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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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



For the quarterly period ended March 31, 2005



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



For the transition period from  to



Commission file number: 1-16103



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PINNACLE DATA SYSTEMS, INC.

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



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



6600 Port Road,
Groveport, Ohio 43125

(Address of principal executive offices)



(614) 748-1150

(Issuers Telephone Number)



No change

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



---



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



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: 5,793,806 common shares, without par value, as of April 15, 2005



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



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PINNACLE DATA SYSTEMS, INC.

INDEX



|               |  |                                                                          |  |         
|-------------- |  | ------------------------------------------------------------------------ |  | --------
|               |  |                                                                          |  | Page No.
|               |  |                                                                         
|PART I         |  | FINANCIAL INFORMATION                                                    |  | 3       
|               |  |                                                                         
|Item 1.        |  | Financial Statements                                                     |  | 3       
|               |  |                                                                         
|               |  | Balance SheetsMarch 31, 2005 and December 31, 2004                       |  | 3-4     
|               |  |                                                                         
|               |  | Statements of IncomeQuarters ended March 31, 2005 and March 27, 2004     |  | 5       
|               |  |                                                                         
|               |  | Statements of Cash FlowsQuarters ended March 31, 2005 and March 27, 2004 |  | 6-7     
|               |  |                                                                         
|               |  | Notes to Financial Statements                                            |  | 8-13    
|               |  |                                                                         
|Item 2.        |  | Managements Discussion and Analysis or Plan of Operation                |  | 14-20   
|               |  |                                                                         
|Item 3.        |  | Controls and Procedures                                                  |  | 21      
|               |  |                                                                         
|PART II        |  | OTHER INFORMATION                                                        |  | 22      
|               |  |                                                                         
|Item 6.        |  | Exhibits.                                                                |  | 22-23   
|               | 
|SIGNATURES     |  | 24                                                                      
|               | 
|CERTIFICATIONS |  | 25-28                                                                   



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##### Table of Contents

Item 1. Financial Statements



PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



BALANCE SHEETS



|                                                                       |  |               |            |                  |   |           
|---------------------------------------------------------------------- |  | ------------- | ---------- | ---------------- | - | ----------
|                                                                       |  | March 31,2005 |            | December 31,2004
|                                                                       |  | (Unaudited)   |            |                 
|ASSETS                                                                 |  |               |            |                  |   |           
|CURRENT ASSETS                                                         |  |               |            |                  |   |           
|Cash                                                                   |  | $             | 12,784     |                  | $ | 15,068    
|Accounts receivable, net of allowance for doubtful accounts of $20,000 |  |               | 4,487,253  |                  |   | 4,398,251 
|Inventory                                                              |  |               | 4,295,204  |                  |   | 4,080,202 
|Prepaid expenses                                                       |  |               | 242,734    |                  |   | 239,720   
|Refundable income taxes                                                |  |               | 111,160    |                  |   | 171,248   
|Deferred income taxes                                                  |  |               | 477,000    |                  |   | 477,000   
|                                                                       |  |               |            |                  |   |           
|                                                                       |  |               | 9,626,135  |                  |   | 9,381,489 
|                                                                       |  |               |            |                  |   |           
|PROPERTY AND EQUIPMENT                                                 |  |               |            |                  |   |           
|Leasehold improvements                                                 |  |               | 314,487    |                  |   | 309,920   
|Furniture and fixtures                                                 |  |               | 383,057    |                  |   | 382,935   
|Computer equipment and related software                                |  |               | 2,599,815  |                  |   | 2,481,919 
|Shop equipment                                                         |  |               | 579,739    |                  |   | 568,223   
|                                                                       |  |               |            |                  |   |           
|                                                                       |  |               | 3,877,098  |                  |   | 3,742,997 
|Less accumulated depreciation and amortization                         |  |               | 2,893,059  |                  |   | 2,772,203 
|                                                                       |  |               |            |                  |   |           
|                                                                       |  |               | 984,039    |                  |   | 970,794   
|                                                                       |  |               |            |                  |   |           
|OTHER ASSETS                                                           |  |               | 22,166     |                  |   | 22,566    
|                                                                       |  |               |            |                  |   |           
|                                                                       |  | $             | 10,632,340 |                  | $ | 10,374,849
|                                                                       |  |               |            |                  |   |           



