinsic value method. Under this method, no compensation expense was recorded for the three quarters ending September 27, 2003 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 three quarters ending September 27, 2003 would have been as follows:



|Net income, as reported                                                                                                           |  | $ | 376,286 |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | - | ------- | -
|Deduct: total stock-based compensation expense determined under the fair value method for all awards, net of related tax
benefits |  |   | (64,033 | )
|                                                                                                                                  | 
|Pro forma net income                                                                                                              |  | $ | 312,253 |  
|                                                                                                                                  | 
|Earnings per common share, basic:                                                                                                 |  |   |         |  
|As reported                                                                                                                       |  | $ | 0.07    |  
|Pro forma                                                                                                                         |  | $ | 0.06    |  
|Earnings per common share, diluted                                                                                                |  |   |         |  
|As reported                                                                                                                       |  | $ | 0.07    |  
|Proforma                                                                                                                          |  | $ | 0.05    |  



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



|Risk-free interest rate                 |  | 4.55   | %
|--------------------------------------- |  | ------ | -
|Dividend yield                          |  | 0      | %
|Volatility factor                       |  | 101.37 | %
|Weighted average expected life in years |  | 9.0    |  



-9-



---

PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



Note 4. Income Taxes



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



Note 5. Earnings Per Common
and Common Equivalent Share



Basic earnings per common
share was computed by dividing net income/(loss) by the weighted average number of shares of common stock outstanding. For diluted earnings per share, the number of common shares was increased by the number of shares issuable on the exercise of
outstanding stock options when the market price of the common stock exceeds the exercise price of the options. This increase in the number of common shares was reduced by the number of common shares that are assumed to have been purchased with the
proceeds from the exercise of the options; those purchases were assumed to have been made at the average price of the common stock during that part of the periods when the market price of the common stock exceeded the exercise price of the options.
For the three quarters ended September 28, 2002, stock options were anti-dilutive.



The following data show the amounts used in computing earnings per share (EPS) and the effect on income and the weighted-average number of shares of dilutive potential common stock for the periods ended September 27,
2003 and September 28, 2002.



|                                                                                |  | 3nd Quarter |           | Three Quarters |  
|------------------------------------------------------------------------------- |  | ----------- | --------- | -------------- | -
|                                                                                |  | 2003        |           | 2002           |  
|Income available to common stockholders used in basic and diluted EPS           |  | $           | 122,099   |                | $
|                                                                                |  |             |           |                |  
|Weighted average number of of common shares used in basic EPS                   |  |             | 5,530,030 |                |  
|                                                                                |  |             |           |               
|Effect of dilutive stock options                                                |  |             | 327,718   |                |  
|                                                                                |  |             |           |                |  
|Weighted number of common shares and dilutive stock options used in diluted EPS |  |             | 5,857,748 |                |  
|                                                                                |  |             |           |                |  



-10-



---

PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



Note 6. Operating Segments



The Other column listed below reflects items that are not allocated to segments. These items primarily represent
assets and expenses for various administrative functions within the Company.



|                              |  | Three Quarters Ended September 27, 2003 |           |               |   |          
|----------------------------- |  | --------------------------------------- | --------- | ------------- | - | ---------
|                              |  | ProductSales                            |           | Service Sales |   | Other    
|Sales                         |  | $                                       | 9,205,263 |               | $ | 5,916,805
|Gross profit                  |  |                                         | 2,245,559 |               |   | 2,118,520
|Income/(loss) from operations |  |                                         | 1,035,977 |               |   | 1,040,867
|Depreciation and amortization |  |                                         | 190,153   |               |   | 91,801   
|Interest expense              |  |                                         |          |               |   |         
|Total assets                  |  |                                         | 3,887,004 |               |   | 2,361,805
|Capital expenditures          |  |                                         | 44,013    |               |   | 57,878   
|                              |  |                                        
|                              |  | Three Quarters Ended September 28, 2002 |           |               |   |          
|                              |  | ProductSales                            |           | Service Sales |   | Other    
|Sales                         |  | $                                       | 7,591,117 |               | $ | 4,777,291
|Gross profit                  |  |                                         | 1,551,293 |               |   | 1,825,536
|Income/(loss) from operations |  |                                         | 210,944   |               |   | 1,172,674
|Depreciation and amortization |  |                                         | 163,543   |               |   | 99,841   
|Interest expense              |  |                                         |          |               |   |         
|Total assets                  |  |                                         | 3,038,456 |               |   | 2,202,837
|Capital expenditures          |  |                                         | 12,060    |               |   | 46,753   



