<PAGE>   1

                                    FORM 10-Q
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

             [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934.

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

                                       OR

            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934.

          FOR THE TRANSITION PERIOD FROM              TO
                                         ------------    --------------

                         COMMISSION FILE NUMBER 0-24773

                             PINNACLE HOLDINGS INC.

     INCORPORATED IN DELAWARE I.R.S. EMPLOYER IDENTIFICATION NO. 65-0652634

             301 NORTH CATTLEMEN ROAD, SARASOTA, FLORIDA 34232-6427

                            TELEPHONE: (941) 364-8886

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]

At August 13, 2001, Registrant had outstanding 48,430,593 shares of $.001 par
value common stock.


<PAGE>   2

<TABLE>
<CAPTION>
                                                                                                                 PAGE
                                                                                                                 -----
<S>           <C>                                                                                                <C>
PART I.       FINANCIAL INFORMATION
Item 1.       Financial Statements
              Unaudited Condensed Consolidated Balance Sheets as of December 31, 2000 and June 30, 2001              1
              Unaudited Condensed Consolidated Statements of Operations for the six months ended
                June 30, 2000 and 2001                                                                               2
              Unaudited Condensed Consolidated Statements of Operations for the three months ended
                June 30, 2000 and 2001                                                                               3
              Unaudited Condensed Consolidated Statement of Changes in Stockholders' Equity
                for the six months ended June 30, 2001                                                               4
              Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended
                June 30, 2000 and 2001                                                                               5
              Notes to Unaudited Condensed Consolidated Financial Statements                                      6-12

Item 2.       Management's Discussion and Analysis of Financial Condition and
                Results of Operations                                                                            13-24

Item 3.       Quantitative and Qualitative Disclosures About Market Risk                                            25

PART II.      OTHER INFORMATION

Item 1.       Legal Proceedings                                                                                     26

Item 2.       Not Applicable                                                                                        26

Item 3.       Not Applicable                                                                                        26

Item 4.       Submission of Matters to a Vote of Security Holders                                                   27

Item 5.       Other Information                                                                                     27

Item 6.       Exhibits and Reports on Form 8-K                                                                      27


SIGNATURES                                                                                                          28

EXHIBIT INDEX                                                                                                       29
</TABLE>


<PAGE>   3

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:

                             PINNACLE HOLDINGS INC.
                UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                         December 31,                 June 30,
                                                                                             2000                       2001
                                                                                         ------------               -----------
                                                                                                                    (unaudited)
                                                                                          (in thousands, except per share data)
<S>                                                                                      <C>                        <C>
                            Assets
Current assets:
   Cash and cash equivalents                                                             $    44,233                $    22,910
   Accounts receivable, net                                                                   18,056                     22,590
   Prepaid expenses and other current assets                                                  10,984                     10,727
                                                                                         -----------                -----------
     Total current assets                                                                     73,273                     56,227

Fixed assets, net                                                                          1,307,945                  1,223,718
Leasehold interests, net                                                                      62,482                     44,491
Assets held for sale                                                                              --                     30,346
Deferred debt issue costs, net                                                                18,094                     19,202
Other assets                                                                                   7,813                     11,020
                                                                                         -----------                -----------
                                                                                         $ 1,469,607                $ 1,385,004
                                                                                         ===========                ===========

              Liabilities and Stockholders' Equity
Current liabilities:
   Accounts payable                                                                      $     4,993                $     5,408
   Accrued expenses                                                                           22,735                     28,200
   Deferred revenue                                                                            6,795                      6,961
   Interest rate swap liability                                                                   --                      8,489
   Current portion of long-term debt                                                          16,868                     28,138
                                                                                         -----------                -----------
     Total current liabilities                                                                51,391                     77,196
Long-term debt                                                                               869,392                    870,269
Other liabilities                                                                             14,400                     14,014
                                                                                         -----------                -----------
                                                                                             935,183                    961,479

Minority interest in subsidiary                                                                  321                        891

Commitments and contingencies (Note 9)                                                            --                         --

Stockholders' equity:
   Preferred stock, $.001 par value, 5,000,000 shares authorized; 0 shares
     issued and outstanding at December 31, 2000 and
     June 30, 2001                                                                                --                         --
   Common Stock, $.001 par value, 100,000,000 shares authorized;
     48,430,593 shares issued and outstanding at
     December 31, 2000 and June 30, 2001                                                          48                         48
   Additional paid-in capital                                                                773,240                    773,231
   Accumulated other comprehensive income (loss)                                                (403)                    (2,556)
   Accumulated deficit                                                                      (238,782)                  (348,089)
                                                                                         -----------                -----------
                                                                                             534,103                    422,634
                                                                                         -----------                -----------
                                                                                         $ 1,469,607                $ 1,385,004
                                                                                         ===========                ===========
</TABLE>


The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
         are an integral part of these condensed financial statements.


                                       1

<PAGE>   4

                             PINNACLE HOLDINGS INC.
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                                    Six Months Ended
                                                                                                        June 30,
                                                                                         --------------------------------------
                                                                                            2000                       2001
                                                                                         -----------                -----------
                                                                                         (unaudited)                (unaudited)
                                                                                          (in thousands, except per share data)
<S>                                                                                      <C>                        <C>
Revenues                                                                                 $    84,283                $    97,395

Direct operating expenses, excluding depreciation and amortization                            29,303                     36,515
                                                                                         -----------                -----------
Gross margin, excluding depreciation and amortization                                         54,980                     60,880
Other expenses:
  General and administrative                                                                   4,200                     11,983
  Corporate development                                                                       13,522                     12,848
  State franchise, excise and minimum taxes                                                      742                        950
  Depreciation and amortization                                                               51,766                     64,862
  Impairment on assets held for sale                                                              --                     34,563
                                                                                         -----------                -----------
                                                                                              70,230                    125,206
                                                                                         -----------                -----------
Loss from operations                                                                         (15,250)                   (64,326)
Interest expense, net                                                                         16,311                     29,536
Amortization of original issue discount and debt issuance costs                               13,250                     14,760
Loss on disposal of assets                                                                        --                      1,862
Foreign currency transaction loss                                                                 --                        248
Minority interest in net loss of subsidiary                                                       --                       (130)
                                                                                         -----------                -----------
Loss before income tax benefit                                                               (44,811)                  (110,602)
Income tax benefit                                                                                --                      1,295
                                                                                         -----------                -----------
Net loss                                                                                 $   (44,811)               $  (109,307)
                                                                                         ===========                ===========

Basic and diluted net loss per common share                                              $     (0.95)               $     (2.26)
Weighted average number of common shares outstanding                                          47,411                     48,431
                                                                                         ===========                ===========
</TABLE>


The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
         are an integral part of these condensed financial statements.


                                       2

<PAGE>   5

                             PINNACLE HOLDINGS INC.
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                                   Three Months Ended
                                                                                                        June 30,
                                                                                         --------------------------------------
                                                                                            2000                       2001
                                                                                         -----------                -----------
                                                                                         (unaudited)                (unaudited)
                                                                                          (in thousands, except per share data)
<S>                                                                                      <C>                        <C>
Revenues                                                                                 $    44,359                $    49,120

Direct operating expenses, excluding depreciation and amortization                            14,957                     18,952
                                                                                         -----------                -----------
Gross margin, excluding depreciation and amortization                                         29,402                     30,168
Other expenses:
  General and administrative                                                                   2,107                      8,697
  Corporate development                                                                        6,954                      5,977
  State franchise, excise and minimum taxes                                                      376                        472
  Depreciation and amortization                                                               27,005                     31,962
  Impairment on assets held for sale                                                              --                     34,563
                                                                                         -----------                -----------
                                                                                              36,442                     81,671
                                                                                         -----------                -----------
Loss from operations                                                                          (7,040)                   (51,503)
Interest expense, net                                                                          7,534                     11,812
Amortization of original issue discount and debt issuance costs                                6,824                      7,572
Loss on disposal of assets                                                                        --                      2,016
Foreign currency transaction gain                                                                 --                       (118)
Minority interest in net loss of subsidiary                                                       --                        (52)
                                                                                         -----------                -----------
Loss before income tax benefit                                                               (21,398)                   (72,733)
Income tax benefit                                                                                --                        989
                                                                                         -----------                -----------
Net loss                                                                                 $   (21,398)               $   (71,744)
                                                                                         ===========                ===========

Basic and diluted net loss per common share                                              $     (0.44)               $     (1.48)
Weighted average number of common shares outstanding                                          48,345                     48,431
                                                                                         ===========                ===========
</TABLE>


The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
         are an integral part of these condensed financial statements.


                                       3

<PAGE>   6

                             PINNACLE HOLDINGS INC.
  UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                    (in thousands)

                                                                                            Accumulated
                                                      Common Stock            Additional       Other
                                                   -------------------         Paid-in     Comprehensive  Accumulated  Stockholders'
                                                   Shares       Amount         Capital     Income (Loss)    Deficit       Equity
                                                   ------       ------        ----------   -------------  -----------  ------------
<S>                                                <C>          <C>           <C>          <C>            <C>          <C>
Balance at December 31, 2000                       48,431        $   48         $773,240      $  (403)      $(238,782)    $ 534,103
Unaudited:
Comprehensive income (loss):
  Net loss                                                                                                   (109,307)     (109,307)
  Foreign currency translation gain                                                               849                           849
  Cumulative effect of change in accounting
    for derivative financial instruments,
    net of applicable income taxes                                                             (4,002)                       (4,002)
  Losses (gains) reclassified into earnings
    from other comprehensive income (loss)
    net of applicable income taxes                                                              1,000                         1,000
                                                                                                                          ---------
  Total comprehensive loss                                                                                                 (111,460)

Repurchase of common stock                                                            (9)                                        (9)
                                                   ------        -----          --------      -------       ---------     ---------
 Balance at June 30, 2001                          48,431        $  48          $773,231      $(2,556)      $(348,089)    $ 422,634
                                                   ======        =====          ========      =======       =========     =========
</TABLE>


The accompanying Notes to Unaudited Condensed Consolidated Financial Statements
         are an integral part of these condensed financial statements.