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



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##### Table of Contents

PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



BALANCE SHEETS



|                                                                                                                              |  |               |            |                  |   |           
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ---------------- | - | ----------
|                                                                                                                              |  | March 31,2005 |            | December 31,2004
|                                                                                                                              |  | (Unaudited)   |            |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                          |  |               |            |                  |   |           
|                                                                                                                              |  |              
|CURRENT LIABILITIES                                                                                                           |  |               |            |                  |   |           
|Line of credit                                                                                                                |  | $             | 1,629,926  |                  | $ | 2,525,020 
|Accounts payable                                                                                                              |  |               | 2,654,062  |                  |   | 2,176,746 
|Accrued expenses:                                                                                                             |  |               |            |                  |   |           
|Wages, payroll taxes and benefits                                                                                             |  |               | 381,178    |                  |   | 295,681   
|Other                                                                                                                         |  |               | 202,122    |                  |   | 207,398   
|Unearned revenue                                                                                                              |  |               | 97,240     |                  |   | 13,822    
|                                                                                                                              |  |               |            |                  |   |           
|                                                                                                                              |  |               | 4,964,528  |                  |   | 5,218,667 
|                                                                                                                              |  |               |            |                  |   |           
|LONG-TERM LIABILITIES                                                                                                         |  |               |            |                  |   |           
|Deferred income taxes                                                                                                         |  |               | 101,000    |                  |   | 101,000   
|                                                                                                                              |  |               |            |                  |   |           
|                                                                                                                              |  |               | 5,065,528  |                  |   | 5,319,667 
|                                                                                                                              |  |               |            |                  |   |           
|COMMITMENTS AND CONTINGENCIES                                                                                                 |  |               |           |                  |   |          
|                                                                                                                              |  |               |            |                  |   |           
|STOCKHOLDERS EQUITY                                                                                                          |  |               |            |                  |   |           
|Preferred stock; no par value; 4,000,000 shares authorized; no shares issued or outstanding                                   |  |               |           |                  |   |          
|Common stock; no par value; 25,000,000 shares authorized; 5,764,406 and 5,628,806 shares issued and outstanding, respectively |  |               | 2,465,404  |                  |   | 2,266,482 
|Additional paid-in capital                                                                                                    |  |               | 609,007    |                  |   | 543,095   
|Retained earnings                                                                                                             |  |               | 2,492,401  |                  |   | 2,245,605 
|                                                                                                                              |  |               |            |                  |   |           
|                                                                                                                              |  |               | 5,566,812  |                  |   | 5,055,182 
|                                                                                                                              |  |               |            |                  |   |           
|                                                                                                                              |  | $             | 10,632,340 |                  | $ | 10,374,849
|                                                                                                                              |  |               |            |                  |   |           



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



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



STATEMENTS OF INCOME



|                                  |  |                            |           |                            |   |          
|--------------------------------- |  | -------------------------- | --------- | -------------------------- | - | ---------
|                                  |  | Quarter EndedMarch 31,2005 |           | Quarter EndedMarch 27,2004
|                                  |  | (Unaudited)                |           | (Unaudited)               
|SALES                             |  |                            |           |                            |   |          
|Product sales                     |  | $                          | 5,304,860 |                            | $ | 5,429,462
|Service sales                     |  |                            | 2,187,640 |                            |   | 1,618,210
|                                  |  |                            |           |                            |   |          
|                                  |  |                            | 7,492,500 |                            |   | 7,047,672
|                                  |  |                            |           |                            |   |          
|COST OF SALES                     |  |                            |           |                            |   |          
|Product sales                     |  |                            | 4,482,826 |                            |   | 3,846,742
|Service sales                     |  |                            | 987,081   |                            |   | 923,843  
|                                  |  |                            |           |                            |   |          
|                                  |  |                            | 5,469,907 |                            |   | 4,770,585
|                                  |  |                            |           |                            |   |          
|GROSS PROFIT                      |  |                            | 2,022,593 |                            |   | 2,277,087
|                                  |  |                           
|OPERATING EXPENSES                |  |                            | 1,596,946 |                            |   | 1,641,482
|                                  |  |                            |           |                            |   |          
|INCOME FROM OPERATIONS            |  |                            | 425,647   |                            |   | 635,605  
|                                  |  |                            |           |                            |   |          
|OTHER EXPENSE                     |  |                            |           |                            |   |          
|Interest expense                  |  |                            | 27,851    |                            |   | 22,141   
|                                  |  |                            |           |                            |   |          
|INCOME BEFORE INCOME TAXES        |  |                            | 397,796   |                            |   | 613,464  
|                                  |  |                           
|INCOME TAX EXPENSE                |  |                            | 151,000   |                            |   | 251,000  
|                                  |  |                            |           |                            |   |          
|NET INCOME                        |  | $                          | 246,796   |                            | $ | 362,464  
|                                  |  |                            |           |                            |   |          
|BASIC EARNINGS PER COMMON SHARE   |  | $                          | 0.04      |                            | $ | 0.07     
|                                  |  |                            |           |                            |   |          
|DILUTED EARNINGS PER COMMON SHARE |  | $                          | 0.04      |                            | $ | 0.06     
|                                  |  |                            |           |                            |   |          



