---



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 June 28, 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 ofincorporation or organization) |  | (IRS EmployerIdentification 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 5,535,796 common shares, without par value, as of August 11, 2003.



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



---



---

PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



BALANCE SHEETS



|                                                                                      |  | June 28, 2003 |           | December 31,2002
|------------------------------------------------------------------------------------- |  | ------------- | --------- | ----------------
|                                                                                      |  | (Unaudited)   |           |                 
|ASSETS                                                                                |  |               |           |                 
|                                                                                      |  |              
|CURRENT ASSETS                                                                        |  |               |           |                 
|Cash                                                                                  |  | $             | 69,999    |                 
|Accounts receivable, net of allowance for doubtful accounts of $15,000                |  |               | 3,492,663 |                 
|Inventory                                                                             |  |               | 2,396,996 |                 
|Other prepaid expenses                                                                |  |               | 204,712   |                 
|Deferred income taxes                                                                 |  |               | 514,000   |                 
|                                                                                      |  |               |           |                 
|                                                                                      |  |               | 6,678,370 |                 
|                                                                                      |  |               |           |                 
|PROPERTY AND EQUIPMENT                                                                |  |               |           |                 
|Leasehold improvements                                                                |  |               | 222,237   |                 
|Furniture and fixtures                                                                |  |               | 329,921   |                 
|Computer equipment and related software                                               |  |               | 2,265,158 |                 
|Shop equipment                                                                        |  |               | 495,315   |                 
|                                                                                      |  |               |           |                 
|                                                                                      |  |               | 3,312,631 |                 
|Less accumulated depreciation and amortization                                        |  |               | 2,066,291 |                 
|                                                                                      |  |               |           |                 
|                                                                                      |  |               | 1,246,340 |                 
|                                                                                      |  |               |           |                 
|OTHER ASSETS                                                                          |  |               |           |                 
|Deposits                                                                              |  |               | 20,957    |                 
|License agreement, less accumulated amortization of $25,561 and $18,528, respectively |  |               | 16,639    |                 
|                                                                                      |  |               |           |                 
|                                                                                      |  |               | 37,596    |                 
|                                                                                      |  |               |           |                 
|                                                                                      |  | $             | 7,962,306 |                 
|                                                                                      |  |               |           |                 



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



2



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



BALANCE SHEETS



|                                                                                                  |  | June 28,2003 |           | December 31,2002
|------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ----------------
|                                                                                                  |  | (Unaudited)  |           |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                              |  |              |           |                 
|                                                                                                  |  |             
|CURRENT LIABILITIES                                                                               |  |              |           |                 
|Line of credit                                                                                    |  | $            | 1,965,268 |                 
|Current portion of long-term debt                                                                 |  |              |          |                 
|Current portion of capital lease obligation                                                       |  |              | 10,344    |                 
|Accounts payable                                                                                  |  |              | 1,501,347 |                 
|Accrued expenses:                                                                                 |  |              |           |                 
|Wages, payroll taxes and benefits                                                                 |  |              | 380,454   |                 
|Income taxes                                                                                      |  |              | 107,943   |                 
|Other                                                                                             |  |              | 69,396    |                 
|Unearned revenue                                                                                  |  |              | 27,700    |                 
|                                                                                                  |  |              |           |                 
|                                                                                                  |  |              | 4,062,452 |                 
|                                                                                                  |  |              |           |                 
|LONG-TERM LIABILITIES                                                                             |  |              |           |                 
|Deferred income taxes                                                                             |  |              | 93,000    |                 
|                                                                                                  |  |              |           |                 
|                                                                                                  |  |              | 93,000    |                 
|                                                                                                  |  |              |           |                 
|                                                                                                  |  |              | 4,155,452 |                 
|                                                                                                  |  |              |           |                 
|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; 5,518,870 shares issued and outstanding |  |              | 2,161,656 |                 
|Additional paid-in capital                                                                        |  |              | 502,095   |                 
|Retained earnings                                                                                 |  |              | 1,143,103 |                 
|                                                                                                  |  |              |           |                 
|                                                                                                  |  |              | 3,806,854 |                 
|                                                                                                  |  |              |           |                 
|                                                                                                  |  | $            | 7,962,306 |                 
|                                                                                                  |  |              |           |                 