-11-



---

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 five customers that make up approximately 68% of our revenue during the first three
quarters of 2003, increased competition, any adverse change in Sun Microsystems business or our relationship with Sun, around whose computing platforms a large portion of our business is based, lack of acceptance of new products, pricing
pressures, lack of adequate financing to take advantage of business opportunities that may arise, lack of success in technological advancements, risks associated with our new business practices, processes and information systems, and other factors.



The following discussions and analyses are for the periods ended September
27, 2003 compared to the periods ended September 28, 2002.



SALES



Sales for the third quarter and first three quarters of 2003 and 2002 were as
follows:



|($ thousands) |  | Third Quarter |       | % Change |   |       | Three Quarters |     | % Change | 
|------------- |  | ------------- | ----- | -------- | - | ----- | -------------- | --- | -------- | 
|              |  | 2003          |       | 2002     |   |       | 2003           |     | 2002     | 
|Total company |  | $             | 5,192 |          | $ | 4,513 |                | 15  | %        | 
|Product       |  |               | 3,539 |          |   | 2,650 |                | 34  | %        | 
|Service       |  |               | 1,653 |          |   | 1,863 |                | -11 | %        | 



The increase in product sales for both
the third quarter and the first three quarters of 2003 was due to the addition of new product customers, for whom we began new build programs in late 2002 and 2003. The sales from these new programs, along with the increase in sales from some
existing customer programs, exceeded the decrease in sales from other existing customer programs. We believe that the increase in our customer base and in overall product sales reflects successful customer trials resulting from the recent
improvement in the economy in general and in capital spending specifically.



During the first quarter of 2003, HP informed us that in the second quarter of 2003, the HP-UNIX workstation repair program would be consolidated into printed circuit assembly repair operations in California. However, HP expanded its tape
library programs with us to include additional repair volume and the assembly and test of new units that substantially replaces the lost workstation repair sales. The assembly and test of new tape library units is included in product sales. As a
result, service sales decreased in the third quarter of 2003 by 11% compared to the same quarter in 2002. Due largely to the overlap of the aforementioned H-P repair programs in the first half of 2003, overall year-to-date service sales are 24%
ahead of the first three quarters of 2002. H-P service sales represented slightly less than half of all service sales in the third quarter, while H-P service sales represent more than half of all service sales over the year-to-date.



-12-



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GROSS PROFIT



Gross profit for the third quarter and first three quarters of 2003 and 2002 was as follows:



|($ thousands) |  | Third Quarter |       | % Change |   |       | Three Quarters |     | % Change | 
|------------- |  | ------------- | ----- | -------- | - | ----- | -------------- | --- | -------- | 
|              |  | 2003          |       | 2002     |   |       | 2003           |     | 2002     | 
|Total company |  | $             | 1,519 |          | $ | 1,619 |                | -6  | %        | 
|Product       |  |               | 983   |          |   | 814   |                | 21  | %        | 
|Service       |  |               | 536   |          |   | 805   |                | -33 | %        | 



The gross profit margin percentages
for 2003 and 2002 were as follows:



|              |  | Third Quarter |   |  | Three Quarters |  
|------------- |  | ------------- | - |  | -------------- | -
|              |  | 2003          |   |  | 2002           |  
|Total company |  | 29            | % |  | 36             | %
|Product       |  | 28            | % |  | 31             | %
|Service       |  | 32            | % |  | 43             | %



The decline in the third quarter in
gross profit margin percentage on product sales resulted from a less profitable mix of products. Increased leverage of higher product sales totals resulted in a slightly higher gross profit margin percentage for the year-to-date for 2003, compared
to 2002.



The decline in the third quarter in gross profit margin percentage on
service sales also resulted from a less profitable mix of programs. The gross profit margin percentage in the quarter was also negatively impacted by the startup costs associated with a new service program for the aerospace industry. In addition to
the quarterly items, the slight decline in the service gross profit margin percentage over the first three quarters of 2003 was also attributable to component sales at cost and some additional expenses associated with the transfer of the HP board
business in the second quarter.



