<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  FORM 10-QSB


[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF
     1934
          For the quarterly period ended March 31, 2001

[_]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
          For the transition period from __________ to ________

          Commission file number: 0-28483
                                  -------


                          PINNACLE DATA SYSTEMS, INC.
--------------------------------------------------------------------------------
       (Exact name of small business issuer as specified in its charter)

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

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

                                (614) 748-1150
                          ---------------------------
                          (Issuer's Telephone Number)

                     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 5,466,004 common shares, without par
value, as of April 30, 2001.

Transitional Small Business Disclosure Format (Check one):  Yes [_] No [X]
<PAGE>

                        PART I - Financial Information


Item 1. Financial Statements.



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

                        Independent Accountants' Report

          We have reviewed the accompanying balance sheets of Pinnacle Data
    Systems, Inc. as of March 31, 2001 and 2000, and the related statements of
    income and cash flows for the thirteen weeks then ended. These financial
    statements are the responsibility of the management of Pinnacle Data
    Systems, Inc.

          We conducted our review in accordance with standards established by
    the American Institute of Certified Public Accountants. A review of interim
    financial information consists principally of applying analytical procedures
    to financial data and making inquiries of persons responsible for financial
    and accounting matters. It is substantially less in scope than an audit
    conducted in accordance with generally accepted auditing standards, the
    objective of which is the expression of an opinion regarding the financial
    statements taken as a whole. Accordingly, we do not express such an opinion.

          Based on our review, we are not aware of any material modifications
    that should be made to the accompanying financial statements in order for
    them to be in conformity with generally accepted accounting principles.



                                         /s/ HAUSSER + TAYLOR LLP


Columbus, Ohio
April 20, 2000

                                      -2-
<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                  (DBA PDSi)

                                BALANCE SHEETS

                            March 31, 2001 and 2000
                            -----------------------

<TABLE>
<CAPTION>
                               ASSETS                                           2001                 2000
                               ------                                           ----                 ----
<S>                                                                        <C>                   <C>
CURRENT ASSETS
  Cash                                                                     $        38,962       $     203,546
  Accounts receivable, net of allowance for doubtful
   accounts of $8,000 and $11,500, respectively                                  4,836,605           3,105,896
  Inventory                                                                      7,766,239           4,179,201
  Other prepaid expenses                                                           239,545             163,465
  Deferred income taxes (Note 3)                                                   247,000             132,000
                                                                            --------------       -------------
                                                                                13,128,351           7,784,108
                                                                            --------------       -------------



PROPERTY AND EQUIPMENT
  Leasehold improvements                                                           189,389              77,515
  Furniture and fixtures                                                           299,865             260,914
  Computer equipment and related software                                        1,255,190           1,098,883
  Shop equipment                                                                   306,417             299,062
  Vehicle                                                                           21,846              21,846
                                                                            --------------       -------------
                                                                                 2,072,707           1,758,220
  Less accumulated depreciation and amortization                                   968,763             880,589
                                                                            --------------       -------------
                                                                                 1,103,944             877,631
                                                                            --------------       -------------

OTHER ASSETS
  Deposits
                                                                                    20,385              18,112
                                                                            --------------       -------------
                                                                                    20,385              18,112
                                                                            --------------       -------------
                                                                           $    14,252,680      $    8,679,851
                                                                            ==============       =============
</TABLE>



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

                                      -3-
<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                  (DBA PDSi)

                                BALANCE SHEETS

                            March 31, 2001 and 2000
                            -----------------------

<TABLE>
<CAPTION>
                LIABILITIES AND STOCKHOLDERS' EQUITY                           2001                 2000
                ------------------------------------                           ----                 ----
<S>                                                                         <C>                  <C>
CURRENT LIABILITIES
 Line of credit                                                             $  6,290,401         $  1,759,600
 Current portion of long-term debt                                               133,333              126,521
 Accounts payable                                                              2,795,319            3,247,021
 Accrued expenses:
  Wages and payroll taxes                                                        210,841              182,949
  Vacation                                                                        58,295               80,985
  Profit sharing plan                                                            124,081               20,800
  Property taxes                                                                  12,000                6,750
  Income taxes                                                                         -              106,576
  Other                                                                          148,034              150,776
 Unearned service revenue                                                         31,507               80,068
                                                                            ------------         ------------
                                                                               9,803,811            5,762,046
                                                                            ------------         ------------

