KMC TELECOM HOLDINGS INC, S-4, 1999-11-18

KMC TELECOM HOLDINGS INC
S-4, 1999-11-18
COMMUNICATIONS SERVICES, NEC

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As filed with the Securities and Exchange Commission on November 18, 1999
Registration No. 333-
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- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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KMC TELECOM HOLDINGS, INC.
KMC TELECOM FINANCING, INC.
(Exact name of registrant as specified in its charter)

Delaware 4813 22-3545325
Delaware 4813 22-3655227
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)

1545 Route 206, Suite 300
Bedminster, New Jersey 07921
(908) 470-2100
(Address, including ZIP Code, and telephone number, including area code, of
each registrant's principal executive offices)

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Michael A. Sternberg
President and Chief Executive Officer
KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ 07921
(908) 470-2100
(Name and address, including ZIP Code and telephone number, including area
code, of agent for service)

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with a copy to:
Brian J. Calvey, Esq.
Kelley Drye & Warren LLP
101 Park Avenue
New York, New York 10178
(212) 808-7800

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Approximate date of commencement of proposed sale of securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Proposed
Proposed Maximum
Title of each Class of Amount Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered Per Note Price(1) Fee
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<S> <C> <C> <C> <C>
13 1/2% Senior Notes
due 2009.............. $275,000,000 100% $275,000,000 $76,450
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KMC Telecom Financing,
Inc. Guarantee(2)..... -- -- -- --
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TOTAL(3)............. $275,000,000 100% $275,000,000 $76,450
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</TABLE>
(1) Estimated solely for purposes of calculating the amount of the
registration fee pursuant to Rule 457(f). Pursuant to Rule 457(n), no
separate fee is payable with respect to the exchange notes guarantee.
(2) No separate consideration will be received for the exchange notes
guarantee.
(3) Such amount represents the principal amount of the exchange notes to be
exchanged hereunder.

----------------
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

KMC TELECOM HOLDINGS, INC.

OFFER TO EXCHANGE $275,000,000 OF ITS 13 1/2%
SENIOR NOTES DUE 2009 WHICH HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT
FOR $275,000,000 OF ITS OUTSTANDING 13 1/2%
SENIOR NOTES DUE 2009

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Terms of the exchange offer

. The exchange offer will expire at 5:00 p.m., New York City time, on ,
1999 unless extended.

. The exchange offer is subject to certain customary conditions, which we may
waive.

. All outstanding notes that are validly tendered and not withdrawn will be
exchanged.

. KMC Telecom Financing, Inc. is also offering to exchange its guarantee of
KMC Telecom Holdings, Inc.'s obligations under the outstanding notes for a
like guarantee of the exchange notes, which exchange notes guarantee has
also been registered under the Securities Act.

. Tenders of outstanding notes may be withdrawn at any time prior to the
expiration of the exchange offer.

. The terms of the exchange notes we will issue in the exchange offer are
substantially identical to those of the outstanding notes, except that
certain transfer restrictions and registration rights relating to the
outstanding notes will not apply to the exchange notes.

----------------

BEFORE PARTICIPATING IN THIS EXCHANGE OFFER PLEASE REFER TO THE SECTION IN
THIS PROSPECTUS ENTITLED "RISK FACTORS" COMMENCING ON PAGE 15.

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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE NOTES TO BE DISTRIBUTED IN THE
EXCHANGE OFFER, NOR HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

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The date of this prospectus is , 1999
<PAGE>

TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 15
The Exchange Offer....................................................... 32
Use of Proceeds.......................................................... 41
Capitalization........................................................... 42
Selected Financial Data.................................................. 43
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 45
Business................................................................. 55
Management............................................................... 74
Certain Relationships and Related Transactions........................... 81
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Principal Stockholders..................................................... 83
Description of Certain Indebtedness and Preferred Stock.................... 87
Description of the Exchange Notes.......................................... 93
Certain United States Federal Income Tax Considerations.................... 130
Plan of Distribution....................................................... 135
Legal Matters.............................................................. 135
Experts.................................................................... 136
Available Information...................................................... 136
Documents Incorporated By Reference........................................ 137
Index to Financial Statements.............................................. F-1
</TABLE>
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Notice to New Hampshire Residents

Neither the fact that a Registration Statement or an application for a
license has been filed under chapter 421-b of the New Hampshire revised
statutes with the State of New Hampshire nor the fact that a security is
effectively registered or a person is licensed in the State of New Hampshire
constitutes a finding by the Secretary of State of the State of New Hampshire
that any document filed under RSA 421-b is true, complete and not misleading.
Neither any such fact nor the fact that an exemption or exception is available
for a security or a transaction means that the Secretary of State of the State
of New Hampshire has passed in any way upon the merits or qualifications of,
or recommended or given approval to, any person, security or transaction. It
is unlawful to make, or cause to be made, to any prospective purchaser,
customer or client any representation inconsistent with the provisions of this
paragraph.

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Forward-Looking Statements

This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions including, among other things, those discussed
under "Risk Factors," as well as "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Examples of forward-looking
statements include all statements that are not historical in nature, including
statements regarding:

. operations and prospects,

. expected financial position,

. funding needs and financing sources,

. business and financing plans,

. network construction and development plans,

. regulatory matters,

. expected identity, plans and facilities of competitors in our
markets, and

. expected actions of third parties, such as equipment suppliers.

Other matters set forth in this prospectus may also cause actual results in
the future to differ materially from those described in the forward-looking
statements. We do not intend to update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise. In light of these risks, uncertainties and assumptions, the future
events discussed in this prospectus might not occur.

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.
Because it is a summary, it does not contain all of the information that you
should consider before participating in the exchange offer. You should read the
entire prospectus carefully, including the section entitled "Risk Factors" and
the financial statements and the related notes to those statements included in
this prospectus. Except as otherwise required by the context, references in
this prospectus to "we," "us," the "Issuer" or the "Company" refer to the
business of KMC Telecom Holdings, Inc. and all of its subsidiaries. The term
"you" refers to prospective investors in the exchange notes (as defined).

The Company

We are a facilities-based competitive local exchange carrier providing
telecommunications and data services in Tier III Markets (markets with a
population from 100,000 to 750,000). A facilities-based competitive local
exchange carrier is one which operates its own network, including switching
equipment and transmission lines, rather than one which intends to primarily
resell the services of other carriers. The markets in which we operate are
predominantly located in the Southeastern and Midwestern United States. We
target as customers business, government and institutional end-users, as well
as Internet service providers, long distance carriers and wireless service
providers. Our objective is to provide our customers with a complete solution
for their communications needs. We currently provide on-net local dial tone,
Internet access, ISDN (or integrated services digital network), long distance,
special access, private line and a variety of other advanced services and
features.

We currently operate in 23 Tier III Markets. We have constructed robust
fiber optic networks in each of our markets which we believe allow us to ensure
high quality services, facilitate the delivery of value-added and data
services, and effectively control our costs. We currently have Lucent
Technologies Series 5ESS(R)-type switches in commercial operation in all of our
23 existing markets. We also intend to install Lucent switches in any future
networks which we may build. Over time, we expect to transition the majority of
our customers to our own networks by means of either unbundled network elements
leased from the incumbent local exchange carrier (i.e., the established local
telephone company, such as Ameritech, Bell Atlantic, BellSouth, SBC or one of
the subsidiaries of GTE Corporation or Sprint Corporation) or direct
connections to our own networks.

Through September 30, 1999, we have invested $454.1 million in property,
plant and equipment. For 1998, our revenues totaled $22.4 million, comprised of
$14.2 million from resale of switched and dedicated services and $8.2 million
from on-net special access, private line and switched services. "On-net"
switched services includes both switched services provided through direct
connections to our own networks and switched services provided through
unbundled network elements leased from the incumbent local exchange carrier.
Resale of switched and dedicated services accounted for 63% of our revenues for
1998, 56% of our revenues for the first quarter of 1999, 40% of our revenues
for the second quarter of 1999 and 38% of our revenues for the third quarter of
1999. To date, we have completed construction of our backbone in each of our
networks as planned. Our major customers include: AT&T Corp., Boeing Inc.,
Comcast Cable Communications, Inc., Daimler Chrysler Corporation, Harris
Corporation, Intergraph Corp., MCI WorldCom, Inc., NASA, Sprint Corporation,
Time-Warner, Inc. and UUNet Technologies, Inc.

High-speed connectivity has become important to business due to the dramatic
increase in Internet usage and the proliferation of personal computer- and
Internet protocol-based applications. By leveraging customer relationships and
bundling service offerings, competitive local exchange carriers such as the
Company have begun to exploit a variety of high-growth, value-added data
services opportunities, including high-speed Internet access, BRI (or Basic
Rate ISDN), PRI (or Primary Rate ISDN), HDSL (or high bit-rate digital
subscriber line), LAN (or Local Area Network) and WAN (or Wide Area Network)
connectivity, managed network services, Virtual Private Networks, remote access
and e-commerce services. Data services represented approximately 7% of our
revenue for the first nine months of 1999. We expect this percentage to grow
over time. To take advantage

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of this opportunity, we intend to continue to aggressively market our current
data services offerings, such as ISDN, HDSL, Internet access, Local Area
Network-to-Local Area Network interconnect, and Wide Area Network services, and
to roll out new services such as port wholesale, frame relay and ATM (or
asynchronous transfer mode).

We believe that our success in meeting our revenue targets and in completing
our networks as planned has demonstrated that our strategy of building
comprehensive, cost-effective, facilities-based networks in Tier III cities is
compelling. We believe we are positioned to become the leading facilities-based
competitive local exchange carrier focused on Tier III markets. Accordingly, we
have determined to significantly expand our business by constructing networks
in 14 additional Tier III Markets by the end of the first half of 2000. To
finance these expansion plans, we will utilize proceeds from our recent private
placements of PIK Preferred Stock, approximately $250.0 million available for
this purpose under our $600.0 million vendor financing facility with Lucent
Technologies Inc. and proceeds of the offering of the original notes.

The following table presents information, as of September 30, 1999,
concerning our existing 23 networks and the 14 new networks on which
construction has begun or for which network engineering has been completed:

Existing Networks

(see accompanying notes on following page)

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New Networks

<TABLE>
<CAPTION>
Switched Dedicated DS-0
Addressable Access Equivalent
Commercially Route Commercial Lines In Circuits
Location Operational(1) Miles(2) Buildings(3) Service(4) In Service(5)
- -------- ------------------- -------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
Clearwater/St. Petersburg,
FL.......................... Fourth Quarter 1999 70 3,426 -- --
Charleston, SC............... Fourth Quarter 1999 51 1,540 -- --
Lansing, MI.................. Fourth Quarter 1999 29 1,300 -- --
Dayton, OH................... Fourth Quarter 1999 36 2,137 -- --
Akron, OH.................... Fourth Quarter 1999 25 1,355 -- --
Spartanburg, SC.............. Fourth Quarter 1999 25 1,140 -- --
Toledo, OH................... Fourth Quarter 1999 31 1,392 -- --
Columbia, SC................. Fourth Quarter 1999 24 1,884 -- --
Monroe, LA................... Fourth Quarter 1999 24 1,005 -- --
Montgomery, AL............... Fourth Quarter 1999 25 1,961 -- --
Biloxi/Gulfport, MS.......... Second Quarter 2000 41 798 -- --
Chattanooga, TN.............. Second Quarter 2000 24 1,815 -- --
Johnson City/Kingsport, TN... Second Quarter 2000 69 1,577 -- --
Rockville/Bethesda/Frederick,
MD.......................... Second Quarter 2000 126 4,070 -- --
--- ------ ---- ----
600 25,400 -- --
=== ====== ==== ====
</TABLE>
- --------
(1) Refers to the date on which testing is completed and the switch is first
available to carry customer traffic. Fiber optic networks typically become
commercially operational for non-switched traffic in the quarter before the
switch is available to carry customer traffic. The quarters presented for
new networks represent our estimate of the calendar quarters in which the
new networks will be commercially operational. We cannot assure you that
the new networks will be commercially operational when estimated.
(2) Represents (i) for existing networks, current owned operational route miles
and (ii) for new networks, the number of operational route miles currently
estimated to be owned and operational at the time the network becomes
commercially operational.
(3) Addressable by either unbundled network elements leased from the incumbent
local exchange carrier or by a direct connection to our own network. We
define a commercial building as one with greater than ten employees.
(4) Represents all active switched channels we provide to customers either by
resale via the incumbent local exchange carrier's network, by unbundled
network elements leased from the incumbent local exchange carrier, or by
direct connection to our own network.
(5) Represents all active dedicated DS-0, DS-1 and DS-3 circuits we provide to
customers expressed on a DS-0 basis.

Business Strategy

The following are the key elements of our business strategy:

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aerial deployment of fiber optic cable, which is less expensive than the buried
deployment required in many Tier I and Tier II Markets. We estimate that
approximately 70% of our fiber is deployed aerially.

Early to Market Advantage. We strive to be the first facilities-based
competitive local exchange carrier in a geographic area to actively market and
provide services. We believe that by effecting early entry into Tier III
Markets with a facilities-based strategy, we will be able to limit entry by
additional competitive local exchange carriers, although we can give no
assurance in this regard.

Comprehensive Fiber Networks. We build geographically extensive, full
service, facilities-based networks. We believe such networks provide
significant operating leverage, facilitate the capture of market share, and are
likely to deter other competitive local exchange carriers from attempting to
penetrate our markets due to the cost of constructing a competing network of
equal capability. In all of our 23 existing markets, we have completed our
backbone construction connecting the market's central business district with
outlying office parks, large institutions, the locations of long distance
carriers' transmission equipment and major incumbent local exchange carrier
central offices. We intend to continue to expand our existing networks in
response to anticipated customer demand.

Local Presence with Personalized Customer Service. We seek to capture and
retain customers through local, personalized sales, marketing and customer
service programs. To this end, we:

. establish sales offices in each market in which we operate a network,

. strive to recruit our city directors and sales staff from the local
market,

. rely principally on a face-to-face selling approach, and

. support our sales staff with locally based customer service and
technical support personnel.

We believe that our "Creative Solutions with a Hometown Touch"(TM) sales
approach is very important to customers in Tier III Markets, who do not
typically receive focused local sales contact or customer support from the
incumbent local exchange carrier.

Focus on Value-Added Data Services. We believe it is strategically important
to offer these services because:

. they provide for competitive differentiation,

. they present a substantial margin opportunity,

. as a facilities-based provider, we are able to offer these services
without significant marginal operating costs, and

. incumbent local exchange carriers have underinvested in facilities and
sales forces related to these services.

Low Cost Construction. It is our practice to use innovative "switch-in-a-
box" construction and deployment techniques for most of our networks. Using
these techniques, transmission, switching and power equipment are pre-installed
by Lucent under controlled factory conditions in portable, weatherproof, storm-
proof concrete buildings delivered to the Lucent facility by our contractor.
The completed buildings are then shipped to the appropriate city for final
installation, reducing costs, installation risks and time to market.

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installation. We believe that this system will allow us to quickly address
customer concerns and provide us with a competitive advantage in customer
service and operations efficiency.

Experienced Management Team. Our senior management team includes individuals
with over 250 years of experience, collectively, in the telecommunications
industry. It is led by Harold N. Kamine, Chairman of the Board of Directors,
and Michael A. Sternberg, the Company's President and Chief Executive Officer.
Other members of the team include Roscoe C. Young II, Chief Operating Officer,
James D. Grenfell, Executive Vice President, Chief Financial Officer and
Secretary, James L. Barwick, Senior Vice President and Chief Technology
Officer, Tricia Breckenridge, Executive Vice President--Business Development
and Paul R. DiMarco, Vice President--Information Technology and Chief
Information Officer.

Recent Developments

Senior Notes Offering. On May 24, 1999, we issued the original notes in a
private offering. Approximately $104.1 million of the proceeds of the offering
were used to purchase a portfolio of U.S. government securities which were
pledged to secure the payment of the first six interest payments on the notes
(including the exchange notes). We will use the net proceeds of the offering,
along with other funds, to complete the 14 additional networks which we plan to
construct by the end of the first half of 2000.

Preferred Stock Placements. On February 4, 1999, we issued PIK Preferred
Stock and warrants to purchase common stock for aggregate gross proceeds of
$65.0 million to two purchasers. On April 30, 1999, we issued additional shares
of PIK Preferred Stock and warrants to purchase common stock to an additional
purchaser for aggregate gross proceeds of $35.0 million.

Lucent Facility. On February 4, 1999, our subsidiary which will own the 14
additional networks which we plan to construct by the end of the first half of
2000, entered into a secured vendor financing facility with Lucent Technologies
Inc. (the "Lucent Facility"). Under this Lucent Facility, our subsidiary will
be permitted to borrow, subject to certain conditions, up to an aggregate of
$600.0 million, primarily for the purchase from Lucent of switches and other
telecommunications equipment. Only $250.0 million is presently available under
this Lucent Facility.

Expanded Senior Debt Facility. On December 22, 1998, we refinanced and
expanded our $70.0 million senior credit facility with Newcourt Commercial
Finance Corporation to a $250.0 million facility. Under the refinanced and
expanded facility (the "Senior Secured Credit Facility"), which is with a group
of lenders led by Newcourt Commercial Finance Corporation, First Union National
Bank, General Electric Capital Corporation and Canadian Imperial Bank of
Commerce, our subsidiaries which own our initial 23 networks are permitted to
borrow up to an aggregate of $250.0 million, subject to certain conditions, for
the purchase of fiber optic cable, switches and other telecommunications
equipment and, once certain financial conditions are met, for working capital
and for other general corporate purposes.

The Company is a Delaware corporation. Our principal executive offices are
located at 1545 Route 206, Suite 300, Bedminster, New Jersey 07921 and our
telephone number at that location is (908) 470-2100.

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Summary Of The Exchange Offer

The Exchange Offer.......... We are offering to exchange $275,000,000
aggregate principal amount of our exchange notes
for a like aggregate principal amount of our
original notes. In order to be exchanged, the
original notes must be properly tendered and
accepted. All outstanding original notes that are
validly tendered and not validly withdrawn will
be exchanged.

Resales of Exchange Notes... Based on certain no-action letters issued by the
staff of the Securities and Exchange Commission,
we believe that the exchange notes may be offered
for resale, resold and otherwise transferred by
you without compliance with the registration and
prospectus delivery provisions of the Securities
Act; provided, that:

. you are acquiring the exchange notes in the
ordinary course of your business;

. you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate,
in the distribution of the exchange notes; and

. you are not an affiliate of the Company or the
Guarantor, within the meaning of Rule 405
under the Securities Act of 1933.

If any of the foregoing are not true and you
transfer any exchange note without delivering a
prospectus meeting the requirements of the
Securities Act or without an exemption from such
requirements, you may incur liability under the
Securities Act. We do not and will not assume, or
indemnify you against, such liability.

Registration Rights......... The terms of a registration rights agreement
which we entered into with the placement agents
for the original notes grants you certain
exchange and registration rights with respect to
your original notes. This exchange offer is
intended to satisfy all of those rights and those
rights will terminate when the exchange offer is
completed. If you do not exchange your original
notes for exchange notes, you will no longer be
able to obligate us to register your original
notes under the Securities Act, except in the
limited circumstances provided under the
registration rights agreement. In addition, you

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will not be able to resell, offer to resell or
otherwise transfer your original notes unless
they are registered under the Securities Act, or
unless you resell, offer to resell or otherwise
transfer them under an exemption from the
registration requirements of, or in a transaction
not subject to, the Securities Act. Please refer
to the section in this prospectus entitled "Risk
Factors--A Failure to Participate in the Exchange
Offer May Have Adverse Consequences."

Expiration Date............. The exchange offer will expire at 5:00 p.m., New
York City time, on , 1999 unless we decide
to extend it.

Conditions to the Exchange
Offer...................... The exchange offer is not subject to any
condition other than certain customary
conditions, including that:

. there is no change in laws and regulations
which would impair our ability to proceed with
the exchange offer,

. there is no change in the current
interpretation of the staff of the Securities
and Exchange Commission which permits resales
of the exchange notes,

. there is no stop order issued by the staff of
the Securities and Exchange Commission which
suspends the effectiveness of the registration
statement of which this prospectus is a part,

. there is no litigation which impairs our
ability to proceed with the exchange offer,

. we obtain all the governmental approvals we
deem necessary for the exchange offer, and

. there is no change, or development involving a
prospective change, in our business or
financial affairs which might materially
impair our ability to proceed with the
exchange offer.

Please refer to the section in this prospectus
entitled "The Exchange Offer--Conditions of the
Exchange Offer."

Procedures for Tendering
Original Notes............. If you wish to participate in the exchange offer,
you must complete, sign and date the Letter of
Transmittal, or a facsimile of the Letter of
Transmittal, and mail or otherwise deliver it
together with your original notes and any other
documents required by the Letter of Transmittal
to The Chase Manhattan Bank, as Exchange Agent,
at the address indicated on the Letter of
Transmittal. In the alternative, you can tender
your original notes by following the procedures
for book-entry transfer described in this
prospectus. See "The Exchange Offer--Procedures
for Tendering."

Special Procedures for
Beneficial Owners.......... If your original notes are registered in the name
of a broker, dealer, commercial bank, trust
company or other nominee, we urge you to contact
that person promptly if you wish to tender your
original

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notes in the exchange offer. See "The Exchange
Offer--Procedures for Tendering."

Guaranteed Delivery
Procedures................. If you wish to tender your original notes and you
cannot get your required documents to the
Exchange Agent prior to the Expiration Date, you
may tender your original notes according to the
guaranteed delivery procedures described under
the section of this prospectus entitled "The
Exchange Offer--Guaranteed Delivery Procedures."

Withdrawal Rights........... You may withdraw the tender of your original
notes at any time prior to 5:00 p.m. New York
City time on the Expiration Date. To withdraw,
you must send a written or facsimile transmission
notice of withdrawal to the Exchange Agent at its
address set forth under "The Exchange Offer--
Exchange Agent" prior to 5:00 p.m., New York City
time, on the Expiration Date.

Certain U.S. Federal Income
Tax Consequences........... The exchange of the original notes for exchange
notes will not be a taxable exchange for United
States federal income tax purposes. Please refer
to the section of this prospectus entitled
"Certain United States Federal Income Tax
Considerations."

Use of Proceeds............. Neither the Company nor the Guarantor will
receive any proceeds from the issuance of the
exchange notes. The exchange offer is intended
solely to satisfy certain of our obligations
under the registration rights agreement.

Exchange Agent.............. The Chase Manhattan Bank is serving as the
Exchange Agent in connection with the exchange
offer.

Summary of the Terms of the Exchange Notes

Notes Offered............... $275,000,000 aggregate principal amount of
131/2% Senior Notes due 2009. The form and terms
of the exchange notes are the same as the form and
terms of the original notes, except that the
exchange notes will be registered under the
Securities Act and, therefore, will not bear
legends restricting their transfer and will not be
entitled to registration rights under the
registration rights agreement. The exchange notes
will evidence the same debt as the original notes
and both the original notes and the exchange notes
are governed by the same indenture.

Maturity.................... May 15, 2009.

Yield and Interest.......... The exchange notes will accrue interest at a rate
of 13 1/2% per year, payable semi-annually on
each May 15 and November 15, beginning November
15, 1999.

Security.................... We used a portion of the proceeds from the sale
of the original notes to purchase a portfolio of
U.S. government securities that has been

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pledged as security for the first six interest
payments on the original notes and the exchange
notes.

Optional Redemption......... We may redeem any of the original notes and the
exchange notes beginning May 15, 2004. The
initial redemption price is 106.750% of their
principal amount, plus accrued interest. The
redemption price will decline each year after
2004 and will reach 100% of their principal
amount, plus accrued interest, beginning on May
15, 2007.

In addition, before May 15, 2002, we may redeem
up to 35% of the aggregate principal amount of
the original notes and the exchange notes with
the proceeds of certain sales of our capital
stock at 113.5% of their principal amount, plus
accrued interest. We may make such redemption
only if, after the redemption, an amount equal to
at least 65% of the aggregate principal amount of
the notes originally issued remains outstanding
and only if notice of the redemption is given
within 60 days of the related sale of stock.

Change of Control........... Upon a change of control (as defined in the
section of this prospectus entitled "Description
of the Exchange Notes") we will be required to
make an offer to purchase all of your exchange
notes at a purchase price in cash equal to 101%
of the aggregate principal amount of the exchange
notes together with accrued and unpaid interest,
if any, to the date of repurchase. Please refer
to the section of this prospectus entitled
"Description of the Exchange Notes--Repurchase of
Notes Upon a Change of Control."

Ranking..................... The exchange notes will:

. be unsecured (except as described in
"Security" above) senior obligations of KMC
Telecom Holdings, Inc.,

. rank equally in right of payment with all
existing and future unsubordinated, unsecured
indebtedness of KMC Telecom Holdings, Inc.,
and

. be senior in right of payment to any future
subordinated indebtedness.

At September 30, 1999, KMC Telecom Holdings, Inc.
(on an unconsolidated basis) had $292.2 million
of indebtedness other than the original notes.
However, we are a holding company and the notes
will be effectively subordinated to all existing
and future indebtedness (including the Senior
Secured Credit Facility and the Lucent Facility)
and liabilities (including trade payables) of our
subsidiaries. As of September 30, 1999, our
subsidiaries had liabilities of $172.3 million,
including indebtedness of $125.0 million. In
addition, our subsidiaries had an additional
$375.0 million of borrowing capacity available
from lenders under their credit facilities,
subject to certain conditions.

11
<PAGE>

Certain Covenants........... The indenture under which the exchange notes will
be issued contains covenants that, among other
things, restrict our ability and the ability of
certain of our subsidiaries to:

. incur additional indebtedness,

. create liens,

. engage in sale-leaseback transactions,

. pay dividends or make distributions in respect
of capital stock,

. make certain investments or certain other
restricted payments,

. sell assets,

. redeem capital stock,

. issue or sell stock of restricted
subsidiaries,

. enter into transactions with stockholders or
affiliates, or

. effect a consolidation or merger of KMC
Telecom Holdings.

These limitations are, however, subject to a
number of important qualifications and
exceptions.

Book Entry; Delivery and
Form....................... The exchange notes will be represented by one or
more permanent global securities in bearer form
deposited on behalf of The Depository Trust
Company and registered in the name of Cede & Co.,
its nominee. You will not receive exchange notes
in registered form unless one of the events
described in the section of this prospectus
entitled "Description of the Exchange Notes--Book
Entry; Delivery and Form" occurs. Instead,
beneficial interests in the exchange notes will
be shown on, and transfers of these will be
effected only through, records maintained by the
Depository Trust Company with respect to its
participants.

Trading..................... There has previously been only a limited
secondary market, and no public market, for the
original notes. The original notes are eligible
for trading in the Private Offerings, Resales and
Trading Through Automated Linkages (PORTAL)
market. There is no established trading market
for the exchange notes. We do not currently
intend to apply for listing of the exchange notes
on any national securities exchange or for
quotation through any automated quotation system.
Accordingly, there can be no assurance as to the
development of any market for, or for the
liquidity of any market that may develop for, the
exchange notes. See "Risk Factors--There Will Be
No Public Market for the Exchange Notes."

Risk Factors

You should consider carefully the information provided in the section in
this prospectus entitled "Risk Factors" beginning on page 15 and all the other
information provided to you in this prospectus in deciding whether to tender
your original notes in the exchange offer.

12
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA

Our financial data for the years ended December 31, 1996, 1997 and 1998
presented below were derived from our audited consolidated financial
statements. Our financial data as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 presented below were derived from our
unaudited consolidated financial statements. Although this data is unaudited,
in the opinion of our management it reflects all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of results
for interim periods. Operating results for interim periods are not necessarily
indicative of results to be expected for the full fiscal years. You should read
this information in conjunction with the sections of this prospectus entitled
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in conjunction with the historical
financial statements and notes thereto included in the back of this prospectus.

<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- -------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue...................... $ 205 $ 3,417 $ 22,425 $ 13,588 $ 42,284
Operating expenses:
Network operating costs..... 1,361 7,735 37,336 24,577 75,209
Selling, general and
administrative............. 2,216 9,923 24,534 15,301 41,680
Stock option compensation
expense.................... 240 13,870 7,080 6,594 13,240
Depreciation and
amortization............... 287 2,506 9,257 5,198 19,230
------- -------- -------- -------- ---------
Total operating expenses.... 4,104 34,034 78,207 51,670 149,359
------- -------- -------- -------- ---------
Loss from operations......... (3,899) (30,617) (55,782) (38,082) (107,075)
Other expense(a)............. -- -- -- -- (4,297)
Interest income.............. -- 513 8,818 10,349 7,035
Interest expense(b)(c)....... (596) (2,582) (29,789) (25,970) (47,848)
------- -------- -------- -------- ---------
Net loss..................... (4,495) (32,686) (76,753) (53,703) (152,185)
Dividends and accretion on
redeemable preferred
stock(b).................... -- (8,904) (18,285) (14,157) (42,085)
------- -------- -------- -------- ---------
Net loss applicable to common
shareholders................ $(4,495) $(41,590) $(95,038) $(67,860) $(194,270)
======= ======== ======== ======== =========
Other Data:
Capital expenditures
(including acquisitions).... $ 9,111 $ 61,146 $161,803 $ 90,938 $ 218,497
Adjusted EBITDA(d)........... (3,373) (14,241) (39,445) (26,290) (74,605)
EBITDA(d).................... (3,613) (28,111) (46,525) (32,884) (92,142)
Cash used in operating
activities.................. (2,687) (8,676) (33,573) (23,146) (67,216)
Cash used in investing
activities.................. (10,174) (62,992) (180,198) (185,093) (264,809)
Cash provided by financing
activities.................. 14,314 85,734 219,399 224,976 332,051
Ratio of earnings to fixed
charges(e).................. -- -- -- -- --
</TABLE>

<TABLE>
<CAPTION>
September 30, 1999
------------------
(in thousands)
<S> <C>
Balance Sheet Data:
Cash and cash equivalents.................................... $ 21,207
Investments held for future capital expenditures............. 75,000
Restricted investments(f).................................... 105,473
Networks and equipment, net.................................. 426,782
Total assets................................................. 697,496
Notes payable................................................ 125,000
Long-term debt............................................... 567,161
Redeemable preferred stock................................... 168,813
Redeemable common stock and warrants......................... 39,123
Total nonredeemable equity (deficiency)...................... (284,942)
</TABLE>

(see accompanying notes on following page)

13
<PAGE>

- --------
(a) During the second quarter of 1999, the Company recorded a $4.3 million
charge to other expense in connection with an unfavorable arbitration
award. The net amount due under the terms of the award was paid in full in
June 1999.
(b) Assuming that (i) the private placements of the Company's PIK Preferred
Stock which occurred on February 4 and April 30, 1999, (ii) the December
1998 refinancing and expansion of the Senior Secured Credit Facility, (iii)
the establishment of the Lucent Facility, (iv) the offering of the Senior
Discount Notes which occurred on January 29, 1998 and (v) the offering of
the original notes which occurred on May 24, 1999, had all been consummated
on January 1, 1998, interest expense would have been $80.0 million for 1998
and $64.9 million for the nine months ended September 30, 1999 and
dividends and accretion on redeemable preferred stock would have been $37.4
million for 1998 and $45.5 million for the nine months ended September 30,
1999.
(c) Excludes capitalized interest of (i) $103,000 for 1996, (ii) $854,000 for
1997, (iii) $5.1 million for 1998 and (iv) $3.5 million for the nine months
ended September 30, 1999. During the construction of the Company's
networks, the interest costs related to construction expenditures are
capitalized.
(d) Adjusted EBITDA consists of earnings (loss) before net interest, income
taxes, depreciation and amortization charges, stock option compensation
expense (a non-cash charge) and other expense. EBITDA consists of earnings
(loss) before all of the foregoing items except stock option compensation
expense and other expense. These items are provided because they are
measures commonly used in the telecommunications industry. They are
presented to enhance an understanding of the Company's operating results
and they are not intended to represent cash flow or results of operations
in accordance with generally accepted accounting principles. Adjusted
EBITDA and EBITDA are not calculated under generally accepted accounting
principles and are not necessarily comparable to similarly titled measures
of other companies. For a presentation of cash flows calculated under
generally accepted accounting principles, see the Company's historical
financial statements contained in the back of this prospectus.
(e) The ratio of earnings to fixed charges is computed by dividing pretax
income from continuing operations before fixed charges (other than
capitalized interest) by fixed charges. Fixed charges consist of interest
charges, dividend obligations and amortization of debt expense and discount
or premium related to indebtedness, whether expensed or capitalized, and
that portion of rental expense the Company believes to be representative of
interest. Earnings were insufficient to cover fixed charges by $4.6 million
for 1996, $33.5 million for 1997, $81.9 million for 1998, $56.7 million for
the nine months ended September 30, 1998, and $155.7 million for the nine
months ended September 30, 1999. After giving pro forma effect to the
increase in interest expense resulting from the December 1998 refinancing
and expansion of the Senior Secured Credit Facility, the establishment of
the Lucent Facility, the Senior Discount Note offering and the offering of
the original notes as if they occurred on January 1, 1998, earnings would
have been insufficient to cover fixed charges by $132.1 million for 1998
and by $172.8 million for the nine months ended September 30, 1999.
(f) Represents amounts pledged to secure the first six payments of interest on
the notes.

14
<PAGE>

RISK FACTORS

You should carefully consider the risks described below before
participating in the exchange offer. The risks and uncertainties described
below are not the only ones facing us. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also impair our
business operations.

If any of the following risks actually occur, our business, financial
condition or results of operations could be materially adversely affected. In
such case, you may lose all or part of your investment.

A Failure to Participate in the Exchange Offer May Have Adverse Consequences

The original notes have not been registered under the Securities Act of
1933 or any state securities laws. As a result, the original notes may not be
offered, sold or otherwise transferred except in compliance with the
registration requirements of the Securities Act and any other applicable
securities laws, or pursuant to an exemption therefrom. Original notes that
bear legends restricting their transfer that are not exchanged will continue
to bear those legends. In addition, upon completion of the exchange offer, the
holders of original notes that are not exchanged will not be entitled to have
such original notes registered under the Securities Act, nor will they have
any similar rights, under the registration rights agreement. We currently do
not intend to register under the Securities Act any original notes which
remain outstanding after completion of the exchange offer.

To the extent that original notes are tendered and accepted in the exchange
offer, the principal amount of the outstanding original notes will be reduced
by the principal amount so tendered and exchanged and a holder's ability to
sell unexchanged original notes could be adversely affected. As a result the
liquidity of the market for unexchanged original notes could be adversely
affected upon completion of the exchange offer.

We Have Had a Limited Operating History and Have Incurred Substantial Negative
Gross Profits, Operating Losses, Negative Cash Flow and Negative Adjusted
EBITDA

We were formed in September 1997 as a holding company. The Company's
subsidiaries commenced material operations in 1996 and, as a result, we have
had only a limited operating history and limited revenues. We have only
recently completed the process of building many of our networks. Accordingly,
you will have limited historical financial information upon which to base your
evaluation of our business and an investment in the notes. You should consider
our prospects for financial and operational success in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development.

In connection with the construction of our networks we have incurred and
expect to continue to incur significant and increasing negative gross profits,
operating losses and negative adjusted EBITDA while we expand our business and
build our customer base. We can give no assurance that we will obtain an
adequate customer base for any of our services. Our negative gross profits,
operating losses and negative cash flow have increased each of the last four
years. For 1998, we had revenues of $22.4 million, gross profits of negative
$14.9 million, operating losses of $55.8 million and adjusted EBITDA of
negative $39.4 million. For 1998, cash used by operations was $33.6 million,
cash expended for investing purposes was $180.2 million, and cash provided by
financing activities was $219.4 million. On a pro forma basis giving effect to
the increase in interest expense resulting from the December 1998 refinancing
and expansion of the Senior Secured Credit Facility, the establishment of the
Lucent Facility, the Senior Discount Note offering and the offering of the
original notes as if they occurred on January 1, 1998, our free cash flow
(EBITDA minus capital expenditures and interest expense) for 1998 would have
been negative $288.3 million. See the section in this prospectus entitled
"Selected Financial Data" for information on the first nine months of 1999.

Our negative gross profits, operating losses, negative adjusted EBITDA,
cash used by operations and capital expenditures will increase as a result of
the continuation of our expansion strategy. We cannot assure you that we will
achieve or sustain profitability or generate positive EBITDA or at any time
have sufficient resources to meet our capital expenditure and working capital
requirements. We will need to significantly increase our revenues and cash
flows to meet our debt service obligations, including our obligations on the
notes.

15
<PAGE>

We Must Renegotiate Certain Financial Covenants in Certain of Our Credit
Facilities to Avoid Default

We obtained a waiver of compliance, for the quarter ended September 30,
1999, with certain financial covenants (related to revenue and EBITDA)
contained in the Senior Secured Credit Facility. In addition, the EBITDA
covenant was amended for the fourth quarter of 1999 to a level which we expect
to achieve.

We Have a Substantial Amount of Indebtedness, Significant Debt Service
Requirements and Refinancing Risks

At September 30, 1999, we had outstanding approximately $692.2 million of
indebtedness. The participating lenders in our Senior Secured Credit Facility
have agreed to provide certain of our subsidiaries with up to an aggregate of
$250.0 million of financing, subject to certain conditions. Lucent has agreed
to provide another one of our subsidiaries with up to an aggregate of $600.0
million of financing, subject to certain conditions, approximately $250.0
million of which is currently available. We are currently engaged in
discussions with the agents for the lenders under the Senior Secured Credit
Facility and with Lucent which contemplate certain changes in the Senior
Secured Credit Facility and the Lucent Facility. See "--We Must Renegotiate
Certain Financial Covenants in Certain of Our Credit Facilities to Avoid
Default". Although the net proceeds from the offering of the notes have
enhanced our liquidity and improved our financial flexibility in the near
term, our total indebtedness and interest expense have significantly increased
as a result of that offering.

Our substantial indebtedness could have important consequences to you. For
example, it could:

. increase the chance that we will not be able to make payments on the
notes,

. limit our ability to obtain additional financing in the future for
working capital, capital expenditures, debt service requirements or
other purposes,

. require us to dedicate a substantial portion of our cash flow from
operations to make payments on our indebtedness, thereby reducing the
funds available to us for other purposes, including working capital and
capital expenditures,

. limit our flexibility in planning for, or reacting to changes in, our
business or the industry in which we operate,

. make us more highly leveraged than many, if not all, of our competitors,
which could place us at a competitive disadvantage compared to those of
our competitors that are less leveraged, and

. increase our vulnerability in the event of a downturn in our business.

If we fail to meet our obligations there could be a default on our
indebtedness which would permit the holders of substantially all of our
indebtedness to accelerate the maturity thereof. In such event, we may not be
able to meet our obligations on the notes.

16
<PAGE>

In connection with the buildup of our networks and expansion of our
competitive local exchange carrier services, we have been experiencing
increasingly negative adjusted EBITDA and our earnings were insufficient to
cover fixed charges for 1996, 1997, 1998 and the nine months ended September
30, 1999. After giving pro forma effect to the increase in interest expense
resulting from the December 1998 refinancing and expansion of the Senior
Secured Credit Facility, the establishment of the Lucent Facility, the Senior
Discount Note offering and the offering of the original notes as if they
occurred on January 1, 1998, our earnings would have been insufficient to
cover fixed charges by $132.1 million for 1998 and by $172.8 million for the
nine months ended September 30, 1999. There can be no assurance that we will
be able to improve our earnings before fixed charges or adjusted EBITDA or
that we will be able to meet our debt service obligations.

During 1999 we also intend to investigate the technological and market
feasibility of serving Tier IV Markets near our Tier III Markets. As part of
this investigation we currently plan to construct fiber optic networks in two
Tier IV markets during 1999.

We cannot assure you that our cash flow from operations and capital
resources will be sufficient to repay the notes, the Senior Discount Notes,
the Senior Secured Credit Facility and the Lucent Facility in full or that a
substantial portion of our indebtedness will not need to be refinanced. The
Senior Discount Notes, the Senior Secured Credit Facility and the Lucent
Facility all mature prior to the notes and any additional indebtedness
incurred in the future may mature prior to the notes and may need to be
refinanced. We cannot assure you that we will be able to effect such
refinancings. Any of the foregoing risks could have a material adverse effect
on our business, financial condition and results of operations and our ability
to make payments on the notes.

Under the Senior Secured Credit Facility and the Lucent Facility, our
subsidiaries are required to meet certain financial tests at the end of each
quarter. Failure to comply with these tests could limit our subsidiaries'
ability to make further borrowings, or could result in a default under the
Senior Secured Credit Facility or the Lucent Facility, allowing the lenders to
accelerate the maturity of the loans made thereunder. We obtained a waiver of
compliance, for the quarter ended September 30, 1999, with certain financial
covenants (related to revenue and EBITDA) contained in the Senior Secured
Credit Facility. In addition, the EBITDA covenant was amended for the fourth
quarter of 1999 to a level which we expect to achieve. We are presently
engaged in discussions with Lucent and the agents for the lenders under the
Senior Secured Credit Facility which contemplate amendments to the financial
covenants in the Lucent Facility and the Senior Secured Credit Facility for
periods after the fourth quarter of 1999. We believe that these discussions
will lead to definitive agreements during the first quarter of 2000. If,
however, we are not successful in completing the negotiations as presently
contemplated, it is likely that we will fail to comply with one or more of the
covenants presently contained in those facilities for the quarter ended March
31, 2000. See "--We Must Renegotiate Certain Financial Covenants in Certain of
Our Credit Facilities to Avoid Default". We cannot assure you that our
subsidiaries will be able to comply with these covenants in the future. Any
failure by our subsidiaries to comply with these covenants could have a
material adverse effect on our business, financial condition and results of
operations and our ability to make payments on the notes.

Because We Are a Holding Company, We Will Be Reliant on Funds from Our
Subsidiaries to Repay Our Indebtedness and Our Subsidiaries' Creditors May
Have Priority on those Funds

We are a holding company whose sole material asset is the common stock of
our subsidiaries. We have pledged all of the common stock of our operating
subsidiaries that own our 23 existing networks to the lenders under the Senior
Secured Credit Facility. In addition, we have pledged all of the common stock
of our subsidiary that will own the 14 new networks currently planned for
completion by the end of the first half of 2000 to the lenders under the
Lucent Facility. Our operating subsidiaries, which currently own substantially
all of our operating assets, are directly liable to the lenders under the
Senior Secured Credit Facility and the Lucent Facility, but have no liability
to the holders of the notes. We also loaned or contributed a substantial
portion of the net proceeds from the Senior Discount Note offering and from
the offering of the notes to our operating subsidiaries.

We must rely upon dividends and other payments from our operating
subsidiaries to generate the funds necessary to meet our obligations,
including the payment of principal and interest on the notes. These
subsidiaries

17
<PAGE>

are legally distinct from us and have no obligation to pay amounts due with
respect to the notes or to make funds available for such payments, except to
the extent that they may be obliged to repay loans which we make to them. Our
operating subsidiaries will not guarantee the notes. The ability of our
operating subsidiaries to make such payments to us will be subject to, among
other things, the availability of funds, the terms of each operating
subsidiary's indebtedness and applicable state laws. In particular, the terms
of the operating subsidiaries' credit facilities prohibit them from paying
dividends and principal and interest on intercompany borrowings unless, among
other things, they are in compliance with certain financial covenants.
Accordingly, we cannot assure you that we will be able to obtain any funds
from our operating subsidiaries. The unconsolidated financial statements of
KMC Telecom Holdings (the obligor on the notes) are presented as a schedule to
the financial statements at the back of this prospectus.

Claims of creditors of our subsidiaries, including trade creditors, will
generally have priority as to the assets of such subsidiaries over the claims
of the Company and the holders of our indebtedness, including the notes.
Accordingly, the notes will be effectively subordinated to the liabilities
(including the Senior Secured Credit Facility, the Lucent Facility and trade
payables) of our subsidiaries. At September 30, 1999, our subsidiaries had
approximately $172.3 million of liabilities (excluding intercompany
liabilities), including $125.0 million of secured indebtedness. In addition,
our subsidiaries had an additional $125.0 million of borrowing capacity
available under the Senior Secured Credit Facility and an additional $250.0
million of borrowing capacity available under the Lucent Facility, subject to
certain conditions. We have unconditionally guaranteed the repayment of the
Senior Secured Credit Facility and a portion of the Lucent Facility.

The notes will be unsubordinated, unsecured indebtedness of the Company. At
September 30, 1999, we had, on a consolidated basis, an aggregate of
approximately $125.0 million of secured indebtedness. This indebtedness was
secured by a pledge of all of our stock in those of our operating subsidiaries
which own our 23 existing networks and substantially all of their assets. If
the lenders of this secured indebtedness foreclose on the collateral, the
holders of the secured indebtedness will be entitled to payment out of the
proceeds of their collateral prior to holders of the notes. In the event of
bankruptcy of the Company, holders of secured indebtedness will have a claim
on the assets of the Company prior to the claim of the holders of the notes.
In addition, if the collateral is insufficient to satisfy such secured
indebtedness, holders of the secured indebtedness would be entitled to share
pari passu with the notes and the Senior Discount Notes with respect to any of
our other assets. Assets remaining after satisfaction of the claims of holders
of secured indebtedness may not be sufficient to pay amounts due on any or all
of the notes and the Senior Discount Notes then outstanding.

Our Future Growth May Require Substantial Additional Capital

Our current plans for expansion of our existing networks, the development
of new networks, the further development of our products and services and the
continued funding of operating losses will require substantial additional cash
from outside sources. We currently anticipate that our capital expenditures
for 1999 will be approximately $350.5 million, of which $218.5 million was
spent during the nine months ended September 30, 1999. We also anticipate that
we will have substantial net losses to fund in 1999 and future years and that
our substantial cash requirements will continue into the foreseeable future.

We believe that the net proceeds of the offering of the notes, together
with our cash, investments held for future capital expenditures, borrowings
expected to be available under the Senior Secured Credit Facility, borrowings
expected to be available under the Lucent Facility (approximately $250.0
million of which is expected to be available to fund our current business
plan) and the net proceeds from the placements of our PIK Preferred Stock will
provide sufficient funds for us to expand our business as currently planned
and to fund our currently anticipated expenses through the completion of the
initial fiber optic backbone and installation of a switch in our 23 existing
networks and the 14 additional networks currently planned for completion by
the end of the first half of 2000. Thereafter, we will require additional
financing.

However, in the event that:

. our plans change,

18
<PAGE>

. the assumptions upon which our plans are based prove inaccurate,

. we expand or accelerate our business plan, or

. we determine to consummate acquisitions,

the foregoing sources of funds may prove to be insufficient to complete all
such networks, and we may require additional financing sooner than we
currently expect.

Additional sources of financing may include:

. public or private equity or debt financings,

. capitalized leases, and

. other financing arrangements.

Pursuant to certain provisions of our Series A and Series C Cumulative
Convertible Preferred Stock, and our Series E and Series F Senior Redeemable,
Exchangeable, PIK Preferred Stock, we may not increase the authorized number
of shares of our preferred stock or common stock without the consent of the
holders of two-thirds of the shares of those series. We currently have only
three million shares of common stock authorized.

We cannot assure you that additional financing will be available to us on
acceptable terms, within the limitations contained in our indebtedness, or at
all. Failure to obtain such additional financing could result in the delay or
abandonment of some or all of our development and expansion plans and
expenditures, which would have a material adverse effect on our business
prospects and our ability to make payments on the notes.

Our Industry is Extremely Competitive and Many of our Competitors Have Greater
Resources Than We Do.

The telecommunications industry is extremely competitive, particularly with
respect to price and service. We face competition in all of our markets.
Generally, our incumbent local exchange carrier competitor is one of the
Regional Bell Operating Companies, one of GTE Corporation's subsidiaries or
one of Sprint Corporation's subsidiaries. The incumbent local exchange
carriers:

. have long-standing relationships with their customers,

. have financial, technical and marketing resources substantially greater
than ours,

. have the potential to fund competitive services with revenues from a
variety of businesses, and

. currently benefit from certain existing regulations that favor the
incumbent local exchange carriers over us in certain respects.

We do not believe that Tier III Markets can profitably support more than
two competitors to the incumbent local exchange carrier. Accordingly, we
believe that once we have completed the construction of our network backbone
and the installation of our switch in a given market, potential new entrants
in that market are likely to seek to deploy their capital elsewhere. We will
generally continue to build in our markets after initial backbone construction
and switch installation. We expect that this demonstration of our commitment
to our markets will further deter new entrants.

However, it is likely that in several of our markets we will face
competition from two or more facilities-based competitive local exchange
carriers. After the investment and expense of establishing a network and
support services in a given market, the marginal cost of carrying an
additional call is negligible. Accordingly, in Tier III Markets where there
are three or more facilities-based competitive local exchange carriers, we
expect substantial price competition. We believe that such markets are likely
to be unprofitable for one or more operators.

19
<PAGE>

The competitive local exchange carrier competitors in our 23 existing
markets include, among others:

(1) Huntsville--Knology Holdings (an ITC DeltaCom subsidiary) currently
operates a facilities-based network and a switch. Knology acquired Cable
Alabama and is marketing residential service bundling cable-telephony
services. It resells BellSouth services. Knology reports a host digital switch
in Huntsville. ICI-Intermedia Communications has a franchise to provide
service and some fiber optic cable in the city, but no switch. ICI is
reselling frame relay via BellSouth lines. AT&T Local Services has a point of
interface switch.

(2) Baton Rouge--Adelphia Business Solutions (formerly Hyperion) has a
switch and a 96 route mile fiber network. EATEL has a switch and a small fiber
ring; their network is mostly digital. EATEL is a KMC customer. ITC DeltaCom
reports a switch, although as of October 1999 it was not active. ITC
DeltaCom's fiber network is leased. e.spire has a switch and a fiber network
consisting of 1.2 route miles. Adelphia, ITC DeltaCom and e.spire resell
BellSouth services. American MetroCom reports a switch and had plans to
construct a network in the first quarter of 1999, although, as of October
1999, American MetroCom had not applied for construction permits.

(3) Shreveport--AT&T Local Services has a switch. e.spire has a network
consisting of 2.5 route miles, but does not have a switch.

(4) Corpus Christi--e.spire has a 1 route mile network, but does not have a
switch. LOGIX has a fiber network under construction. ChoiceCom, a subsidiary
of ICG Communications, Inc., has a network consisting of a 4 route mile loop
and a switch. TCG (now AT&T Local Services) reports a switch. However, as of
October 1999, it was not active. Golden Harbor is a residential reseller with
a non-active switch.

(5) Savannah--AT&T Local Services has a switch. However, it is not actively
marketing services in Savannah at the present time.

(6) Madison--TDS MetroCom has a switch and a 60 route mile network. US
Xchange has a switch and a 40 route mile network. Mid-Plains has a switch and
a fiber network, but, at present, it resells services. McLeod USA has a fiber
backbone network, but does not have a switch. Frontier and Millenium currently
offer resale service. AT&T Local Services has a switch.

(7) Augusta--Knology Holdings (an ITC DeltaCom Subsidiary) is offering
local service to business customers. It back hauls from its switch in West
Point, GA, which is its headquarters. Knology has a fiber network in Augusta.
It resells BellSouth services. AT&T Local Services has a switch.

(8) Melbourne--Time Warner has cable service with fiber in the ground and
is offering local service. Its switch is located in Maitland, FL
(approximately 60 miles away). ICI-Intermedia Communications provides resale
service from a switch in Orlando, FL (approximately 55 miles away). US LEC
leases fiber and has a switch in Orlando, FL. TCG, now AT&T Local Services,
has a switch and its fiber network is a part of the TCG Southeast Florida
network.

(9) Greensboro--Time Warner has fiber and a switch in this market. BTI has
a switch and long-haul fiber and is reselling unbundled network elements.
Interpath Communications (a Carolina Power and Light Subsidiary) has a point
of interface switch and fiber through Carolina Power and Light. Interpath is
reselling BellSouth services. US LEC has a switch and is leasing fiber from
Duke Net and Time Warner. US LEC is reselling BellSouth unbundled network
elements.

(10) Winston-Salem--Time Warner is the local cable provider and has some
fiber optic cable. AT&T Local Services has a switch, but is not currently
active. TCG of the Carolinas (which has been acquired by AT&T Local Services)
reports a switch located in Charlotte, NC (approximately 70 miles away) and
plans for a fiber network in 2000. ITC DeltaCom reports a switch and leases
fiber. ITC DeltaCom is reselling unbundled network elements.

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(11) Tallahassee--ComCast Cable provides data transport for Internet
service providers, but does not have a switch. ITC DeltaCom has a switch and a
long haul fiber network. AT&T Local Services has a switch, but is not actively
marketing local service at this time.

(12) Roanoke--Roanoke & Botetourt Telephone Company (R&B Communications)
has had a franchise for a number of years, has six fiber rings and a switch,
and is currently working on a joint venture with Cox Cable and Fibertel.
Adelphia Business Solutions (formerly Hyperion) has installed a switch in
Charlottesville, VA (96 miles away) with plans to offer service in Roanoke. As
of October 1999, Adelphia had not contacted the city of Roanoke to apply for a
franchise. TCG (now AT&T Local Services) reports a switch.

(13) Ann Arbor--MCI WorldCom has a private fiber network and switch at the
University of Michigan which does not preclude the Company from offering
services to the university. McLeod USA (formerly Ovation/Phone Michigan)
reports a switch and, as of October 1999, was constructing a fiber network.
AT&T Local Services has a point of interface switch and is offering both
business and residential service. Teligent is a wireless competitive local
exchange carrier with a switch.

(14) Topeka--AT&T Local Services has a switch.

(15) Fort Wayne--US Xchange has a greater than 50 mile ring collocated to
all central offices and a switch. Indigital Telecom, a new competitive local
exchange carrier, has a switch and is reselling service.

(16) Eden Prairie--McLeod USA (formerly Ovation) has a fiber network
consisting of 80 plus fiber route miles, a switch in Minneapolis and a sales
office in Eden Prairie. MCI WorldCom has a fiber network reported at 100 route
miles and three switches in the Minneapolis suburbs. AT&T Local Services has a
switch. ICI-Intermedia Communications has a switch and fiber in St. Paul and
Minneapolis. Onvoy has a switch and leases fiber from MEANS.

(17) Daytona Beach--US LEC leases fiber and has a point of interface
switch. Adelphia Business Solutions (formerly Hyperion) was constructing a
network as of October 1999, but does not report a switch. AT&T Local Services,
ITC DeltaCom and Time Warner report switches.

(18) Fort Myers--ITC DeltaCom has a switch and leases fiber. TCG (now AT&T
Local Services) reports a switch.

(19) Longview--Golden Harbor is a business and residential reseller and
reports a non-active switch. TCG of Dallas (now AT&T Local Services) also
reports a non-active switch.

(20) Sarasota--ICI-Intermedia Communications provides switch-based service
from its fiber network in Tampa.

(21) Pensacola--ITC DeltaCom has a switch, a long haul fiber network and
resells service. AT&T Local Services has a point of interface switch.

(22) Fayetteville--Time Warner has a cable franchise and has the right
under the franchise to offer local services. As of October 1999, it had not
installed a switch. AT&T Local Services has a switch. US LEC leases fiber and
has a point of interface switch. BTI has a long haul fiber network and reports
a switch. BTI resells incumbent local exchange carrier services.

(23) Norfolk/Hampton Roads/Virginia Beach--Cox Cable is constructing a
network, has a switch, and is attempting to negotiate an agreement with AT&T
Local Services, which also has a switch. US LEC has a switch in Virginia
Beach. Cox Fibernet Commercial has a switch. Adelphia Business Solutions
(formerly Hyperion) has a switch and a network under construction as of
October 1999. Net 2000 leases fiber and has a switch. TCG (now AT&T Local
Services) reports a switch.

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The competitive local exchange carrier competitors in the 14 markets in
which we are presently developing new networks include, among others:

(1) Clearwater/St. Petersburg--ICI-Intermedia Communications has
approximately 1 route mile of fiber in St. Petersburg. It reports switches in
both St. Petersburg and Clearwater. AT&T Local Services has two switches in
Tampa. US LEC has a switch and leases fiber from the incumbent local exchange
carriers, long distance carriers and other fiber carriers. e.spire has fiber
and a switch in Tampa. Time Warner has a cable fiber network and reports a
switch in Tampa. WinStar, a wireless competitive local exchange carrier, has a
switch.

(2) Charleston--e.spire has a 1.5 route mile fiber network, but does not
have a switch. Knology Holdings (an ITC DeltaCom subsidiary) has a five-year
contract with the city to construct a fiber network and has a switch. Knology
is presently reselling residential service with plans to offer service to
business in the future. NewSouth is a switch-based (no fiber) competitive
local exchange carrier which is currently reselling service. AT&T Local
Services has a switch and offers both residential and business services.

(3) Lansing--MCI WorldCom has a 5 route mile fiber network and a switch.
AT&T Local Services has a point of interface switch.

(4) Dayton--ICG Telecom reports a 14 route mile fiber network, 2.3 miles of
which are owned by ICG, with the remaining 11.7 miles leased from Ameritech.
ICG has a switch and resells service. TCG (now AT&T Local Services) has
recently been granted an ordinance to construct a small network in downtown
Dayton and reports a switch.

(5) Akron--ICG Telecom has a fiber network reported at approximately 5
route miles with a switch and is currently reselling service. Frontier is
reselling and has a long haul fiber network. TCG (now AT&T Local Services)
reports two switches, a point of interface and a Nortel DMH. NextLink has a
joint venture with Ohio Edison, has a fiber network, a switch and is
reselling.

(6) Spartanburg--BTI has a long haul fiber network, a switch and is
reselling. e.spire has a small network (less than one mile) and a switch in
Greenville (30 miles away). NewSouth is a switch-based competitive local
exchange carrier, without fiber facilities, and is reselling BellSouth
services. AT&T Local Services has a switch and is offering both residential
and business service.

(7) Toledo--ICG Telecom reports a switch. MCI WorldCom has a fiber network
of approximately 5 route miles and a switch. Buckeye Cable (Toledo Area
Telecom) is the local cable company offering business and residential
services. It has fiber and a switch. TCG (now AT&T Local Services) reports a
switch, and AT&T Local Services has a switch and is offering both residential
and local service.

(8) Columbia--AT&T Local Services reports 3 switches and markets to both
business and residential customers. e.spire has a 5.7 route mile fiber
network, a switch and is reselling services. BTI has a switch, is collocated
with e.spire, has recently franchised with the city and has a long haul fiber
network. BTI resells services. NewSouth reports a switch, but has no fiber.

(9) Monroe--ITC DeltaCom reports a switch, has a long haul fiber network,
and is reselling services.

(10) Montgomery--e.spire has a 1.8 route mile fiber network with a switch
and is reselling services. A planned 25 mile expansion has been on hold for
over a year. Knology Holdings (an ITC DeltaCom subsidiary) reports a switch
and resells services. ITC DeltaCom plans to install a switch, has a long haul
fiber network, and is reselling services. American MetroCom constructed a 1.8
route mile fiber network along the same route as e.spire. However it has not
installed a switch.

(11) Biloxi/Gulfport--Actel is leasing fiber from Frontier and is back
hauling from their switch in Mobile, AL. AT&T Local Services has a switch.

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(12) Chattanooga--TCG (now AT&T Local Services) reports 2 switches, a point
of interface and a Nortel DMH. TCG constructed a 3 route mile fiber network
prior to its acquisition by AT&T. AT&T Local Services markets to both business
and residential customers. e.spire is reselling and has a 2 route mile fiber
network, but no switch. US LEC leases fiber, is reselling and reports a point
of interface switch.

(13) Johnson City/Kingsport--There is currently no competitive local
exchange carrier competitor in this market.

(14) Rockville/Bethesda/Frederick--RCN has a 2 route mile fiber network
providing residential and business service to Gaithersburg and Rockville. RCN
has a switch and is reselling services. TCG (now AT&T Local Services) has a
switch in the District of Columbia. Teligent, a wireless competitive local
exchange carrier, has a switch in the District of Columbia which serves
Bethesda. e.spire's District of Columbia switch serves Gaithersburg. NewComNet
is planning to construct a fiber network and install a switch. ComCast has
fiber in Rockville and has donated 6 strands to the city for connectivity.
AT&T Local Services serves residential and business customers in Bethesda and
Gaithersburg from their District of Columbia switch.

Potential competitors include:

. microwave and satellite carriers,

. wireless telecommunications providers,

. cable television companies,

. utilities,

. Regional Bell Operating Companies seeking to operate outside their
current local service areas, and

. large long distance carriers, such as AT&T and MCI WorldCom, which have
begun to offer integrated local and long distance telecommunications
services.

AT&T, TCI and Teleport have also announced their intention to offer local
services.

Consolidation of telecommunications companies and the formation of
strategic alliances within the telecommunications industry, as well as the
development of new technologies, could also give rise to significant new
competitors to the Company. One of the primary purposes of the
Telecommunications Act of 1996 is to promote competition, particularly in
local markets. We believe that Tier III Markets will also see more agent and
distributor resale initiatives.

Recent regulatory initiatives allow competitive local exchange carriers
such as the Company to interconnect with incumbent local exchange carrier
facilities. This provides increased business opportunities for us. However,
these regulatory initiatives have been accompanied by increased pricing
flexibility for, and relaxation of regulatory oversight of, the incumbent
local exchange carriers. If the incumbent local exchange carriers engage in
increased volume and discount pricing practices or charge us increased fees
for interconnection to their networks, or if the incumbent local exchange
carriers delay implementation of our interconnection to their networks, our
business, financial condition and results of operations and our ability to
make payments on the notes could be adversely affected.

To the extent we interconnect with and use incumbent local exchange carrier
networks to serve our customers, we are dependent upon their technology and
capabilities. We will become increasingly dependent on interconnection with
incumbent local exchange carriers as switched services become a greater
percentage of our business. The Telecommunications Act imposes interconnection
obligations on incumbent local exchange carriers, but we cannot assure you
that we will be able to obtain the interconnections we require at desirable
rates, terms and conditions. In the event that we experience difficulties in
obtaining appropriate and reasonably priced service from the incumbent local
exchange carriers, our ability to serve our customers would be impaired.

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Both the long distance business and data transmission business are
extremely competitive. Prices in both businesses have declined significantly
in recent years and are expected to continue to decline. In the long distance
business we will face competition from large carriers such as AT&T, MCI
WorldCom and Sprint. We will rely on other carriers to provide transmission
and termination for our long distance traffic and therefore will be dependent
on such carriers.