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 Two Quarters Ended |          
|------------------------------------------ |  | --------------------- | --------- | ------------ | -------------------------- | ---------
|                                           |  | June 28,2003          |           | June 29,2002 |                            |          
|                                           |  | (unaudited)           |           |              | (unaudited)                |          
|SALES                                      |  |                       |           |              |                            |          
|Product sales                              |  | $                     | 3,463,543 |              | $                          | 3,009,234
|Service sales                              |  |                       | 2,307,789 |              |                            | 1,441,206
|                                           |  |                       |           |              |                            |          
|                                           |  |                       | 5,771,332 |              |                            | 4,450,441
|                                           |  |                       |           |              |                            |          
|COST OF SALES                              |  |                       |           |              |                            |          
|Product sales                              |  |                       | 2,643,902 |              |                            | 2,377,450
|Service sales                              |  |                       | 1,522,174 |              |                            | 951,213  
|                                           |  |                       |           |              |                            |          
|                                           |  |                       | 4,166,076 |              |                            | 3,328,663
|                                           |  |                       |           |              |                            |          
|GROSS PROFIT                               |  |                       | 1,605,256 |              |                            | 1,121,777
|                                           |  |                       |           |              |                            |          
|OPERATING EXPENSES                         |  |                       |           |              |                            |          
|Selling, general and administrative        |  |                       | 1,257,963 |              |                            | 917,622  
|Research and development                   |  |                       | 30,741    |              |                            | 193,458  
|                                           |  |                       |           |              |                            |          
|                                           |  |                       | 1,288,704 |              |                            | 1,111,080
|                                           |  |                       |           |              |                            |          
|INCOME/(LOSS) FROM OPERATIONS              |  |                       | 316,552   |              |                            | 10,697   
|                                           |  |                       |           |              |                            |          
|OTHER EXPENSE                              |  |                       |           |              |                            |          
|Interest expense                           |  |                       | 22,468    |              |                            | 27,243   
|                                           |  |                       |           |              |                            |          
|INCOME/(LOSS) BEFORE INCOME TAXES          |  |                       | 294,084   |              |                            | (16,546  
|                                           |  |                       |           |             
|INCOME TAX EXPENSE/(BENEFIT )              |  |                       | 115,000   |              |                            | (6,000   
|                                           |  |                       |           |              |                            |          
|NET INCOME/(LOSS)                          |  | $                     | 179,084   |              | $                          | (10,546  
|                                           |  |                       |           |              |                            |          
|BASIC INCOME/LOSS PER COMMON SHARE         |  | $                     | 0.03      |              | $                          | (0.00    
|                                           |  |                       |           |              |                            |          
|FULLY DILUTED INCOME/LOSS PER COMMON SHARE |  | $                     | 0.03      |              | $                          | (0.00    
|                                           |  |                       |           |              |                            |          



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



Two Quarters
Ended June 28, 2003 and June 29, 2002



|                                                                                         |  | 2003        |            |   | 2002        |  
|---------------------------------------------------------------------------------------- |  | ----------- | ---------- | - | ----------- | -
|                                                                                         |  | (Unaudited) |            |   | (Unaudited) |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                     |  |             |            |   |             |  
|Net income/(loss)                                                                        |  | $           | 254,187    |   |             | $
|                                                                                         |  |             |            |   |             |  
|Adjustments to reconcile net income/(loss) to net cash provided by operating activities: |  |             |            |   |             |  
|Depreciation and amortization                                                            |  |             | 279,538    |   |             |  
|Inventory reserves                                                                       |  |             | 145,798    |   |             |  
|Loss on disposal of equipment                                                            |  |             | 1,289      |   |             |  
|(Increase)/decrease in assets:                                                           |  |             |            |   |             |  
|Accounts receivable                                                                      |  |             | (1,404,971 | ) |             |  
|Inventory                                                                                |  |             | 70,546     |   |             |  
|Prepaid expenses and other assets                                                        |  |             | 116,916    |   |             |  
|Refundable income taxes                                                                  |  |             |           |   |             |  
|Increase/(decrease) in liabilities:                                                      |  |             |            |   |             |  
|Accounts payable                                                                         |  |             | 722,425    |   |             |  
|Accrued expenses and taxes                                                               |  |             | 51,547     |   |             |  
|Unearned revenues                                                                        |  |             | 27,700     |   |             |  
|                                                                                         |  |             |            |   |             |  
|Total adjustments                                                                        |  |             | 10,788     |   |             |  
|                                                                                         |  |             |            |   |             |  
|Net cash provided by operating activities                                                |  |             | 264,975    |   |             |  
|                                                                                         |  |             |            |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                     |  |             |            |   |             |  
|Purchases of property and equipment                                                      |  |             | (48,921    | ) |             |  
|                                                                                         |  |             |            |   |             |  
|Net cash used in investing activities                                                    |  |             | (48,921    | ) |             |  
|                                                                                         |  |             |            |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                     |  |             |            |   |             |  
|Net change in line of credit                                                             |  |             | (136,601   | ) |             |  
|Principal payments on long-term debt                                                     |  |             | (33,333    | ) |             |  
|Principal payments on capital lease obligation                                           |  |             | (12,415    | ) |             |  
|Proceeds from stock options exercised                                                    |  |             |           |   |             |  
|Other proceeds from shareholders                                                         |  |             | 589        |   |             |  
|                                                                                         |  |             |            |   |             |  
|Net cash used in financing activities                                                    |  |             | (181,760   | ) |             |  
|                                                                                         |  |             |            |   |             |  