                                       4

<PAGE>   7

                             PINNACLE HOLDINGS INC.
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                   Six Months Ended
                                                                                                        June 30,
                                                                                         --------------------------------------
                                                                                            2000                       2001
                                                                                         -----------                -----------
                                                                                         (unaudited)                (unaudited)
                                                                                                     (in thousands)
<S>                                                                                      <C>                        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                                 $   (44,811)               $  (109,307)
Adjustments to reconcile net loss to net cash provided
   by operating activities:
       Depreciation and amortization                                                          51,766                     64,862
       Amortization of original issue discount and debt issuance costs                        13,249                     14,758
       Income tax benefit                                                                         --                     (1,367)
       Reserve for doubtful accounts                                                             373                      1,300
       Disposal of fixed assets                                                                   --                      1,862
       Impairment of capitalized acquisitions and construction costs                              --                      3,520
       Impairment on assets held for sale                                                         --                     34,561
       Minority share of net loss of subsidiary                                                   --                       (130)
       Change in value of derivative financial instruments                                        --                      5,487
       (Increase) decrease in:
          Accounts receivable, gross                                                          (5,050)                    (5,834)
          Prepaid expenses and other current assets                                           (7,161)                       257
          Other assets                                                                        (2,623)                    (2,327)
       Increase (decrease) in:
          Accounts payable                                                                       (87)                       415
          Accrued expenses                                                                     1,686                      5,465
          Deferred revenue                                                                     4,694                        166
          Other liabilities                                                                      (70)                       122
                                                                                         -----------                -----------
                                                                                              56,777                    123,117
                                                                                         -----------                -----------
Net cash provided by operating activities                                                     11,966                     13,810
                                                                                         -----------                -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Payments made in connection with acquisitions:
          Fixed assets                                                                      (289,138)                   (12,636)
          Net current liabilities acquired                                                       177                         --
       Capital expenditures:
          Fixed assets                                                                       (22,351)                   (20,353)
                                                                                         -----------                -----------
Net cash used in investing activities                                                       (311,312)                   (32,989)
                                                                                         -----------                -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
       Borrowings under long-term debt, net                                                  277,567                        330
       Repayment of long-term debt                                                          (200,181)                    (1,313)
       Deferred debt issue costs                                                                  --                     (2,630)
       Proceeds from issuance of common stock, net                                           282,874                         (9)
       Minority interest in subsidiary                                                            --                        700
                                                                                         -----------                -----------
Net cash provided by (used in) financing activities                                          360,260                     (2,922)
                                                                                         -----------                -----------
Effect of exchange rate changes on cash                                                          305                        778
                                                                                         -----------                -----------

Net increase (decrease) in cash and cash equivalents                                          61,219                    (21,323)
Cash and cash equivalents, beginning of period                                                94,863                     44,233
                                                                                         -----------                -----------
Cash and cash equivalents, end of period                                                 $   156,082                $    22,910
                                                                                         ===========                ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Cash paid for interest                                                                   $    17,657                $    17,969
                                                                                         ===========                ===========
Non-cash Transactions:
       Seller debt issued in acquisition                                                 $     8,989                         --
</TABLE>


The accompanying notes to Unaudited Condensed Consolidated Financial Statements
         are an integral part of these condensed financial statements.


                                       5

<PAGE>   8

                             PINNACLE HOLDINGS INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

         As used in this Quarterly Report on Form 10-Q for the period ending
June 30, 2001, unless the context otherwise requires, "we," "us," "our,"
"Company," or "Pinnacle" refers to Pinnacle Holdings Inc. and its consolidated
subsidiaries, including Pinnacle Towers Inc., Pinnacle Towers III Inc. ("PT
III"), Pinnacle Towers IV Inc. ("PT IV"), Pinnacle Towers V Inc. ("PT V"), and
Pinnacle Towers, Ltd.

1.       BASIS OF PRESENTATION

         The accompanying unaudited condensed consolidated financial statements
reflect the financial position and results of operations and cash flows of
Pinnacle Holdings Inc. and its wholly owned subsidiaries: Pinnacle Towers Inc.,
Pinnacle Towers Canada Inc., Coverage Plus Antenna Systems, Inc., PT III, PT IV,
PT V and Tower Systems, Inc. We took several actions during the first quarter of
2001 to restructure our investments in PT III and PT IV in order to take
advantage of changes in the REIT tax laws, which became effective on January 1,
2001, as well as to permit the REIT qualifying assets of PT III to fall under
the REIT election of Pinnacle Holdings Inc. Pinnacle Towers Inc. acquired all of
the voting common stock of PT III and PT IV originally held by certain officers
of Pinnacle, upon which PT III became a wholly owned "qualified REIT subsidiary"
of Pinnacle Holdings Inc. and PT IV became a wholly owned "taxable REIT
subsidiary" of Pinnacle Holdings Inc. Prior to the acquisition described in the
preceding sentence, PT III transferred substantially all of its non-REIT
qualifying assets to PT V, a wholly owned subsidiary of PT III, and PT V
thereupon became a "taxable REIT subsidiary" of Pinnacle Holdings Inc. Pinnacle
Towers Inc. has contributed $12.0 million in capital, including $7.5 million
during the six months ended June 30, 2001, to a newly created entity, Pinnacle
Towers, Ltd., to establish a 91% interest in the entity. Pinnacle Towers, Ltd.
will use the capital to purchase telecommunication sites throughout the United
Kingdom and continental Europe. The financial position, results of operations
and cash flows of Pinnacle Towers, Ltd. are consolidated in the financial
statements of Pinnacle Holdings Inc. and the minority interest disclosed. All
significant intercompany balances and transactions have been eliminated.

         Results of operations for any interim period are not necessarily
indicative of results of any other periods or for the year. The accompanying
unaudited condensed consolidated financial statements have been prepared in
conformity with generally accepted accounting principles in the United States
for interim financial statements and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. They do not include all information and notes required
by generally accepted accounting principles for complete financial statements.
However, except as disclosed herein, there has been no material change in
information disclosed in the notes to the consolidated financial statements
included in Pinnacle's Annual Report on Form 10-K for the year ended December
31, 2000. In the opinion of management, all adjustments (consisting of normal
recurring adjustments), as well as the accounting change to adopt Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" considered necessary for the fair
presentation have been included. These unaudited condensed consolidated
financial statements should be read in conjunction with Pinnacle's consolidated
financial statements and notes thereto included in Pinnacle's Annual Report on
Form 10-K for the year ended December 31, 2000.

2.       ADOPTION OF SFAS NO. 133 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
         HEDGING ACTIVITIES

         Effective January 1, 2001, we adopted SFAS No. 133 as amended by SFAS
No. 137 and 138. These statements require us to recognize all derivative
instruments in the balance sheets at their fair value. These statements also
establish new accounting rules for hedging instruments, which depend on the
nature of the hedge relationship. As disclosed in further detail below, the
second quarter 2001 unaudited condensed consolidated financial statements
include the provisions required by SFAS No. 133, while the second quarter 2000
unaudited condensed consolidated financial statements were prepared in
accordance with the applicable professional literature for derivatives and
hedging instruments in effect at that time.


                                       6

<PAGE>   9

         The adoption of SFAS No. 133 resulted in Pinnacle recording a
transition adjustment to recognize our derivative instruments at fair value and
to recognize the change in fair value of our derivatives. The cumulative effect
of this transition adjustment was an after-tax reduction to other comprehensive
income (OCI) of approximately $4.0 million. The reduction in other comprehensive
net income is primarily related to the change in the fair value of our interest
rate swap agreement. We estimated that we would reclassify into earnings during
the twelve-month period ending December 31, 2001, approximately $2.0 million of
net losses relating to the transition adjustment recorded as of January 1, 2001.

         We recorded our derivatives as accrued expenses in the unaudited
condensed consolidated balance sheet at June 30, 2001, at fair value. The fair
value of derivatives used to modify our risks fluctuates over time. These fair
value amounts should not be viewed in isolation, but rather in relation to the
fair values or cash flows of the underlying hedged transactions and other
exposures and to the overall reduction in our risk relating to adverse
fluctuations in interest rates and other market factors. In addition, the
earnings impact resulting from our derivative instruments is recorded in the
same line item within the unaudited condensed consolidated statement of
operations as the underlying exposure being hedged.

         As a condition of our senior credit facility we are required to enter
into and maintain at all times interest hedge contracts covering a minimum of
50% of the debt outstanding under the senior credit facility. Pinnacle enters
into interest rate swap agreements to manage the interest rate risk associated
with certain of our variable rate debt. The swap agreements convert the credit
agreement floating rate debt from LIBOR plus a margin, as defined in the
agreement, to fixed rate debt plus the applicable margin under the credit
agreement on an amount equal to the notional value of the interest rate swap. As
of June 30, 2001, and December 31, 2000, we had one interest rate swap agreement
for a notional amount of $260 million that pays interest at a fixed rate of
6.37% and matures on December 31, 2001, and includes an option whereby the
counterparty may extend the maturity to December 31, 2002, with all other terms
remaining unchanged with the exception of the notional amount, which will
decrease to $130 million.

         Because of the written option feature, the interest rate swap agreement
does not meet the criteria to be accounted for as a hedge under SFAS No. 133.
Accordingly, the changes in the fair value of this agreement, subsequent to the
adoption of the statement on January 1, 2001, are recorded in earnings
immediately. The earnings impact recorded during the three and six month periods
ending June 30, 2001, relating to this interest rate swap was approximately $0.0
million and $5.5 million, respectively, and is recorded in interest expense in
the unaudited condensed consolidated statement of operations. For the three
months ended June 30, 2001, approximately $0.5 million represents an increase in
the fair value of the interest rate swap agreement and approximately $0.5
million represents the reversal into current year income of the underlying
exposure previously recognized in comprehensive loss. For the six months ended
June 30, 2001, approximately $4.5 million represents the additional decline in
the fair value of the interest rate swap agreement since January 1, 2001 and
approximately $1.0 million represents the reversal into current year income of
the underlying exposure previously recognized in comprehensive loss.

3.       COMPREHENSIVE LOSS

         Total comprehensive loss for the six months ended June 30, 2001, was
($111.5) million, comprising net loss of ($109.3) million, cumulative effect of
change in accounting for derivative financial instruments net of taxes of ($4.0)
million, offset by a net reduction for foreign currency translation of
approximately $0.8 million and approximately $1.0 million in losses reclassified
into earnings from other comprehensive loss. Total comprehensive loss was
($44.8) million for the six months ended June 30, 2000.


                                       7

<PAGE>   10

4.       NEW ACCOUNTING PRONOUNCEMENTS

         In June 2001, the Financial Accounting Standard Board issued Statements
of Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment testing in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.

         We will apply the new rules on accounting for goodwill and other
intangible assets beginning January 1, 2002. As of June 30, 2001, we do not have
any recorded goodwill or indefinite lived intangible assets. If warranted by
future acquisitions, we will comply with the requirements for non-amortization
and for periodic impairment tests as deemed necessary. As of June 30, 2001, the
applications of the non-amortization provisions of the Statement and the
requirements for impairment testing are being evaluated.

5.       ACQUISITIONS

         Historically, we have actively acquired communications sites and
related real estate assets.

         On August 31, 1999, we consummated the acquisition of the North
American Antenna Site Business (the "Motorola Antenna Site Acquisition") of
Motorola, Inc., acquiring approximately 1,858 communications sites and related
assets from Motorola for $254 million, comprised of $245 million in cash and
418,520 shares of common stock, valued at $9 million, plus fees and initial
expenses of approximately $2.2 million. This acquisition results in us having
sites in all fifty States and nine Canadian Provinces. We transferred certain of
the rooftop communications sites we acquired from Motorola to PT III.

         Included in the initial total purchase price recorded on the
acquisition date of the Motorola Antenna Site Acquisition were incurred costs of
approximately $2.2 million. These incurred and accrued deal costs were comprised
primarily of employee severance and relocation costs, $0.5 million, contract and
title work related to telecommunications sites, due diligence and closing costs,
$1.7 million. Subsequently, we incurred an additional $24.6 million of costs
associated with post-closing work associated with the acquisition, $17.3 million
of which we subsequently capitalized and $7.3 million of which we subsequently
expensed.

         There is a working capital adjustment component of the Motorola Antenna
Site Acquisition. As of June 30, 2001, Pinnacle recorded a net receivable due
from Motorola as a result of this working capital adjustment component of $0.2
million in prepaid expenses and other current assets. As this adjustment has not
been agreed upon and settled, in finalizing this adjustment with Motorola we may
settle on a different amount. Any significant adjustments to this estimated
working capital adjustment component upon settlement will be reflected in income
and disclosed accordingly.