We expect to experience declining prices and increasing price competition.
We cannot assure you that we will be able to achieve or maintain adequate
market share or revenue, or compete effectively, in any of our markets. Any of
the foregoing factors could have a material adverse effect on our business,
financial condition and results of operations and our ability to make payments
on the notes.

The Regional Bell Operating Companies Have Disputed the Entitlement of
Competitive Local Exchange Carriers to Reciprocal Compensation for Certain
Calls to Internet Service Providers

Every time a customer of a Regional Bell Operating Company calls an
Internet service provider that is one of our customers, we are entitled to
receive payment from the Regional Bell Operating Company. This payment is
called "reciprocal compensation." The Regional Bell Operating Companies object
to making reciprocal compensation payments and are seeking to have this
changed by legislation, regulation and litigation. The Regional Bell Operating
Companies have threatened to withhold, and in many cases have withheld,
reciprocal compensation for the transport and termination of such calls. We
recognized revenue of approximately $2.9 million, or 12.9% of our 1998
revenue, from incumbent local exchange carriers related to reciprocal
compensation. We recognized revenue of approximately $4.8 million, or 11.4% of
our revenue, related to these calls, for the nine months ended September 30,
1999. Payments of approximately $135,000 and $375,000 were received from the
incumbent local exchange carriers during 1998 and the nine months ended
September 30, 1999, respectively.

We determined to recognize this revenue because we concluded, based upon
all of the facts and circumstances available to us at the time, including
numerous state public service commission and state and federal court decisions
upholding competitive local exchange carriers' entitlement to reciprocal
compensation for such calls, that realization of those amounts was reasonably
assured. On October 13, 1999, however, the Louisiana Public Service Commission
ruled that local traffic to Internet service providers in Louisiana is not
eligible for reciprocal compensation. As a result of that ruling, we
determined that we could no longer conclude that realization of amounts
attributable to reciprocal compensation for termination of local calls to
Internet service providers in Louisiana was reasonably assured. Accordingly,
we recorded an adjustment to reduce revenue in the quarter ended September 30,
1999, which reversed all reciprocal compensation revenue previously recognized
related to Internet service provider traffic in Louisiana for the entire year
of 1998 and for the first nine months of 1999. The adjustment amounted to $4.4
million, of which $1.1 million relates to the year ended December 31, 1998 and
$3.3 million relates to the nine months ended September 30, 1999.

To date, 35 state commissions have ruled on this issue in the context of
state commission arbitration proceedings or enforcement proceedings with
respect to existing interconnection agreements. So far, 31 of the 35 state
commissions have determined that reciprocal compensation is owed for such
calls with one of those, Missouri, not requiring payment until the public
service commission sets rates. Several of these cases are presently on appeal.
We cannot predict the outcome of these appeals, or of additional pending
cases. If these

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calls were to be determined not to be local calls and not subject to access
charges, it could have an adverse effect on our business, financial condition
and results of operations and our ability to make payments on the notes.

Our management will continue to consider the circumstances surrounding this
dispute periodically in determining whether reserves against unpaid balances
are warranted. As of September 30, 1999, no reserves are considered necessary
by management.

Our interconnection agreements provide for reciprocal compensation. As these
expire, the incumbent local exchange carriers are expected to refuse to execute
new agreements that provide for reciprocal compensation. This is the case for
our interconnection agreement with BellSouth, which expired in February, 1999.
Upon termination of our interconnection agreements, if we cannot agree on
reciprocal compensation with the incumbent local exchange carrier, the matter
will be referred for arbitration. If new interconnection agreements do not
provide for reciprocal compensation, this could have a material adverse effect
on our business, financial condition and results of operations and our ability
to make payments on the notes.

There Are Significant Risks in Our Expansion Strategy and a Failure to Manage
Our Growth Effectively Could Adversely Affect Our Operations

We must achieve substantial growth in order to meet our payment obligations
under our indebtedness. Our networks have only recently become commercially
operational and we have only recently deployed switches in our networks. Our
success will depend, among other things, upon our ability to:

. assess potential markets,

. design and build fiber optic backbone routes that provide ready access
to a substantial customer base,

. achieve a sufficient customer base,

. install facilities,

. obtain required rights-of-way, building access and governmental permits,

. implement interconnection and collocation with the incumbent local
exchange carriers,

. obtain unbundled network elements from incumbent local exchange
carriers, and

. secure financing.

In addition, we may make additional acquisitions of existing businesses.
Acquisitions could divert our resources and management time and would require
integration with our management information, payroll and other systems, and
with our existing networks and service offerings.

We cannot assure you that any expansions of our networks will be completed
on schedule, at a commercially reasonable cost or within our specifications.

Our growth may place a significant strain on our financial, management and
operational resources. Our future performance will depend, in part, upon our
ability to:

. manage our growth effectively,

. monitor operations,

. control costs, and

. maintain effective quality control.

This will require us to continue to implement and improve our operating,
financial and accounting systems, to expand, train and manage our employee base
and to effectively manage the integration of acquired businesses.

If we fail to expand in accordance with our plans or to manage our growth,
there would be a material adverse effect on our business, financial condition
and results of operations. In addition, the establishment of

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<PAGE>

new operations or acquisitions will involve significant expenses in advance of
anticipated revenues and may cause fluctuations in our operating results. Any
of the foregoing risks could have a material adverse effect on our ability to
make payments on the notes.

There Are Significant Risks Involved in Implementation of Our Business Plan

We are a recent entrant into the competitive local telecommunications
services industry. The local telecommunications services market was virtually
closed to competition until the Telecommunications Act of 1996 and related
regulatory rulings eliminated many barriers to entry. There are numerous
operating complexities associated with providing these services. We will be
required to develop new products, services and systems and will need to
develop new marketing initiatives to sell these services. We have limited
experience providing switched access and local dial tone services and we
cannot assure you that we will be able to successfully implement our switched
and data services strategy.

We are deploying high capacity digital switches in our markets. This will
enable us to offer local dial tone and a variety of switched access services
and data services. We expect to incur negative gross profits and negative
EBITDA from our switched services in any given market during the 24 to 36
month period after the switch is deployed. We expect operating margins to
improve as each network is expanded and larger volumes of traffic are carried
on our network. Implementation of our switched and data services is also
subject to the ability of our equipment manufacturers to meet our switch
deployment schedule. We cannot assure you that all of our switches will be
deployed on the schedule that we presently contemplate or that, if deployed,
our switches will be utilized to the degree that we presently expect.

Our services may not be profitable due to, among other factors:

. lack of customer demand,

. inability to secure access to incumbent local exchange carrier
facilities at acceptable rates,

. competition and pricing pressure from other competitive local exchange
carriers and the incumbent local exchange carriers, and

. cost overruns in connection with network build-outs.

The franchises that we obtain may require us to complete the build-out of
our network within a period specified in the franchise grant. If we are unable
to complete the build-out of a network within the specified period, and unable
to obtain an extension of time in which to complete the build-out, our
franchise agreement may be terminable by the local authority.

Any of the foregoing risks could have a material adverse effect on our
ability to make payments on the notes.

We Must Improve Our Customer Service Systems

Sophisticated information and processing systems are vital to our growth
and our ability to monitor costs, bill customers, provision customer orders
and achieve operating efficiencies. Until recently our billing and information
systems were produced largely in-house with partial reliance on third-party
vendors and these systems have generally met our needs due in part to our low
volume of bills and orders. As we expand our services and our customer base,
the need for sophisticated billing and information systems has increased
significantly. We have recently embarked upon a program to implement a full
suite of order management, customer service, billing and financial
applications. These applications will include electronic order tracking
software developed by Eftia OSS Solutions Inc., software providing
comprehensive billing functions developed by Billing Concepts Systems, Inc.,
and financial software developed by People Soft, Inc. Initial installation of
the new operational support systems was made during the third quarter of 1999,
with development and expansion to continue over the next 12 to 18 months. The
initial installation of the new billing and financial systems was completed
during the second quarter of 1999. Additional development of the billing and
financial systems will take place over the next 12 months. Our failure to:

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<PAGE>

. implement the new operational support systems on a timely basis,

. adequately identify all of our information and processing needs, or

. upgrade our systems as necessary,

could have a material adverse effect on our business, financial condition and
results of operations and our ability to make payments on the notes.

We Will Be Reliant on Incumbent Local Exchange Carriers for Interconnection
and Provisioning

In each of our markets, we rely on incumbent local exchange carriers to
originate and terminate all of our switched services traffic until our own
switch becomes operational. Although the incumbent local exchange carriers are
legally required to "unbundle" their services and permit us to purchase only
the origination and termination services we need, thereby decreasing operating
expenses, we cannot assure you that such unbundling will be timely or result
in favorable prices. The Supreme Court overturned the Federal Communications
Commission's rules regarding what network elements must be unbundled by the
incumbent local exchange carriers, and remanded to the Federal Communications
Commission the question of which network elements are "necessary" to competing
carriers such as the Company. On November 5, 1999, the Federal Communications
Commission issued an order and proposed rulemaking establishing the network
elements that must be offered by incumbent local exchange carriers as
unbundled network elements. The Supreme Court's decision also creates some
uncertainty regarding the legal status of complaints filed at the Federal
Communications Commission to enforce interconnection agreements.

Carrying customer traffic on our own network generates substantially higher
margins than reselling (i.e. paying an incumbent local exchange carrier to
carry the traffic over its network). We are in the process of bringing our
customers on-net, so that their traffic will generate better margins. During
the first nine months of 1999 we significantly expanded our internal
department that deals with bringing customers on-net. During the next 12
months we expect to begin transmitting our orders to the incumbent local
exchange carriers electronically. However, we are dependent on the incumbent
local exchange carriers to carry out the conversion process. During 1998, the
first quarter of 1999, the second quarter of 1999 and the third quarter of
1999, respectively, 63%, 56%, 40% and 38% of our revenue was from reselling.

We cannot bring a customer on-net unless the incumbent local exchange
carrier sends a technician to physically alter its network. Historically, the
incumbent local exchange carriers have not stationed a large number of
technicians in Tier III Markets. We believe that incumbent local exchange
carriers are increasing their technical staffs in Tier III Markets, but they
are still not able to process our orders promptly.

In addition, the incumbent local exchange carriers have a financial
incentive to delay this process. Accordingly, we expect to face substantial
delays in bringing our resale customers on-net, which will delay our ability
to improve our financial results as much as we would like.

The foregoing factors could result in a material adverse effect on our
business, financial condition and results of operations and our ability to
make payments on the notes.

There Are Significant Risks of Entry into the Long Distance Business

In order to offer our end-user customers a complete package of
telecommunications services, we recently began to offer long distance
services. As a new entrant in the long distance business, we expect to
generate low gross margins and substantial start-up expenses as we roll out
our long distance service offerings.

Long distance telecommunications services will involve the origination of
traffic from end-user customers to our telecommunications switches. From
these, we will rely on other carriers to provide transmission and termination
services for our long distance traffic and will therefore be dependent on such
carriers. We enter into

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resale agreements with long distance carriers to provide us with long distance
transmission services. These agreements typically provide for the resale of
long distance services on a per minute basis (some with minimum volume
commitments or volume discounts). The negotiation of these agreements involves
estimates of future supply and demand for long distance telecommunications
transmission capacity, as well as estimates of the calling pattern and traffic
levels of our future long distance customers. Should we fail to meet our
minimum volume commitments, if any, pursuant to these resale agreements, we
may be obligated to pay underutilization charges or we may lose the benefit of
all or a portion of the volume discounts we have negotiated. Likewise, we may
underestimate our need for long distance facilities and therefore be required
to obtain the necessary transmission capacity in "spot markets" which are
often more expensive than longer term contracts. We cannot assure you that we
will acquire long distance capacity on favorable terms or that we can
accurately predict long distance prices and volumes so that we can generate
favorable gross margins from our long distance business. Our success in
entering into the long distance business will be dependent upon, among other
things:

. our ability to select new equipment and software and integrate these
into our networks,

. our ability to hire and train qualified personnel,

. our ability to enhance our billing, back-office and information systems
to accommodate long distance services, and

. the acceptance by potential customers of our long distance service
offerings.

If our long distance transmission business fails to generate favorable
gross margins, or if we fail in any of the foregoing respects, such failure
may have a material adverse effect on our business, financial condition and
results of operations and our ability to make payments on the notes.

There Are Significant Risks of Entry into the Data Transmission Business

To complement our telecommunications services offerings, we began offering
data transmission services in certain of our markets in 1997. We now offer
ISDN, HDSL, Internet access, Local Area Network-to-Local Area Network
interconnect and Wide-Area Network services and we are developing product
applications for port wholesale, frame relay and ATM services to complement
our existing data services. These services are primarily targeted at large and
medium sized businesses with substantial data communications requirements. In
providing these services, we will be dependent upon vendors for equipment, as
well as ongoing training and support and other matters. The success of our
entry into the data transmission business will be dependent upon, among other
things:

. our ability to select new equipment and software and integrate these
into our networks,

. our ability to hire and train qualified personnel,

. our ability to enhance our billing, back-office and information systems
to accommodate data transmission services, and

. the acceptance by potential customers of our service offerings.

We cannot assure you that we will be successful with respect to these
matters. If we are not successful with respect to these matters, there may be
a material adverse effect on our business, financial condition and results of
operations and our ability to make payments on the notes.

We Are Subject to Significant Government Regulation Which May Change in an
Adverse Manner

Our networks and the provision of switched and private line services are
subject to significant regulation at the federal, state and local levels. The
telecommunications industry in general, and the competitive local exchange
carrier industry in particular, are undergoing substantial regulatory change
and uncertainty. We cannot assure you that future regulatory, judicial or
legislative changes, or other regulatory activities, will not have a material
adverse effect on our business, financial condition and results of operations
and our ability to make payments on the notes. See "Business--Regulation".

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The Terms of Our Indebtedness May Restrict Our Corporate Activities

The documents under which our long-term debt was issued contain a number of
significant covenants. These covenants limit, among other things, our ability
to:

. borrow additional money,

. create liens,

. engage in sale-leaseback transactions,

. pay dividends,

. make investments,

. sell assets,

. issue capital stock,

. redeem capital stock,

. merge or consolidate, and

. enter into transactions with our stockholders and affiliates.

However, the limitations contained in the documents under which our long-
term debt was issued are subject to a number of important qualifications and
exceptions. In particular, while the indenture applicable to our Senior
Discount Notes and the indenture applicable to the notes restrict our ability
to incur additional indebtedness, they do permit us to incur an unlimited
amount of purchase money indebtedness. If we incur new indebtedness, the
related risks that we and our subsidiaries now face could intensify. Any of
the foregoing factors could have a material adverse effect on our business,
financial condition and results of operations and our ability to make payments
on the notes.

We Are Dependent on Agreements with Third Parties for Our Rights-of-Way and
Franchises

We must obtain easements, rights-of-way, entry to premises, franchises and
licenses from various private parties, actual and potential competitors and
state and local governments in order to construct and operate our networks,
some of which may be terminated upon 30 or 60 days' notice to us. We cannot
assure you that we will obtain rights-of-way and franchise agreements on
acceptable terms or that current or potential competitors will not obtain
similar rights-of-way and franchise agreements that will allow them to compete
against us. If any of our existing franchise or license agreements were
terminated or not renewed and we were forced to remove our fiber optic cables
or abandon our networks in place, such termination could have a material
adverse effect on our business, financial condition and results of operations
and our ability to make payments on the notes.

We Are Dependent on Certain Key Customers

Our five largest customers accounted for approximately 92% of our
consolidated revenues in 1996, 32% of our consolidated revenues in 1997, 11%
of our consolidated revenues in 1998 and 9% of our consolidated revenues in
the nine months ended September 30, 1999. We expect customer concentration to
continue to decrease as we expand into new markets and begin full scale
marketing of an integrated service package. In the near term, however, the
loss of, or decrease of business from, one or more of our principal customers
could have a material adverse effect on our business, financial condition and
results of operations, as well as our ability to make payments on the notes.
Although we actively market our products and services, we cannot assure you
that we will be able to attract new customers or retain our existing
customers.

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We Could Experience System Failures and Service Disruptions As a Result of the
Year 2000 Problem

We face certain risks arising from Year 2000 issues which could have a
material adverse effect on our business and our ability to make payments on
the notes. See the section of this prospectus entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance" for a discussion of certain risks relating to Year 2000
issues.

The Telecommunications Industry is Subject to Rapid Technological Change

The telecommunications industry is subject to rapid and significant changes
in technology, and we must rely on third parties for the development of and
access to new technology. We cannot predict the effect of technological
changes on our business. We believe our future success will depend, in part,
on our ability to anticipate or adapt to such changes and to offer, on a
timely basis, services that meet customer demands. We cannot assure you that
we will be able to anticipate or adapt to such changes and to offer, on a
timely basis, services that meet customers' demands. A failure to do so would
have a material adverse effect on our business, financial condition and
results of operations and our ability to make payments on the notes.

The Future Success of Our Business Depends Upon Certain Key Personnel

We believe that the efforts of a small number of key management and
operating personnel will largely determine our success and the loss of any of
such persons could adversely affect the Company. We do not maintain so-called
"key man" insurance on any of our personnel. We have employment agreements
with Mr. Kamine, the Chairman of our Board of Directors, Mr. Sternberg, our
President and Chief Executive Officer, and Mr. Young, our Chief Operating
Officer, all of which currently run through December 31, 2002. Our success
will also depend in part upon our ability to hire and retain highly skilled
and qualified operating, marketing, financial and technical personnel. The
competition for qualified personnel in the telecommunications industry is
intense and, accordingly, we cannot assure you that we will be able to hire or
retain necessary personnel. Our failure to hire or retain necessary personnel
could have a material adverse effect on our business, financial condition and
results of operations, and our ability to make payments on the notes.

Control by Principal Stockholders

Harold N. Kamine, Chairman of the Board of the Company, presently owns
approximately 67.3% of the outstanding shares of our common stock. On a fully-
diluted basis, Nassau Capital Partners L.P. and certain of its affiliates and
Mr. Kamine own approximately 29% and 25% of the outstanding shares of common
stock, respectively. The Company, Mr. Kamine, Nassau, Newcourt Communications
Finance Corporation, a subsidiary of Newcourt Capital, Inc., General Electric
Capital Corporation, First Union National Bank and First Union Capital
Partners are parties to an Amended and Restated Stockholders Agreement, dated
as of October 31, 1997. Pursuant to provisions contained in both the Company's
certificate of incorporation and this stockholders agreement, Mr. Kamine and
Nassau are currently entitled to elect all of the Company's seven directors
with each entitled to nominate three directors, and the seventh to be
nominated by agreement of Mr. Kamine, Nassau and either Newcourt
Communications Finance Corporation or the holders of a majority of the
outstanding shares of our Series C Cumulative Convertible Preferred Stock. The
number of directors which Mr. Kamine is entitled to elect would be reduced to
two if the number of shares owned by him were to fall below two-thirds of the
number of shares of the Company initially issued to him, and to one if the
number of shares owned by him were to fall below one-third of the number of
shares initially issued to him. If his ownership were to fall below 5% of the
number of shares initially issued to him, Mr. Kamine would no longer be
entitled to elect any directors pursuant to such provisions. Comparable
reductions would be made to the number of directors which Nassau is entitled
to elect if its ownership were to fall below the specified levels. Certain
decisions concerning the operations or financial structure of the Company may
present conflicts of interest between Mr. Kamine and Nassau and the holders of
the notes. Pursuant to certain provisions of our Series A Cumulative
Convertible Preferred Stock, Series C Cumulative Convertible Preferred Stock
and Series E and Series F Senior Redeemable, Exchangeable

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PIK Preferred Stock, we may not increase the authorized number of shares of
preferred stock or common stock without the consent of the holders of two-
thirds of the shares of those series. We have only three million shares of
common stock authorized.

There Will Be No Public Market for the Exchange Notes

The original notes were not registered under the Securities Act or under
the securities laws of any state and may not be resold unless they are
subsequently registered or resold pursuant to an exemption from the
registration requirements of the Securities Act and applicable state
securities laws. The exchange notes will be registered under the Securities
Act but will constitute a new issue of securities with no established trading
market, and there can be no assurance as to:

. the development of any market for the exchange notes,

. the liquidity of any such market that may develop,

. the ability of holders of exchange notes to sell their exchange notes,
or

. the price at which the holders of the exchange notes would be able to
sell their exchange notes.

The original notes have been designated for trading among qualified
institutional investors in the PORTAL market. However, the exchange notes will
be new securities for which there is currently no public market. We do not
intend to list the exchange notes on any national securities exchange or for
quotation through any automated quotation system. We cannot assure you that an
active trading market will exist for the exchange notes, or that any trading
market that may develop will be liquid. If such a market were to exist, the
exchange notes could trade at prices that may be higher or lower than their
principal amount or purchase price, depending on many factors, including
prevailing interest rates, the market for similar notes and our financial
performance. If a market for the exchange notes does not develop, purchasers
may be unable to resell such exchange notes for an extended period of time, if
at all. Historically, the market for non-investment grade debt has been
subject to disruptions that have caused substantial volatility in the prices
of securities similar to the exchange notes. We cannot assure you that the
market for the exchange notes, if any, will not be subject to similar
disruptions. Any such disruptions may adversely affect you as a holder of the
exchange notes.

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<PAGE>

THE EXCHANGE OFFER

Purpose of the Exchange Offer

The original notes were initially issued and sold by KMC Telecom Holdings,
Inc. on May 24, 1999 to the placement agents pursuant to a placement agreement
dated May 19, 1999. The placement agents subsequently resold the original
notes to:

. qualified institutional buyers, as defined in Rule 144A under the
Securities Act of 1933, in reliance on Rule 144A; and

. non-U.S. persons in offshore transactions in reliance on Regulation S
under the Securities Act.

Pursuant to the placement agreement, KMC Telecom Holdings, Inc. and the
placement agents entered into a registration rights agreement. Pursuant to the
registration rights agreement, we agreed to use our best efforts to complete
the exchange offer on or before November 24, 1999.

The summary herein of certain provisions of the registration rights
agreement does not purport to be complete and we refer you to the provisions
of the registration rights agreement, which has been filed as an exhibit to
the registration statement of which this prospectus is a part.

The registration statement of which this prospectus is a part is intended
to satisfy our obligations with respect to the registration of original notes
in accordance with the terms of the registration rights agreement.

Following completion of the exchange offer, holders of original notes not
validly tendered in the exchange offer and holders of exchange notes will not
have any further registration rights. In addition, holders of original notes
will continue to be subject to restrictions on transfer of their original
notes. Accordingly, the liquidity of the market for original notes could be
adversely affected. See the section in this prospectus entitled "Risk
Factors--A Failure to Participate in the Exchange Offer May Have Adverse
Consequences."

Based on interpretations by the staff of the Securities and Exchange
Commission, as set forth in no-action letters issued to third parties, we
believe that the exchange notes issued pursuant to the exchange offer may be
offered for resale, resold or otherwise transferred by each holder of exchange
notes (other than a broker-dealer who acquires the notes directly from the
Company for resale pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such holder:

. is acquiring the exchange notes in the ordinary course of its business,

. is not participating in, and does not intend to participate in, a
distribution of the exchange notes within the meaning of the Securities
Act, and has no arrangement or understanding with any person to
participate in a distribution of the exchange notes within the meaning
of the Securities Act, and

. is not an affiliate (as defined in Rule 405 under the Securities Act) of
the Company.

By tendering original notes in exchange for exchange notes, each holder,
other than a broker-dealer, will be required to make representations to that
effect. If a holder of original notes is participating in or intends to
participate in, a distribution of the exchange notes, or has any arrangement
or understanding with any person to participate in a distribution of the
exchange notes to be acquired pursuant to the exchange offer, such holder may
be deemed to have received restricted securities and may not rely on the
applicable interpretations of the staff of the Securities and Exchange
Commission. Any such holder will have to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
secondary resale transaction.

Each broker-dealer that receives exchange notes for its own account in
exchange for original notes may be deemed to be an "underwriter" within the
meaning of the Securities Act and must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with
any resale of such exchange notes. The Letter of Transmittal which accompanies
this prospectus states that by so acknowledging

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<PAGE>

and by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. A
broker-dealer may utilize this prospectus, as it may be amended or
supplemented from time to time, in connection with offers to sell, resales and
other transfers of exchange notes received in exchange for original notes
which were acquired by such broker-dealer as a result of market making or
other trading activities. We have agreed that we will make this prospectus
available to any broker-dealer for a period of time not to exceed 180 days
after the consummation of the exchange offer for use in connection with any
such offer to sell, resale or other transfer. Please refer to the section in
this prospectus entitled "Plan of Distribution."

Terms Of the Exchange Offer

Upon the terms and conditions described in this prospectus and the
accompanying Letter of Transmittal, we will accept any and all original notes
which are validly tendered and which are not withdrawn prior to 5:00 p.m. New
York City time on , 1999, or such later time and date to which we extend
the exchange offer in our sole discretion. This time and date, as specified
herein, or as extended, is referred to in this prospectus as the "Expiration
Date". We will issue $1,000 principal amount of exchange notes for each $1,000
principal amount of original notes validly tendered pursuant to the exchange
offer and not withdrawn prior to the Expiration Date. Original notes may only
be tendered in integral multiples of $1,000.

The form and terms of the exchange notes are the same as the form and terms
of the original notes except that:

. the exchange notes will have been registered under the Securities Act
and, therefore, will not bear legends restricting their transfer, and

. the holders of the exchange notes will not be entitled to any of the
registration rights of holders of original notes under the registration
rights agreement, which rights, in any event, will terminate upon the
completion of the exchange offer.

The exchange notes will represent the same indebtedness as the original notes
and will be issued under, and be entitled to the benefits of, the indenture
which authorized the issuance of the original notes. The exchange notes and
the original notes will be treated as a single class of debt securities under
the indenture.

As of the date of this prospectus $275.0 million in aggregate principal
amount of original notes was outstanding. Only a registered holder of original
notes (or such holder's legal representative or attorney-in-fact), as
reflected in the Trustee's records under the indenture, may participate in the
exchange offer. There is no fixed record date for determining holders of the
original notes entitled to participate in the exchange offer. Holders of
original notes do not have any appraisal or dissenters' rights under the
General Corporation Law of Delaware or the indenture in connection with the
exchange offer. We intend to conduct the exchange offer in accordance with the
applicable provisions of the registration rights agreement and the applicable
requirements of the Securities Act and the rules and regulations of the
Securities and Exchange Commission thereunder.

We will be deemed to have accepted validly tendered original notes when,
and if, we give oral or written notice to the Chase Manhattan Bank, as
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of original notes for the purposes of receiving the exchange notes from us.

You will not be required to pay brokerage commissions or fees or, subject
to the instructions in the Letter of Transmittal, transfer taxes with respect
to the exchange of original notes in the exchange offer. We will pay all
charges and expenses, other than certain applicable taxes described below, in
connection with this exchange offer. See "--Fees and Expenses."

Extension; Amendments

In order to extend the exchange offer, we are obligated to notify the
Exchange Agent of any extension by oral (promptly confirmed in writing) or
written notice and will make a public announcement thereof, each prior to 9:00
a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.

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<PAGE>

We expressly reserve the right in our discretion:

. to delay accepting any original notes,

. to extend the exchange offer, or

. to amend the terms of the exchange offer in any manner,

by giving oral or written notice of such delay, extension or amendment to the
Exchange Agent.

If we amend the exchange offer in a manner determined by us to constitute a
material change, we will promptly disclose such amendment by means of a
prospectus supplement that we will distribute to each registered holder of
original notes. In addition, we will also extend the exchange offer for an
additional five to ten business days, depending on the significance of the
amendment, if the exchange offer would otherwise expire during such period.

Without limiting the manner in which we may choose to make a public
announcement of any delay, extension or amendment of the exchange offer, we
will have no obligation to publish, advertise or otherwise communicate any
such public announcement, other than by making a timely release to an
appropriate news agency.

Procedures For Tendering

Only a registered holder of original notes (or such registered holder's
legal representative or attorney-in-fact) may tender such original notes in
the exchange offer. The term "holder" with respect to the exchange offer means
any person in whose name original notes are registered on our books or any
other person who has obtained a properly completed bond power from the
registered holder. To tender your original notes in the exchange offer, you
must complete, sign and date the Letter of Transmittal, or a facsimile
thereof, have the signatures thereon guaranteed if required by the Letter of
Transmittal, and mail or otherwise deliver the Letter of Transmittal or such
facsimile together with the certificates representing the original notes being
tendered and any other required documents to the Exchange Agent at the address
set forth below under "--Exchange Agent" for receipt at or prior to 5:00 p.m.
New York City time on the Expiration Date. Alternatively, you may either:

. send a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such original notes, if such procedure is available,
into the Exchange Agent's account at the Depository Trust Company ("DTC"
or the "depository") pursuant to the procedure for book-entry transfer
described below, at or prior to 5:00 p.m. on the Expiration Date, or

. comply with the guaranteed delivery procedures described below.

Your tender of original notes will constitute an agreement between you and
us in accordance with the terms and subject to the conditions set forth in
this prospectus and in the Letter of Transmittal.

THE METHOD OF DELIVERY OF ORIGINAL NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT YOUR ELECTION AND RISK. INSTEAD OF DELIVERY BY
MAIL, WE RECOMMEND THAT YOU USE AN OVERNIGHT OR HAND DELIVERY SERVICE,
PROPERLY INSURED. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO ASSURE
TIMELY DELIVERY. YOU SHOULD NOT SEND THE LETTER OF TRANSMITTAL OR ANY ORIGINAL
NOTES TO THE COMPANY. YOU MAY REQUEST YOUR BROKERS, DEALERS, COMMERCIAL BANKS,
TRUST COMPANIES OR NOMINEES TO EFFECT SUCH TENDER ON YOUR BEHALF.

If you are the beneficial owner of original notes that are registered in
the name of a broker, dealer, commercial bank, trust company or other nominee
and you wish to tender your original notes, you should contact the registered
holder promptly and instruct such registered holder to tender on your behalf.
If you wish to tender on your own behalf, you must, prior to completing and
executing the Letter of Transmittal and delivering your

34
<PAGE>

original notes, either make appropriate arrangements to register ownership of
the original notes in your name or obtain a properly completed bond power from
the registered holder. The transfer of registered ownership may take
considerable time.

Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the original notes are tendered:

. by a registered holder who has not completed the box titled "Special
Delivery Instructions" on the Letter of Transmittal, or

. for the account of an Eligible Institution.

In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be made by a member firm of a registered national securities exchange or
of the National Association of Securities Dealers, Inc., a commercial bank or
trust company having an office or correspondent in the United States or an
"eligible guarantor institution" (within the meaning of Rule 17Ad-15 under the
Securities Exchange Act of 1934) that is a member of one of the recognized
signature guarantee programs identified in the Letter of Transmittal (an
"Eligible Institution").

If the Letter of Transmittal is signed by a person other than the
registered holder of any original notes listed therein, those original notes
must be endorsed or accompanied by a properly completed bond power, signed by
the registered holder exactly as the registered holder's name appears on the
original notes.

If the Letter of Transmittal or any original notes are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, those
persons should so indicate when signing. Unless waived by us, evidence
satisfactory to us of their authority to so act must also be submitted with
the Letter of Transmittal.

The Exchange Agent and the depository have confirmed that any financial
institution that is a participant in the depository's system may utilize the
depository's Automated Tender Offer Program to tender original notes.

A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by the
original notes being tendered (or a timely confirmation is received of a book-
entry transfer of original notes into the Exchange Agent's account at the
depository with an Agent's Message) or a Notice of Guaranteed Delivery from an
Eligible Institution is received by the Exchange Agent. Issuances of exchange
notes in exchange for original notes tendered pursuant to a Notice of
Guaranteed Delivery by an Eligible Institution will be made only against
delivery of the Letter of Transmittal (and any other required documents) and
the tendered original notes (or a timely confirmation is received of a book-
entry transfer of original notes into the Exchange Agent's account at the
depository with an Agent's Message, as defined below under "--Book-Entry
Transfer") to the Exchange Agent.

All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered original notes will be
determined by us in our sole discretion, which determination will be final and
binding. We reserve the absolute right to reject any and all original notes
not properly tendered or any original notes which if accepted, in our opinion
or in our counsel's opinion, would be unlawful. We also reserve the right to
waive any defects, irregularities or conditions of tender as to particular
original notes. Our interpretation of the terms and conditions of the exchange
offer (including the instructions in the Letter of Transmittal) will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of original notes must be cured within such time as we
determine. Although we intend to notify you of defects or irregularities with
respect to tenders of original notes, neither we, the Exchange Agent nor any
other person shall incur any liability for failure to give such notification.
Tenders of original notes will not be deemed to have been made until such
defects or irregularities have been cured or waived.

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<PAGE>

While we presently have no plan to acquire any original notes that are not
tendered in the exchange offer, or to file a registration statement to permit
resales of any original notes that are not tendered pursuant to the exchange
offer, we reserve the right in our sole discretion to purchase or make offers
for any original notes that remain outstanding subsequent to the Expiration
Date and, to the extent permitted by applicable law, purchase original notes
in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
exchange offer.

Acceptance of Original Notes For Exchange; Delivery of Exchange Notes

Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the Expiration Date, all original notes
properly tendered and will issue the exchange notes promptly after acceptance
of the original notes. For purposes of the exchange offer, the original notes
will be deemed to have been accepted as validly tendered for exchange when,
and if, we have given oral or written notice to the Exchange Agent.

Return Of Original Notes

If any tendered original notes are not accepted for any reason set forth in
the terms and conditions of the exchange offer or if original notes are
withdrawn, we will return the unaccepted, withdrawn or non-exchanged original
notes to you without expense (or, in the case of original notes tendered by
book-entry transfer into the Exchange Agent's account at the depository
pursuant to the book-entry transfer procedures described below, the original
notes will be credited to an account maintained with the depository) as
promptly as practicable after withdrawal, rejection of tender, the Expiration
Date or earlier termination of the exchange offer.

Book-Entry Transfer

The Exchange Agent will make a request to establish an account with respect
to the original notes with the depository for purposes of the exchange offer
promptly after the date of this prospectus. Any financial institution that is
a participant in the depository's Book-Entry Transfer Facility system may make
book-entry delivery of the original notes by causing the depository to
transfer such original notes into the Exchange Agent's account and to deliver
an "Agent's Message" (as defined below) on or prior to the Expiration Date in
accordance with the depository's procedures for such transfer and delivery. If
delivery of original notes is effected through book-entry transfer into the
Exchange Agent's account at the depository and an Agent's Message is not
delivered, the Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents must be transmitted to
and received or confirmed by the Exchange Agent at its addresses set forth
herein under "--Exchange Agent" prior to 5:00 p.m., New York City time on the
Expiration Date or pursuant to the guaranteed delivery procedures described
below. DELIVERY OF DOCUMENTS TO THE DEPOSITORY DOES NOT CONSTITUTE DELIVERY TO
THE EXCHANGE AGENT. All references in this prospectus to deposit of original
notes will be deemed to include the depository's book-entry delivery method.

The term "Agent's Message" means a message transmitted by the depository to
and received by the Exchange Agent and forming a part of a Book-Entry
Confirmation which states that the depository has received an express
acknowledgment from the tendering participant, which acknowledgment states
that the participant has received and agrees to be bound by, and makes the
representations and warranties contained in the Letter of Transmittal and that
we may enforce the Letter of Transmittal against the participant.

Guaranteed Delivery Procedures

If you are a registered holder of original notes and wish to tender your
original notes, but time will not permit your required documents to reach the
Exchange Agent on or prior to the Expiration Date, you may still tender in the
exchange offer if:

. you tender through an Eligible Institution,

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<PAGE>

. on or prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Letter
of Transmittal and Notice of Guaranteed Delivery, substantially in the
form provided by us (by facsimile transmission, mail or hand delivery),
setting forth your name and address as holder of original notes and the
amount of original notes tendered, stating that the tender is being made
thereby and guaranteeing that within five business days after the
Expiration Date, a Book-Entry Confirmation or the certificates relating
to the original notes, and all other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, and

. a Book-Entry Confirmation or the certificates for all tendered original
notes, and all other documents required by the Letter of Transmittal are
received by the Exchange Agent within five business days after the
Expiration Date.

Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their original notes according to the
guaranteed delivery procedures set forth above.

Withdrawal Of Tenders

Except as otherwise provided in this prospectus, you may withdraw tenders
of original notes any time prior to 5:00 p.m., New York City time, on the
Expiration Date.

For a withdrawal to be effective, you must send a written notice of
withdrawal to the Exchange Agent at the address set forth below under "--
Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration
Date. Any such notice of withdrawal must:

. specify the name of the person having deposited the original notes to be
withdrawn,

. identify the original notes to be withdrawn (including the certificate
number or numbers and principal amount of original notes), and

. be signed by the holder in the same manner as the original signature on
the Letter of Transmittal by which the original notes were tendered
(including required signature guarantees).

All questions as to the validity, form and eligibility (including time of
receipt) of notices of withdrawal will be determined by us, in our sole
discretion, and our determination will be final and binding on all parties.
Any original notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the exchange offer, and no exchange
notes will be issued with respect thereto unless the original notes so
withdrawn are validly retendered. Properly withdrawn original notes may be
retendered by following one of the procedures described above at any time on
or prior to the Expiration Date.

Termination of Certain Rights

All registration rights under the registration rights agreement accorded to
holders of the original notes (and all rights to receive additional interest
on the notes to the extent and in the circumstances specified therein) will
terminate upon consummation of the exchange offer except with respect to our
duty to keep the registration statement effective until the closing of the
exchange offer and, for a period of 180 days after the closing of the exchange
offer, to provide copies of the latest version of the prospectus to any
broker-dealer that requests copies of such prospectus in the Letter of
Transmittal for use in connection with any resale by such broker-dealer of
exchange notes received for its own account pursuant to the exchange offer in
exchange for original notes acquired for its own account as a result of
market-making or other trading activities.

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<PAGE>

Conditions of the Exchange Offer

Notwithstanding any other term of the exchange offer, we will not be
required to accept original notes for exchange, or issue exchange notes in
exchange for any original notes, and we may terminate or amend the exchange
offer as provided in this prospectus before the acceptance of such original
notes, if:

. a change in laws or regulations occurs which, in our sole judgment,
impairs our ability to proceed with the exchange offer,

. a change in the current interpretation of the staff of the Securities
and Exchange Commission occurs which current interpretation permits the
exchange notes issued pursuant to the exchange offer in exchange for the
original notes to be offered for resale, resold or otherwise transferred
by holders thereof (other than in certain circumstances),

. a stop order is issued by the Securities and Exchange Commission or any
state securities authority suspending the effectiveness of the
registration statement of which this prospectus is a part or the
qualification of the indenture under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"), or proceedings are initiated or, to
our knowledge, threatened for that purpose,

. an action or proceeding is instituted or threatened in any court or
before any governmental agency or body that in our judgment would
reasonably be expected to prohibit, prevent or otherwise impair our
ability to proceed with the exchange offer,

. a governmental approval is not obtained, which approval we deem, in our
sole judgment, necessary for the consummation of the exchange offer, or

. a change, or a development involving a prospective change, in our
business or financial affairs occurs which, in our sole judgment, might
materially impair our ability to proceed with the exchange offer.

These conditions are for our sole benefit and we may assert them regardless
of the circumstances giving rise to any such condition or we may waive them,
in whole or in part, at any time and from time to time, if we determine in our
reasonable judgment that any of the foregoing events or conditions has
occurred or exists or has not been satisfied, subject to applicable law. Our
failure at any time to exercise any of the foregoing rights will not be deemed
a waiver of any such right and each such right will be deemed an ongoing right
which we may assert at any time and from time to time.

If we determine that we may terminate the exchange offer, as provided
above, we may:

. refuse to accept any original notes and return to the holders thereof
any original notes that have been tendered,

. extend the exchange offer and retain all original notes tendered prior
to the Expiration Date, subject to the rights of holders of tendered
original notes to withdraw their tendered original notes, or

. waive such termination event with respect to the exchange offer and
accept all properly tendered original notes that have not been withdrawn
or otherwise amend the terms of the exchange offer in any respect as
provided under the section in this prospectus entitled "--Extension;
Amendments."

The exchange offer is not conditioned upon any minimum principal amount of
original notes being tendered for exchange.

We have no obligation to, and will not knowingly, permit acceptance of
tenders of original notes from our affiliates (within the meaning of Rule 405
under the Securities Act) or from any other holder or holders who are not
eligible to participate in the exchange offer under applicable law or
interpretations thereof by the Securities and Exchange Commission, or if the
exchange notes to be received by such holder or holders of original notes in
the exchange offer, upon receipt, will not be tradable by such holder without
restriction under the Securities Act and the Securities Exchange Act of 1934
and without material restrictions under the "blue sky" or securities laws of
substantially all of the states of the United States.

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<PAGE>

Exchange Agent

We have appointed The Chase Manhattan Bank as Exchange Agent for the
exchange offer. Questions and requests for assistance, requests for additional
copies of this prospectus or of the Letter of Transmittal and requests for
Notices of Guaranteed Delivery should be directed to the Exchange Agent as
follows:

By registered or certified mail, by overnight courier or by hand:

The Chase Manhattan Bank
55 Water Street
Room 234, North Building
New York, New York 10041
Attention: Carlos Esteves

or:

By facsimile Transmission:

The Chase Manhattan Bank
Facsimile Number: (212) 638-7380 or (212) 638-7381
Confirm by Telephone: (212) 638-0828

In addition, Letters of Transmittal and any other required documentation
should be sent to the Exchange Agent at the address set forth above, except
where facsimile transmission is specifically authorized (e.g., withdrawals and
Notices of Guaranteed Delivery). DELIVERY OF THE LETTER OF TRANSMITTAL TO AN
ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN
AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.

Fees And Expenses

We will bear the expenses of soliciting tenders pursuant to the exchange
offer. The principal solicitation is being made by mail; however, additional
solicitation may be made by telegraph, facsimile transmission, telephone or in
person by officers and regular employees of KMC Telecom Holdings and its
affiliates.

We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptance of the exchange offer. We will, however, pay the Exchange Agent
reasonable and customary fees for its services and will reimburse its
reasonable out-of-pocket expenses in connection therewith.

We will pay all transfer taxes, if any, applicable to the exchange of the
original notes pursuant to the exchange offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the original notes pursuant
to the exchange offer, then the amount of any such transfer taxes (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the
amount of such transfer taxes will be billed directly to the tendering holder.

Consequences Of Failure To Exchange

Participation in the exchange offer is voluntary. Holders of the original
notes are urged to consult their financial and tax advisors in making their
own decisions on what action to take.

Original notes that are not exchanged for exchange notes pursuant to the
exchange offer will remain "restricted securities" within the meaning of Rule
144 under the Securities Act. Accordingly, such original notes may be resold
only:

. to us or any of our subsidiaries,

39
<PAGE>

. so long as the original notes are eligible for resale pursuant to Rule
144A, to a person whom the seller reasonably believes is a "qualified
institutional buyer" within the meaning of Rule 144A under the
Securities Act, purchasing for its own account or for the account of a
qualified institutional buyer, to whom notice is given that the resale,
pledge or other transfer is being made in reliance on Rule 144A,

. outside the United States to non-U.S. Persons in an offshore transaction
in compliance with Rule 904 under the Securities Act,

. pursuant to an exemption from registration under the Securities Act in
accordance with Rule 144 (if available),

. to an institutional "accredited investor" that, prior to such transfer,
furnishes to the Trustee a signed letter containing certain
representations and agreements relating to the restrictions on transfer
of the original notes and, if such transfer is in respect of a principal
amount of original notes at the time of transfer of less than $500,000,
an opinion of counsel acceptable to us that the transfer is in
compliance with the Securities Act, or

. pursuant to an effective registration statement under the Securities
Act,

in each case in accordance with any applicable securities laws of any state of
the United States and subject to certain requirements of the Trustee being
met. The liquidity of the original notes could be adversely affected by the
exchange offer. See "Risk Factors--A Failure to Participate in the Exchange
Offer May Have Adverse Consequences."

Resales Of The Exchange Notes

Based on certain no-action letters issued by the staff of the Securities
and Commission, we believe that the exchange notes or interests therein issued
pursuant to the exchange offer in exchange for original notes or interests
therein may be offered for resale, resold and otherwise transferred by you
(unless you are a broker-dealer who purchases such exchange notes directly
from us to resell pursuant to Rule 144A or any other available exemption under
the Securities Act) without compliance with the registration and prospectus
delivery requirements of the Securities Act; provided that

. you are acquiring the exchange notes in the ordinary course of your
business,

. you are not participating, do not intend to participate, and have no
arrangement or understanding with any person to participate, in the
distribution of exchange notes, and

. you are not an affiliate of the Company, within the meaning of Rule 405
under the Securities Act.

However, if you acquire exchange notes in the exchange offer for the
purpose of distributing or participating in the distribution of the exchange
notes, you cannot rely on the position of the staff of the Commission in the
no-action letters issued to third parties and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration
is otherwise available.

Each broker-dealer that receives exchange notes for its own account may be
deemed an "underwriter" within the meaning of the Securities Act and must
acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such exchange notes. A broker-
dealer may use this prospectus for any offer to resell, resale or other
transfer of exchange notes received in exchange for original notes which were
acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Letter of Transmittal that accompanies this
prospectus states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. We have agreed that, for a period of 180
days after the consummation of the exchange offer, we will make this
prospectus available to any broker-dealer for use in connection with any such
offer to resell, resale or other transfer. Please refer to the section in this
prospectus entitled "Plan of Distribution." Subject to certain limitations, we
will take steps to ensure that the issuance of the exchange notes will comply
with state securities or "blue sky" laws.

40
<PAGE>

USE OF PROCEEDS

The exchange offer is being effected to satisfy certain of our obligations
under the registration rights agreement. We will not receive any cash proceeds
from the issuance of the exchange notes offered hereby. In consideration for
issuing the exchange notes, we will receive an equal aggregate principal
amount of original notes. Original notes that are properly tendered in the
exchange offer and not validly withdrawn will be accepted, canceled and
retired and cannot be reissued. Accordingly, the issuance of the exchange
notes will not result in any increase in our outstanding indebtedness.

The net proceeds to the Company from the original issuance of the original
notes were approximately $262.6 million, after deducting underwriting
discounts, commissions and other expenses paid by us. We invested
approximately $104.1 million of the net proceeds in a portfolio of U.S.
government securities, which were then pledged as security for the payment in
full of the first six scheduled interest payments on the notes.

We intend to use the balance of the net proceeds of the offering
(approximately $158.5 million), a substantial portion of which has been loaned
or contributed to our subsidiaries, together with our cash on hand,
investments held for future capital expenditures and borrowings available
under our Senior Secured Credit Facility and the Lucent Facility, to finance
the planned expansion and further development of our networks, including
through acquisitions, and for other general corporate purposes, including to
fund operating losses. Expected capital expenditures for expansion and further
development of our networks primarily include the purchase and installation of
switches, electronic components, fiber optic cable and additional equipment,
and to a lesser extent, acquisitions. Expected expenditures for general
corporate and working capital purposes include (i) expenditures with respect
to our management information system and customer service support
infrastructure, (ii) operating and administrative expenses, primarily those
associated with sales and marketing, with respect to the development and
operation of existing and new networks, and (iii) the funding of operating
losses.

Pending these uses, the net proceeds of the offering of the original notes
have been placed in interest bearing bank accounts or invested in United
States government securities or other short-term, interest bearing investment-
grade securities. Our investment objectives for these funds during this period
will be safety, liquidity and yield, in that order.

41
<PAGE>

CAPITALIZATION

The following table sets forth our capitalization as of September 30, 1999.
You should read this table in conjunction with the sections of this prospectus
entitled "Use of Proceeds," "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and related notes thereto included in the back of
this prospectus.

<TABLE>
<CAPTION>
September 30,
1999
--------------
(in thousands)
<S> <C>
Cash and cash equivalents....................................... $ 21,207
========
Investments held for future capital expenditures................ $ 75,000
========
Restricted investments (a)...................................... $105,473
========

Senior Secured Credit Facility (b).............................. $125,000
--------
Long-term debt (b):
Lucent Facility............................................... --
Senior Discount Notes, net of original issue discount......... 292,161
Notes......................................................... 275,000
--------
Total long-term debt........................................ 567,161
--------
Redeemable equity:
Senior redeemable, exchangeable, PIK preferred stock, par
value $.01 per share; authorized: 630,000 shares; issued and
outstanding:
Series E, 62,681 shares ($62,681 liquidation preference).... 48,130
Series F, 42,599 shares ($42,559 liquidation preference).... 39,143
Redeemable cumulative convertible preferred stock, par value
$.01 per share; authorized: 498,800 shares; issued and
outstanding:
Series A, 123,800 shares ($12,830 liquidation preference)... 50,813
Series C, 175,000 shares ($17,500 liquidation preference)... 30,727
Redeemable common stock; issued and outstanding: 224,041
shares....................................................... 27,459
Redeemable common stock warrants.............................. 11,664
--------
Total redeemable equity..................................... 207,936
--------
Nonredeemable equity (deficiency):
Common stock, par value $.01 per share; authorized 3,000,000
shares; issued and outstanding: 628,635 shares............... 6
Additional paid-in capital.................................... --
Unearned compensation......................................... ( 6,227)
Accumulated deficit........................................... (278,721)
--------
Total nonredeemable equity (deficiency)..................... (284,942)
--------
Total capitalization........................................ $615,155
========
</TABLE>
- --------
(a) Represents amounts pledged to secure the first 6 payments of interest on
the notes (including additional interest which may be due in the event
that we fail to effect the registration of the notes as provided in
"Description of the Exchange Notes--Registration Rights").
(b) As of September 30, 1999, three of our subsidiaries had an additional
$125.0 million of borrowing capacity available from lenders under the
Senior Secured Credit Facility and another of our subsidiaries had an
additional $250.0 million of borrowing capacity available under the Lucent
Facility, in each case subject to certain conditions.

42
<PAGE>

SELECTED FINANCIAL DATA

Our selected financial data set forth below for the period from May 10,
1994 (date of inception) to December 31, 1994 and for the years ended December
31, 1995, 1996, 1997 and 1998 were derived from our audited financial
statements and those of our predecessors. Our selected financial data as of
September 30, 1999 and for the nine months ended September 30, 1998 and 1999
are unaudited, but, in the opinion of our management, they reflect all
adjustments necessary for a fair presentation of results for interim periods.
Operating results for interim periods are not necessarily indicative of
results to be expected for the full fiscal years. You should read the selected
financial data in conjunction with the sections of this prospectus entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in conjunction with the financial statements and the notes
thereto included in the back of this prospectus.

<TABLE>
<CAPTION>
Nine Months
May 10, 1994 Year Ended Ended
(date of inception) December 31, September 30,
to ------------------------------------ -------------------
December 31, 1994 1995 1996 1997 1998 1998 1999
------------------- ------- ------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ -- $ -- $ 205 $ 3,417 $ 22,425 $ 13,588 $ 42,284
Operating expenses:
Network operating
costs................. -- -- 1,361 7,735 37,336 24,577 75,209
Selling, general and
administrative........ 4 1,591 2,216 9,923 24,534 15,301 41,680
Stock option
compensation expense.. -- -- 240 13,870 7,080 6,594 13,240
Depreciation and
amortization.......... -- 6 287 2,506 9,257 5,198 19,230
------ ------- ------- -------- -------- -------- ---------
Total operating
expenses.............. 4 1,597 4,104 34,034 78,207 51,670 149,359
------ ------- ------- -------- -------- -------- ---------
Loss from operations.... (4) (1,597) (3,899) (30,617) (55,782) (38,082) (107,075)
Other expense(a)........ -- -- -- -- -- -- (4,297)
Interest income......... -- -- -- 513 8,818 10,349 7,035
Interest expense(b)(c).. -- (23) (596) (2,582) (29,789) (25,970) (47,848)
------ ------- ------- -------- -------- -------- ---------
Net loss................ (4) (1,620) (4,495) (32,686) (76,753) (53,703) (152,185)
Dividends and accretion
on redeemable preferred
stock(b)............... -- -- -- (8,904) (18,285) (14,157) (42,085)
------ ------- ------- -------- -------- -------- ---------
Net loss applicable to
common shareholders.... $ (4) $(1,620) $(4,495) $(41,590) $(95,038) $(67,860) $(194,270)
====== ======= ======= ======== ======== ======== =========
Net loss per common
share.................. $(0.01) $ (2.70) $ (7.49) $ (64.93) $(114.42) $ (81.94) $ (228.20)
====== ======= ======= ======== ======== ======== =========
Weighted average number
of common shares
outstanding............ 600 600 600 641 831 828 851
====== ======= ======= ======== ======== ======== =========
Other Data:
Capital expenditures
(including
acquisitions).......... $ -- $ 3,498 $ 9,111 $ 61,146 $161,803 $ 90,938 $ 218,497
Adjusted EBITDA (d)..... (4) (1,591) (3,373) (14,241) (39,445) (26,290) (74,605)
EBITDA(d)............... (4) (1,591) (3,613) (28,111) (46,525) (32,884) (92,142)
Cash used in operating
activities............. 4 (779) (2,687) (8,676) (33,573) (23,146) (67,216)
Cash used in investing
activities............. -- (1,920) (10,174) (62,992) (180,198) (185,093) (264,809)
Cash provided by
financing activities... 1 2,728 14,314 85,734 219,399 224,976 332,051
Ratio of earnings to
fixed charges(e)....... -- -- -- -- -- -- --
<CAPTION>
As of December 31, As of
-------------------------------------------------------- September 30,
1994 1995 1996 1997 1998 1999
---- ------- ------- -------- -------- -------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 5 $ 34 $ 1,487 $ 15,553 $ 21,181 $ 21,207
Investments held for
future capital
expenditures........... -- -- -- -- 27,920 75,000
Restricted
investments(f)......... -- -- -- -- -- 105,473
Networks and equipment,
net.................... -- 3,496 12,347 71,371 224,890 426,782
Total assets............ 8 3,704 16,715 95,943 311,310 697,496
Notes payable........... -- -- -- -- -- 125,000
Long-term debt.......... -- 2,727 12,330 61,277 309,225 567,161
Redeemable preferred
stock.................. -- -- -- 35,925 52,033 168,813
Redeemable common stock
and warrants........... -- -- -- 11,726 22,979 39,123
Total nonredeemable
equity (deficiency).... (3) (1,623) 389 (26,673) (104,353) (284,942)
</TABLE>

(see accompanying notes on following page)

43
<PAGE>

- --------
(a) During the second quarter of 1999, the Company recorded a $4.3 million
charge to other expense in connection with an unfavorable arbitration
award. The net amount due under the terms of the award was paid in full in
June 1999.
(b) Assuming that (i) the private placements of the Company's PIK Preferred
Stock which occurred on February 4 and April 30, 1999, (ii) the December
1998 refinancing and expansion of the Senior Secured Credit Facility,
(iii) the establishment of the Lucent Facility, (iv) the offering of the
Senior Discount Notes which occurred on January 29, 1998 and (v) the
offering of the original notes which occurred on May 24, 1999, had all
been consummated on January 1, 1998, interest expense would have been
$80.0 million for 1998 and $64.9 million for the nine months ended
September 30, 1999 and dividends and accretion on redeemable preferred
stock would have been $37.4 million for 1998 and $45.5 million for the
nine months ended September 30, 1999.
(c) Excludes capitalized interest of (i) $37,000 for 1995, (ii) $103,000 for
1996, (iii) $854,000 for 1997, (iv) $5.1 million for 1998 and (v) $3.5
million for the nine months ended September 30, 1999. During the
construction of the Company's networks, the interest costs related to
construction expenditures are capitalized.
(d) Adjusted EBITDA consists of earnings (loss) before net interest, income
taxes, depreciation and amortization charges, stock option compensation
expense (a non-cash charge) and other expense. EBITDA consists of earnings
(loss) before all of the foregoing items except stock option compensation
expense and other expense. These items are provided because they are
measures commonly used in the telecommunications industry. They are
presented to enhance an understanding of the Company's operating results
and they are not intended to represent cash flow or results of operations
in accordance with generally accepted accounting principles. Adjusted
EBITDA and EBITDA are not calculated under generally accepted accounting
principles and are not necessarily comparable to similarly titled measures
of other companies. For a presentation of cash flows calculated under
generally accepted accounting principles, see the Company's historical
financial statements contained in the back of this prospectus.
(e) The ratio of earnings to fixed charges is computed by dividing pretax
income from continuing operations before fixed charges (other than
capitalized interest) by fixed charges. Fixed charges consist of interest
charges, dividend obligations and amortization of debt expense and
discount or premium related to indebtedness, whether expensed or
capitalized, and that portion of rental expense the Company believes to be
representative of interest. Earnings were insufficient to cover fixed
charges by $4,475 for 1994, $1.7 million for 1995, $4.6 million for 1996,
$33.5 million for 1997, $81.9 million for 1998, $56.7 million for the nine
months ended September 30, 1998 and $155.7 million for the nine months
ended September 30, 1999. After giving pro forma effect to the increase in
interest expense resulting from the December 1998 refinancing and
expansion of the Senior Secured Credit Facility, the establishment of the
Lucent Facility, the Senior Discount Note offering and the offering of the
original notes as if they occurred on January 1, 1998, earnings would have
been insufficient to cover fixed charges by $132.1 million for 1998 and by
$172.8 million for the nine months ended September 30, 1999.
(f) Represents amounts pledged to secure the first six payments of interest on
the notes.

44
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis together with the
Company's financial statements, including the notes and the other financial
information appearing elsewhere in this prospectus. Due to our limited
operating history, startup nature and rapid growth, period-to-period
comparisons of financial data are not necessarily indicative, and you should
not rely upon them as an indicator of our future performance. The following
discussion includes forward-looking statements. For a discussion of important
factors that could cause actual results to differ from results discussed in
the forward-looking statements, see the section of this prospectus entitled
"Risk Factors."

Overview

General. We are a facilities-based competitive local exchange carrier
providing telecommunications and data services in Tier III Markets. The
markets in which we operate are predominantly located in the Southeastern and
Midwestern United States. We target as customers business, government and
institutional end-users, as well as Internet service providers, long distance
carriers and wireless service providers. Our objective is to provide our
customers with a complete solution for their communications needs. We
currently provide on-net local dial tone, Internet access, ISDN, long
distance, special access, private line and a variety of other advanced
services and features.

We have invested significant capital and effort in developing our
telecommunications business. This capital has been invested in the development
of our networks, the hiring of an experienced management team, the development
and installation of operating systems, the introduction of services, marketing
and sales efforts, and an acquisition. We expect to make increasing capital
expenditures to build additional networks, to expand current networks to
additional customer buildings, long distance carrier points of presence and
incumbent local exchange carrier central offices, and to broaden our service
offerings, and we may consummate acquisitions. Proper management of our growth
will require us to maintain cost controls, continue to assess market
potential, ensure quality control in implementing our services, as well as to
expand our internal management, customer care and billing and information
systems, all of which will require substantial investment.

The development, construction and expansion of our networks requires
significant capital, a large portion of which is invested before any revenue
is generated. We have incurred, and expect to continue to incur, significant
and increasing operating losses, negative EBITDA and net cash outflows for
operating and investing activities while we expand our network operations and
build our customer base. Based on our experience to date and that of our
competitors, we estimate that a new network will begin to generate positive
EBITDA within 24 to 36 months after commencement of commercial operations.
Construction periods and operating results will vary from network to network.
There can be no assurance that we will be able to establish a sufficient
revenue-generating customer base or gross margins in any particular market or
on a consolidated basis.

The facilities-based competitive local exchange carrier business is capital
intensive. We estimate that the total initial costs associated with the
purchase and installation of fiber optic cable and transmission and switching
equipment, including capitalized engineering costs, will average approximately
$8.0 million to $10.0 million for the fiber optic backbone and switch in each
standard Tier III network, depending upon the size of the market served, the
scope and complexity of the network, and the proportion of aerial to
underground fiber deployment. Our actual costs could vary significantly from
this range. The amounts and timing of these expenditures are subject to a
variety of factors that may vary significantly with the geographic and
demographic characteristics of each market. In addition to equipment and
construction expenditure requirements, upon commencement of the construction
phase of a network we begin to incur direct operating costs for such items as
salaries and rent. As network construction progresses, we incur costs
associated with construction, including preparation of rights-of-way, and
increased sales, marketing, operating and administrative expenses. We
capitalize certain direct costs related to network planning and construction
costs for new networks.

45
<PAGE>

The initial construction of a network consists of deploying the fiber optic
backbone, installing the switch and related electronics and testing the
system. This takes approximately 6 months, depending upon the size and
complexity of the network. The time required during the construction phase is
also significantly influenced by the number of route miles involved, the mix
of aerial versus underground fiber deployment, possible delays in preparing
rights-of-way, provisioning fiber optic cable and electronic equipment, and
required construction permits and other factors, including weather.

Local Services. To facilitate our entry into local services, we plan to
install switching equipment in all of our markets. Switches are in commercial
operation in all of our 23 existing markets. We also intend to install Lucent
switches in any future networks which we may build. Once a switch is
commercially operational, we offer local dial tone and switched data services
such as ISDN, HDSL, Internet access, Local Area Network-to-Local Area Network
interconnect and Wide Area Network services, as well as voice mail and other
custom calling features.

We expect operating margins to improve as switching becomes operational and
switched services are provided on-net, the network is expanded (primarily by
adding buildings to the network), and larger volumes of traffic are carried on
our network. Although under the Telecommunications Act of 1996, incumbent
local exchange carriers are required to unbundle local network elements,
thereby decreasing operating expenses by permitting us to purchase only the
origination and termination services we need, we cannot assure you that such
unbundling will be effected in a timely manner and result in prices favorable
to us.