LONG-TERM LIABILITIES
 Long-term debt, less current portion                                            133,334              282,557
 Deferred income taxes (Note 3)                                                   41,000               14,000
                                                                            ------------         ------------
                                                                                 174,334              296,557
                                                                            ------------         ------------
                                                                               9,978,145            6,058,603
                                                                            ------------         ------------
STOCKHOLDERS' EQUITY
 Preferred stock; no par value; 4,000,000 shares authorized;
 no shares issued or outstanding                                                       -                    -
 Common stock; no par value; 10,000,000 shares authorized;
 5,443,004 and 4,902,804 shares issued
 and outstanding, respectively                                                 2,089,624            1,636,638
 Additional paid-in capital                                                      497,506              214,506
 Retained earnings                                                             1,687,405              770,104
                                                                            ------------         ------------
                                                                               4,274,535            2,621,248
                                                                            ------------         ------------
                                                                            $ 14,252,680         $  8,679,851
                                                                            ============         ============
</TABLE>

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

                                     - 4 -
<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                  (DBA PDSi)

                             STATEMENTS OF INCOME

                 Thirteen Weeks Ended March 31, 2001 and 2000
                 --------------------------------------------

<TABLE>
<CAPTION>
                                                                               2001                 2000
                                                                               ----                 ----
<S>                                                                        <C>                  <C>
SALES
 Product sales                                                             $   6,194,842        $   4,184,415
 Repair sales                                                                    537,649              541,308
 Other service sales                                                             792,992              318,231
                                                                           -------------        -------------
                                                                               7,525,483            5,043,954
                                                                           -------------        -------------
COST OF SALES
 Product sales                                                                 4,938,329            3,252,836
 Repair sales                                                                    359,475              261,134
 Other service sales                                                             646,803              255,171
                                                                           -------------        -------------
                                                                               5,944,607            3,769,141
                                                                           -------------        -------------

GROSS PROFIT                                                                   1,580,876            1,274,813
                                                                           -------------        -------------
OPERATING EXPENSES
  Selling, general and administrative                                          1,315,164              932,165
                                                                           -------------        -------------

INCOME FROM OPERATIONS                                                           265,712              342,648
                                                                           -------------        -------------

OTHER EXPENSE
  Interest expense                                                               118,041               37,631
                                                                           -------------        -------------
                                                                                 118,041               37,631
                                                                           -------------        -------------

INCOME  BEFORE INCOME TAXES                                                      147,671              305,017

INCOME TAXES (Note 3)                                                             58,000              118,957
                                                                           -------------        -------------

NET INCOME                                                                 $      89,671        $     186,060
                                                                           =============        =============
BASIC EARNINGS PER COMMON SHARE                                            $        0.02        $        0.04
                                                                           =============        =============
DILUTED EARNINGS PER COMMON SHARE                                          $        0.01        $        0.03
                                                                           =============        =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 Basic                                                                         5,425,104            4,875,738

 Diluted                                                                       6,064,129            5,469,462
</TABLE>

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

                               - 5 -
<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                  (DBA PDSi)

                           STATEMENTS OF CASH FLOWS

                 Thirteen Weeks Ended March 31, 2001 and 2000
                 --------------------------------------------
<TABLE>
<CAPTION>
                                                                                             2001                2000
                                                                                             ----                ----
<S>                                                                                     <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                                               $    89,671      $      186,060
                                                                                           -----------        ------------
  Adjustments to reconcile net income to net cash used
  in operating activities:
    Depreciation and amortization                                                               97,394              81,664
    Provision for doubtful accounts                                                                  -               1,500
    Inventory reserves                                                                           7,774              29,787
    (Increase) decrease in assets:
      Accounts receivable                                                                      537,295            (637,315)
      Inventory                                                                                743,912          (1,531,706)
      Prepaid expenses and other assets                                                       (105,457)            (28,427)
    Increase (decrease) in liabilities:
      Accounts payable                                                                      (2,635,752)          1,467,805
      Accrued expenses and taxes                                                              (203,227)            (11,455)
      Unearned revenues                                                                        (10,833)             18,815
                                                                                           -----------          -----------
        Total adjustments                                                                   (1,568,894)           (609,332)
                                                                                           -----------          -----------
          Net cash used in operating activities                                             (1,479,223)           (423,272)
                                                                                           -----------          -----------


CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of property and equipment                                                          (27,508)           (103,077)
                                                                                           -----------       -------------
          Net cash used in investing activities                                                (27,508)           (103,077)
                                                                                           -----------       -------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Net proceeds from line of credit                                                           1,487,092             459,600
  Principal payments on long-term debt                                                         (38,459)           (186,001)
  Long-term borrowings                                                                               -             400,000
  Proceeds from stock options exercised                                                         61,187              21,000
                                                                                           -----------       -------------
          Net cash provided by financing activities                                          1,509,820             694,599
                                                                                           -----------       -------------

INCREASE IN CASH                                                                                 3,089             168,250

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

CASH - End of year                                                                        $     38,962      $      203,546
                                                                                           ===========       =============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
 INFORMATION

    Interest paid                                                                         $    152,500      $       27,525
                                                                                           ===========       =============

    Income taxes paid                                                                     $    213,000      $       35,982
                                                                                           ===========       =============
</TABLE>


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

                                      -6-
<PAGE>

                          PINNACLE DATA SYSTEMS, INC.
                                  (DBA PDSi)


                         NOTES TO FINANCIAL STATEMENTS



Note 1.   Organization


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



Note 2.   Summary of Significant Accounting Policies


          The accompanying unaudited financial statements have been prepared in
          accordance with generally accepted accounting principles for interim
          financial information and with instructions to form 10-QSB and Article
          10 of Regulation S-X. Accordingly they do not include all of the
          information and footnotes required by generally accepted accounting
          principles for complete financial statements. In the opinion of
          management, all adjustments considered necessary for fair presentation
          of the results of operations for the periods presented have been
          included. The financial statements should be read in conjunction with
          the audited financial statements and the notes thereto for the fiscal
          year ended December 31, 2000. Interim results are not necessarily
          indicative of results for the full year.


          The preparation of financial statements in conformity with generally
          accepted accounting principles requires management to make estimates
          and assumptions that affect the reported amounts of assets and
          liabilities at the date of the financial statements and the reported
          amounts of revenues and expenses during the reporting period. Actual
          results could differ from those estimates.


Note 3.   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.

                                      -7-
<PAGE>

                          PINNACLE DATA SYSTEMS, INC.

                                  (DBA PDSi)


                         NOTES TO FINANCIAL STATEMENTS


Note 4.   Operating Segments


          During 2001, the Company restructured its reportable segments to
          include Product Sales, Repair Sales and Other Service Sales.
          Previously, the Company's reportable segments only included Product
          and Service sales. The new format separates repair sales from all
          other service sales, which include testing and screening of customer
          components, logistics and inventory management services, and non-
          recurring engineering services. All previously reported segment
          information has been restated to conform with the new presentation.

          The other column listed below reflects items that are not allocated to
          segments. These items primarily represent assets and expenses for
          various administrative functions within the Company. The Company
          evaluates performance based on operating earnings of the reportable
          segments.