         Also in conjunction with the Motorola Antenna Site Acquisition,
Motorola performed certain services on our behalf under a Transition Services
Agreement, including the receipt of cash payments from tenants for a one month
period and payment of vendor invoices for a two month period subsequent to
closing. Accordingly, there is an amount of cash settlement, net of the fees
charged by Motorola for this service, due us of $4.6 million recorded as prepaid
expenses and other current assets as of June 30, 2001. These amounts have been
recorded based on information provided to us by Motorola in connection with
their receipt of cash and payment of vendors. As the final amount due us has not
yet been agreed upon with Motorola, in finalizing this amount with Motorola we
may settle on a different amount. Any significant adjustments to this amount
upon settlement will be reflected in income and disclosed accordingly.

         During the year ended December 31, 2000, we completed 226 acquisitions
of 1,467 communications sites and related assets, each of which was individually
insignificant to Pinnacle, from various sellers for an aggregate purchase price
of $405.8 million consisting of $395.8 million in cash and $10.1 million of
notes payable to the former communications site owners.


                                       8

<PAGE>   11

         During the six months ended June 30, 2001, we completed three
acquisitions of communications sites and related assets for an aggregate
purchase price of $0.4 million.

         We account for our acquisitions using the purchase method of
accounting. The results of operations of the acquired assets are included with
those of Pinnacle from the dates of the respective acquisitions. The pro forma
results of operations listed below reflect purchase accounting and pro forma
adjustments as if the transactions occurred as of January 1, 2000. The unaudited
pro forma consolidated financial statements are not necessarily indicative of
the results that would have occurred if the assumed transactions had occurred on
the dates indicated and are not necessarily indicative of the expected financial
position or results of operations in the future.

<TABLE>
<CAPTION>
                                                                           Pro Forma Six Months Ended
                                                                    ---------------------------------------
                                                                    (in thousands except per share amounts)
                                                                       June 30, 2000          June 30, 2001
                                                                    ------------------        -------------
                                                                        (unaudited)            (unaudited)
         <S>                                                        <C>                       <C>
         Revenue                                                        $ 95,599              $  97,394

         Gross margin, excluding depreciation and amortization            64,151                 60,886

         Net loss                                                        (55,682)              (109,303)

         Basic and diluted net loss per share common                    $  (1.17)             $   (2.26)
</TABLE>

6.       ASSETS HELD FOR SALE

         On June 7, 2001, we adopted a plan to dispose of certain operating
assets pursuant to management's decision to dedicate resources to Pinnacle's
core competency, communications site acquisition and operation. As a result of
the adoption of this plan, five colocation properties located in Texas and St.
Louis, Missouri have been deemed assets held for sale. In accordance with
Statement of Financial Account Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," assets held
for sale are reported at the lower of their net historical basis or estimated
fair market value less costs to sell.

         The historical carrying value of the properties as of June 30, 2001,
was approximately $65.0 million. During the three months ended June 30, 2001, we
recognized a write-down adjustment of approximately $34.6 million, which is
included in impairment on assets held for sale. This amount represents the
difference between the carrying values and the estimated fair market value less
costs to sell for these five properties. We estimated the fair market value less
costs to sell by discounting expected future cashflows using a discount rate
commensurate with available risk factors, which is materially consistent with
recent third party offers. Depreciation expense has not been recognized since
the date the colocation assets were classified as held for sale.

         For the six months ended June 30, 2001, excluding the write-down
adjustment, these properties had a net operating loss of $1.0 million. The
combined properties produced revenues of $3.2 million, had operating expenses of
$1.8 million, and tax and depreciation charges of $2.4 million. We are in the
process of marketing these properties and foresee being able to dispose of them
within a reasonable period.


                                       9

<PAGE>   12
7.       LONG-TERM DEBT

         Our senior credit facility provides $670 million of financing of which
$520 million was committed at June 30, 2001, and December 31, 2000, and $427.8
million and $428.9 million was utilized at June 30, 2001, and December 31, 2000,
respectively.

         The senior credit facility indebtedness currently bears interest at
variable rates based on LIBOR, plus varying margins. At our option, the senior
credit facility indebtedness may instead bear interest at the greater of the
Federal Funds effective rate plus .50% or a Prime Rate with varying margins.
Advances under our senior credit facility bear interest payable in quarterly
installments. In addition, we are required to pay commitment and customary
facility fees on the total amount of commitments. As of June 30, 2001, and
December 31, 2000, the interest rate was 8.16% and 8.05%, respectively.

         The senior credit facility is secured by a lien on substantially all of
our assets and a pledge of substantially all of the capital stock of our
subsidiaries. The senior credit facility contains customary covenants such as
limitations on our ability to incur indebtedness, to incur liens or encumbrances
on assets, to make certain investments, to make distributions to stockholders,
or prepay subordinated debt. Under the senior credit facility, we may not permit
the ratio of senior debt to annualized EBITDA as defined in the agreement to
exceed certain amounts.

         For the fiscal quarter ended December 31, 2000, we were not in
compliance with two financial ratio covenants under our bank loan agreement. In
February 2001, we entered into an amendment to our senior credit facility, which
adjusted substantially all of our ratio covenants, primarily aimed at lessening
requirements for covenant periods in 2001. In addition to the covenant changes,
the amendment also changed permitted levels of investment in our Canadian and UK
subsidiaries. In consideration for the amendment, we paid the lenders in our
senior credit facility a fee equal to 25 basis points, plus we agreed to
increase the pricing grid by 25 basis points for 2001. In April, 2001 we
obtained a one-time waiver with respect to covenant breaches so long as actual
ratios met the amended requirements. The amendment also adjusted the interest
rates charged on the loan based on the quarterly leverage ratio calculations for
periods subsequent to the date of the waiver. Additionally, fees paid of $1.8
million to the banks as a result of this amendment will be deferred and
amortized over the remaining term of the underlying debt agreement.

         On March 22, 2000, we completed a private placement of $200 million of
the 5.5% Convertible Subordinated Notes due 2007 to certain institutional
purchasers pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended (the "Securities Act"). We repaid
outstanding revolving debt under our senior credit facility with the net
proceeds of $193.5 million from this private placement. Interest is payable on
the notes on March 15 and September 15 of each year. The notes will mature on
September 15, 2007, unless previously redeemed or repurchased. The notes are
convertible into Pinnacle's common stock at the option of the note holders at an
initial price of $78.375 per share, which conversion price is subject to
adjustment under the terms of the notes. We may redeem the notes on or after
March 21, 2003. Pursuant to a Registration Rights Agreement dated March 22,
2000, we filed a registration statement on May 23, 2000, to cover resales of the
notes and the shares of our common stock issuable upon conversion of the notes,
which was declared effective by the Securities and Exchange Commission ("SEC")
on June 20, 2001.

         Under the terms of the Registration Rights Agreement, because the
registration statement was not declared effective by the SEC by September 18,
2000, the interest rate on the notes increased by 0.5%. Thereafter, because the
registration statement was not declared effective by December 17, 2000, the
interest rate on the notes increased by an additional 0.5%. The rate on the
notes could not increase to greater than 6.5% under the terms of the
Registration Rights Agreement. As a result of the effectiveness of the
registration statement on June 20, 2001, the additional interest that began
accruing on the notes on September 19, 2000 has ceased accruing.

         As a condition of our senior credit facility we are required to enter
into and maintain at all times interest rate hedge contracts covering a minimum
of 50% of the debt outstanding under the senior credit facility. We enter into
interest rate swap agreements to manage the interest rate risk associated with
certain of our variable rate debt. The swap agreements effectively convert the
credit agreement floating rate debt from LIBOR plus a margin, as defined in the
agreement, to a fixed rate debt plus the applicable margin under the credit
agreement on an amount equal to the notional value of the interest rate swap. We
are exposed to credit losses in the event of non-performance by counter-parties
on these agreements, which we do not believe are significant. See Note 2,
Adoption of SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities."


                                       10

<PAGE>   13
         Prior to our adoption of SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," the interest rate swap agreement qualified
for hedge accounting treatment. As such and in accordance with the transition
provisions of SFAS No. 133, we recorded a derivative liability for the fair
value of the swap on January 1, 2001, for $4.0 million as a component of other
comprehensive income. Upon adoption of SFAS No. 133, the interest rate swap
agreement no longer qualified as hedge due to the embedded written option
exercisable at our option. Accordingly, the changes in the fair value of this
agreement are recorded in earnings immediately. The earnings impact recorded
during the three and six month periods ending June 30, 2001, relating to the
interest rate swap amounted to $0.0 million and $5.5 million, respectively. For
the three months ended June 30, 2001 approximately $0.5 million represents an
increase in the fair value of the interest rate swap agreement and approximately
$0.5 million represents the reversal into current year income of the underlying
exposure previously recognized in comprehensive loss. For the six
months ended June 30, 2001 approximately $4.5 million represents the additional
decline in the fair value of the interest rate swap agreement since January 1,
2001, and approximately $1.0 million represents the reversal into current year
income of the underlying exposure previously recognized in comprehensive
loss. See Note 2, Adoption of SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities."

8.       PUBLIC OFFERINGS AND STOCKHOLDERS' EQUITY

         Secondary Offerings

         On January 24, 2000, we completed a secondary offering of common stock
whereby we sold 7,200,000 shares of our common stock. The price per share was
$41, resulting in net proceeds of approximately $283 million. The proceeds were
invested initially in short-term liquid securities and were used with borrowings
made under our senior credit facility to fund acquisitions, the construction of
new communications sites and improvements to existing communications sites all
of which was used as of June 30, 2001. The total shares sold included a
concurrent exercise of the underwriters' over-allotment option whereby 1,350,000
shares were sold (including 450,000 shares sold by certain of our stockholders).

         Other Issuances of Stock

         During the six months ended June 30, 2000 and 2001, we issued 54,944
and no shares, respectively, of our common stock upon exercise of various stock
options granted to our employees.

         Unsuccessful Offering Costs and SEC Investigation

         We are involved in an SEC investigation and the SEC Staff has requested
information from us, our current independent accountants, Ernst & Young LLP
("E&Y") and our former independent accountants, PricewaterhouseCoopers LLP
("PWC"), as part of its investigation. The SEC's investigation appears to be
focused primarily on the Motorola Antenna Site Acquisition and on the
independence of PWC as Pinnacle's auditor. We have cooperated and intend to
continue to cooperate with the SEC in its investigation.

         During August 2000, we discontinued a secondary offering of common
stock due to market conditions relative to our stock price as influenced by our
announcement regarding the SEC investigation. We believe that we currently
remain unable to access the equity and debt markets on attractive terms.
Accordingly, we have written off as an expense for the year ended December 31,
2000, $1.3 million in non-recurring costs incurred related to this unsuccessful
equity offering process, which costs would have been recorded as a reduction of
additional paid in capital from the offering had the offering been completed.

         We can not predict the outcome of the SEC's investigation. Regardless
of the outcome, however, it is likely that we will incur substantial costs and
the investigation will cause a diversion of our management's time and attention.

         In March 2001, we announced that in order to remove uncertainty with
respect to the independence issues, the Audit Committee of Pinnacle's Board of
Directors authorized the engagement of the accounting firm of E&Y to reaudit our
financial statements for the year ended December 31, 1999 and audit the year


                                       11

<PAGE>   14

ended December 31, 2000. As a result of the reaudit of 1999 and the audit of
2000, we revised our accounting for certain costs capitalized in connection with
the Motorola Antenna Site Acquisition. In our revised financial statements, we
have determined to capitalize all costs that relate directly to the acquisition
except those post-closing costs that are deemed to more than incidentally reduce
our need to incur ongoing business expense necessary to integrate those assets
into our operations.