Revenue. Historically, we have derived our revenue primarily from resale of
switched services, along with special access, private line and Internet access
services provided on our facilities. Future revenues will include increasing
amounts of on-net services, long distance services and value-added data
services, such as ISDN, HDSL, Local Area Network-to-Local Area Network
interconnect, Wide Area Network services, BRI (or Basic Rate ISDN), PRI (or
Primary Rate ISDN) and port wholesale as well as other value-added services
such as Centrex-type services, voice mail and other custom calling features.
We maintain interconnection agreements with incumbent local exchange carriers
in each state in which we operate. Among other things, these contracts govern
the reciprocal amounts to be billed by us for terminating local traffic of
Internet service providers in each state. The Regional Bell Operating
Companies have advised competitive local exchange carriers, such as the
Company, that they do not consider calls in the same local calling area which
are placed by their customers to competitive local exchange carrier customers
which are Internet service providers to be local calls under the
interconnection agreements. The Regional Bell Operating Companies claim that
these calls should be classified as exchange access calls, even though the
Federal Communications Commission exempted local calls for Internet service
providers from payment of access charges. The Regional Bell Operating
Companies claim that, as a result, they do not owe any compensation to
competitive local exchange carriers for transporting and terminating these
calls. The Regional Bell Operating Companies have threatened to withhold, and
in many cases have withheld, reciprocal compensation to competitive local
exchange carriers for the transport and termination of these calls. During
1998, we recognized revenue from incumbent local exchange carriers of
approximately $2.9 million, or 12.9% of 1998 revenue, for these services. The
comparable figure for the nine months ended September 30, 1999 is $4.8
million, or 11.4% of our revenue for that period. Payments of approximately
$135,000 and $375,000 were received from the incumbent local exchange carriers
during 1998 and the nine months ended September 30, 1999, respectively.

46
<PAGE>

recognized related to Internet service provider traffic in Louisiana for the
entire year of 1998 and for the first nine months of 1999. The adjustment
amounted to $4.4 million, of which $1.1 million relates to the year ended
December 31, 1998 and $3.3 million relates to the nine months ended September
30, 1999.

Although incumbent local exchange carriers have disputed the entitlement of
competitive local exchange carriers to reciprocal compensation for termination
of local calls to Internet service providers in jurisdictions other than
Louisiana as well, we have determined to continue to recognize amounts due to
us for reciprocal compensation for calls in jurisdictions other than Louisiana
in which we operate systems because we have concluded, based upon all of the
facts and circumstances, including numerous state public service commission
and state and federal court decisions upholding competitive local exchange
carriers entitlement to reciprocal compensation for such calls, that
realization of such amounts is reasonably assured. In these jurisdictions we
will continue to account for reciprocal compensation with the incumbent local
exchange carriers, including the activity associated with the disputed
Internet service provider traffic, as local traffic pursuant to the terms of
our interconnection agreements. Accordingly, in jurisdictions other than
Louisiana, we will continue to recognize revenue in the period that the
traffic is terminated.

Management believes reciprocal compensation for Internet traffic to be an
industry-wide matter that will ultimately be resolved on a state-by-state
basis. To date, 35 state commissions have ruled on this issue. So far, 31 of
the 35 commissions have determined that reciprocal compensation is owed for
such calls with one of those, Missouri, not requiring payment until the public
service commission sets rates. Several of these cases are presently on appeal.
A number of other state commissions currently have proceedings pending to
consider this matter. On February 26, 1999, the Federal Communications
Commission issued a declaratory ruling on the issue of inter-carrier
compensation for calls bound to Internet service providers. The Federal
Communications Commission ruled that the calls are jurisdictionally mixed, but
largely interstate calls. The Federal Communications Commission determined
that this ruling did not resolve the issue of whether reciprocal compensation
is owed for such calls under existing interconnection agreements. The Federal
Communications Commission noted a number of factors that would allow state
commissions to continue to require payment of reciprocal compensation.

Operating Expenses. Our principal operating expenses consist of network
operating costs, selling, general and administrative expenses, stock option
compensation expense and depreciation and amortization. Network operating
costs include charges from incumbent local exchange carriers for resale
services, termination and unbundled network element charges; charges from long
distance carriers for resale of long distance services; salaries and benefits
associated with network operations, billing and information services and
customer care personnel; franchise fees and other costs, including direct city
administration costs. Network operating costs also include a percentage of
both our intrastate and interstate revenues which we pay as universal service
fund charges. Selling, general and administrative expenses consist of sales
personnel and support costs, corporate and finance personnel and support costs
and legal and accounting expenses. Depreciation and amortization includes
charges related to plant, property and equipment and amortization of
intangible assets, including franchise acquisition costs. Depreciation and
amortization expense will increase as we place additional networks into
service.

Interest Expense. Interest expense includes interest charges on our Senior
Discount Notes, our Senior Secured Credit Facility and the Lucent Facility.
Interest expense also includes amortization of deferred financing costs.
Interest expense will increase substantially in future periods as a result of
the issuance of the notes and increased borrowings under the expanded Senior
Secured Credit Facility and the Lucent Facility, discussed below, to finance
network build-out.

Results of Operations

Nine Months Ended September 30, 1999 Compared To Nine Months Ended
September 30, 1998

Revenue. Revenue increased from $13.6 million for the nine months ended
September 30, 1998 (the "1998 Nine Months") to $42.3 million for the nine
months ended September 30, 1999 (the "1999 Nine Months"). This increase is
primarily attributable to the fact that we derived revenue from 23 markets
during the

47
<PAGE>

1999 Nine Months compared to 11 markets during the 1998 Nine Months. During
1998 and the 1999 Nine Months we recognized revenue which we believed was due
to us from incumbent local exchange carriers for terminating local traffic of
Internet service providers. We determined to recognize this revenue because we
concluded, based upon all of the facts and circumstances known to us at the
time, including numerous state public service commission and state and federal
court decisions upholding competitive local exchange carriers' entitlement to
reciprocal compensation for such calls, that realization of those amounts was
reasonably assured. On October 13, 1999, however, the Louisiana Public Service
Commission ruled that local traffic to Internet service providers in Louisiana
is not eligible for reciprocal compensation. As a result of that ruling, we
determined that we could no longer conclude that realization of amounts
attributable to termination of local calls to Internet service providers in
Louisiana was reasonably assured. Accordingly, we recorded an adjustment to
reduce revenue in the 1999 Third Quarter, which reversed all reciprocal
revenue recognized related to Internet service provider traffic in Louisiana
for the entire year of 1998 and the 1999 Nine Months. The adjustment amounted
to $4.4 million, of which $1.1 million relates to the year ended December 31,
1998 and $3.3 million relates to the 1999 Nine Months.

Excluding the effect of the adjustment, revenue for the 1999 Nine Months
would have been $46.7 million, including $9.2 million of revenue related to
reciprocal compensation. Each of our systems that generated revenue during the
1998 Nine Months generated higher revenue during the 1999 Nine Months.

Revenue for the 1998 Nine Months and 1999 Nine Months included $9.4 million
and $18.3 million, respectively, of revenue derived from resale of switched
services and an aggregate of $4.2 million and $24.0 million (including, after
giving effect to the $4.4 million adjustment for Louisiana, $4.8 million of
revenue related to reciprocal compensation during the 1999 Nine Months),
respectively, of revenue derived from on-net special access, private line and
switched services.

Although incumbent local exchange carriers, such as BellSouth, have
generally withheld payments of amounts due for reciprocal compensation to
competitive local exchange carriers such as the Company for calls to Internet
service providers and disputed the entitlement of competitive local exchange
carriers to reciprocal compensation for such calls in jurisdictions other than
Louisiana as well, we have determined to continue to recognize amounts due to
us for reciprocal compensation for such calls in jurisdictions other than
Louisiana, because we have concluded, based upon all of the facts and
circumstances, including numerous state public service commission and state
and federal court decisions upholding competitive local exchange carriers'
entitlement to reciprocal compensation for such calls, that realization of
such amounts is reasonably assured.

Network Operating Costs. Network operating costs increased from $24.6
million in the 1998 Nine Months to $75.2 million in the 1999 Nine Months. This
increase of $50.6 million was due primarily to the increase in the number of
markets in which we operated in the 1999 Nine Months and the related increases
of $13.4 million in personnel costs, $12.4 million in costs associated with
providing resale services and leasing unbundled network element services, $5.4
million in contracted network support costs, $5.1 million in consultant and
professional services related costs, $2.7 million in reciprocal expense, $1.8
million in facility costs, $1.5 million in telecommunications costs, and $8.3
million in other direct operating costs.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $15.3 million for the 1998 Nine Months
to $41.7 million for the 1999 Nine Months. This increase of $26.4 million
resulted primarily from increases of $15.6 million in personnel costs, $4.0
million in professional costs (consisting primarily of legal costs), $2.4
million in travel related expenses, and $400,000 in advertising costs, along
with increases in other marketing and general and administrative costs
aggregating approximately $4.0 million.

Stock Option Compensation Expense. Stock option compensation expense, a
non-cash charge, increased from $6.6 million for the 1998 Nine Months to $13.2
million for the 1999 Nine Months. This increase primarily resulted from an
increase in the estimated fair value of the Company's common stock.

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Depreciation and Amortization. Depreciation and amortization expense
increased from $5.2 million for the 1998 Nine Months to $19.2 million for the
1999 Nine Months primarily as a result of depreciation expense associated with
the greater number of networks in commercial operation during the 1999 Nine
Months.

Other Expense. During the second quarter of 1999, the Company recorded a
$4.3 million charge to other expense in connection with an unfavorable
arbitration award. The net amount due under the terms of the award was paid in
full in June 1999.

Interest Expense. Interest expense increased from $26.0 million in the 1998
Nine Months to $47.8 million in the 1999 Nine Months. The increase resulted
primarily from the issuance of the original notes in May 1999, additional
accretion on the Senior Discount Notes, and increased interest charges related
to higher borrowings under the Senior Secured Credit Facility. The Company
capitalized interest related to network construction projects of $2.9 million
during the 1998 Nine Months and $3.5 million during the 1999 Nine Months.

Net Loss. For the reasons stated above, net loss increased from $53.7
million for the 1998 Nine Months to $152.2 million for the 1999 Nine Months.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Revenue. Revenue increased from $3.4 million for 1997 to $22.4 million for
1998. This increase is primarily attributable to the fact that for 1998 we
derived revenues from 8 markets during the entire period, as well as 14
additional markets from which we began to derive revenues at various points
during the period, as compared to 1997 when we derived revenues from only 1
market during the entire period, and began to derive revenues from 7 additional
markets at various points during the year. In addition, each of our markets
from which we derived revenues during 1997 generated increased revenues during
1998. Revenue for 1997 and 1998 included $2.3 million and $14.2 million,
respectively, of revenue derived from resale of switched services and an
aggregate of $1.1 million and $8.2 million (including $2.9 million of revenue
from reciprocal compensation in 1998), respectively, of revenue derived from
on-net special access, private line and switched services. Resale of switched
services represented 67.6% of revenue in 1997 and 63.4% of revenue in 1998.

Network Operating Costs. Network operating costs increased from $7.7 million
in 1997 to $37.3 million in 1998. This increase of approximately $29.6 million
was due primarily to the increase in the number of markets in which we operated
in 1998 and the related increases of $14.5 million in costs associated with
providing resale services and leasing unbundled network element services, $5.3
million in personnel costs, $1.6 million in consulting and professional
services costs, $3.4 million in contracted network support costs, and $1.1
million in facilities related costs, $1.0 million in travel related costs and
$2.7 million in other direct operating costs.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $9.9 million in 1997 to $24.5 million in
1998. This increase of approximately $14.6 million resulted primarily from
increases of $8.5 million in personnel costs, $900,000 in professional costs
(consisting primarily of legal costs relating to regulatory matters) and $1.2
million in travel related costs, as well as increases in other marketing and
general and administrative costs aggregating approximately $4.0 million.

Stock Option Compensation Expense. Stock option compensation expense, a non-
cash charge, decreased from $13.9 million in 1997 to $7.1 million in 1998.
These charges are directly impacted by changes in the estimated fair value of
the Company's common stock. The increase in the estimated fair value of such
stock in 1998 was less than the increase in 1997. The expense charge for 1998
includes the net effect of a credit resulting from the termination of the KMC
Telecom Inc. stock option plan, which was substantially offset by a charge
related to the adoption of the KMC Telecom Holdings, Inc., stock option plan,
in September 1998.

Depreciation and Amortization. Depreciation and amortization expense
increased from $2.5 million for 1997 to $9.3 million for 1998, primarily as a
result of depreciation expense associated with the greater number of networks
in commercial operation during 1998, as well as higher amortization of
intangible assets.

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Interest Expense. Interest expense increased from $2.6 million in 1997 to
$29.8 million in 1998. This increase resulted primarily from the issuance of
the Senior Discount Notes during the first quarter of 1998, which generated
interest expense of $29.6 million in 1998, as well as the increased expense
attributable to the higher level of borrowings under a credit facility in 1998.
The Company capitalized interest of $5.1 million related to network
construction projects during 1998 and $854,000 during 1997.

Net Loss. For the reasons stated above, net loss increased from $32.7
million for 1997 to $76.8 million for 1998.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Revenue. Revenue increased from $205,000 for 1996 to $3.4 million for 1997.
Revenue increased primarily because we began aggressively marketing our
services in our first market, Huntsville, Alabama, which generated $1.6 million
of revenue for 1997. In addition, the network in Melbourne, Florida, which we
purchased during 1997, and the 6 markets from which we began to generate
revenues during 1997, generated an aggregate of $1.8 million in revenue during
1997. Furthermore, we initiated marketing efforts in May 1997 in all of the
markets in which our networks had become commercially operational or in which
we were constructing networks. For 1997, out of total revenues of $3.4 million,
we derived $2.3 million from resale of switched services and $1.1 million from
special access and private line services, of which $943,000 was generated by
on-net services.

Network Operating Costs. Network operating costs increased from $1.4 million
for 1996 to $7.7 million for 1997. The increase was due primarily to costs of
$2.4 million associated with hiring personnel and staffing local offices, $1.8
million in selling, customer care, insurance, facilities and other direct
operating costs and $2.1 million in costs associated with providing resale
services which we initiated in May 1997.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $2.2 million for 1996 to $9.9 million
for 1997. The increase was due primarily to increases of $4.3 million
attributable to hiring additional personnel in all categories, particularly in
senior management and sales and marketing, $1.1 million in consulting costs
(primarily related to marketing services), and $1.2 million in legal
expenditures (primarily incurred in connection with regulatory activities and
vendor contracts). We expect that selling, general and administrative expenses
will continue to increase in absolute terms as we continue to expand our
network services and marketing activities, but that they will decline as an
overall percentage of revenue.

Stock Option Compensation Expense. Stock option compensation expense, a non-
cash charge, increased from $240,000 in 1996 to $13.9 million in 1997. The
increase was due primarily to an increase in the estimated fair value of KMC
Telecom Inc.'s common stock.

Depreciation and Amortization. Depreciation and amortization expenses
increased from $287,000 for 1996 to $2.5 million for 1997. The increase
reflected the 6 networks that became commercially operational and the one
network that was purchased during 1997 as well as higher amortization of
intangible assets.

Interest Expense. Interest expense increased from $596,000 for 1996 to $2.6
million for 1997, primarily reflecting borrowings under a credit facility in
1997, as well as amortization of deferred financing costs of $561,000. We
capitalized interest of $854,000 related to network construction projects
during 1997. Interest expense will continue to increase as a result of the
issuance of the Senior Discount Notes and to the extent that we increase our
borrowings under the Senior Secured Credit Facility.

Net loss. For the reasons stated above, net loss increased from $4.5 million
for 1996 to $32.7 million for 1997.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Revenue. Revenue increased from $0 for 1995 to $205,000 for 1996. The
increase in revenue was due to the commencement of the Huntsville network
operations in 1996.

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Network Operating Costs. Network operating costs increased from $0 for 1995
to $1.4 million for 1996. This increase was primarily related to the
commencement of operations of the Huntsville network and the related increases
of $550,000 in personnel costs and $850,000 in facilities and other direct
operating costs.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $1.6 million for 1995 to $2.2 million
for 1996. The increase was due primarily to the hiring of additional senior
management personnel and development of network construction and implementation
plans. Of these amounts, approximately $568,000 for 1996 was incurred by the
Company from affiliated companies owned by Harold N. Kamine for services
(including rent) which we shared with such affiliated companies.

Depreciation and Amortization. Depreciation and amortization increased from
$6,000 for 1995 to $287,000 for 1996. This increase was due primarily to the
completion of construction of the Huntsville network.

Interest Expense. Interest expense increased from $23,000 for 1995 to
$596,000 for 1996. This increase was due primarily to the increase in loans
from stockholders in 1996 and the convertible debt provided by Nassau in 1996,
as well as the amortization of financing costs on the convertible debt.

Net Loss. For the reasons stated above, net loss increased from $1.6 million
for 1995 to $4.5 million for 1996.

Stock Compensation Plan

During 1996 and 1997 one of our principal operating subsidiaries granted
options to purchase shares of its common stock pursuant to its 1996 Stock Plan.
On June 26, 1998, the Board of Directors of the Company adopted the 1998 Stock
Purchase and Option Plan for Key Employees of KMC Telecom Holdings, Inc. and
Affiliates which authorizes the grant of options to purchase common stock of
the Company. During the third quarter of 1998, the Company replaced the options
to purchase shares of common stock of the subsidiary previously granted under
its 1996 Stock Plan, with options to purchase common stock of the Company
granted under the 1998 Stock Plan and granted options to certain additional
employees of the Company. Upon cancellation of the outstanding options under
the 1996 Stock Plan, the Company reversed all compensation expense previously
recorded with respect to such options. Additionally, to the extent the fair
value of the common stock of the Company exceeded the exercise price of the
options granted under the 1998 Stock Plan, the Company recognized compensation
expense related to such options to the extent vested. The net effect of the
cancellation of the options outstanding under the 1996 Stock Plan and the grant
of options under the 1998 Stock Plan resulted in a credit to compensation
expense of approximately $600,000 in 1998.

Certain provisions in the stock option awards granted under the 1998 Stock
Plan will necessitate that such awards be treated as variable stock
compensation awards pursuant to Accounting Principles Board Opinion No. 25.
Accordingly, compensation expense will be charged or credited periodically
through the date of exercise or cancellation of such stock options, based on
changes in the value of the Company's stock as well as the vesting schedule of
such options. These compensation charges or credits are non-cash in nature, but
could have a material effect on the Company's future reported net income
(loss).

Liquidity and Capital Resources

We have incurred significant operating and net losses as a result of the
development and operation of our networks. We expect that such losses will
continue as we emphasize the development, construction and expansion of our
networks and build our customer base. As a result, there will not be any cash
provided by operations in the near future and we will need to fund the
expansion of our networks. We have financed our operating losses and capital
expenditures with equity invested by our founders, preferred stock placements,
credit facility borrowings and the Senior Discount Notes and the notes.

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On May 24, 1999, we issued the original notes in a private offering.
Approximately $104.1 million of the proceeds of the offering were used to
purchase a portfolio of U.S. government securities which have been pledged to
secure the payment of the first six interest payments on these notes (including
the exchange notes). We will use the net proceeds of the offering to complete
the 14 additional networks which we plan to construct by the end of the first
half of 2000.

In February 1999, we issued PIK Preferred Stock and warrants to purchase
common stock for aggregate gross proceeds of $65.0 million to two purchasers.
In April 1999, we issued additional shares of PIK Preferred Stock and warrants
to purchase common stock to one additional purchaser for aggregate gross
proceeds of $35.0 million.

In February 1999, our subsidiary which will own the 14 additional networks
which we currently plan to construct by the end of the first half of 2000,
entered into a secured vendor financing facility with Lucent Technologies Inc.
Under this Lucent Facility, our subsidiary will be permitted to borrow, subject
to certain conditions, up to an aggregate of $600.0 million, primarily for the
purchase from Lucent of switches and other telecommunications equipment.
Currently, only $250.0 million is available under this facility. The balance of
$350.0 million will become available only upon (a) additional lenders agreeing
to participate in the facility so that Lucent's own aggregate commitment does
not exceed $250.0 million and (b) the Company satisfying certain other
requirements, the most significant of which is the Company raising, and
contributing to the subsidiary, at least $300.0 million from the sale of high
yield debt or equity. As of September 30, 1999, the Company had no borrowings
outstanding under the facility.

In December 1998, we refinanced and expanded our $70.0 million senior
secured credit facility with Newcourt Commercial Finance Corporation to a new
$250.0 million facility. Under the refinanced and expanded facility, which is
with a group of lenders led by Newcourt Commercial Finance Corporation, First
Union National Bank, General Electric Capital Corporation and Canadian Imperial
Bank of Commerce, our subsidiaries which own our initial 23 networks are
permitted to borrow up to an aggregate of $250.0 million, subject to certain
conditions, for the purchase of fiber optic cable, switches and other
telecommunications equipment and, once certain financial conditions are met,
for working capital and other general corporate purposes.

In January 1998, we sold units consisting of 12 1/2% Senior Discount Notes
due 2008 and warrants to purchase shares of common stock. The gross proceeds of
the offering were $250.0 million. The Senior Discount Notes are unsecured,
unsubordinated obligations of the Company, pari passu with the notes, and
mature on February 15, 2008.

Net cash provided by financing activities from borrowings and equity
issuances was $219.4 million for 1998 and $332.1 million for the nine months
ended September 30, 1999. Our net cash used in operating and investing
activities was $213.8 million for 1998 and $332.0 million for the nine months
ended September 30, 1999.

We made capital expenditures of $9.1 million in 1996, $61.1 million in 1997
(including the acquisition of the Melbourne, Florida network for a purchase
price of $2.0 million), $161.8 million in 1998 and $218.5 million in the nine
months ended September 30, 1999. We currently plan to make additional capital
expenditures of approximately $132.0 million during the remainder of 1999.
Continued significant capital expenditures are expected to be made thereafter.
The majority of these expenditures is expected to be made for network
construction and the purchase of switches and related equipment to facilitate
the offering of our services. In addition, we expect to continue to incur
operating losses while we expand our business and build our customer base.
Actual capital expenditures and operating losses will depend on numerous
factors, including the nature of future expansion and acquisition opportunities
and factors beyond our control, including economic conditions, competition,
regulatory developments and the availability of capital.

At September 30, 1999, we had outstanding commitments aggregating
approximately $92.8 million related to the purchase of fiber optic cable and
telecommunications equipment as well as engineering services, principally under
our agreements with Lucent Technologies.

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At September 30, 1999, we had $125.0 million of indebtedness outstanding
under the Senior Secured Credit Facility, and had $125.0 million in borrowing
capacity available under the Senior Secured Credit Facility, subject to certain
conditions. On the same date, we had no indebtedness outstanding under the
Lucent Facility and had $250.0 million in borrowing capacity available
thereunder.

We have received a signed commitment from Lucent to refinance the existing
Lucent Facility upon terms which would involve the provision of additional
funding to the Company and the resetting of the financial covenants for periods
after the fourth quarter of 1999. We are currently engaged in discussions with
the agents for the lenders under the Senior Secured Credit Facility which
presently contemplates comparable amendments to the financial covenants in the
Senior Secured Credit Facility. We believe that these negotiations will lead to
definitive agreements during the first quarter of 2000. If, however, we are not
successful in completing the negotiations as presently contemplated and
amending the financial covenants in the Senior Secured Credit Facility and the
Lucent Facility, it is likely that we will fail to comply with one or more of
the covenants presently contained in those facilities for the quarter ended
March 31, 2000, which failure, unless waived, would constitute a default under
those credit facilities. Given that, as of this date, the Company has not yet
signed definitive agreements with Lucent and the agents for the lenders under
the Senior Secured Credit Facility implementing the foregoing refinancings,
under applicable financial accounting standards, the Company was required to
reclassify the $125.0 million outstanding at September 30, 1999 under the
Senior Secured Credit Facility as current liabilities in its September 30, 1999
balance sheet. If, as expected, the Company successfully completes the
contemplated refinancings of the Senior Secured Credit Facility and Lucent
Facility prior to the issuance of its financial statements for the year ended
December 31, 1999, the applicable accounting standards will permit it to
classify the amounts outstanding under the Senior Secured Credit Facility as
long-term debt in its balance sheet as of December 31, 1999. A covenant default
under the Senior Secured Credit Facility or the Lucent Facility is not an
automatic default under our other outstanding indebtedness but, under certain
circumstances, may become one, depending upon the actions of the lenders under
the Senior Secured Credit Facility and Lucent Facility.

We believe that our cash, investments held for future capital expenditures
and borrowings available under the Senior Secured Credit Facility and the
Lucent Facility, together with the net proceeds from our April 1999 issuance of
our PIK Preferred Stock and the proceeds of the offering of the original notes
will be sufficient to meet our liquidity needs through the completion of our
initial 23 networks and the 14 additional networks currently planned for
completion by the end of the first half of 2000, although we can give no
assurance in this regard. Thereafter, we will require additional financing.
However, in the event that our plans change, the assumptions upon which our
plans are based prove inaccurate, we expand or accelerate our business plan or
we determine to consummate acquisitions, the foregoing sources of funds may
prove insufficient to complete all such networks, and we may be required to
seek additional financing sooner than we currently expect. Additional sources
of financing may include public or private equity or debt financings by the
Company, capitalized leases and other financing arrangements.

We can give no assurance that additional financing will be available to us
or, if available, that it can be obtained on a timely basis and on acceptable
terms. Failure to obtain such financing could result in the delay or
abandonment of some or all of our development and expansion plans and
expenditures, which would have a material adverse effect on our business,
financial condition and results of operations. Such a failure could also limit
our ability to make principal and interest payments on our indebtedness,
including the notes, and meet our dividend and redemption obligations with
respect to our preferred stock. The Company has no working capital or other
credit facility under which it may borrow for working capital and other general
purposes. We can give no assurance that such financing will be available to the
Company in the future or that, if such financing were available, it would be
available on terms and conditions acceptable to the Company.

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Year 2000 Compliance

Similar to all businesses, we may be affected by the inability of certain
computer software to distinguish between the years 1900 and 2000 due to a
commonly-used programming convention. Unless such programs are modified or
replaced prior to January 1, 2000, calculations based on date arithmetic or
logical operations performed by such programs may be incorrect. In addition,
the Senior Secured Credit Facility and the Lucent Facility impose certain Year
2000 compliance obligations on us.

Management's plan to address the effect of the Year 2000 issue focuses on
the following areas: applications systems (including our billing system and
financial software), infrastructure (including personal computers and servers
used throughout the Company), and other third party business partners, vendors
and suppliers. Management's analysis and review of these areas is comprised
primarily of the following phases: developing an inventory of hardware,
software and embedded chips; assessing the degree to which each area is
currently compliant with Year 2000 requirements; performing renovations,
repairs and replacements as needed to attain compliance; testing to ensure
compliance; and, developing a contingency plan for each area if our initial
efforts to attain compliance are either unsuccessful or untimely.

Management completed the inventory and assessment phases of the project
during the fourth quarter of 1998. The renovation, repair and replacement phase
and the testing phase have commenced; however, we expect to continue these
phases throughout 1999.

Further, we have completed the initial installation and are continuing the
process of implementing new billing software systems, operational support
systems and financial and personnel software systems. Although these
implementations were made necessary by the expansion of our business and were
not directly related to Year 2000 issues, they have enabled us to utilize new
software for these purposes which the respective suppliers have certified as
Year 2000 compliant.

Costs incurred to date have primarily consisted of labor from the
redeployment of existing information services and operational resources. We
expect to spend approximately $150,000 for these Year 2000 compliance efforts
which will be expensed as incurred. This amount does not include the costs of
the new billing software, operational software and financial and personnel
software systems which we are implementing as a result of the expansion of our
business.

If the software applications of the local exchange carriers, long distance
carriers or others on whose services we depend or with which our systems
interact are not Year 2000 compliant, it could affect our systems which could
have a material adverse effect on our business, financial condition and results
of operations.

Although we do not presently anticipate a material business interruption as
a result of the Year 2000 issue, the worst case scenario if all of our Year
2000 efforts fail would result in a daily loss of revenues of approximately
$250,000 calculated based upon our current revenues.

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BUSINESS

The Company

We are a facilities-based competitive local exchange carrier providing
telecommunications and data services in Tier III Markets (population from
100,000 to 750,000). The markets in which we operate are predominantly located
in the Southeastern and Midwestern United States. We target as customers
business, government and institutional end-users, as well as Internet service
providers, long distance carriers and wireless service providers. Our
objective is to provide our customers with a complete solution for their
communications needs. We currently provide on-net local dial tone, Internet
access, ISDN, long distance, special access, private line and a variety of
other advanced services and features.

We currently operate in 23 Tier III Markets. We have constructed robust
fiber optic networks in each of our markets which we believe allow us to
ensure high quality services, facilitate the delivery of value-added and data
services, and effectively control our costs. We currently have Lucent
Technologies Series 5ESS(R)-type switches in commercial operation in all of
our 23 existing markets. We also intend to install Lucent switches in any
future networks which we may build. Over time, we expect to transition the
majority of our customers to our own networks by means of either unbundled
network elements leased from the incumbent local exchange carrier (i.e., the
established local telephone company, such as Ameritech, Bell Atlantic,
BellSouth, SBC or one of the subsidiaries of GTE Corporation or Sprint
Corporation) or direct connections to our own networks.

With cash on hand, investments held for future capital expenditures, the
proceeds of the offering of the notes, the proceeds of our recent private
placements of PIK Preferred Stock and the approximately $250.0 million
expected to be available for that purpose under the Lucent Facility, we
presently plan to construct networks in 14 additional Tier III Markets. We
currently anticipate that these new networks will be completed and placed in
commercial operation by the end of the first half of 2000.

Industry Overview

According to the Federal Communications Commission's Statistics of
Communications Common Carriers, incumbent local exchange carriers in the
United States generated approximately $103.1 billion in revenue in 1997 from
the provision of local exchange services. Local exchange services consist of a
number of service components and are defined by specific regulatory
classifications. For 1997, total revenue by service was (i) interstate access
services revenues of $24.0 billion; (ii) intrastate access services revenues
of $8.0 billion; (iii) basic local service (including dial tone, local area
charges, dedicated point-to-point intra-LATA service and enhanced calling
features) revenues of $52.0 billion; (iv) intra-LATA toll call revenues of
$9.2 billion; and (v) miscellaneous (including provision of directories,
billing and collection services and corporate operations) revenues of $9.9
billion. In addition, the Federal Communications Commission reported that
total toll service revenues in the United States in 1997 were $100.8 billion.

Local exchange and long distance services represent a large, steadily
growing market opportunity currently dominated by the incumbent local exchange
carriers and the major long distance companies.

A number of important trends are reshaping the approximately $230.0 billion
U.S. communications industry, creating substantial opportunities for
competitive local exchange carriers beyond capturing market share from
incumbent local exchange carriers in local exchange services. These trends
include (i) increasing customer demand for high speed, broadband services,
such as the Internet and personal computer- and Internet protocol-based
applications, (ii) the emergence of e-commerce as a new paradigm for business
transactions and (iii) continued consolidation among service providers to
broaden their service bundle and technical capabilities.

By leveraging customer relationships and bundling service offerings,
competitive local exchange carriers have begun to exploit a variety of high-
growth, value added services opportunities, including high speed Internet
access, HDSL, Local Area Network and Wide Area Network connectivity, managed
network services, Virtual Private Networks, remote access, and e-commerce
services. We believe that new entrants have an excellent

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opportunity to establish themselves as leading providers of such value-added
services, particularly in Tier III Markets. Prior to the passage of the
Telecommunications Act of 1996, many incumbent local exchange carriers have
underinvested in human resources (including sales, sales support and
engineering personnel), fiber and networking infrastructure in Tier III
Markets.

High-speed connectivity has become important to business due to the
dramatic increase in Internet usage and the proliferation of personal
computer- and Internet protocol-based applications. According to International
Data Corporation, an independent telecommunications and technology research
company, the number of Internet users worldwide reached approximately 69
million in 1997 and is forecasted to grow to approximately 320 million by
2002. The popularity of the Internet with consumers has also driven the rapid
growth in exploiting the Internet as a commercial medium, as businesses
establish Web sites, corporate intranets and extranets and implement e-
commerce applications to expand their customer reach and improve their
communications efficiency. International Data Corporation estimates that the
value of goods and services sold worldwide through the Internet will increase
from $12.0 billion in 1997 to over $400.0 billion in 2002. Importantly, these
applications are increasingly viewed as mission-critical by businesses of all
sizes, making the availability of broadband capacity, network quality, a
value-added services portfolio and technical capability an important
competitive distinction among service providers.

Business Strategy

The principal elements of our business strategy include:

Focus on Tier III Markets. We intend to operate in Tier III Markets with
attractive demographic, economic, competitive and demand characteristics. We
believe that incumbent local exchange carriers tend to focus their efforts on
larger markets and generally underserve and underinvest in Tier III Markets.
We also believe that there is generally significantly less competition from
other facilities-based competitive local exchange carriers in Tier III
Markets, which allows us to gain market share more rapidly than we could
expect in Tier I and Tier II Markets. In addition, network construction, labor
and rights-of-way costs are generally lower in Tier III Markets than in Tier I
and Tier II Markets. For example, many Tier III Markets permit significant
aerial deployment of fiber optic cable which is less expensive than the buried
deployment required in many Tier I and Tier II Markets. We estimate that
approximately 70% of our fiber is deployed aerially. We select target markets
from among the approximately 250 Tier III Markets in the United States by
first identifying those markets that do not yet have significant, established
competitors to the existing incumbent local exchange carrier, and by then
reviewing the specific demographic, economic, competitive and
telecommunications demand characteristics of such markets to determine their
suitability for the types of services which we offer. We estimate market
demand on the basis of the concentration of potential business, government and
institutional end-user customers in the market and the general economic
prospects for the area. During 1999 we also intend to investigate the
technological and market feasibility of serving Tier IV Markets near our Tier
III Markets. As part of this investigation we currently plan to begin
construction on fiber optic networks in two Tier IV Markets during 1999.

Comprehensive Fiber Networks. We build geographically extensive, full
service, facilities-based networks. We believe such networks provide
significant operating leverage, facilitate the capture of market share, and
are likely to deter other competitive local exchange carriers from attempting
to penetrate our markets due to the cost of constructing a competing network
of equal capability. Prior to both the initial construction of our network
backbone and any subsequent network expansion, we perform detailed rate of
return analyses to justify the capital expenditures involved. In all of our 23
existing markets, we have completed our backbone construction connecting the
market's central business district with outlying office parks, large
institutions, the locations of

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long distance carriers' transmission equipment and major incumbent local
exchange carrier central offices. We intend to continue to expand our existing
networks in response to anticipated customer demand.

Local Presence With Personalized Customer Service. We seek to capture and
retain customers through local, personalized sales, marketing and customer
service programs. To this end, we:

. establish sales offices in each market in which we operate a network,

. strive to recruit our city directors and sales staff from the local
market,

. rely principally on a face-to-face selling approach, and

. support our sales staff with locally based customer service and
technical support personnel.

Most of our existing sales personnel are local residents who have
previously worked for the incumbent local exchange carrier or other
telecommunications companies. We believe that our "Creative Solutions with a
Hometown Touch"(TM) sales approach is very important to customers in Tier III
Markets, who do not typically receive focused local sales contact or customer
support from the incumbent local exchange carrier. We seek to build long-term
relationships with our customers by responding rapidly and creatively to their
telecommunications needs.

Focus on Value-Added Data Services. We believe it is strategically
important to offer these services because:

. they provide for competitive differentiation,

. they present a substantial margin opportunity,

. as a facilities-based provider, we are able to offer these services
without significant marginal operating costs, and

. incumbent local exchange carriers have underinvested in facilities and
sales forces related to these services.

Low Cost Construction. It is our practice to use innovative "switch-in-a-
box" construction and deployment techniques for most of our networks. Using
these techniques, transmission, switching and power equipment are pre-
installed by Lucent under controlled factory conditions in portable,
weatherproof, storm-proof concrete buildings delivered to the Lucent facility
by our contractor. The completed buildings are then shipped to the appropriate
city for final installation, reducing costs, installation risks and time to
market.

Quality Operations Support System. We are developing a high quality
operations support system to provide us with comprehensive billing, order
processing and customer care software for all of our existing and contemplated
services. This system is designed to provide us with a single "flow-through"
order form that will entail several components, allowing each order to be
tracked from service provisioning through to complete installation. We believe
that this system will allow us to quickly address customer concerns and
provide us with a competitive advantage in customer service and operations
efficiency. Initial installation of the new operational support systems was
made during the third quarter of 1999, with development and expansion to
continue over the next 12 to 18 months.

Experienced Management Team. Our senior management team includes
individuals with over 250 years of experience, collectively, in the
telecommunications industry. It is led by Harold N. Kamine, Chairman of the
Board of Directors, and Michael A. Sternberg, the Company's President and
Chief Executive Officer. Other members of the team include Roscoe C. Young II,
Chief Operating Officer, James D. Grenfell, Executive Vice President, Chief
Financial Officer and Secretary, James L. Barwick, Senior Vice President and
Chief Technology Officer, Tricia Breckenridge, Executive Vice President--
Business Development and Paul R. DiMarco, Vice President--Information
Technology and Chief Information Officer.

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Services

General. We have historically provided dedicated access service and have
also resold switched services which we purchased from incumbent local exchange
carriers. In December 1997, we began providing our own on-net switched
services to our customers. For 1997 on-net switched services accounted for 32%
of our revenue and resale services accounted for 68% of our revenue. For 1998
on-net switched services accounted for 37% of our revenue and resale services
accounted for 63% of our revenues. For the nine months ended September 30,
1999 on-net switched services accounted for 57% of our revenue and resale
services accounted for 43% of our revenues.

Private Line and Special Access Services. We currently provide various
types of on-net dedicated services which permit the transmission of voice and
data between two points over circuits dedicated to a particular customer.
Private line service involves the provision of a private, dedicated
telecommunications connection of a customer's different locations. For these
services we offer several types of dedicated circuits that have different
capacities. DS-1 and DS-3 circuits are dedicated lines that can carry up to 24
and 672 circuits, respectively. Special access service involves leasing
private, dedicated telecommunications lines running over our networks to long
distance carriers. The long distance carriers use these lines to connect
different locations where they have installed transmission equipment within
the market, to connect locations where they have installed transmission
equipment to the transmission equipment locations of other long distance
carriers within the market, or to connect large customers directly to the
locations of their transmission equipment. In addition to DS-0, DS-1 and DS-3
dedicated circuits, we also offer OC3, OC12 and OC48 circuits for these
services. These OC circuits provide the fastest transmission available for
carriers and large business users.

Switch-Based Services. We have added and continue to add capability to
provide local dial tone and switched access origination and termination
services to our networks. Switches are currently in commercial operation in
all of our 23 existing markets. Over time, we expect to transition the
majority of our customers to our own networks by means of either unbundled
network elements leased from the incumbent local exchange carrier or direct
connections to our own networks; however this can be a time consuming task.
See "Risk Factors--We Will Be Reliant on Incumbent Local Exchange Carriers for
Interconnection and Provisioning." We have entered into interconnection
agreements with incumbent local exchange carriers for all of our existing
networks, although our agreement with BellSouth has expired.

Long Distance. We offer a full range of long distance products including
inter-LATA, intra-LATA, interstate, international, calling card and 800-number
services. During the first quarter of 1999, we introduced KMC-branded operator
services, directory services, prepaid phone cards and audio-conference
services. We offer these services both on-net and off-net. We offer long
distance services on a resale basis by entering into wholesale agreements with
various long distance carriers to deliver these services. We believe that many
of our customers will prefer the option of purchasing long distance services
from us as part of a one-stop telecommunications solution.

Centrex-type Services. We provide Centrex-type services. By using Centrex-
type services instead of purchasing and installing a switching system on its
own premises, a customer can substantially reduce its capital expenditures and
the fixed costs associated with maintaining telecommunications equipment. We
introduced our ClearStarsm Advantage service in all of our operational markets
during the first quarter of 1999. It has been designed to support multiple
applications, ranging from basic access services to services focused on
desktop applications. The basic access service connects to a customer's
internal system and is equipped with up to 14 features including call
forwarding, speed dialing and call transfer capabilities. More sophisticated
levels of service are designed to replace portions of a customer's existing
telecommunications system. At the high end of service offerings is ClearStarsm
Advantage Plus, a packaged, end-to-end offering which combines all of the
basic features with Basic Rate ISDN network access, advanced feature
functionality, voice messaging and Lucent ISDN multi-featured telephone sets.

New Data Services Offerings. We introduced ISDN services in late 1998. Data
services represented approximately 7% of our revenue for the first nine months
of 1999. We currently plan to expand our capabilities

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by introducing additional data services in 1999. We believe that these
services will enhance our ability to provide an integrated turnkey solution to
our customers' voice, data and video transmission requirements. These data
services will include:

. Basic Rate ISDN. Basic Rate ISDN, or BRI, provides customers the
potential of 144 kilobits per second of digital communications via a single
network facility interface. We believe it will be attractive to small and
medium size customers, since it provides dial-up access to the Internet,
and other dial-up data applications, while simultaneously providing the
ability to integrate voice traffic on a single network facility.

. Primary Rate ISDN. Primary Rate ISDN provides customers the
equivalent of 1.544 megabits per second of digital communications via a T-1
type facility, with 23 channels for voice and data communications and a
24th channel providing network signaling and control for the services. We
focus our Primary Rate ISDN sales efforts on (i) Internet service providers
who use Primary Rate ISDN as a means of supporting customer access to their
operations, and (ii) end-user customers who use Primary Rate ISDN as a
network access facility for their internal telecommunications systems.

. Port wholesale. Port wholesaling is a technology that provides large
bandwidth users with data switching capability at the network level,
allowing them to acquire capacity as required without investing in data
switching equipment. Port wholesaling gives us the ability to provide data
switching to Internet service providers by allowing data calls to be
terminated through the port wholesale equipment rather than the switch.
This enables the Internet service provider to more cost effectively manage
its data requirements while, at the same time, increasing the efficiency
and capacity of the Lucent Technologies Series 5ESS(R)- type switch.

. HDSL. HDSL is a method of using unconditioned, copper wire pairs for
high bit-rate data transport for use in the "last mile" connecting our
network backbone ring to the customer's premises. We plan to utilize HDSL
to provide high bandwidth data and video service to small and medium size
customers.

. Frame Relay/ATM. Frame relay and ATM, or asynchronous transfer mode,
are used by some of our data customers as a fast data transport service for
Wide Area Networks. Today we resell these services. In the future we intend
to provide these services over our own network and utilize a third party
provider for transport outside our network.

We plan to remain flexible in responding to evolving customer demands for data
services.

Local Networks

As part of determining the economic viability of a network in a particular
market, we review the demographic, economic, competitive and
telecommunications demand characteristics of the market. We estimate market
demand using data gathered from long distance carriers, the Federal
Communications Commission, local sources, site visits and specific market
studies commissioned by the Company, the concentration of potential business,
government and institutional end-user customers and the general economic
prospects for the area.

Once we target a market for development, we design a network to provide
access to approximately 70% of the business customers in that market either
through direct connections to our network or through unbundled network
elements leased from the incumbent local exchange carrier. Typically, we
construct a "self-healing" synchronous optical network ("SONET") architecture
backbone ring to provide coverage of the major business districts, government
offices, hospitals, office parks and universities, the principal locations of
the transmission equipment of long distance carriers offering services in the
area, and the incumbent local exchange carrier's central office(s). Following
construction of our backbone network, we expect to build additional loops to
increase the size of our addressable market.

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Existing Networks

(see accompanying notes on following page)

60
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New Networks

<TABLE>
<CAPTION>
Switched Dedicated DS-0
Addressable Access Equivalent
Commercially Route Commercial Lines In Circuits In
Location Operational(1) Miles(2) Buildings(3) Service(4) Service(5)
- -------- ------------------- -------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
Clearwater/St. Petersburg, FL.. Fourth Quarter 1999 70 3,426 -- --
Charleston, SC.. Fourth Quarter 1999 51 1,540 -- --
Lansing, MI..... Fourth Quarter 1999 29 1,300 -- --
Dayton, OH...... Fourth Quarter 1999 36 2,137 -- --
Akron, OH....... Fourth Quarter 1999 25 1,355 -- --
Spartanburg,
SC............. Fourth Quarter 1999 25 1,140 -- --
Toledo, OH...... Fourth Quarter 1999 31 1,392 -- --
Columbia, SC.... Fourth Quarter 1999 24 1,884 -- --
Monroe, LA...... Fourth Quarter 1999 24 1,005 -- --
Montgomery, AL.. Fourth Quarter 1999 25 1,961 -- --
Biloxi/Gulfport,
MS............. Second Quarter 2000 41 798 -- --
Chattanooga,
TN............. Second Quarter 2000 24 1,815 -- --
Johnson City/Kingsport, TN.. Second Quarter 2000 69 1,577 -- --
Rockville/Bethesda/ Frederick, MD.. Second Quarter 2000 126 4,070 -- --
--- ------ --- ---
600 25,400 -- --
=== ====== === ===
</TABLE>
- --------
(1) Refers to the date on which testing is completed and the switch is first
available to carry customer traffic. Fiber optic networks typically become
commercially operational for non-switched traffic in the quarter before
the switch is available to carry customer traffic. The quarters presented
for new networks represent our estimate of the calendar quarters in which
the new networks will be commercially operational. We cannot assure you
that the new networks will be commercially operational when estimated.
(2) Represents (i) for existing networks, current owned operational route
miles and (ii) for new networks, the number of operational route miles
currently estimated to be owned and operational at the time the network
becomes commercially operational.
(3) Addressable by either unbundled network elements leased from the incumbent
local exchange carrier or by a direct connection to our own network. We
define a commercial building as one with greater than ten employees.
(4) Represents all active switched channels we provide to customers either by
resale via the incumbent local exchange carrier's network, by unbundled
network elements leased from the incumbent local exchange carrier, or by
direct connection to our own network.
(5) Represents all active dedicated DS-0, DS-1 and DS-3 circuits we provide to
customers expressed on a DS-0 basis.

The construction of a network requires us to obtain municipal franchises
and other permits. These rights are typically the subject of non-exclusive
agreements of finite duration providing for the payment of fees by the Company
or the provision of services by the Company to the municipality without
compensation. In addition, we must secure rights-of-way and other access
rights which are typically provided under non-exclusive multi-year agreements,
which generally contain renewal options. Generally, these rights are obtained
from utilities, incumbent local exchange carriers, other competitive local
exchange carriers, railroads and long distance carriers. The
Telecommunications Act of 1996 requires most utilities to afford access to
rights-of-way to competitive local exchange carriers on non-discriminatory
terms and conditions and at reasonable rates. However, there can be no
assurance that delays or disputes will not occur. Our agreements for rights-
of-way and similar matters generally require us to indemnify the party
providing such rights. Such indemnities could make us liable for actions
(including negligence) of the other party.

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Our requirements for a planned network are communicated to our engineering
group which finalizes the route and completes the network's design.
Independent construction and installation contractors are selected through a
competitive bidding process. Our own personnel negotiate required contracts
and rights-of-way and supervise the construction, installation and testing of
network components prior to commencing commercial service. Cable, equipment
and supplies required for the networks are available from a variety of sources
at competitive rates. The construction period for a new network varies
depending upon such factors as the number of backbone route miles to be
installed, the relative use of aerial as opposed to buried cable deployment,
the initial number of buildings targeted for connection to the network
backbone and other factors. Based upon our experience, we believe that a new
fiber optic network can be made commercially operational within approximately
6 months after construction commences.

In a typical Tier III Market, selected office buildings are connected to
our network by network backbone extensions or unbundled network elements
leased from the incumbent local exchange carrier. Within each building,
customer equipment is connected to Company-provided electronic equipment where
customer transmissions are digitized, combined and converted to an optical
signal. The traffic is then transmitted through the network backbone to the
Company's local central office where it can be routed to its ultimate
destination.

We are able to expand our reach in a market by collocating equipment in an
incumbent local exchange carrier's central office and leasing unbundled
network elements from that incumbent local exchange carrier in order to reach
customers located in buildings which are not directly connected to our own
backbone ring. We attempt to place collocation equipment in a sufficient
number of incumbent local exchange carrier central offices to allow us to
reach approximately 70% of the business customers in a given market, either by
means of such unbundled network elements or direct connections to our own
network. The decision as to whether to collocate in a specific central office
is based upon the number of business lines, number and type of businesses,
number of households and the location of the central office within the market.

Our networks consist of our fiber optic backbones, fiber laterals and
unbundled network elements. Our networks allow for high speed, high quality
transmission of voice, data and video communications. We typically install
backbone fiber optic cables containing 48 to 144 fiber strands which have
significantly greater bandwidth carrying capacity than other media. Our OC-48
SONET networks support up to 32,256 simultaneous voice conversations over a
single pair of fiber optic fibers. We expect that continuing developments in
compression technology and multiplexing equipment will increase the capacity
of each fiber, thereby providing more bandwidth carrying capacity at
relatively low incremental costs.

We currently offer end-to-end fully protected fiber services utilizing
SONET ring architecture which routes customer traffic simultaneously in both
directions around the ring to provide protection against fiber cuts. If a line
is cut, traffic can simply be reversed and sent to its destination around the
other side of the ring. Back-up electronics become operational in the event of
failure of the primary components.

We monitor our fiber optic networks and electronics seven days per week, 24
hours per day, using a combination of local and national network control
centers. Local network monitoring is accomplished by means of an automatic
notification system that monitors for any system anomaly. This system provides
instantaneous alarms to an on-call network technician whenever an anomaly is
detected. The local market technician is trained in network problem resolution
and provides on-site corrective procedures when appropriate. A national
Network Reliability Center, located in Denver, Colorado, acts as the focal
point for all of our operating networks, providing integrated and centralized
network monitoring, and correlation and problem management. The Network
Reliability Center has access to all operating networks and can work
independently of the local systems to effect repair or restoration activities.
The Network Reliability Center is currently provided by Lucent on a
contractual basis. In the future, we may develop our own national center.

We manage our network systems both locally and centrally. Customer service
calls and maintenance are primarily handled through the local offices. In
addition, as described above, we contract to provide integrated monitoring of
our networks via Lucent's Network Reliability Center. This is accomplished by
the use of a

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sophisticated integrated management system that is connected to all of our
locations, including our Duluth, Georgia, operations center. With this system
the Network Reliability Center is capable of accessing all available
information regarding the configuration and operating condition of any network
components in use. This proactive monitoring capability is further augmented
by a 24 hour a day, seven day a week call center, also provided by Lucent at
the Network Reliability Center, that receives, tracks and manages all customer
calls and issues to satisfactory conclusion. The call center works with the
Company's own customer care representatives and engineers in the Duluth
facility to ensure that timely and consistent service is provided.

Sales and Marketing

We target our sales and marketing activities at three separate customer
groups: retail, national accounts and wholesale. Retail customers are composed
of business, government and institutional telecommunications and data services
end-users and local Internet service providers. National accounts are usually
large corporations which have branches or local offices within our markets,
but which make their buying decisions centrally from their corporate
headquarters. Wholesale customers typically consist of long distance carriers,
wireless service providers and national Internet service providers. As of
September 30, 1999, we had approximately 200 employees engaged in sales and
marketing activities.

Retail Customers. We target retail customer segments such as business,
government, healthcare and educational institutions. We target all business
customers in our markets as well as local Internet service providers. Each
city's local sales staff is responsible for calling on the retail customers in
its market.

Sales Personnel. We establish local sales offices in each market that we
serve. Initially, each local sales office is staffed by a City Director and 2
or 3 salespersons, which increases to between 4 and 6 as our operations in the
market expand. All sales personnel are hired locally since we believe that
knowledge of, and contacts in, a local market are key factors for competitive
differentiation and commercial success in a Tier III Market. We believe that
this local focus will help to set us apart from the incumbent local exchange
carriers, our principal competitors.

City Directors. We seek to hire local, seasoned telecommunications
managers, with sales experience, as City Directors. City Directors assist with
the initial network buildout and oversee the daily operations of their
network, in addition to managing sales staff and market development. Daily
operations responsibilities include monitoring provisioning, customer service,
pricing decisions and the billing process. A City Director works with senior
management in the strategic planning process, including capital expenditures
and budget planning. They perform cash flow analysis for fiber connections of
new buildings to the network, and participate in planning fiber network
extensions in their markets.

National Accounts. While there are few Fortune 500 companies with
headquarters located in our operating cities, there are branches and local
offices of large corporations within our market areas. Often these large
corporations make their buying decisions centrally, either through their
telecommunications or MIS functions, which are normally located at corporate
headquarters. Our national accounts sales organization is structured to assist
them in determining requirements for their various locations within our
markets. We believe that this focus on national accounts will further increase
our market penetration with large companies in our cities.

Wholesale Customers. We currently target the major long distance carriers
such as AT&T, MCI WorldCom and Sprint, Internet service providers, wireless
service providers and other competitive local exchange carriers, through our
carrier group. We believe that we can effectively compete to provide access to
these customers based on price, reliability, technology, route diversity,
ease-of-ordering and customer service. Historically, long distance carriers
have paid significant charges to incumbent local exchange carriers to
terminate long distance calls. We provide these services at a discount. In
addition, to the extent that incumbent local exchange carriers begin to
compete with long distance carriers in providing long distance services, the
long distance carriers have a competitive incentive to move access business
away from incumbent local exchange carriers to competitive local exchange
carriers such as the Company. Wireless service providers, who need network
backbone to transport

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<PAGE>

calls, are an active customer base, as are other competitive local exchange
carriers as wholesale users. Revenues from access services may decline in
future years due to a change in pricing proposed by the Federal Communications
Commission.

Suppliers

Lucent. We have contracted with Lucent, as our primary supplier, to
purchase switching, transport and digital cross connect products. Lucent has
also agreed to implement and test our switches and related equipment. In
addition, Lucent and the Company have entered into an agreement pursuant to
which Lucent has agreed to monitor our switches on an on-going basis. Lucent
currently holds $31.9 million of our PIK Preferred Stock.

Billing Support Systems Implementation. In the second quarter of 1999, we
installed software developed by Billing Concepts Systems, Inc. to provide us
with comprehensive billing functionality, including the ability to collect
call detail records, message rating, bill calculation, invoice generation,
commission tracking, customer care and inquiry, collections management, and
quality assurance. We anticipate that the Billing Concepts software will
result in our ability to produce a single bill covering all of the products
and services that we provide to a customer. Additional development of the new
billing systems will take place over the next 12 months.

Operational Support Systems Implementation. We have entered into an
agreement with Eftia OSS Solutions Inc. to develop operational support
systems. These systems will manage service order processing, circuit and asset
inventory, telephone number inventory and trouble administration. The
operational support system's responsibilities will be expanded during the
later phases of the project to include workforce management, local number
portability management, network management, service bureau interfaces, and
Internet-based service inquiry. We anticipate the system will automate
operational support activities and provide a means of managing operational
performance of our business. Initial installation of the new operational
support systems was made during the third quarter of 1999, with development
and expansion to continue over the next 12 to 18 months.

Competition

Overview. The telecommunications industry is highly competitive. Our
principal competitors in Tier III Markets will be the incumbent local exchange
carriers. In most instances the incumbent local exchange carrier is one of the
Regional Bell Operating Companies (such as Ameritech, Bell Atlantic, BellSouth
or SBC), one of GTE Corporation's subsidiaries or one of Sprint Corporation's
subsidiaries. Incumbent local exchange carriers presently have almost 100% of
the market share in those areas we consider our market areas. Because of their
relatively small size, we do not believe that Tier III Markets can profitably
support more than two competitors to the incumbent local exchange carrier.

Other competitors may include other competitive local exchange carriers,
microwave and satellite carriers, wireless telecommunications providers and
private networks built by large end-users. Potential competitors (using
similar or different technologies) include cable television companies,
utilities and Regional Bell Operating Companies seeking to operate outside
their current local service areas. In addition, there may be future
competition from large long distance carriers, such as AT&T and MCI WorldCom,
which have begun to offer integrated local and long distance
telecommunications services. AT&T also has announced its intention to offer
local services using a new wireless technology. Consolidation of
telecommunications companies and the formation of strategic alliances within
the telecommunications industry, as well as the development of new
technologies, could give rise to significant new competitors to the Company.

Both the long distance business and the data transmission business are
extremely competitive. Prices in both businesses have declined significantly
in recent years and are expected to continue to decline. In the long distance
business, we will face competition from large carriers such as AT&T, MCI
WorldCom and Sprint. We will rely on other carriers to provide transmission
and termination for our long distance traffic and therefore will be dependent
on such carriers.

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We expect to experience declining prices and increasing price competition.

Incumbent Local Exchange Carriers. Our principal competitors for local
exchange services are the Regional Bell Operating Companies, GTE Corporation's
subsidiaries and Sprint Corporation's subsidiaries. As a recent entrant in the
integrated telecommunications services industry, we have not yet achieved a
significant market share for any of our services. In particular, the incumbent
local exchange carriers:

. have long-standing relationships with their customers,

. have financial, technical and marketing resources substantially greater
than ours,

. have the potential to fund competitive services with revenues from a
variety of businesses, and

. currently benefit from certain existing regulations that favor the
incumbent local exchange carriers over us in certain respects.

Recent regulatory initiatives allow us, as a competitive local exchange
carrier, to interconnect with incumbent local exchange carrier facilities.
This provides increased business opportunities for us. However, these
regulatory initiatives have been accompanied by increased pricing flexibility
for, and relaxation of regulatory oversight of, the incumbent local exchange
carriers. If the incumbent local exchange carriers engage in increased volume
and discount pricing practices or charge us increased fees for interconnection
to their networks, or if the incumbent local exchange carriers seek to delay
implementation of our interconnection to their networks, our business,
financial condition and results of operations and our ability to make payments
on the notes could be adversely affected.

To the extent that we interconnect with and use incumbent local exchange
carrier networks to serve our customers, we are dependent upon their
technology and capabilities. We will become increasingly dependent on
interconnection with incumbent local exchange carriers as switched services
become a greater percentage of our business. The Telecommunications Act of
1996 imposes interconnection obligations on incumbent local exchange carriers,
but we cannot assure you that we will be able to obtain the interconnection we
require at rates, and on terms and conditions, that will permit us to offer
switched services at desirable rates, terms and conditions. In the event that
we experience difficulties in obtaining appropriate and reasonably priced
service from the incumbent local exchange carriers, our ability to serve our
customers would be impaired.

Competitive Local Exchange Carriers and Other Competitors. We will compete
from time to time with other competitive local exchange carriers. It is likely
that in several of our markets we will face competition from two or more
facilities-based competitive local exchange carriers. After the investment and
expense of establishing a network and support services in a given market, the
marginal cost of carrying an additional call is negligible. Accordingly, in
Tier III Markets where there are 3 or more facilities-based competitive local
exchange carriers, we expect substantial price competition. We believe that
operations in such markets are likely to be unprofitable for one or more
operators.

The competitive local exchange carrier competitors in our 23 existing
markets include, among others:

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e.spire resell BellSouth services. American MetroCom reports a switch and had
plans to construct a network in the first quarter of 1999, although, as of
October 1999, American MetroCom had not applied for construction permits.

(3) Shreveport--AT&T Local Services has a switch. e.spire has a network
consisting of 2.5 route miles, but does not have a switch.

(5) Savannah--AT&T Local Services has a switch. However, it is not actively
marketing services in Savannah at the present time.

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Local Services has a point of interface switch and is offering both business
and residential service. Teligent is a wireless competitive local exchange
carrier with a switch.

(14) Topeka--AT&T Local Services has a switch.

(18) Fort Myers--ITC DeltaCom has a switch and leases fiber. TCG (now AT&T
Local Services) reports a switch.

(19) Longview--Golden Harbor is a business and residential reseller and
reports a non-active switch. TCG of Dallas (now AT&T Local Services) also
reports a non-active switch.

(20) Sarasota--ICI-Intermedia Communications provides switch-based service
from its fiber network in Tampa.

(21) Pensacola--ITC DeltaCom has a switch, a long haul fiber network and
resells services. AT&T Local Services has a point of interface switch.

The competitive local exchange carrier competitors in the 14 markets in
which we are presently developing new networks include, among others:

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(3) Lansing--MCI WorldCom has a 5 route mile fiber network and a switch.
AT&T Local Services has a point of interface switch.

(9) Monroe--ITC DeltaCom reports a switch, has a long haul fiber network,
and is reselling services.

(11) Biloxi/Gulfport--Actel is leasing fiber from Frontier and is back
hauling from their switch in Mobile, AL. AT&T Local Services has a switch.

(13) Johnson City/Kingsport--There is currently no competitive local
exchange carrier competitor in this market.

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We believe that there may be additional competitors that have formulated
plans to enter our markets.

We expect to face competition in each of our markets. However, we believe
that our commitment to build a significant network, deploy switches and
establish local sales and support facilities at the outset in each of the Tier
III Markets which we target should reduce the number of facilities-based
competitors and drive other entrants to focus on the resale of incumbent local
exchange carrier service or our services or to invest in other markets. We
believe that each market will also see more agent and distributor resale
initiatives.

Regulation

Our services are subject to varying degrees of federal, state and local
regulation. The Federal Communications Commission exercises jurisdiction over
facilities of, and interstate and international services offered by,
telecommunications common carriers. The state regulatory commissions retain
jurisdiction over the same facilities and services to the extent they are used
to originate or terminate intrastate communications. Local governments
sometimes impose franchise or licensing requirements on competitive local
exchange carriers.

Federal Regulation

We are regulated at the federal level as a nondominant common carrier
subject to minimal regulation under Title II of the Communications Act of
1934. The Communications Act of 1934 was substantially amended by the
Telecommunications Act of 1996. This legislation is designed to enhance
competition in the local telecommunications marketplace by:

. removing state and local entry barriers,

. requiring incumbent local exchange carriers to provide interconnection
to their facilities,

. facilitating the end-users' choice to switch service providers from
incumbent local exchange carriers to competitive local exchange carriers
such as the Company, and

. requiring access to rights-of-way.

The legislation also is designed to enhance the competitive position of the
competitive local exchange carriers and increase local competition by newer
competitors such as long distance carriers, cable television companies and
public utility companies. Under the Telecommunications Act of 1996, Regional
Bell Operating Companies have the opportunity to provide in-region long
distance services if certain conditions are met and are no longer prohibited
from providing certain cable television services. In addition, the
Telecommunications Act of 1996 eliminates certain restrictions on utility
holding companies, thus clearing the way for them to diversify into
telecommunications services.

The Telecommunications Act of 1996 specifically requires all
telecommunications carriers (including incumbent local exchange carriers and
competitive local exchange carriers (such as the Company)):

. not to prohibit or unduly restrict resale of their services,

. to provide dialing parity and nondiscriminatory access to telephone
numbers, operator services, directory assistance and directory listings,

. to afford access to poles, ducts, conduits and rights-of-way, and

. to establish reciprocal compensation arrangements for the transport and
termination of telecommunications.