<TABLE>
<CAPTION>
                                                Thirteen Weeks Ended March 31, 2001
                                  ---------------------------------------------------------------
                                    Product          Repair           Service
                                     Sales            Sales            Sales            Other            Total
                                  -----------      -----------      -----------     -------------     -----------
<S>                               <C>              <C>              <C>              <C>              <C>
Sales                             $ 6,194,842      $   537,649      $   792,992      $         -      $ 7,525,483
Gross profit                        1,256,512          178,175          146,189                -        1,580,876
Operating earnings                    389,931           30,643           22,127           (176,989)       265,712
Depreciation and
  amortization                         18,261           29,218           25,566             24,349         97,394
Interest expense                       98,325            9,701            4,056              5,959        118,041
Total assets                       11,872,119        1,171,314          489,785            719,462     14,252,680
Capital expenditures                    2,007           15,814              -                9,687         27,508

<CAPTION>
                                                Thirteen Weeks Ended March 31, 2000
                                  ---------------------------------------------------------------
                                    Product          Repair           Service
                                     Sales            Sales            Sales             Other             Total
                                  -----------      -----------      -----------       -----------       -----------
<S>                               <C>              <C>              <C>               <C>               <C>
Sales                             $ 4,184,415      $   541,308      $   318,231       $         -     $ 5,043,954
Gross profit                          931,579          280,174           63,060                 -       1,274,813
Operating earnings                    366,539          151,667           (2,691)         (172,867)        342,648
Depreciation and
  amortization                         24,985           20,166           14,938            21,575          81,664
Interest expense                       29,150            3,917            1,718             2,846          37,631
Total assets                        6,723,729          903,598          396,358           656,166       8,679,851
Capital expenditures                   27,831                -           30,923            44,323         103,077
</TABLE>

                                      -8-
<PAGE>

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.

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 any of the
three customers that made up approximately 63% of our revenue during 2000,
increased competition, any adverse change in Sun Microsystems' business or our
relationship with Sun, around whose computing platforms 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.

Results of Operations

Thirteen weeks ended March 31, 2001 compared to thirteen weeks ended March 31,
2000

SALES

Sales were $7,525,483 in the first thirteen weeks of 2001, an increase of 49%
over sales of $5,043,954 in the same period of 2000.

Product sales were $6,194,842 for the first thirteen weeks of 2001, an increase
of 48% over the first thirteen weeks of 2000. The increase in product sales was
primarily attributable to an increase in product shipments to three customers.
Those three customers generated a total of approximately $4.3 million, or 69% of
total product sales in the first thirteen weeks of 2001, compared to a total of
$1.2 million, or 28% of total product sales in the same period of 2000.

Despite the record sales in the first thirteen weeks of 2001, as the general
economic downturn developed we began to see our product customers cutting back
on how far into the future they are placing orders and making forecasts of
orders. Our customers also have begun to reduce the number of our products that
they are carrying in their inventories. Around the beginning of May 2001,
several of our larger customers indefinitely postponed orders previously placed
with us. As the general economy improves, we expect to see our customers begin
taking deliveries on those orders. The exact timing of when they will resume
placing orders is virtually impossible for us to predict. Especially in light of
the fact that we have a relatively high concentration of our recent sales in a
few customers, the result of those customers delaying orders will likely have a
significantly negative impact on our sales and profitability in the short term.
Given our current level of spending for future product development, a delay of
only a few product customer orders beyond June 2001 would result in a net loss
for the period ended June 30, 2001. At this time we expect a net loss after tax
of between five and nine cents per share in that reporting period.

We will continue to strive to add to our customer base as we pursue the strategy
of acquiring larger customers with larger projects, which could result in
greater short-term volatility in product revenue and profit.

                                      -9-
<PAGE>

Beginning with this Form 10Q we have separated repair sales from other service
sales. Other service sales include testing and screening of customer components,
logistics and inventory management services, and non-recurring engineering
services. The reason for reporting repair sales separate from other services
sales is the significant difference in gross margins of the two types of sales.
The other types of service sales typically have lower gross margins than repair
sales.

Repair sales were generally flat from the previous year. Repair sales for the
first thirteen weeks of 2001 were $537,649, a decline of less than 1% from the
same period in 2000. Approximately 75% of our repair sales are to one customer.
We continue to strive to add one or more large repair customers.