9.       COMMITMENTS AND CONTINGENCIES

         As of and subsequent to June 30, 2001, we entered into letters of
intent to purchase two communications sites related assets, reflecting an
aggregate commitment to pay approximately $0.1 million, which is subject to
consummation of the transactions pending completion of due diligence efforts and
any further negotiation that may result therefrom. In addition, we have
completed one acquisition of communications site related assets for an aggregate
purchase price of $0.09 million subsequent to June 30, 2001.

         Pinnacle, its Chief Operating Officer, Steven R. Day, its former Chief
Financial Officer, Jeffrey J. Card, and its former Chief Executive Officer,
Robert J. Wolsey, various current and former directors of Pinnacle, Pinnacle's
former accountants, PricewaterhouseCoopers, LLP, and the underwriters of
Pinnacle's January 18, 2000 secondary offering, were recently named as
defendants in a consolidated class action complaint styled In re Pinnacle
Holdings Corp. Securities Litigation, Case No. 8:01-CV-624-T-27MSS filed on
August 8, 2001, in the United States District Court for the Middle District of
Florida, in Tampa. The consolidated amended complaint filed August 8, 2001,
consolidates a number of securities class action suits previously filed in the
same court. The plaintiffs named in the consolidated action claim to represent
all persons who purchased our common stock during the period between June 29,
1999 and March 17, 2001.

         The plaintiffs allege that Pinnacle, the directors, the underwriters,
and Messrs. Day and Wolsey violated Section 11 of the Securities Act of 1933, by
permitting the publication and dissemination of the prospectus for the January
18, 2000 secondary offering. The plaintiffs allege that the prospectus contained
various misrepresentations concerning, among other things, the value of the
towers that Pinnacle had previously acquired and our due diligence investigation
relating to the Motorola Antenna Site Acquisition.

         The plaintiffs have also alleged that the directors, and Messrs. Wolsey
and Day are vicariously liable pursuant to Section 15 of the Securities Act for
Pinnacle's alleged violation of Section 11. Section 15 of the Securities Act
makes those persons who control a "primary violator" vicariously liable for the
primary violator's violation of Section 11.

         The plaintiffs further allege that Pinnacle, Messrs. Wolsey and Card,
and the other named defendants violated Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder, by making various allegedly
misleading statements relating to certain of our financial statements, the
Motorola Antenna Site Acquisition, the nature of the SEC's investigation
concerning our accounting practices and our relationship with our former
accountants, and other matters, in various press releases and filings with the
SEC.

         The plaintiffs have also alleged that Messrs. Day, Wolsey, and Card
violated Section 20 of the Securities Exchange Act, which imposes vicarious
liability on those persons who control a primary violator of Section 10(b) and
Rule 10b-5.

         Plaintiffs have requested compensatory damages, interest, their costs
and expenses incurred in the action including attorneys' and experts' fees, and
other relief.

         We intend to respond appropriately and in the best interests of
Pinnacle to the consolidated action; however we cannot assure you that we will
prevail in such litigation. Securities lawsuits may result in substantial costs,
divert management's attention and other resources, and have a material and
adverse effect on our financial condition and the results of our operations in
the future.

10.      SUBSEQUENT EVENTS

         Subsequent to June 30, 2001, we approved a plan to reduce our workforce
by 14 positions, a 6% reduction from the December 31, 2000, workforce total of
approximately 237 full-time employees. We recorded a $0.2 million accrual for
these general and administrative charges. We expect that the severance costs
will be fully paid by the first quarter of 2002.


                                       12

<PAGE>   15

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS:

         This Quarterly Report on Form 10-Q contains forward-looking statements
that have been made pursuant to the provisions of the Private Securities
Litigation Reform Act of 1995. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results may differ materially from those expressed or
forecasted in any such forward-looking statements. In addition, we may from time
to time make oral forward-looking statements. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events, or otherwise. Such statements appear in a number
of places in this report and include statements regarding the intent, belief or
current expectations of Pinnacle, its directors or its officers with respect to,
among other things: (1) trends affecting our financial condition or results of
operation; (2) the industry in which the Company operates; (3) our business and
growth strategies; and (4) other matters. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those indicated in the forward-looking statements as a result of various
factors. Readers are cautioned not to place undue reliance on these
forward-looking statements. Factors to consider in evaluating any
forward-looking statements and the other information contained in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2000 filed with the
SEC on April 26, 2001.

         We restated our audited financial statements for the year ended
December 31, 1999, and our unaudited financial statements for the quarters ended
March 31, 2000, June 30, 2000, and September 30, 1999 and 2000, to expense
certain costs previously capitalized as direct costs of the Motorola Antenna
Site Acquisition and to accrue direct costs of the Motorola Antenna Site
Acquisition only as the related services were performed. Direct costs incurred
in connection with a purchased business are required to be capitalized and
indirect costs are required to be expensed. Determining under available
accounting guidance which costs or portions thereof are direct, as opposed to
indirect, requires the exercise of a certain amount of judgment. Upon completion
of the Motorola Antenna Site Acquisition, after consultation with our outside
auditors at the time, PricewaterhouseCoopers LLP ("PWC"), we determined to
capitalize all pre- and post-closing costs directly related to the acquisition.
Such treatment was reflected in our subsequent periodic financial statements
including those contained in our annual Report on Form 10-K that contained
financial statements audited by PWC. Following an inquiry by the SEC, and after
consideration of comments received from the Division of Corporate Finance at the
SEC in connection with our Registration Statement on Form S-11 and consulting
with our new independent auditors, Ernst & Young, LLP ("E&Y"), we reconsidered
our previous accounting judgment and concluded it was appropriate to capitalize
all costs that related directly to the acquisition except those post-closing
costs that are deemed to more than incidentally reduce our need to incur ongoing
business expenses necessary to integrate those assets into our operations.
Additionally, we had previously, at the date of the acquisition, accrued
estimated direct costs of acquisitions regardless of whether the costs had been
incurred as of that date. We have now concluded that such costs should be
accrued as the services are incurred.

OVERVIEW

         We acquire communications sites and construct rental towers and lease
space on these communications sites to a broad base of wireless communications
providers, operators of private networks, government agencies and other
customers. Our objective is to acquire or construct clusters of rental
communications sites in areas where there is significant existing and expected
continued growth in the demand for rental communications sites by wireless
communications providers. We seek to obtain a significant ownership position of
communications site assets in our targeted markets in order to offer "one-stop
shopping" to wireless communications providers who are deploying or expanding
wireless communications networks.

         Since our formation in May 1995, we have focused on creating a
portfolio of wireless communications site clusters in high growth markets such
as Atlanta, Birmingham, Boston, Chicago, Dallas, Houston, Los Angeles, New
Orleans, New York, Orlando, and Tampa.


                                       13

<PAGE>   16

         We have acquired five carrier neutral colocation facilities located in
Texas and St. Louis, Missouri for an aggregate purchase price of $68.8 million.

         Colocation facilities are buildings that provide telecommunications
service providers, such as incumbent local exchange carriers, competitive local
exchange carriers, fiber optic network carriers, Internet backbone providers,
application service providers and Internet data centers, square footage space to
house their equipment (i.e. switches, servers, routers) and access to an
interexchange carrier (typically known as long distance carriers). Independently
owned carrier neutral colocation facilities provide interconnectivity to
multiple communications carriers versus carrier-owned facilities that offer
interconnectivity to just their own network.

         On June 7, 2001, we adopted a plan to dispose of certain operating
assets pursuant to management's decision to dedicate resources to Pinnacle's
core competency, communications site acquisition and operation. As a result of
the adoption of this plan, five colocation properties located in Texas and St.
Louis, Missouri have been deemed assets held for sale. In accordance with
Statement of Financial Account Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," assets held
for sale are reported at the lower of their net historical basis or estimated
fair market value less costs to sell.

         The historical carrying value of the properties as of June 30, 2001,
was approximately $65.0 million. During the three months ended June 30, 2001, we
recognized a write-down adjustment of approximately $34.6, million which is
included in impairment on assets held for sale. This amount represents the
difference between the carrying values and the estimated fair market value less
costs to sell for these five properties. We estimated the fair market value less
costs to sell by discounting expected future cashflows using a discount rate
commensurate with available risk factors, which is materially consistent with
recent third party offers. Depreciation expense has not been recognized since
the date the colocation assets were classified as held for sale.

         For the six months ended June 30, 2001, excluding the write-down
adjustment, these properties had a net operating loss of $1.0 million. The
combined properties produced revenues of $3.2 million, had operating expenses of
$1.8 million, and tax and depreciation charges of $2.4 million. We are in the
process of marketing these properties and foresee being able to dispose of them
within a reasonable period.

         The table below outlines the number of acquisitions and dispositions we
have completed and the corresponding wireless communications sites and carrier
neutral colocation facilities as of June 30, 2001. Non-revenue producing sites
are those sites acquired as part of a larger, more profitable acquisition of
sites, that are not generating revenue. Non-revenue producing sites that begin
producing revenue, are reclassified into the appropriate category of revenue
producing sites. No value is assigned to non-revenue producing sites.

<TABLE>
<CAPTION>
                                      Revenue Producing Sites
                 ----------------------------------------------------------------  Non-Revenue                Acquisitions
                 Owned      Managed      Leased      Built   CoLocation  Subtotal     Sites         Total      Completed
                 -----      -------      ------      -----   ----------  --------  -----------      -----     ------------
<S>              <C>        <C>          <C>         <C>     <C>         <C>       <C>              <C>       <C>
1995                29         --          --           4        --          33           --           33          13

1996               119         --          --           4        --         123           --          123          49

1997               134         --          --          22        --         156           --          156          72

1998               517         --          --          47        --         564           --          564          82

1999               858        584         858          23        --       2,323          722        3,045         130

2000               699        (19)         78           5         5         768          434        1,202         226

YTD 2001            48         25         (71)          2        --           4          (53)         (49)          3
                 -----      -----        ----        ----    ------       -----        -----        -----         ---

Total            2,404        590         865         107         5       3,971        1,103        5,074         575
                 =====      =====        ====        ====    ======       =====        =====        =====         ===
</TABLE>


                                       14

<PAGE>   17
         Since June 30, 2001, we have completed one acquisition of
communications site related assets for an aggregate purchase price of $0.09
million. In addition, as of and subsequent to June 30, 2001, we entered into two
letters of intent to purchase communications site related assets that we
currently believe are probable to close, reflecting an aggregate commitment to
pay approximately $0.1 million. These probable acquisitions are subject to
consummation of the transactions pending completion of due diligence efforts and
any further negotiation, which may result therefrom. We have identified
additional potential acquisition sites that we are not currently actively
pursuing because of our limited ability to currently access capital discussed
elsewhere in this report. However, should we become able to access additional
capital on reasonable terms, we would likely resume efforts to evaluate
acquiring those and other sites.

         We believe that significant opportunities for growth exist by
maximizing the use of our existing and future communications sites. Because the
costs of operating a communications site are primarily fixed on owned sites,
increasing tower utilization significantly improves tower level operating
margins on these sites. We believe that "same site" organic revenue growth on
owned communications sites is a meaningful indicator of the quality of these
sites and our ability to generate incremental revenue on such sites. Organic
growth is measured by comparing the run rate revenue of our owned communications
sites at the end of a period to the run rate revenue for the same owned
communications sites at the end of the prior period.