69
<PAGE>

It also requires competitive local exchange carriers and incumbent local
exchange carriers to provide interconnection for the transmission and routing
of telephone exchange service and exchange access. It requires incumbent local
exchange carriers to provide such interconnection:

. at any technically feasible point within the incumbent local exchange
carrier's network,

. that is at least equal in quality to that provided by the incumbent
local exchange carrier to itself, its affiliates or any other party to
which the incumbent local exchange carrier provides interconnection, and

. at rates, terms and conditions that are just, reasonable and
nondiscriminatory.

Incumbent local exchange carriers also are required under the new law to
provide nondiscriminatory access to network elements on an unbundled basis at
any technically feasible point, to offer their local telephone services for
resale at wholesale rates, and to facilitate collocation of equipment
necessary for competitors to interconnect with or access the unbundled network
elements.

The Telecommunications Act of 1996 provided for the removal of most
restrictions from AT&T and the Regional Bell Operating Companies resulting
from the consent decree entered in 1982 providing for divestiture of the
Regional Bell Operating Companies from AT&T in 1984. The Telecommunications
Act establishes procedures under which a Regional Bell Operating Company can
enter the market for long distance service between specified areas within its
local service area. The Telecommunications Act of 1996 permitted the Regional
Bell Operating Companies to enter the out-of-region long distance market
immediately upon enactment, and Regional Bell Operating Companies can provide
intra-LATA long distance services. Before the Regional Bell Operating Company
can provide in-region inter-LATA services, it must obtain Federal
Communications Commission approval upon a showing that facilities-based
competition is present in its market, that the Regional Bell Operating Company
has entered into interconnection agreements in the states where it seeks
authority, that the Regional Bell Operating Company has satisfied a 14-point
"checklist" of competitive requirements, and that such entry is in the public
interest. To date, such authority has not been granted, but requests by the
Regional Bell Operating Companies are the subject of pending appeals. The
provision of inter-LATA services by Regional Bell Operating Companies is
expected to reduce the market share of major long distance carriers, and
consequently, may have an adverse effect on the ability of competitive local
exchange carriers to generate access revenues from the long distance carriers.

Federal Communications Commission Rules Implementing the Local Competition
Provisions of the Telecommunications Act of 1996. The Federal Communications
Commission in 1996 established a framework of national rules enabling state
public service commissions and the Federal Communications Commission to begin
implementing many of the local competition provisions of the
Telecommunications Act of 1996. The Federal Communications Commission
prescribed certain minimum points of interconnection necessary to permit
competing carriers to choose the most efficient points at which to
interconnect with the incumbent local exchange carriers' networks. The Federal
Communications Commission also adopted a minimum list of unbundled network
elements that incumbent local exchange carriers must make available to
competitors upon request and a methodology for states to use in establishing
rates for interconnection and the purchase of unbundled network elements. The
Federal Communications Commission also adopted a methodology for states to use
when applying the Telecommunications Act's "avoided cost standard" for
incumbent local exchange carriers to set the prices to be charged to resellers
of their services.

The Federal Communications Commission has authority to establish national
pricing rules for interconnection, unbundled elements and resale services. The
Supreme Court also upheld the Federal Communications Commission's
interpretation of the "pick and choose" provisions, which permit carriers to
obtain favorable provisions in interconnection agreements. However, the
Supreme Court overturned the Federal Communications Commission's rules
regarding what network elements must be unbundled by the Regional Bell
Operating Companies, and remanded to the Federal Communications Commission the
question of what network elements are "necessary" to competing carriers such
as the Company. On November 5, 1999, the Federal

70
<PAGE>

Communications Commission issued an order and proposed rulemaking establishing
the network elements that must be offered by incumbent local exchange carriers
as unbundled network elements. In addition, the Supreme Court's decision
creates some uncertainty regarding the legal status of complaints filed at the
Federal Communications Commission to enforce interconnection agreements. We
cannot assure you that we will be able to maintain interconnection agreements
on terms acceptable to us.

Other Regulation. In general, the Federal Communications Commission's
policies encourage the entry of new competitors in the telecommunications
industry and are designed to prevent anti-competitive practices. Currently,
large incumbent local exchange carriers such as GTE and the Regional Bell
Operating Companies are regulated as "dominant" carriers, while competitive
local exchange carriers such as the Company are considered "nondominant"
carriers. Dominant carriers face more detailed regulatory scrutiny. As a
nondominant carrier, we are subject to relatively minimal Federal
Communications Commission regulation.

. Tariff. We may install and operate facilities for the transmission of
domestic interstate communications without prior Federal Communications
Commission authorization. The Federal Communications Commission requires
us to file tariffs and periodic reports concerning our interstate
circuits and deployment of network facilities, and offer interstate
services on a nondiscriminatory basis, at just and reasonable rates. We
also remain subject to Federal Communications Commission complaint
procedures.

The Federal Communications Commission adopted an order in 1996 (the
"Detariffing Order") which eliminated the requirement that nondominant
interstate carriers maintain tariffs on file with the Federal
Communications Commission for domestic interstate services. The order
provided that, after a nine-month transition period, relationships
between interstate carriers and their customers would be set by
contract. Several parties requested reconsideration and/or filed
appeals of the Detariffing Order. On February 13, 1997, the United
States Court of Appeals for the District of Columbia Circuit stayed
implementation of the Detariffing Order. If the Detariffing Order
becomes effective, nondominant interstate services providers will no
longer be able to rely on the filing of tariffs with the Federal
Communications Commission as a means of providing notice to customers
of prices, terms and conditions under which they offer their interstate
services. If we cancel our Federal Communications Commission tariffs as
a result of the Detariffing Order, we will need to individually
negotiate contract terms with certain of our customers, which could
result in substantial legal and administrative expense.

. Access Charges. The Federal Communications Commission has granted
incumbent local exchange carriers significant flexibility in pricing
their interstate special and switched access services on a specific
central office by central office basis. Under this pricing scheme,
incumbent local exchange carriers may establish pricing zones based on
access traffic density and charge different prices for each zone. We
anticipate that this pricing flexibility will result in incumbent local
exchange carriers lowering their prices in high traffic density areas,
which is where our customers are concentrated. The Federal
Communications Commission adopted an order on August 5, 1999 granting
incumbent local exchange carriers subject to price cap regulation
additional pricing flexibility. These changes will reduce access charges
and will shift charges currently based on minutes to flat-rate, monthly
per line charges. As a result, the aggregate amount of access charges
paid by long distance carriers to access providers in the United States
may decrease.

The order provides certain immediate regulatory relief to incumbent
local exchange carriers subject to price cap regulation and sets a
framework of "triggers" to provide those companies with greater pricing
flexibility to set interstate access rates as competition increases.
The order also initiated a rulemaking to determine whether the Federal
Communications Commission should regulate the access charges of
competitive local exchange carriers. If this increased pricing
flexibility is not effectively monitored by federal regulators, it
could have a material adverse effect on the Company's ability to price
its interstate access services competitively. A May 16, 1999 order,
which was upheld on appeal by the United States Court of Appeals for
the Eighth Circuit, substantially increased the amounts that incumbent
local exchange carriers subject to the Federal Communications
Commission's price cap

71
<PAGE>

rules ("price cap local exchange carriers") recover through monthly
flat-rate charges and substantially decreased the amounts that these
local exchange carriers recover through traffic sensitive (per-minute)
access charges. Several parties appealed the May 16th order.

These decisions are likely to have a significant impact on the operations,
expenses, pricing and revenue of the Company.

Universal Service Reform. The Federal Communications Commission implemented
the provisions of the Telecommunications Act of 1996 relating to the
preservation and advancement of universal telephone service in 1997. The
Federal Communications Commission's universal service principles provide that
universal service support mechanisms and rules should not unfairly advantage
or disadvantage one provider or technology over another. All
telecommunications carriers providing interstate telecommunications services,
including the Company, must contribute to the universal service support fund.
On October 8, 1999, the Federal Communications Commission released an order
implementing changes to its universal service rules to comply with a recent
decision of the Fifth Circuit Court of Appeals. Among other changes, the
Federal Communications Commission revised its rules concerning assessment of
carriers' intrastate and international revenues for universal service
contribution. The contribution factor for November and December 1999 is
5.8995% of interstate and international end-user telecommunications revenues,
which will supersede the fourth quarter contribution factors previously
announced. The Federal Communications Commission narrowed the scope of the
contribution base, removing intrastate end-user telecommunications revenues
from the assessment, consistent with the opinion of the Fifth Circuit Court of
Appeals.

State Regulation

We believe that most, if not all, states in which we operate or propose to
operate require a certification or other authorization to offer intrastate
services. Many of the states in which we operate or intend to operate are in
the process of addressing issues relating to the regulation of competitive
local exchange carriers. We are subject to state tariff filing requirements.

These certifications generally require a showing that the carrier has
adequate financial, managerial and technical resources to offer the proposed
services in a manner consistent with the public interest.

We have obtained intrastate authority for the provision of our dedicated
services and a full range of local switched services and long distance
services. In most states, we are required to file tariffs setting forth the
terms, conditions and prices for services that are classified as intrastate.
We plan to obtain additional state authorities to accommodate our business and
network expansion.

Some states also impose reporting, customer service, and quality
requirements, as well as unbundling and universal service requirements. In
addition, we are subject to the outcome of proceedings held by state utility
commissions to determine state regulatory policies with respect to incumbent
local exchange carrier and competitive local exchange carrier competition,
geographic build-out, mandatory detariffing and other issues relevant to
competitive local exchange carrier operations. Certain states have adopted
state-specific universal service funding obligations.

In addition to obtaining state certifications, we must negotiate terms of
interconnection with the incumbent local exchange carrier before we can begin
providing switched services. Our executed agreements are subject to the
approval of the state commissions. State commissions have approved our
existing agreements. We anticipate state commission approval of our future
interconnection agreements.

We believe that, as the degree of local competition increases, the states
will offer the incumbent local exchange carriers increasing pricing
flexibility. This flexibility may present the incumbent local exchange
carriers with an opportunity to subsidize services that compete with our
services with revenues generated from non-competitive services, thereby
allowing incumbent local exchange carriers to offer competitive services at
prices

72
<PAGE>

below the cost of providing the service. We cannot predict the extent to which
this may occur, but it could have a material adverse effect on our business
and our ability to make payments on the Notes.

We actively participate in various regulatory proceedings before the
states, the outcome of which may establish policies that affect our
competitive and/or economic position in the local and other telecommunications
services markets.

We also may be subject to requirements in certain states to obtain prior
approval for, or notify the state commission of, any transfers of control,
sales of assets, corporate reorganizations, issuances of stock or debt
instruments and related transactions.

Local Government Authorizations. We are required to obtain street use and
construction permits and licenses and/or franchises to install and expand our
fiber optic networks using municipal rights of way. In some municipalities
where we have installed or anticipate constructing networks, we will be
required to pay license or franchise fees based on a percentage of gross
revenues or on a per foot basis, as well as post performance bonds or letters
of credit. We are actively pursuing permits, franchises and other relevant
authorities for use of rights-of-way and utility facilities in a number of
cities.

Legal Proceedings

We are from time to time involved in litigation incidental to the conduct
of our business. There is no pending legal proceeding to which we are a party,
however, which, in the opinion of our management, is likely to have a material
adverse effect on our business, financial condition and results of operations
and our ability to make payments on the notes.

Employees

As of September 30, 1999, we had approximately 840 full time employees.
None of our employees are represented by a labor union or subject to a
collective bargaining agreement, nor have we experienced any work stoppage due
to labor disputes. We believe that our relations with our employees are good.

Properties

We are headquartered in Bedminster, New Jersey in approximately 14,000
square feet of office space, approximately 7,200 of which we lease from Kamine
Development Corp. (an entity controlled by Mr. Kamine, the Company's Chairman
of the Board). The lease with Kamine Development Corp., which expires in
January 2007, provides for a base annual rental of approximately $217,000
(adjusted periodically for changes in the consumer price index), plus
operating expenses.

We also maintain an operations center in an aggregate of approximately
83,000 square feet of leased space in Duluth, Georgia under leases which
expire at various dates from February 2000 through February 2003. We also own
or lease facilities in each of our existing markets for central offices, sales
offices and the location of our switches and related equipment.

We believe that our facilities are in good condition, are suitable for our
operations and that, if needed, suitable alternative space would be readily
available.

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<PAGE>

MANAGEMENT

The following table sets forth certain information concerning the executive
officers and directors of the Company, including their ages as of September
30, 1999.

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Harold N. Kamine........ 43 Chairman of the Board of Directors

Gary E. Lasher.......... 63 Vice Chairman of the Board of Directors

Michael A. Sternberg.... 54 President, Chief Executive Officer and Director

Roscoe C. Young II...... 48 Chief Operating Officer

James D. Grenfell....... 47 Executive Vice President, Chief Financial Officer and Secretary

Charles Rosenblum....... 49 Senior Vice President--Human Resources

James L. Barwick........ 66 Senior Vice President and Chief Technology Officer

Tricia Breckenridge..... 53 Executive Vice President--Business Development

Paul R. DiMarco......... 50 Vice President--Information Technology, Chief Information Officer

John G. Quigley......... 45 Director

Richard H. Patterson.... 41 Director

Randall A. Hack......... 52 Director

William H. Stewart...... 32 Director
</TABLE>

Harold N. Kamine is the Chairman of the Board of the Company and its
founder and has been a director of the Company since 1994. He is also chief
executive officer and sole owner of Kamine Development Corp. and associated
companies in the independent power industry. Mr. Kamine has successfully
financed a number of unregulated non-utility power generation projects.
Companies owned by Mr. Kamine owned substantial interests in and managed six
power generation plants in the Northeastern United States. Mr. Kamine devotes
approximately eighty percent of his time to the affairs of the Company.
Mr. Kamine and Mr. Rosenblum are first cousins.

Gary E. Lasher joined the Company as its Vice Chairman of the Board
effective November 1, 1997. He was the founder, Chief Executive Officer and
President of Eastern TeleLogic Corporation from 1987 to 1997. Eastern
TeleLogic was a leading competitive local exchange carrier operating in
greater Philadelphia, Delaware and southern New Jersey before its purchase by
TCG (Teleport Communications Group) in October 1996. Prior to Eastern
TeleLogic, from 1984-1986, Mr. Lasher was Chief Operating Officer of Private
Satellite Network, a company which built and operated video satellite networks
for major corporations. Mr. Lasher spent 20 years with Continental Telephone
holding various positions including Corporate Vice President, President of the
International Engineering and Construction Company, and various senior
positions with Continental Telephone's regulated subsidiaries. Mr. Lasher is
one of the founding members of the Association for Local Telecommunications
Services ("ALTS") and served for three years as Chairman of the Association.

Michael A. Sternberg has spent 29 years in telecommunications, including
business development, marketing, sales and general management. Prior to
joining the Company in July 1996 as President and Chief Executive Officer,
Mr. Sternberg was a co-founder and Chief Operating Officer, from April 1991 to
July 1996, of RimSat, a privately owned satellite company which from January
1993 to July 1996 owned and operated two Russian-built satellites which
provided television, voice and data capacity to Asian operators. From March
1990 to April 1991, Mr. Sternberg served as Chief Executive Officer of
Sternberg & Associates, Inc., a company he founded. From 1988 to 1990,
Mr. Sternberg served as Senior Vice President--Marketing and Sales with MFS
Communications. Previously, Mr. Sternberg had served as President of Stantel
Telecommunications, a division

74
<PAGE>

of STC, a digital telecommunications transmissions products company based in
Falls Church, Virginia; Senior Vice President--Marketing and Corporate
Development at CIT-Alcatel in Reston, Virginia; Vice President--Marketing at
General Dynamics Communications Company in St. Louis; Executive Vice
President--Marketing and Sales of OKI Electronics of America in Fort
Lauderdale; and Chief Operating Officer of National Telephone Company in
Hartford, Connecticut. He has served as a director of the Company since August
1996. Mr. Sternberg is a member of the Executive Committee of ALTS.

Roscoe C. Young II has approximately 20 years experience in the field of
telecommunications with both new venture and Fortune 500 companies. Prior to
joining the Company in November 1996, Mr. Young served as Vice President,
Network Component Services for Ameritech Corporation from June 1994 to October
1996. From March 1988 to June 1994, Mr. Young served as Senior Vice President,
Network Services for MFS Communications. From October 1977 to March 1988,
Mr. Young served in a number of senior operations, sales and marketing,
engineering, financial management, and human resource positions for AT&T Corp.

James D. Grenfell has over 20 years experience in the telecommunications
industry. He joined the Company as its Executive Vice President, Chief
Financial Officer and Secretary in March 1999. From August 1998 to March 1999
he was an independent consultant. Previously, he served as Executive Vice
President and Chief Financial Officer of ICG Communications, Inc., a
competitive local exchange carrier headquartered in Denver, Colorado from
November 1995 to July 1998. Prior to joining ICG, Mr. Grenfell served as
Director of Financial Planning for BellSouth Corporation and Vice President
and Assistant Treasurer of BellSouth Capital Funding. He was with BellSouth
from 1985 through November 1995, serving previously as Finance Manager of
Mergers and Acquisitions. Prior to BellSouth, Mr. Grenfell spent two years as
a Project Manager with Utility Financial Services and six years with GTE of
the South, a subsidiary of GTE Corporation, including four years as Assistant
Treasurer. Mr. Grenfell is a Chartered Financial Analyst.

Charles Rosenblum has over 20 years experience in human resources,
primarily in human resources planning, staffing and development. He joined the
Company in January 1997. From May 1995 to January 1997 he served as Vice
President--Human Resources of Kamine Development Corp. Previously he had held
the positions of Director, Management Development with KPMG Peat Marwick and
Manager of Management Education with Dun & Bradstreet Corporation. Earlier he
had served in various human resource positions with Allstate Insurance
Company. Mr. Rosenblum and Mr. Kamine are first cousins.

James L. Barwick has 39 years of experience in the telecommunications
industry. Mr. Barwick joined the Company in March 1997. Prior to joining the
Company, Mr. Barwick had been self-employed since 1986 as a telecommunications
consultant with expertise in equipment application engineering, radio path
engineering, analog and digital Mux, switching and transport systems in the
long distance carrier and incumbent local exchange carrier areas, technical
writing, project management and computer assisted design systems.

Tricia Breckenridge joined the Company in April 1995. From January 1993 to
April 1995 she was Vice President and General Manager of FiberNet USA's
Huntsville, Alabama operations. Previously she had served as Vice President,
External Affairs and later Vice President, Sales and Marketing of Diginet,
Inc. She was co-founder of Chicago Fiber Optic Corporation, the predecessor of
Metropolitan Fiber Systems. Earlier she was Director of Regulatory Affairs for
Telesphere Corporation.

Paul R. DiMarco joined the Company in September, 1998, as its Vice
President--Information Technology and Chief Information Officer. From May 1995
to September 1998, he served as Senior Vice President and Chief Information
Officer with Nycomed Americas, a multi-national pharmaceutical company. From
May 1990 to May 1995, Mr. DiMarco was Director of Information Technology for
Ortho-McNeil Pharmaceutical Corporation, a major pharmaceutical division
within the Johnson and Johnson family of companies. Prior to joining Ortho-
McNeil, Mr. DiMarco served for thirteen years with AT&T Corp. in positions of
increasing responsibility including District Manager within the Information
Technology Organization, National Account Manager, and Manager Technical-
Support for the Commercial and Residential Billing System.

75
<PAGE>

John G. Quigley has served as a director of the Company since August 1996.
Mr. Quigley is a founding member of Nassau Capital L.L.C., which is the
general partner of Nassau Capital Partners. Between 1980 and the formation of
Nassau Capital in 1995, Mr. Quigley was an attorney with the law firm of
Kirkland & Ellis in Chicago; a partner at Adler & Shaykin; and a partner at
Clipper Capital Partners.

Richard H. Patterson has served as a director of the Company since May
1997. From May 1986 to January 1999, Mr. Patterson served as a Partner of
Waller Capital Corporation, a media and communications investment banking
firm. Since August 1997, he has served as a Vice President of Waller-Sutton
Media LLC and Vice President of Waller-Sutton Management Group, Inc., two
entities which manage a media and telecommunications private equity fund.
Mr. Patterson is a member of the Board of Directors of Regent Communications,
Inc., which owns and operates radio stations in mid-to-small size markets.

Randall A. Hack has served as a director of the Company since August 1996.
Since January 1995, Mr. Hack has been a member of Nassau Capital L.L.C., an
investment management firm. From 1990 to 1994, he was the President and Chief
Executive Officer of Princeton University Investment Company, which manages
the endowment for Princeton University. Mr. Hack also serves on the Boards of
Directors of Sweetwater, Inc., OmniCell Technologies, Inc., Castle Tower
Holding Corp. and Mezzanine Capital Property Investors, Inc.

William H. Stewart has served as a director of the Company since August
1997. Mr. Stewart is Managing Director of Nassau Capital L.L.C. and joined
that firm in June 1995. From 1989 until joining Nassau, Mr. Stewart was a
portfolio manager and equity analyst at the Bank of New York. Mr. Stewart also
serves on the boards of Business Evolution Inc. and Signius Corporation. He is
a Chartered Financial Analyst and a member of the New York Society of Security
Analysts.

Pursuant to provisions contained in both the Company's certificate of
incorporation and a stockholders agreement, Mr. Kamine and the Nassau entities
are currently entitled to elect all of the Directors, three of whom are
nominated by Mr. Kamine (one of whom must be the President and Chief Executive
Officer), three of whom are nominated by Nassau and one of whom is nominated
by agreement of Mr. Kamine, Nassau and either Newcourt Communications Finance
Corporation or the holders of a majority of the outstanding shares of the
Company's Series C Cumulative Convertible Preferred Stock. The number of
Directors which Mr. Kamine is entitled to elect would be reduced to two if the
number of shares owned by him were to fall below two-thirds of the number of
shares of the Company initially issued to him, and to one if the number of
shares owned by him were to fall below one-third of the number of shares
initially issued to him. If his ownership were to fall below 5% of the number
of shares initially issued to him, Mr. Kamine would no longer be entitled to
elect any Directors pursuant to such provisions. Comparable reductions would
be made to the number of Directors which Nassau is entitled to elect if its
ownership were to fall below the specified levels. If a default relating to
payment occurs under the Senior Secured Credit Facility, and continues uncured
for 90 days, the holders of Series C Cumulative Convertible Preferred Stock
(currently Nassau, General Electric Capital Corporation and First Union Corp.)
will be entitled to elect two additional Directors, who will serve until the
default is cured.

Kamine/Besicorp Allegany L.P., an independent power company 50% owned by
corporations which Mr. Kamine owns, filed a voluntary petition to reorganize
its business under Chapter 11 of the Federal Bankruptcy Code in November 1995.
In October 1998, the bankruptcy court confirmed a plan of liquidation for this
entity. The United States Bankruptcy Court for the Northern District of
Indiana appointed a receiver for RimSat, a company which Mr. Sternberg co-
founded and for which he formerly served as Chief Operating Officer, and a
petition for bankruptcy under Chapter 11 of the Federal Bankruptcy Code with
respect to RimSat was filed in 1996. That proceeding is ongoing.

Directors hold office until the next Annual Meeting of stockholders or
until their successors are duly elected and qualified. Executive officers are
elected annually by the Board of Directors and serve at the discretion of the
Board of Directors.

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<PAGE>

Committees of the Board

The Board of Directors of the Company has authorized a Compensation
Committee to be composed of three members. The present members of the
Compensation Committee are Messrs. Kamine, Quigley and Patterson. The Board of
Directors has created an Executive Committee consisting of Mr. Kamine and Mr.
Quigley, or, in Mr. Quigley's absence, Mr. Stewart. The Board of Directors has
also created an Audit Committee consisting of Messrs. Lasher, Patterson and
Quigley.

Summary Compensation Table

The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by, or paid to, the Company's
Chief Executive Officer during 1998, and the other four most highly
compensated executive officers of the Company whose aggregate cash and cash
equivalent compensation exceeded $100,000 during the fiscal year ended
December 31, 1998 (collectively, the "Named Executive Officers").

Summary Compensation Table

<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
--------------------------------------- --------------
Securities
Name and Principal Other Annual Underlying
Position Year Salary Bonus Compensation (1) Options(#)(2)
------------------ ---- -------- -------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Michael A. Sternberg.... 1998 $275,000 $407,500 -- 65,000
President and Chief
Executive Officer 1997 $240,385 $187,500 $ 45,909 9,228

Roscoe C. Young II...... 1998 $218,270 $497,500 $ 52,189 32,500
Chief Operating Officer 1997 $180,000 $182,046 $198,180 2,309

Cynthia Worthman(3)..... 1998 $200,000 $187,500 -- 32,500
Vice President, Chief 1997 $175,000 $200,000 -- 3,461
Financial Officer,
Secretary and
Treasurer

Charles Rosenblum....... 1998 $168,270 $ 96,750 -- 5,000
Senior Vice President-- 1997 $150,000 $ 77,500 -- 691
Human Resources

Tricia Breckenridge..... 1998 $155,577 $ 75,000 -- 5,000
Executive Vice 1997 $104,138 $ 49,000 -- 691
President--Business
Development
</TABLE>
- --------
(1) The amount reported in this column for Mr. Sternberg in 1997 includes
relocation related expenses of $39,662 and personal use of a Company
automobile of $6,247. The amounts reported in this column for Mr. Young
include relocation related expenses of $47,377 and personal use of a
Company automobile of $4,812 for 1998, and relocation related expenses of
$196,029 and personal use of a Company automobile of $2,151 for 1997. The
aggregate value of the perquisites and other personal benefits, if any,
received by Mr. Sternberg in 1998 and by each of Ms. Worthman,
Mr. Rosenblum and Ms. Breckenridge in 1998 and 1997 have not been reflected
in this table because the amount was below the lesser of $50,000 or 10% of
the total of annual salary and bonus for the executive officer for the year.
(2) The options granted in 1997 were options to purchase shares of common
stock of one of the Company's principal operating subsidiaries, KMC
Telecom Inc. All of the options shown as granted in 1997 were cancelled
during the third quarter of 1998 and replaced by options to purchase
common stock of the Company. See "--Stock Option Grants". All options
granted during 1998 are options to purchase shares of common stock of the
Company.
(3) Ms. Worthman served in the capacities indicated throughout the year ended
December 31, 1998. James D. Grenfell became Executive Vice President,
Chief Financial Officer and Secretary in March 1999.

77
<PAGE>

Stock Option Grants

The Company was formed as a holding company in September 1997. Prior to the
establishment of the present holding company structure, during 1996 and 1997,
KMC Telecom Inc. (now one of the Company's principal operating subsidiaries)
granted options to purchase shares of its common stock, par value $.01 per
share, to employees, including the Named Executive Officers, and selected
employees of certain affiliated companies owned by Mr. Kamine pursuant to the
1996 Stock Purchase and Option Plan for Key Employees of KMC Telecom Inc. and
Affiliates.

In order to reflect the establishment of the Company's holding company
structure, on June 26, 1998, the Board of Directors of the Company adopted a
new stock option plan, the 1998 Stock Purchase and Option Plan for Key
Employees of KMC Telecom Holdings, Inc. and Affiliates, which authorizes the
grant of options to purchase shares of common stock of the Company. During the
third quarter of 1998, the Company replaced the options to purchase shares of
common stock of KMC Telecom Inc. previously granted under the 1996 KMC Telecom
Inc. plan (including all options shown as granted during 1997 in the preceding
table) with options to purchase shares of common stock of the Company granted
under the 1998 KMC Telecom Holdings, Inc. plan and granted options to
additional employees of the Company, including Mr. Lasher, under the 1998 KMC
Holdings plan. The Company may subsequently grant additional options.

The following table sets forth information regarding grants of options to
purchase shares of common stock made by the Company during 1998 to each of the
Named Executive Officers.

Option Grants in Fiscal Year 1998
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Number of Percent of Stock Price
Securities Total Options Fair Value of Appreciation For
Underlying Granted to Exercise or Common Stock Option Term (3)
Options Employees in Base Price on Date of Expiration ---------------------------------
Name Granted (#)(1) Fiscal 1998 ($/Share) Grant(2) Date (0%) (5%) (10%)
---- -------------- ------------- ----------- ------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael A.
Sternberg........... 39,000 $20.00 $130 9/30/08 $4,290,000 $7,478,496 $12,370,274
13,000 25.0% $30.00 $130 9/30/08 $1,300,000 $2,362,832 $ 3,993,425
13,000 $40.00 $130 9/30/08 $1,170,000 $2,232,832 $ 3,863,425
Roscoe C. Young II... 19,500 $20.00 $130 9/30/08 $2,145,000 $3,739,248 $ 6,185,137
6,500 12.5% $30.00 $130 9/30/08 $ 650,000 $1,181,416 $ 1,996,712
6,500 $40.00 $130 9/30/08 $ 585,000 $1,116,416 $ 1,931,712
Cynthia Worthman..... 19,500 $20.00 $130 9/30/08 $2,145,000 $3,739,248 $ 6,185,137
6,500 12.5% $30.00 $130 9/30/08 $ 650,000 $1,181,416 $ 1,996,712
6,500 $40.00 $130 9/30/08 $ 585,000 $1,116,416 $ 1,931,712
Charles Rosenblum.... 3,000 $20.00 $130 9/30/08 $ 330,000 $ 575,269 $ 951,560
1,000 1.9% $30.00 $130 9/30/08 $ 100,000 $ 181,756 $ 307,187
1,000 $40.00 $130 9/30/08 $ 90,000 $ 171,756 $ 297,187
Tricia Breckenridge.. 3,000 $20.00 $130 9/30/08 $ 330,000 $ 575,269 $ 951,560
1,000 1.9% $30.00 $130 9/30/08 $ 100,000 $ 181,756 $ 307,187
1,000 $40.00 $130 9/30/08 $ 90,000 $ 171,756 $ 297,187
</TABLE>
- --------
(1) 10% of the aggregate amount of each such option vests on each subsequent
six-month anniversary of the date of grant with options with the lowest
exercise price vesting first followed by others in ascending order of
exercise price. For purposes of vesting, options granted in 1998 under the
1998 KMC Telecom Holdings, Inc. plan to replace options granted in 1996 or
1997 under the 1996 KMC Telecom Inc. plan are deemed to have been granted
on the date of grant of the options which they replace.
(2) There is no active trading market for our common stock. The fair value
shown is based upon management's estimate of the fair value of our common
stock on the date in September 1998 when these options were granted under
the new 1998 KMC Telecom Holdings, Inc. plan. The grant prices were based
on the grant prices of the options previously granted in 1996 and 1997
under the 1996 KMC Telecom Inc. plan which were cancelled and replaced by
the options reflected in this table. The grant prices of the options
granted in

78
<PAGE>

1996 and 1997 had been based on the fair value of the shares of KMC Telecom
Inc. common stock on the respective dates of their grants.
(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (0%, 5% and 10%)
on common stock over the term of the options. These assumptions are based
on rules promulgated by the Securities and Exchange Commission and do not
reflect the Company's estimate of future stock price appreciation. Actual
gains, if any, on the stock option exercises and common stock holdings are
dependent on the timing of such exercises and the future value of the
common stock. There can be no assurance that the rates of appreciation
assumed in this table can be achieved or that the amounts reflected will
be received by the option holders.

Option Exercises and Option Year-End Value Table

No options were exercised during 1998 by any of the Named Executive
Officers. The following table sets forth information regarding the number and
year-end value of unexercised options to purchase shares of common stock held
at December 31, 1998 by each of the Named Executive Officers.

Fiscal 1998 Year-End Option Values

<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised "In-the-Money"
Shares Value Options at Options at
Acquired On Realized December 31, 1998 December 31, 1998
Name Exercise(#) ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
---- ----------- -------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Michael A. Sternberg.... -- -- 32,500/32,500 $3,575,000/$3,185,000
Roscoe C. Young II...... -- -- 16,250/16,250 $1,787,500/$1,592,500
Cynthia Worthman........ -- -- 16,250/16,250 $1,787,500/$1,592,500
Charles Rosenblum....... -- -- 3,500/1,500 $ 380,000/$ 140,000
Tricia Breckenridge..... -- -- 3,500/1,500 $ 380,000/$ 140,000
</TABLE>
- --------
(1) Options are "In-the-Money" if the fair market value of the underlying
securities exceeds the exercise price of the options. There is no active
trading market for the Company's common stock. The fair market value of
the option grants at December 31, 1998 was determined on the basis of
management's estimate of the fair value of the Company's common stock on
that date.

Director Compensation

Our Directors do not currently receive any compensation for their services
in such capacity, except that Mr. Lasher receives $25,000 per year in
connection with his services as Vice Chairman of the Board and Mr. Patterson
receives $25,000 per year in connection with his services as a Director.

Executive Employment Contracts

The Company has an employment contract with Harold N. Kamine, the Chairman
of its Board of Directors. The Company's employment agreement with Mr. Kamine
provides for a term of four years, effective as of January 1, 1999. Under the
agreement, Mr. Kamine's base salary is $450,000 per annum, and Mr. Kamine is
required to devote at least fifty percent of his time and attention to the
performance of his duties under the agreement. Mr. Kamine is entitled to
receive benefits generally received by senior executives of the Company,
including reimbursement of expenses incurred on behalf of the Company, and
participation in group plans. If Mr. Kamine's employment agreement is
terminated as a result of Mr. Kamine's death or permanent disability, or upon
the Company's breach of the agreement, he, or his estate, is entitled to a
severance payment in an amount equal to the lesser of (i) two times his annual
base salary and (ii) the aggregate unpaid base salary that would have been
paid to him during the remaining balance of the term of the employment
contract, subject to a minimum of one-half of his annual base salary.

79
<PAGE>

The Company has an employment contract with Michael A. Sternberg, its
President and Chief Executive Officer. The Company's employment agreement with
Mr. Sternberg provides for a term of four years, effective as of January 1,
1999. Under the agreement, Mr. Sternberg's base salary is $500,000 per annum
and he is entitled to be considered for an annual bonus in an amount to be
determined by the Compensation Committee of the Company's Board of Directors.
Mr. Sternberg is entitled to receive benefits generally received by Company
officers, including options to purchase Company stock, reimbursement of
expenses incurred on behalf of the Company, and a leased automobile. Upon
termination of the agreement, Mr. Sternberg is subject to a confidentiality
covenant and a twenty-four month non-competition agreement. If the Company
terminates Mr. Sternberg's employment without cause, he is entitled to a
severance payment in an amount equal to the lesser of (i) two times his annual
base salary and (ii) the aggregate unpaid base salary that would have been
paid to him during the remaining balance of the term of the employment
contract, subject to a minimum of one-half of his annual base salary.

The Company has an employment contract with Roscoe C. Young, II, its
Executive Vice President and Chief Operating Officer. The Company's employment
agreement with Mr. Young provides for a term of four years, effective as of
January 1, 1999. Under the agreement, Mr. Young's base salary is $450,000 per
annum and he is entitled to be considered for an annual bonus in an amount to
be determined by the Compensation Committee of the Company's Board of
Directors. Mr. Young is entitled to receive benefits generally received by
Company officers, including options to purchase Company stock, reimbursement
of expenses incurred on behalf of the Company, and a leased automobile. Upon
termination of the agreement, Mr. Young is subject to a confidentiality
covenant and a twenty-four month non-competition agreement. If the Company
terminates Mr. Young's employment without cause, he is entitled to a severance
payment in an amount equal to the lesser of (i) two times his annual base
salary and (ii) the aggregate unpaid base salary that would have been paid to
him during the remaining balance of the term of the employment contract,
subject to a minimum of one-half of his annual base salary.

Employee Plans

KMC Holdings Stock Option Plan. Employees, directors or other persons
having a close relationship with the Company or any of its affiliates are
eligible to participate in the 1998 Stock Purchase and Option Plan for Key
Employees of KMC Telecom Holdings, Inc. and Affiliates. However, neither
Mr.Kamine nor any person employed by Nassau or any affiliate of Nassau is
eligible for grants under the plan. The 1998 KMC Telecom Holdings, Inc. plan
is administered by the Compensation Committee of the Board of Directors of the
Company. The Compensation Committee is authorized to grant (i) options
intended to qualify as incentive stock options, (ii) non-qualified stock
options, (iii) stock appreciation rights, (iv) restricted stock, (v)
performance units, (vi) performance shares and (vii) certain other types of
awards.

The number of shares of Company common stock available for grant under the
plan is 600,000. No participant may receive more than 75,000 shares of Company
common stock under the plan.

The Compensation Committee has the power and authority to designate
recipients of grants under the plan, to determine the terms, conditions and
limitations of grants under the plan and to interpret the provisions of the
plan. The exercise price of all incentive stock options granted under the plan
must be at least equal to the fair market value (as defined in the plan) of
Company common stock on the date the options are granted and the exercise
price of all non-qualified options granted under the plan must be at least
equal to 50% of the fair market value of Company common stock on the date the
options are granted. The maximum term of each option granted under the plan
will be 10 years. Options will become exercisable at such times and in such
installments as the Compensation Committee provides in the terms of each
individual option.

80
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company and certain affiliated companies owned by Harold N. Kamine, its
Chairman of the Board, share certain administrative services. The entity which
bears the cost of the service is reimbursed by the other for the other's
proportionate share of such expenses. These shared services do not include the
rent paid by the Company for its headquarters offices to an affiliate of
Mr. Kamine under the lease described below. The Company reimbursed Kamine-
affiliated companies for these shared services an aggregate of approximately
$136,000, for 1998.

From May 1, 1996 through January 29, 1998, Kamine Development Corp., an
affiliate of the Company, was paid a fee at an annual rate of $266,000 as
reimbursement for the services of Mr. Kamine as Chairman of the Board of the
Company. The amount of this fee was reduced to $100,000 per annum as of
January 29, 1998 and it was terminated effective December 31, 1998. The amount
of the fee paid in 1998 is included in the shared services payment described
in the first paragraph above. Effective January 1, 1999, Mr. Kamine became an
employee of the Company and he is currently paid a salary at the rate of
$450,000 per annum for his services as Chairman of the Board.

Effective June 1, 1996, the Company entered into a lease agreement with
Kamine Development Corp. (an entity controlled by Mr. Kamine) pursuant to
which the Company leases its headquarters office in Bedminster, New Jersey.
The lease expires in January 2007. The lease provides for a base annual rental
of approximately $217,000 (adjusted periodically for changes in the consumer
price index), plus operating expenses.

In February, 1998, the Company loaned to Roscoe C. Young II, the Company's
Chief Operating Officer, the principal sum of $350,000. The loan is evidenced
by a promissory note which bears interest at the rate of 6% per annum.
Interest and principal are payable at maturity on February 13, 2003. In June
1998, the Company loaned Mr. Young an additional $110,000, of which $55,000
was repaid within thirty (30) days. The balance of the loan is evidenced by a
promissory note which bears interest at the rate of 6% per annum. It is
payable in December 1999. The largest aggregate amount of loans outstanding to
Mr. Young at any time during 1998 was $460,000. The aggregate amount of loans
outstanding to Mr. Young at September 30, 1999 was $405,000.

In March, 1998, the Company made a bridge loan to Tricia Breckenridge in
the principal amount of $150,000. Ms. Breckenridge is Executive Vice
President--Business Development of the Company. The loan which bore interest
at the rate of 6% per annum, was repaid in full in 1998.

Pursuant to an agreement dated as of January 1, 1999, the Company is
entitled to utilize a Citation III business jet chartered by Bedminster
Aviation LLC, a limited liability company wholly owned by Mr. Kamine, for a
fixed price of $2,600 per hour of flight time. The Citation III will enable up
to eight employees, guests or representatives of the Company to utilize local
airfields and visit multiple cities in which the Company either has an
operating system or is building a system, without the necessity of returning
to commercial hubs such as Atlanta or St. Louis. The Company has agreed to use
its best efforts to utilize the Citation III fifty hours per quarter during
1999. However, the Company is under no obligation to do so and has not
guaranteed any financial arrangements with respect to the aircraft or to
Bedminster Aviation LLC.

On July 1, 1999, the Company acquired all of the membership interests of
KMC Services LLC from Harold N. Kamine, the Chairman of our Board of
Directors, for nominal consideration. KMC Services LLC offers a leasing
program for equipment physically installed at a customer's premises, known as
CPE equipment, for the Company to integrate into its ClearStarsm Advantage
program. As of June 30, 1999, the Company had loaned KMC Services LLC an
aggregate of approximately $709,000. The loan bore interest at the rate of 10%
per annum and was to have been payable December 31, 1999. The acquisition was
accounted for as a combination of entities under common control, and no
changes were made to the historical cost basis of KMC Services LLC's assets.
Accordingly, during the second quarter of 1999, the Company reduced the
carrying value of its $709,000

81
<PAGE>

loan receivable from KMC Services LLC to an amount equal to the value of KMC
Services LLC's net assets at the acquisition date.

Pursuant to agreements entered into in September and October 1997 between
the Company and each of the holders of Series A Cumulative Convertible
Preferred Stock and Series C Cumulative Convertible Preferred Stock, each such
holder has agreed to forego the payment of accumulated dividends on its shares
of Series A Cumulative Convertible Preferred Stock and Series C Cumulative
Convertible Preferred Stock of the Company from the date of such Dividend
Agreement through the date on which such holder disposes of its interest in
the Company; provided, that, upon such disposition, such holder realizes not
less than a ten percent (10%) compound rate of return on its investment for
the period from the date of such Dividend Agreement to the date of such
disposition.

Mr. Kamine, Nassau Capital Partners, L.P., NAS Partners I L.L.C., Newcourt
Communications Finance Corporation, General Electric Capital Corporation,
First Union Corp. (the successor to CoreStates Holdings, Inc.) and First Union
National Bank are parties to a stockholders agreement relating to the Company.
First Union National Bank and First Union Corp. are affiliates of First Union
Capital Markets. Pursuant to this stockholder's agreement and the Company's
certificate of incorporation, Mr. Kamine and Nassau are currently entitled to
elect all of the Company's seven Directors, with each entitled to nominate
three Directors, and the seventh to be nominated by agreement of Mr. Kamine,
Nassau and either Newcourt Communications Finance Corporation or the holders
of a majority of the outstanding shares of the Company's Series C Cumulative
Convertible Preferred Stock. The number of Directors which Mr. Kamine is
entitled to elect would be reduced to two if the number of shares owned by him
were to fall below two-thirds of the number of shares of the Company initially
issued to him, and to one if the number of shares owned by him were to fall
below one-third of the number of shares initially issued to him. If his
ownership were to fall below 5% of the number of shares initially issued to
him, Mr. Kamine would no longer be entitled to elect any Directors pursuant to
such provisions. Comparable reductions would be made to the number of
Directors which Nassau is entitled to elect if its ownership were to fall
below the specified levels.

Newcourt Commercial Finance Corporation (an affiliate of Newcourt Capital,
Inc.) has provided financing for the Company as one of the lenders under the
Senior Secured Credit Facility. Pursuant to the Senior Secured Credit
Facility, the lenders have agreed to make available, subject to certain
conditions, up to a total of $250.0 million for construction and development
of the Company's 23 existing networks. The Company paid Newcourt Capital, Inc.
and its affiliates an aggregate of $1,717,000 in fees, discounts and
commissions during the year ended December 31, 1998.

Upon closing of its offering of Senior Discount Notes in January 1998, the
Company paid Nassau approximately $600,000 for dividend arrearages on its
shares of Series A Cumulative Convertible Preferred Stock of KMC Telecom Inc.
which Nassau had exchanged for its shares of Series A Cumulative Convertible
Preferred Stock of the Company.

Pursuant to an agreement among the Company, Mr. Kamine and Nassau, for 1998
Nassau received $100,000 as a financial advisory fee and as compensation for
the Nassau designees who served on the Board of Directors of the Company.
Nassau will be paid $450,000 as a financial advisory fee for 1999.

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<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information as of September 30, 1999
with respect to the beneficial ownership of shares of common stock by (i) each
person known to the Company to be a beneficial owner of more than 5% of the
outstanding shares of common stock, (ii) each of the Company's directors, (iii)
each of the Named Executive Officers, and (iv) all executive officers and
directors as a group.

<TABLE>
<CAPTION>
Number of Percentage
Name and Address of Beneficial Owner Shares (1) Ownership(1)
- ------------------------------------ ---------- ------------
<S> <C> <C>
Harold N. Kamine..................................... 573,835 67.3%
c/o Kamine Development Corp.
1545 Route 206
Bedminster, NJ 07921

Nassau Capital Partners L.P.......................... 661,454(2) 44.1%
c/o Nassau Capital L.L.C.
22 Chambers Street
Princeton, NJ 08542

Newcourt Capital, Inc. .............................. 191,033.2(3) 21.6%
2 Gate Hall Drive
Parsippany, NJ 07054

First Union Corp..................................... 146,742.6(4) 14.8%
301 South College St.
Charlotte, NC 28288

General Electric Capital Corporation................. 200,476(5) 19.0%
120 Long Ridge Road
Stamford, CT 06927

CIBC Inc............................................. 44,104 5.2%
425 Lexington Avenue
New York, New York 10017

Lucent Technologies Inc. ............................ 6,433(6) 0.8%
283 King George Rd.
Warren, NJ 07059

Michael A. Sternberg................................. 39,000(7) 4.4%
c/o KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, New Jersey 07921

Gary E. Lasher....................................... 6,000(7) 0.7%
c/o KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, New Jersey 07921

John G. Quigley...................................... 661,454(8) 44.1%
c/o Nassau Capital L.L.C.
22 Chambers Street
Princeton, NJ 08542
</TABLE>

83
<PAGE>

<TABLE>
<CAPTION>
Number of Percentage
Name and Address of Beneficial Owner Shares (1) Ownership(1)
- ------------------------------------ ---------- ------------
<S> <C> <C>
Richard H. Patterson............................... 2,000(7) 0.2%
c/o Waller Capital Corporation
30 Rockefeller Center
Suite 4350
New York, NY 10112

Randall A. Hack.................................... 661,454(8) 44.1%
c/o Nassau Capital L.L.C.
22 Chambers Street
Princeton, NJ 08542

William H. Stewart................................. 661,454(9) 44.1%
c/o Nassau Capital L.L.C.
22 Chambers Street
Princeton, NJ 08542

Roscoe C. Young II................................. 19,500(7) 2.2%
c/o KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ 07921

Charles Rosenblum.................................. 4,600(7) 0.5%
c/o KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ 07925

Tricia Breckenridge................................ 4,600(7) 0.5%
c/o KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ 07921

Directors and Officers of the Company as a Group
(11 persons)...................................... 1,315,389(2) 83.2%
</TABLE>
- --------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares subject to options, warrants and convertible securities
held by that person that are currently exercisable or exercisable within
60 days of September 30, 1999 are deemed outstanding. Such shares,
however, are not deemed outstanding for the purposes of computing the
percentage ownership of any other person. Except as indicated in the
footnotes to this table, each shareholder named in the table has sole
voting and investment power with respect to the shares set forth opposite
such shareholder's name.
(2) Includes 600,000 shares of common stock which Nassau and NAS Partners I
L.L.C., of which Messrs. Quigley, Hack and Stewart are members, have the
right to acquire upon conversion of 122,708 and 1,092 shares of Series A
Cumulative Convertible Preferred Stock, respectively, and 47,619 shares of
common stock which Nassau and NAS Partners I, L.L.C. have the right to
acquire upon conversion of 24,778 and 222 shares of Series C Cumulative
Convertible Preferred Stock, respectively. These are the same shares
listed for Messrs. Quigley, Hack and Stewart.
(3) Includes 159,184.5 shares of common stock held by Newcourt Communications
Finance Corporation, a subsidiary of Newcourt Capital, Inc., and 31,848.7
shares of common stock which Newcourt Commercial Finance Corporation, also
a subsidiary of Newcourt Capital, Inc., has the right to acquire upon the
exercise of warrants.
(4) Includes 95,238 shares of common stock which First Union Corp. has the
right to acquire upon conversion of 50,000 shares of Series C Cumulative
Convertible Preferred Stock of the Company, and 44,587 shares which First
Union Corp. has the right to acquire upon the exercise of warrants.

84
<PAGE>

(5) Includes 190,476 shares of common stock which General Electric Capital
Corporation has the right to acquire upon conversion of 100,000 shares of
Series C Cumulative Convertible Preferred Stock of the Company and 10,000
shares of common stock which General Electric Capital Corporation has the
right to acquire upon exercise of a warrant.
(6) Represents shares of common stock which Lucent Technologies Inc. has the
right to acquire upon the exercise of warrants.
(7) Represents shares of common stock which the holder has the right to
acquire upon the exercise of options that are exerciseable within sixty
days of September 30, 1999 pursuant to the 1998 Stock Purchase and Option
Plan for Key Employees of KMC Telecom Holdings, Inc. and Affiliates.
(8) Messrs. Quigley and Hack, Directors of the Company, are members of Nassau
Capital L.L.C., the general partner of Nassau; accordingly Messrs. Quigley
and Hack may be deemed to be beneficial owners of such shares and for
purposes of this table they are included. Messrs. Quigley and Hack
disclaim beneficial ownership of all such shares within the meaning of
Rule 13d-3 under the Exchange Act. Messrs. Quigley and Hack are also
members of NAS Partners I, L.L.C.; accordingly Messrs. Quigley and Hack
may be deemed to be beneficial owners of such shares and for purposes of
this table they are included. Messrs. Quigley and Hack disclaim beneficial
ownership of all such shares within the meaning of Rule 13d-3 under the
Exchange Act.
(9) All of the shares indicated as owned by Mr. Stewart are owned directly or
indirectly by Nassau and are included because of Mr. Stewart's affiliation
with Nassau. Mr. Stewart is also a member of NAS Partners I, L.L.C.;
accordingly, Mr. Stewart may be deemed to be the beneficial owner of such
shares and for purposes of this table they are included. Mr. Stewart
disclaims beneficial ownership of all of these shares within the meaning
of Rule 13d-3 under the Exchange Act.

Stockholders Agreement. The Amended and Restated Stockholders Agreement
dated as of October 31, 1997 restricts the ability of the parties to that
agreement to transfer shares in the Company to persons not affiliated with or
related to such parties. Pursuant to this stockholders agreement and the
Company's certificate of incorporation, Mr. Kamine and Nassau are currently
entitled to elect all of the Directors, three of whom are nominated by
Mr. Kamine (one of whom must be the President and Chief Executive Officer),
three of whom are nominated by Nassau and one of whom is nominated by agreement
of Mr. Kamine, Nassau and either Newcourt Communications Finance Corporation or
the holders of a majority of the outstanding shares of the Company's Series C
Cumulative Convertible Preferred Stock. The number of Directors which Mr.
Kamine is entitled to elect would be reduced to two if the number of shares
owned by him were to fall below two-thirds of the number of shares of the
Company initially issued to him, and to one if the number of shares owned by
him were to fall below one-third of the number of shares initially issued to
him. If his ownership were to fall below 5% of the number of shares initially
issued to him, Mr. Kamine would no longer be entitled to elect any Directors
pursuant to such provisions. Comparable reductions would be made to the number
of Directors which Nassau is entitled to elect if its ownership were to fall
below the specified levels. If a default relating to payment occurs under the
Senior Secured Credit Facility, and continues uncured for 90 days, the holders
of Series C Cumulative Convertible Preferred Stock (currently Nassau, General
Electric Capital Corporation and First Union Corp.) will be entitled to elect
two additional Directors, who will serve until the default is cured.

Each of Nassau, First Union Corp., General Electric Capital Corporation and
Newcourt Communications Finance Corporation has a "put right" entitling it to
have the Company repurchase its shares for the fair market value of such
shares if no Liquidity Event (defined as (i) an initial public offering with
gross proceeds of at least $40.0 million, (ii) the sale of substantially all
of the stock or assets of the Company or (iii) the merger or consolidation of
the Company with one or more other corporations) has taken place by the later
of (x) October 22, 2003 or (y) 90 days after the final maturity date of the
notes. First Union Corp., General Electric Capital Corporation and Newcourt
Communications Finance Corporation may not exercise such put rights unless
Nassau has exercised its put right. The indenture applicable to the notes, the
indenture applicable to our Senior Discount Notes and the terms of our other
indebtedness will limit our ability to repurchase such shares.

85
<PAGE>

Certain of the current stockholders have demand registration rights with
respect to their shares of our common stock commencing on the earlier of June
5, 2000 (in the case of Mr. Kamine or Nassau) and the date on which the
Company completes an initial public offering of common stock (and any related
holdback period expires). Each of the holders of registrable securities also
has certain piggyback registration rights. The parties to the stockholders
agreement have agreed not to effect any public sale or distribution of common
stock of the Company, or securities convertible into such common stock, within
180 days of the effective date of any demand or piggyback registration.

86
<PAGE>

DESCRIPTION OF CERTAIN INDEBTEDNESS AND PREFERRED STOCK

Senior Discount Notes

On January 29, 1998 we issued $460.8 million aggregate principal amount at
maturity of 12 1/2% Senior Discount Notes due 2008. On August 11, 1998, we
exchanged those notes for $460.8 million aggregate principal amount at
maturity of notes that had been registered under the Securities Act of 1933.
The terms of the Senior Discount Notes are substantially similar to those of
the notes, except that the notes pay cash interest, mature after the Senior
Discount Notes and have a different interest rate.

The Senior Discount Notes are unsecured, unsubordinated obligations of the
Company and were sold at a substantial discount from their principal amount at
maturity. We are not required to make any payment of interest on the Senior
Discount Notes prior to August 15, 2003. The Senior Discount Notes will fully
accrete to face value on February 15, 2003. From and after February 15, 2003,
the Senior Discount Notes will bear interest, which will be payable in cash,
at the rate of 12 1/2% per annum on February 15 and August 15 of each year,
commencing August 15, 2003.

The indenture pursuant to which our Senior Discount Notes were issued
contains certain covenants that, among other things, limit our ability to
incur additional indebtedness, pay dividends or make certain other
distributions, enter into transactions with stockholders and affiliates and
create liens on our assets. We have the option to redeem the Senior Discount
Notes at any time after February 15, 2003, at redemption prices ranging from
100% to 106.25% of their principal amount at maturity, plus any accrued and
unpaid interest. Before April 15, 2000, we may also redeem up to 35% of the
aggregate principal amount at maturity of the Senior Discount Notes with the
proceeds from sales of our common equity at a redemption price equal to 112.5%
of their accreted value on such date. Upon a change of control, we are
required to make an offer to purchase the Senior Discount Notes at a purchase
price equal to 101% of their accreted value.

Senior Secured Credit Facility

Under our Senior Secured Credit Facility, Newcourt Commercial Finance
Corporation, First Union National Bank, General Electric Capital Corporation
and Canadian Imperial Bank of Commerce are the lead lenders for a $250.0
million senior secured credit facility for certain of our operating
subsidiaries, KMC Telecom Inc., KMC Telecom II, Inc., their respective wholly-
owned limited liability companies, and KMC Telecom of Virginia, Inc., which
own our existing 23 systems. Affiliates of certain of the placement agents
with respect to the original notes are lenders under this facility. Initially,
the proceeds of loans under this senior secured credit facility may be used
for the construction of fiber optic telecommunications networks, and for the
payment of transaction fees and expenses, subject to certain conditions. Once
the borrowers satisfy certain financial tests the proceeds of loans may also
be used by these subsidiaries for working capital and other general corporate
purposes, subject to certain conditions. The Senior Secured Credit Facility
includes a $175.0 million eight year revolving loan and a $75.0 million eight
and one-half year term loan.

We have unconditionally guaranteed the repayment of the Senior Secured
Credit Facility when such repayment is due. We have also agreed to pay all
amounts outstanding under the Senior Secured Credit Facility, on demand, upon
the occurrence and during the continuation of any event of default. We have
pledged the shares of KMC Telecom Inc. and KMC Telecom II, Inc. to secure our
obligations under the guaranty. KMC Telecom Inc. and KMC Telecom II, Inc.
have, in turn, pledged their ownership interests in their subsidiaries, as
well as all of their other assets and the assets of their subsidiaries to
Newcourt Commercial Finance Corporation.

The Senior Secured Credit Facility contains a number of negative covenants
that, among other things, restrict the ability of the borrowers thereunder to
sell or lease assets, redeem stock, pay dividends or make any other payments
(including payments of principal or interest on loans) to us or incur
additional indebtedness or act as guarantor for the debt of any persons,
subject to certain conditions.

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The borrowers are required to comply with certain financial tests and
maintain certain financial ratios, including, among others, a ratio of total
debt to contributed capital, certain minimum revenues, maximum EBITDA losses
and minimum EBITDA, maximum capital expenditures and minimum access lines. The
Senior Secured Credit Facility also includes customary events of default,
including, among others, a cross-default to other material indebtedness,
bankruptcy, breach of representations and warranties, a material adverse
change, and the occurrence of a change of control.

Lucent Facility

On February 4, 1999, our subsidiary, KMC Telecom III, Inc. and its
subsidiary limited liability company, which will own the 14 additional
networks currently planned for completion by the end of the first half of
2000, entered into a secured credit facility with Lucent Technologies Inc. The
Lucent Facility provides for borrowings by KMC Telecom III, Inc. and its
subsidiary to fund certain equipment acquisition costs and related expenses,
and will mature on January 1, 2007. The Lucent Facility provides for an
aggregate commitment of up to $600.0 million available as follows: (i) $125.0
million was immediately available to purchase Lucent products, (ii) $125.0
million becomes available upon the borrowers' receipt of an additional $35.0
million of funded equity or qualified intercompany loans, and (iii) up to an
additional $350.0 million becomes available upon (A) Lucent's selling
commitments to make loans such that Lucent's aggregate commitment does not
exceed $250.0 million at any one time, (B) the borrowers' complying with
certain financial covenants, (C) the borrowers' delivery of a business plan to
Lucent and (D) the Company or KMC Telecom III Holdings, Inc. raising and
contributing at least $300.0 million in high yield debt or equity to KMC
Telecom III, Inc.

We have guaranteed up to $250.0 million of the Lucent Facility, and KMC
Telecom III Holdings, Inc. has agreed to pay all amounts outstanding under the
Lucent Facility, on demand, upon the occurrence and during the continuation of
any event of default. KMC Telecom III Holdings, Inc. has pledged the shares of
KMC Telecom III, Inc., and KMC Telecom III, Inc. has pledged its ownership
interests in its subsidiary limited liability company, to Lucent. In addition,
KMC Telecom III, Inc. and its subsidiary have each granted a security interest
in all of their assets to Lucent.

The Lucent Facility contains a number of negative covenants that, among
other things, restrict the ability of the borrowers to sell or lease assets,
redeem stock, pay dividends or make any other payments (including payments of
principal or interest on loans) to us or incur additional indebtedness or act
as guarantor for the debt of any person.

The borrowers are required to comply with certain financial tests and
maintain certain financial ratios, including, among others, a ratio of total
debt to contributed capital, certain minimum revenues, maximum EBITDA losses
and minimum EBITDA, maximum capital expenditures and minimum access lines. The
Lucent Facility also includes customary events of default, including, among
others, a cross-default to other material indebtedness, bankruptcy, breach of
representations and warranties, a material adverse change, and the occurrence
of a change of control.

Preferred Stock

Our board of directors has authority, subject to certain consent rights of
holders of preferred stock, to authorize the issuance of classes of preferred
stock from time to time in one or more series, with such designations,
preferences and relative rights within the limits prescribed by the Delaware
General Corporation Law, as may be determined by the board of directors. The
designations, preferences and rights of the existing series of preferred stock
are set forth below:

Series A Cumulative Convertible Preferred Stock. There are 123,800 shares
of Series A Cumulative Convertible Preferred Stock authorized and outstanding.
Series A Preferred Stock has a liquidation preference of $100 per share and an
annual dividend equal to 7.0% of the liquidation preference, payable
quarterly, when and if declared by the Board of Directors out of funds legally
available therefor. Unpaid dividends accumulate and

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the unpaid amount increases at the annual rate of 7.0%, compounded quarterly.
All accumulated but unpaid dividends will be paid upon the occurrence of a
Realization Event (defined as (i) an initial public offering with gross
proceeds of at least $40.0 million or (ii) sale of substantially all the
assets or stock of the Company or the merger or consolidation of the Company
into one or more other corporations). Pursuant to an agreement among Nassau,
NAS and the Company dated September 22, 1997, Nassau and NAS have agreed to
forego the payment of dividends from September 22, 1997 through the date on
which Nassau or NAS disposes of its interest in the Company; provided that at
the time of such disposition Nassau or NAS, as the case may be, has received
not less than a 10% annual compound rate of return during the period it held
the Series A Preferred Stock.

Series A Preferred Stock is convertible into common stock at a conversion
price equal to $20.63 per share of common stock, subject to adjustment upon
the occurrence of certain events. Holders of Series A Preferred Stock may
convert all or part of such shares to common stock at any time and from time
to time. Upon conversion, the holders are entitled to receive a cash payment
of the accumulated but unpaid dividends; provided, however, that the Company
may substitute common shares having a fair market value equal to the amount of
such cash payment if the conversion occurs before a Realization Event. Series
A Preferred Stock will automatically convert into common stock upon the
occurrence of a Qualified Public Offering (defined as the first sale of common
stock pursuant to a registration statement filed under the Securities Act in
which the Company receives gross proceeds of at least $40.0 million, provided
that the per share price at which such shares are sold in such offering is at
least four times the conversion price of the Series A Preferred Stock).

The holders of Series A Preferred Stock, except as otherwise provided in
the Company's certificate of incorporation, are entitled to vote on all
matters voted on by holders of common stock. Each share of Series A Preferred
Stock is entitled to a number of votes equal to the number of shares of common
stock into which such share is convertible. Without the prior consent of two-
thirds of the shares of Series A Preferred Stock, among other things, the
Company may not increase the number of shares of preferred stock (of whatever
series) authorized for issuance, or declare or pay any dividends on shares of
common stock or other junior shares.

Series C Cumulative Convertible Preferred Stock. There are 350,000 shares
of Series C Cumulative Convertible Preferred Stock authorized of which 175,000
shares are outstanding. Series C Preferred Stock has a liquidation preference
of $100 per share and an annual dividend equal to 7.0% of the liquidation
preference, payable quarterly, when and if declared by the Board of Directors
out of funds legally available therefor. Unpaid dividends accumulate and the
unpaid amount increases at the annual rate of 7.0%, compounded quarterly. All
accumulated but unpaid dividends will be paid upon the occurrence of a
Realization Event. Pursuant to the Purchase Agreement among the Company, GECC,
First Union Corp. and Nassau dated as of October 31, 1997, each current holder
of Series C Preferred Stock has agreed to forego the payment of dividends that
accumulate during the period from October 31, 1997 through the date on which
such holder disposes of its interest in the Company; provided that at the time
of such disposition it has received not less than a 10% annual compound rate
of return during such period.