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



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



STATEMENTS OF CASH FLOWS



|                                                                                  |  |                            |          |   |                            |   |            |  
|--------------------------------------------------------------------------------- |  | -------------------------- | -------- | - | -------------------------- | - | ---------- | -
|                                                                                  |  | Quarter EndedMarch 31,2005 |          |   | Quarter EndedMarch 27,2004 |  
|                                                                                  |  | (Unaudited)                |          |   | (Unaudited)                |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |                            |          |   |                            |   |            |  
|Net income                                                                        |  | $                          | 246,796  |   |                            | $ | 362,464    |  
|                                                                                  |  |                            |          |   |                            |   |            |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                            |          |   |                            |   |            |  
|Depreciation and amortization                                                     |  |                            | 121,256  |   |                            |   | 145,045    |  
|Inventory reserves                                                                |  |                            | 94,040   |   |                            |   | 51,036     |  
|(Increase)/decrease in assets:                                                    |  |                            |          |   |                            |   |            |  
|Accounts receivable                                                               |  |                            | (89,002  | ) |                            |   | (267,985   | )
|Inventory                                                                         |  |                            | (309,042 | ) |                            |   | (1,168,230 | )
|Prepaid expenses and other assets                                                 |  |                            | (3,014   | ) |                            |   | (143,386   | )
|Refundable income taxes                                                           |  |                            | 126,000  |   |                            |   |           |  
|Increase/(decrease) in liabilities:                                               |  |                            |          |   |                            |   |            |  
|Accounts payable                                                                  |  |                            | 417,130  |   |                            |   | 585,152    |  
|Accrued expenses and taxes                                                        |  |                            | 82,971   |   |                            |   | 465,897    |  
|Unearned revenues                                                                 |  |                            | 83,418   |   |                            |   | 24,730     |  
|                                                                                  |  |                            |          |   |                            |   |            |  
|Total adjustments                                                                 |  |                            | 523,757  |   |                            |   | (307,741   | )
|                                                                                  |  |                            |          |   |                            |   |            |  
|Net cash provided by operating activities                                         |  |                            | 770,553  |   |                            |   | 54,723     |  
|                                                                                  |  |                            |          |   |                            |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |                            |          |   |                            |   |            |  
|Purchases of property and equipment                                               |  |                            | (134,101 | ) |                            |   | (25,723    | )
|                                                                                  |  |                            |          |   |                            |   |            |  
|Net cash used in investing activities                                             |  |                            | (134,101 | ) |                            |   | (25,723    | )
|                                                                                  |  |                            |          |   |                            |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |                            |          |   |                            |   |            |  
|Net change in line of credit                                                      |  |                            | (895,094 | ) |                            |   | (598,551   | )
|Outstanding checks in excess of funds on deposit                                  |  |                            | 60,186   |   |                            |   | 570,476    |  
|Principal payments on capital lease obligation                                    |  |                            | (2,750   | ) |                            |   |           |  
|Proceeds from stock options exercised                                             |  |                            | 198,922  |   |                            |   | 990        |  
|                                                                                  |  |                            |          |   |                            |   |            |  
|Net cash used in financing activities                                             |  |                            | (638,736 | ) |                            |   | (27,085    | )
|                                                                                  |  |                            |          |   |                            |   |            |  



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



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



STATEMENTS OF CASH FLOWS (CONTINUED)



|                                                                                  |  |                            |        |   |                            |   |       
|--------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | -------------------------- | - | ------
|                                                                                  |  | Quarter EndedMarch 31,2005 |        |   | Quarter EndedMarch 27,2004
|                                                                                  |  | (Unaudited)                |        |   | (Unaudited)               
|INCREASE IN CASH                                                                  |  |                            | (2,284 | ) |                            |   | 1,915 
|                                                                                  |  |                           
|CASH - Beginning of quarter                                                       |  |                            | 15,068 |   |                            |   | 11,997
|                                                                                  |  |                            |        |   |                            |   |       
|CASH - End of quarter                                                             |  | $                          | 12,784 |   |                            | $ | 13,912
|                                                                                  |  |                            |        |   |                            |   |       
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                  |  |                            |        |   |                            |   |       
|Interest paid                                                                     |  | $                          | 30,567 |   |                            | $ | 22,097
|                                                                                  |  |                            |        |   |                            |   |       
|Income taxes paid, net of refunds                                                 |  | $                          | 25,000 |   |                            | $ | 27,800
|                                                                                  |  |                            |        |   |                            |   |       
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONS           |  |                            |        |   |                            |   |       
|                                                                                  |  |                           
|Inventory capitalized as computer equipment.                                      |  | $                          |       |   |                            | $ | 15,995
|                                                                                  |  |                            |        |   |                            |   |       
|Income tax benefit from stock option plans credited to Additional paid-in-capital |  | $                          | 65,912 |   |                            | $ |      
|                                                                                  |  |                            |        |   |                            |   |       



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



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PINNACLE DATA SYSTEMS, INC.