         "Same-site" organic growth is a result of expanded marketing efforts to
increase the number of customers per site, renegotiating leases that are subject
to renewal, and contractual price escalations for existing customers. Taking
into consideration new leases written as of December 31, 2000, we experienced
"same site" revenue growth, gross, of approximately 19.4% for the year ended
December 31, 2000, on the base of communications sites we owned as of December
31, 1999. For the twelve month period ended June 30, 2001, we experienced "same
site" organic revenue growth on those communications sites we owned as of June
30, 2000, at the following rates:

<TABLE>
<CAPTION>
                                            Owned              All
                                            Sites             Sites
                                            -----             -----
         <S>                                <C>               <C>
         Gross new revenues                 15.3%             15.5%
         Net of cancellations               12.6%             12.2%
</TABLE>

         Owned sites as depicted in this table are those where we own either the
land, the tower or both on a tower site, or have a permanent easement on a
rooftop. This would contrast to other sites in our portfolio where we have: 1)
contractual rights to manage towers or rooftops, either exclusively or
non-exclusively; 2) have a non-permanent easement right on a rooftop site; or,
3) lease a space on a tower owned by another tower owner for the purpose of
sub-leasing to one of our tenants who needed space on a site in an area where we
had no site inventory in existence.

         The new revenue rates remain strong compared to our 2000 results. We
have experienced strong new lease activity with respect to our telephony
customers, which includes PCS, cellular and digital SMR (specialized mobile
radio). In addition, we experienced rapid growth in our new business from the
new technology market segments, which include data, LMDS, wireless internet,
satellite radio and 911 location customers, during the six month period ended
June 30, 2001. We expect that strong new lease activity with respect to our
telephony customers will continue as they continue their aggressive build-outs,
and we also look for our new technology customers to provide increasingly more
significant contributions to our new revenues as they become a larger part of
our overall business. These new technology customers are attracted to most of
our communications sites because they deploy at higher elevations and our
portfolio of sites generally accommodates these elevations.

         The "net of cancellations" rates above reflect tenant lease churn at
rates in the third and fourth quarters of 2000, significantly greater than those
we have previously experienced. These greater churn rates result primarily from
one customer's deconstruction of its analog SMR network and the effects of
certain private land mobile tenants shifting to using one of the many commercial
wireless services now available. We have substantially less exposure now to
churn related to deconstruction of analog sites and we expect that the churn
from the smaller land mobile tenants will level out soon and that churn from


                                       15

<PAGE>   18

paging customers will remain relatively stable. Tenant churn in the first six
months of 2001 averaged 4.0% as compared to 10.0% in 2000.

         We have generated net losses since inception and at June 30, 2001, had
an accumulated deficit totaling approximately $348.1 million. Due to our plans
to continue to grow the business predominantly through acquisitions at such time
as additional capital becomes available to us on attractive terms, we expect
that charges relating to depreciation of existing and future assets and interest
expense associated with related debt balances will be substantial. Also, this
growth through acquisitions will continue to result in significant corporate
development expenses. Accordingly, we expect to continue to generate losses for
the foreseeable future.

         Our annualized run rate revenue is calculated as of a given date by
annualizing the monthly rental rates then in effect for customer lease contracts
as of such date. We believe that growth in our annualized run rate revenue is a
meaningful indicator of our performance. As of June 30, 2001, our annualized run
rate revenue was approximately $193.9 million.

         On August 31, 1999, we completed the Motorola Antenna Site Acquisition
and acquired approximately 1,858 communications sites from Motorola consisting
of approximately 499 owned sites, 526 managed sites and 833 leased sites, for
$254 million in cash and stock, plus fees and expenses. We have never completed
a transaction as large as the Motorola Antenna Site Acquisition. Due to the
magnitude, timing, logistical and other constraints of the Motorola Antenna Site
Acquisition, we were unable prior to closing the transaction to access, analyze
and verify all information needed to (1) ascertain the physical inventory and
condition of the assets acquired (including through engineering surveys of the
assets); (2) estimate the fair value of the assets acquired and liabilities
assumed for purposes of purchase price allocation in our financial statements;
(3) identify, evaluate and record the assets acquired and liabilities assumed
for purposes of determining the final purchase price; and (4) properly evaluate
all record title and mortgage documents for acquired real estate assets.

         The total of our Motorola Antenna Site Acquisition pre- and
post-closing transaction related due diligence and related efforts cost
approximately $19.0 million, approximately $17.3 million of which was incurred
post-closing. Such efforts did not reveal any unanticipated information
regarding matters that had a material adverse effect on our operations and
liquidity.

         Motorola's representations and warranties in the definitive purchase
agreement between us and Motorola (the "Motorola Purchase Agreement") did not
survive the closing of the acquisition. Therefore, our ability to obtain
compensation from Motorola for defects in title, the need for third party
consents (and the need to make payments to obtain such consents) or other
site-related and other unanticipated issues is limited. We may be able to seek
redress under certain other provisions of the Motorola Purchase Agreement,
including through the purchase price adjustment based on changes in working
capital and the covenant requiring Motorola to provide further assurances as
needed to convey the acquired assets.

         Prior to the Motorola Antenna Site Acquisition, we did not have a
significant number of managed or leased sites in our portfolio. Generally,
managed and leased sites have higher operating costs than owned towers,
primarily as a result of higher rental costs related to revenue sharing with the
site owners. In addition, on leased sites, we generally have a right to lease
only a limited portion of a site, which limits total revenue potential. Higher
relative operating costs and limited revenue growth results in substantially
lower tower cash flow and EBITDA margin performance on managed and leased sites.
Accordingly, the acquisition of managed and leased sites in the Motorola Antenna
Site Acquisition or any potential future acquisitions will substantially
decrease our site level operating margins.

         Following the closing of the Motorola Antenna Site Acquisition we
transferred a portion of the rooftop communication sites we acquired from
Motorola to PT III in order to minimize the risk that the ownership of, or
income from, such assets might negatively affect our qualification as a REIT,
and received in exchange $9.8 million of nonvoting convertible preferred stock,
approximately 9% of the outstanding voting common stock and a $39.2 million
convertible promissory note. Certain of our executive officers


                                       16

<PAGE>   19

owned the remaining outstanding voting common stock of PT III until March 2001
when PT III became a wholly owned "qualified REIT subsidiary" of ours. We also
agreed to make our personnel, facilities and general and administrative overhead
available to PT III, and PT III agreed to reimburse us for our costs incurred in
doing so. During 2000, we purchased approximately $2.5 million of additional
nonvoting convertible preferred stock of PT III and approximately $10.0 million
of additional convertible promissory notes. PT III used such funds to acquire
all of the stock of two corporations which own and manage communications sites,
and to acquire certain assets used in communications site management and related
activities. Substantially all of the income derived from the activities
described in the preceding sentence constitute income which is non-REIT
qualifying. The assets and liabilities and results of operations of PT III are
included with those of Pinnacle Towers Inc. in the consolidated financial
statements.

         During 2000, we invested funds in PT IV, which used the funds to
acquire all of the stock of another corporation engaged in the management of
rooftop communication sites on behalf of third party property owners, which
constitutes an activity the income from which is non-REIT qualifying. In return
for our total investment of approximately $12 million in PT IV, we received a
$9.6 million PT IV convertible promissory note, $2.4 million of PT IV nonvoting
convertible preferred stock and approximately 9% of the outstanding voting
common stock of PT IV. Certain of our executive officers owned the remaining
outstanding voting common stock of PT IV until March 2001 when PT IV became a
wholly owned "taxable REIT subsidiary" of ours. We also agreed to make our
personnel, facilities, and general and administrative overhead available to PT
IV, and PT IV agreed to reimburse us for our costs incurred in doing so.

         On July 18, 2000, the Internal Revenue Service issued a private letter
ruling to PT III confirming that the ownership of, and receipt of income from,
its rooftop sites and related equipment will be considered qualifying assets and
income for REIT purposes. Although PT III had initially planned to make its own
REIT election provided that the Internal Revenue Service ruled favorably with
respect to such assets and income, PT III did not elect to be taxed as a REIT
for the 2000 calendar year because the non-REIT income received by PT III as a
result of the acquisitions on non-REIT qualifying assets which it made during
2000 prevented PT III from satisfying certain of the gross income requirements
for REIT qualification.

         We have taken several actions during 2001 to restructure our
investments in PT III and PT IV in order to take advantage of changes in the
REIT tax law which became effective on January 1, 2001. Such restructuring will
also permit the REIT qualifying assets and income of PT III, which were the
subject of PT III's favorable July 18, 2000, ruling of the Internal Revenue
Service, to fall under our REIT election. PT III transferred substantially all
of its non-REIT qualifying assets to PT V, a wholly owned subsidiary of PT III.
Following such transfer, we acquired all of the PT III voting common stock owned
by certain officers of Pinnacle, upon which PT III, as a wholly owned
subsidiary, became a "qualified REIT subsidiary" of ours. As a "qualified REIT
subsidiary," the assets and income of PT III will be considered ours and covered
by our REIT election on and after the date on which PT III became wholly owned
by us. We and PT V jointly elected to treat PT V as a "taxable REIT subsidiary."
We and PT IV jointly elected to treat PT IV as a "taxable REIT subsidiary."
After the making of the "taxable REIT subsidiary" election for PT IV, we
acquired all of the outstanding voting common stock of PT IV owned by certain of
our officers, thereby making PT IV a wholly owned "taxable REIT subsidiary" of
ours.

         Each of PT III, PT IV and PT V has entered into a cost and expense
sharing and reimbursement agreement with Pinnacle Towers Inc., pursuant to which
Pinnacle Towers Inc. has provided and will continue to provide personnel,
facilities and general administrative services and overhead to each of PT III,
PT IV and PT V, in return for which each such company has agreed to reimburse
Pinnacle Towers for its cost and expense allocable thereto. Each of PT III, PT
IV and PT V is required to guarantee our senior credit facility and each is
required to grant a security interest in all of its assets to secure such
guarantee.

         During 2000, and the six month period ending June 30, 2001, we made
investments in a subsidiary we formed to do business in the United Kingdom. As
of June 30, 2001, we owned an approximately 91% interest in that subsidiary. The
business of this subsidiary is the acquisition and operation of communications
sites. In some cases, the sites have towers located on them, and in other cases,
we expect to construct towers on the sites we have acquired. As of June 30,
2001, we have invested a total of $12.0


                                       17

<PAGE>   20

million in this subsidiary. We do not expect that this business will become a
significant part of our overall business operations. Currently, we expect that
our investment in this business will be limited to less than $12.5 million. We
have recently had discussions with third parties concerning their potential
investment in this business. Such an investment could result in our retaining a
minority interest in that subsidiary and no longer controlling it. The results
of operations are reported on a consolidated basis with the minority interest
disclosed.

RESULTS OF OPERATIONS

         The following table sets forth, for the quarterly periods indicated,
each statement of operations item as a percentage of revenue. The results of
operations are not necessarily indicative of results for any future period. The
following data should be read in conjunction with our consolidated financial
statements and notes thereto included elsewhere herein.