Other service sales for 2001 were $792,992, which was 149% higher than in 2000.
The majority of the increase was from logistics management services wherein, on
behalf of our largest repair customer, we send components that are under
warranty by other Original Equipment Manufacturers (OEM's) out to those
manufacturers for them to repair. We are billed by the OEM, and then rebill to
our largest repair customer at the same price, with no gross margin. Our efforts
in these exchanges are compensated by our customer by a monthly management fee.
Beginning with the second quarter of 2001 we will be marking up those charges to
our customer by a small amount.

We do not currently expect repair and other service sales to be negatively
impacted by the general economic slowdown.

GROSS PROFIT

Our gross profit increased from $1,274,813 in the first thirteen weeks of 2000
to $1,580,876 in 2001, an increase of 24%. Direct labor declined slightly from
6.4% of sales to 6.1%. Overhead increased from 6.2% to 6.4%, primarily due to a
significant increase in facility costs associated with increasing the size of
our facility.

The gross margin on product sales decreased to 20% for 2001, compared to 22% in
2000. Material, labor and overhead costs all increased by a fraction of 1% as a
percentage of product sales. Material costs of product sales are overwhelmingly
our largest cost item. Consequently, changes in those costs have the largest
potential to impact our profitability.

The gross margin on repair sales was 33% in 2001, compared to 52% in 2000. The
decline was due to increases in direct labor and overhead. A few positions that
performed a variety of roles in 2000 were dedicated to repair services in 2001,
performing quality assurance and statistical analysis for repairs from our
largest repair customer. Those positions are now charged to direct labor. The
increase in overhead was the result of additional equipment and the increase in
the size of our facility.

The gross margin on other service sales in 2001 was 18%, compared to 20% in
2000.  In 2000, the gross margin was relatively low due to significant start-up
costs involved with beginning the logistics and inventory management service
operation.  The margin was relatively low in 2001 due to the aforementioned OEM
warranty repair services on which there is no margin.

Our overall gross margin declined from 25% in 2000 to 21% in 2001.


OPERATING EXPENSES

Operating expenses totaled $1,315,164 for the first thirteen weeks of 2001,
compared with $932,165 for the same period in 2000. The 41% increase from 2000
to 2001 was less than the 49% rate of growth of sales but greater than the 24%
rate of growth of gross profit. The majority of the increase came from higher
wages from an expanded engineering and technical staff; approximately 20% of
which were

                                      -10-
<PAGE>

employed to support current revenue and approximately 80% of which were employed
to prepare for anticipated future growth.

As a percentage of sales, operating expenses decreased from 18% in 2000 to 17%
in 2001. Because operating expenses increased more than gross profit from the
first thirteen weeks of 2000 to 2001, income from operations decreased 22% to
$265,712 (3.5% of sales) for 2001, from $342,648 (6.8% of sales) in 2000.


OTHER INCOME AND EXPENSE

As a result of our increased use of our line of credit to support higher
accounts receivable and inventory, interest expense in 2001 grew 214%, from
$37,631 in 2000 to $118,041 in 2001.


INCOME TAXES AND NET INCOME

Income before income taxes declined to $147,671 for 2001 (2% of sales), compared
to $305,017 for 2000 (6% of sales), a decrease of 52%. Consequently, income tax
expense decreased, from $118,957 in 2000 to $58,000 in 2001. Net income was
$89,671 (1% of sales) in 2001, compared to $186,060 (4% of sales) in 2000, a
decrease of 52%.

Our basic earnings per share declined from $0.04 for 2000, to $0.02 for 2001.
Fully diluted earnings per share declined from $0.03 for 2000, to $0.01 for
2001.


LIQUIDITY AND CAPITAL RESOURCES

During the first thirteen weeks of 2001, we used $1,479,223 of cash in our
operating activities, compared to a use of cash of $423,272 in the same period
in 2000. We used cash to pay down our accounts payable and accrued expenses and
taxes by approximately $2.8 million. That amount was partially offset by
reductions in accounts receivable of $537,295 and inventory of $743,912. Much of
the inventory consumption came out of a substantial one-time buy of components
that we made during the last week of 2000 in order to avoid significant price
increases in those components. The total one-time buy was approximately $1.7
million. We placed an order for approximately $900,000 at the end of March 2001
for some of those same components used in our large customer products to meet
our customer orders at the time and to take advantage of substantial price
discounts. As those components were not shipped until April, they are not
reflected in the financial statements contained herein.