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)



Two
Quarters Ended June 28, 2003 and June 29, 2002



|                                                                                  |  | 2003 |         | 2002 |  
|--------------------------------------------------------------------------------- |  | ---- | ------- | ---- | -
|INCREASE/(DECREASE) IN CASH                                                       |  |      | 34,294  |      |  
|                                                                                  |  |     
|CASHBeginning of period                                                          |  |      | 35,705  |      |  
|                                                                                  |  |      |         |      |  
|CASHEnd of period                                                                |  | $    | 69,999  |      | $
|                                                                                  |  |      |         |      |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                  |  |      |         |      |  
|Interest paid                                                                     |  | $    | 44,479  |      | $
|                                                                                  |  |      |         |      |  
|Income taxes paid, net of refunds                                                 |  | $    | 131,500 |      | $
|                                                                                  |  |      |         |      |  
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONS           |  |      |         |      |  
|                                                                                  |  |     
|During 2003, the company capitalized $136,719 of inventory as computer equipment. |  |      |         |      |  
|                                                                                  |  |     
|During 2002, the company capitalized $5,830 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 second quarter of 2003 ended on June 28 and contained 91 days. The second quarter of 2002 ended on June 29 and also contained 91 days. The first quarter of 2003 ended on March
29 and contained 88 days. The first quarter of 2002 ended on March 30 and contained 89 days. Therefore, the first two quarters of 2003 contained 179 days and the first two quarters of 2002 contained 180 days.



The balance sheets as of June 28, 2003 and December 31, 2002, and the
statements of operations and cash flows for the quarter and two quarters ended June 28, 2003 and June 29, 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 June 28, 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 2004 financial statements. Management does not
expect the initial adoption of this accounting pronouncement will have a material impact on the Companys financial statements.



8



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)



Note 3. Stock Options



During the two quarters ended June 28, 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                        |  | 0         |  |                                
|Exercised                      |  | 0         |  |                                
|Forfeited                      |  | 11,050    |  | $                              
|                               |  |           |  |                                
|Outstanding, June 28, 2003     |  | 1,257,600 |  | $                              
|                               |  |           |  |                                



The Company accounts
for employee and director stock options using the intrinsic value method. Under this method, no compensation expense was recorded for the two quarters ending June 28, 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 two quarters ending June 28, 2003 would have been as follows:



|Net income, as reported                                                                                                           |  | $ | 254,187 |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | - | ------- | -
|Deduct: total stock-based compensation expense determined under the fair value method for all awards, net of related tax
benefits |  |   | (52,853 | )
|                                                                                                                                  | 
|Pro forma net income                                                                                                              |  |   | 201,334 |  
|                                                                                                                                  | 
|Earnings per common share, basic:                                                                                                 |  |   |         |  
|As reported                                                                                                                       |  | $ | 0.05    |  
|Pro forma                                                                                                                         |  | $ | 0.04    |  
|Earnings per common share, diluted                                                                                                |  |   |         |  
|As reported                                                                                                                       |  | $ | 0.04    |  
|Proforma                                                                                                                          |  | $ | 0.04    |  



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 two quarters ended:



|Risk-free interest rate                 |  | 5.50  | %
|--------------------------------------- |  | ----- | -
|Dividend yield                          |  | 0     | %
|Volatility factor                       |  | 93.62 | %
|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



Earnings per common and
common equivalent share were computed by dividing net income/(loss) by the weighted average number of shares of common stock outstanding during the second quarter and first two quarters of 2003. At June 28, 2003, 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.