<TABLE>
<CAPTION>
                                                                  Six months ended:                Three months ended:
                                                          -------------------------------     ------------------------------
                                                          June 30, 2000     June 30, 2001     June 30, 2000    June 30, 2001
                                                           (unaudited)       (unaudited)       (unaudited)      (unaudited)
                                                          -------------     -------------     -------------     ------------
<S>                                                       <C>               <C>               <C>               <C>
Statement of Operations Data:
Revenue                                                       100.0%            100.0%            100.0%            100.0%
Direct operating expenses, excluding
     depreciation and amortization                             34.8%             37.5%             33.7%             38.6%
                                                             ------            ------            ------            ------
Gross margin, excluding
     depreciation and amortization                             65.2%             62.5%             66.3%             61.4%
Other expenses
   General and administrative                                   5.0%             12.3%              4.7%             17.7%
   Corporate development                                       16.0%             13.2%             15.7%             12.2%
   State franchise, excise and minimum taxes                    0.9%              1.0%              0.8%              1.0%
   Depreciation and amortization                               61.4%             66.6%             60.9%             65.1%
   Impairment loss on assets held for sale                      0.0%             35.5%              0.0%             70.4%
                                                             ------            ------            ------            ------
Loss from operations                                          -18.1%            -66.1%            -15.8%           -105.0%
Interest expense, net                                          19.4%             30.3%             17.0%             24.0%
Amortization of original issue discount and                    15.7%             15.2%             15.4%             15.4%
Loss on disposal of assets                                      0.0%              1.9%              0.0%              4.1%
Foreign currency translation gain (loss)                        0.0%              0.3%              0.0%             -0.2%
Minority interest in net loss of subsidiary                     0.0%             -0.1%              0.0%             -0.1%
Income tax benefit                                              0.0%             -1.3%              0.0%             -2.0%
                                                             ------            ------            ------            ------
Net loss                                                      -53.2%           -112.4%            -48.2%           -146.2%
                                                             ======            ======            ======            ======
</TABLE>

Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000

         Revenues increased by $13.1 million, or 15.6%, to $97.4 million for the
six month period ended June 30, 2001, from $84.3 million for the six month
period ended June 30, 2000. This additional revenue is partially attributable to
the acquisition and construction of 395 sites since July 1, 2000. They are as
follows: 392 sites during the last two quarters of 2000 and three sites during
the first two quarters of 2001. The remainder of the revenue increase is related
to same-site organic growth. Same-site organic growth is a result of expanded
marketing efforts to increase the number of customers per site, renegotiating
leases that are subject to renewal and contractual price escalations for
existing customers.

         Direct operating expenses, excluding depreciation and amortization,
increased by $7.2 million or 24.6% to $36.5 million for the six month period
ended June 30, 2001, from $29.3 million for the six month period ended June 30,
2000. This increase is consistent with the increase in revenue from the
acquisition and construction of the 395 sites discussed above. Also, the
execution of new site management contracts in November 2000, resulted in a $1.4
million increase in site management expenses, and professional fees for mapping,
surveys and engineering services increased by $1.3 million over this period.
Direct operating expenses as a percentage of revenue increased to 37.5% for the
six month period ended June 30, 2001, from 34.8% for the six month period ended
June 30, 2000.


                                       18

<PAGE>   21

         General and administrative expenses increased for the six month period
ended June 30, 2001, to $12.0 million from $4.2 million for the six month period
ended June 30, 2000. General and administrative expense increased by $4.9
million due to a change in the allocation percentages between general and
administrative expense and corporate development expense. Our diminished
acquisition and site development activity starting in the fourth quarter of
2000, due to our current inability to access additional capital from the equity
and debt markets on terms we believe are attractive due to the ongoing SEC
investigation which began during the third quarter of 2000, warrants this change
in allocation percentages. Additionally increased staffing required for the
increased work volume, increased levels of advertising and marketing
expenditures, and other related costs associated with our growth plus the
effects of an increase in the overall professional fees and expenses due to the
ongoing SEC investigative action accounted for the remaining $2.9 million
increase. As a percentage of revenue, general and administrative expenses
increased to 12.3% of revenue for the six month period ended June 30, 2001, from
5.0% for the six month period ended June 30, 2000, reflecting a higher growth in
expenses relative to revenues as well as the effects of the change in allocation
between general and administrative expense and corporate development expense.

         Corporate development expense decreased by $0.7 million or 5.0% to
$12.8 million for the six month period ended June 30, 2001, from $13.5 million
for the six month period ended June 30, 2000. Corporate development expense
decreased by $4.9 million due to a change in allocation percentages between
general and administrative expense and corporate development expense. Our
diminished acquisition and site development activity starting in the fourth
quarter of 2000, due to our current inability to access additional capital from
the equity and debt markets on terms we believe are attractive due to the
ongoing SEC investigation which began during the third quarter of 2000, warrants
this change in allocation percentages. This decrease was offset by an increase
in expense due to our decision to no longer pursue a build-to-suit contract with
a vendor, whereby the vendor was to construct 46 towers for Pinnacle.
Consequently, corporate development expenses increased by $3.2 million related
to this event and the discontinuance of other unrelated construction projects.
Further headcount reductions occurred subsequent to June 30, 2001, as part of a
plan to reduce our workforce by 14 positions. These reductions will primarily
affect corporate development expenses, with less significant impacts on our
general and administrative expenses, in future periods. Corporate development
expenses decreased as a percentage of revenue to 13.2% for the six month period
ended June 30, 2001, compared to 16.0% for the six month period ended June 30,
2000.

         State franchise, excise and minimum taxes, which represent taxes
assessed in connection with our operations in various state jurisdictions,
increased to $1.0 million for the six month period ended June 30, 2001, from
$0.7 for the six month period ended June 30, 2000. Such taxes are calculated
using various methods such as a portion of our property within a given state,
our capital structure or based upon a minimum tax in lieu of income taxes. The
increase in expense is related to the overall growth in the business and related
activity during this same period.

         Interest expense, net of amortization of original issue discount and
interest income, increased 81.1% to $29.5 million for the six month period ended
June 30, 2001, from $16.3 million for the six month period ended June 30, 2000.
The increase is partially attributable to the adoption of SFAS No. 133 which
resulted in us recording an additional $5.5 million of interest expense for the
six month period ended June 30, 2001. Of the total, $4.5 million represents the
additional decline in the fair value of the interest rate swap agreement as of
June 30, 2001, and approximately $1.0 million represents the reversal into
current year income of the underlying exposure previously recognized in
comprehensive loss. Another portion of the increase is due to a $5.6 million
decrease in interest income due to the decline in our interest bearing cash
balances, from $6.5 million for the six month period ended June 30, 2000, to
$0.9 million for the six month period ended June 30, 2001, that is presented as
an offset to interest expense.

         Impairment loss on assets held for sale represents the write-down of
the five colocation properties held for sale. In accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, assets held for sale are reported at the lower of their net
historical basis or estimated fair market value less costs to sell.


                                       19

<PAGE>   22

Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000

         Revenues increased by $4.8 million, or 10.7%, to $49.1 million for the
three month period ended June 30, 2001, from $44.4 million for the three month
period ended June 30, 2000. This additional revenue is partially attributable to
the acquisition and construction of 395 sites since July 1, 2000. They are as
follows: 392 sites during the last two quarters of 2000 and three sites during
the first two quarters of 2001. The remainder of the revenue increase is related
to same-site organic growth. Same-site organic growth is a result of expanded
marketing efforts to increase the number of customers per site, renegotiating
leases that are subject to renewal and contractual price escalations for
existing customers.

         Direct operating expenses, excluding depreciation and amortization,
increased by $4.0 million or 26.7% to $19.0 million for the three month period
ended June 30, 2001, from $15.0 million for the three month period ended June
30, 2000. This increase is partially attributable to the increase in revenue
from the acquisition and construction of the 395 sites discussed above. Also,
the execution of new site management contracts in November 2000, resulted in a
$0.7 million increase in site management expenses, and professional fees for
mapping, surveys and engineering services increased by $0.9 million over this
period. Direct operating expenses as a percentage of revenue increased to 38.6%
for the three month period ended June 30, 2001, from 33.7% for the three month
period ended June 30, 2000.

         General and administrative expenses increased for the three month
period ended June 30, 2001, to $8.7 million from $2.1 million for the three
month period ended June 30, 2000. General and administrative expense increased
by $4.8 million due to a change in the allocation percentages between general
and administrative expense and corporate development expense. Our diminished
acquisition and site development activity starting in the fourth quarter of
2000, due to our current inability to access additional capital from the equity
and debt markets on terms we believe are attractive due to the ongoing SEC
investigation which began during the third quarter of 2000, warrants this change
in allocation percentages. Additionally increased staffing required for the
increased work volume, increased levels of advertising and marketing
expenditures, and other related costs associated with our growth plus the
effects of an increase in the overall professional fees and expenses due to the
ongoing SEC investigative action accounted for the remaining $1.8 million
increase. As a percentage of revenue, general and administrative expenses
increased to 17.7% of revenue for the three month period ended June 30, 2001,
from 4.7% for the three month period ended June 30, 2000, reflecting a higher
growth in expenses relative to revenues as well as the effects of the change in
allocation between general and administrative expense and corporate development
expense.

         Corporate development expense decreased by $1.0 million or 14.1% to
$6.0 million for the three month period ended June 30, 2001, from $7.0 million
for the three month period ended June 30, 2000. Corporate development expense
decreased by $4.8 million due to a change in allocation percentages between
general and administrative expense and corporate development expense. Our
diminished acquisition and site development activity starting in the fourth
quarter of 2000, due to our current inability to access additional capital from
the equity and debt markets on terms we believe are attractive due to the
ongoing SEC investigation which began during the third quarter of 2000, warrants
this change in allocation percentages. This decrease was offset by an increase
in expense due to our decision to no longer pursue a build-to-suit contract with
a vendor, whereby the vendor was to construct 46 towers for Pinnacle.
Consequently, corporate development expenses increased by $3.0 million related
to this event and the discontinuance of other unrelated construction projects.
Further headcount reductions occurred subsequent to June 30, 2001, as part of a
plan to reduce our workforce by 14 positions. These reductions will primarily
affect corporate development expenses, with less significant impacts on our
general and administrative expenses, in future periods. Corporate development
expenses decreased as a percentage of revenue to 12.2% for the six month period
ended June 30, 2001, compared to 15.7% for the six month period ended June 30,
2000.

         State franchise, excise and minimum taxes, which represent taxes
assessed in connection with our operations in various state jurisdictions,
increased to $0.5 million for the three month period ended June 30, 2001, from
$0.4 for the three month period ended June 30, 2000. Such taxes are calculated
using various methods such as a portion of our property within a given state,
our capital structure or based upon a minimum tax in lieu of income taxes. The
increase in expense is related to the overall growth in the business and related
activity during this same period.


                                       20

<PAGE>   23

         Interest expense, net of amortization of original issue discount and
interest income, increased 56.8% to $11.8 million for the three month period
ended June 30, 2001, from $7.5 million for the three month period ended June 30,
2000. Interest expense remained relatively unchanged, however, a $3.4 million
decrease in interest income from $3.7 million for the three month period ended
June 30, 2000, to $0.3 million for the three month period ended June 30, 2001,
due to the decline in our interest bearing cash balances, is presented as an
offset to interest expense.

         Impairment loss on assets held for sale represents the write-down of
the five colocation properties held for sale. In accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, assets held for sale are reported at the lower of their net
historical basis or estimated fair market value less costs to sell.