OPERATING EXPENSES (SELLING, GENERAL AND
ADMINISTRATIVE, RESEARCH AND DEVELOPMENT) AND INTEREST EXPENSES



Selling,
general and administrative (SG&A), and research and development (R&D) and interest expenses for the third quarter and first three quarters of 2003 and 2002 were as follows:



|($ thousands)    |  | Third Quarter |       | % Change |   |       | Three Quarters |     | % Change | 
|---------------- |  | ------------- | ----- | -------- | - | ----- | -------------- | --- | -------- | 
|                 |  | 2003          |       | 2002     |   |       | 2003           |     | 2002     | 
|SG&A expense     |  | $             | 1,241 |          | $ | 1,102 |                | 13  | %        | 
|R&D expense      |  |               | 44    |          |   | 167   |                | -74 | %        | 
|Interest expense |  |               | 22    |          |   | 32    |                | -31 | %        | 
|                 |  |               |       |          |   |       |                |     |          | 
|Total expense    |  | $             | 1,307 |          | $ | 1,301 |                | 0   | %        | 
|                 |  |               |       |          |   |       |                |     |          | 



The increase in SG&A expenses
throughout 2003 was attributable to the shift of R&D expense to SG&A, as well as incentive and commission programs related to increases in both new, as opposed to existing, customer business and bottom-line profitability. The shift from
R&D expenses to SG&A expenses is a result of product development resources working on new service opportunities and customer specific product opportunities rather than speculative new product opportunities in 2003 compared to 2002.



In the first three quarters of 2003, a decreased use of the credit line due to
the accumulation of five quarters of profits resulted in lower interest expense compared to the same period of 2002. The average daily balance declined to approximately $1,912,000 in 2003 from $2,474,000 in 2002. Interest rates paid on the line of
credit ranged from 4.25% to 4.5% in 2003, and ranged from 3.9% to 5.0% in 2002.



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INCOME TAXES AND NET INCOME/(LOSS)



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 used for the third quarter and first three quarters of both 2003 and 2002 was 39%.



Income/(loss) before taxes, income taxes/(benefit) and net income/(loss) for the third quarter and first three quarters of 2003 and 2002
were as follows:



|($ thousands)                     |  | Third Quarter |     | Three Quarters |  
|--------------------------------- |  | ------------- | --- | -------------- | -
|                                  |  | 2003          |     | 2002           |  
|Income/(loss) before income taxes |  | $             | 212 |                | $
|Income tax expense/(benefit)      |  |               | 90  |                |  
|                                  |  |               |     |                |  
|Net income/(loss)                 |  | $             | 122 |                | $
|                                  |  |               |     |                |  



Earnings/(loss) per share for the
third quarter and first three quarters of 2003 and 2002 were as follows:



|                                               |  | Third Quarter |           | Three Quarters |  
|---------------------------------------------- |  | ------------- | --------- | -------------- | -
|                                               |  | 2003          |           | 2002           |  
|Basic EPS                                      |  | $             | 0.02      |                | $
|Diluted EPS                                    |  | $             | 0.02      |                | $
|                                               |  |               |           |               
|Weighted average number of shares outstanding: |  |               |           |                |  
|Basic                                          |  |               | 5,530,030 |                |  
|Fully diluted                                  |  |               | 5,857,748 |                |  



The improvement to net profits in 2003
from net losses in 2002 resulted primarily from increased service sales resulting from the execution of the strategy to shift resources to growing service sales, an increase in product sales, and maintaining tight control of overall operating
expenses.



LIQUIDITY AND CAPITAL RESOURCES



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



|($ thousands)        |  | 9/27/03 |       | 12/31/02 |   | % Change | 
|-------------------- |  | ------- | ----- | -------- | - | -------- | 
|Accounts receivable  |  | $       | 3,501 |          | $ | 2,088    | 
|Inventory            |  |         | 1,921 |          |   | 2,750    | 
|Other current assets |  |         | 717   |          |   | 870      | 
|                     |  |         |       |          |   |          | 
|Total                |  |         | 6,139 |          |   | 5,708    | 
|                     |  |         |       |          |   |          | 