Series C Preferred Stock is convertible into common stock at a conversion
price equal to (i) from the date of initial issuance to but excluding the date
which is 30 months after the date of such initial issuance, $52.50 per share
of common stock; provided, however, that if a Realization Event occurs during
such 30-month period the conversion price will be equal to a fraction the
numerator of which is (A) the consideration per share of common stock (on a
fully diluted basis) received in connection with such Realization Event, and
the denominator of which is (B) 1.30 raised to a number equal to the number of
years (or fraction thereof) from the date of initial issuance of the Series C
Preferred Stock until the date of such Realization Event, but in no case
greater than $52.50 nor less than $42.18 per share of common stock and (ii)
from and after the date which is 30 months after the date of initial issuance,
$42.18, subject to adjustment upon the happening of certain events. Holders of
Series C Preferred Stock may convert all or part of such shares to common
stock at any time and from time to time. Upon conversion, the holders are
entitled to receive a cash payment of the accumulated but unpaid dividends;
provided, however, that the Company may substitute common shares having a fair
market value equal to the amount of such cash payment if the conversion occurs
before a Realization Event. Series C Preferred Stock will automatically
convert into common stock upon the occurrence of a Qualified Public Offering.

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The holders of Series C Preferred Stock, except as otherwise provided in
the Company's certificate of incorporation, are entitled to vote on all
matters voted on by holders of common stock. Each share of Series C Preferred
Stock is entitled to a number of votes equal to the number of shares of common
stock into which such share is convertible. Without the prior consent of two-
thirds of the shares of Series C Preferred Stock, among other things, the
Company may not increase the number of shares of preferred stock (of whatever
series) authorized for issuance, or declare or pay any dividends on shares of
common stock or other junior shares.

The Series C Preferred Stock is subject to redemption at the option of the
Company, in whole but not in part, in connection with an "Acquisition Event."
An Acquisition Event is defined to mean any merger or consolidation of the
Company with any other company, person or entity, whether or not the Company
is the surviving entity, as a result of which the holders of the Company's
common stock (determined on a fully diluted basis) will hold less than a
majority of the outstanding shares of common stock or other equity interest of
the company, person or entity resulting from such transaction, or any parent
of such entity.

Series D Cumulative Convertible Preferred Stock. There are 25,000 shares of
Series D Cumulative Convertible Preferred Stock authorized, none of which are
currently outstanding. Series D Preferred Stock has a liquidation preference
of $100 per share and an annual dividend equal to 7.0% of the liquidation
preference, payable quarterly, when and if declared by the Board of Directors
out of funds legally available therefor. Unpaid dividends accumulate and the
unpaid amount increases at the annual rate of 7.0%, compounded quarterly. All
accumulated but unpaid dividends will be paid upon the occurrence of a
Realization Event.

Series D Preferred Stock is convertible at any time into an equal number of
shares of Series C Preferred Stock. In addition, Series D Preferred Stock is
convertible into common stock at a conversion price equal to (i) from the date
of initial issuance to but excluding the date which is 30 months after the
date of such initial issuance, $52.50 per share of common stock; provided,
however, that if a Realization Event occurs during such 30-month period the
conversion price will be equal to a fraction the numerator of which is (A) the
consideration per share of common stock (on a fully diluted basis) received in
connection with such Realization Event, and the denominator of which is (B)
1.30 raised to a number equal to the number of years (or fraction thereof)
from the date of initial issuance of the Series D Preferred Stock until the
date of such Realization Event, but in no case greater than $52.50 nor less
than $42.18 per share of common stock and (ii) from and after the date which
is 30 months after the date of initial issuance, $42.18, subject to adjustment
upon the happening of certain events. Holders of Series D Preferred Stock may
convert all or part of such shares to common stock at any time and from time
to time. Upon conversion, the holders are entitled to receive a cash payment
of the accumulated but unpaid dividends; provided, however, that the Company
may substitute common shares having a fair market value equal to the amount of
such cash payment if the conversion occurs before a Realization Event. Series
D Preferred Stock will automatically convert into common stock upon the
occurrence of a Qualified Public Offering.

The holders of Series D Preferred Stock have voting rights in certain
circumstances. The outstanding shares of Series D Preferred Stock are subject
to redemption at the option of the Company, in whole but not in part, in
connection with an Acquisition Event.

Series E Senior Redeemable, Exchangeable, PIK Preferred Stock. There are
575,000 shares of Series E Senior Redeemable, Exchangeable, PIK Preferred
Stock authorized, of which 65,004 are currently outstanding. Series E
Preferred Stock has a liquidation preference of $1,000 per share and an annual
dividend equal to 14.5% of the liquidation preference, payable quarterly. On
or before January 15, 2004, the Company may pay dividends in cash or in
additional fully-paid and nonassessable shares of Series E Preferred Stock.
After January 15, 2004, dividends must be paid in cash, subject to certain
conditions. Unpaid dividends accrue at the dividend rate of the Series E
Preferred Stock, compounded quarterly.

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redeem the Series E Preferred Stock, in whole or in part, at any time after
April 15, 2004, at redemption prices beginning at 110% and declining to 100%
of the liquidation preference of the Series E Preferred Stock, plus all
accrued and unpaid dividends to the date of redemption.

Before April 15, 2002, we may also redeem up to 35% of the aggregate
liquidation preference of Series E Preferred Stock with the proceeds of one or
more sales of our capital stock at a redemption price equal to 110% of the
liquidation preference on the redemption date.

Upon a change of control, we are required to make an offer to repurchase
the Series E Preferred Stock for cash at a purchase price of 101% of the
liquidation preference thereof, together with all accumulated and unpaid
dividends to the date of purchase.

The Series E Preferred Stock is not convertible. The Company may, at the
sole option of the Board of Directors (subject to the legal availability of
funds therefor), exchange all, but not less than all, of the Series E
Preferred Stock then outstanding, including any shares of Series E Preferred
Stock issued as payment for dividends, for a new series of subordinated
debentures (the "Exchange Debentures") issued pursuant to an exchange
debenture indenture. The holders of Series E Preferred Stock are entitled to
receive on the date of any such exchange, Exchange Debentures having an
aggregate principal amount equal to (i) the total of the liquidation
preference for each share of Series E Preferred Stock exchanged, plus (ii) an
amount equal to all accrued but unpaid dividends payable on such share. In the
event such exchange would result in the issuance of Exchange Debentures in a
principal amount less than $1,000 or which is not an integral multiple of
$1,000 (such principal amount less than $1,000 or the difference between such
principal amount and the highest integral of $1,000 which is less than such
principal amount, as the case may be, is hereinafter referred to as the
"Fractional Principal Amount"), the Company may, subject to any restrictions
in the terms of the then-existing Indebtedness of the Company, at the option
of the Board of Directors, pay cash to each holder of Series E Preferred Stock
in lieu of Fractional Principal Amounts of Exchange Debentures otherwise
issuable upon exchange of the Series E Preferred Stock.

Series F Senior Redeemable, Exchangeable, PIK Preferred Stock. There are
55,000 shares of Series F Senior Redeemable, Exchangeable, PIK Preferred Stock
authorized, 44,177 shares of which are currently outstanding. Series F
Preferred Stock has a liquidation preference of $1,000 per share and an annual
dividend equal to 14.5% of the liquidation preference, payable quarterly. On
or before January 15, 2004, the Company may pay dividends in cash or in
additional fully-paid and nonassessable shares of Series F Preferred Stock.
After January 15, 2004, dividends must be paid in cash, subject to certain
conditions. Unpaid dividends accrue at the dividend rate of the Series F
Preferred Stock, compounded quarterly.

We have the option to redeem the Series F Preferred Stock at any time, in
whole or in part, at a redemption price equal to 110% of the liquidation
preference on the redemption date, plus all accrued and unpaid dividends to
the date of redemption. If we fail to redeem all shares of Series F Preferred
Stock prior to the date that is the earlier of (i) the date that is sixty days
after the date on which we close an underwritten primary offering of at least
$200.0 million of our common stock pursuant to an effective registration
statement under the Securities Act or (ii) February 4, 2001, we must issue to
certain holders of Series E Preferred Stock and Series F Preferred Stock,
warrants to purchase up to an aggregate of 5.0% of the common stock of the
Company outstanding as of the date the Series F Preferred Stock was issued.
The number of warrants to be issued will be reduced pro rata based on the
number of shares of Series F Preferred Stock redeemed.

Upon a change of control, we are required to make an offer to repurchase
the Series F Preferred Stock for cash at a purchase price of 101% of the
liquidation preference thereof, together with all accumulated and unpaid
dividends to the date of purchase.

Upon the earlier of (i) the date that is sixty days after the date on which
the Company closes an underwritten primary offering of at least $200.0 million
of its common stock, pursuant to an effective registration statement under the
Securities Act or (ii) February 4, 2001, any outstanding Series F Preferred
Stock will automatically

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convert into the right to receive Series E Preferred Stock, on a one for one
basis. The Company may, at the sole option of the Board of Directors (subject
to the legal availability of funds therefor), exchange all, but not less than
all, of the Series F Preferred Stock then outstanding, including any shares of
Series F Preferred Stock issued as payment for dividends, for Exchange
Debentures. The holders of Series F Preferred Stock are entitled to receive on
the date of any such exchange, Exchange Debentures having an aggregate
principal amount equal to (i) the total of the liquidation preference for each
share of Series F Preferred Stock exchanged, plus (ii) an amount equal to all
accrued but unpaid dividends payable on such share. The Company may, subject
to any restrictions in the terms of the then-existing Indebtedness of the
Company, at the option of the Board of Directors, pay cash to each holder of
Series F Preferred Stock in lieu of Fractional Principal Amounts of Exchange
Debentures otherwise issuable upon exchange of the Series F Preferred Stock.

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DESCRIPTION OF THE EXCHANGE NOTES

The original notes were, and the exchange notes (collectively, the "notes")
will be, issued under the Indenture, dated as of May 24, 1999, between us and
The Chase Manhattan Bank (the "Trustee"). A copy of the Indenture has been
filed as an Exhibit to the Registration Statement of which this prospectus is
a part. The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all of the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part thereof by
the Trust Indenture Act of 1939, as amended. Whenever particular defined terms
of the Indenture not otherwise defined herein are referred to, such defined
terms are incorporated herein by reference. For definitions of certain
capitalized terms used in the following summary, see "--Certain Definitions."

General

The form and terms of the exchange notes are the same as the form and terms
of the original notes, except that the exchange notes have been registered
under the Securities Act and therefore will not bear legends restricting the
transfer thereof. The exchange notes will be unsubordinated, unsecured (except
as described in "--Security"), senior obligations of the Company, initially
limited to $275,000,000 aggregate principal amount. Subject to the covenants
described below under "--Covenants" and applicable law, the Company may issue
additional notes ("Additional Notes") under the Indenture. The original notes,
the exchange notes and any Additional Notes subsequently issued would be
treated as a single class for all purposes under the Indenture.

The exchange notes will initially bear interest at 13 1/2% per annum from
May 24, 1999 or from the most recent Interest Payment Date to which interest
has been paid. We will pay interest on the notes semiannually on May 15 and
November 15 of each year, beginning November 15, 1999. We will pay interest to
holders of record at the close of business on the May 1 or November 1
immediately preceding the Interest Payment Date. Interest is computed on a
360-day year of twelve 30-day months.

If you give us wire transfer instructions, we will pay all principal,
premium and interest on your notes in accordance with your instructions. If
you do not give us wire transfer instructions, we will make payments of
principal, premium and interest at the office or agency of the paying agent,
which will initially be the Trustee, unless we elect to make interest payments
by check mailed to you.

We will issue the exchange notes only in fully registered form, without
coupons, in denominations of $1,000 of principal amount and any integral
multiple thereof. See "--Book-Entry; Delivery and Form." We will not require
the payment of any service charge for any registration of transfer or exchange
of notes, but we may require payment of a sum sufficient to cover any transfer
tax or other similar governmental charge payable in connection with any
transfer or exchange.

Optional Redemption

We may redeem the notes, in whole or in part, at any time on or after May
15, 2004 at the following Redemption Prices (expressed in percentages of
principal amount), plus accrued and unpaid interest, if any, to the Redemption
Date, if redeemed during the 12-month period commencing May 15, of the years
set forth below:

<TABLE>
<CAPTION>
Year Redemption Price
---- ----------------
<S> <C>
2004..................................................... 106.750%
2005..................................................... 104.500%
2006..................................................... 102.250%
2007 and thereafter...................................... 100.000%
</TABLE>

In addition, at any time prior to May 15, 2002, we may redeem up to 35% of
the principal amount of the notes with the Net Cash Proceeds of one or more
public or private Equity Offerings at a Redemption Price

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(expressed as a percentage of principal amount) of 113.500%, plus accrued and
unpaid interest to the Redemption Date; provided that at least 65% of the
aggregate principal amount of notes originally issued remains outstanding
after each such redemption and notice of any such redemption is mailed within
60 days after the applicable Equity Offering.

We will give not less than 30 days' nor more than 60 days' notice of any
redemption. If less than all of the notes are to be redeemed, selection of the
notes for redemption will be made by the Trustee:

. in compliance with the requirements of the principal national securities
exchange, if any, on which the notes are listed, or

. if the notes are not listed on a national securities exchange, by lot or
by such other method as the Trustee in its sole discretion shall deem to
be fair and appropriate.

However, we will not redeem in part any note of $1,000 in principal amount or
less. If we redeem any note in part only, the notice of redemption relating to
such note will state the portion of the principal amount of such note to be
redeemed. We will issue a new note in principal amount equal to the unredeemed
portion of the original note in the name of the holder thereof upon
cancellation of the original note.

Sinking Fund

There will be no sinking fund payment on the notes.

Registration Rights

We agreed with the initial purchasers, for the benefit of the holders of
the original notes, that we would use our reasonable best efforts, at our
cost, to consummate this exchange offer. In satisfaction of this obligation,
we are hereby offering the exchange notes in return for surrender of the
original notes. It is intended by us that the exchange offer will satisfy
these registration rights, which will terminate upon the consummation of the
exchange offer. For each original note surrendered to us pursuant to the
exchange offer, the Holder will receive an exchange note of equal principal
amount. Interest on each exchange note will accrue from the last Interest
Payment Date on which interest was paid on the notes so surrendered or, if no
interest has been paid on such notes, from the Closing Date. Interest on each
exchange note will be calculated and paid in the same manner as interest on
the original notes so surrendered and exchanged therefor.

Security

On the Closing Date, we utilized approximately $104.1 million of the
proceeds from the offering of the original notes to purchase the Pledged
Securities in an amount sufficient, upon receipt of scheduled interest and
principal payments on such securities, to provide for payment in full of the
first six scheduled interest payments due on the notes and pledged the Pledged
Securities to the Trustee for the benefit of the Holders.

The Pledged Securities will be held by the Trustee in the Pledge Account.
Pursuant to the Pledge Agreement, immediately prior to an Interest Payment
Date on the notes, the Company may either deposit with the Trustee from funds
otherwise available to the Company cash sufficient to pay the interest
scheduled to be paid on such date or the Company may direct the Trustee to
release from the Pledge Account proceeds sufficient to pay interest then due
on the notes. In the event that the Company exercises the former option, the
Company may thereafter direct the Trustee to release to the Company proceeds
or Pledged Securities from the Pledge Account in like amount. A failure to pay
interest on the notes in a timely manner through the first six scheduled
interest payment dates will constitute an immediate Event of Default under the
Indenture, with no grace or cure period.

Interest earned on the Pledged Securities will be added to the Pledge
Account. In the event that the funds or Pledged Securities held in the Pledge
Account exceed the amount sufficient to provide for payment in full of the

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first six scheduled interest payments due on the notes, the Trustee will be
permitted to release any such excess amount to the Company. The notes will be
secured by the Pledged Securities and the Pledge Account and, accordingly, the
Pledged Securities and the Pledge Account will also secure repayment of the
principal amount of the notes to the extent of such security.

Under the Pledge Agreement, assuming that the Company makes the first six
scheduled interest payments on the notes in a timely manner, the Trustee will
release all of the remaining Pledged Securities in the Pledge Account to the
Company and thereafter the notes will be unsecured.

Ranking

The exchange notes will be unsubordinated, unsecured (except as described
in "--Security") senior indebtedness of the Company, ranking equal in right of
payment with all of our existing and future unsubordinated, unsecured
indebtedness (including the Senior Discount Notes). The exchange notes will be
senior in right of payment to any of our future subordinated indebtedness. As
of September 30, 1999, including the notes, the Company (on an unconsolidated
basis) had $567.2 million of indebtedness, excluding current liabilities, none
of which was secured. However, we are a holding company and the exchange notes
will be effectively subordinated to all existing and future indebtedness
(including the Senior Secured Credit Facility and Lucent Facility) and
liabilities (including trade payables and any subordinated indebtedness) of
our subsidiaries. As of September 30, 1999, our subsidiaries had approximately
$172.3 million of liabilities (excluding intercompany payables).

Book-Entry; Delivery and Form

Except as described below, we will initially issue the exchange notes in
the form of one or more fully registered exchange notes in global form (each,
a "Global Note"). We will deposit each Global Note on the date of the closing
of the exchange offer with, or on behalf of, the depository or an agent of the
depository in New York, New York and register the exchange notes in the name
of the depository or its nominee (the "Global Note Registered Owner") or will
leave such notes in the custody of the Trustee. Except as set forth below, the
Global Note may be transferred, in whole and not in part, only to another
nominee of the depository or to a successor of the depository or its nominee.

Exchange notes issued in exchange for other original notes will be issued
in registered, certificated form without interest coupons.

We are providing you with the following description of the operations and
procedures of DTC, Euroclear and Cedel solely as a matter of convenience.
These operations and procedures are solely within the control of the
respective settlement systems and are subject to change by them from time to
time. We take no responsibility for these operations and procedures and urge
you to contact the system or their participants directly to discuss these
matters.

The depository has advised us that it is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in the accounts of its Participants. The Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Access to the depository's system is also
available to other entities such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants or Indirect Participants may
beneficially own securities held by or on behalf of the depository only
through Participants or Indirect Participants. The ownership interests and
transfer of ownership interests of such persons held by or on behalf of the
depository are recorded on the records of the Participants and Indirect
Participants.

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The depository has also advised us that pursuant to procedures established
by it, (i) upon deposit of the Global Note, the depository will credit the
accounts of its Participants with portions of the principal amount of the
Global Note representing the exchange notes issued in exchange for the
original notes that each such Participant has instructed the depository to
surrender for exchange and (ii) ownership of such interests in the Global Note
will be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by the depository (with respect to the
Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interests in the Global Note).

Under the terms of the Indenture, the Company and the Trustee will treat
the persons in whose names the exchange notes, including the Global Note, are
registered as the owners thereof for the purpose of receiving payments in
respect of the principal of and premium, if any, and interest on any exchange
notes and for any and all other purposes whatsoever. Payments on any exchange
notes registered in the name of the Global Note Registered Owner will be
payable by the Trustee to the Global Note Registered Owner in its capacity as
the registered holder under the Indenture. Consequently, neither us, the
Trustee nor any of our agents or the Trustee has or will have any
responsibility or liability for:

. any aspect of the depository's records or the records of any Participant
or Indirect Participant relating to or payments made on account of
beneficial ownership interests in the Global Note, or for maintaining,
supervising or reviewing any of the depository's records or records of
any Participant or Indirect Participant relating to the beneficial
ownership interests in the Global Note, or

. any other matter relating to the actions and practices of the depository
or any of its Participants or Indirect Participants.

The depository has advised us that its current practice, upon receipt of
any payment in respect of securities such as the exchange notes (including
principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in principal amount of beneficial interests in the
relevant security as shown on the records of the depository, unless the
depository has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to the
beneficial owners of exchange notes will be governed by standing instructions
and customary practices and will be the responsibility of the Participants or
the Indirect Participants and will not be the responsibility of the
depository, the Trustee or us, as the case may be.

Neither we nor the Trustee will be liable for any delay by the depository
or any of its Participants or Indirect Participants in identifying the
beneficial owners of the related exchange notes, and we and the Trustee may
conclusively rely on, and will be protected in relying on, instructions from
the Global Note Registered Owner for all purposes.

Transfers between Participants in DTC will be effected in accordance with
DTC's procedures and will be settled in same-day funds. Transfers between
participants in Euroclear and Cedelbank will be effected in the ordinary way
in accordance with their respective rules and operating procedures.
Transactions settled through DTC, Euroclear and Cedelbank will settle on a T +
5 basis.

We expect that DTC, Euroclear or Cedelbank, as applicable, will take any
action permitted to be taken by a holder of notes only at the direction of one
or more Participants to whose account the interest in a Global Note is
credited and only in respect of such portion of the aggregate principal amount
of notes as to which such Participant or Participants has or have given such
direction. However, if there is an Event of Default under the notes, DTC,
Euroclear or Cedelbank, as applicable, will exchange the applicable Global
Notes for Certificated Notes which it will distribute to its participants and
which may be legended.

Subject to compliance with the transfer restrictions applicable to the
Global Notes, cross-market transfers between the Participants in DTC, on the
one hand, and Euroclear or Cedelbank participants, on the other hand, will be
effected through DTC in accordance with DTC's rules on behalf of each of
Euroclear or Cedelbank by its common depositary. However, such cross-market
transactions will require delivery of instructions to Euroclear

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or Cedelbank by the counterparty in such system in accordance with the rules
and procedures and within the established deadlines (Brussels time) of such
system. Euroclear or Cedelbank will, if the transaction meets its settlement
requirements, deliver instructions to its common depositary to take action to
effect final settlement on its behalf by delivering or receiving interests in
the Global Notes in DTC, and making or receiving payments in accordance with
normal procedures for same-day funds settlement applicable to DTC. Euroclear
participants and Cedelbank participants may not deliver instructions directly
to the common depositaries for Euroclear or Cedelbank.

Because of time zone differences, the securities account of a Euroclear or
Cedelbank participant purchasing an interest in a Global Note from a
Participant in DTC will be credited, and any such crediting will be reported
to the relevant Euroclear or Cedelbank participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Cedelbank) immediately following the settlement date of DTC. Cash received in
Euroclear or Cedelbank as a result of sales of interest in a Global Note by or
through a Euroclear or Cedelbank Participant to a Participant in DTC will be
received with value on the settlement date of DTC but will be available in the
relevant Euroclear or Cedelbank cash account only as of the business day for
Euroclear or Cedelbank following DTC's settlement date.

Although DTC, Euroclear and Cedelbank are expected to follow the foregoing
procedures in order to facilitate transfers of interests in a Global Note
among Participants of DTC, Euroclear and Cedel Bank, as the case may be, they
are under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. None of us, the Trustee or
any paying agent will have any responsibility for the performance by DTC,
Euroclear or Cedelbank or their respective participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.

If DTC is at any time unwilling or unable to continue as a depositary, or
Euroclear and Cedelbank cease to be a clearing agency, for the Global Notes
and a successor depositary or clearing agency is not appointed by us within 90
days, we will issue Certificated Notes which may bear a legend in exchange for
the Global Notes. Holders of an interest in a Global Note may receive
Certificated Notes which may bear such legend in accordance with DTC's rules
and procedures in addition to those provided for under the Indenture.

Certain Definitions

Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of any other capitalized term used herein for
which no definition is provided.

"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition; provided that Indebtedness of such Person which is
redeemed, defeased, retired or otherwise repaid at the time of or immediately
upon consummation of the transactions by which such Person becomes a
Restricted Subsidiary or upon consummation of such Asset Acquisition shall not
be Acquired Indebtedness.

"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such
period determined in conformity with GAAP; provided that the following items
shall be excluded in computing Adjusted Consolidated Net Income (without
duplication):

(i) the net income (or loss) of any Person that is not a Restricted
Subsidiary (or is an Unrestricted Subsidiary), except to the extent of the
amount of dividends or other distributions actually paid to the Company or
any of its Restricted Subsidiaries by such Person or an Unrestricted
Subsidiary during such period;

(ii) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (iv) (C) of paragraph 1 of the
"Limitation on Restricted Payments" covenant described

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below (and in such case, except to the extent includable pursuant to clause
(i) above), the net income (or loss) of any Person accrued prior to the
date it becomes a Restricted Subsidiary or is merged into or consolidated
with the Company or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by
the Company or any of its Restricted Subsidiaries;

(iii) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by
the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary (except to the extent such
restriction has been legally waived);

(iv) any gains or losses (on an after-tax basis) attributable to Asset
Sales or the termination of discontinued operations;

(v) except for purposes of calculating the amount of Restricted Payments
that may be made pursuant to clause (iv) (C) of paragraph 1 of the
"Limitation on Restricted Payments" covenant described below, any amount
paid or accrued as dividends on Preferred Stock of the Company or any
Restricted Subsidiary owned by Persons other than the Company and any of
its Restricted Subsidiaries;

(vi) all extraordinary gains and extraordinary losses;

(vii) the cumulative effect of a change in accounting principles since
the Closing Date; and

(viii) at the irrevocable election of the Company for each occurrence,
any net after-tax income (loss) from discontinued operations; provided that
for purposes of any subsequent Investment in the entity conducting such
discontinued operations under the "Restricted Payments" covenant, such
entity shall be treated as an Unrestricted Subsidiary until such
discontinued operations have actually been disposed of.

"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade
names, trademarks, patents, unamortized debt discount and expense and other
like intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission or provided to
the Trustee pursuant to the "Commission Reports and Reports to Holders"
covenant.

"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.

"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary or shall be merged into or consolidated
with the Company or any of its Restricted Subsidiaries or (ii) an acquisition
by the Company or any of its Restricted Subsidiaries of the property and
assets of any Person other than the Company or any of its Restricted
Subsidiaries that constitute substantially all of a division or line of
business of such Person.

"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted
Subsidiaries or (iii) any other property and

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assets (other than the Capital Stock or other Investment in an Unrestricted
Subsidiary) of the Company or any of its Restricted Subsidiaries outside the
ordinary course of business of the Company or such Restricted Subsidiary and,
in each case, that is not governed by the provisions of the Indenture
applicable to mergers, consolidations and sales of all or substantially all of
the assets of the Company; provided that "Asset Sale" shall not include:

(a) sales or other dispositions of inventory, receivables and other
current assets,

(b) sales or other dispositions of assets for consideration at least
equal to the fair market value of the assets sold or disposed of, to the
extent that the consideration received would constitute property or assets
of the kind described in clause (i) (B) of paragraph 2 of the "Limitation
on Asset Sales" covenant,

(d) any Restricted Payment that is permitted to be made, and is made,
under the "Limitation on Restricted Payments" covenant,

(e) sales or other dispositions of assets with a fair market value (as
certified in an Officers' Certificate) not in excess of $500,000 (provided
that any series of related sales or dispositions in excess of $500,000
shall be considered "Asset Sales"),

(f) the lease, assignment of a lease or sub-lease of any real or
personal property in the ordinary course of business,

(g) foreclosures on assets,

(h) pledges of assets or stock by the Company or any of its Restricted
Subsidiaries otherwise permitted under the indentures for the Notes and the
Senior Discount Notes, including such pledges securing Indebtedness under
the Senior Secured Credit Facility or under the Lucent Facility, and

(i) the exercise of warrants to acquire Common Stock of the Company and
the exercise of warrants to acquire Common Stock of KMC Telecom Inc. by
Newcourt Finance.

"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the
amount of such principal payment by (ii) the sum of all such principal
payments.

"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock, Preferred Stock, partnership or membership interests and any other
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.

"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present
value of the rental obligations of such Person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person.

"Capitalized Lease Obligations" means the amount of the liability in
respect of a Capitalized Lease that would at such time be required to be
capitalized and reflected as a liability on a balance sheet prepared in
accordance with GAAP.

"Change of Control" means such time as:

(i) a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of more than 35% of the total
voting power of the Voting Stock of the Company on a fully diluted basis
and such ownership represents a greater percentage of the total voting
power of the Voting Stock of the Company, on a fully diluted basis, than is
held by the Existing Stockholders on such date; or

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(ii) individuals who on the Closing Date constitute the Board of
Directors (together with any new directors whose election by the Board of
Directors or whose nomination by the Board of Directors for election by the
Company's stockholders was approved by a vote of at least a majority of the
members of the Board of Directors then in office who either were members of
the Board of Directors on the Closing Date or whose election or nomination
for election was previously so approved) cease for any reason to constitute
a majority of the members of the Board of Directors then in office.

"Closing Date" means the date on which the Notes were originally issued
under the Indenture, May 24, 1999.

"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's common stock, whether now outstanding
or issued after the date of the Indenture, including, without limitation, all
series and classes of such common stock.

"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income,

(i) Consolidated Interest Expense,

(ii) income taxes (other than income taxes (either positive or negative)
attributable to extraordinary and non-recurring gains or losses or sales of
assets),

(iii) depreciation expense,

(iv) amortization expense and

(v) all other non-cash items reducing Adjusted Consolidated Net Income
(other than items that will require cash payments and for which an accrual
or reserve is, or is required by GAAP to be, made), less all non-cash items
increasing (or, in the case of a loss, decreasing) Adjusted Consolidated
Net Income, determined, with respect to clauses (ii), (iii) and (iv), on a
consolidated basis for the Company and its Restricted Subsidiaries in
conformity with GAAP;

provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted
Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise
reduced in accordance with GAAP) by an amount equal to (A) the amount of the
Adjusted Consolidated Net Income attributable to such Restricted Subsidiary
multiplied by (B) the percentage ownership interest in the income of such
Restricted Subsidiary not owned on the last day of such period by the Company
or any of its Restricted Subsidiaries.

"Consolidated Interest Expense" means, for any period, the aggregate amount
(without duplication) of interest in respect of Indebtedness (including,
without limitation, amortization of original issue discount on any
Indebtedness and the interest portion of any deferred payment obligation,
calculated in accordance with the effective interest method of accounting; all
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing; the net costs associated with
Interest Rate Agreements; and Indebtedness that is Guaranteed or secured by
the Company or any of its Restricted Subsidiaries) and the interest component
of Capitalized Lease Obligations paid, accrued or scheduled to be paid or to
be accrued by the Company and its Restricted Subsidiaries during such period;
excluding, however:

(i) any amount of such interest of any Restricted Subsidiary if the net
income of such Restricted Subsidiary is excluded in the calculation of
Adjusted Consolidated Net Income pursuant to clause (iii) of the definition
thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted
Consolidated Net Income pursuant to clause (iii) of the definition
thereof), and

(ii) any premiums, fees and expenses (and any amortization thereof)
payable in connection with the Lucent Facility, the Senior Secured Credit
Facility and the offerings of the Series E Preferred Stock, the

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Series F Preferred Stock, the Senior Discount Notes and the Notes, all as
determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP.

"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant described below (such four fiscal
quarter period being the "Four Quarter Period"); provided that, in making the
foregoing calculation, pro forma effect shall be given to the following events
which occur from the beginning of the Four Quarter Period through the
Transaction Date (the "Reference Period"):

(1) the Incurrence of the Indebtedness with respect to which the
computation is being made and (if applicable) the application of the net
proceeds therefrom, including to refinance other Indebtedness, as if such
Indebtedness was incurred, and the application of such proceeds occurred,
at the beginning of the Four Quarter Period;

(2) the Incurrence, repayment or retirement of any other Indebtedness by
the Company and its Restricted Subsidiaries since the first day of the Four
Quarter Period as if such Indebtedness was incurred, repaid or retired at
the beginning of the Four Quarter Period;

(3) in the case of Acquired Indebtedness, the related acquisition, as if
such acquisition occurred at the beginning of the Four Quarter Period;

(4) any acquisition or disposition by the Company and its Restricted
Subsidiaries of any company or any business or any assets out of the
ordinary course of business, whether by merger, stock purchase or sale or
asset purchase or sale or any related repayment of Indebtedness, in each
case since the first day of the Four Quarter Period, assuming such
acquisition or disposition had been consummated on the first day of the
Four Quarter Period and after giving pro forma effect to net cost savings
that the Company reasonably believes in good faith could have been achieved
during the Four Quarter Period as a result of such acquisition or
disposition (provided that both (A) such cost savings were identified and
quantified in an Officers' Certificate delivered to the Trustee at the time
of the consummation of the acquisition or disposition and (B) with respect
to each acquisition or disposition completed prior to the 90th day
preceding such date of determination, actions were commenced or initiated
by the Company within 90 days of such acquisition or disposition to effect
such cost savings identified in such Officers' Certificate and with respect
to any other acquisition or disposition, such Officers' Certificate sets
forth the specific steps to be taken within the 90 days after such
acquisition or disposition to accomplish such cost savings); and

(5) the occurrence of any of the events described in clauses (1)-(4)
above by any Person that has become a Restricted Subsidiary or has been
merged with or into the Company or any Restricted Subsidiary during such
Reference Period; and

provided further that (x) in making such computation, the Consolidated
Interest Expense attributable to interest on any Indebtedness computed on a
pro forma basis and (A) bearing a floating interest rate shall be computed as
if the rate in effect on the date of computation had been the applicable rate
for the entire period (taking into account any Interest Rate Agreements
applicable to such Indebtedness) and (B) which was not outstanding during the
period for which the computation is being made but which bears, at the option
of the Company, a fixed or floating rate of interest shall be computed by
applying, at the option of the Company, either the fixed or floating rate, and
(y) in making such computation, the Consolidated Interest Expense of the
Company attributable to interest on any Indebtedness under a revolving credit
facility computed on a pro forma basis shall be computed based upon the pro
forma average daily balance of such Indebtedness during the applicable period.

"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation, and which

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shall not take into account Unrestricted Subsidiaries), less any amounts
attributable to Disqualified Stock or any equity security convertible into or
exchangeable for Indebtedness, the cost of treasury stock and the principal
amount of any promissory notes receivable from the sale of the Capital Stock
of the Company or any of its Restricted Subsidiaries, each item to be
determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).

"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.

"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.

"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is:

(i) required to be redeemed prior to the Stated Maturity of the Notes,

(ii) redeemable at the option of the holder of such class or series of
Capital Stock at any time prior to the Stated Maturity of the Notes or

(iii) convertible into or exchangeable for Capital Stock referred to in
clause (i) or (ii) above or Indebtedness having a scheduled maturity prior
to the Stated Maturity of the Notes;

provided that any Capital Stock that would not constitute Disqualified Stock
but for provisions thereof giving holders thereof the right to require such
Person to repurchase or redeem such Capital Stock (or the security for which
such Capital Stock is convertible into or exchangeable for) upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
Stated Maturity of the Notes shall not constitute Disqualified Stock if the
"asset sale" or "change of control" provisions applicable to such Capital
Stock (or the security for which such Capital Stock is convertible into or
exchangeable for) are no more favorable to the holders of such Capital Stock
(or the security for which such Capital Stock is convertible into or
exchangeable for) than the provisions contained in the "Limitation on Asset
Sales" and "Repurchase of Notes upon a Change of Control" covenants described
below and such Capital Stock (or the security for which such Capital Stock is
convertible into or exchangeable for) specifically provides that such Person
will not repurchase or redeem any such stock pursuant to such provision prior
to the Company's repurchase of such Notes as are required to be repurchased
pursuant to the "Limitation on Asset Sales" and "Repurchase of Notes upon a
Change of Control" covenants described below.

"Equity Offering" means any public or private sale of Common Stock or
Preferred Stock of the Company (excluding Disqualified Stock), other than
public offerings with respect to the Company's Common Stock registered on Form
S-8.

"Existing Stockholders" means Harold N. Kamine, his Affiliates and Nassau.

"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive
if evidenced by a Board Resolution; provided that for purposes of clause (ix)
of paragraph 2 of the "Limitation on Indebtedness" covenant, (x) the fair
market value of any security registered under the Exchange Act shall be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the sale of Capital Stock and
(y) in the event the aggregate fair market value of any other property (other
than cash or cash equivalents) received by the Company exceeds $10 million,
the fair market value of such property shall be determined by a nationally
recognized investment banking firm or a nationally recognized firm having
expertise in the specific area which is the subject of such determination and
set forth in their written opinion which shall be delivered to the Trustee.

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"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or
in such other statements by such other entity as approved by a significant
segment of the accounting profession. All ratios and computations contained or
referred to in the Indenture shall be computed in conformity with GAAP applied
on a consistent basis, except that calculations made for purposes of
determining compliance with the terms of the covenants and with other
provisions of the Indenture shall be made without giving effect to (i) the
amortization of any expenses incurred in connection with the Lucent Facility,
the Senior Secured Credit Facility and the offerings of the Notes, the Senior
Discount Notes and the Company's Series C, Series D, Series E and Series F
Preferred Stock and (ii) except as otherwise provided, the amortization of any
amounts required or permitted by Accounting Principles Board Opinion Nos. 16
and 17.

"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or
by agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.

"Guarantor" means KMC Telecom Financing, Inc., a Wholly-Owned Restricted
Subsidiary of the Company.

"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.

"Indebtedness" means, with respect to any Person at any date of
determination (without duplication):

(i) all indebtedness of such Person for borrowed money,

(ii) all obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments,

(iii) all obligations of such Person in respect of letters of credit or
other similar instruments (including reimbursement obligations with respect
thereto, but excluding trade letters of credit),

(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is due more
than six months after the date of placing such property in service or
taking delivery and title thereto or the completion of such services,
except Trade Payables and accrued current liabilities arising in the
ordinary course of business,

(v) all Capitalized Lease Obligations of such Person,

(vi) all Indebtedness referred to in clauses (i) through (v) hereof of
other Persons secured by a Lien on any asset of such Person, whether or not
such Indebtedness is assumed by such Person; provided that the amount of
such Indebtedness shall be the lesser of (A) the fair market value of such
asset at such date of determination and (B) the amount of such
Indebtedness,

(vii) all Indebtedness of other Persons Guaranteed by such Person to the
extent such Indebtedness is Guaranteed by such Person, and

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(viii) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate Agreements.

The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date (or, in the case of a revolving credit or
other similar facility, the total amount of funds outstanding on the date of
determination) of all unconditional obligations as described above and, with
respect to contingent obligations, the maximum liability upon the occurrence
of the contingency giving rise to the obligation of the types described above,
provided

(A) that the amount outstanding at any time of any Indebtedness issued
with original issue discount is the original issue price of such
Indebtedness,

(B) that money borrowed and set aside at the time of the Incurrence of
any Indebtedness in order to prefund the payment of the interest on such
Indebtedness shall not be deemed to be "Indebtedness", and

"Indenture" means the indenture dated as of the Closing Date among the
Company, KMC Telecom Financing, Inc., the Company's Wholly-Owned Restricted
Subsidiary, and the Trustee.

"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.

"Investment" means, with respect to any Person, all investments by such
Person in other Persons in the form of any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee
or similar arrangement; but excluding advances to customers in the ordinary
course of business that are, in conformity with GAAP, recorded as accounts
receivable on the balance sheet of the Company or its Restricted Subsidiaries
and commissions, travel and similar advances to officers and employees made in
the ordinary course of business) or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition of
Capital Stock, bonds, notes, debentures or other similar instruments issued
by, such other Person and shall include:

(i) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary and

(ii) the fair market value of the Capital Stock (or any other
Investment), held by the Company or any of its Restricted Subsidiaries, of
(or in) any Person that has ceased to be a Restricted Subsidiary,
including, without limitation, by reason of any transaction permitted by
clause (iii) of the "Limitation on the Issuance and Sale of Capital Stock
of Restricted Subsidiaries" covenant;

provided that the fair market value of the Investment remaining in any
Person that has ceased to be a Restricted Subsidiary shall not exceed the
aggregate amount of Investments previously made in such Person valued at the
time such Investments were made less the net reduction of such Investments.
For purposes of the definition of "Unrestricted Subsidiary" and the
"Limitation on Restricted Payments" covenant described below,

(i) "Investment" shall include the fair market value of the assets (net
of liabilities (other than liabilities to the Company or any of its
Restricted Subsidiaries)) of any Restricted Subsidiary at the time that
such Restricted Subsidiary is designated an Unrestricted Subsidiary,

(ii) the fair market value of the assets (net of liabilities (other than
liabilities to the Company or any of its Restricted Subsidiaries)) of any
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary shall be considered a reduction in
outstanding Investments, and

(iii) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such transfer.

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"Investment Grade Securities" means:

(i) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof,

(ii) debt securities or debt instruments with a rating of BBB+ or higher
by S&P or Baa1 or higher by Moody's or the equivalent of such rating by
such rating organization, or, if no rating of S&P or Moody's then exists,
the equivalent of such rating by any other nationally recognized securities
rating agency, but excluding any debt securities or instruments
constituting loans or advances among the Company and its Subsidiaries, and

(iii) investment in any fund that invests exclusively in investments of
the type described in clauses (i) and (ii) which fund may also hold cash
pending investment and/or distribution.

"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof or any
agreement to give any security interest).

"Lucent Facility" means the vendor financing facility between Lucent
Technologies Inc., KMC Telecom III, Inc. and KMC Telecom Leasing III LLC,
providing for aggregate borrowings of up to $600 million and maturing on the
eighth anniversary of the closing of such credit facility, as the same may be
amended, restated, modified, renewed, refunded, replaced, or refinanced, in
whole or in part, from time to time (and whether or not with the original
administrative agent and lenders or other administrative agent or agents or
other lenders and whether provided under the original Lucent Facility or any
other credit agreement or indenture).

"Moody's" means Moody's Investors Service, Inc. and its successors.

"Nassau" means Nassau Capital Partners L.P., NAS Partners I L.L.C. or their
respective successors, and their Affiliates.

"Net Cash Proceeds" means:

(a) with respect to any Asset Sale, the proceeds of such Asset Sale in
the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal,
but not interest, component thereof) when received in the form of cash or
cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and
proceeds from the conversion of other property received when converted to
cash or cash equivalents, net of:

(i) brokerage commissions and other commissions, fees and expenses
(including fees and expenses of counsel, accountants and investment
bankers) related to such Asset Sale and any relocation expenses
incurred as a result thereof,

(ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without
regard to the consolidated results of operations of the Company and its
Restricted Subsidiaries, taken as a whole,

(iii) payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (A) is secured
by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale, and

(iv) appropriate amounts to be provided by the Company or any
Restricted Subsidiary as a reserve against any liabilities associated
with such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as determined in
conformity with GAAP, and

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(b) with respect to any issuance or sale of Capital Stock, the proceeds
of such issuance or sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary) and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of attorney's
fees, accountants' fees, underwriters' or placement agents' fees, discounts
or commissions and brokerage, consultant and other fees incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.

"Note Guarantee" means the Guarantee of the Notes by the Guarantor pursuant
to the Indenture.

"Offer to Purchase" means an offer to purchase Notes by the Company from
the Holders commenced by mailing a notice to the Trustee and each Holder
stating:

(i) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment on a pro rata basis;

(ii) the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date
such notice is mailed) (the "Payment Date");

(iii) that any Note not tendered will continue to accrue interest
pursuant to its terms;

(iv) that, unless the Company defaults in the payment of the purchase
price, any Note accepted for payment pursuant to the Offer to Purchase
shall cease to accrue interest on and after the Payment Date;

(v) that Holders electing to have a Note purchased pursuant to the Offer
to Purchase will be required to surrender the Note, together with the form
entitled "Option of the Holder to Elect Purchase" on the reverse side of
the Note completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the Business Day immediately
preceding the Payment Date;

(vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and

(vii) that Holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered; provided that each Note purchased and each new Note
issued shall be in a principal amount of $1,000 or an integral multiple
thereof.

On the Payment Date, the Company shall:

(i) accept for payment on a pro rata basis Notes or portions thereof
tendered pursuant to an Offer to Purchase;

(ii) deposit with the Paying Agent money sufficient to pay the purchase
price of all Notes or portions thereof so accepted; and

(iii) deliver, or cause to be delivered, to the Trustee all Notes or
portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the
Company.

The Paying Agent shall promptly mail to the Holders of Notes so accepted
payment in an amount equal to the purchase price (or, if the Notes are
represented by one or more permanent global Notes registered in the name of
The Depository Trust Company or its nominee, by such other method as required
thereby), and the Trustee shall promptly authenticate and mail to such Holders
a new Note equal in principal amount to any unpurchased portion of the Note
surrendered; provided that each Note purchased and each new Note issued shall
be in a principal amount of $1,000 or an integral multiple thereof. The
Company will publicly announce the

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results of an Offer to Purchase as soon as practicable after the Payment Date.
The Trustee shall act as the Paying Agent for an Offer to Purchase. The
Company will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that the Company is required to
repurchase Notes pursuant to an Offer to Purchase.

"Permitted Investment" means:

(i) an Investment in the Company or a Restricted Subsidiary or a Person
which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or consolidated with or into or transfer or convey
all or substantially all its assets to, the Company or a Restricted
Subsidiary; provided that such Person's primary business is related,
ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment;

(ii) Temporary Cash Investments and Investment Grade Securities;

(iii) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP and reasonable advances to sales representatives;

(iv) any Investment acquired by the Company or any of its Restricted
Subsidiaries (x) in exchange for any other Investment or accounts
receivable held by the Company or any such Restricted Subsidiary in
connection with or as a result of a bankruptcy, workout, reorganization or
recapitalization of the issuer of such other Investment or accounts
receivable or (y) as a result of a foreclosure by the Company or any of its
Restricted Subsidiaries with respect to any secured Investment or other
transfer of title with respect to any secured Investment in default;

(v) any Investment acquired in consideration for the issuance of Capital
Stock (other than Disqualified Stock) or the proceeds of the issuance of
Capital Stock (other than Disqualified Stock) to the extent such amounts
have not been previously applied to a Restricted Payment pursuant to clause
(iv) (c) (2) of paragraph 1 of the "Limitation on Restricted Payments"
covenant or clause (iii) or (iv) of paragraph 2 of the "Limitation on
Restricted Payments" covenant or used to support the Incurrence of
Indebtedness pursuant to clause (x) of paragraph 2 of the "Limitation on
Indebtedness" covenant and Investments acquired as a capital contribution;

(vi) Guarantees permitted by the "Limitation on Indebtedness" covenant;

(vii) loans or advances to employees of the Company or any Restricted
Subsidiary that do not in the aggregate exceed at any one time outstanding
$5.0 million;

(viii) Currency Agreements and Interest Rate Agreements permitted under
the "Limitation on Indebtedness" covenant;

(ix) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance and
other similar deposits;

(x) Investments in debt securities or other evidences of Indebtedness
that are issued by companies engaged in the Telecommunications Business;
provided that when each Investment pursuant to this clause (x) is made, the
aggregate amount of Investments outstanding under this clause (x) does not
exceed $3.0 million;

(xi) Strategic Investments and Investments in Permitted Joint Ventures
in an amount not to exceed $20.0 million at any one time outstanding;

(xii) an Investment in any Person the primary business of which is
related, ancillary or complementary to the business of the Company and its
Subsidiaries on the date of such Investments in an amount not to exceed at
any time outstanding the sum of (x) $23.0 million plus (y) 10% of the
Company's Consolidated EBITDA, if positive, for the immediately preceding
four fiscal quarters (valued in each case as provided in the definition of
"Investments");

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(xiii) securities received in connection with Asset Sales to the extent
constituting non-cash consideration permitted under the "Asset Sale"
covenant; and

(xiv) Investments in an amount not to exceed $5.0 million at any time
outstanding.

"Permitted Joint Venture" means any Unrestricted Subsidiary or any other
Person in which the Company or a Restricted Subsidiary owns, directly or
indirectly, an ownership interest (other than a Restricted Subsidiary) and
whose primary business is related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries at the time of
determination.

"Permitted Liens" means:

(i) Liens for taxes, assessments, governmental charges or claims that
are being contested in good faith by appropriate legal proceedings promptly
instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made;

(ii) statutory and common law Liens of landlords, carriers,
warehousemen, mechanics, suppliers, materialmen and repairmen, or other
similar Liens arising in the ordinary course of business and with respect
to amounts not yet delinquent or that are bonded or being contested in good
faith by appropriate legal proceedings promptly instituted and diligently
conducted and for which a reserve or other appropriate provision, if any,
as shall be required in conformity with GAAP shall have been made;

(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security;

(iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, licenses, statutory or regulatory obligations,
bankers' acceptances, surety and appeal bonds, trade or government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money);

(v) easements (including reciprocal easement agreements), rights-of-way,
municipal, building and zoning ordinances and similar charges, utility
agreements, covenants, reservations, restrictions, encroachments, charges,
encumbrances, title defects or other irregularities that do not materially
interfere with the ordinary course of business of the Company or any of its
Restricted Subsidiaries;

(vi) Liens (including extensions and renewals thereof) upon real or
personal property acquired after the Closing Date; provided that:

(a) such Lien is created solely for the purpose of securing Trade
Payables that the Company reasonably expects to pay within 90 days or
Indebtedness Incurred, in accordance with the "Limitation on
Indebtedness" covenant described below, to finance the cost (including
the cost of improvements or construction) of the item of property or
assets subject thereto and such Lien is created prior to, at the time of
or within six months after the later of the acquisition, the completion
of construction or the commencement of full operation of such property,

(b) the principal amount of the Trade Payables or Indebtedness
secured by such Lien does not exceed 100% of such cost and

(c) any such Lien shall not extend to or cover any property or
assets other than such item of property or assets and any improvements
on such item;

(vii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its
Restricted Subsidiaries, taken as a whole;

(viii) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of the Company or its
Restricted Subsidiaries relating to such property or assets;

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(ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease;

(x) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;

(xi) Liens on property of, or on shares of Capital Stock or Indebtedness
of, any Person existing at the time such Person becomes, or becomes a part
of, any Restricted Subsidiary; provided that such Liens do not extend to or
cover any property or assets of the Company or any Restricted Subsidiary
other than the property or assets acquired;

(xii) Liens in favor of the Company or any Restricted Subsidiary;

(xiii) Liens arising from the rendering of a final judgment or order
against the Company or any Restricted Subsidiary that does not give rise to
an Event of Default;

(xiv) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof;

(xv) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;

(xvi) Liens encumbering customary initial deposits and margin deposits,
and other Liens that are within the general parameters customary in the
industry and incurred in the ordinary course of business, in each case,
securing Indebtedness under Interest Rate Agreements and Currency
Agreements and forward contracts, options, futures contracts, futures
options or similar agreements or arrangements designed solely to protect
the Company or any of its Restricted Subsidiaries from fluctuations in
interest rates, currencies or the price of commodities;

(xvii) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by
the Company or any of its Restricted Subsidiaries in the ordinary course of
business in accordance with the past practices of the Company and its
Restricted Subsidiaries prior to the Closing Date;

(xviii) Liens on or sales of receivables; and

(xix) Liens on cash set aside at the time of Incurrence of any
Indebtedness, or government securities purchased with such cash, in either
case to the extent that such cash or government securities prefund or
secure the payment of interest on such Indebtedness and are held in an
escrow account or similar arrangements to be applied for such purpose.

"Person" means an individual, a corporation, a partnership, a limited
liability company, a joint venture, an association, a trust, an unincorporated
organization or any other entity or organization, including a government or
political subdivision or an agency or instrumentality thereof.

"Pledge Account" means the account established with the Trustee, or any
successor trustee, pursuant to the terms of the Pledge Agreement for the
purchase of the Pledged Securities.

"Pledge Agreement" means the Collateral Pledge and Security Agreement,
dated as of the Closing Date, made in favor of the Trustee, governing the
disbursement of funds from the Pledge Account, as such agreement may be
amended, restated, supplemented or otherwise modified from time to time.

"Pledged Securities" means the United States Treasury securities and/or
security entitlements relating thereto to be held in the Pledge Account and
pledged by the Guarantor in favor of the Trustee for the benefit of the
Holders of the Notes in accordance with the Pledge Agreement.

"Preferred Stock" or "preferred stock" means, with respect to any Person,
any and all shares, interests, participations or other equivalents (however
designated, whether voting or non-voting) of such Person's preferred or
preference stock, whether now outstanding or issued after the date of this
Indenture, including, without limitation, all series and classes of such
preferred or preference stock.

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"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.

"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.

"Senior Discount Notes" means the Company's 12 1/2% Senior Discount Notes
due 2008 issued in the original aggregate principal amount at maturity of
$460,800,000 under an indenture dated as of January 29, 1998 between the
Company and The Chase Manhattan Bank, as trustee.

"Senior Secured Credit Facility" means the Loan and Security Agreement
dated as of December 22, 1998 among KMC Telecom Inc., KMC Telecom II, Inc.,
KMC Telecom of Virginia, Inc. and Newcourt Commercial Finance Corporation and
any other lenders or borrowers from time to time party thereto, any collateral
documents, instruments and agreements executed in connection therewith and any
amendments, supplements, modifications, extensions, renewals, restatements,
refinancings or refundings thereof.

"Significant Subsidiary" means, any Subsidiary that would be a "significant
subsidiary" as defined in 17 CFR Part 210.1-01(w), promulgated pursuant to the
Securities Act, as such regulation is in effect on the date hereof.

"Specified Date" means any Redemption Date, any Payment Date for an Offer
to Purchase or any date on which the Notes first become due and payable after
an Event of Default.

"S&P" means Standard & Poor's Ratings Services and its successors.

"Stated Maturity" means:

(i) with respect to any debt security, the date specified in such debt
security as the fixed date on which the final installment of principal of
such debt security is due and payable, and

(ii) with respect to any scheduled installment of principal of or
interest on any debt security, the date specified in such debt security as
the fixed date on which such installment is due and payable.

"Strategic Investments" means:

(i) Investments that the Board of Directors has determined in good faith
will enable the Company or any of its Restricted Subsidiaries to obtain
additional business that it might not be able to obtain without making such
Investment, and

(ii) Investments in entities the principal function of which is to
perform research and development with respect to products and services that
may be used or useful in the Telecommunications Business; provided that the
Company or one of its Restricted Subsidiaries is entitled or otherwise
reasonably expected to obtain rights to such products or services as a
result of such Investment.

"Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance the acquisition of a Person engaged in the
Telecommunications Business that by its terms, or by the terms of any
agreement or instrument pursuant to which such Indebtedness is outstanding,
(i) is expressly made subordinate in right of payment to the Notes and (ii)
provides that no payment of principal, premium or interest on, or any other
payment with respect to, such Indebtedness may be made prior to the payment in
full of all of the Company's obligations under the Notes; provided that such
Indebtedness may provide for and be repaid at any time from the proceeds of
the sale of Capital Stock (other than Disqualified Stock) of the Company after
the Incurrence of such Indebtedness.

"Subsidiary" means, with respect to any Person,

(i) any corporation, association, or other business entity (other than a
partnership) of which more than 50% of the total voting power of shares of
Capital Stock entitled (without regard to the occurrence of any

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contingency) to vote in the election of directors, managers or trustees
thereof is at the time of determination owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of such
Person or a combination thereof, and

(ii) any partnership, joint venture, limited liability company or
similar entity of which (x) more than 50% of the capital accounts,
distribution rights, total equity and voting interests or general or
limited partnership interests, as applicable, are owned or controlled,
directly or indirectly, by such Person or one or more of the other
Subsidiaries of such Person or a combination thereof whether in the form of
membership, general, special or limited partnership or otherwise and (y)
such Person or any Wholly Owned Restricted Subsidiary of such Person is a
general partner or otherwise controls such entity.

"Telecommunications Business" means the development, ownership or operation
of one or more telephone, telecommunications or information systems or the
provision of telephony, telecommunications or information services (including,
without limitation, any voice, video transmission, data or Internet services)
and any related, ancillary or complementary business.

"Temporary Cash Investment" means any of the following:

(i) direct obligations of the United States of America or any agency
thereof or obligations fully and unconditionally guaranteed by the United
States of America or any agency or instrumentality thereof,

(ii) time deposit accounts, certificates of deposit, eurodollar time
deposits and money market deposits maturing within 180 days or less of the
date of acquisition thereof issued by a bank or trust company which is
organized under the laws of the United States of America, any state thereof
or any foreign country recognized by the United States of America, and
which bank or trust company has capital, surplus and undivided profits
aggregating in excess of $50 million (or the foreign currency equivalent
thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized
statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker
dealer or mutual fund distributor,

(iii) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clauses (i) and (ii) above
entered into with a bank meeting the qualifications described in clause
(ii) above,

(iv) commercial paper, maturing not more than 90 days after the date of
acquisition, issued by a corporation (other than an Affiliate of the
Company) organized and in existence under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's or "A-1" (or
higher) according to S&P,

(v) securities with maturities of six months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by S&P or Moody's, and

(vi) investment funds investing 95% of their assets in securities of the
type described in clauses (i)-(v) above.

"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.

"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date
such Indebtedness is to be Incurred and, with respect to any Restricted
Payment, the date such Restricted Payment is to be made.

"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below; and (ii) any

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Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Restricted Subsidiary (including any newly acquired or newly formed
Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any Lien on any
property of, the Company or any Restricted Subsidiary; provided that

(A) any Guarantee by the Company or any Restricted Subsidiary of any
Indebtedness of the Subsidiary being so designated shall be deemed an
"Incurrence" of such Indebtedness and an "Investment" by the Company or
such Restricted Subsidiary (or both, if applicable) at the time of such
designation;

(B) either (I) the Subsidiary to be so designated has total assets of
$1,000 or less or (II) if such Subsidiary has assets greater than $1,000,
such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below and

(C) if applicable, the Incurrence of Indebtedness and the Investment
referred to in clause (A) of this proviso would be permitted under the
"Limitation on Indebtedness" and "Limitation on Restricted Payments"
covenants described below.

The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that (i) no Default or Event of Default shall
have occurred and be continuing at the time of or after giving effect to such
designation and (ii) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately after such designation would, if Incurred
at such time, have been permitted to be Incurred (and shall be deemed to have
been Incurred) for all purposes of the Indenture. Any such designation by the
Board of Directors shall be evidenced to the Trustee by promptly filing with
the Trustee a copy of the Board Resolution giving effect to such designation
and an Officers' Certificate certifying that such designation complied with
the foregoing provisions.

"Voting Stock" means, with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of
directors, managers or other voting members of the governing body of such
Person.

"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of 95% or more of the outstanding Capital Stock of such Subsidiary
(other than any director's qualifying shares or Investments by foreign
nationals mandated by applicable law) by such Person or one or more Wholly
Owned Subsidiaries of such Person.

Covenants

Overview

In the Indenture, the Company has agreed to certain covenants that limit
its and its Restricted Subsidiaries' ability, among other things, to:

. incur additional debt;

. pay dividends, acquire shares of capital stock, make payments on
subordinated debt or make investments;

. place limitations on distributions from Restricted Subsidiaries;

. issue or sell capital stock of Restricted Subsidiaries;

. issue guarantees;

. sell or exchange assets;

. enter into transactions with shareholders and affiliates;

. create liens; and

. effect mergers.

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In addition, if a Change of Control occurs, each Holder of Notes will have
the right to require the Company to repurchase all or a part of the Holder's
Notes at a price equal to 101% of the principal amount of those Notes, plus
any accrued interest to the date of repurchase.

Limitation on Indebtedness

1. The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); provided that the Company may Incur
Indebtedness if, after giving effect to the Incurrence of such Indebtedness
and the receipt and application of the proceeds therefrom, the Consolidated
Leverage Ratio would be greater than zero and less than 6:1.