Our inventory total at December 31, 2000 included approximately $1.25 million of
components that we had acquired in the fourth quarter of 2000 in order to
assemble computer systems for one of our largest customers. One of the
components needed for the assembly was to be provided by the customer. Due to
technical problems experienced by the customer, no shipments were made of that
component by the customer prior to December 31, 2000. Consequently, we continued
to carry that amount of inventory into 2001. It was our expectation that the
technical problems would be resolved and the components received during the
first quarter of 2001, thereby liquidating the inventory. However, only a small
number of the components were made available by March 31, 2001. Approximately
$250,000 of inventory was shipped to the customer in February and March, leaving
approximately $1 million of components left in our inventory. We are working
with the customer to arrange in interim financial solution to the situation
while they continue to resolve the technical problems.

Because of the postponement of orders by the large product customers, we have a
substantial amount of finished products as well as unfinished components for
each of those customers. When the customers resume their orders, we will be able
to immediately ship those products and realize revenue.

                                      -11-
<PAGE>

We used $27,508 of cash in our investing activities in 2001, compared to
$103,077 in 2000. During the first thirteen weeks of 2000 we were in the process
of adding personnel and acquiring additional space in our building.
Consequently, we made significantly more purchases of computer equipment and
furniture than was necessary in 2001.

In March 2000, we entered into a new loan agreement with Key Bank in order to
increase our borrowing capacity and to reduce our interest rates. The initial
package with Key included a revolving line of credit and a $400,000 term loan
requiring 36 monthly principal and interest payments of $12,627. Both
instruments had an interest rate of prime minus 0.25%. The line of credit
initially had a limit of the lower of $2,500,000, or a percentage of our
eligible accounts receivables and inventory. In August 2000, the limit of the
line of credit was increased to $7,000,000 and the interest rate was reduced to
prime minus 0.85%. The loan agreement also includes a $250,000 lease line of
credit for purchases of equipment and furnishings. The loan agreement requires
us to meet certain financial targets and to comply with certain other covenants,
including restrictions on paying dividends, incurring additional indebtedness
and liens, guarantees of other obligations, and reorganizations. Our obligations
under the loan agreement are collateralized by substantially all of our assets.

The initial draw on the line of credit was approximately $1,475,000. Combined
with the $400,000 term loan, the proceeds were used to retire a term loan and
line of credit at Firstar Bank. The payoffs of those loans were approximately
$175,000 and $1,700,000, respectively. At March 31, 2001, the line of credit
balance was $6,290,401. The balance on the term loan was $266,667. We have not
yet made any draws against the lease line of credit.

In 2001, our overall financing activities provided cash of $1,509,820 compared
to $694,599, in 2000. Long-term debt was reduced by $38,459 and the line of
credit increased by $1,487,092. We also received $61,187 from the exercise of
stock options and warrants. As a result of the stock option and warrant
exercises and net income earned during the first thirteen weeks of 2001, total
stockholders equity increased by approximately $150,000.

The combination of the inventory backlogs created by the delay of the one
customer project with technical problems and the postponement of other customer
orders has the potential of creating short-term liquidity problems for us. We
are working with both our customers and our suppliers, as well as our bank, to
get through the liquidity shortage.

Our current bank financing agreement is not sufficient to support either further
growth of our current products or the research and development expenditures we
intend to make for future products. We are considering a variety of debt and
equity vehicles.

                                      -12-
<PAGE>

                          PART II - OTHER INFORMATION


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

               (A)  Exhibits.

                    None

               (B)  Reports on Form 8-K.

                    No reports on Form 8-K were filed during the thirteen weeks
                    ended March 31, 2001.

                                  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 __________________                  /s/ John D. Bair
                                         -----------------------------------
                                         John D. Bair, Chief Executive Officer


Date __________________                  /s/ Thomas J. Carr
                                         --------------------------------------
                                         Thomas J. Carr, Chief Financial Officer

                                      -13-