-14-



---

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



|($ thousands)       |  | 9/27/03 |       | 12/31/02 |   | % Change | 
|------------------- |  | ------- | ----- | -------- | - | -------- | 
|Line of credit      |  | $       | 1,537 |          | $ | 2,102    | 
|Accounts payable    |  |         | 1,350 |          |   | 779      | 
|Other current liab. |  |         | 450   |          |   | 562      | 
|                    |  |         |       |          |   |          | 
|Total               |  | $       | 3,337 |          | $ | 3,443    | 
|                    |  |         |       |          |   |          | 



During the first three quarters of
2003, $716,000 of cash was generated by operating activities. Net income before depreciation, asset disposals and inventory reserve increases was $989,000. Additional cash was generated by reductions in inventory of $449,000, and other current
assets of $179,000, and by an increase in accounts payable and other current liabilities of $511,000. The amount of cash generated by operating activities was reduced by a net increase in accounts receivable of $1,413,000. The reduction in inventory
was primarily attributable to sales to a large product customer in the first quarter of 2003 that consumed components that were on hand at December 31, 2002. Accounts receivable increased because sales in the last two months prior to September 27,
2003 totaled approximately $3.8 million, compared to only approximately $2.5 million in the last two months prior to December 31, 2002. The increase in short-term liabilities was also due to the higher sales and purchasing activity near the end of
the third quarter of 2003 compared to the end of the fourth quarter of 2002.



For the first three quarters of 2003, we used $108,000 of cash generated by operating activities to purchase equipment, including computers and software, primarily to support new product customers and the new service program for the
aerospace industry. We used $565,000 to pay down our line of credit. We used $33,000 to pay off the balance of a three-year bank term note and we used $19,000 to make payments on a capital lease.



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 a Blanket Lien on 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 $4,000,000 as well as a sub-limit of $2,000,000 that can be collateralized by inventory. That calculation represents the maximum amount that can be drawn on the line of credit. The balance on the line of credit at September 27, 2003
was $1,537,000. The borrowing base calculation on that date was $3,833,000, resulting in an unused capacity of $2,296,000. We are not currently, and do not expect at this time to be, constrained by our credit limits. We were in compliance with all
covenants of the line for the first three quarters of 2003.



On April 1, 2003,
the line of credit was renewed until May 15, 2004. 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. The company is 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.



-15-



---

We lease our operating facility under an operating lease in which we have an obligation to pay rent through 2009. See
Note 6 to the financial statements contained in our Form 10-KSB for the year ended December 31, 2002. Except for that operating lease, we have not entered into any off-balance sheet transactions in 2003 and 2002.



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, 2002 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 shipment of the products via common carrier 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.



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.



-16-



---

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.
|            |  |                                                                                                                                      
|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.



-17-



---

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



-18-



---

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



-19-



---

|Exhibit No. |  | Description of Exhibit                                                                                                                                                              |  | If Incorporated by Reference, Document with which Exhibit was Previously Filed with the
SEC
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------
|31(a)       |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Quarterly Report on Form 10-QSB of Pinnacle Data Systems, Inc. for the quarter ended September 27,
2003. |  | Contained herein.                                                                          
|            |  |                                                                                                                                                                                    
|31(b)       |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Quarterly Report on Form 10-QSB of Pinnacle Data Systems, Inc. for the quarter ended September 27,
2003. |  | 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 September 27,
2003. |  | Contained herein.                                                                          
|            |  |                                                                                                                                                                                    
|32(b)       |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Quarterly Report on Form 10-QSB of Pinnacle Data Systems, Inc. for the quarter ended September 27,
2003. |  | Contained herein.                                                                          



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



On July 23, 2003, Pinnacle Data Systems, Inc. issued a new release announcing its earnings for the three month period ending June 28, 2003.



-20-



---

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: |  | October 22, 2003 |  |  |  |  |  | /s/ Michael R. Sayre                      
|      |  |                  |  |  |  |  |  | Michael R. Sayre, Executive Vice President
|      |  |                  |  |  |  |  |  | and Chief Financial Officer               
|      |  |                  |  | 
|Date: |  | October 22, 2003 |  |  |  |  |  | /s/ Thomas J. Carr                        
|      |  |                  |  |  |  |  |  | Thomas J. Carr, Controller                



-21-