2. Notwithstanding the foregoing, the Company and any Restricted
Subsidiary (except as specified below) may Incur each and all of the
following:

(i) Indebtedness of the Company or its Restricted Subsidiaries
outstanding at any time in an aggregate principal amount not to exceed
$100.0 million of unsubordinated Indebtedness and $100.0 million of
subordinated Indebtedness, less any amount of such Indebtedness permanently
repaid as provided under the "Limitation on Asset Sales" covenant described
below (and any Guarantees thereof by the Company or its Restricted
Subsidiaries);

(ii) the Incurrence by the Company of Indebtedness represented by the
Notes;

(iii) Indebtedness in existence on the Closing Date;

(iv) Indebtedness of the Company to a Restricted Subsidiary and
Indebtedness of a Restricted Subsidiary to the Company or another
Restricted Subsidiary; provided that such Indebtedness is made pursuant to
an intercompany note (which, in the case of Indebtedness owed to the
Company, shall be unsubordinated) and any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
subsequent transfer of such Indebtedness (other than to the Company or
another Restricted Subsidiary) shall be deemed, in each case, to constitute
an Incurrence of such Indebtedness not permitted by this clause (iv);

(v) Indebtedness issued in exchange for, or the net proceeds of which
are used to refinance or refund, then outstanding Indebtedness (other than
Indebtedness Incurred under clauses (i), (iv), (vi), (viii) or (xi) of this
paragraph 2) and any refinancings thereof in an amount not to exceed the
amount so refinanced or refunded (plus premiums, accrued interest, fees and
expenses); provided that Indebtedness the proceeds of which are used to
refinance or refund Indebtedness that is subordinated in right of payment
to the Notes shall only be permitted under this clause (v) if:

(A) such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new Indebtedness is
issued or remains outstanding, is expressly made subordinate in right
of payment to the Notes at least to the extent that the Indebtedness to
be refinanced is subordinated to the Notes and

(B) such new Indebtedness, determined as of the date of Incurrence
of such new Indebtedness, does not mature prior to the Stated Maturity
of the Indebtedness to be refinanced or refunded, and the Average Life
of such new Indebtedness is at least equal to the remaining Average
Life of the Indebtedness to be refinanced or refunded; and

provided further that in no event may Indebtedness of the Company be
refinanced by means of any Indebtedness of any Restricted Subsidiary
pursuant to this clause (v);

(vi) Indebtedness:

(A) in respect of performance, surety, appeal bonds and completion
guarantees provided in the ordinary course of business,

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(B) under Currency Agreements and Interest Rate Agreements; provided
that such agreements (a) are designed solely to protect the Company or
its Restricted Subsidiaries against fluctuations in foreign currency
exchange rates or interest rates and (b) do not increase the
Indebtedness of the obligor outstanding at any time (except to the
extent Incurred under another clause hereof) other than as a result of
fluctuations in foreign currency exchange rates or interest rates or by
reason of fees, indemnities and compensation payable thereunder, and

(C) arising from agreements providing for indemnification, adjustment
of purchase price or similar obligations, or from Guarantees or letters
of credit, surety bonds or performance bonds securing any obligations of
the Company or any of its Restricted Subsidiaries pursuant to such
agreements, in each case Incurred in connection with the disposition of
any business, assets or Restricted Subsidiary (other than Guarantees of
Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary for the purpose of financing
such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary
in connection with such disposition;

(vii) Indebtedness of the Company, to the extent the net proceeds
thereof are promptly (A) used to purchase Notes or the Senior Discount
Notes tendered in an Offer to Purchase made as a result of a Change in
Control or (B) deposited to defease the Notes or the Senior Discount Notes
as described below under "Defeasance";

(viii) Guarantees of the Notes and the Senior Discount Notes and
Guarantees of Indebtedness of the Company by any Restricted Subsidiary
provided the Guarantee of such Indebtedness is permitted by and made in
accordance with the "Limitation on Issuance of Guarantees by Restricted
Subsidiaries" covenant described below and any Guarantee by the Company of
Indebtedness or other obligations of any of its Restricted Subsidiaries so
long as the incurrence of such Indebtedness Incurred by such Restricted
Subsidiary is permitted under the terms of this covenant;

(ix) Indebtedness Incurred to finance the cost (including the cost of
design, development, acquisition, construction, installation, improvement,
transportation or integration) to acquire equipment, inventory or network
assets (including acquisitions by way of acquisitions of real property,
leasehold improvements, Capitalized Leases and acquisitions of the Capital
Stock of a Person that becomes a Restricted Subsidiary to the extent of the
fair market value of the equipment, inventory or network assets so
acquired) by the Company or a Restricted Subsidiary after the Closing Date;

(x) Indebtedness of the Company not to exceed, at any one time
outstanding, two times the sum of:

(A) the Net Cash Proceeds received by the Company after the Closing
Date from the issuance and sale of its Capital Stock (other than
Disqualified Stock) to a Person that is not a Subsidiary of the Company,
to the extent such Net Cash Proceeds have not been used pursuant to
clause (iv)(C)(2) of paragraph 1 or clause (iii) or (iv) of paragraph 2
of the "Limitation on Restricted Payments" covenant described below or
clause (v) of the definition of "Permitted Investments" to make a
Restricted Payment, and

(B) 80% of the fair market value of property (other than cash and
cash equivalents) received by the Company after the Closing Date from
the sale of its Capital Stock (other than Disqualified Stock) to a
Person that is not a Subsidiary of the Company, to the extent such sale
of Capital Stock has not been used pursuant to clause (iii) or (iv) of
paragraph 2 of the "Limitation on Restricted Payments" covenant
described below to make a Restricted Payment; provided that such
Indebtedness Incurred pursuant to this clause (x) does not mature prior
to the Stated Maturity of the Notes and has an Average Life longer than
the Notes;

(xi) Indebtedness Incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit in the ordinary course of business, including, without
limitation, letters of credit in respect of workers' compensation claims or
self insurance, or other

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Indebtedness with respect to reimbursement type obligations regarding
workers' compensation claims; provided, however, that upon the drawing of
such letters of credit or the Incurrence of such Indebtedness, such
obligations are reimbursed within 30 days following such drawing or
Incurrence;

(xii) Indebtedness of Persons that are acquired by the Company or any of
its Restricted Subsidiaries or merged into a Restricted Subsidiary in
accordance with the terms of the Indenture; provided that such Indebtedness
is not incurred in contemplation of such acquisition or merger; and
provided further that after giving effect to such acquisition or merger,
either (x) the Company would be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Consolidated Leverage Ratio test
set forth in paragraph 1 of this covenant or (y) the Consolidated Leverage
Ratio is lower (if greater than zero) or higher (if less than zero) than
immediately prior to such acquisition; and

(xiii) Strategic Subordinated Indebtedness.

3. Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that the Company or a Restricted
Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant
shall not be deemed to be exceeded with respect to any outstanding
Indebtedness due solely to the result of fluctuations in the exchange rates of
currencies. Accretion on an instrument issued at a discount will not be deemed
to constitute an Incurrence of Indebtedness.

4. For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or
obligations with respect to letters of credit supporting Indebtedness
otherwise included in the determination of such particular amount shall not be
included and (2) any Liens granted pursuant to the equal and ratable
provisions referred to in the "Limitation on Liens" covenant described below
shall not be treated as Indebtedness. For purposes of determining compliance
with this "Limitation on Indebtedness" covenant, in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described in the proviso in paragraph 1 above or in the clauses in paragraph 2
above, the Company, in its sole discretion, shall classify, and may from time
to time reclassify, such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in the proviso or one of such
clauses.

Limitation on Restricted Payments

1. The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly:

(i) declare or pay any dividend or make any distribution on or with
respect to its Capital Stock (other than (x) dividends or distributions
payable solely in shares of its Capital Stock (other than Disqualified
Stock) or in options, warrants or other rights to acquire shares of such
Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders) held by Persons
other than the Company or any of its Restricted Subsidiaries,

(ii) purchase, redeem, retire or otherwise acquire for value any shares
of Capital Stock of (A) the Company or an Unrestricted Subsidiary
(including options, warrants or other rights to acquire such shares of
Capital Stock) held by any Person or (B) a Restricted Subsidiary other than
a Wholly Owned Restricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Affiliate of
the Company (other than a Wholly Owned Restricted Subsidiary),

(iii) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of the Company that is subordinated
in right of payment to the Notes (other than the purchase, redemption,
repurchase or other acquisition of such subordinated Indebtedness purchased
in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within six months of the
date of acquisition) or

(iv) make any Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in clauses (i) through
(iv) above being collectively "Restricted Payments") if, at the time of,
and after giving effect to, the proposed Restricted Payment:

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(A) a Default or Event of Default shall have occurred and be
continuing,

(B) the Company could not Incur at least $1.00 of Indebtedness under
paragraph 1 of the "Limitation on Indebtedness" covenant, or

(C) the aggregate amount of all Restricted Payments (the amount, if
other than in cash, to be determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a
Board Resolution) made after the Closing Date shall exceed the sum of:

(1) 50% of the aggregate amount of the Adjusted Consolidated Net
Income (or, if the Adjusted Consolidated Net Income is a loss, minus
100% of the amount of such loss) (determined by excluding income
resulting from transfers of assets by the Company or a Restricted
Subsidiary to an Unrestricted Subsidiary) accrued on a cumulative
basis during the period (taken as one accounting period) beginning
on the first day of the fiscal quarter immediately following the
Closing Date and ending on the last day of the last fiscal quarter
preceding the Transaction Date for which reports have been filed
with the Commission or provided to the Trustee pursuant to the
"Commission Reports and Reports to Holders" covenant plus

(2) 100% of the aggregate Net Cash Proceeds and the actual market
value of marketable securities (on the date the calculation
hereunder is made) received by the Company after the Closing Date
from the issuance and sale permitted by the Indenture of its Capital
Stock (other than Disqualified Stock) to a Person who is not a
Subsidiary of the Company, including an issuance or sale permitted
by the Indenture of Indebtedness of the Company for cash subsequent
to the Closing Date upon the conversion of such Indebtedness into
Capital Stock (other than Disqualified Stock) of the Company, or
from the issuance to a Person who is not a Subsidiary of the Company
of any options, warrants or other rights to acquire Capital Stock of
the Company (in each case, exclusive of any Disqualified Stock or
any options, warrants or other rights that are redeemable at the
option of the holder, or are required to be redeemed, prior to the
Stated Maturity of the Notes), and the Net Cash Proceeds from any
capital contributions to the Company after the Closing Date from
Persons other than Subsidiaries of the Company, in each case
excluding such Net Cash Proceeds to the extent used to Incur
Indebtedness pursuant to clause (x) of paragraph 2 under the
"Limitation on Indebtedness" covenant and excluding Net Cash
Proceeds from the issuance of Capital Stock to the extent used to
make a Permitted Investment in accordance with clause (v) of such
defined term, plus

(3) amounts received from Investments (other than Permitted
Investments) in any Person resulting from payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to the Company or any Restricted
Subsidiary or from the Net Cash Proceeds from the sale of any such
Investment (except, in each case, to the extent any such payment or
proceeds are included in the calculation of Adjusted Consolidated
Net Income), or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed, in each case, the
amount of Investments previously made by the Company or any
Restricted Subsidiary in such Person or Unrestricted Subsidiary.

2. The foregoing provision shall not be violated by reason of:

(i) the payment of any dividend within 60 days after the date of
declaration thereof if, at said date of declaration, such payment would
comply with the foregoing paragraph 1;

(ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to the Notes including premium, if any, and accrued and unpaid
interest, with the proceeds of, or in exchange for, Indebtedness Incurred
under clauses (i) or (v) of paragraph 2 of the "Limitation on Indebtedness"
covenant;

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(iii) the repurchase, redemption or other acquisition of Capital Stock
of the Company or an Unrestricted Subsidiary (or options, warrants or other
rights to acquire such Capital Stock) in exchange for, or out of the
proceeds of a substantially concurrent offering of, shares of Capital Stock
(other than Disqualified Stock) of the Company (or options, warrants or
other rights to acquire such Capital Stock);

(iv) the making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of Indebtedness of
the Company which is subordinated in right of payment to the Notes in
exchange for, or out of the proceeds of, a substantially concurrent
offering of, shares of the Capital Stock (other than Disqualified Stock) of
the Company (or options, warrants or other rights to acquire such Capital
Stock);

(v) payments or distributions to dissenting stockholders pursuant to
applicable law, pursuant to or in connection with a consolidation, merger
or transfer of assets that complies with the provisions of the Indenture
applicable to mergers, consolidations and transfers of all or substantially
all of the property and assets of the Company;

(vi) the declaration or payment of dividends on the Common Stock of the
Company following a Public Equity Offering of such Common Stock, of up to
6% per annum of the Net Cash Proceeds received by the Company in such
Public Equity Offering;

(vii) the repurchase, retirement or other acquisition or retirement for
value of Capital Stock (or options, warrants or other rights to acquire
such Capital Stock) of the Company that is not registered under the
Exchange Act and is held by any current or former employee, director or
consultant (or their estates or the beneficiaries of such estates) of the
Company or any Subsidiary, not to exceed (A) in any calendar year $2.0
million or (B) $5.0 million in the aggregate;

(viii) repurchases of Capital Stock deemed to occur upon exercise of
stock options if such Capital Stock represents a portion of the exercise
price of such options;

(ix) repurchases of fractional shares of Capital Stock in connection
with the exercise of warrants to acquire Common Stock of the Company,
provided such repurchase is in compliance with the "Limitation on
Transactions with Shareholders and Affiliates" covenant; and

(x) other Restricted Payments in an aggregate amount not to exceed $2.0
million;

provided that, except in the case of clauses (i), (ii), (iii) and (iv), no
Default or Event of Default shall have occurred and be continuing or occur as
a consequence of the actions or payments set forth therein.

3. Each Restricted Payment permitted pursuant to the preceding paragraph 2
(other than the Restricted Payment referred to in clauses (ii) or (viii)
thereof, an exchange of Capital Stock for Capital Stock or Indebtedness
referred to in clause (iii) or (iv) thereof and an Investment referred to in
clause (vi) thereof), and the Net Cash Proceeds from any issuance of Capital
Stock referred to in clauses (iii) and (iv), shall be included in calculating
whether the conditions of clause (iv)(c) of paragraph 1 of this "Limitation on
Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Capital Stock
of the Company are used for the redemption, repurchase or other acquisition of
the Notes, or Indebtedness that is equal in right of payment with the Notes,
then the Net Cash Proceeds of such issuance shall be included in clause
(iv)(c) of paragraph 1 of this "Limitation on Restricted Payments" covenant
only to the extent such proceeds are not used for such redemption, repurchase
or other acquisition of Indebtedness.

4. Any Restricted Payments made other than in cash shall be valued at fair
market value. The amount of any Investment "outstanding" at any time shall be
deemed to be equal to the amount of such Investment on the date made, less the
return of capital to the Company and its Restricted Subsidiaries with respect
to such Investment by distribution, sale or otherwise (up to the amount of
such Investment on the date made).

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Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries

1. The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or restriction of any kind on the ability of any
Restricted Subsidiary to:

(i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by
the Company or any other Restricted Subsidiary,

(ii) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary,

(iii) make loans or advances to the Company or any other Restricted
Subsidiary, or

(iv) transfer any of its property or assets to the Company or any other
Restricted Subsidiary.

2. The foregoing provisions shall not restrict any encumbrances or
restrictions:

(i) existing on the Closing Date in the Senior Secured Credit Facility,
the Lucent Facility, the Indenture, the indenture for the Senior Discount
Notes or any other agreements in effect on the Closing Date, and any
extensions, refinancings, renewals or replacements of such agreements;
provided that the encumbrances and restrictions in any such extensions,
refinancings, renewals or replacements are no less favorable in any
material respect to the Holders than those encumbrances or restrictions
that are then in effect and that are being extended, refinanced, renewed or
replaced;

(ii) existing under or by reason of applicable law, rule, regulation or
order;

(iii) existing with respect to any Person or the property or assets of
such Person acquired by the Company or any Restricted Subsidiary, existing
at the time of such acquisition and not incurred in contemplation thereof,
which encumbrances or restrictions are not applicable to any Person or the
property or assets of any Person other than such Person or the property or
assets of such Person so acquired;

(iv) in the case of clause (iv) of paragraph 1 of this "Limitation on
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries"
covenant:

(A) that restrict in a customary manner the subletting, assignment
or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset,

(B) existing by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any property or assets of
the Company or any Restricted Subsidiary not otherwise prohibited by
the Indenture,

(C) arising or agreed to in the ordinary course of business, not
relating to any Indebtedness, and that do not, individually or in the
aggregate, detract from the value of property or assets of the Company
or any Restricted Subsidiary in any manner material to the Company or
any Restricted Subsidiary or

(D) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature discussed in
clause (iv) above on the property so acquired;

(v) with respect to the Company or a Restricted Subsidiary and imposed
pursuant to an agreement that has been entered into for the sale of assets,
including, without limitation, customary restrictions on the disposition of
all or substantially all of the Capital Stock of, or property and assets
of, such Restricted Subsidiary or the Company;

(vi) contained in the terms of any Indebtedness or any agreement
pursuant to which such Indebtedness was issued (in each case other than
Indebtedness incurred under the Senior Secured Credit Facility) if:

(A) the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial covenant
contained in such Indebtedness or agreement,

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(B) the encumbrance or restriction is not materially more
disadvantageous to the Holders of the Notes than is customary in
comparable financings (as determined by the Company) and

(C) the Company determines that any such encumbrance or restriction
will not materially affect the Company's ability to make principal or
interest payments on the Notes;

(vii) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;

(viii) customary provisions in joint venture agreements and other
similar agreements entered into in the ordinary course of business; and

(ix) any encumbrances or restrictions of the type referred to in clauses
(i)-(iv) of paragraph 1 of this covenant imposed by any amendments,
modifications, renewals, restatements, increases, supplements, refundings,
replacements or refinancings of the contracts referred to in clauses (i)
through (viii) above; provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings are, in the good faith judgment of the Company, not materially
more disadvantageous to the Holders than those contained in the restriction
prior to such amendment, modification, restatement, renewal, increase,
supplement, refunding, replacement or refinancing.

3. Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent the
Company or any Restricted Subsidiary from (1) creating, incurring, assuming or
suffering to exist any Liens otherwise permitted in the "Limitation on Liens"
covenant or (2) restricting the sale or other disposition of property or
assets of the Company or any of its Restricted Subsidiaries that secure
Indebtedness of the Company or any of its Restricted Subsidiaries.

Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries

The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except:

(i) to the Company or a Wholly Owned Restricted Subsidiary;

(ii) issuances of director's qualifying shares or sales to foreign
nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to
the extent required by applicable law;

(iii) if, immediately after giving effect to such issuance or sale, such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary
and any Investment in such Person remaining after giving effect to such
issuance or sale would have been permitted to be made under the "Limitation
on Restricted Payments" covenant if made on the date of such issuance or
sale; or

(iv) issuances or sales of Common Stock (including options, warrants or
other rights to purchase shares of such Common Stock) of a Restricted
Subsidiary, provided that the Company or any Restricted Subsidiary applies
an amount equal to the Net Cash Proceeds thereof in accordance with the
"Limitation on Asset Sales" covenant.

Limitation on Issuances of Guarantees by Restricted Subsidiaries

1. The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is pari passu
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless:

(i) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for a Guarantee (a
"Subsidiary Guarantee") of payment of the Notes by such Restricted
Subsidiary and

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(ii) such Restricted Subsidiary waives and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the
Company or any other Restricted Subsidiary as a result of any payment by
such Restricted Subsidiary under its Subsidiary Guarantee; provided that
this paragraph 1 shall not be applicable to any Guarantee of any Restricted
Subsidiary (x) that existed at the time such Person became a Restricted
Subsidiary and was not Incurred in connection with, or in contemplation of,
such Person becoming a Restricted Subsidiary or (y) of the Indebtedness
Incurred under the Senior Secured Credit Facility.

2. If the Guaranteed Indebtedness is (A) pari passu in right of payment
with the Notes, then the Guarantee of such Guaranteed Indebtedness shall be
pari passu in right of payment with, or subordinated to, the Subsidiary
Guarantee or (B) subordinated in right of payment to the Notes, then the
Guarantee of such Guaranteed Indebtedness shall be subordinated in right of
payment to the Subsidiary Guarantee at least to the extent that the Guaranteed
Indebtedness is subordinated to the Notes.

3. Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon:

(i) any sale, exchange or transfer, to any Person not an Affiliate of
the Company, of all of the Company's and each Restricted Subsidiary's
Capital Stock in, or all or substantially all the assets of, such
Restricted Subsidiary (which sale, exchange or transfer is not prohibited
by the Indenture) or

(ii) the release or discharge of the Guarantee which resulted in the
creation of such Subsidiary Guarantee, except a discharge or release by or
as a result of payment under such Guarantee.

Limitation on Transactions with Shareholders and Affiliates

1. The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction
(including, without limitation, the purchase, sale, lease or exchange of
property or assets, or the rendering of any service) with any Affiliate of the
Company or any Restricted Subsidiary, except upon fair and reasonable terms no
less favorable to the Company or such Restricted Subsidiary than could be
obtained, at the time of such transaction or, if such transaction is pursuant
to a written agreement, at the time of the execution of the agreement
providing therefor, in a comparable arm's-length transaction with a Person
that is not such a holder or an Affiliate.

2. The foregoing limitation does not limit, and shall not apply to

(i) transactions:

(A) approved by a majority of the disinterested members of the Board
of Directors, or

(B) for which the Company or a Restricted Subsidiary delivers to the
Trustee a written opinion of a nationally recognized investment banking
firm or a nationally recognized firm having expertise in the specific
area which is the subject of such determination stating that the
transaction is fair to the Company or such Restricted Subsidiary from a
financial point of view;

(ii) any transaction solely between the Company and any of its
Restricted Subsidiaries or solely between Restricted Subsidiaries;

(iii) the payment of reasonable and customary regular fees to, and
indemnity provided on behalf of, officers, directors, employees or
consultants of the Company or its Restricted Subsidiaries;

(iv) any payments or other transactions pursuant to any tax-sharing
agreement between the Company and any other Person with which the Company
files a consolidated tax return or with which the Company is part of a
consolidated group for tax purposes;

(v) any agreement as in effect as of the Closing Date or any amendment
thereto (so long as any such amendment is not disadvantageous to the
Holders in any material respect);

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(vi) the existence of, or the performance by the Company or any of its
Restricted Subsidiaries of its obligations under the terms of, any
stockholders agreement (including any registration rights agreement or
purchase agreement related thereto) to which it is a party as of the
Closing Date and any similar agreements which it may enter into thereafter
(so long as any such amendment is not disadvantageous to the Holders in any
material respect);

(vii) any Permitted Investments and Restricted Payments not prohibited
by the "Limitation on Restricted Payments" covenant; or

(viii) the issuance of any Capital Stock (other than Disqualified Stock)
of the Company.

Notwithstanding the foregoing, any transaction or series of related
transactions covered by paragraph 1 of this "Limitation on Transactions with
Shareholders and Affiliates" covenant and not covered by clauses (ii) through
(vii) of this paragraph 2 the aggregate amount of which exceeds $3.0 million
in value, must be approved or determined to be fair in the manner provided for
in clause (i)(A) or (B) above.

Limitation on Liens

1. The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character (including, without limitation, licenses), or any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without
making effective provision for all of the Notes and all other amounts due
under the Indenture to be directly secured equally and ratably with (or, if
the obligation or liability to be secured by such Lien is subordinated in
right of payment to the Notes, prior to) the obligation or liability secured
by such Lien.

2. The foregoing limitation does not apply to:

(i) Liens existing on the Closing Date or required on the Closing Date
to be provided in the future;

(ii) Liens securing obligations under the Senior Secured Credit Facility
(including Liens pursuant to after-acquired clauses);

(iii) Liens granted after the Closing Date on any assets or Capital
Stock of the Company or its Restricted Subsidiaries created in favor of the
Holders;

(iv) Liens with respect to the assets of a Restricted Subsidiary granted
by such Restricted Subsidiary to the Company or a Restricted Subsidiary to
secure Indebtedness owing to the Company or such other Restricted
Subsidiary;

(v) Liens securing Indebtedness which is Incurred to refinance secured
Indebtedness which is permitted to be Incurred under clause (v) of
paragraph 2 of the "Limitation on Indebtedness" covenant; provided that
such Liens do not extend to or cover any property or assets of the Company
or any Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced;

(vi) Liens on any property or assets of a Restricted Subsidiary securing
Indebtedness of such Restricted Subsidiary permitted under the "Limitation
on Indebtedness" covenant; or

(vii) Permitted Liens.

Limitation on Sale-Leaseback Transactions

1. The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.

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2. The foregoing restriction does not apply to any sale-leaseback
transaction if:

(i) the lease is for a period, including renewal rights, of not in
excess of three years;

(ii) the lease secures or relates to industrial revenue or pollution
control bonds;

(iii) the transaction is solely between the Company and any Wholly Owned
Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or

(iv) the Company or such Restricted Subsidiary, within 12 months after
the sale or transfer of any assets or properties is completed, applies an
amount not less than the net proceeds received from such sale in accordance
with clause (A) or (B) of paragraph 2 of the "Limitation on Asset Sales"
covenant described below.

Limitation on Asset Sales

1. The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless:

(i) the consideration received by the Company or such Restricted
Subsidiary is at least equal to the fair market value of the assets sold or
disposed of and

(ii) at least 75% of the consideration received consists of cash or
Temporary Cash Investments.

For purposes of this covenant, the following are deemed to be cash:

(x) the principal amount or accreted value (whichever is larger) of
Indebtedness of the Company or any Restricted Subsidiary with respect to
which the Company or such Restricted Subsidiary has either (A) received a
written release or (B) been released by operation of law, in either case,
from all liability on such Indebtedness in connection with such Asset Sale
and

(y) securities received by the Company or any Restricted Subsidiary from
the transferee that are promptly converted by the Company or such
Restricted Subsidiary into cash.

2. In the event and to the extent that the Net Cash Proceeds received by
the Company or any of its Restricted Subsidiaries from one or more Asset Sales
occurring on or after the Closing Date in any period of 12 consecutive months
exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of the
date closest to the commencement of such 12-month period for which a
consolidated balance sheet of the Company and its Subsidiaries has been filed
with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant), then the Company shall or shall
cause the relevant Restricted Subsidiary to:

(i) within 12 months after the date Net Cash Proceeds so received exceed
10% of Adjusted Consolidated Net Tangible Assets:

(A) apply an amount equal to such excess Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of the Company or any
Restricted Subsidiary providing a Subsidiary Guarantee pursuant to the
"Limitation on Issuances of Guarantees by Restricted Subsidiaries"
covenant described above or Indebtedness of any other Restricted
Subsidiary, in each case owing to a Person other than the Company or
any of its Restricted Subsidiaries or

(B) invest an equal amount, or the amount not so applied pursuant to
clause (A) (or enter into a definitive agreement committing to so
invest within 12 months after the date of such agreement), in property
or assets (other than current assets) of a nature or type or that are
used in a business (or in a Person (other than a natural person) having
property and assets of a nature or type, or engaged in a business)
similar or related to the nature or type of the property and assets of,
or the business of, the Company and its Restricted Subsidiaries
existing on the date of such investment (as determined in good faith by
the Board of Directors, whose determination shall be conclusive and
evidenced by a Board Resolution) and

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(ii) apply (no later than the end of the 12-month period referred to in
clause (i)) such excess Net Cash Proceeds (to the extent not applied
pursuant to clause (i)) as provided in the following paragraph 3 of this
"Limitation on Asset Sales" covenant.

The amount of such excess Net Cash Proceeds required to be applied (or to
be committed to be applied) during such 12-month period as set forth in clause
(i) of the preceding sentence and not applied as so required by the end of
such period shall constitute "Excess Proceeds."

3. If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to
this "Limitation on Asset Sales" covenant totals at least $5 million, the
Company must commence, not later than the fifteenth Business Day of such
month, and consummate an Offer to Purchase from the Holders on a pro rata
basis, and an offer to purchase any outstanding Indebtedness with similar
provisions requiring the Company to make an offer to purchase such
Indebtedness, in an aggregate principal amount of the Notes and such pari
passu Indebtedness equal to:

(A) with respect to the Notes, the product of such Excess Proceeds
multiplied by a fraction, the numerator of which is the outstanding
principal amount of the Notes and the denominator of which is the sum of
the outstanding principal amount of the Notes and such pari passu
Indebtedness (the product hereinafter referred to as the "Note Amount"),
and

(B) with respect to the pari passu Indebtedness, the excess of the
Excess Proceeds over the Note Amount,

at a purchase price equal to 100% of the principal amount or accreted value of
such pari passu Indebtedness, as the case may be, on the relevant Payment Date
or such other date set forth in the documentation governing the pari passu
Indebtedness, plus, in each case, accrued interest (if any) to the Payment
Date or such other date set forth in the documentation governing the pari
passu Indebtedness. If the aggregate purchase price of the Notes tendered
pursuant to the Offer to Purchase is less than the Excess Proceeds, the
remaining will be available for use by the Company for general corporate
purposes. Upon the consummation of any Offer to Purchase in accordance with
the terms of the Indenture, the amount of Net Cash Proceeds from Asset Sales
subject to any future Offer to Purchase shall be deemed to be zero.

Repurchase of Notes Upon a Change of Control

The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding,
at a purchase price equal to 101% of the principal amount of the Notes on the
relevant Payment Date, plus accrued interest (if any) to the Payment Date;
provided, however, that notwithstanding the occurrence of a Change of Control,
the Company shall not be obligated to purchase the Notes pursuant to this
covenant in the event that it has irrevocably committed to, within 90 days of
such Change of Control, redeem all the Notes in accordance with the terms
hereof.

There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well
as may be contained in other securities of the Company which might be
outstanding at the time). The above covenant requiring the Company to
repurchase the Notes will, unless consents are obtained, require the Company
to repay all indebtedness then outstanding which by its terms would prohibit
such Note repurchase, either prior to or concurrently with such Note
repurchase.

Commission Reports and Reports to Holders

At all times from and after the earlier of (i) the date of the commencement
of an exchange offer or the effectiveness of a Shelf Registration Statement
(the "Registration") and (ii) the date that is six months after the Closing
Date, in either case, whether or not the Company is then required to file
reports with the Commission, the Company shall deliver for filing with the
Commission all such reports and other information as it would be

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required to file with the Commission by Section 13(a) or 15(d) under the
Exchange Act if it were subject thereto. All references herein to reports
"filed" with the Commission shall be deemed to refer to the reports then most
recently delivered for filing, whether or not accepted by the Commission. The
Company shall supply the Trustee and each Holder or shall supply to the
Trustee for forwarding to each such Holder, without cost to such Holder,
copies of such reports and other information. In addition, at all times prior
to the earlier of the date of the Registration and the date that is six months
after the Closing Date, the Company shall, at its cost, deliver to each Holder
of the Notes quarterly and annual reports substantially equivalent to those
which would be required by the Exchange Act (or, in lieu thereof, the
Registration Statement on Form S-1, S-3 or S-4 filed or to be filed with the
Commission in connection with the exchange offer or the Shelf Registration
Statement, if such form and any amendments thereof contains comparable
information). In addition, at all times prior to the Registration, upon the
request of any Holder or any prospective purchaser of the Notes designated by
a Holder, the Company shall supply to such Holder or such prospective
purchaser the information required under Rule 144A under the Securities Act.

Events of Default

1. The following events are defined as "Events of Default" in the
Indenture:

(a) default in the payment of principal of (or premium, if any, on) any
Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise;

(b) default in the payment of interest on any Note when the same becomes
due and payable, and such default continues for a period of 30 days;

(c) the Company or the Guarantor defaults in the performance of or
breaches any other covenant or agreement of the Company or the Guarantor in
the Indenture or under the Notes (other than a default specified in clause
(a) or (b) above) and such default or breach continues for a period of 30
consecutive days after written notice by the Trustee or the Holders of 25%
or more in aggregate principal amount of the Notes;

(d) the Company shall have failed to make or consummate an Offer to
Purchase in accordance with the "Limitation on Asset Sales" covenant above;

(e) the Company shall have failed to make or consummate an Offer to
Purchase in accordance with the provisions of "Repurchase of Notes Upon a
Change of Control" above;

(f) there occurs with respect to any issue or issues of Indebtedness of
the Company or any Significant Subsidiary having an outstanding principal
amount at maturity of $5 million or more in the aggregate for all such
issues of all such Persons, whether such Indebtedness now exists or shall
hereafter be created,

(I) an event of default that has caused the holder thereof to
declare such Indebtedness to be due and payable prior to its Stated
Maturity and such Indebtedness has not been discharged in full or such
acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or
(II) the failure to make a principal payment at the final (but not
any interim) fixed maturity and such defaulted payment shall not have
been made, waived or extended within 30 days of such payment default;

(g) any final judgment or order (not covered by insurance) for the
payment of money in excess of $5 million in the aggregate (treating any
deductibles, self-insurance or retention as not so covered) shall be
rendered against the Company or any Significant Subsidiary and shall not be
paid or discharged, and there shall be any period of 30 consecutive days
following entry of the final judgment or order that causes the aggregate
amount for all such final judgments or orders outstanding and not paid or
discharged against the Company or any of its Significant Subsidiaries to
exceed $5 million during which a stay of enforcement of such final judgment
or order, by reason of a pending appeal or otherwise, shall not be in
effect;

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(h) a court having jurisdiction in the premises enters a decree or order
for:

(A) relief in respect of the Company, the Guarantor or any
Significant Subsidiary in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect,

(B) appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official of the Company, the Guarantor
or any Significant Subsidiary or for all or substantially all of the
property and assets of the Company, the Guarantor or any Significant
Subsidiary or

(C) the winding up or liquidation of the affairs of the Company, the
Guarantor or any Significant Subsidiary and, in each case, such decree
or order shall remain unstayed and in effect for a period of 30
consecutive days;

(i) the Company, the Guarantor or any Significant Subsidiary:

(A) commences a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or consents
to the entry of an order for relief in an involuntary case under any
such law,

(B) consents to the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of the Company, the Guarantor or any Significant
Subsidiary or for all or substantially all of the property and assets
of the Company, the Guarantor or any Significant Subsidiary or

(j) prior to the payment in full of the first six interest payments on
the Notes, the Note Guarantee ceases to be in full force and effect or is
declared null and void, or the Guarantor denies that it has any further
liability under the Note Guarantee, or gives notice to such effect (other
than by reason of the termination of the Indenture).

2. If an Event of Default (other than an Event of Default specified in
clause (h) or (i) above that occurs with respect to the Company or the
Guarantor) occurs and is continuing under the Indenture, the Trustee or the
Holders of at least 25% in aggregate principal amount of the Notes then
outstanding, by written notice to the Company (and to the Trustee if such
notice is given by the Holders), may, and the Trustee at the request of such
Holders shall, declare the principal of, premium, if any, and accrued interest
on the Notes to be immediately due and payable. Upon a declaration of
acceleration, such principal of, premium, if any, and accrued interest shall
be immediately due and payable. In the event of a declaration of acceleration
because an Event of Default set forth in clause (f) above has occurred and is
continuing, such declaration of acceleration shall be automatically rescinded
and annulled if the event of default triggering such Event of Default pursuant
to clause (f) shall be remedied or cured by the Company or the relevant
Significant Subsidiary or waived by the holders of the relevant Indebtedness
within 60 days after the declaration of acceleration with respect thereto. If
an Event of Default specified in clause (h) or (i) above occurs with respect
to the Company or the Guarantor, the principal of, premium, if any, and
accrued interest on the Notes then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part
of the Trustee or any Holder. The Holders of at least a majority in principal
amount of the outstanding Notes by written notice to the Company and to the
Trustee, may waive all past defaults and rescind and annul a declaration of
acceleration and its consequences if:

(i) all existing Events of Default, other than the nonpayment of the
principal of, premium, if any, and interest on the Notes that have become
due solely by such declaration of acceleration, have been cured or waived
and

(ii) the rescission would not conflict with any judgment or decree of a
court of competent jurisdiction. For information as to the waiver of
defaults, see "--Modification and Waiver."

3. The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any

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trust or power conferred on the Trustee. However, the Trustee may refuse to
follow any direction that conflicts with law or the Indenture, that may
involve the Trustee in personal liability, or that the Trustee determines in
good faith may be unduly prejudicial to the rights of Holders of Notes not
joining in the giving of such direction and may take any other action it deems
proper that is not inconsistent with any such direction received from Holders
of Notes. A Holder may not pursue any remedy with respect to the Indenture or
the Notes unless:

(i) the Holder gives the Trustee written notice of a continuing Event of
Default;

(ii) the Holders of at least 25% in aggregate principal amount of
outstanding Notes make a written request to the Trustee to pursue the
remedy;

(iii) such Holder or Holders offer the Trustee indemnity satisfactory to
the Trustee against any costs, liability or expense;

(iv) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and

(v) during such 60-day period, the Holders of a majority in aggregate
principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request.

However, such limitations do not apply to the right of any Holder of a Note
to receive payment of the principal of, premium, if any, or interest on, such
Note or to bring suit for the enforcement of any such payment, on or after the
due date expressed in the Notes, which right shall not be impaired or affected
without the consent of the Holder.

4. The Indenture will require certain officers of the Company to certify,
on or before a date not more than 90 days after the end of each fiscal year,
that a review has been conducted of the activities of the Company and its
Restricted Subsidiaries and the Company's and its Restricted Subsidiaries'
performance under the Indenture and that the Company has fulfilled all
obligations thereunder, or, if there has been a default in the fulfillment of
any such obligation, specifying each such default and the nature and status
thereof. The Company will also be obligated to notify the Trustee of any
default or defaults in the performance of any covenants or agreements under
the Indenture.

Consolidation, Merger and Sale of Assets

The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into the Company unless:

(i) the Company shall be the continuing Person, or the Person (if other
than the Company) formed by such consolidation or into which the Company is
merged or that acquired or leased such property and assets of the Company
shall be a corporation organized and validly existing under the laws of the
United States of America or any jurisdiction thereof and shall expressly
assume, by a supplemental indenture, executed and delivered to the Trustee,
all of the obligations of the Company on all of the Notes and under the
Indenture;

(ii) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing;

(iii) immediately after giving effect to such transaction on a pro forma
basis,

(A) the Company or any Person becoming the successor obligor of the
Notes, as the case may be, shall have a Consolidated Net Worth equal to
or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction or

(B) the Company or any Person becoming the successor obligor of the
Notes, as the case may be, shall have a Consolidated Leverage Ratio no
more than the greater of (I) 6:1 and (II) the Consolidated Leverage
Ratio of the Company immediately prior to such transaction;

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provided that this clause (iii) shall not apply to a consolidation or
merger with or into a Wholly Owned Restricted Subsidiary with a positive
net worth; provided that, in connection with any such merger or
consolidation, no consideration (other than Capital Stock (other than
Disqualified Stock) in the surviving Person or the Company) shall be issued
or distributed to the stockholders of the Company; and

(iv) the Company delivers to the Trustee an Officers' Certificate
(attaching the arithmetic computations to demonstrate compliance with
clause (iii) above) and an Opinion of Counsel, in each case stating that
such consolidation, merger or transfer and such supplemental indenture
complies with this provision and that all conditions precedent provided for
herein relating to such transaction have been complied with;

provided, however, that clause (iii) above does not apply if, in the good
faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the principal purpose
of such transaction is part of a plan to change the state of incorporation of
the Company; and that any such transaction shall not have as one of its
purposes the evasion of the foregoing limitations.

Defeasance

1. Defeasance and Discharge. The Indenture provides that the Company will
be deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to
the Notes (except for, among other matters, certain obligations to register
the transfer or exchange of the Notes, to replace stolen, lost or mutilated
Notes, to maintain paying agencies and to hold monies for payment in trust)
if, among other things,

(A) the Company has deposited with the Trustee, in trust, money and/or
U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the Notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Notes,

(B) the Company has delivered to the Trustee:

(i) either:

(x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a
result of the Company's exercise of its option under this
"Defeasance" provision and will be subject to federal income tax on
the same amount and in the same manner and at the same times as
would have been the case if such deposit, defeasance and discharge
had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service
to the same effect unless there has been a change in applicable
federal income tax law after the Closing Date such that a ruling is
no longer required or

(y) a ruling directed to the Trustee received from the Internal
Revenue Service to the same effect as the aforementioned Opinion of
Counsel, and

(ii) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940
and after the passage of 123 days following the deposit, the trust fund
will not be subject to the effect of Section 547 of the United States
Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law,

(C) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or
lapse of time or both would become an Event of Default, shall have occurred
and be continuing on the date of such deposit or during the period ending
on the 123rd day after the date of such deposit, and such deposit shall not
result in a breach or violation of, or constitute a default under, any
other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound and

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(D) if at such time the Notes are listed on a national securities
exchange, the Company has delivered to the Trustee an Opinion of Counsel to
the effect that the Notes will not be delisted as a result of such deposit,
defeasance and discharge, provided that if simultaneously with the deposit
of the money and/or U.S. Government Obligations referred to in (A) above,
the Company has caused an irrevocable, transferable, standby letter of
credit to be issued by a bank with capital and surplus exceeding the
principal amount of the Notes then outstanding, expiring not earlier than
180 days from its issuance, in favor of the Trustee which permits the
Trustee to draw an amount equal to the principal, premium, if any, and
accrued interest on the Notes through the expiry date of the letter of
credit, then the Company will be deemed to have paid and discharged any and
all obligations in respect of the Notes on the date of the deposit and
issuance of the letter of credit.

2. Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clause (iii) under "Consolidation, Merger and
Sale of Assets" and all the covenants described herein under "Covenants,"
clause (c) under "Events of Default" with respect to such other covenants and
clauses (c), (d), (e), (f) and (g) under "Events of Default" shall be deemed
not to be Events of Default upon, among other things, the deposit with the
Trustee, in trust, of money and/or U.S. Government Obligations that through
the payment of interest and principal in respect thereof in accordance with
their terms will provide money in an amount sufficient to pay the principal
of, premium, if any, and accrued interest on the Notes on the Stated Maturity
of such payments in accordance with the terms of the Indenture and the Notes,
the satisfaction of the provisions described in clauses (B)(ii), (C) and (D)
of the preceding paragraph 1 and the delivery by the Company to the Trustee of
an Opinion of Counsel to the effect that, among other things, the Holders will
not recognize income, gain or loss for federal income tax purposes as a result
of such deposit and defeasance of certain covenants and Events of Default and
will be subject to federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such deposit and
defeasance had not occurred.

3. Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions
of the Indenture with respect to the Notes as described in the immediately
preceding paragraph 2 and the Notes are declared due and payable because of
the occurrence of an Event of Default that remains applicable, the amount of
money and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated
Maturity but may not be sufficient to pay amounts due on the Notes at the time
of the acceleration resulting from such Event of Default. However, the Company
will remain liable for such payments.

Modification and Waiver

Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that
no such modification or amendment may, without the consent of each Holder
affected thereby,

(i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note,

(ii) reduce the principal amount of, or premium, if any, or interest on,
any Note,

(iii) change the place or currency of payment of principal of, or
premium, if any, or interest on, any Note,

(iv) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption,
on or after the Redemption Date) of any Note,

(v) reduce the above-stated percentage of outstanding Notes the consent
of whose Holders is necessary to modify or amend the Indenture,

(vi) waive a default in the payment of principal of, premium, if any, or
interest on the Notes or

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(vii) reduce the percentage or aggregate principal amount of outstanding
Notes the consent of whose Holders is necessary for waiver of compliance
with certain provisions of the Indenture or for waiver of certain defaults.

Guarantee

The Company's obligations under the Notes are fully and unconditionally
guaranteed on an unsubordinated basis (the "Note Guarantee") by KMC Telecom
Financing, Inc., a Wholly-Owned Restricted Subsidiary of the Company that has
no assets, other than certain rights relating to the Pledged Securities;
provided that the Note Guarantee shall not be enforceable against KMC Telecom
Financing, Inc. in an amount in excess of the net worth of KMC Telecom
Financing, Inc. at the time that determination of such net worth is, under
applicable law, relevant to the enforceability of the Note Guarantee. Such net
worth shall include any claim of KMC Telecom Financing, Inc. against the
Company for reimbursement. After the first six interest payments on the Notes
are paid in full, the Note Guarantee will terminate and the Guarantor will
have no further obligations in respect of the Indenture or the Notes.

No Personal Liability of Incorporators, Stockholders, Officers, Directors, or
Employees

The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any
of the Notes or because of the creation of any Indebtedness represented
thereby, shall be had against any incorporator, stockholder, officer,
director, employee or controlling person of the Company or of any successor
Person thereof. Each Holder, by accepting the Notes, waives and releases all
such liability.

Concerning the Trustee

The Indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as
are specifically set forth in such Indenture. If an Event of Default has
occurred and is continuing, the Trustee will use the same degree of care and
skill in its exercise of the rights and powers invested in it under the
Indenture as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.

The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights
of the Trustee, should it become a creditor of the Company, to obtain payment
of claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.

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<PAGE>

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following summary sets forth the opinion of Kelley Drye & Warren LLP,
counsel to the Company, as to the principal U.S. federal income tax
consequences of an exchange of the original notes for the exchange notes and
the ownership and disposition of the exchange notes under U.S. federal income
tax laws as of the date hereof. This summary is based on current provisions of
the U.S. Internal Revenue Code of 1986, as amended (the "Code"), applicable
Treasury Regulations, judicial authority, and current administrative rulings
and pronouncements of the Internal Revenue Service, all of which are subject
to change, possibly with retroactive effect. There can be no assurance that
the Internal Revenue Service will not take a contrary view, and no ruling from
the Internal Revenue Service has been or will be sought by the Company.

This summary does not purport to deal with all aspects of taxation that may
be relevant to particular holders of the exchange notes in light of their
personal investment or tax circumstances, or to certain types of investors
(including individual retirement accounts and other tax deferred accounts,
insurance companies, financial institutions, broker-dealers, tax-exempt
organizations, holders holding the exchange notes as part of a hedge, straddle
or conversion transaction or holders whose functional currency is not the U.S.
dollar) subject to special treatment under the U.S. federal income tax laws.
In addition, except as otherwise provided, this discussion deals only with
exchange notes acquired by investors at their initial issue prices in the
offering of the notes, and held as capital assets within the meaning of
Section 1221 of the Code.

For purposes of this discussion, the term "U.S. Holder" means a citizen or
resident of the U.S., a corporation, limited liability company or partnership
created or organized in the U.S. or under the laws of the U.S. or any
political subdivision thereof, an estate the income of which is includible in
gross income for U.S. federal income tax purposes regardless of its source, or
a trust if a court within the U.S. is able to exercise primary supervision
over the administration of the trust and one or more U.S. persons has the
authority to control all substantial decisions of the trust. The term "Non-
U.S. Holder" means any person other than a U.S. Holder.

THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. THE TAX TREATMENT
MAY VARY DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM
OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES, INCLUDING THE APPLICABILITY
AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.

The Exchange

The exchange of original notes for exchange notes pursuant to the exchange
offer will not be a taxable event for U.S. federal income tax purposes. As a
result, there will not be any material U.S. federal income tax consequences to
a holder exchanging original notes for exchange notes pursuant to the exchange
offer.

Because each exchange note is a continuation of the corresponding original
note, the remainder of this discussion of certain federal income tax
consideration generally refers only to "notes."

The Notes

The Company intends to treat the notes as indebtedness for U.S. federal
income tax purposes. However, it is possible that the Service will contend
that the notes should be treated as an equity interest in, rather than as debt
of, the Company. If the notes are treated as equity, the amount of any actual
or constructive payments on a note would first be taxable to the holder as
dividend income to the extent of the Company's current and accumulated
earnings and profits, and then would be treated as a return of capital to the
extent of the holder's tax basis in the note, with any remaining amount
treated as gain from the sale of a note. As a result, until such time as the
Company has earnings and profits as determined for U.S. federal income tax
purposes, payments on a note treated as equity will be a nontaxable return of
capital and will be applied against and reduce the adjusted tax basis of such
note in the hands of its holder (but not below zero) and any excess will be
treated as gain from

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<PAGE>

the sale of the note. Further, any payments on the notes treated as equity to
Non-U.S. Holders would not be eligible for the portfolio interest exception
from U.S. withholding tax, and dividends thereon would be subject to U.S.
withholding tax at a flat rate of 30% (or lower applicable treaty rate) and
gain from their sale or other taxable disposition might also be subject to
U.S. tax in certain circumstances. In addition, in the event of equity
treatment, the Company would not be entitled to deduct interest on the notes
for U.S. federal income tax purposes. The remainder of this discussion assumes
that the notes will constitute debt of the Company for such tax purposes.

Payments of Interest on the Notes

Interest paid on a note generally will be taxable to a U.S. Holder as
ordinary interest income at the time it accrues or is received, in accordance
with the U.S. Holder's regular method of accounting for federal income tax
purposes.

Mandatory and Optional Redemptions

In the event of a change of control, the Company will be required to offer
to redeem all of the notes at redemption prices specified elsewhere herein. In
the event that the Company receives net proceeds from certain sales of its
capital stock, the Company may, at any time prior to May 15, 2002, use all or
a portion of such net proceeds to redeem the notes in amounts and at
redemption prices specified elsewhere herein. Under Treasury Regulations
issued under provisions of the Code relating to original issue discount (the
"OID Regulations"), computation of yield and maturity of the notes is not
affected by such redemption rights and obligations if, based on all the facts
and circumstances as of the issue date, payments on the notes are
significantly more likely than not to occur in accordance with the stated
payment schedule of the notes (which does not reflect a change of control or
sales of certain kinds of the Company's capital stock). The Company believes,
based on all of the facts and circumstances as of the issue date, it is
significantly more likely than not that the notes will be paid according to
their stated schedule. Therefore, the Company will not take the redemption
rights and obligations into account in determining the yield and maturity of
the notes.

The Company may redeem the notes, in whole or in part, at any time on or
after May 15, 2004, at redemption prices specified elsewhere herein, plus
accrued and unpaid interest to the date of redemption. The OID Regulations
contain rules for determining yield and maturity of any instrument that may be
redeemed prior to its stated maturity date at the option of the issuer. Under
the OID Regulations, solely for purposes of the accrual of OID, it is assumed
that the issuer will exercise any option to redeem a debt instrument if such
exercise will lower the yield-to-maturity of the debt instrument. The Company
believes that it will not be presumed to redeem the notes prior to their
stated maturity under the foregoing rules because the exercise of such option
would not lower the yield-to-maturity of the notes.

Market Discount

If a U.S. Holder acquires a note for an amount that is less than its stated
redemption price at maturity, the amount of the difference will be treated as
"market discount," unless such difference is less than a specified de minimis
amount. Under the market discount rules of the Code, a U.S. Holder will be
required to treat any principal payment on, or any gain on the sale, exchange,
retirement or other disposition (including a gift) of, a note as ordinary
income to the extent of any accrued market discount that has not previously
been included in income. Market discount generally accrues on a straight-line
basis over the remaining term of the note, unless the U.S. Holder elects to
accrue market discount on a constant yield method based on compounding
interest. A U.S. Holder may not be allowed to deduct immediately all or a
portion of the interest expense on any indebtedness incurred or continued to
purchase or to carry such note.

A U.S. Holder may elect to include market discount in income currently as
it accrues (either on a straight-line basis or, if the U.S. Holder so elects,
on a constant-yield basis), in which case the interest deferral rule set forth
in the preceding paragraph will not apply. Such an election will apply to all
market discount bonds acquired

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<PAGE>

by the U.S. Holder on or after the first day of the first taxable year to
which such election applies and may be revoked only with the consent of the
Internal Revenue Service.

Amortization of Bond Premium

A U.S. Holder that purchases a note for an amount in excess of the sum of
all remaining payments due on the note after the purchase date (other than
payments of qualified stated interest) will be considered to have purchased
the note at a premium. Such holder may elect to amortize such premium (as an
offset to interest income), using a constant-yield method, over the remaining
term of the note, subject to special rules for early redemption provisions.
Such election, once made, generally applies to all debt instruments held or
subsequently acquired by the U.S. Holder on or after the first day of the
first taxable year to which such election applies and may be revoked only with
the consent of the Internal Revenue Service. A U.S. Holder that elects to
amortize such premium must reduce its tax basis in the note by the amount of
the premium amortized during its holding period. If a U.S. Holder does not
elect to amortize bond premium, the amount of such premium will be included in
the U.S. Holder's tax basis for purposes of computing gain or loss in
connection with a taxable disposition of the note.

Sale or Other Disposition

In general, upon the sale, exchange or redemption of a note, a U.S. Holder
will recognize taxable gain or loss equal to the difference between (i) the
amount of cash and the fair market value of any property received on the sale,
exchange or redemption (not including any amount attributable to accrued but
unpaid interest) and (ii) the U.S. Holder's adjusted tax basis in the note. A
U.S. Holder's adjusted tax basis in a note generally will be equal to the cost
of the note to such U.S. Holder, increased by the amount of any market
discount previously included in income by the U.S. Holder and reduced by the
amount of any payment received by the U.S. Holder, other than payments of
qualified stated interest, and by the amount of amortizable bond premium taken
into account.

Subject to the discussion of market discount above, gain or loss realized
on the sale, exchange or redemption of a note will be capital gain or loss.
Capital gain recognized by certain non-corporate U.S. Holders, including
individuals, generally will be subject to a maximum federal income tax rate of
20% if the U.S. Holder held the note for more than one year. The deductibility
of capital losses is subject to limitations.

Non-U.S. Holders

In general, payments of interest on the notes by the Company or any paying
agent to a beneficial owner of a note that is a Non-U.S. Holder will not be
subject to U.S. withholding tax, provided that (i) such Non-U.S. Holder does
not own, actually or constructively, 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote, within the
meaning of Section 871(h)(3) of the Code, (ii) such Non-U.S. Holder is not a
controlled foreign corporation that is related, directly or indirectly, to the
Company through stock ownership, (iii) such Non-U.S. Holder is not a bank
receiving interest described in Section 881(c)(3)(A) of the Code, and (iv) the
certification requirements under Section 871(h) or Section 881(c) of the Code
and Treasury Regulations thereunder (summarized below) are satisfied,

A Non-U.S. Holder of a note will not be subject to U.S. income tax on gain
realized on the sale, exchange or other disposition of such note unless (i)
such Non-U.S. Holder is an individual who is present in the U.S. for 183 days
or more in the taxable year of sale, exchange or other disposition, and
certain conditions are met, (ii) such gain is effectively connected with the
conduct by the Non-U.S. Holder of a trade or business in the U.S. and, if
certain tax treaties apply, is attributable to a U.S. permanent establishment
maintained by the Non-U.S. Holder, or (iii) the Non-U.S. Holder is subject to
Code provisions applicable to certain U.S. expatriates.

A note held by an individual who is not a citizen or resident of the U.S.
at the time of his death will not be subject to U.S. estate tax as a result of
such individual's death, provided that, at the time of such individual's

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<PAGE>

death, the individual does not own, actually or constructively, 10% or more of
the total combined voting power of all classes of stock of the Company
entitled to vote and payments with respect to such note would not have been
effectively connected with the conduct by such individual of a trade or
business in the U.S.

To satisfy the certification requirements referred to above, (i) the
beneficial owner of a note must certify, under penalties of perjury, to the
Company or its paying agent, as the case may be, that such owner is a Non-U.S.
Holder and must provide such owner's name and address and U.S. taxpayer
identification number ("TIN") (which certification may be made on IRS
Form W-8BEN), if any, or (ii) a securities clearing organization, bank or other
financial institution that holds customers securities in the ordinary course
of its trade or business (a "Financial Institution") and holds the note on
behalf of the beneficial owner thereof must certify, under penalties of
perjury, to the Company or its paying agent, as the case may be, that such
certificate has been received from the beneficial owner and must furnish the
payor with a copy thereof.

For payments made after December 31, 2000, in the case of notes held by a
foreign partnership that is not a withholding foreign partnership, the
partnership, in addition to providing an IRS Form W-8IMY, must attach an IRS
Form W-8BEN received from each partner.

If a Non-U.S. Holder of a note is engaged in a trade or business in the
U.S. and if interest on the note or gain realized on the sale, exchange or
other disposition of the note is effectively connected with the conduct of
such trade or business (and, if a tax treaty applies, is attributable to a
U.S. permanent establishment maintained by the Non-U.S. Holder in the U.S.),
the Non-U.S. Holder, although exempt from U.S. withholding tax (provided that
certification requirements are met), will generally be subject to regular U.S.
income tax on such interest or gain in the same manner as if it were a U.S.
Holder. In lieu of the certificate described above, such a Non-U.S. Holder
will be required to provide the Company with a properly executed IRS Form 4224
(or, after December 31, 2000, an IRS Form W-8ECI) in order to claim an
exemption from withholding tax. In addition, if such Non-U.S. Holder is a
foreign corporation, it may be subject to a branch profits tax equal to 30%
(or such lower rate provided by an applicable treaty) of its effectively
connected earnings and profits for the taxable year, subject to certain
adjustments.

Non-U.S. Holders should consult with their tax advisors regarding U.S. and
foreign tax consequences with respect to the notes.

Backup Withholding and Information Reporting

Backup withholding at a rate of 31% will apply to payments made in respect
of a note to a holder that is not an "exempt recipient" and that fails to
provide a TIN or certificate of exempt status or fails to report in full
dividend or interest income in the manner required. Generally, individuals are
not exempt recipients, whereas corporations and certain other entities are
exempt recipients. Payments made in respect of a note must be reported to the
Internal Revenue Service, unless the holder is an exempt recipient or
otherwise establishes an exemption.

In the case of payments of interest on a note to a Non-U.S. Holder, backup
withholding and information reporting will not apply if such Non-U.S. Holder
has furnished a certificate of foreign status on IRS Form W-8BEN, W-8ECI or
W-8IMY or otherwise establishes an exemption (provided that neither the Company
nor a paying agent has actual knowledge, or after December 31, 2000, reason to
know, that the holder is a U.S. Holder or that the conditions of any other
exemption are not in fact satisfied).

Payments of the proceeds of the sale of a note to or through a foreign
office of a broker that is (i) a U.S. person, (ii) a controlled foreign
corporation, (iii) a foreign person 50% or more of whose gross income from all
sources for the three-year period ending with the close of its taxable year
preceding the payment was effectively connected with the conduct of a trade or
business within the U.S. or (iv) with respect to payments made after December
31, 2000, foreign partnerships with certain connections to the U.S., are
currently subject to certain information reporting requirements, but not
backup withholding, unless the payee is an exempt recipient or such broker has
evidence in its records that the payee is a Non-U.S. Holder and has no actual
knowledge or, after

133
<PAGE>

December 31, 2000, reason to know that such evidence is false and certain
other conditions are met. Payments of the proceeds of a sale of a note to or
through the U.S. office of a broker will be subject to information reporting
and backup withholding unless the payee certifies under penalties of perjury
as to his, her or its status as a Non-U.S. Holder and satisfies certain other
qualifications (and no agent or broker who is responsible for receiving or
reviewing such statement has actual knowledge or, after December 31, 2000,
reason to know that it is incorrect) and provides his, her or its name and
address or the payee otherwise establishes an exemption.

Non-U.S. Holders should consult their tax advisors regarding the
application of information reporting and backup withholding in their
particular situations, the availability of an exemption therefrom, and the
procedure for obtaining an exemption, if available. Any amounts withheld under
the backup withholding rules from a payment to a holder of a note will be
allowed as a refund or credit against such holder's U.S. federal income tax,
provided that the required information is furnished to the Internal Revenue
Service.

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<PAGE>

PLAN OF DISTRIBUTION

Reference is made to "The Exchange Offer" above for a description of the
exchange offer, including the purpose of the exchange offer, the basis upon
which the exchange notes are offered and expenses incurred in connection with
the exchange offer.

Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer in exchange for original notes acquired by such
broker-dealer as a result of market making or other trading activities may be
deemed to be an "underwriter" within the meaning of the Securities Act and,
therefore, must deliver a prospectus meeting the requirements of the
Securities Act in connection with the exchange offer. Accordingly, each such
broker-dealer must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
exchange notes. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
exchange notes received in exchange for original notes where such original
notes were acquired as a result of market-making activities or other trading
activities. We have agreed that, starting on the consummation of the exchange
offer, and ending on the close of business six months after the consummation
of the exchange offer, we will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
such resale.

Neither we nor any of our affiliates has entered into any arrangement or
understanding with any broker-dealer to distribute the exchange notes and we
will not receive any proceeds from any sale of exchange notes by any broker-
dealers or any other persons. Exchange notes received by broker-dealers for
their own account pursuant to the exchange offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the exchange notes or a
combination of such methods of resale, at market prices prevailing at the time
of the resale, at prices related to such prevailing market prices or
negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker or dealer and/or the purchaser
of any such exchange notes. Any broker or dealer that resells exchange notes
that were received by it for its own account pursuant to the exchange offer
and any broker or dealer that participates in a distribution of such exchange
notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of exchange notes and any
commissions or concessions received by any such person may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.

For a period of six months after the consummation of the exchange offer, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such
documents in the Letter of Transmittal. We have agreed to pay all expenses
incident to the exchange offer other than commissions or concessions of any
brokers or dealers and expenses of counsel for the underwriters or holders of
the exchange notes.

LEGAL MATTERS

Certain legal matters in connection with the exchange offer are being
passed upon for us by Kelley Drye & Warren LLP, New York, New York. Certain
attorneys in the firm of Kelley Drye & Warren own an aggregate of
approximately $385,000 of the partnership interests in KMC Telecommunications
L.P. which owns 40,000 shares of our common stock. Certain regulatory matters
are being passed upon for us by Swidler Berlin Shereff Friedman, LLP,
Washington, D.C.

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<PAGE>

EXPERTS

Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1998 and 1997 and for each
of the three years in the period ended December 31, 1998, as set forth in
their reports. We have included our consolidated financial statements and
schedule in this prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's reports, given on their authority as experts
in accounting and auditing.

AVAILABLE INFORMATION

We have filed a Registration Statement on Form S-4 with the Securities and
Exchange Commission covering the exchange notes, and this prospectus is part
of our Registration Statement. For further information on the Company and the
exchange notes, you should refer to our Registration Statement and its
exhibits. This prospectus summarizes material provisions of contracts and
other documents to which we refer you. Since the prospectus may not contain
all the information that you find important, you should review the full text
of these documents. We have included copies of these documents as exhibits to
our Registration Statement.

We are subject to certain of the informational reporting requirements of
the Securities Exchange Act of 1934, and in accordance therewith file periodic
reports and other information with the Commission. We are not, however,
subject to the Commission's proxy rules and do not file proxy statements with
the Commission. Such reports and other information filed by us can be
inspected and copied at the Commission's Public Reference Section, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the
Regional Offices of the Commission located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade
Center, 13th Floor, New York, New York 10048. Such materials may also be
accessed electronically by means of the Commission's home page on the Internet
at http://www.sec.gov. Copies of such materials may be obtained from the
Public Reference Section of the Commission at prescribed rates. Information
regarding the operation of the Commission's Public Reference Room may be
obtained by calling the Commission at 1-800-SEC-0330.

In the event that we cease to be subject to the informational reporting
requirements of the Securities Exchange Act of 1934, we have agreed that, so
long as any notes remain outstanding, we will file with the Commission and
distribute to holders of the notes, copies of the financial information that
would have been contained in annual reports and quarterly reports, including
management's discussion and analysis of financial condition and results of
operations, that we would have been required to file with the Commission
pursuant to the Securities Exchange Act of 1934. Such financial information
will include annual reports containing consolidated financial statements and
notes thereto, together with an opinion thereon expressed by an independent
public accounting firm, as well as quarterly reports containing unaudited
condensed consolidated financial statements for the first three quarters of
each fiscal year. We will also make such reports available to prospective
purchasers of the notes, securities analysts and broker-dealers upon their
request. In addition, we have agreed that for so long as any of the notes
remain outstanding we will make available to any prospective purchaser of the
notes or beneficial owner of the notes in connection with any sale thereof the
information required by Rule 144A under the Securities Act of 1933, until such
time as we have either exchanged the notes for securities identical in all
material respects which have been registered under the Securities Act of 1933
or until such time as the holders thereof have disposed of the notes pursuant
to an effective registration statement.

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<PAGE>

Documents Incorporated By Reference

The following documents and other materials, which we have filed with the
Securities and Exchange Commission, are incorporated herein and specifically
made a part of this prospectus by this reference:

(1) Annual Report on Form 10-K for the fiscal year ended December 31, 1998;

(2) Quarterly Report on Form 10-Q for the quarter ended March 31, 1999;

(3) Quarterly Report on Form 10-Q for the quarter ended June 30, 1999;

(4) Quarterly Report on Form 10-Q for the quarter ended September 30, 1999;

(5) Current Report on Form 8-K filed on April 29, 1999; and

(6) Current Report on Form 8-K filed June 10, 1999.