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 June 28, 2003 and June 29, 2002.



|                                                                                |  | 2nd Quarter |           |      | Two Quarters |          
|------------------------------------------------------------------------------- |  | ----------- | --------- | ---- | ------------ | ---------
|                                                                                |  | 2003        |           | 2002 |              |          
|Income available to common stockholders used in basic EPS and diluted EPS       |  | $           | 179,084   |      | $            | (10,546  
|                                                                                |  |             |           |      |              |          
|Weighted average number of of common shares used in basic EPS                   |  |             | 5,518,870 |      |              | 5,503,440
|                                                                                |  |             |           |     
|Effect of dilutive stock options                                                |  |             | 157,908   |      |              |         
|                                                                                |  |             |           |      |              |          
|Weighted number of common shares and dilutive stock options used in diluted EPS |  |             | 5,676,778 |      |              | 5,503,440
|                                                                                |  |             |           |      |              |          



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.



|                              |              | Two Quarters Ended June 28, 2003 |           |               | Total |      
|----------------------------- | ------------ | -------------------------------- | --------- | ------------- | ----- | -----
|                              | ProductSales |                                  |           | Service Sales |       | Other
|Sales                         |              | $                                | 5,666,419 |               |       |      
|Gross profit                  |              |                                  | 1,262,828 |               |       |      
|Income/(loss) from operations |              |                                  | 503,910   |               |       |      
|Depreciation and amortization |              |                                  | 119,143   |               |       |      
|Interest expense              |              |                                  |          |               |       |      
|Total assets                  |              |                                  | 3,351,423 |               |       |      
|Capital expenditures          |              |                                  | 39,562    |               |       |      
|                              |              |                                 
|                              |              | Two Quarters Ended June 29, 2002 |           |               | Total |      
|                              | ProductSales |                                  |           | ServiceSales  |       | Other
|Sales                         |              | $                                | 4,940,945 |               |       | $    
|Gross profit                  |              |                                  | 708,102   |               |       |      
|Income/(loss) from operations |              |                                  | (132,462  | )             |       |      
|Depreciation and amortization |              |                                  | 111,208   |               |       |      
|Interest expense              |              |                                  |          |               |       |      
|Total assets                  |              |                                  | 4,976,658 |               |       |      
|Capital expenditures          |              |                                  | 10,965    |               |       |      



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 70% of our revenue during the first two
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 June 28,
2003 compared to the periods ended June 29, 2002.



SALES



Sales for the second quarter and first two quarters of 2003
and 2002 were as follows:



|($ thousands) |      | Second Quarter |       | % Change |   |       | Two Quarters |      | % Change | 
|------------- | ---- | -------------- | ----- | -------- | - | ----- | ------------ | ---- | -------- | 
|              | 2003 |                | 2002  |          |   | 2003  |              | 2002 |         
|Total company |      | $              | 5,771 |          | $ | 4,450 |              | 30   | %        | 
|Product       |      |                | 3,463 |          |   | 3,009 |              | 15   | %        | 
|Service       |      |                | 2,308 |          |   | 1,441 |              | 60   | %        | 



The increase in product sales for both
the second quarter and the first two quarters of 2003 was due primarily to the assembly and test of tape library units for Hewlett-Packard Company (HP), which began shipping during the first quarter of 2003, and production ordering on 2002
trials.The increase in service sales for both the second quarter and the first two quarters of 2003 was due primarily to the continued ramp-up of new service programs, as well as non-recurring component sales related to discontinued programs
and non-recurring engineering services provided during the second quarter. Excluding the non-recurring sales in the service sales total, service sales increased 34% in the second quarter of 2003 compared to the second quarter of 2002 and over the
first two quarters of 2003 compared to the first two quarters of 2002.



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. There was some overlap of those programs in the second quarter of 2003 which will not occur again in
the third quarter. As a result, service sales are expected to decrease in the third quarter of 2003. HP service sales represented slightly more than half of all service sales in the second quarter and over the first two quarters.