(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS



(UNAUDITED)



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



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



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



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



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



|                                |  |           |           |            |   |          
|------------------------------- |  | --------- | --------- | ---------- | - | ---------
|                                |  | 3/31/2005 |           | 12/31/2004
|Component parts (raw materials) |  | $         | 3,714,183 |            | $ | 3,362,924
|Work-in-process                 |  |           | 204,634   |            |   | 369,937  
|Finished goods                  |  |           | 376,387   |            |   | 347,341  
|                                |  |           |           |            |   |          
|                                |  | $         | 4,295,204 |            | $ | 4,080,202
|                                |  |           |           |            |   |          



The carrying values
of component parts and finished goods represent the lower of average cost or managements estimate of its net realizable value. Such value is based on forecasts of product orders and repair/trade-in activity in the ensuing years. Such forecasts
are based on historical information, known contracts, and managements expertise in computer hardware life cycles.



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PINNACLE DATA SYSTEMS, INC.



(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS



(UNAUDITED)



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



The Company divides its fiscal calendar into 4 periods or quarters. Starting in 2005, the Company adopted a calendar fiscal schedule, with the
four quarters of the year always ending on March 31, June 30, September 30, and December 31. Prior to 2005, the Company intended that each quarter consist of thirteen weeks. The first quarter of each year began on January 1 and the fourth quarter
ended on December 31. Depending on what day of the week January 1 fell, the first quarter might contain a few days less than thirteen full weeks and the fourth quarter might contain a few days more than thirteen full weeks. The first quarter of 2005
ended on March 31 and contained 90 days. The first quarter of 2004 ended on March 27 and contained 87 days.



The balance sheet as of March 31, 2005 and the statements of income and cash flows for the quarter ended March 31, 2005 and March 27, 2004 have been
prepared by the Company without audit. In the opinion of management, all adjustments, which consist solely of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States
of America, the financial position, statements of income and changes in cash flows for all periods presented have been made.



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



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The Company accounts for employee and director stock options using the intrinsic value method. Under this
method, no compensation expense was recorded in the first quarter of 2005 because all stock options were granted at an exercise price equal to or greater than the fair market value of the Companys stock on the date of the grant. If
compensation expense for the Companys stock option grants had been determined based on their estimated fair value at the grant dates, the Companys net income and earnings per share for the quarters ending March 31, 2005 and March 27,
2004 would have been as follows:



PINNACLE DATA SYSTEMS,
INC.



(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS



(UNAUDITED)



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



|                                                                                                                                  |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                                                  |  | 2005 |         |   | 2004 |  
|Net income, as reported                                                                                                           |  | $    | 246,796 |   |      | $ | 362,464 |  
|Deduct: total stock-based compensation expense determined under the fair value method for all awards, net of related tax
benefits |  |      | (59,345 | ) |      |   | (73,562 | )
|                                                                                                                                  |  |      |         |   |      |   |         |  
|Net income, pro forma                                                                                                             |  | $    | 187,451 |   |      | $ | 288,902 |  
|                                                                                                                                  |  |     
|Earnings per common share, basic:                                                                                                 |  |      |         |   |      |   |         |  
|As reported                                                                                                                       |  | $    | 0.04    |   |      | $ | 0.07    |  
|Pro forma                                                                                                                         |  | $    | 0.03    |   |      | $ | 0.05    |  
|Earnings per common share, diluted:                                                                                               |  |      |         |   |      |   |         |  
|As reported                                                                                                                       |  | $    | 0.04    |   |      | $ | 0.06    |  
|Pro forma                                                                                                                         |  | $    | 0.03    |   |      | $ | 0.05    |  



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



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



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PINNACLE DATA SYSTEMS, INC.



(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS



(UNAUDITED)



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



At March 31, 2005, the Company had a bank line of credit with a limit of $6,000,000 and monthly interest payments at prime. The effective rate was 5.75%.
The Company was obligated for funds drawn against this line of credit in the amount of $1,629,926 and $2,525,020 at March 31, 2005 and December 31, 2004, respectively.



The line is payable on demand and is collateralized by a Blanket Lien on all assets of the Company. The amount
available under the line of credit is subject to borrowing base restrictions as outlined in the agreement. On December 28, 2004, the terms of the bank line of credit with KeyBank were amended to reflect the Companys near term borrowing needs
and the Companys credit risk as rated by KeyBank. The amount available under the line was increased to $6,000,000 from $5,000,000 and is due and renewable by May 15, 2006. The borrowing base calculation on March 31, 2005 was $5,967,000,
resulting in an unused capacity of $4,337,000.



|Note 4 | Stock Options
|------ | -------------



During the quarter ended March 31, 2005, the Companys stock option activities and weighted average exercise prices were as follows:



|                               |  |           |   |  |               |     
|------------------------------ |  | --------- | - |  | ------------- | ----
|                               |  | Shares    |   |  | ExercisePrice
|Outstanding, December 31, 2004 |  | 1,526,950 |   |  | $             | 2.00
|Granted                        |  | 21,000    |   |  |               | 3.06
|Exercised                      |  | (135,600  | ) |  |               | 1.47
|Forfeited                      |  | (350      | ) |  |               | 3.22
|                               |  |           |   |  |               |     
|Outstanding, March 31, 2005    |  | 1,412,000 |   |  | $             | 2.07
|                               |  |           |   |  |               |     



The fair value of
options granted was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the -quarter ended March 31, 2005:



|                                        |  |       |  
|--------------------------------------- |  | ----- | -
|Risk-free interest rate                 |  | 4.40  | %
|Dividend yield                          |  | 0     | %
|Volatility factor                       |  | 83.00 | %
|Weighted average expected life in years |  | 9     |  



The options granted
during the quarter had a weighted-average fair value of $2.53.