In addition, all documents that we file with the Securities and Exchange
Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities
Exchange Act of 1934 subsequent to the date of this prospectus will be deemed
to be incorporated by reference into this prospectus and to be a part hereof
from the date of filing of such documents with the Securities and Exchange
Commission. Any statement contained in this prospectus or in a document
incorporated or deemed to be incorporated by reference in this prospectus will
be deemed to be modified or superseded for purposes of this prospectus to the
extent that a statement contained in this prospectus or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modified or supersedes such statement. Any such statement so
modified or superseded will not be deemed, except as so modified or
superseded, to constitute a part of this prospectus.

Statements contained in this prospectus or in any document incorporated by
reference in this prospectus as to the contents of any contract or other
document referred to herein or therein are not necessarily complete. In each
instance, where applicable, we refer you to the copy of such contract or other
document filed as an exhibit to the documents incorporated by reference, each
such statement being qualified in all respects by such reference.

This prospectus incorporates documents by reference that are not presented
herein or delivered herewith. Copies of such documents, other than exhibits to
such documents that are not specifically incorporated by reference herein, are
available without charge to any person to whom this prospectus is delivered,
upon written or oral request to: James D. Grenfell, Chief Financial Officer,
KMC Telecom Holdings, Inc., 1545 Route 206, Suite 300, Bedminster, New Jersey
07921; tel:(908)470-2100.

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KMC TELECOM HOLDINGS, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Condensed Consolidated Balance Sheets, December 31, 1998 and
September 30, 1999...................................................... F-2
Unaudited Condensed Consolidated Statements of Operations, Nine Months
Ended September 30, 1998 and 1999....................................... F-3
Unaudited Condensed Consolidated Statements of Cash Flows, Nine Months
Ended September 30, 1998 and 1999....................................... F-4
Notes to Unaudited Condensed Consolidated Financial Statements........... F-5
Report of Independent Auditors........................................... F-14
Consolidated Balance Sheets, December 31, 1997 and 1998.................. F-15
Consolidated Statements of Operations, Years Ended December 31, 1996,
1997 and 1998........................................................... F-16
Consolidated Statements of Redeemable and Nonredeemable Equity, Years
Ended December 31, 1996, 1997 and 1998.................................. F-17
Consolidated Statements of Cash Flows, Years Ended December 31, 1996,
1997 and 1998........................................................... F-18
Notes to Consolidated Financial Statements............................... F-19
Independent Auditors' Report............................................. S-1
Condensed Parent Company Financial Statements............................ S-2
</TABLE>

F-1
<PAGE>

KMC TELECOM HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......................... $ 21,181 $ 21,207
Restricted investments............................. -- 37,125
Accounts receivable, net of allowance for doubtful
accounts of $350 and $2,095 in 1998 and 1999,
respectively...................................... 7,539 23,810
Prepaid expenses and other current assets.......... 1,315 1,076
--------- ---------
Total current assets................................ 30,035 83,218
Investments held for future capital expenditures.... 27,920 75,000
Long term restricted investments.................... -- 68,348
Networks and equipment, net......................... 224,890 426,782
Intangible assets, net.............................. 2,829 2,985
Deferred financing costs, net....................... 20,903 40,045
Other assets........................................ 4,733 1,118
--------- ---------
$ 311,310 $ 697,496
========= =========
Liabilities, redeemable and nonredeemable equity
(deficiency)
Current liabilities:
Accounts payable................................... $ 21,052 $ 33,232
Accrued expenses................................... 10,374 49,109
Notes payable...................................... -- 125,000
--------- ---------
Total current liabilities........................... 31,426 207,341
Notes payable....................................... 41,414 --
Senior discount notes payable....................... 267,811 292,161
Senior notes payable................................ -- 275,000
--------- ---------
Total liabilities................................... 340,651 774,502
Commitments and contingencies
Redeemable equity:
Senior redeemable, exchangeable, PIK preferred
stock, par value $.01 per share; authorized: -0-
shares in 1998, 630 shares in 1999; shares issued
and outstanding:
Series E, -- 0 -- shares in 1998 and 63 shares in
1999 ($62,681 liquidation preference)............ -- 48,130
Series F, -- 0 -- shares in 1998 and 43 shares in
1999 ($42,599 liquidation preference)............ -- 39,143
Redeemable cumulative convertible preferred stock,
par value $.01 per share 499 shares authorized;
shares issued and outstanding:
Series A, 124 shares in 1998 and 1999 ($12,380
liquidation preference).......................... 30,390 50,813
Series C, 175 shares in 1998 and 1999 ($17,500
liquidation preference).......................... 21,643 30,727
Redeemable common stock, 224 shares issued and
outstanding....................................... 22,305 27,459
Redeemable common stock warrants................... 674 11,664
--------- ---------
Total redeemable equity............................. 75,012 207,936
--------- ---------
Nonredeemable equity (deficiency):
Common stock, par value $.01 per share; 3,000
shares authorized, 614 shares and 629 shares
issued and outstanding in 1998 and 1999,
respectively...................................... 6 6
Additional paid-in capital......................... 13,750 --
Unearned compensation.............................. (5,824) (6,227)
Accumulated deficit................................ (112,285) (278,721)
--------- ---------
Total nonredeemable equity (deficiency)............. (104,353) (284,942)
--------- ---------
$ 311,310 $ 697,496
========= =========
</TABLE>

See accompanying notes.

F-2
<PAGE>

KMC TELECOM HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1998 1999
-------- ---------
<S> <C> <C>
Revenue................................................... $ 13,588 $ 42,284
Operating expenses:
Network operating costs................................. 24,577 75,209
Selling, general and administrative..................... 15,301 41,680
Stock option compensation expense....................... 6,594 13,240
Depreciation and amortization........................... 5,198 19,230
-------- ---------
Total operating expenses.............................. 51,670 149,359
-------- ---------
Loss from operations...................................... (38,082) (107,075)
Other expense............................................. -- (4,297)
Interest income........................................... 10,349 7,035
Interest expense.......................................... (25,970) (47,848)
-------- ---------
Net loss.................................................. (53,703) (152,185)
Dividends and accretion on redeemable preferred stock..... (14,157) (42,085)
-------- ---------
Net loss applicable to common shareholders................ $(67,860) $(194,270)
======== =========
Net loss per common share................................. $ (81.94) $ (228.20)
======== =========
Weighted average number of common shares outstanding...... 828,181 851,321
======== =========
</TABLE>

See accompanying notes.

F-3
<PAGE>

KMC TELECOM HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Operating Activities
Net loss................................................. $ (53,703) $(152,185)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 5,198 19,230
Non-cash interest expense.............................. 22,774 40,174
Non-cash stock option compensation expense............. 6,593 13,240
Changes in assets and liabilities:
Accounts receivable.................................. (3,941) (16,271)
Prepaid expenses and other current assets............ (354) 239
Other assets......................................... (584) 1,065
Accounts payable..................................... (2,653) 14,707
Accrued expenses..................................... 3,571 12,585
Due from affiliate................................... (47) --
--------- ---------
Net cash used in operating activities.................... (23,146) (67,216)
--------- ---------
Investing Activities
Construction of networks and purchases of equipment...... (90,938) (216,508)
Acquisitions of franchises, authorizations and related
assets.................................................. (1,100) (1,221)
Deposit on purchases of equipment........................ (3,055) --
Purchases of investments, net............................ (90,000) (47,080)
--------- ---------
Net cash used in investing activities.................... (185,093) (264,809)
--------- ---------
Financing Activities
Repayment of notes payable............................... (20,801) --
Proceeds from issuance of preferred stock and related
warrants, net of issuance costs......................... -- 91,235
Proceeds from issuance of common stock and warrants, net
of issuance costs....................................... 10,000 --
Proceeds from exercise of stock options.................. -- 333
Proceeds from issuance of senior discount notes, net of
issuance costs.......................................... 236,369 --
Proceeds from issuance of senior notes, net of issuance
costs and purchase of portfolio of restricted
investments............................................. -- 159,942
Proceeds from senior secured credit facility, net of
issuance costs.......................................... -- 82,770
Issuance costs of Lucent facility........................ -- (2,229)
Dividends on preferred stock of subsidiary............... (592) --
--------- ---------
Net cash provided by financing activities................ 224,976 332,051
--------- ---------
Net increase in cash and cash equivalents................ 16,737 26
Cash and cash equivalents, beginning of period........... 15,553 21,181
--------- ---------
Cash and cash equivalents, end of period................. $ 32,290 $ 21,207
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest, net of amounts
capitalized............................................. $ 3,274 $ 5,751
========= =========
</TABLE>

See accompanying notes.

F-4
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999

1. Basis of Presentation and Organization

KMC Telecom Holdings, Inc. and its subsidiaries, KMC Telecom Inc., KMC
Telecom II, Inc., KMC Telecom III, Inc., KMC Telecom of Virginia, Inc., and
KMC Telecom Financing, Inc. are collectively referred to herein as the
Company. All significant intercompany accounts and transactions have been
eliminated in consolidation.

On July 1, 1999, the Company acquired all of the membership interests of
KMC Services LLC from Harold N. Kamine, the Chairman of our Board of
Directors, for nominal consideration. KMC Services LLC was formed to provide
services to the Company and its customers, initially offering a leasing
program for equipment physically installed at a customer's premises. The
acquisition was accounted for as a combination of entities under common
control, and no changes were made to the historical cost basis of KMC Services
LLC's assets. Accordingly, during the second quarter of 1999, the Company
reduced the carrying value of its $709,000 loan receivable from KMC Services
LLC to an amount equal to the value of KMC Services LLC's net assets at the
acquisition date. KMC Services LLC has been consolidated with the Company
since July 1, 1999.

The unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial reporting. Accordingly, they do not include certain
information and note disclosures required by generally accepted accounting
principles for annual financial reporting and should be read in conjunction
with the financial statements and notes thereto of KMC Telecom Holdings, Inc.
as of and for the year ended December 31, 1998.

The unaudited interim financial statements reflect all adjustments which
management considers necessary for a fair presentation of the results of
operations for these periods. The results of operations for the interim
periods are not necessarily indicative of the results for the full year.

The balance sheet of KMC Telecom Holdings, Inc. at December 31, 1998 was
derived from the audited consolidated balance sheet at that date.

2. Investments Held for Future Capital Expenditures

The Company has designated certain amounts as investments held for future
capital expenditures. As of September 30, 1999, the Company's investments held
for future capital expenditures consisted of cash equivalents (bank term
deposits and commercial paper with maturities of less than 90 days) of $69.8
million and debt securities (US government obligations and commercial bonds
due within 1 year) of $5.2 million. All debt securities have been designated
by the Company as held-to-maturity. Accordingly, such securities are recorded
in the accompanying financial statements at amortized cost. At September 30,
1999, the carrying value of such held-to-maturity debt securities approximated
their fair value.

F-5
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

3. Networks and Equipment

Networks and equipment are comprised of the following (in thousands):

<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Fiber optic systems.................................. $ 99,502 $138,577
Telecommunications equipment......................... 115,769 162,011
Furniture and other.................................. 7,340 19,209
Leasehold improvements............................... 1,177 1,555
Construction-in-progress............................. 11,770 132,703
-------- --------
235,558 454,055
Less accumulated depreciation........................ (10,668) (27,273)
-------- --------
$224,890 $426,782
======== ========
</TABLE>

Costs capitalized during the development of the Company's networks include
amounts incurred related to network engineering, design and construction and
capitalized interest. Capitalized interest related to the construction of the
networks for the nine months ended September 30, 1998 and 1999 amounted to
$2.9 million and $3.5 million, respectively.

4. Intangible Assets

Intangible assets are comprised of the following (in thousands):

<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Franchise costs...................................... $ 1,690 $1,672
Authorizations and rights-of-way..................... 1,455 1,965
Building access agreements and other................. 1,062 697
------- ------
4,207 4,334
Less accumulated amortization........................ (1,378) (1,349)
------- ------
$ 2,829 $2,985
======= ======
</TABLE>

F-6
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. Accrued Expenses

Accrued expenses are comprised of the following (in thousands):

<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Accrued compensation............................. $ 4,138 $10,721
Deferred revenue................................. 1,187 2,934
Accrued costs related to financing activities.... 380 8,423
Accrued interest payable......................... 162 17,502
Accrued cost of sales............................ 565 2,549
Other accrued expenses........................... 3,942 6,980
-------- -------
$ 10,374 $49,109
======== =======
</TABLE>

6. Lucent Loan and Security Agreement

Lucent Loan and Security Agreement

KMC Telecom III entered into a Loan and Security Agreement (the "Lucent
Facility") dated February 4, 1999 with Lucent Technologies Inc. ("Lucent")
which provides for borrowings to be used to fund the acquisition of certain
telecommunications equipment and related expenses. The Lucent Facility
provides for an aggregate commitment of up to $600 million, of which $250
million is currently available to purchase Lucent products. Further, up to an
additional $350 million will be available upon (a) additional lenders
participating in the Lucent Facility and making commitments to make loans so
that Lucent's aggregate commitment does not exceed $250 million and (b) the
Company satisfying certain other requirements, the most significant of which
is KMC Holdings raising and contributing at least $300 million in high yield
debt or equity (other than disqualified stock) to KMC Telecom III. The Lucent
Facility places certain restrictions upon KMC Telecom III's ability to
purchase non-Lucent equipment with proceeds from such facility. At September
30, 1999, no amounts had been borrowed under the Lucent Facility.

Interest on borrowings under the Lucent Facility is charged, at the option
of KMC Telecom III, at a floating rate of LIBOR plus the "Applicable LIBOR
Margin", or at an alternative base rate plus the "Applicable Base Rate Margin"
(as defined). Such margins will be increased by 0.25% until KMC Telecom III
and its subsidiaries have completed systems in fourteen markets. If KMC
Telecom III defaults on any payment due under the Lucent Facility, the
interest rate will increase by four percentage points. If any other event of
default shall occur, the interest rate will be increased by two percentage
points. Interest on each LIBOR loan is payable on each LIBOR interest payment
date in arrears and interest on each base rate loan is payable quarterly in
arrears. KMC Telecom III must pay an annual commitment fee on the unused
portion of the Lucent Facility of 1.25%.

Loans borrowed under the Lucent Facility amortize in amounts based upon the
following percentages of the aggregate amount of the loans drawn under the
Lucent Facility:

<TABLE>
<CAPTION>
Payment Dates Amortization
------------- ----------------
<S> <C>
May 1, 2002--February 1, 2003........................... 2.5% per quarter
May 1, 2003--February 1, 2006........................... 5.0% per quarter
May 1, 2006--February 1, 2007........................... 7.5% per quarter
</TABLE>

F-7
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

KMC Holdings has unconditionally guaranteed the repayment of up to $250
million under the Lucent Facility when such repayment is due, whether at
maturity, upon acceleration, or otherwise. KMC Telecom III Holdings, Inc.,
which owns the shares of KMC Telecom III and is wholly-owned by KMC Holdings,
has pledged the shares of KMC Telecom III to Lucent to collateralize its
obligations under the guaranty. In addition, KMC Telecom III has pledged all
of its assets to Lucent.

The Lucent Facility contains a number of affirmative and negative covenants
including, among others, covenants restricting the ability of KMC Telecom III
to consolidate or merge with any person, sell or lease assets not in the
ordinary course of business, sell or enter into any long term leases of dark
fiber, redeem stock, pay dividends or make any other payments (including
payments of principal or interest on loans) to KMC Holdings, create
subsidiaries, transfer any permits or licenses, or incur additional
indebtedness or act as guarantor for the debt of any other person, subject to
certain conditions.

KMC Telecom III is required to comply with certain financial tests and
maintain certain financial ratios, including, among others, a ratio of total
debt to contributed capital, certain minimum revenues, maximum EBITDA losses
and minimum EBITDA, maximum capital expenditures and minimum access lines, a
maximum total leverage ratio, a minimum debt service coverage ratio, a minimum
fixed charge coverage ratio and a maximum consolidated leverage ratio. The
covenants become more restrictive upon the earlier of (i) July 1, 2002 and
(ii) after KMC Telecom III achieves positive EBITDA for two consecutive fiscal
quarters.

Failure to satisfy any of the financial covenants will constitute an event
of default under the Lucent Facility, permitting the lenders to terminate the
commitment and/or accelerate payment of outstanding indebtedness. The Lucent
Facility also includes other customary events of default, including, without
limitation, a cross-default to other material indebtedness, material
undischarged judgments, bankruptcy, loss of a material franchise or material
license, breach of representations and warranties, a material adverse change,
and the occurrence of a change of control.

Waiver and Amendments to Financial Covenants

The Company obtained a waiver of compliance, for the quarter ended
September 30, 1999, with certain financial covenants (related to revenue and
EBITDA) contained in the Senior Secured Credit Facility (for a description of
the Senior Secured Credit Facility, see Note 6 of the Notes to the
Consolidated Financial Statements in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998). In addition, the EBITDA covenant was
amended for the fourth quarter of 1999 to a level which the Company expects to
achieve.

The Company has received a signed commitment from Lucent to refinance the
existing Lucent Facility upon terms which would involve the provision of
additional funding to the Company and the resetting of the financial covenants
for periods after the fourth quarter of 1999. The Company is currently engaged
in discussions with the agents for the lenders under the Senior Secured Credit
Facility which presently contemplate comparable amendments to the financial
covenants in the Senior Secured Credit Facility. The Company believes that
these negotiations will lead to definitive agreements during the first quarter
of 2000. If, however, the Company is not successful in completing the
negotiations as presently contemplated and amending the financial covenants in
the Senior Secured Credit Facility and the Lucent Facility, the Company is
likely to fail to comply with one or more of the covenants presently contained
in those facilities for the quarter ended March 31, 2000, which failure,
unless waived, would constitute a default under those credit facilities. Given
that, as of this date, the Company has not yet signed definitive agreements
with Lucent and the agents for the lenders under the Senior Secured Credit
Facility implementing the foregoing refinancings, under applicable financial
accounting standards, the

F-8
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company was required to reclassify the $125 million outstanding at September
30, 1999 under the Senior Secured Credit Facility as current liabilities in
the accompanying balance sheet. If, as expected, the Company successfully
completes the contemplated refinancings of the Senior Secured Credit Facility
and Lucent Facility prior to the issuance of its financial statements for the
year ended December 31, 1999, the applicable accounting standards will permit
it to classify the amounts outstanding under the Senior Secured Credit
Facility as long-term debt in its balance sheet as of December 31, 1999. A
covenant default under the Senior Secured Credit Facility or the Lucent
Facility is not an automatic default under the Company's other outstanding
indebtedness but, under certain circumstances, may become one, depending upon
the actions of the lenders under the Senior Secured Credit Facility and Lucent
Facility.

7. Interest Rate Swap Agreement

The Company has entered into an interest rate swap agreement with a
commercial bank to reduce the impact of changes in interest rates on its
outstanding variable rate debt. The agreement effectively fixes the Company's
interest rate on the $125 million of outstanding variable rate borrowings
under the Senior Secured Credit Facility due 2007. The interest rate swap
agreement terminates in April 2004. The Company is exposed to credit loss in
the event of nonperformance by the other party to the interest rate swap
agreement. However, the Company does not anticipate nonperformance by the
counterparty.

8. Preferred Stock and Warrant Issuances

Series E Preferred Stock

On February 4, 1999, the Company issued 25,000 shares of Series E Senior
Redeemable, Exchangeable, PIK Preferred Stock (the "Series E Preferred Stock")
to Newcourt Commercial Finance Corporation ("Newcourt Finance"), generating
aggregate gross proceeds of $22.9 million. On April 30, 1999, the Company
issued an additional 35,000 shares of Series E Preferred Stock for gross
proceeds of $25.9 million. The Series E Preferred Stock has a liquidation
preference of $1,000 per share and an annual dividend equal to 14.5% of the
liquidation preference, payable quarterly. On or before January 15, 2004, the
Company may pay dividends in cash or in additional fully paid and
nonassessable shares of Series E Preferred Stock. After January 15, 2004,
dividends must be paid in cash, subject to certain conditions. Unpaid
dividends accrue at the dividend rate of the Series E Preferred Stock,
compounded quarterly. On April 15, 1999 and July 15, 1999, the Company issued
695 shares and 1,986 shares, respectively, of Series E Preferred Stock to pay
the dividends due for such periods.

The Series E Preferred Stock must be redeemed on February 1, 2011, subject
to the legal availability of funds therefor, at a redemption price, payable in
cash, equal to the liquidation preference thereof on the redemption date, plus
all accumulated and unpaid dividends to the date of redemption. After April
15, 2004, the Series E Preferred Stock may be redeemed, in whole or in part,
at the option of the Company, at a redemption price equal to 110% of the
liquidation preference of the Series E Preferred Stock plus all accrued and
unpaid dividends to the date of redemption. The redemption price declines to
an amount equal to 100% of the liquidation preference as of April 15, 2007.

In addition, on or prior to April 15, 2002, the Company may, at its option,
redeem up to 35% of the aggregate liquidation preference of Series E Preferred
Stock with the proceeds of sales of its capital stock at a redemption price
equal to 110% of the liquidation preference on the redemption date plus
accrued and unpaid dividends.

The holders of Series E Preferred Stock have voting rights in certain
circumstances. Upon the occurrence of a change of control, the Company will be
required to make an offer to repurchase the Series E Preferred Stock

F-9
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

for cash at a purchase price of 101% of the liquidation preference thereof,
together with all accumulated and unpaid dividends to the date of purchase.

The Series E Preferred Stock is not convertible. The Company may, at the
sole option of the Board of Directors (out of funds legally available),
exchange all, but not less than all, of the Series E Preferred Stock then
outstanding, including any shares of Series E Preferred Stock issued as
payment for dividends, for a new series of subordinated debentures (the
"Exchange Debentures") issued pursuant to an exchange debenture indenture. The
holders of Series E Preferred Stock are entitled to receive on the date of any
such exchange, Exchange Debentures having an aggregate principal amount equal
to (i) the total of the liquidation preference for each share of Series E
Preferred Stock exchanged, plus (ii) an amount equal to all accrued but unpaid
dividends payable on such share.

Series F Preferred Stock

On February 4, 1999, the Company issued 40,000 shares of Series F Senior
Redeemable, Exchangeable, PIK Preferred Stock (the "Series F Preferred Stock")
to Lucent and Newcourt Finance, generating aggregate gross proceeds of $38.9
million. The Series F Preferred Stock has a liquidation preference of $1,000
per share and an annual dividend equal to 14.5% of the liquidation preference,
payable quarterly. The Company may pay dividends in cash or in additional
fully paid and nonassessable shares of Series F Preferred Stock. On April 15,
1999 and July 15, 1999, the Company issued 1,112 shares and 1,486 shares,
respectively, of Series F Preferred Stock to pay the dividends due for such
period.

The Series F Preferred Stock may be redeemed at any time, in whole or in
part, at the option of the Company, at a redemption price equal to 110% of the
liquidation preference on the redemption date plus an amount in cash equal to
all accrued and unpaid dividends thereon to the redemption date. Upon the
occurrence of a change of control, the Company will be required to make an
offer to purchase the Series F Preferred Stock for cash at a purchase price of
101% of the liquidation preference thereof, together with all accumulated and
unpaid dividends to the date of purchase.

The holders of Series F Preferred Stock have voting rights under certain
circumstances.

Upon the earlier of (i) the date that is sixty days after the date on which
the Company closes an underwritten primary offering of at least $200 million
of its Common Stock, pursuant to an effective registration statement under the
Securities Act or (ii) February 4, 2001, any outstanding Series F Preferred
Stock will automatically convert into Series E Preferred Stock, on a one for
one basis.

The Company may, at the sole option of the Board of Directors (out of funds
legally available), exchange all, but not less than all, of the Series F
Preferred Stock then outstanding, including any shares of Series F Preferred
Stock issued as payment for dividends, for Exchange Debentures. The holders of
Series F Preferred Stock are entitled to receive on the date of any such
exchange, Exchange Debentures having an aggregate principal amount equal to
(i) the total of the liquidation preference for each share of Series F
Preferred Stock exchanged, plus (ii) an amount equal to all accrued but unpaid
dividends payable on such share.

Warrants

In connection with the February 4, 1999 issuances of the Series E Preferred
Stock and the Series F Preferred Stock, warrants to purchase an aggregate of
24,660 shares of Common Stock were sold to Newcourt Finance and Lucent. The
aggregate gross proceeds from the sale of these warrants was approximately
$3.2 million. These warrants, at an exercise price of $.01 per share, are
exercisable from February 4, 2000 through February 1, 2009.

F-10
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In addition, the Company also delivered to the Warrant Agent certificates
representing warrants to purchase an aggregate of an additional 107,228 shares
of Common Stock at an exercise price of $.01 per share (the "Springing
Warrants"). The Springing Warrants may become issuable under the circumstances
described in the following paragraph.

If the Company fails to redeem all shares of Series F Preferred Stock prior
to the date (the "Springing Warrant Date") which is the earlier of (i) the
date that is sixty days after the date on which the Company closes an
underwritten primary offering of at least $200 million of its Common Stock
pursuant to an effective registration statement under the Securities Act or
(ii) February 4, 2001, the Warrant Agent is authorized to issue the Springing
Warrants to the Eligible Holders (as defined in the warrant agreement) of the
Series E and Series F Preferred Stock. In the event the Company has redeemed
all outstanding shares of Series F Preferred Stock prior to the Springing
Warrant Date, the Springing Warrants will not be issued and the Warrant Agent
will return the certificates to the Company. To the extent the Company
exercises its option to exchange all of the Series F Preferred Stock for
Exchange Debentures prior to the Springing Warrant Date, the Springing
Warrants will not become issuable. Therefore, as the future issuance of the
Springing Warrants is entirely within the control of the Company and the
likelihood of their issuance is deemed to be remote, no value has been
ascribed to the Springing Warrants.

In connection with the April 30, 1999 issuance of additional shares of the
Series E Preferred Stock, warrants to purchase an aggregate of 60,353 shares
of Common Stock were issued to Newcourt Finance and First Union. The aggregate
gross proceeds from the sale of these warrants was approximately $9.1 million.
These warrants, at an exercise price of $.01 per share, are exercisable from
February 4, 2000 through February 1, 2009.

9. Service Revenues

The Company provides on-net switched and dedicated services and resells
switched services previously purchased from the incumbent local exchange
carrier. On-net services include both services provided through direct
connections to our own networks and services provided by means of unbundled
network elements leased from the incumbent local exchange carrier.

The Company's service revenues consist of the following (in thousands):

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1998 1999
-------- --------
<S> <C> <C>
On-net..................................................... $ 4,240 $ 23,992
Resale..................................................... 9,348 18,292
-------- --------
Total...................................................... $ 13,588 $ 42,284
======== ========
</TABLE>

10. Commitments and Contingencies

Purchase Commitments

As of September 30, 1999, the Company has outstanding commitments
aggregating approximately $92.8 million related to purchases of
telecommunications equipment and fiber optic cable and its obligations under
its agreements with certain suppliers.

F-11
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Arbitration Award

During the second quarter of 1999, the company recorded a $4.3 million
charge to other expense in connection with an unfavorable arbitration award.
The net amount due under the terms of the award was paid in full in June 1999.

Redemption Rights

Pursuant to a stockholders agreement, certain of the Company's stockholders
and warrant holders have "put rights" entitling them to have the Company
repurchase their preferred and common shares and redeemable common stock
warrants for the fair value of such securities if no Liquidity Event (defined
as (i) an initial public offering with gross proceeds of at least $40 million,
(ii) the sale of substantially all of the stock or assets of the Company or
(iii) the merger or consolidation of the Company with one or more other
corporations) has taken place by the later of (x) October 22, 2003 or (y) 90
days after the final maturity date of the Senior Discount Notes. The
restrictive covenants of the Senior Discount Notes limit the Company's ability
to repurchase such securities. All of the securities subject to such "put
rights" are presented as redeemable equity in the accompanying balance sheets.

The redeemable preferred stock, redeemable common stock and redeemable
common stock warrants, which are subject to the stockholders agreement, are
being accreted up to their fair market values from their respective issuance
dates to their earliest potential redemption date (October 22, 2003). At
September 30, 1999, the aggregate redemption value of the redeemable equity
was approximately $235 million, reflecting per share redemption amounts of
$897 for the Series A Preferred Stock, $352 for the Series C Preferred Stock
and $185 for the redeemable common stock and redeemable common stock warrants.

11. Net Loss Per Common Share

The following table sets forth the computation of net loss per common
share-basic (in thousands, except share and per share amounts):

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1998 1999
-------- ---------
<S> <C> <C>
Numerator:
Net loss................................................ $(53,703) $(152,185)
Dividends and accretion on redeemable preferred stock..... (14,157) (42,085)
-------- ---------
Numerator for net loss per common share--basic.......... $(67,860) $(194,270)
======== =========
Denominator:
Denominator for net loss per common share--weighted
average number of common shares outstanding............. 828,181 851,321
======== =========
Net loss per common share--basic.......................... $ (81.94) $ (228.20)
======== =========
</TABLE>

Options and warrants to purchase an aggregate of 373,135 and 483,273 shares
of common stock were outstanding as of September 30, 1998 and 1999,
respectively, but a computation of diluted net loss per common share has not
been presented, as the effect would be anti-dilutive.

F-12
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

12. Louisiana Reciprocal Revenue

During 1998 and the first nine months of 1999 the Company recognized
revenue which it believed was due from incumbent local exchange carriers for
terminating local traffic of Internet service providers (ISPs). The Company
determined to recognize this revenue because, based upon all of the facts and
circumstances known at the time, including numerous state public service
commission and state and federal court decisions upholding competitive local
exchange carriers' entitlement to reciprocal compensation for such calls, that
realization of those amounts was reasonably assured. On October 13, 1999,
however, the Louisiana Public Service Commission ruled that local traffic to
ISPs in Louisiana is not eligible for reciprocal compensation. As a result of
that ruling, the Company determined that it could no longer conclude that
realization of amounts attributable to termination of local calls to ISPs in
Louisiana was reasonably assured. Accordingly, an adjustment was recorded to
reduce revenue in the 1999 Third Quarter, which reversed all reciprocal
revenue recognized related to ISP traffic in Louisiana for the entire year of
1998 and the first nine months of 1999. The adjustment amounted to $4.4
million, of which $1.1 million relates to the year ended December 31, 1998 and
$3.3 million relates to the nine months ended September 30, 1999.

The Company has been advised by its regulatory counsel that this decision
appears to be well out of the mainstream on the issue. To date, Louisiana is
the only state which has rendered a decision, pursuant to an existing
agreement, that has permitted an incumbent local exchange carrier to use a
competitive local exchange carriers' facilities to complete calls without
compensation to the competitive local exchange carrier. Thirty-three other
states have ruled that the originating carrier must compensate the terminating
carrier for such use. Many of these decisions have been affirmed by state and
federal courts on appeal and none have been reversed. The Company intends to
appeal the decision to the appropriate authority.

F-13
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
KMC Telecom Holdings, Inc.

We have audited the consolidated balance sheets of KMC Telecom Holdings,
Inc. as of December 31, 1998 and 1997, and the related consolidated statements
of operations, redeemable and nonredeemable equity and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of KMC Telecom Holdings, Inc. as of December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

MetroPark, New Jersey
February 2, 1999

F-14
<PAGE>

KMC TELECOM HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands)

<TABLE>
<CAPTION>
December 31
-------------------
1997 1998
-------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................ $ 15,553 $ 21,181
Accounts receivable, net of allowance for doubtful
accounts of $34 and $350 in 1997 and 1998,
respectively............................................ 1,318 7,539
Prepaid expenses and other current assets................ 489 1,315
-------- ---------
Total current assets....................................... 17,360 30,035
Investments held for future capital expenditures........... -- 27,920
Networks and equipment, net................................ 71,371 224,890
Intangible assets, net..................................... 2,655 2,829
Deferred financing costs, net.............................. 4,196 20,903
Other assets............................................... 361 4,733
-------- ---------
$ 95,943 $ 311,310
======== =========
Liabilities, redeemable and nonredeemable equity
(deficiency)
Current liabilities:
Accounts payable......................................... $ 5,513 $ 21,052
Accrued expenses......................................... 8,128 10,374
Due to affiliates........................................ 47 --
-------- ---------
Total current liabilities.................................. 13,688 31,426
Notes payable.............................................. 51,277 41,414
Subordinated notes payable................................. 10,000 --
Senior discount notes payable.............................. -- 267,811
-------- ---------
Total liabilities.......................................... 74,965 340,651
Commitments and contingencies
Redeemable equity:
Redeemable cumulative convertible preferred stock, par
value $.01 per share; 499 shares authorized; shares
issued and outstanding:
Series A, 124 shares in 1997 and 1998 ($12,380
liquidation preference)............................... 18,879 30,390
Series C, 150 shares in 1997 and 175 shares in 1998
($17,500 liquidation preference in 1998).............. 14,667 21,643
Series D, 25 shares in 1997 and -0- shares in 1998..... 2,379 --
Redeemable common stock, shares issued and outstanding,
133 in 1997 and 224 in 1998............................. 11,187 22,305
Redeemable common stock warrants......................... 539 674
-------- ---------
Total redeemable equity.................................... 47,651 75,012
Nonredeemable equity (deficiency)
Common stock, par value $.01 per share; 3,000 shares
authorized, 614 shares issued and outstanding........... 6 6
Additional paid-in capital............................... 15,374 13,750
Unearned compensation.................................... (6,521) (5,824)
Accumulated deficit...................................... (35,532) (112,285)
-------- ---------
Total nonredeemable equity (deficiency).................... (26,673) (104,353)
-------- ---------
$ 95,943 $ 311,310
======== =========
</TABLE>

See accompanying notes.

F-15
<PAGE>

KMC TELECOM HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Revenue.......................................... $ 205 $ 3,417 $ 22,425
Operating expenses:
Network operating costs........................ 1,361 7,735 37,336
Selling, general and administrative............ 2,216 9,923 24,534
Stock option compensation expense.............. 240 13,870 7,080
Depreciation and amortization.................. 287 2,506 9,257
------- -------- --------
Total operating expenses......................... 4,104 34,034 78,207
------- -------- --------
Loss from operations............................. (3,899) (30,617) (55,782)
Interest income.................................. -- 513 8,818
Interest expense................................. (596) (2,582) (29,789)
------- -------- --------
Net loss......................................... (4,495) (32,686) (76,753)
Dividends and accretion on redeemable preferred
stock........................................... -- (8,904) (18,285)
------- -------- --------
Net loss applicable to common shareholders....... $(4,495) $(41,590) $(95,038)
======= ======== ========
Net loss per common share........................ $ (7.49) $ (64.93) $(114.42)
======= ======== ========
Weighted average number of common shares
outstanding..................................... 600 641 831
======= ======== ========
</TABLE>

See accompanying notes.

F-16
<PAGE>

KMC Telecom Holdings, Inc.

(See Note 1)
Consolidated Statements of Redeemable and Nonredeemable Equity
Years ended December 31, 1996, 1997 and 1998
(in thousands)

<TABLE>
<CAPTION>
Redeemable Equity
--------------------------------------------------------------------------------
Preferred Stock
--------------------------------------------
Series A Series C Series D Common Stock Total
-------------- -------------- -------------- ----------------------- Redeemable
Shares Amount Shares Amount Shares Amount Shares Amount Warrants Equity
------ ------- ------ ------- ------ ------- ------ ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1995............ -- $ -- -- $ -- -- $ -- -- $ -- $ -- $ --
Change in
authorized
capital.........
Conversion of
stockholder"s
loan and related
imputed interest
to equity.......
Issuance of
common stock....
Issuance of
stock options to
employees.......
Amortization of
unearned
compensation....
Fair value of
stock options
issued to non-
employees.......
Reclassification
of deficit
accumulated
through date of
termination of
Subchapter S
election........
Net loss........
--- ------- --- ------- --- ------- --- ------- ------ -------
Balance,
December 31,
1996............ -- -- -- -- -- -- -- -- -- --
Conversion of
convertible
notes payable to
Series A
Preferred
Stock........... 124 11,519 11,519
Issuance of
warrants........ 2,025 2,025
Issuance of
common stock and
exercise of
warrants........ 133 10,863 (1,500) 9,363
Issuance of
Series C
Preferred
Stock........... 150 14,199 14,199
Issuance of
Series D
Preferred
Stock........... 25 2,299 2,299
Accretion on
redeemable
equity.......... 7,360 468 80 324 14 8,246
Issuance and
adjustment to
fair value of
stock options to
employees.......
Amortization of
unearned
compensation....
Increase in fair
value of stock
options issued
to
non-employees...
Net loss........
--- ------- --- ------- --- ------- --- ------- ------ -------
Balance,
December 31,
1997............ 124 18,879 150 14,667 25 2,379 133 11,187 539 47,651
Conversion of
Series D
Preferred Stock
to Series C
Preferred
Stock........... 25 2,379 (25) (2,379) --
Issuance of
common stock.... 91 9,500 9,500
Accretion on
redeemable
equity.......... 11,511 4,597 1,618 135 17,861
Payment of
dividends on
preferred stock
of subsidiary...
Issuance of
warrants........
Cancellation of
KMC Telecom
stock options...
Issuance and
adjustment to
fair value of
stock options to
employees.......
Issuance and
adjustment to
fair value of
stock options to
non-employees...
Amortization of
unearned
compensation....
Net loss........
--- ------- --- ------- --- ------- --- ------- ------ -------
Balance,
December 31,
1998............ 124 $30,390 175 $21,643 -- $ -- 224 $22,305 $ 674 $75,012
=== ======= === ======= === ======= === ======= ====== =======
<CAPTION>
Nonredeemable Equity
--------------------------------------------------------------
Total
Non-
Common Stock Additional redeemable
------------- Paid-in Unearned Accumulated Equity
Shares Amount Capital Compensation Deficit (Deficiency)
------ ------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1995............ -- $-- $ 2 $ -- $ (1,625) $ (1,623)
Change in
authorized
capital......... 560 6 (6) --
Conversion of
stockholder"s
loan and related
imputed interest
to equity....... 2,267 2,267
Issuance of
common stock.... 40 4,000 4,000
Issuance of
stock options to
employees....... 1,283 (1,283) --
Amortization of
unearned
compensation.... 44 44
Fair value of
stock options
issued to non-
employees....... 196 196
Reclassification
of deficit
accumulated
through date of
termination of
Subchapter S
election........ (3,274) 3,274 --
Net loss........ (4,495) (4,495)
------ ------ ---------- ------------ ----------- ------------
Balance,
December 31,
1996............ 600 6 4,468 (1,239) (2,846) 389
Conversion of
convertible
notes payable to
Series A
Preferred
Stock...........
Issuance of
warrants........
Issuance of
common stock and
exercise of
warrants........ 14
Issuance of
Series C
Preferred
Stock...........
Issuance of
Series D
Preferred
Stock...........
Accretion on
redeemable
equity.......... (8,246) (8,246)
Issuance and
adjustment to
fair value of
stock options to
employees....... 14,296 (14,296) --
Amortization of
unearned
compensation.... 9,014 9,014
Increase in fair
value of stock
options issued
to
non-employees... 4,856 4,856
Net loss........ (32,686) (32,686)
------ ------ ---------- ------------ ----------- ------------
Balance,
December 31,
1997............ 614 6 15,374 (6,521) (35,532) (26,673)
Conversion of
Series D
Preferred Stock
to Series C
Preferred
Stock...........
Issuance of
common stock....
Accretion on
redeemable
equity.......... (17,861) (17,861)
Payment of
dividends on
preferred stock
of subsidiary... (592) (592)
Issuance of
warrants........ 10,446 10,446
Cancellation of
KMC Telecom
stock options... (26,191) 4,845 (21,346)
Issuance and
adjustment to
fair value of
stock options to
employees....... 27,906 (27,906) --
Issuance and
adjustment to
fair value of
stock options to
non-employees... 4,668 4,668
Amortization of
unearned
compensation.... 23,758 23,758
Net loss........ (76,753) (76,753)
------ ------ ---------- ------------ ----------- ------------
Balance,
December 31,
1998............ 614 $ 6 $13,750 $(5,824) $(112,285) $(104,353)
====== ====== ========== ============ =========== ============
</TABLE>

See accompanying notes.

F-17
<PAGE>

KMC TELECOM HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
Year ended December 31
-----------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Operating activities
Net loss....................................... $ (4,495) $(32,686) $ (76,753)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 287 2,506 9,257
Non-cash interest expense.................... 698 610 25,356
Non-cash stock option compensation expense... 240 13,870 7,080
Changes in assets and liabilities:
Accounts receivable........................ (23) (1,296) (6,221)
Prepaid expenses and other current assets.. (138) (346) (826)
Accounts payable........................... 789 2,934 7,449
Accrued expenses........................... 417 6,062 2,953
Due to affiliates.......................... (410) (35) (47)
Other assets............................... (52) (295) (1,821)
-------- -------- ---------
Net cash used in operating activities.......... (2,687) (8,676) (33,573)
-------- -------- ---------
Investing activities
Construction of networks and purchases of
equipment..................................... (9,111) (59,146) (148,580)
Acquisitions of franchises, authorizations and
related assets................................ (1,063) (1,846) (1,147)
Cash paid for acquisition of Melbourne
Network....................................... -- (2,000) --
Deposit on purchases of equipment.............. -- -- (2,551)
Purchase of investments, net................... -- -- (27,920)
-------- -------- ---------
Net cash used in investing activities.......... (10,174) (62,992) (180,198)
-------- -------- ---------
Financing activities
Proceeds from stockholder loans................ 3,542 -- --
Repayment of stockholder loans................. (4,181) -- --
Proceeds from notes payable, net of issuance
costs......................................... 10,953 59,873 938
Proceeds from issuance of common stock and
warrants, net of issuance costs............... 4,000 9,363 20,446
Proceeds from issuance of preferred stock, net
of issuance costs............................. -- 16,498 --
Issuance costs of senior secured credit
facility...................................... -- -- (6,515)
Repayment of notes payable..................... -- -- (20,801)
Proceeds from issuance of senior discount
notes, net of issuance costs.................. -- -- 225,923
Dividends on preferred stock of subsidiary..... -- -- (592)
-------- -------- ---------
Net cash provided by financing activities...... 14,314 85,734 219,399
-------- -------- ---------
Net increase in cash and cash equivalents...... 1,453 14,066 5,628
Cash and cash equivalents, beginning of year... 34 1,487 15,553
-------- -------- ---------
Cash and cash equivalents, end of year......... $ 1,487 $ 15,553 $ 21,181
======== ======== =========
Supplemental disclosure of cash flow
information
Cash paid during the year for interest, net of
amounts capitalized........................... $ 97 $ 766 $ 4,438
======== ======== =========
</TABLE>

See accompanying notes.

F-18
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

KMC Telecom Holdings, Inc. ("KMC Holdings") is a holding company formed
during 1997 primarily to own all of the shares of its operating subsidiaries,
KMC Telecom Inc. ("KMC Telecom"), KMC Telecom II, Inc. ("KMC Telecom II"), KMC
Telecom III, Inc. ("KMC Telecom III") and KMC Telecom of Virginia Inc. On
September 22, 1997, the stockholders of KMC Telecom exchanged all of their KMC
Telecom common and preferred stock for equal numbers of shares of common and
preferred stock of KMC Holdings. The merger was accounted for as an exchange
of shares between entities under common control, and no changes were made to
the historical cost basis of KMC Telecom's net assets.

KMC Holdings and its direct and indirect wholly-owned subsidiaries, KMC
Telecom, KMC Telecom II, KMC Telecom III and KMC Telecom of Virginia, Inc. are
collectively referred to herein as the Company.

The predecessors to KMC Telecom, Kamine Multimedia Corp. and KMC Southeast
Corp. (the "Predecessors") were incorporated in the state of Delaware on May
10, 1994 and April 19, 1995, respectively, and all of the outstanding common
stock of each company was owned by Harold N. Kamine ("Kamine"). Effective May
23, 1996, Kamine Multimedia Corp. was merged into KMC Southeast Corp., and the
surviving corporation was renamed KMC Telecom Inc. The merger was accounted
for as a combination of entities under common control, and the net assets of
Kamine Multimedia Corp. were transferred at their historical cost in a manner
similar to that in pooling of interests accounting.

The Company is a facilities-based competitive local exchange carrier
("CLEC") providing telecommunications and data services to its customers;
principally business, government and institutional end-users, as well as
Internet service providers, long distance companies and wireless service
providers, primarily in the Southeastern and Midwestern United States.

2. Summary of Significant Accounting Policies

Basis of Presentation

As noted above, effective May 23, 1996, KMC Telecom was the successor
resulting from the merger of the Predecessors, and effective September 22,
1997, KMC Telecom became a wholly-owned subsidiary of KMC Holdings. The
accompanying financial statements include the consolidated financial position
and results of operations of KMC Holdings and its subsidiaries subsequent to
September 22, 1997, the results of operations of KMC Telecom from May 23,
1996, and the combined results of operations of the Predecessors from January
1, 1996. All significant intercompany transactions and balances have been
eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.

Investments Held for Future Capital Expenditures

The Company has designated certain amounts as investments held for future
capital expenditures. As of December 31, 1998, the Company's investments held
for future capital expenditures consisted of cash equivalents (bank term
deposits and commercial paper with maturities of less than 90 days) of $11.2
million and debt securities (U.S. government obligations and commercial bonds
due within 1 year) of $16.7 million. All debt securities have been designated
by the Company as held-to-maturity. Accordingly, such securities are recorded

F-19
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

in the accompanying December 31, 1998 financial statements at amortized cost.
At December 31, 1998, the carrying value of such held-to-maturity debt
securities approximated their fair value.

Networks and Equipment

Networks and equipment are stated at cost, net of accumulated depreciation.
Depreciation is provided over the estimated useful lives of the respective
assets using the straight-line method for financial statement reporting
purposes.

The estimated useful lives of the Company's principal classes of assets are
as follows:

<TABLE>
<CAPTION>
Networks:
<S> <C>
Fiber optic systems.......................................... 20 years
Telecommunications equipment................................. 10 years
Furniture and fixtures......................................... 5 years
Leasehold improvements......................................... Life of lease
</TABLE>

Intangible Assets

Costs incurred in developing new networks or expanding existing networks,
including negotiation of rights-of-way and obtaining regulatory authorizations
are capitalized and amortized over the initial term of the agreements, which
generally range from 2 to 15 years. Costs incurred to obtain city franchises
are capitalized by the Company and amortized over the initial term of the
franchises, which generally range from 2 to 15 years.

Deferred Financing Costs

The Company capitalizes issuance costs related to its debt. Such costs are
amortized utilizing the interest method over the lives of the related debt.
The related amortization is included as a component of interest expense, and
amounted to $189,000, $561,000 and $2,279,000 for the years ended December 31,
1996, 1997 and 1998, respectively.

Other Assets

Other assets are comprised principally of non-refundable deposits for the
purchase of switching equipment, employee loans, security deposits and other
deposits.

Revenue Recognition

Revenue is recognized in the period the service is provided. Unbilled
revenue included in accounts receivable represents revenue earned for services
which will be billed in the succeeding month and totaled $1,272,000 at
December 31, 1998. The Company generally invoices customers one month in
advance for recurring services resulting in deferred revenue of $1,187,000 at
December 31, 1998.

Net Loss Per Common Share

Earnings per share are calculated in accordance with FASB Statement No.
128, Earnings per Share ("Statement 128"). All earnings per share amounts for
all periods have been presented in accordance with the provisions of Statement
128. Diluted earnings per share have not been presented for any period, as the
impact of including outstanding options and warrants would be anti-dilutive.
The Predecessors' earnings per share have been computed as if the May 23, 1996
merger had occurred as of January 1, 1996.

F-20
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Income Taxes

The Company uses the liability method to account for income taxes. Deferred
taxes are recorded based upon differences between the financial statement and
tax basis of assets and liabilities.

Advertising Costs

Advertising costs are included in selling, general and administrative
expenses and charged to expense as incurred. For the years ended December 31,
1997 and 1998, such costs were $66,000 and $2,769,000, respectively.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Impairment of Long-Lived Assets

The Company records impairment losses on long-lived assets used in
operations or expected to be disposed of when events and circumstances
indicate that the cash flows expected to be derived from those assets are less
than the carrying amounts of those assets. No such events and circumstances
have occurred.

Stock-Based Compensation

As permitted by FASB Statement No. 123, Accounting for Stock-Based
Compensation ("Statement 123"), the Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
("APB 25") and related interpretations in accounting for its employee stock-
based compensation. Under APB 25, no compensation expense is recognized at the
time of option grant if the exercise price of the employee stock option is
fixed and equals or exceeds the fair market value of the underlying common
stock on the date of grant, and the number of shares to be issued pursuant to
the exercise of such option are known and fixed at the grant date. As more
fully described in Note 7, the Company's outstanding stock options are not
considered fixed options under APB 25. The Company accounts for non-employee
stock-based compensation in accordance with Statement 123.

Comprehensive Income

In 1998, the Company adopted FASB Statement No. 130, Reporting
Comprehensive Income, which established new rules for the reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. This statement has no effect on the Company's
financial statement presentation because the Company presently has no items of
comprehensive income.

Segment Reporting

In 1998, the Company adopted FASB Statement No. 131, Disclosures About
Segments of an Enterprise and Related Information ("Statement 131"). Statement
131 uses a management approach to report financial and descriptive information
about an entity's operating segments. Operating segments are revenue-producing
components of an enterprise for which separate financial information is
produced internally for the entity's management. Under this definition, the
Company operated within a single segment for all periods presented.

F-21
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Recently Issued Accounting Pronouncements

In January 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities, which is effective for fiscal years beginning after December 15,
1998. This statement requires costs of start-up activities to be expensed as
incurred. The Company does not anticipate that the adoption of this statement
will have any effect on its results of operations or financial position,
because the Company currently expenses such costs.

In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Company expects to adopt the new
Statement effective January 1, 2000. This statement will require the Company
to recognize all derivatives on the balance sheet at fair value. The Company
does not anticipate that the adoption of this statement will have a
significant effect on its results of operations or financial position, because
the Company presently has no derivatives.

3. Networks and Equipment

Networks and equipment are comprised of the following:

<TABLE>
<CAPTION>
December 31
-----------------
1997 1998
------- --------
(in thousands)
<S> <C> <C>
Fiber optic systems....................................... $29,837 $ 99,502
Telecommunications equipment.............................. 18,052 115,769
Furniture and fixtures.................................... 1,518 7,340
Leasehold improvements.................................... 792 1,177
Construction-in-progress.................................. 23,556 11,770
------- --------
73,755 235,558
Less accumulated depreciation............................. (2,384) (10,668)
------- --------
$71,371 $224,890
======= ========
</TABLE>

Costs capitalized during the development of the Company's networks include
amounts incurred related to network engineering, design and construction and
capitalized interest. Capitalized interest related to the construction of the
networks during the years ended December 31, 1996, 1997 and 1998 amounted to
$103,000, $854,000 and $5,133,000, respectively.

For the years ended December 31, 1996, 1997 and 1998, depreciation expense
was $260,000, $2,122,000 and $8,284,000, respectively.

4. Intangible Assets

Intangible assets are comprised of the following:

<TABLE>
<CAPTION>
December 31
---------------
1997 1998
------ -------
(in thousands)
<S> <C> <C>
Franchise costs............................................. $1,342 $ 1,690
Authorizations and rights-of-ways........................... 1,151 1,455
Building access agreements and other........................ 567 1,062
------ -------
3,060 4,207
Less accumulated amortization............................... (405) (1,378)
------ -------
$2,655 $ 2,829
====== =======
</TABLE>

F-22
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. Accrued Expenses

Accrued expenses are comprised of the following:

<TABLE>
<CAPTION>
December 31
--------------
1997 1998
------ -------
(in thousands)
<S> <C> <C>
Accrued compensation......................................... $1,179 $ 4,138
Deferred revenue............................................. 498 1,187
Other accrued expenses....................................... 6,451 5,049
------ -------
$8,128 $10,374
====== =======
</TABLE>

6. Long-Term Debt

Senior Secured Credit Facility

On September 22, 1997, KMC Telecom and KMC Telecom II entered into an
Amended and Restated Loan and Security Agreement (the "AT&T Facility") with
AT&T Commercial Finance Corporation ("AT&T Finance") which provided for
borrowings up to an aggregate of $70 million.

On December 22, 1998, KMC Telecom, KMC Telecom II and KMC Telecom of
Virginia (the "Borrowers"), refinanced and expanded the AT&T Facility by
entering into a Loan and Security Agreement (the "Senior Secured Credit
Facility") with AT&T Finance, First Union National Bank, General Electric
Capital Corporation ("GECC") and Canadian Imperial Bank of Commerce (the
"Lenders"). Under the Senior Secured Credit Facility, the Lenders agreed to
lend the Borrowers up to an aggregate of $250 million initially to be used for
the construction and expansion of fiber optic telecommunications networks in
certain markets and for payment of transaction fees and expenses and, subject
to the attainment of certain financial conditions, for working capital and
general corporate purposes.

The Senior Secured Credit Facility includes a $175 million eight year
revolving loan (the "Revolver") and a $75 million eight and one half year term
loan (the "Term Loan"). At December 31, 1998, an aggregate of $41.4 million
was outstanding under this facility.

The Senior Secured Credit Facility will mature no later than July 1, 2007.
The outstanding principal balance of the Term Loan is payable in twenty
consecutive quarterly installments of $188,000 beginning on April 1, 2002 and
two final installments of $35.6 million each on April 1, 2007 and July 1,
2007. The aggregate commitment of the Lenders under the Revolver will be
reduced on each payment date beginning April 1, 2002. The initial quarterly
commitment reductions are 2.5%, increasing to 5% on April 1, 2003 and further
increasing to 7.5% on April 1, 2006. Commencing on April 1, 2002, the
aggregate Revolver commitment will be further reduced by an amount equal to
50% of excess operating cash flows (as defined in the facility) for the prior
fiscal year until the Borrowers achieve and maintain for at least two
consecutive fiscal quarters certain financial conditions. Additionally, in the
event certain principal amounts due under the Revolver are repaid and not
reborrowed within 120 days of such repayment, then the aggregate commitment
under the Revolver will be reduced by such amount.

Borrowings under the Senior Secured Credit Facility will bear interest
payable at the Borrowers' option, at (a) the "Applicable Base Rate Margin"
(which generally ranges from 1.75% to 3.25%) plus the greater of (i) the
administrative agent's prime rate or (ii) the overnight federal funds rate
plus .5% or (b) the "Applicable LIBOR Margin" (which generally ranges from
2.75% to 4.25%) plus LIBOR, as defined. If the Borrowers default on any
interest or principal payment due under the Senior Secured Credit Facility,
the interest rate will increase by four percentage points. If any other event
of default shall occur, the interest rate will be increased by two

F-23
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

percentage points. Interest on each LIBOR loan is payable on each LIBOR
interest payment date in arrears and interest on each base rate loan is
payable quarterly in arrears. Interest on borrowings outstanding
at December 31, 1998 was based on LIBOR, and the Borrowers were being charged
at an annual rate of 9.38%. The Borrowers must pay an annual commitment fee on
the unused portion of the Senior Secured Credit Facility ranging from .75% to
1.25%.

KMC Holdings has unconditionally guaranteed the repayment of the Senior
Secured Credit Facility when such repayment is due, whether at maturity, upon
acceleration, or otherwise. KMC Holdings has pledged the shares of each of the
Borrowers to the Lenders to collateralize its obligations under the guaranty.
In addition, the Borrowers have each pledged all of their assets to the
Lenders.

The Senior Secured Credit Facility contains a number of affirmative and
negative covenants including, among others, covenants restricting the ability
of the Borrowers to consolidate or merge with any person, sell or lease assets
not in the ordinary course of business, sell or enter into long term leases of
dark fiber, redeem stock, pay dividends or make any other payments (including
payments of principal or interest on loans) to KMC Holdings, create
subsidiaries, transfer any permits or licenses, or incur additional
indebtedness or act as guarantor for the debt of any person, subject to
certain conditions.

The Borrowers are required to comply with certain financial tests and
maintain certain financial ratios, including, among others, a ratio of total
debt to contributed capital, certain minimum revenues, maximum EBITDA losses
and minimum EBITDA, maximum capital expenditures and minimum access lines, a
maximum total leverage ratio, a minimum debt service coverage ratio, a minimum
fixed charge coverage ratio and a maximum consolidated leverage ratio. The
covenants become more restrictive upon the earlier of (i) June 30, 2001 and
(ii) after the Borrowers achieve positive EBITDA on a combined basis for two
consecutive fiscal quarters.

Failure to satisfy any of the financial covenants will constitute an event
of default under the Senior Secured Credit Facility permitting the Lenders,
after notice, to terminate the commitment and/or accelerate payment of
outstanding indebtedness. The Senior Secured Credit Facility also includes
other customary events of default, including, without limitation, a cross-
default to other material indebtedness, material undischarged judgments,
bankruptcy, loss of a material franchise or material license, breach of
representations and warranties, a material adverse change, and the occurrence
of a change of control.

Senior Discount Notes

On January 29, 1998, KMC Holdings sold 460,800 units, each unit consisting
of a 12 1/2% senior discount note with a principal amount at maturity of
$1,000 due 2008 pursuant to the Senior Discount Note Indenture between KMC
Holdings and the Chase Manhattan Bank, as trustee (the "Senior Discount
Notes"), and one warrant to purchase .21785 shares of Common Stock of KMC
Holdings at an exercise price of $.01 per share. The gross and net proceeds of
the offering were approximately $250.0 million and $236.4 million,
respectively. A substantial portion of the net proceeds of the offering have
been loaned by KMC Holdings to its subsidiaries. On August 11, 1998, KMC
Holdings consummated an offer to exchange the notes issued on January 29, 1998
for $460.8 million aggregate principal amount at maturity of notes that had
been registered under the Securities Act of 1933 (as used below and elsewhere
herein, "Senior Discount Notes" includes the original notes and the exchange
notes).

The Senior Discount Notes are unsecured, unsubordinated obligations of the
Company and mature on February 15, 2008. The Senior Discount Notes were sold
at a substantial discount from their principal amount at maturity, and there
will not be any payment of interest on the Senior Discount Notes prior to
August 15, 2003. The Senior Discount Notes will fully accrete to face value on
February 15, 2003. From and after February 15,

F-24
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2003, the Senior Discount Notes will bear interest, which will be payable in
cash, at the rate of 12.5% per annum on February 15 and August 15 of each
year, commencing August 15, 2003. The Company is accreting the initial
carrying value of the Senior Discount Notes to their aggregate face value over
the term of the debt at its effective interest rate of 13.7%.

The Senior Discount Notes are redeemable, at the Company's option, in whole
or in part, on or after February 15, 2003 and prior to maturity, at redemption
prices equal to 106.25% of the aggregate principal amount at maturity, plus
accrued and unpaid interest, if any, to the redemption date, declining to 100%
of the aggregate principal amount at maturity, plus accrued and unpaid
interest as of February 15, 2006.

In addition, at any time prior to April 15, 2000, the Company may redeem up
to 35% of the aggregate principal amount at maturity of the Senior Discount
Notes with the net proceeds from the sale of common equity at a redemption
price of 112.50% of their accreted value on the redemption date.

The indebtedness evidenced by the Senior Discount Notes ranks pari passu in
right of payment with all existing and future unsubordinated, unsecured
indebtedness of KMC Holdings and senior in right of payment to all existing
and future subordinated indebtedness of KMC Holdings. However, KMC Holdings is
a holding company and the Senior Discount Notes are, therefore, effectively
subordinated to all existing and future liabilities (including trade payables)
of its subsidiaries.

Within 30 days of the occurrence of a Change of Control (as defined in the
Senior Discount Note Indenture), the Company must offer to purchase for cash
all Senior Discount Notes then outstanding at a purchase price equal to 101%
of the accreted value thereof, plus accrued interest. The Company's ability to
comply with this requirement is subject to certain restrictions contained in
the Senior Secured Credit Facility.

The Senior Discount Note Indenture contains events of default, including,
but not limited to, (i) defaults in the payment of principal, premium or
interest, (ii) defaults in compliance with covenants contained in the Senior
Discount Note Indenture, (iii) cross defaults on more than $5 million of other
indebtedness, (iv) failure to pay more than $5 million of judgments that have
not been stayed by appeal or otherwise and (v) the bankruptcy of KMC Holdings
or certain of its subsidiaries. The Senior Discount Note Indenture restricts,
among other things, the ability of KMC Holdings to incur additional
indebtedness, create liens, engage in sale-leaseback transactions, pay
dividends or make distributions in respect of capital stock, make investments
or certain other restricted payments, sell assets of KMC Holdings, redeem
capital stock, issue or sell stock of restricted subsidiaries, enter into
transactions with stockholders or affiliates or effect a consolidation or
merger. The Senior Discount Note Indenture permits KMC Holdings' subsidiaries
to be deemed unrestricted subsidiaries and, thus, not subject to the
restrictions of the Senior Discount Note Indenture.

The Senior Discount Notes are "applicable high yield discount obligations"
("AHYDOs"), as defined in the Internal Revenue Code of 1986, as amended. Under
the rules applicable to AHYDOs, a portion of the original issue discount
("OID") that accrues on the Senior Discount Notes will not be deductible by
the Company at any time. Any remaining OID on the Senior Discount Notes will
not be deductible by the Company until such OID is paid.

Other Indebtedness

On September 22, 1997, KMC Telecom and KMC Telecom II obtained a
subordinated term loan (the "Supplemental AT&T Facility") from AT&T Finance
with an original principal amount of $10 million. The Supplemental AT&T
Facility was, by its terms, due in full upon the closing of a debt offering
with gross cash proceeds of at least $50 million. On January 29, 1998, the
entire $10 million outstanding under this facility was repaid in full with a
portion of the proceeds of the Company's issuance of Senior Discount Notes and
warrants.

F-25
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

During 1996, KMC Telecom issued convertible secured notes payable
aggregating $11,894,000 and $106,000 to two entities, Nassau Capital Partners
L.P. and NAS Partners I L.L.C. ("Nassau Capital" and "Nassau Partners",
respectively, collectively referred to as "Nassau") (such notes are
collectively referred to herein as the "Convertible Notes".) On January 21,
1997, the Convertible Notes, including accrued interest through that date,
aggregating approximately $12,380,000 were converted into 123,800 shares of
Series A Cumulative Convertible Preferred Stock of KMC Telecom (such stock was
subsequently exchanged for an equal number of shares of Series A Preferred
Stock of KMC Holdings on September 22, 1997).