LIQUIDITY AND CAPITAL RESOURCES

         Our liquidity needs arise from our acquisition-related activities, debt
service obligations, working capital needs and capital expenditures. We have
historically funded our liquidity needs with proceeds from equity contributions,
public equity offerings, bank borrowings, debt offerings, and cash flow from
operations. We had a net working capital deficit of $21.0 million and net
working capital of $21.9 million as of June 30, 2001, and December 31, 2000,
respectively. Our ratio of total debt to stockholders' equity was 2.1 to 1.0 at
June 30, 2001 and 1.7 to 1.0 at December 31, 2000.

         Senior Credit Facility

         Our senior credit facility provides us with a $285 million revolving
line of credit, with an uncommitted increase option, which could increase the
revolving line of credit to $435 million, a $125 million term loan and a $110
million term loan, for a total availability of up to $670 million, of which $520
million (including letters of credit) is currently committed. Under our
revolving line of credit, we may make borrowings and repayments until June 30,
2006. Under one term loan, advances must be repaid in full by June 30, 2006. In
addition, after June 30, 2001, scheduled quarterly reductions in the commitment
amount begin and continue through June 30, 2006, at which time the commitment
will be reduced to zero. Based on commitment and availability levels as of June
30, 2001, we anticipate that the initial payments on the revolving line of
credit will be required during 2003. Quarterly principal payments on the term
loans begin September 30, 2001. Accordingly, the portion of this debt due within
the next twelve months has been classified as short-term. Outstanding balances
under the $125 million and $110 million term loans, $235 million as of June 30,
2001, are scheduled to be paid in full by June 30, 2006, and 2007, respectively.
Advances under our senior credit facility have been used primarily to fund
acquisitions and construction of new communications sites. As of June 30, 2001,
approximately $260 million of the borrowings under our senior credit facility at
various variable interest rates were effectively hedged against changes in
interest rates pursuant to the interest rate swap agreements we have entered
into as required by the senior credit facility. The balance of such borrowings
are at various variable interest rates and are not subject to any interest rate
swap agreements or similar hedges.

         As of June 30, 2001, we had $92.2 million available under our senior
credit facility, after giving effect to approximately $35.1 million of
outstanding letters of credit, which reduced availability under our senior
credit facility. As a result of a covenant in the indenture governing our senior
discount notes, currently we can only access additional availability under our
senior credit facility to fund acquisitions, and we can only borrow an amount
such that the ratio of our debt to cash flow (as calculated pursuant to such
indenture) does not increase as a result of such acquisition. We can also borrow
up to $15.0 million for other purposes. Typically, this will require that we
fund a significant portion of most acquisitions with our cash, the extent of
which is determined by the disparity between the cash flow multiple we pay for
the acquisition and the leverage ratio covenant in effect under the senior
credit facility. Effective April 30, 2000, the senior credit facility requires
that 50% - 75% of certain annual excess cash flows (as defined by the senior
credit facility) be used to paydown the balance outstanding under the revolving
line of credit.


                                       21

<PAGE>   24

         For the fiscal quarter ended December 31, 2000, we were not in
compliance with two financial ratio covenants under our bank loan agreement. In
February 2001, we entered into an amendment to our senior credit facility, which
adjusted substantially all of our ratio covenants, primarily aimed at lessening
requirements for covenant periods in 2001. In addition to the covenant changes,
the amendment also changed permitted levels of investment in our Canadian and UK
subsidiaries. In consideration for the amendment, we paid the lenders in our
senior credit facility a fee equal to 25 basis points, plus we agreed to
increase the pricing grid by 25 basis points for 2001.

         In April 2001, we obtained a one-time waiver with respect to covenant
breaches so long as actual ratios met the amended requirements. The following
table summarizes the initial covenant requirements and the amended requirements
for the period ended December 31, 2000, and our actual ratios at the respective
dates:

<TABLE>
<CAPTION>
                                                                                                    Amended
         Covenant                                         Original Requirement     Actual         Requirement
         -----------------------------------------------------------------------------------------------------
         <S>                                                  <C>                <C>               <C>
         Leverage Ratio.......................................<5.00 to 1.00      5.05 to 1.00      <5.40 to 1.0
         Pro Forma Debt Service Coverage Ratio...             >1.25 to 1.00      1.20 to 1.00      >1.10 to 1.0
</TABLE>

         The waiver also adjusted the interest rates charged on the loan based
on the quarterly leverage ratio calculations for the periods subsequent to the
date of the waiver. The amendment did not adjust the above ratio requirements
for future measurement dates. The above ratio requirements for the June 30,
2001, measurement date are 4.75 to 1.00 and 1.25 to 1.00 for the leverage and
pro forma debt service coverage ratios, respectively. Additionally, fees paid of
$1.8 million to the banks as a result of this amendment will be deferred and
amortized over the remaining term of the underlying debt agreement. Based upon
our plans and projections for 2001, management believes that we will be in
compliance with our financial covenants during the next year.

         Senior Discount Notes

         In March 1998, we completed an offering of the 10% Senior Discount
Notes due 2008. We received net proceeds of approximately $192.8 million from
that offering. The proceeds were used to repay outstanding borrowings under our
senior credit facility, to repay in full and retire a $12.5 million bridge loan
from our then largest stockholder, ABRY Broadcast Partners II, L.P., and accrued
interest thereon and a $20 million subordinated term loan and accrued interest
thereon and to pay a distribution preference to certain holders of our common
stock. The notes will mature on March 15, 2008. Cash interest is not payable on
the notes prior to March 15, 2003. Thereafter, the notes will require
semi-annual cash interest payments of $16.25 million.

         Convertible Notes

         On March 22, 2000, we completed a private placement of $200 million of
5.5% Convertible Subordinated Notes due 2007 to certain institutional purchasers
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act. We repaid outstanding revolving debt under our senior credit
facility with the net proceeds of $193.5 million from this private placement.
Interest is payable on the notes on March 15 and September 15 of each year. The
notes will mature on September 15, 2007 unless previously redeemed or
repurchased. The notes are convertible into Pinnacle's common stock at the
option of the note holders at an initial price of $78.375 per share, which
conversion price is subject to adjustment under the terms of the notes. We may
redeem the notes on or after March 21, 2003. Pursuant to a Registration Rights
Agreement dated March 22, 2000, we filed a registration statement on May 23,
2000, to cover resales of the Convertible Notes and the shares of our common
stock issuable upon conversion of the Convertible Notes, which was declared
effective by the SEC on June 20, 2001.

         Under the terms of the Registration Rights Agreement, because the
registration statement was not declared effective by the SEC by September 18,
2000, the interest rate on the notes increased by 0.5%. Thereafter, because the
registration statement was not declared effective by December 17, 2000, the
interest rate on the notes increased by an additional 0.5%. The interest rate on
the notes could not increase to


                                       22

<PAGE>   25

greater than 6.5% under the terms of the Registration Rights Agreement. As a
result of the effectiveness of the registration statement on June 20, 2001, the
additional interest that began accruing on September 19, 2000 has ceased
accruing.

         Other Indebtedness

         We also use seller financing to fund certain of our communications site
acquisitions. As of June 30, 2001, we had outstanding, in the aggregate amount,
$29.3 million of seller notes bearing interest at rates ranging from 8.0% to
13.0% per annum.

         Public Offerings

         On January 24, 2000, we completed a secondary offering of common stock
whereby we sold 7,200,000 shares of our common stock. The price per share was
$41, resulting in net proceeds of approximately $283.0 million. The proceeds
were invested initially in short-term liquid securities and were used along with
borrowings made under the senior credit facility to fund acquisitions, the
construction of new communications sites and improvements to existing
communications sites, all of which was used as of June 30, 2001. The total
shares sold included a concurrent exercise of the underwriters' over-allotment
option whereby 1,350,000 shares were sold (including 450,000 shares sold by
certain of our stockholders).

         Capital Investments

         Capital investments, including acquisitions, for the six month period
ended June 30, 2001, were $ 33.0 million, compared to $311.3 million in the
comparable 2000 period. Due to our inability to access additional capital, we
expect to make limited additional capital investments for acquisitions,
construction and upgrading of additional towers in 2001.

         We believe that the availability under our senior credit facility, cash
flow from operations and existing cash balances will be sufficient to meet
working capital requirements for existing properties. Among the factors
affecting our ability to complete all probable acquisitions are the availability
of financing from our lenders and other sources of public or private debt and
equity. As discussed elsewhere herein we have found accessing capital on
attractive terms to be a challenge. We had to discontinue an equity offering
during the third quarter of 2000. Additionally, we have had to significantly
scale back our previous communications site acquisition plans, and have had to
discontinue our efforts to actively enter the colocation facilities business.

         As of June 30, 2001, we estimate that we had cash on hand, borrowings
available under our senior credit facility and excess cash flow from operations
to be able to pursue limited additional acquisition opportunities over the next
six months. However, in light of our current inability to access additional
capital on terms we believe are attractive, unless we secure additional capital
we may not pursue significant acquisition opportunities.

         On June 7, 2001 we adopted a plan to dispose of certain operating
assets pursuant to management's decision to dedicate resources to Pinnacle's
core competency, tower asset acquisition and operation. As a result of the
adoption of this plan, five colocation properties located in Texas and St.
Louis, Missouri have been deemed assets held for sale. In accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, assets held for sale are reported at the lower of
their net historical basis or estimated fair market value less costs to sell.

         The historical carrying value of the properties as of June 30, 2001,
was approximately $65.0 million. During the three months ended June 30, 2001,
the Company recognized a write-down adjustment of approximately $34.6 million,
which is included in impairment - on assets held for sale. This amount
represents the difference between the carrying values and the estimated fair
market value less costs to sell these five properties. We estimated the fair
market value less costs to sell by discounting expected future cashflows using a
discount rate commensurate with available risk factors, which is materially
consistent with recent third party offers. Depreciation expense has not been
recognized since


                                       23

<PAGE>   26

the date the colocation assets were classified as held for sale.

         Our senior credit facility does not require any portion of any proceeds
from any sale of the colocation facilities assets that may occur to be used to
repay debt, so long as such proceeds are reinvested in permitted acquisitions or
capital expenditures within 180 days of the sale transaction. However, if any
such sale were to occur, we may consider applying some portion of the proceeds
from such sale to repay debt under our senior credit facility to maintain
appropriate post-sale leverage ratios. To the extent that we pursue additional
acquisitions, construction activity and other capital expenditures requiring
funding in excess of our currently available sources, we will be required to
obtain additional financing. Currently we are considering various fund raising
options and are conducting discussions in connection with these considerations.
There can be no assurance that such financing will be commercially available or
be permitted by the terms of our existing indebtedness. To the extent that we
are unable to finance future capital expenditures, we may not be able to achieve
our current revised business strategy. Should we become able to access
additional capital on attractive terms, we would revise our business strategy to
increase the rate that we acquire communications sites.

ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT

         Effective January 1, 2001, we adopted SFAS No. 133 as amended by SFAS
No. 137 and 138. These statements require us to recognize all derivative
instruments in the balance sheets at the fair value. These statements also
establish new accounting rules for hedging instruments, which depend on the
nature of the hedge relationship. As disclosed in further detail below, the
second quarter 2001 unaudited condensed consolidated financial statements
include the provisions required by SFAS No. 133, while the second quarter 2000
unaudited condensed consolidated financial statements were prepared in
accordance with the applicable professional literature for derivatives and
hedging instruments in effect at that time.