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##### Table of Contents

PINNACLE DATA SYSTEMS, INC.



(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS



(UNAUDITED)



|Note 5. | 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 6. | Earnings Per Common and Common Equivalent Share
|------- | -----------------------------------------------



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



|                                                                |  |                                      |         |                     |           |                 |   |     
|--------------------------------------------------------------- |  | ------------------------------------ | ------- | ------------------- | --------- | --------------- | - | ----
|                                                                |  | For the quarter ended March 31, 2005
|                                                                |  | Income(Numerator)                    |         | Shares(Denominator) |           | Per-ShareAmount
|Basic EPS                                                       |  |                                      |         |                     |           |                 |   |     
|Income available to common shareholders                         |  | $                                    | 246,796 |                     | 5,725,817 |                 | $ | 0.04
|                                                                |  |                                      |        
|Effect of Dilutive Securities                                   |  |                                      |         |                     |           |                 |   |     
|Options                                                         |  |                                      |         |                     | 529,761   |                 |   |     
|                                                                |  |                                      |         |                     |           |                 |   |     
|Diluted EPS                                                     |  |                                      |         |                     |           |                 |   |     
|Income available to common stockholders and assumed conversions |  | $                                    | 246,796 |                     | 6,255,578 |                 | $ | 0.04
|                                                                |  |                                      |         |                     |           |                 |   |     
|                                                                | 
|                                                                |  | For the quarter ended March 27, 2004
|                                                                |  | Income(Numerator)                    |         | Shares(Denominator) |           | Per-ShareAmount
|Basic EPS                                                       |  |                                      |         |                     |           |                 |   |     
|Income available to common shareholders                         |  | $                                    | 362,464 |                     | 5,540,244 |                 | $ | 0.07
|                                                                |  |                                      |        
|Effect of Dilutive Securities                                   |  |                                      |         |                     |           |                 |   |     
|Options                                                         |  |                                      |         |                     | 449,786   |                 |   |     
|                                                                |  |                                      |         |                     |           |                 |   |     
|Diluted EPS                                                     |  |                                      |         |                     |           |                 |   |     
|Income available to common stockholders and assumed conversions |  | $                                    | 362,464 |                     | 5,990,030 |                 | $ | 0.06
|                                                                |  |                                      |         |                     |           |                 |   |     



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PINNACLE DATA SYSTEMS, INC.



(DBA PDSi)



NOTES TO FINANCIAL STATEMENTS



(UNAUDITED)



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



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



|                              |  |                              |           |               |   |           |  |   |           |   |  |   |           
|----------------------------- |  | ---------------------------- | --------- | ------------- | - | --------- |  | - | --------- | - |  | - | ----------
|                              |  | Quarter Ended March 31, 2005
|                              |  | Product Sales                |           | Service Sales |   | Other     |  |   | Total    
|Sales                         |  | $                            | 5,304,860 |               | $ | 2,187,640 |  | $ |          |   |  | $ | 7,492,500 
|Gross profit                  |  |                              | 822,034   |               |   | 1,200,559 |  |   |          |   |  |   | 2,022,593 
|Income from operations        |  |                              | 224,998   |               |   | 982,078   |  |   | (781,429  | ) |  |   | 425,647   
|Depreciation and amortization |  |                              | 58,328    |               |   | 29,373    |  |   | 33,555    |   |  |   | 121,256   
|Interest expense              |  |                              |          |               |   |          |  |   | 27,851    |   |  |   | 27,851    
|Total assets                  |  |                              | 5,692,255 |               |   | 2,765,447 |  |   | 2,174,638 |   |  |   | 10,632,340
|Capital expenditures          |  |                              | 874       |               |   | 19,405    |  |   | 113,822   |   |  |   | 134,101   
|                              | 
|                              |  | Quarter Ended March 27, 2004
|                              |  | ProductSales                 |           | Service Sales |   | Other     |  |   | Total    
|Sales                         |  | $                            | 5,429,462 |               | $ | 1,618,210 |  | $ |          |   |  | $ | 7,047,672 
|Gross profit                  |  |                              | 1,582,720 |               |   | 694,367   |  |   |          |   |  |   | 2,277,087 
|Income from operations        |  |                              | 1,067,353 |               |   | 268,601   |  |   | (700,349  | ) |  |   | 635,605   
|Depreciation and amortization |  |                              | 70,034    |               |   | 30,009    |  |   | 45,002    |   |  |   | 145,045   
|Interest expense              |  |                              |          |               |   |          |  |   | 22,141    |   |  |   | 22,141    
|Total assets                  |  |                              | 7,215,553 |               |   | 1,099,014 |  |   | 2,038,946 |   |  |   | 10,353,513
|Capital expenditures          |  |                              | 34,084    |               |   | 7,634     |  |   |          |   |  |   | 41,718    