12



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GROSS PROFIT



Gross profit for the second quarter and first two quarters of 2003 and 2002 was as follows:



|($ thousands) |      | Second Quarter |       | % Change |   |       | Two Quarters |      | % Change | 
|------------- | ---- | -------------- | ----- | -------- | - | ----- | ------------ | ---- | -------- | 
|              | 2003 |                | 2002  |          |   | 2003  |              | 2002 |         
|Total company |      | $              | 1,605 |          | $ | 1,122 |              | 43   | %        | 
|Product       |      |                | 819   |          |   | 632   |              | 30   | %        | 
|Service       |      |                | 786   |          |   | 490   |              | 60   | %        | 



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



|($ thousands) |      | Second Quarter |      | Two Quarters
|------------- | ---- | -------------- | ---- | ------------
|              | 2003 |                | 2002 |             
|Total company |      | 28%            |      | 25%         
|Product       |      | 24%            |      | 21%         
|Service       |      | 34%            |      | 34%         



The improvement in gross profit margin
on product sales resulted from a slightly more profitable mix of products as well as increased leverage of higher sales totals.



In the second quarter of 2003, the gross profit margin on service sales was negatively impacted by the component sales at cost and some additional expenses, both
associated with the transfer of the HP board business. Over the first two quarters of 2003, the leverage of higher sales was partially offset by the startup costs of the HP tape drive program and the transfer of the HP board repair program,
resulting in an improvement of 1% over the same period of 2002.



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 second quarter and first two quarters of 2003 and 2002 were as follows:



|($ thousands)    |      | Second Quarter |       | % Change |   |       | Two Quarters |      | % Change | 
|---------------- | ---- | -------------- | ----- | -------- | - | ----- | ------------ | ---- | -------- | 
|                 | 2003 |                | 2002  |          |   | 2003  |              | 2002 |         
|SG&A expense     |      | $              | 1,258 |          | $ | 918   |              | 37   | %        | 
|R&D expense      |      |                | 31    |          |   | 194   |              | -84  | %        | 
|Interest expense |      |                | 22    |          |   | 27    |              | -19  | %        | 
|                 |      |                |       |          |   |       |              |      |          | 
|Total expense    |      | $              | 1,311 |          | $ | 1,139 |              | 15   | %        | 
|                 |      |                |       |          |   |       |              |      |          | 



The increase in SG&A expenses
throughout 2003 was attributable to 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.



13



---

In the first two quarters of 2003, a decreased use of the credit line due to lower levels of inventory and due to the
accumulation of four quarters of profits resulted in lower interest expense compared to the same period of 2002. The average daily balance declined to approximately $2,046,000 in 2003 from $2,474,000 in 2002. Interest rates paid on the line of
credit were 4.5% in 2003, and ranged from 3.90% to 4.75% in 2002. Early in 2003, we paid off a bank term note that had been in effect throughout 2002, which also contributed to the reduction in interest expense in 2003 compared to 2002.



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 second quarter and first two quarters of both 2003 and 2002 was 39%.



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



|($ thousands)                     |      | Second Quarter |      |  | Two Quarters |     
|--------------------------------- | ---- | -------------- | ---- |  | ------------ | ----
|                                  | 2003 |                | 2002 |  |              | 2003
|Income/(loss) before income taxes |      | $              | 294  |  | $            | (17 
|Income tax expense/(benefit)      |      |                | 115  |  |              | (6  
|                                  |      |                |      |  |              |     
|Net income/(loss)                 |      | $              | 179  |  | $            | (11 
|                                  |      |                |      |  |              |     



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



|                                               |  | Second Quarter |           |      | Two Quarters |          
|---------------------------------------------- |  | -------------- | --------- | ---- | ------------ | ---------
|                                               |  | 2003           |           | 2002 |              |          
|Basic EPS                                      |  | $              | 0.03      |      | $            | (0.00    
|Diluted EPS                                    |  | $              | 0.03      |      | $            | (0.00    
|                                               |  |                |           |     
|Weighted average number of shares outstanding: |  |                |           |      |              |          
|Basic                                          |  |                | 5,518,870 |      |              | 5,503,440
|Fully diluted                                  |  |                | 5,676,778 |      |              | 5,503,440



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.