         The adoption of SFAS No. 133 resulted in us recording a transition
adjustment to recognize our derivative instruments at fair value and to
recognize the change in fair value of our derivatives. The cumulative effect of
these transition adjustments was an after-tax reduction to other comprehensive
income (OCI) of approximately $4.0 million. The reduction in other comprehensive
net income is primarily related to the change in the fair value of our interest
rate swap agreement. We estimated that we would reclassify into earnings during
the twelve-month period ending December 31, 2001, approximately $2.0 million of
net losses relating to the transition adjustment recorded as of January 1, 2001.

         The earnings impact recorded during the three and six month periods
ending June 30, 2001, relating to this interest rate swap was approximately $0.0
million and $5.5 million, respectively, and is recorded in interest expense in
the unaudited condensed consolidated statement of operations. For the three
months ended June 30, 2001, approximately $0.5 million represents an increase in
the fair value of the interest rate swap agreement and approximately $0.5
million represents the reversal into current year income of the underlying
exposure previously recognized in comprehensive loss. For the six
months ended June 30, 2001, approximately $4.5 million represents the additional
decline in the fair value of the interest rate swap agreement since January 1,
2001, and approximately $1.0 million represents the reversal into current year
income of the underlying exposure previously recognized in comprehensive income
(loss).

         In June 2001, the Financial Accounting Standard Board issued Statements
of Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment testing in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.

         We will apply the new rules on accounting for goodwill and other
intangible assets beginning January 1, 2002. As of June 30, 2001, we do not have
any recorded goodwill or indefinite lived intangible assets. If warranted by
future acquisitions, we will comply with the requirements for non-amortization
and for periodic impairment tests as deemed necessary. As of June 30, 2001, the
applications of the non-amortization provisions of the Statement and the
requirements for impairment testing are being evaluated.



                                       24

<PAGE>   27

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:

         We are exposed to market risks from changes in interest rates earned on
our long-term debt. The impact on earnings and value of our long-term debt is
subject to change as a result of movements in market rates and prices. As of
June 30, 2001, and December 30, 2000, pursuant to the requirements of our senior
credit facility, we had $392.6 million and $392.4, respectively, in long-term
debt subject to variable interest rates of which $260.0 million was effectively
hedged using interest rate swap agreements for both periods. The remaining
$505.8 million and $493.9 million of long term debt as of June 30, 2001 and
December 30, 2000, respectively, is subject to fixed rates of interest. Our
variable rate debt, net of hedged amounts, exposed to changes in market interest
rates was $132.6 million and $132.4 million as of June 30, 2001 and December 31,
2000, respectively.

         The following table presents the future principal payment obligations
and weighted-average interest rates associated with our existing long-term debt
instruments assuming our actual level of long-term indebtedness of $325.0
million under the our 10% Senior Discount Notes due 2008, $200.0 million under
our 5.5% Convertible Subordinated Notes due 2007, and $392.6 million under our
senior credit facility as of June 30, 2001:

<TABLE>
<CAPTION>
                                                                             Expected Maturity Date
                                               ----------------------------------------------------------------------------------
                                                  2001          2002          2003          2004          2005        Thereafter
                                               ----------    ----------    ----------    ----------    ----------    ------------
<S>                                            <C>           <C>           <C>           <C>           <C>           <C>
Liabilities
Long-term Debt
  Fixed Rate (7.97%)                                   --            --            --            --            --     525,000,000
  Variable Rate (Weighted Average Interest
    Rate of 9.04%)                             13,600,000    19,850,000    45,050,032    81,157,001    92,073,864     140,889,546
</TABLE>

         Our primary market risk exposure relates to the following:

         -        the interest rate risk on long-term and short-term borrowings;

         -        our ability to refinance the senior discount notes and the
                  convertible subordinated notes at maturity at market rates;

         -        the impact of interest rate movements on our ability to meet
                  interest expense requirements and exceed financial covenants;
                  and

         -        the impact of interest rate movements on our ability to obtain
                  adequate financing to fund future acquisitions.

         We manage interest rate risk on our outstanding long-term and
short-term debt through our use of fixed and variable rate debt and through the
use of interest rate swaps. While we cannot predict or manage our ability to
refinance existing debt or the impact interest rate movements will have on our
existing debt, we continue to evaluate our financial position on an ongoing
basis.

INFLATION

         Because of the relatively low levels of inflation experienced in 2000
and the six months ended June 30, 2001, inflation did not have a significant
effect on our results in such periods.


                                       25

<PAGE>   28
PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

         SEC Investigation

         As previously disclosed, we are involved in a SEC investigation and the
SEC Staff has requested information from us, our current independent auditors,
E&Y, and our former independent auditors, PWC, as part of its inquiry. The SEC's
investigation appears to be focused primarily on the Motorola Antenna Site
Acquisition and on the independence of PWC as Pinnacle's auditor. We have
cooperated and intend to continue to cooperate with the SEC in its
investigation.

         We cannot predict the outcome of the SEC's investigation. Regardless of
the outcome, however, it is likely that we will incur substantial costs and that
the investigation will cause a diversion of our management's time and attention.

         In March 2001, we announced that in order to remove uncertainty with
respect to the independence issues, the Audit Committee of Pinnacle's Board of
Directors authorized the engagement of E&Y to reaudit our financial statements
for the year ended December 31, 1999 and audit the year ended December 31, 2000.
As a result of the reaudit of 1999 and the audit of 2000, we revised our
accounting for certain costs capitalized in connection with the Motorola Antenna
Site Acquisition. In our revised financial statements, we have determined to
capitalize all costs that relate directly to the acquisition except those
post-closing costs that are deemed to more than incidentally reduce our need to
incur ongoing business expenses necessary to integrate those assets into our
operations.

         Stockholder Class Actions

         Pinnacle, its Chief Operating Officer, Steven R. Day, its former Chief
Financial Officer, Jeffrey J. Card, and its former Chief Executive Officer,
Robert J. Wolsey, various current and former directors of Pinnacle, Pinnacle's
former accountants, PricewaterhouseCoopers, LLP, and the underwriters of
Pinnacle's January 18, 2000 secondary offering, were recently named as
defendants in a consolidated class action complaint styled In re Pinnacle
Holdings Corp. Securities Litigation, Case No. 8:01-CV-624-T-27MSS filed on
August 8, 2001, in the United States District Court for the Middle District of
Florida, in Tampa. The consolidated amended complaint filed August 8, 2001,
consolidates a number of securities class action suits previously filed in the
same court. The plaintiffs named in the consolidated action claim to represent
all persons who purchased our common stock during the period between June 29,
1999 and March 17, 2001.

         The plaintiffs allege that Pinnacle, the directors, the underwriters,
and Messrs. Day and Wolsey violated Section 11 of the Securities Act of 1933, by
permitting the publication and dissemination of the prospectus for the January
18, 2000 secondary offering. The plaintiffs allege that the prospectus contained
various misrepresentations concerning, among other things, the value of the
towers that Pinnacle had previously acquired and our due diligence investigation
relating to the Motorola Antenna Site Acquisition.

         The plaintiffs have also alleged that the directors, and Messrs. Wolsey
and Day are vicariously liable pursuant to Section 15 of the Securities Act for
Pinnacle's alleged violation of Section 11. Section 15 of the Securities Act
makes those persons who control a "primary violator" vicariously liable for the
primary violator's violation of Section 11.

         The plaintiffs further allege that Pinnacle, Messrs. Wolsey and Card,
and the other named defendants violated Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder, by making various allegedly
misleading statements relating to certain of our financial statements, the
Motorola Antenna Site Acquisition, the nature of the SEC's investigation
concerning our accounting practices and our relationship with our former
accountants, and other matters, in various press releases and filings with the
SEC.

         The plaintiffs have also alleged that Messrs. Day, Wolsey, and Card
violated Section 20 of the Securities Exchange Act, which imposes vicarious
liability on those persons who control a primary violator of Section 10(b) and
Rule 10b-5.

         Plaintiffs have requested compensatory damages, interest, their costs
and expenses incurred in the action including attorneys' and experts' fees, and
other relief.

         We intend to respond appropriately and in the best interests of
Pinnacle to the consolidated action; however we cannot assure you that we will
prevail in such litigation. Securities lawsuits may result in substantial costs,
divert management's attention and other resources, and have a material and
adverse effect on our financial condition and the results of our operations in
the future.

         Others

         We are also from time to time involved in ordinary litigation
incidental to the conduct of our business. We believe that none of such pending
litigation will have a material adverse effect on our business, financial
condition or results of operations.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

         Not applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

         Not applicable.


                                       26
<PAGE>   29

ITEM 4   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         At our Annual Meeting of Stockholders, held on June 7, 2001, the
following proposal was voted upon by the stockholders as indicated below:

         To elect five directors to serve for the ensuing year or until their
successors are duly elected and qualified.

<TABLE>
<CAPTION>
                                                    Number of Shares
                                            --------------------------------
                                               For                 Withheld
                                            ----------            ----------
<S>                                         <C>                   <C>
Robert J. Wolsey                            31,078,542            14,121,191
Steven R. Day                               31,078,542            14,125,591
G. Peter O'Brien                            39,239,320             5,960,413
J. Clarke Smith                             39,239,320             5,960,413
Paula E. Boggs                              39,239,320             5,960,413
</TABLE>

ITEM 5.  OTHER INFORMATION.

         On March 14, 2001, 2001 Jeffrey J. Card tendered his resignation as
Chief Financial Officer, effective immediately. At that time Steven R. Day
assumed the Chief Financial Officer's responsibilities on an interim basis until
Pinnacle retains a permanent replacement. Effective June 30, 2001, Robert J.
Wolsey tendered his resignation as Pinnacle's Chief Executive Officer, but
remains employed by Pinnacle as Senior Advisor. On June 30, 2001, Mr. Wolsey's
employment agreement was amended to reflect his change in position from Chief
Executive Officer to Senior Advisor, a copy of which is attached to this report
as Exhibit 10.2.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)      The Exhibits listed in the "Exhibit Index" are filed as part of this
report.

(b)      Reports on Form 8-K. Pinnacle filed an amended Form 8-K with the SEC on
April 26, 2001 reporting that E&Y, rather than PWC will audit the Company's
restated financial statements for the fiscal year ended December 31, 1999.


                                       27

<PAGE>   30

                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                       Pinnacle Holdings Inc.



Date  August 14, 2001                  By:/s/ Steven R. Day
                                          --------------------------------------
                                              Steven R. Day
                                              Chief Executive Officer, Chief
                                              Financial Officer and Secretary

                                       Duly Authorized Officer and Principal
                                       Financial Officer.


                                       28

<PAGE>   31

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>

EXHIBIT NO.                       DESCRIPTION
----------                        -----------
<S>         <C>
3.1         Amended and Restated Certificate of Incorporation of the Company(1)
3.2         Bylaws of the Company(1)
10.1        Sixth Amendment to Fifth Amended and Restated Credit Agreement(2)
10.2        Amendment to Employment Agreement between Pinnacle and Robert J.
            Wolsey, dated June 30, 2001.
</TABLE>

(1)      Incorporated by reference to the Company's Registration Statement on
         Form S-4 filed with the SEC on April 1, 1998 (SEC file no. 333-49147).
(2)      Incorporated by reference to the Company's Annual Report on Form 10-K
         filed with the SEC on April 26, 2001.


                                       29