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



The following discussion should be read in conjunction with the Financial Statements and Notes contained herein. This quarterly report, including the following sections, contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to, statements regarding the Company achieving sequential quarterly sales increases throughout the rest of 2005
and continuing a string of profitable quarters. The words believe, expect, anticipate, estimate, project, should and similar expressions identify forward-looking statements that
speak only as of the date thereof. Investors are cautioned that such statements involve risks and uncertainties that could cause actual results to differ materially from historical or anticipated results due to many factors. These factors include
changes in general economic conditions, changes in the specific markets for our products and services, adverse business conditions, increased competition, changes in customer order patterns, our business or our relationship with major technology
partners, pricing pressures, lack of adequate financing to take advantage of business opportunities that may arise, lack of success in technological advancements, and risks associated with our new business practices, processes and information
systems, and other risks described in this quarterly report and from time to time in the Companys periodic reports and filings with the Securities and Exchange Commission. The Company undertakes no obligations to publicly update or revise such
statements.



The following discussions and analyses are for the quarter
ended March 31, 2005, compared to the comparable period ended March 27, 2004.



OVERVIEW



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



We will continue to implement our targeted growth strategy in 2005 by investing in sales,
marketing and a more scalable organization. Positive contributions from these efforts are anticipated throughout the rest of the year. Sales and earnings for the second quarter of 2005 are expected to be below the all-time quarterly records set in
the second quarter of 2004. However, we expect quarterly sales to increase sequentially throughout the rest of 2005 and to continue our string of profitable quarters. During this period of significant investment, as we transition to that higher
growth, more scalable, operating platform, we remain focused on improvement in annual results.



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##### Table of Contents

SALES



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



|              |  |      |       |      |   |          |  |    |  
|------------- |  | ---- | ----- | ---- | - | -------- |  | -- | -
|($ thousands) |  | 2005 |       | 2004 |   | % Change | 
|Total company |  | $    | 7,493 |      | $ | 7,048    |  | 6  | %
|Product       |  |      | 5,305 |      |   | 5,430    |  | -2 | %
|Service       |  |      | 2,188 |      |   | 1,618    |  | 35 | %



Product sales declined only slightly
from 2004. Lower shipments to industrial process control customers in 2005 were mostly offset by higher sales to imaging customers. The increase in service sales was due to new repair and hardware management programs.



For the first quarter of 2005, we had two customers that generated revenues of approximately
$1,669,000, and $885,000 or 22% and 12% respectively, of total revenue. In the statements of income, approximately $2,548,000 of the revenues from these customers is included in product sales and $6,000 is included in service sales. In addition,
these customers represented 29% and 11%, respectively, of accounts receivable at March 31, 2005.



GROSS PROFIT



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



|              |  |      |       |      |   |          |  |     |  
|------------- |  | ---- | ----- | ---- | - | -------- |  | --- | -
|($ thousands) |  | 2005 |       | 2004 |   | % Change | 
|Total company |  | $    | 2,023 |      | $ | 2,277    |  | -11 | %
|Product       |  |      | 822   |      |   | 1,583    |  | -48 | %
|Service       |  |      | 1,201 |      |   | 694      |  | 73  | %



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



|              |  |      |   |  |      |  
|------------- |  | ---- | - |  | ---- | -
|              |  | 2005 |   |  | 2004 |  
|Total company |  | 27   | % |  | 32   | %
|Product       |  | 15   | % |  | 29   | %
|Service       |  | 55   | % |  | 43   | %



Product sales to newer customers
generally were lower value-added sales and, therefore, had lower margins than the product sales in older customer programs, resulting in the decrease in both the gross profit dollars and percentage on product sales



The increased gross profit dollars and percentage on service sales reflected the higher sales
volumes and the resulting increased operating leverage.



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OPERATING EXPENSES AND INTEREST EXPENSES



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



|                   |  |      |       |      |   |          |  |    |  
|------------------ |  | ---- | ----- | ---- | - | -------- |  | -- | -
|($ thousands)      |  | 2005 |       | 2004 |   | % Change | 
|Operating expenses |  | $    | 1,597 |      | $ | 1,642    |  | -3 | %
|Interest expense   |  |      | 28    |      |   | 22       |  | 27 | %
|                   |  |      |       |      |   |          |  |    |  
|Total expense      |  |      | 1,625 |      |   | 1,664    |  | -2 | %
|                   |  |      |       |      |   |          |  |    |  



Operating expenses were essentially
unchanged in 2005 from 2004. Consistent with our strategic plan, we continued to invest back into the business, particularly in targeted sales and marketing initiatives, to grow sales and achieve a more scalable operational organization.