14



---

LIQUIDITY AND CAPITAL RESOURCES



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



|($ thousands)        |  | 6/28/03 |       | 12/31/02 |   | % Change | 
|-------------------- |  | ------- | ----- | -------- | - | -------- | 
|Accounts receivable  |  | $       | 3,492 |          | $ | 2,088    | 
|Inventory            |  |         | 2,397 |          |   | 2,750    | 
|Other current assets |  |         | 789   |          |   | 870      | 
|                     |  |         |       |          |   |          | 
|Total                |  |         | 6,678 |          |   | 5,708    | 
|                     |  |         |       |          |   |          | 



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



|($ thousands)       |  | 6/28/03 |       | 12/31/02 |   | % Change | 
|------------------- |  | ------- | ----- | -------- | - | -------- | 
|Line of credit      |  | $       | 1,965 |          | $ | 2,102    | 
|Accounts payable    |  |         | 1,501 |          |   | 779      | 
|Other current liab. |  |         | 596   |          |   | 562      | 
|                    |  |         |       |          |   |          | 
|Total               |  | $       | 4,062 |          | $ | 3,443    | 
|                    |  |         |       |          |   |          | 



During the first two quarters of 2003,
$265,000 of cash was generated by operating activities. Net income before depreciation, asset disposals and inventory reserve increases was $680,000. Additional cash was generated by reductions in inventory of $71,000, and other current assets of
$117,000, and by an increase in accounts payable and other current liabilities of $802,000. The amount of cash generated by operating activities was reduced by an increase in accounts receivable of $1,405,000. The reduction in inventory was
primarily attributable to sales to one large product customer that consumed components that were on hand at December 31, 2002. Accounts receivable increased because sales in the last two months prior to June 28, 2003 totaled approximately $4.0
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 second quarter of 2003
compared to the end of the fourth quarter of 2002.



For the first two quarters
of 2003, we used $49,000 of cash generated by operating activities to purchase equipment, including computers and software, primarily to support new product customers. We used $137,000 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 also used $12,000 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 June 28, 2003 was $1,965,000. The borrowing base calculation on that date exceeded the $4,000,000, resulting in an unused capacity (the excess of the borrowing base limit
of $4,000,000 over the amount drawn) of $2,035,000. 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 two 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



15



---

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.



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.



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 4. Submission of matters to a vote of security holders.



The annual meeting of shareholders was held on May 1, 2003. Of the 5,518,870 shares entitled to vote at the meeting,
5,381,664 shares were voted. The results were as follows:



Proposal number 1Election of Directors



(Term
expiring in the year 2005):



|                      |  | FOR       |  | WITHHOLD
|--------------------- |  | --------- |  | --------
|Hugh C. Cathey        |  | 5,376,664 |  | 5,000   
|Paul H. Lambert       |  | 5,319,164 |  | 62,500  
|Robert V.R. Ostrander |  | 5,319,164 |  | 62,500  
|David C. Swaddling    |  | 5,319,164 |  | 62,500  



Proposal number
2To ratify the appointment of Deloitte & Touche LLP as the companys independent accountants for the year ending December 31, 2003:



|FOR       |  | AGAINST |  | ABSTAIN
|--------- |  | ------- |  | -------
|5,373,764 |  | 7,900   |  | 0      



The following
directors continued in office with terms ending in 2004:



John
D. Bair

C. Robert Hahn

Thomas
M. OLeary

Michael R. Sayre



Item 5. Other information.



None.



17



---

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:



|ExhibitNo. |  | 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.
|           |  |                                                                                                                                      
|10(e)      |  | Repair services agreement between                                                                                                     |  | Registration Statement on Form 10-SB filed with                                                             



18



---

|ExhibitNo. |  | Description of Exhibit                                                                                                                |  | If Incorporated by Reference, Document with which Exhibit was Previously Filed with the
SEC      
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------
|           |  | Pinnacle Data Systems, Inc. and Sun Microsystems, Inc. dated March 29, 1999                                                           |  | 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.
|           |  |                                                                                                                                      
|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.



19



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|ExhibitNo. |  | 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)      |  | 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(v)      |  | 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.
|           |  |                                                                                                                                                                               
|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 June 28,
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 June 28,
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 June 28,
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 June 28,
2003. |  | Contained herein.                                                                                 



20



---

(B) Reports on Form 8-K.



On April 28, 2003, Pinnacle Data Systems, Inc. issued a new release announcing its earnings for the three month period
ending March 29, 2003.



21



---

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: August 12, 2003 |  | /s/ Michael R. Sayre                                               
|                      |  | Michael Sayre, Executive Vice President and Chief Financial Officer
|                      | 
|Date: August 12, 2003 |  | /s/ Thomas J. Carr                                                 
|                      |  | Thomas J. Carr, Controller                                         



22