INCOME TAXES AND NET INCOME



Income taxes for the interim periods were computed using the effective tax rate estimated to
be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. The effective tax rate for the first quarter of 2005 was 38%, compared to 41% in the comparable period of 2004.



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



|                    |  |      |     |      |   |          |  |     |  
|------------------- |  | ---- | --- | ---- | - | -------- |  | --- | -
|($ thousands)       |  | 2005 |     | 2004 |   | % Change | 
|Income before taxes |  | $    | 398 |      | $ | 613      |  | -35 | %
|Income taxes        |  |      | 151 |      |   | 251      |  | -40 | %
|                    |  |      |     |      |   |          |  |     |  
|Net income          |  |      | 247 |      |   | 362      |  | -32 | %
|                    |  |      |     |      |   |          |  |     |  



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



|                                               |  |      |           |      |   |          
|---------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                               |  | 2005 |           | 2004
|Basic EPS                                      |  | $    | 0.04      |      | $ | 0.07     
|Fully diluted EPS                              |  | $    | 0.04      |      | $ | 0.06     
|                                               |  |     
|Weighted average number of shares outstanding: |  |      |           |      |   |          
|Basic                                          |  |      | 5,725,817 |      |   | 5,540,244
|Fully diluted                                  |  |      | 6,255,578 |      |   | 5,990,030



The decline in net income in the first
quarter of 2005 resulted from the decline in product revenue, the decline in profit margins on product sales, and the reinvestment of profits into our growth programs.



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LIQUIDITY AND CAPITAL RESOURCES



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



|                     |  |         |       |          |   |          |  |    |  
|-------------------- |  | ------- | ----- | -------- | - | -------- |  | -- | -
|($ thousands)        |  | 3/31/05 |       | 12/31/04 |   | % Change | 
|Accounts receivable  |  | $       | 4,487 |          | $ | 4,398    |  | 2  | %
|Inventory            |  |         | 4,295 |          |   | 4,080    |  | 5  | %
|Other current assets |  |         | 844   |          |   | 903      |  | -7 | %
|                     |  |         |       |          |   |          |  |    |  
|Total                |  | $       | 9,626 |          | $ | 9,381    |  | 3  | %
|                     |  |         |       |          |   |          |  |    |  



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



|                          |  |         |       |          |   |          |  |     |  
|------------------------- |  | ------- | ----- | -------- | - | -------- |  | --- | -
|($ thousands)             |  | 3/31/05 |       | 12/31/04 |   | % Change | 
|Line of credit            |  | $       | 1,630 |          | $ | 2,525    |  | -35 | %
|Accounts payable          |  |         | 2,654 |          |   | 2,177    |  | 22  | %
|Other current liabilities |  |         | 681   |          |   | 517      |  | 32  | %
|                          |  |         |       |          |   |          |  |     |  
|Total                     |  | $       | 4,965 |          | $ | 5,219    |  | -5  | %
|                          |  |         |       |          |   |          |  |     |  



During the first quarter of 2005,
$771,000 of cash was generated by operating activities. Net income before depreciation and inventory reserve increases was $462,000. Cash was used by an increase in accounts receivable of $89,000 and an increase in inventory of $309,000. Additional
cash was generated by increases in accounts payable of $417,000 and in other current liabilities of $166,000. The increased inventory total reflects a continued buildup begun in the fourth quarter of 2004 to support two multi-year customer programs
that require a substantial investment in inventory. In both programs, agreements minimize our risk of inventory loss and our revenue includes extra charges for carrying the inventory.



For the first quarter of 2005, we used $134,000 of cash generated by operating activities to purchase equipment, including computers and
software.



In addition to the cash generated by operations, we received
$199,000 from employee and director stock option exercises. The excess of the cash generated by those two sources over the investment in new equipment was used to pay down our line of credit by $895,000.



The line of credit, which is our primary source of operational and non-operational funding,
is maintained with KeyBank National Association 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.



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 $6,000,000 as well as a sub-limit of $3,000,000 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 March 31, 2005 was $1,630,000. The borrowing base calculation on that date was $5,967,000, resulting in an unused capacity
of $4,337,000. We were in compliance with all covenants of the line at March 31, 2005.



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On December 28, 2004, the line of credit was renewed until May 15, 2006. The maximum limit of the line was increased to
$6,000,000 from $5,000,000. As the line of credit is our primary source of financing, it is critical to our short-term liquidity. To maintain a sufficient borrowing base to meet our needs and meet the covenant requirements of the line, we must
maintain sales and gross profit levels with minimum inventory on hand, and effectively manage cash flow from collections to payments. Significant delays or loss of customer orders, or delayed customer payments, could severely impact our ability to
meet our short-term financial obligations. Inventory reductions also reduce our borrowing base, thereby limiting our capacity for short-term borrowing. This would include reductions in inventory due to changes in the valuation of our inventory and
the setting of appropriate inventory reserves to reflect changes in technology or reduced customer requirements.



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



OFF-BALANCE SHEET ARRANGEMENTS



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



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



CRITICAL ACCOUNTING POLICIES



The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to
make judgments, assumptions and estimates that affect the amounts reported in the Financial Statements and accompanying notes. Note 1 to the Financial Statements in the Annual Report on our Form 10-KSB for the year ended December 31, 2004 describes
the significant accounting policies and methods used in the preparation of the Financial Statements. Estimates are used for, but not limited to, the accounting for allowance for doubtful accounts and inventory reserves. Actual results could differ
from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Financial Statements.



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



The allowance for doubtful accounts is based on our assessment of the collectibility of
specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customers credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of
amounts due to us could be adversely affected.



Inventory purchases and
commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may
be required to increase our inventory allowances and our gross margin would be adversely affected.



RISK FACTORS



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



If we are unable to compete effectively with existing or new competitors, the loss of our
competitive position could result in price reductions, fewer customer orders, reduced revenues, reduced margins, reduced levels of profitability, and loss of market share. If we are unable to manage our inventory, will not be able to satisfy
customer demand. Our reliance on one or a few suppliers for inventory components could delay shipments and increase our costs. Our future operating results depend on our ability to purchase a sufficient amount of components to meet the demands of
our customers. Since we may order components from suppliers in advance of receipt of customer orders for our products that include these components, we could face a material inventory risk. Our products may have quality issues that could adversely
affect our sales and reputation. We are dependent on significant customers, as noted in the SALES section above.



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



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



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prediction of revenues, earnings and working capital for each financial period especially difficult and uncertain and
increases the risk of unanticipated variations in quarterly results and financial condition.



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



Our stock price, like that of other technology companies, can be volatile. Our stock price can be affected by many factors such as quarterly increases or decreases in our earnings, speculation in the investment community about our financial
condition or results of operations, technological developments, or the loss of key management or technical personnel. In addition, general macroeconomic and market conditions unrelated to our financial performance may also affect our stock price.



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##### Table of Contents

Item 3. Controls and Procedures.



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



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



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##### Table of Contents

PART II  OTHER INFORMATION



Item 6. Exhibits.



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



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



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|           |  |                                                                                                                                                                                 |  |                                                                                                  
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description of Exhibit                                                                                                                                                          |  | If Incorporated by Reference, Document with which Exhibit was Previously Filed with the SEC      
|10(am)     |  | Employment agreement between Pinnacle Data Systems, Inc. and John D. Bair dated January 1, 2005.                                                                                |  | Current Report on Form 8-K filed with the Securities and Exchange Commission on January 24, 2005.
|           |  |                                                                                                                                                                                
|10(an)     |  | Employment agreement between Pinnacle Data Systems, Inc. and Christopher L. Winslow dated January 1, 2005.                                                                      |  | Current Report on Form 8-K filed with the Securities and Exchange Commission on January 24, 2005.
|           |  |                                                                                                                                                                                
|10(ao)     |  | Employment agreement between Pinnacle Data Systems, Inc. and Michael R. Sayre dated January 1, 2005.                                                                            |  | Current Report on Form 8-K filed with the Securities and Exchange Commission on January 24, 2005.
|           |  |                                                                                                                                                                                
|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 March 31, 2005. |  | Contained herein.                                                                                
|           |  |                                                                                                                                                                                
|31(b)      |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Quarterly Report on Form 10-QSB of Pinnacle Data Systems, Inc. for the quarter ended March 31, 2005. |  | Contained herein.                                                                                
|           |  |                                                                                                                                                                                
|32(a)      |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Quarterly Report on Form 10-QSB of Pinnacle Data Systems, Inc. for the quarter ended March 31, 2005. |  | Contained herein.                                                                                
|           |  |                                                                                                                                                                                
|32(b)      |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Quarterly Report on Form 10-QSB of Pinnacle Data Systems, Inc. for the quarter ended March 31, 2005. |  | Contained herein.                                                                                



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SIGNATURES



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



|                     |  |                                        
|-------------------- |  | ---------------------------------------
|                     |  | PINNACLE DATA SYSTEMS, INC.            
|                     | 
|Date: April 27, 2005 |  | /s/ Michael R. Sayre                   
|                     |  | Michael Sayre, Executive Vice President
|                     |  | and Chief Financial Officer            
|                     | 
|Date: April 27, 2005 |  | /s/ Thomas J. Carr                     
|                     |  | Thomas J. Carr, Controller             



24