7. Redeemable and Nonredeemable Equity

KMC Telecom Preferred Stock

On January 21, 1997, the Convertible Notes were converted into 123,800
shares of Series A Cumulative Convertible Preferred Stock of KMC Telecom with
an aggregate liquidation value of $12,380,000. Effective September 22, 1997,
all of the shares of Series A Cumulative Convertible Preferred Stock of KMC
Telecom were exchanged for an equal number of shares of Series A Cumulative
Convertible Preferred Stock of KMC Holdings.

Pursuant to an agreement with Nassau, all dividends accumulated on the
Series A Cumulative Convertible Preferred Stock of KMC Telecom through
September 22, 1997 ($592,000) were paid upon the closing of KMC Holdings'
issuance of Senior Discount Notes and warrants on January 29, 1998.

Series A Preferred Stock

There are 123,800 shares of Series A Cumulative Convertible Preferred Stock
of KMC Holdings ("Series A Preferred Stock") authorized and outstanding.
Series A Preferred Stock has a liquidation preference of $100 per share and an
annual dividend equal to 7.0% of the liquidation preference, payable
quarterly, when and if declared by the Board of Directors out of funds legally
available therefor. Unpaid dividends accumulate and the unpaid amount
increases at the annual rate of 7.0%, compounded quarterly. All accumulated
but unpaid dividends will be paid upon the occurrence of a Realization Event
(defined as (i) an initial public offering with gross proceeds of at least $40
million or (ii) sale of substantially all the assets or stock of the Company
or the merger or consolidation of the Company into one or more other
corporations). As of December 31, 1998, dividends in arrears on the Series A
Preferred Stock aggregated $1,144,000. Notwithstanding the foregoing, pursuant
to an agreement among Nassau and the Company, Nassau has agreed to forego the
payment of dividends from September 22, 1997 through the date on which Nassau
disposes of its interest in the Company; provided that at the time of such
disposition, Nassau has received not less than a 10% annual compound rate of
return during the period it held the Series A Preferred Stock.

Series A Preferred Stock is convertible into Common Stock at a conversion
price equal to $20.63 per share of Common Stock, subject to adjustment upon
the occurrence of certain events. Holders of Series A Preferred Stock may
convert all or part of such shares to Common Stock. Upon conversion, subject
to the aforementioned agreement to forego the payment of dividends, the
holders are entitled to receive a cash payment of the accumulated but unpaid
dividends; provided, however, that the Company may substitute common shares
having a fair market value equal to the amount of such cash payment if the
conversion occurs before a Realization Event. Series A Preferred Stock will
automatically convert into Common Stock upon the occurrence of a Qualified
Public Offering (defined as the first sale of Common Stock pursuant to a
registration statement filed under the Securities Act of 1933 in which the
Company receives gross proceeds of at least $40 million, provided that the per
share price at which such shares are sold in such offering is at least four
times the conversion price of the Series A Preferred Stock).

F-26
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The holders of Series A Preferred Stock, except as otherwise provided in
the Company's Certificate of Incorporation, are entitled to vote on all
matters voted on by holders of Common Stock. Each share of Series A Preferred
Stock is entitled to a number of votes equal to the number of shares of Common
Stock into which such share is convertible. Without the prior consent of two-
thirds of the shares of Series A Preferred Stock, among other things, the
Company may not increase the number of shares of preferred stock (of whatever
series) authorized for issuance, or declare or pay any dividends on shares of
Common Stock or other junior shares. As discussed under "Redemption Rights"
below, the holders of Series A Preferred Stock have certain redemption rights.
Accordingly, such stock has been reflected as redeemable equity in the
accompanying financial statements.

Series C Preferred Stock

There are 350,000 shares of Series C Cumulative Convertible Preferred Stock
of KMC Holdings ("Series C Preferred Stock") authorized, of which 175,000
shares are outstanding at December 31, 1998. 150,000 of such shares were
issued in November 1997, generating aggregate gross proceeds of $15 million
and the remaining 25,000 shares were issued in January 1998 upon the
conversion of an equal number of shares of Series D Preferred Stock. Series C
Preferred Stock has a liquidation preference of $100 per share and an annual
dividend equal to 7.0% of the liquidation preference, payable quarterly, when
and if declared by the Board of Directors out of funds legally available
therefor. Unpaid dividends accumulate and the unpaid amount increases at the
annual rate of 7.0%, compounded quarterly. All accumulated but unpaid
dividends will be paid upon the occurrence of a Realization Event. As of
December 31, 1998, dividends in arrears on the Series C Preferred Stock
aggregated $1,458,000. Notwithstanding the foregoing, pursuant to the Purchase
Agreement among the Company, Nassau, GECC and CoreStates Holdings, Inc.
("CoreStates"), each current holder of Series C Preferred Stock has agreed to
forego the payment of dividends that accumulate during the period from
issuance through the date on which such holder disposes of its interest in the
Company; provided that at the time of such disposition, it has received not
less than a 10% annual compound rate of return during such period.

Series C Preferred Stock is convertible into Common Stock at a conversion
price equal to (i) from the date of initial issuance to the date which is 30
months after the date of such initial issuance, $52.50 per share of Common
Stock and (ii) from and after the date which is 30 months after the date of
initial issuance, $42.18; provided that both such amounts are subject to
adjustment upon the occurrence of certain events. Holders of Series C
Preferred Stock may convert all or part of such shares to Common Stock. Upon
conversion, subject to the aforementioned agreement to forego the payment of
dividends, the holders are entitled to receive a cash payment of the
accumulated but unpaid dividends; provided, however, that the Company may
substitute common shares having a fair market value equal to the amount of
such cash payment if the conversion occurs before a Realization Event. Series
C Preferred Stock will automatically convert into Common Stock upon the
occurrence of a Qualified Public Offering.

The holders of Series C Preferred Stock, except as otherwise provided in
the Company's Certificate of Incorporation, are entitled to vote on all
matters voted on by holders of Common Stock. Each share of Series C Preferred
Stock is entitled to a number of votes equal to the number of shares of Common
Stock into which such share is convertible. Without the prior consent of two-
thirds of the shares of Series C Preferred Stock, among other things, the
Company may not increase the number of shares of preferred stock (of whatever
series) authorized for issuance, or declare or pay any dividends on shares of
Common Stock or other junior shares. As discussed under "Redemption Rights"
below, the holders of Series C Preferred Stock have certain redemption rights.
Accordingly, such stock has been reflected as redeemable equity in the
accompanying financial statements.

F-27
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

surviving entity, as a result of which the holders of the Company's Common
Stock (determined on a fully diluted basis) will hold less than a majority of
the outstanding shares of Common Stock or other equity interest of the
Company, person or entity resulting from such transaction, or any parent of
such entity.

Series D Preferred Stock

There are 25,000 shares of Series D Cumulative Convertible Preferred Stock
of KMC Holdings ("Series D Preferred Stock") authorized, none of which are
outstanding at December 31, 1998. There were 25,000 of such shares issued to
Nassau in November 1997, generating aggregate gross proceeds of $2.5 million.
In January 1998, Nassau exercised its conversion rights and converted all of
its shares of Series D Preferred Stock into an equal number of shares of
Series C Preferred Stock.

Common Stock

Holders of Common Stock of the Company are entitled to one vote for each
share held on all matters submitted to a vote of stockholders, except with
respect to the election of Directors. Except as otherwise required by law,
actions at the Company's stockholders meetings (held at least annually),
require the affirmative vote of a majority of the shares represented at the
meeting, a quorum being present. Holders of Common Stock are entitled, subject
to the preferences of preferred stock, to receive such dividends, if any, as
may be declared by the Board of Directors out of funds legally available
therefor. The Senior Discount Note Indenture and the Company's other
indebtedness restrict the ability of the Company to pay dividends on its
Common Stock. Without the prior consent of two-thirds of the shares of Series
A Preferred Stock and two-thirds of the shares of Series C Preferred Stock,
the Company may not declare or pay any dividends on its Common Stock. Except
as discussed under "Redemption Rights" below, the holders of Common Stock have
no preemptive, redemption or conversion rights.

Pursuant to provisions contained in the Company's Certificate of
Incorporation and an Amended and Restated Stockholders Agreement dated as of
October 31, 1997, among the Company, Kamine, Nassau, AT&T Credit Corporation
("AT&T Credit"), GECC, and CoreStates (the "Stockholders' Agreement"), until
Kamine and Nassau cease to own Common Stock or preferred stock convertible
into Common Stock representing at least five percent of the outstanding shares
of Common Stock, assuming all convertible securities are converted, Kamine and
Nassau have special rights entitling each to elect three Directors. A Director
elected by Kamine's shares or Nassau's shares may not be removed except with
the affirmative vote of a majority of the applicable shares of capital stock.
If Kamine or Nassau transfer their shares of capital stock, the number of
Directors their shares are entitled to elect decreases. The number of
Directors which Kamine is entitled to elect would be reduced to two if the
number of shares owned by him were to fall below two-thirds of the number of
shares of the Company initially issued to him, and to one if the number of
shares owned by him were to fall below one-third of the number of shares
initially issued to him. If his ownership were to fall below 5% of the number
of shares initially issued to him, Kamine would no longer be entitled to elect
any Directors pursuant to such provisions. Comparable reductions would be made
to the number of Directors which Nassau is entitled to elect if its ownership
were to fall below the specified percentages. Directors other than those
elected by vote of Kamine's shares or Nassau's shares are elected by holders
of Common Stock and holders of preferred stock that are entitled to vote in
the election of Directors. If a default relating to payment occurs under the
Senior Secured Credit Facility and continues uncured for 90 days, the holders
of Series C Preferred Stock (currently Nassau, GECC and CoreStates) are
entitled to elect two additional Directors, who will serve until the default
is cured.

Redemption Rights

Pursuant to the Stockholders' Agreement, each of Nassau, AT&T Credit, GECC
and CoreStates has a "put right" entitling it to have the Company repurchase
its preferred and common shares for the fair market value of

F-28
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

such shares if no Liquidity Event (defined as (i) an initial public offering
with gross proceeds of at least $40 million, (ii) the sale of substantially
all of the stock or assets of the Company or (iii) the merger or consolidation
of the Company with one or more other corporations) has taken place by the
later of (x) October 22, 2003 or (y) 90 days after the final maturity date of
the Senior Discount Notes (issued in January 1998, with a stated maturity date
of February 15, 2008). CoreStates, GECC and AT&T Credit may not exercise such
put rights unless Nassau has exercised its put right. The Senior Discount Note
Indenture limits the Company's ability to repurchase such shares. All of the
shares of preferred and common stock subject to such "put right" are presented
as redeemable equity in the accompanying balance sheets.

The redeemable preferred stock, redeemable common stock and redeemable
common stock warrants (described below) are being accreted to their fair
market values from their respective issuance dates to their earliest potential
redemption date (October 22, 2003). At December 31, 1998, the aggregate
redemption value of the redeemable equity was approximately $152 million,
reflecting per share redemption amounts of $630 for the Series A Preferred
Stock, $248 for the Series C Preferred Stock and $130 for the redeemable
common stock and redeemable common stock warrants. Accordingly, $8,246,000 and
$17,861,000 of accretion have been charged to additional paid-in-capital in
1997 and 1998, respectively.

Warrants

In connection with KMC Telecom's 1996 Loan and Security Agreement, warrants
representing a 2.5% ownership interest in the fully diluted common voting
capital stock of KMC Telecom, including anti-dilution protection, were granted
to the lenders. These warrants, at an exercise price of $.01 per share, were
issued on January 21, 1997, concurrent with the initial borrowing under the
AT&T Facility, at which date the fair value of such warrants was determined to
be $1.5 million, which was reflected as a charge to deferred financing costs
and credited to redeemable equity in January 1997. On September 22, 1997, such
warrants were exercised, and an aggregate of 28,000 shares of Class A Common
Stock of KMC Telecom were issued to the warrant holders. These shares were
subsequently exchanged for an equal number of shares of Common Stock of KMC
Holdings.

In connection with the AT&T Facility, warrants to purchase 10,000 shares of
Common Stock were issued to GECC in 1997. These warrants, at an exercise price
of $.01 per share, are exercisable from issuance through January 21, 2005. The
fair value of such warrants was determined to be $525,000, which was reflected
as a charge to deferred financing costs and credited to redeemable equity.
Pursuant to the Stockholders' Agreement, GECC may put the shares of Common
Stock issuable upon the exercise of such warrants back to the Company. These
warrants have been presented as redeemable common stock warrants in the
accompanying balance sheet at December 31, 1998.

In connection with the sale of Senior Discount Notes in January 1998, the
Company issued warrants to purchase an aggregate of 100,385 shares of Common
Stock at an exercise price of $.01 per share. The net proceeds of $10,446,000
represented the fair value of the warrants at the date of issuance. The
warrants are exercisable through January 2008.

Options

Prior to the establishment of the present holding company structure, during
1996 and 1997, KMC Telecom granted options to purchase shares of its common
stock, par value $.01 per share ("KMC Telecom Common Stock"), to employees
pursuant to the KMC Telecom Stock Option Plan.

In order to reflect the establishment of the holding company structure, on
June 26, 1998, the Board of Directors adopted a new stock option plan, the KMC
Holdings Stock Option Plan (the "1998 Plan"), which authorizes the grant of
options to purchase Common Stock of the Company. The 1998 Plan was approved by
the

F-29
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

stockholders, effective July 15, 1998. In September 1998, the Company replaced
the options to purchase KMC Telecom Common Stock previously granted under the
KMC Telecom Stock Option Plan with options to purchase Common Stock of the
Company granted under the 1998 Plan and granted options to additional
employees of the Company under the 1998 Plan.

The 1998 Plan, which is administered by the Compensation Committee of the
Board of Directors of KMC Holdings, provides for various grants to key
employees, directors, affiliated members or other persons having a unique
relationship with the Company excluding Kamine and any person employed by
Nassau Capital or any Nassau affiliate. Grants may include, without
limitation, incentive stock options, non-qualified stock options, stock
appreciation rights, dividend equivalent rights, restricted stocks, purchase
stocks, performance shares and performance units. The Compensation Committee
has the power and authority to designate recipients of the options and to
determine the terms, conditions, and limitations of the options.

Under the 1998 Plan, options to purchase 262,750 shares of Common Stock of
KMC Holdings are available for grant, all of which were allocated to the Plan
as of December 31, 1998. No individual may receive options for more than
75,000 shares. The exercise price of all incentive stock options granted under
the 1998 Plan must be at least equal to the fair market value of the shares on
the date of grant. The exercise price of all non-qualified stock options
granted under the 1998 Plan must be at least 50% of the fair market value of
the shares on the date of grant.

Options granted pursuant to the 1998 Plan will have terms not to exceed 10
years and become exercisable over a vesting period as specified in such
options. The 1998 Plan will terminate no later than 2008. Options granted
under the 1998 Plan are nontransferable, other than by will or by the laws of
descent and distribution, and may be exercised during the optionee's lifetime,
only by the optionee.

The 1998 Plan provides for an adjustment of the number of shares
exercisable in the event of a merger, consolidation, recapitalization, change
of control, stock split, stock dividend, combination of shares or other
similar changes, exchange or reclassification of the Common Stock at the
discretion of the Compensation Committee. Pursuant to the agreements adopted
under the 1998 Plan, the greater of 25% of the shares granted or fifty percent
of all unvested options granted become fully vested upon a change-in-control
of the Company, as defined. Under certain circumstances, such percentages may
increase.

The holders of options to acquire shares of Common Stock of KMC Holdings
are required to enter into agreements with KMC Holdings which place certain
restrictions upon their ability to sell or otherwise transfer such shares. In
the event of termination of employment of the option holder by the Company or
the affiliates, the Company can repurchase all of the shares or options held
by such individuals, generally for an amount equal to the fair value of such
shares or the excess of the fair value of such options over their exercise
price.

F-30
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Information on stock options is as follows:

<TABLE>
<CAPTION>
Weighted
Number of Shares Average Exercise
----------------------- ----------------
Outstanding Exercisable Price of Options
----------- ----------- ----------------
<S> <C> <C> <C>
Balances, January 1, 1996........... -- --
Granted........................... 95,385 -- $ 65
Became exercisable................ -- --
-------- -------
Balances, December 31, 1996......... 95,385 -- $ 65
Granted........................... 63,115 -- $ 65
Became exercisable................ -- 22,000
Cancelled......................... (17,000) (3,000) $(65)
-------- -------
Balances, December 31, 1997......... 141,500 19,000 $ 65
Granted........................... 262,500 -- $ 26
Became exercisable................ -- 117,000
Cancelled......................... (141,500) (19,000) $(65)
-------- -------
Balances, December 31, 1998......... 262,500 117,000 $ 26
-------- -------
</TABLE>

The weighted-average exercise price of options exercisable at December 31,
1997 and 1998 is $50 and $22, respectively, and the weighted-average fair
value of options granted during 1996, 1997 and 1998 were $30, $49 and $114 per
share, respectively. Exercise prices for options outstanding as of December
31, 1998 ranged from $20 to $40. The weighted-average remaining contractual
life of those options is 9.7 years.

During the year ended December 31, 1998, non-qualified options to purchase
an aggregate of 262,500 shares were granted at exercise prices of $20 (157,500
options), $30 (52,500 options) and $40 (52,500 options). The options granted
during 1998 are comprised of 230,500 options granted to employees and 32,000
options granted to individuals employed by certain affiliates of the Company.
All such options have 10 year terms. The $20 options become exercisable over a
three year period in six month intervals commencing six months after the grant
date in increments of 26,250 options each. The $30 options become exercisable
in two increments of 26,250 options each, forty-two and forty-eight months
after the grant date. The $40 options become exercisable in two increments of
26,250 options each, fifty-four and sixty months after the grant date. For
purposes of vesting, options granted in 1998 under the 1998 Plan to replace
options granted in 1997 and 1996 under the KMC Telecom Stock Option Plan are
deemed to have been granted on the date of grant of the options which they
replace.

As a result of certain anti-dilution provisions governing the conversion of
shares of Class C Common Stock into shares of Class A Common Stock, KMC
Telecom was required to account for the KMC Telecom Stock Option Plan as a
variable stock option plan. Additionally, as a result of restrictions upon the
holders of options granted under the 1998 Plan, including their ability to
sell or otherwise transfer the related shares, the 1998 Plan is required to be
accounted for as a variable stock option plan. Generally accepted accounting
principles for variable stock option plans require the recognition of a non-
cash compensation charge for these options (amortized over the vesting period
of the employee options and recognized in full as of the grant date for the
non-employee options). Such charge is determined by the difference between the
fair value of the common stock underlying the options and the option price as
of the end of each period. Accordingly, compensation expense will be charged
or credited periodically through the date of exercise or cancellation of such
stock options, based on changes in the value of the Company's stock as well as
the vesting schedule of such options. These compensation charges or credits
are non-cash in nature, but could have a material effect on the Company's
future reported results of operations.

F-31
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company, upon cancellation of the outstanding options under the KMC
Telecom Stock Option Plan, reversed all compensation expense previously
recorded with respect to such options. Additionally, to the extent the fair
value of the Common Stock of the Company exceeded the exercise price of the
options granted under the 1998 Plan, the Company recognized compensation
expense related to such options over their vesting period.

Based on the estimated fair value of the Common Stock of KMC Telecom at
December 31, 1996 and 1997, and KMC Holdings at December 31, 1998, cumulative
deferred compensation obligations of $1,283,000, $15,579,000 and $27,906,000,
respectively, have been established. The Company has recognized compensation
expense aggregating $240,000, $13,870,000 and $7,080,000 for the years ended
December 31, 1996, 1997 and 1998, respectively. The 1998 stock option
compensation expense of $7,080,000 reflects charges of $7,236,000 under the
KMC Telecom Stock Option Plan through its termination in September 1998 and
charges of $21,190,000 related to the 1998 Plan, partially offset by a credit
as a result of the September 1998 cancellation of the KMC Telecom stock
options, reflecting the reversal of $21,346,000 of cumulative compensation
previously recognized for options granted under the KMC Telecom Stock Option
Plan.

In accordance with the provisions of Statement 123, the Company applies APB
25 and related interpretations in accounting for its stock option plan. If the
Company had elected to recognize compensation expense based on the fair value
of the options granted at grant date as prescribed by Statement 123, net loss
and net loss per common share would have been the following:

<TABLE>
<CAPTION>
December 31
---------------------------
1996 1997 1998
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net loss:
As reported.................................. $(4,495) $(32,685) $(76,753)
======= ======== ========
Pro forma.................................... $(4,453) $(20,542) $(76,869)
======= ======== ========
Net loss per common share:
As reported.................................. $ (7.49) $ (64.93) $(114.42)
======= ======== ========
Pro forma.................................... $ (7.42) $ (45.97) $(114.56)
======= ======== ========

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

<CAPTION>
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Expected dividend yield........................ 0% 0% 0%
Expected stock price volatility................ 50% 50% 50%
Risk-free interest rate........................ 6% 6% 6%
Expected life of options....................... 7 years 7 years 7 years
</TABLE>

The expected stock price volatility factors were determined based on an
average of such factors as disclosed in the financial statements of peer
companies. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

F-32
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

8. Income Taxes

As of December 31, 1998, the Company and its subsidiaries had consolidated
net operating loss carryforwards for United States income tax purposes
("NOLs") of approximately $59 million which expire through 2013. Under Section
382 of the Internal Revenue Code of 1986, as amended, if the Company undergoes
an "ownership change," its ability to use its preownership change NOLs (NOLs
accrued through the date of the ownership change) would generally be limited
annually to an amount equal to the product of (i) the long-term tax-exempt
rate for ownership changes prescribed monthly by the Treasury Department and
(ii) the value of the Company's equity immediately before the ownership
change, excluding certain capital contributions. Any allowable portion of the
preownership change NOLs that is not used in a particular taxable year
following the ownership change could be carried forward to subsequent taxable
years until the NOLs expire, usually 15 years after they are generated. As a
result of the cumulative effect of issuances of preferred and common stock
through September 22, 1997, KMC Telecom has undergone an ownership change.

For financial reporting purposes, the Company has an aggregate of
approximately $38 million and $109 million of loss carryforwards and net
temporary differences at December 31, 1997 and 1998, respectively. At existing
federal and state tax rates, the future benefit of these items approximates
$15 million at December 31, 1997 and $42 million at December 31, 1998.
Valuation allowances have been established equal to the entire net tax benefit
associated with all carryforwards and temporary differences at both December
31, 1997 and 1998 as their realization is uncertain.

The composition of expected future tax benefits at December 31, 1997 and
1998 is as follows:

<TABLE>
<CAPTION>
1997 1998
-------- --------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards......................... $ 8,894 $ 22,914
Temporary differences
Stock option compensation.............................. 5,502 8,264
Interest accretion..................................... -- 9,797
Other, net............................................. 523 1,513
-------- --------
Total deferred tax assets................................ 14,919 42,488
Less valuation allowance................................. (14,919) (42,488)
-------- --------
Net deferred tax assets.................................. $ -- $ --
======== ========
</TABLE>

A reconciliation of the expected tax benefit at the statutory federal rate
of 34% is as follows:

<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Expected tax benefit at
statutory rate......... (34.0)% (34.0)% (34.0)%
State income taxes, net
of federal benefit..... (4.0) (2.9) (2.6)
Non-deductible interest
expense................ -- -- 2.0
S Corporation losses not
benefited.............. 4.1 -- --
Other................... .1 .1 .1
Change in valuation
allowance.............. 33.8 36.8 34.5
----- ----- -----
--% --% --%
===== ===== =====
</TABLE>

F-33
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. Commitments and Contingencies

Leases

The Company leases various facilities and equipment under operating leases.
Minimum rental commitments are as follows (in thousands):

<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
1999............................................................... $ 2,247
2000............................................................... 2,222
2001............................................................... 2,169
2002............................................................... 2,120
2003............................................................... 1,615
Thereafter......................................................... 1,334
-------
$11,707
=======
</TABLE>

Rent expense under operating leases was $98,000, $478,000 and $1,299,000
for the years ended December 31, 1996, 1997 and 1998, respectively.

Litigation

By letter dated August 29, 1997, KMC Telecom notified I-Net, Inc. ("I-NET")
that KMC Telecom considered I-NET to be in default under a Master
Telecommunications System Rollout Agreement, dated as of October 1, 1996 (the
"I-Net Agreement"), as a result of I-NET's failure to provide design plans and
specifications for several systems for which it had agreed to provide such
plans and specifications, to properly supervise construction of the systems or
to provide personnel with the necessary expertise to manage the projects. On
February 12, 1998, the Company received a demand for arbitration from Wang
Laboratories, Inc. ("Wang"), the successor to I-NET. The demand seeks at least
$4.1 million. The Company believes that it has meritorious defenses to Wang's
claims and has asserted counterclaims seeking in excess of $2.5 million as a
result of I-NET's defaults under the I-NET Agreement.

The arbitration proceedings are currently underway. The Company believes
that resolution of this matter will not have a material adverse impact on its
financial condition. No assurance can be given, however, as to the ultimate
resolution of this matter.

There are a number of lawsuits and regulatory proceedings related to the
Telecommunications Act of 1996, decisions of the Federal Communications
Commission related thereto and rules and regulations issued thereunder which
may affect the rights, obligations and businesses of incumbent local exchange
carriers, competitive local exchange carriers and other participants in the
telecommunications industry in general, including the Company.

Purchase Commitments

As of December 31, 1998, the Company has outstanding commitments
aggregating approximately $30.6 million related to purchases of
telecommunications equipment and fiber optic cable and its obligations under
its agreements with certain suppliers and service providers.

Employment Agreements

The Company has entered into employment agreements with certain of its
executives. In addition to a base salary, these agreements also provide for
certain incentive compensation payments, based upon completion of

F-34
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

construction and attainment of specified revenues for additional networks. The
Company has also agreed to make similar incentive compensation payments to
certain other key employees.

10. Acquisition

On July 11, 1997, KMC Telecom acquired a network in Melbourne, Florida for
a purchase price of $2 million in cash. The acquisition was accounted for
under the purchase method and the purchase price approximated the fair value
of the fixed assets acquired. Assuming the Melbourne Network had been acquired
as of January 1, 1997, the Company's pro forma consolidated revenue and net
loss for the year ended December 31, 1997 would have been $3,655,000 and
$33,212,000, respectively.

11. Related Party Transactions

During 1996, KMC Telecom had borrowings from Kamine. The proceeds of such
loans were used to fund the construction of the network in Huntsville,
Alabama, and to fund operating cash flow requirements. These loans were
payable on demand and, through April 30, 1996, bore interest at the prime
rate. Interest expense charged by Kamine under these loans amounted to
$120,000 for the year ended December 31, 1996. Effective May 1, 1996, Kamine
elected not to charge interest on these loans. However, for financial
reporting purposes, $180,000 of interest expense was imputed on these loans
for the period from May 1, 1996 to their repayment on November 12, 1996, and a
corresponding credit has been recorded to additional paid-in capital.

The Company and certain affiliated companies owned by Kamine share certain
administrative services. The entity which bears the cost of the service is
reimbursed by the other for the other's proportionate share of such expenses.
The Company reimbursed Kamine-affiliated companies for these shared services
an aggregate of approximately $488,000, $281,000 and $136,000 of expense for
the years ended December 31, 1996, 1997 and 1998, respectively.

From May 1, 1996 through January 29, 1998, an affiliate of the Company was
paid a fee at an annual rate of $266,000 as reimbursement for the services of
Kamine as Chairman of the Board of the Company. The amount of this fee was
reduced to $100,000 per annum as of January 29, 1998 and it was terminated
effective December 31, 1998. The fees paid for these services are included in
the shared services payment described in the immediately preceding paragraph.
Effective January 1, 1999, Kamine became an employee of the Company and he is
currently paid a salary at the rate of $450,000 per annum for his services as
Chairman of the Board.

The Company leases its headquarters office through January 2007 from an
entity controlled by Kamine. The lease provides for a base annual rental cost
of approximately $217,000, adjusted periodically for changes in the consumer
price index, plus operating expenses. Rent expense recognized under this lease
for the years ended December 31, 1996, 1997 and 1998 was $97,000, $207,000 and
$217,000, respectively.

As of December 31, 1998, the Company has made loans aggregating $760,000,
to certain of its executives. Such loans bear interest at a rate of 6% per
annum and are included in other assets.

The Company has reached an agreement in principle with KMC Services LLC, a
limited liability company wholly-owned by Kamine ("KMC Services"), pursuant to
which KMC Services will offer to the Company financial and energy services
which are related to the Company's business. KMC Services may also offer its
services to third parties in jurisdictions in which the Company is not
offering telecommunications services; provided that such third parties are not
competitors of the Company. Initially, KMC Services will offer a leasing
program for equipment physically installed at a customer's premises ("CPE
Equipment") for the Company to integrate into its ClearStar SM Advantage
program, whereby the Company will be able to offer CPE Equipment for lease or
sale to its customers. The equipment will be owned by KMC Services, and the
Company will have no liability for the cost of the equipment, the financing
related to it or the obligation for any lease charges. Any

F-35
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

such sale or lease will be between the Company's customer and KMC Services.
The specific terms and conditions of the agreement between KMC Services LLP
and the Company are currently being negotiated by the parties.

Effective January 1, 1999, the Company is entitled to utilize a Citation
III business jet, chartered by Bedminster Aviation, LLC, a limited liability
company wholly-owned by Kamine, for a fixed price per hour of flight time. The
Company has agreed to use its best efforts to utilize the Citation III fifty
hours per quarter during 1999. The Company is under no obligation to do so and
has not guaranteed any financial arrangements with respect to the aircraft or
to Bedminster Aviation, LLC.

Pursuant to an agreement among the Company, Kamine and Nassau, for 1997 and
1998 Nassau received $100,000 as a financial advisory fee and as compensation
for the Nassau designees who served on the Board of Directors of the Company.
Nassau will be paid $450,000 as a financial advisory fee for 1999.

12. Net Loss Per Common Share

The following table sets forth the computation of net loss per common
share:

<TABLE>
<CAPTION>
1996 1997 1998
------- -------- --------
(in thousands)
<S> <C> <C> <C>
Numerator:
Net loss..................................... $(4,495) $(32,686) $(76,753)
Dividends and accretion on redeemable
preferred stock............................. -- (8,904) (18,285)
------- -------- --------
Numerator for net loss per common share...... $(4,495) $(41,590) $(95,038)
======= ======== ========
Denominator:
Denominator for net loss per common share--
weighted average number of common shares
outstanding................................. 600 641 831
======= ======== ========
Net loss per common share.................... $ (7.49) $ (64.93) $(114.42)
======= ======== ========
</TABLE>

Options and warrants to purchase an aggregate of 242,768 and 372,885 shares
of common stock were outstanding as of December 31, 1997 and 1998,
respectively, but a computation of diluted net loss per common share has not
been presented, as the effect of such securities would be anti-dilutive.

13. Supplemental Disclosure of Noncash Investing and Financing Activities

Information with respect to noncash investing and financing activities is
as follows:

In 1996, Kamine contributed a loan and related imputed interest totaling
$2,267,000 to equity.

In 1997, the Convertible Notes, including accrued interest, aggregating
approximately $12,380,000 were converted into 123,800 shares of Series A
Cumulative Convertible Preferred Stock of KMC Telecom.

In 1997, warrants with a fair value of $1.5 million were granted to
Newcourt Capital and warrants with a fair value of $525,000 were granted to
GECC.

In connection with the Senior Discounts Notes, the Company recognized
noncash interest expense of $29.6 million in 1998.

In connection with options granted to employees under the KMC Telecom Stock
Option Plan in 1996 and 1997, and under the KMC Holdings Stock Option Plan in
1998, cumulative deferred compensation obligations

F-36
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of $1,283,000, $15,579,000 and $27,906,000 have been established in 1996, 1997
and 1998, respectively, with offsetting credits to additional paid-in capital.
Noncash compensation expense of $44,000, $9,014,000 and $23,758,000 in 1996,
1997 and 1998, respectively, was recognized in connection with such options.
In connection with options granted to individuals employed by certain
affiliates of the Company in 1996, 1997 and 1998, the Company recognized
noncash compensation expense of $196,000, $4,856,000 and $4,668,000,
respectively. In addition, during 1998 the Company cancelled all of the then
outstanding options granted under the KMC Telecom Stock Option Plan, resulting
in the reversal of previously recognized compensation expense of $21.3
million.

14. Financial Instruments

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments.

Cash and Cash Equivalents

The carrying amounts approximate fair value because of the short-term
maturity of the instruments.

Investments Held for Future Capital Expenditures

The carrying amounts and fair value are reported at amortized cost since
these securities are to be held to maturity.

Long-Term Debt

The carrying amount of floating-rate long-term debt approximates its fair
value. The fair value of the Company's fixed-rate long-term debt is estimated
using discounted cash flows at the Company's incremental borrowing rates.

Redeemable Equity

The fair values of the Company's redeemable equity instruments are
estimated to be the amounts at which the holders may require the Company to
redeem such securities, adjusted using discounted cash flows.

The carrying amounts and estimated fair values of the Company's financial
instruments are as follows (in millions):

<TABLE>
<CAPTION>
1997 1998
-------------- ---------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- ------
<S> <C> <C> <C> <C>
Cash and cash equivalents................... $15.6 $15.6 $ 21.1 $ 21.1
Investments held for future capital
expenditures............................... -- -- 27.9 27.9
Long-term debt:
Floating rate............................. 61.3 61.3 41.4 41.4
Fixed rate................................ -- -- 267.8 249.6
Redeemable equity instruments:
Series A Preferred Stock.................. 18.9 28.4 30.4 38.9
Series C Preferred Stock.................. 14.7 13.5 21.6 21.6
Series D Preferred Stock.................. 2.4 2.3 -- --
Redeemable common stock................... 11.2 6.3 22.3 14.5
Redeemable common stock warrants.......... .5 .5 .7 .7
</TABLE>

F-37
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
accounts receivable. The Company places its cash investments with major
financial institutions. With respect to accounts receivable, the Company
performs ongoing credit evaluations of its customers' financial conditions and
generally does not require collateral. No individual customer accounted for
more than 10% of revenue, excluding reciprocal compensation revenue, as
described below, for the years ended December 31, 1997 and 1998.

The Company maintains interconnection agreements with incumbent local
exchange carriers ("ILECs") in each state in which it operates. Among other
things, these contracts govern the reciprocal amounts to be billed by
competitive carriers for terminating local traffic of Internet service
providers ("ISPs") in each state. The Regional Bell Operating Companies have
advised competitive local exchange carriers, such as the Company, that they do
not consider calls in the same local calling area which are placed by their
customers to competitive local exchange carrier customers which are Internet
service providers to be local calls under the interconnection agreements. The
Regional Bell Operating Companies claim that these calls are exchange access
calls, which the Federal Communications Commission exempted from payment of
access charges. The Regional Bell Operating Companies claim that, as a result,
they do not owe any compensation to competitive local exchange carriers for
transporting and terminating these calls. The Regional Bell Operating
Companies have threatened to withhold, and in many cases have withheld,
reciprocal compensation to competitive local exchange carriers for the
transport and termination of these calls. During 1998, the Company recognized
revenue from these ILECs of approximately $2.9 million, or 12.9% of 1998
revenue, for these services. Payments of approximately $135,000 were received
from the ILECs during 1998.

Management believes reciprocal compensation for Internet traffic to be an
industry-wide matter that will ultimately be resolved on a state-by-state
basis. To date, twenty-nine state commissions have ruled on the issue and
found that ILECs must pay compensation to competitive carriers for local calls
to ISPs located on competitive carriers' networks. A number of other state
commissions currently have proceedings pending to consider this matter. The
Federal Communications Commission has concluded that calls to ISPs are
interstate calls and therefore exempt from local termination charges. However,
the Commission also stated that existing interconnection agreements providing
for such termination charges must be honored by the ILECs.

The Company accounts for reciprocal compensation with the ILECs, including
the activity associated with the disputed ISP traffic, as local traffic
pursuant to the terms of its interconnection agreements. Accordingly, revenue
is recognized in the period that the traffic is terminated. The circumstances
surrounding the disputes are considered by management periodically in
determining whether reserves against unpaid balances are warranted. As of
December 31, 1998, no reserves have been considered necessary by management.

15. Subsequent Events

Lucent Loan and Security Agreement

KMC Telecom III entered into a Loan and Security Agreement (the "Lucent
Facility") dated February 4, 1999 with Lucent Technologies Inc. ("Lucent")
which provides for borrowings to be used to fund the acquisition of certain
telecommunications equipment and related expenses. The Lucent Facility
provides for an aggregate commitment of up to $600 million, of which $125
million is immediately available to purchase Lucent products and an additional
$125 million will become available upon KMC Telecom III's receipt of an
additional $35 million of funded equity or qualified intercompany loans, as
defined in the agreement. Further, up to an additional $350 million will be
available upon (a) additional lenders participating in the Lucent Facility and
making commitments to make loans so that Lucent's aggregate commitment does
not exceed $250 million and (b) the

F-38
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company satisfying certain other requirements, the most significant of which
is KMC Holdings raising and contributing at least $300 million in high yield
debt or equity (other than disqualified stock) to KMC Telecom III. The Lucent
Facility places certain restrictions upon KMC Telecom III's ability to
purchase non-Lucent equipment with proceeds from such facility.

Interest on borrowings under the Lucent Facility is charged, at the option
of KMC Telecom III, at a floating rate of LIBOR plus the "Applicable LIBOR
Margin", or at an alternative base rate plus the "Applicable Base Rate Margin"
(as defined). Such margins will be increased by 0.25% until KMC Telecom III
and its subsidiaries have completed systems in fourteen markets. If KMC
Telecom III defaults on any payment due under the Lucent Facility, the
interest rate will increase by four percentage points. If any other event or
default shall occur, the interest rate will be increased by two percentage
points. Interest on each LIBOR loan is payable on each LIBOR interest payment
date in arrears and interest on each base rate loan is payable quarterly in
arrears. KMC Telecom III must pay an annual commitment fee on the unused
portion of the Lucent Facility of 1.25%.

Loans borrowed under the Lucent Facility amortize in amounts based upon the
following percentages of the aggregate amount of the loans drawn under the
Lucent Facility:

<TABLE>
<CAPTION>
Payment Dates Amortization
------------- ----------------
<S> <C>
May 1, 2002--February 1, 2003............................... 2.5% per quarter
May 1, 2003--February 1, 2006............................... 5.0% per quarter
May 1, 2006--February 1, 2007............................... 7.5% per quarter
</TABLE>

KMC Holdings has unconditionally guaranteed the repayment of up to $250.0
million under the Lucent Facility when such repayment is due, whether at
maturity, upon acceleration, or otherwise. KMC Telecom III Holdings, Inc.,
which owns the shares of KMC Telecom III and is wholly-owned by KMC Holdings,
has pledged the shares of KMC Telecom III to Lucent to collateralize its
obligations under the guaranty. In addition, KMC Telecom III has pledged all
of its assets to Lucent.

F-39
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Series E Preferred Stock

On February 4, 1999, the Company issued 25,000 shares of Series E Senior
Redeemable, Exchangeable, PIK Preferred Stock (the "Series E Preferred Stock")
to Newcourt Commercial Finance Corporation ("Newcourt Finance"), generating
aggregate gross proceeds of $22.9 million. The Series E Preferred Stock has a
liquidation preference of $1,000 per share and an annual dividend equal to
14.5% of the liquidation preference, payable quarterly. On or before January
15, 2004, the Company may pay dividends in cash or in additional fully paid
and nonassessable shares of Series E Preferred Stock. After January 15, 2004,
dividends must be paid in cash, subject to certain conditions. Unpaid
dividends accrue at the dividend rate of the Series E Preferred Stock,
compounded quarterly.

The holders of Series E Preferred Stock have voting rights in certain
circumstances. Upon the occurrence of a Change of Control, the Company will be
required to make an offer to repurchase the Series E Preferred Stock for cash
at a purchase price of 101% of the liquidation preference thereof, together
with all accumulated and unpaid dividends to the date of purchase.

Series F Preferred Stock

The Series F Preferred Stock may be redeemed at any time, in whole or in
part, at the option of the Company, at a redemption price equal to 110% of the
liquidation preference on the redemption date plus an amount in cash equal to
all accrued and unpaid dividends thereon to the redemption date. Upon the
occurrence of a Change of Control, the Company will be required to make an
offer to purchase the Series F Preferred Stock

F-40
<PAGE>

KMC TELECOM HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

for cash at a purchase price of 101% of the liquidation preference thereof,
together with all accumulated and unpaid dividends to the date of purchase.

The holders of Series F Preferred Stock have voting rights under certain
circumstances.

Warrants

F-41
<PAGE>

Independent Auditors' Report

The Board of Directors and Stockholders
KMC Telecom Holdings, Inc.

We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of KMC Telecom Holdings, Inc. for each
of the three years in the period ended December 31, 1998 (presented separately
herein), and have issued our unqualified opinion thereon dated February 2,
1999. The accompanying condensed parent company financial statements of KMC
Telecom Holdings, Inc., as of December 31, 1997 and 1998 and for the period
from September 22, 1997 (formation) to December 31, 1997 and the year ended
December 31, 1998, are included in the consolidated financial statements. The
scope of our auditing procedures was not designed to provide a basis for our
expressing an opinion about whether the separate condensed parent company
financial statements of KMC Telecom Holdings, Inc., on a stand-alone basis,
are fairly presented in conformity with generally accepted accounting
principles; accordingly, we do not express such an opinion on them. However,
the condensed parent company financial statements of KMC Telecom Holdings,
Inc. referred to above have been subjected to the auditing procedures applied
in our audit of the consolidated financial statements and, in our opinion, are
fairly stated in all material respects in relation to the consolidated
financial statements of KMC Telecom Holdings, Inc. taken as a whole.

/s/ Ernst & Young LLP

MetroPark, New Jersey
February 2, 1999

S-1
<PAGE>

KMC TELECOM HOLDINGS, INC.
(PARENT COMPANY)

CONDENSED BALANCE SHEETS
(in thousands)

<TABLE>
<CAPTION>
December 31
------------------
1997 1998
------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................. $ -- $ 1,221
Amounts due from subsidiaries............................. -- 20,922
Prepaid expenses and other current assets................. -- 332
------- ---------
Total current assets........................................ -- 22,475
Loans receivable from subsidiaries.......................... 25,148 265,713
Equipment, net.............................................. -- 4,775
Intangible assets, net...................................... 506 625
Deferred financing costs, net............................... 732 12,055
Other assets................................................ -- 1,952
------- ---------
$26,386 $ 307,595
======= =========
Liabilities, redeemable and nonredeemable equity
(deficiency)
Current liabilities:
Accounts payable.......................................... $ -- $ 2,043
Accrued expenses.......................................... -- 5,838
------- ---------
Total current liabilities................................... -- 7,881
Senior discount notes payable............................... -- 267,811
Losses of subsidiaries in excess of basis................... 5,408 61,244
------- ---------
Total liabilities........................................... 5,408 336,936
Commitments and contingencies
Redeemable equity:
Redeemable cumulative convertible preferred stock, par
value $.01 per share; 499 shares authorized; shares
issued and outstanding:
Series A, 124 shares in 1997 and 1998 ($12,380
liquidation preference)................................ 18,879 30,390
Series C, 150 shares in 1997 and 175 shares in 1998
($17,500 liquidation preference in 1998)............... 14,667 21,643
Series D, 25 shares in 1997 and -0- shares in 1998...... 2,379 --
Redeemable common stock, shares issued and outstanding,
133 in 1997 and 224 in 1998.............................. 11,187 22,305
Redeemable common stock warrants.......................... 539 674
------- ---------
Total redeemable equity..................................... 47,651 75,012
Nonredeemable equity (deficiency):
Common stock, par value $.01 per share; 3,000 shares
authorized, 614 shares issued and outstanding............ 6 6
Additional paid-in capital................................ 8,853 13,750
Unearned compensation..................................... -- (5,824)
Accumulated deficit....................................... (35,532) (112,285)
------- ---------
Total nonredeemable equity (deficiency)..................... (26,673) (104,353)
------- ---------
$26,386 $ 307,595
======= =========
</TABLE>

See accompanying notes.

S-2
<PAGE>

KMC TELECOM HOLDINGS, INC.
(PARENT COMPANY)

CONDENSED STATEMENTS OF OPERATIONS
(in thousands)

<TABLE>
<CAPTION>
September 22,
1997
(formation) Year Ended
to December 31, December 31,
1997 1998
--------------- ------------
<S> <C> <C>
Operating expenses:
Selling, general and administrative............ $ -- $ 19,624
Stock option compensation expense.............. -- 21,190
Depreciation and amortization.................. -- 1,197
-------- --------
Total operating expenses..................... -- 42,011
Loss from operations............................. -- (42,011)
Intercompany charges............................. -- 20,922
Interest income.................................. -- 8,575
Interest expense................................. -- (23,104)
Equity in net loss of subsidiaries............... (21,860) (41,135)
-------- --------
Net loss......................................... (21,860) (76,753)
Dividends and accretion on redeemable preferred
stock........................................... (8,904) (18,285)
-------- --------
Net loss applicable to common shareholders....... $(30,764) $(95,038)
======== ========
</TABLE>

See accompanying notes.

S-3
<PAGE>

KMC TELECOM HOLDINGS, INC.
(PARENT COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
September 22,
1997 Year
(formation) Ended
to December 31, December 31,
1997 1998
--------------- ------------
<S> <C> <C>
Operating activities
Net loss......................................... $(21,860) $ (76,753)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in net loss of subsidiaries............. 21,860 41,135
Depreciation and amortization.................. -- 1,197
Non-cash interest expense...................... -- 23,104
Non-cash stock option compensation expense..... -- 21,190
Changes in assets and liabilities:
Prepaid expenses and other current assets...... -- (332)
Accounts payable............................... -- 2,043
Accrued expenses............................... -- 5,838
Amounts due from subsidiaries.................. -- (20,922)
Other assets................................... -- (1,952)
-------- ---------
Net cash used in operating activities............ -- (5,452)
-------- ---------
Investing activities
Loans receivable from subsidiaries............... (24,623) (233,685)
Purchases of equipment........................... -- (5,845)
Acquisitions of intangible assets................ (506) (166)
-------- ---------
Net cash used in investing activities............ (25,129) (239,696)
-------- ---------
Financing activities
Proceeds from issuance of common stock and
warrants, net of issuance costs................. 9,363 20,446
Proceeds from issuance of preferred stock, net of
issuance costs.................................. 16,498 --
Proceeds from issuance of senior discount notes,
net of issuance costs........................... (732) 225,923
-------- ---------
Net cash provided by financing activities........ 25,129 246,369
-------- ---------
Net increase in cash and cash equivalents........ -- 1,221
Cash and cash equivalents, beginning of period... -- --
-------- ---------
Cash and cash equivalents, end of period......... $ -- $ 1,221
======== =========
</TABLE>

See accompanying notes.

S-4
<PAGE>

KMC TELECOM HOLDINGS, INC.
(PARENT COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 1998

1. Basis of Presentation

In the parent company only financial statements, KMC Telecom Holdings,
Inc."s (the "Company") investment in subsidiaries is stated at cost less
equity in losses of subsidiaries since date of formation. These parent company
financial statements should be read in conjunction with the Company's
consolidated financial statements. The Company's operating subsidiaries are
KMC Telecom Inc. ("KMC Telecom"), KMC Telecom II, Inc. ("KMC Telecom II"), KMC
Telecom III, Inc. ("KMC Telecom III") and KMC Telecom of Virginia, Inc.

On September 22, 1997, the stockholders of KMC Telecom exchanged all of
their KMC Telecom common and preferred stock for equal numbers of shares of
common and preferred stock of the Company.

Pursuant to a management agreement among the Company and its subsidiaries,
the Company provides management and other services and incurs certain
operating expenses on behalf of its subsidiaries. Such costs are allocated to
the subsidiaries by the Company and reimbursed on a current basis. At December
31, 1998, an aggregate of $20.9 million was due from the subsidiaries for such
costs and is included in the accompanying condensed balance sheet at December
31, 1998 as a current receivable. Such reimbursements are permitted under the
debt agreements of the Company's subsidiaries.

2. Guarantee

On December 22, 1998, KMC Telecom, KMC Telecom II and KMC Telecom of
Virginia, Inc. (the "Borrowers"), entered into a Loan and Security Agreement
(the "Senior Secured Credit Facility") with AT&T Commercial Finance
Corporation, First Union National Bank, General Electric Capital Corporation
and Canadian Imperial Bank of Commerce (the "Lenders").

The Company has unconditionally guaranteed the repayment of the Senior
Secured Credit Facility when such repayment is due, whether at maturity, upon
acceleration, or otherwise. The Company has agreed to pay all amounts
outstanding under the Senior Secured Credit Facility, on demand, upon the
occurrence and during the continuation of any event of default (as defined
therein). The Company has pledged the shares of each of the Borrowers to the
Lenders to collateralize its obligations under the guaranty. In addition, the
Borrowers have pledged all of their assets to the Lenders. Accordingly, if
there were an event of default under the Senior Secured Credit Facility, the
lenders thereunder would be entitled to payment in full and could foreclose on
the assets of the Borrowers, and the holders of the Senior Discount Notes
would have no right to share in such assets. At December 31, 1998, an
aggregate of $41.4 million was outstanding under this facility.

Additionally, the Senior Secured Credit Facility restricts the ability of
the Borrowers to pay dividends to, or to pay principal or interest on loans
from, the Company. Such restrictions could adversely affect the Company's
liquidity and ability to meet its cash requirements, including its ability to
repay the Senior Discount Notes.

At December 31, 1998, an aggregate of $265.7 million has been loaned by the
Company to the Borrowers to be used for the construction and expansion of
fiber optic telecommunications networks and for working capital and general
corporate purposes.

3. Senior Discount Notes

On January 29, 1998, the Company sold 460,800 units, each consisting of a
12 1/2% senior discount note with a principal amount at maturity of $1,000 due
2008 pursuant to the Senior Discount Note Indenture between the Company and
the Chase Manhattan Bank, as trustee (the "Senior Discount Notes") and one
warrant to purchase .21785 shares of Common Stock of the Company at an
exercise price of $.01 per share. The gross and net proceeds of the offering
were approximately $250.0 million and $236.4 million, respectively. A

S-5
<PAGE>

KMC TELECOM HOLDINGS, INC.
(PARENT COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
December 31, 1998

substantial portion of the net proceeds of the offering have been loaned by
the Company to its subsidiaries. On August 11, 1998, the Company consummated
an offer to exchange the notes issued on January 29, 1998 for $460.8 million
aggregate principal amount at maturity of notes that had been registered under
the Securities Act of 1933 (as used below and elsewhere herein, "Senior
Discount Notes" includes the original notes and the exchange notes).

The Senior Discount Notes are unsecured, unsubordinated obligations of the
Company and mature on February 15, 2008. The Senior Discount Notes will fully
accrete to face value on February 15, 2003. From and after February 15, 2003,
the Senior Discount Notes will bear interest, which will be payable in cash,
at the rate of 12.5% per annum on February 15 and August 15 of each year,
commencing August 15, 2003. The Company is accreting the initial carrying
value of the Senior Discount Notes to their aggregate face value over the term
of the debt at its effective interest rate of 13.7%.

The indebtedness evidenced by the Senior Discount Notes ranks pari passu in
right of payment with all existing and future unsubordinated, unsecured
indebtedness of the Company and senior in right of payment to all existing and
future subordinated indebtedness of the Company. However, the Company is a
holding company and the Senior Discount Notes are, therefore, effectively
subordinated to all existing and future liabilities (including trade payables)
of its subsidiaries.

The Senior Discount Notes restrict, among other things, the ability of the
Company to incur additional indebtedness, create liens, engage in sale-
leaseback transactions, pay dividends or make distributions in respect of
capital stock, make investments or certain other restricted payments, sell
assets of the Company, redeem capital stock, issue or sell stock of restricted
subsidiaries, enter into transactions with stockholders or affiliates or
effect a consolidation or merger.

4. Redeemable Equity

Pursuant to provisions contained in the Company's Certificate of
Incorporation and an Amended and Restated Stockholders' Agreement dated as of
October 31, 1997, among the Company, Harold N. Kamine, Nassau Capital Partners
L.P. and NAS Partners I L.L.C. (collectively referred to as "Nassau"), AT&T
Credit Corporation ("AT&T Credit"). General Electric Capital Corporation
("GECC"), and CoreStates Bank, N.A. ("CoreStates"), (the "Stockholders'
Agreement"), each of Nassau, CoreStates, AT&T Credit and GECC has a "put
right" entitling it to have the Company repurchase its preferred and common
shares for the fair market value of such shares if no Liquidity Event (defined
as (i) an initial public offering with gross proceeds of at least $40.0
million, (ii) the sale of substantially all of the stock or assets of the
Company or (iii) the merger or consolidation of the Company with one or more
other corporations) has taken place by the later of (x) October 22, 2003 or
(y) 90 days after the final maturity date of the Senior Discount Notes (issued
in January 1998, with a stated maturity date of February 15, 2008).
CoreStates, GECC and AT&T Credit may not exercise such put rights unless
Nassau has exercised its put right. The restrictive covenants of the Senior
Discount Notes limit the Company's ability to repurchase such shares. All of
the shares of preferred and common stock subject to such "put right" are
presented as redeemable equity in the accompanying condensed balance sheets at
December 31, 1997 and 1998.

The redeemable preferred stock, redeemable common stock and redeemable
common stock warrants (described below) are being accreted up to their fair
market values from their respective issuance dates to their earliest potential
redemption date (October 22, 2003). At December 31, 1998, the aggregate
redemption value of the redeemable equity was approximately $152 million,
reflecting per share redemption amounts of $630 for the

S-6
<PAGE>

KMC TELECOM HOLDINGS, INC.
(PARENT COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
December 31, 1998

Series A Preferred Stock, $248 for the Series C Preferred Stock and $130 for
the redeemable common stock and redeemable common stock warrants.

Warrants to purchase 10,000 shares of Common Stock were issued to GECC in
1997. These warrants, at an exercise price of $.01 per share, are exercisable
from issuance through January 2005. Pursuant to the Stockholders' Agreement,
GECC may put the shares of Common Stock issuable upon the exercise of such
warrants back to the Company. These warrants have been presented as redeemable
common stock warrants in the accompanying condensed balance sheets at December
31, 1997 and 1998.

5. Contingencies

By letter dated August 29, 1997, KMC Telecom notified I-NET, Inc. ("I-NET")
that KMC Telecom considered I-NET to be in default under a Master
Telecommunications Systems Rollout Agreement dated as of October 1, 1996 (the
"I-NET Agreement"), as a result of I-NET's failure to provide design plans and
specifications for several systems for which it had agreed to provide such
plans and specifications, to properly supervise construction of the systems or
to provide personnel with the necessary expertise to manage the projects. On
February 12, 1998, the Company received a demand for arbitration from Wang
Laboratories, Inc. ("Wang") the successor to I-NET. The demand seeks at least
$4.1 million. The Company believes that it has meritorious defenses to Wang's
claims and has asserted counterclaims seeking in excess of $2.5 million as a
result of I-NET's defaults under the I-NET Agreement. The arbitration
proceedings are currently underway. The Company believes that resolution of
this matter will not have a material adverse impact on its financial
condition. No assurance can be given, however, as to the ultimate resolution
of this matter.

6. Subsequent Events

Lucent Loan and Security Agreement

KMC Telecom III entered into a Loan and Security Agreement (the "Lucent
Facility") dated February 4, 1999 with Lucent Technologies, Inc. ("Lucent")
which provided for borrowings up to $600 million (of which $125 million is
immediately available) to be used to fund the acquisition of certain
telecommunications equipment and related expenses.

The Company has unconditionally guaranteed the repayment of up to $250
million under the Lucent Facility when such repayment is due, whether at
maturity, upon acceleration, or otherwise. KMC Telecom III Holdings, Inc.,
which owns the shares of KMC Telecom III and is wholly-owned by the Company,
has pledged the shares of KMC Telecom III to Lucent to collateralize its
obligations under the guaranty. In addition, KMC Telecom III has pledged all
of its assets to Lucent. Accordingly, if there were an event of default under
the Lucent Facility, Lucent thereunder would be entitled to payment in full
and could foreclose on the assets of the Borrower and the holders of the
Senior Discount Notes would have no right to share in such assets.

Additionally, the Lucent Facility restricts the ability of KMC Telecom III
to pay dividends to, or to pay principal or interest on loans from, the
Company. Such restrictions could adversely affect the Company's liquidity and
ability to meet its cash requirements, including its ability to repay the
Senior Discount Notes.

S-7
<PAGE>

KMC TELECOM HOLDINGS, INC.
(PARENT COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
December 31, 1998

Series E Preferred Stock

On February 4, 1999, the Company issued 25,000 shares of Series E Senior
Redeemable, Exchangeable, PIK Preferred Stock (the "Series E Preferred Stock")
to Newcourt Commercial Finance Corporation ("Newcourt Finance"), generating
aggregate gross proceeds of $22.9 million. The Series E Preferred Stock has a
liquidation preference of $1,000 per share and an annual dividend equal to
14.5% of the liquidation preference, payable quarterly. On or before January
15, 2004, the Company may pay dividends in cash or in additional fully paid
and nonassessable shares of Series E Preferred Stock. After January 15, 2004,
dividends must be paid in cash, subject to certain conditions. Unpaid
dividends accrue at the dividend rate of the Series E Preferred Stock,
compounded quarterly.

The Series E Preferred Stock is not convertible. The Company may, at the
sole option of the Board of Directors (out of funds legally available),
exchange all, but not less than all, of the Series E Preferred Stock then
outstanding, for a new series of subordinated debentures (the "Exchange
Debentures") issued pursuant to an exchange debenture indenture.

Series F Preferred Stock

Warrants

S-8
<PAGE>

KMC TELECOM HOLDINGS, INC.
(PARENT COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
December 31, 1998

an underwritten primary offering of at least $200 million of its Common Stock
pursuant to an effective registration statement under the Securities Act or
(ii) February 4, 2001, the Warrant Agent is authorized to issue the Springing
Warrants to the Eligible Holders (as defined in the warrant agreement) of the
Series E and Series F Preferred Stock. In the event the Company has redeemed
all outstanding shares of Series F Preferred Stock prior to the Springing
Warrant Date, the Springing Warrants will not be issued and the Warrant Agent
will return the certificates to the Company. To the extent the Company
exercises its option to exchange all of the Series F Preferred Stock for
Exchange Debentures prior to the Springing Warrant Date, the Springing
Warrants will not become issuable. Therefore, as the future issuance of the
Springing Warrants is entirely within control of the Company and the
likelihood of their issuance is deemed to be remote, no value has been
ascribed to the Springing Warrants.

S-9
<PAGE>

KMC TELECOM HOLDINGS, INC.

OFFER TO EXCHANGE

13 1/2% SENIOR NOTES DUE 2009
FOR
ALL OUTSTANDING
13 1/2% SENIOR NOTES DUE 2009

----------------

PROSPECTUS

----------------

<PAGE>

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article Seventh of the Certificate of Incorporation, as amended, provides
that a director of the corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived
any improper personal benefit. No amendment or repeal of this provision shall
apply to or have any effect on the liability or alleged liability of any
director for or with respect to any acts or omissions of such director
occurring prior to such amendment or repeal. Article VI, Section 5 of the By-
Laws provides that the Corporation shall indemnify, to the fullest extent
permitted by law, members of the Board, its officers, employees and agents and
any and all persons whom it shall have power to indemnify against any and all
expenses, liabilities or other matters.

The effect of these provisions is to eliminate the rights of the Company
and its stockholders (through stockholders' derivative suits on behalf of the
Company) to recover monetary damages against a director or officer for beach
of fiduciary duty (including breaches resulting from grossly negligent
behavior), except in the situations described above.

These provisions will not limit the liability of directors or officers
under the federal securities laws of the United States. This discussion of
Article Seventh of the Company's Certificate of Incorporation, as amended, and
Article VI, Section 5 of the By-Laws is qualified in its entirety by reference
to the relevant provisions of the Certificate of Incorporation (filed as
Exhibit 3.1).

See Item 22 for a statement of the Company's undertaking as to the
Securities and Exchange Commission's position respecting indemnification
arising under the Securities Act of 1933.

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

a) Exhibits.

<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
3.1 Certificate of Incorporation of KMC Telecom Holdings, Inc., as
amended, dated as of April 30, 1999 (incorporated herein by reference
to Exhibit 3.1 to KMC Telecom Holdings, Inc. Form 10-Q for the
quarterly period ended June 30, 1999).

3.2 Certificate of Powers, Designations, Preferences and Rights of the
Series A Cumulative Convertible Preferred Stock, Par Value $.01 Per
Share, as amended, dated as of April 30, 1999 (incorporated herein by
reference to Exhibit 3.2 to KMC Telecom Holdings, Inc. Form 10-Q for
the quarterly period ended June 30, 1999).

3.3 Certificate of Powers, Designations, Preferences and Rights of the
Series C Cumulative Convertible Preferred Stock, Par Value $.01 Per
Share, as amended, dated as of April 30, 1999 (incorporated herein by
reference to Exhibit 3.3 to KMC Telecom Holdings, Inc. Form 10-Q for
the quarterly period ended June 30, 1999).

3.4 Certificate of Powers, Designations, Preferences and Rights of the
Series D Cumulative Convertible Preferred Stock, Par Value $.01 Per
Share, as amended, dated as of April 30, 1999 (incorporated herein by
reference to Exhibit 3.4 to KMC Telecom Holdings, Inc. Form 10-Q for
the quarterly period ended June 30, 1999).

</TABLE>

II-1
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
3.5 Certificate of Voting Powers, Designations, Preferences and Relative
Participating, Optional or Other Special Rights and Qualifications,
Limitations and Restrictions Thereof of the Series E Senior
Redeemable, Exchangeable, PIK Preferred Stock, as amended, dated as of
April 30, 1999. (incorporated herein by reference to Exhibit 3.5 to
KMC Telecom Holdings, Inc. Form 10-Q for the quarterly period ended
June 30, 1999).

3.6 Certificate of Voting Powers, Designations, Preferences and Relative
Participating, Optional or Other Special Rights and Qualifications,
Limitations and Restrictions Thereof of the Series F Senior
Redeemable, Exchangeable, PIK Preferred Stock, as amended dated as of
April 30, 1999. (incorporated herein by reference to Exhibit 3.6 to
KMC Telecom Holdings, Inc. Form 10-Q for the quarterly period June 30,
1999).

3.7 By-Laws of KMC Telecom Holdings, Inc. (incorporated herein by
reference to Exhibit 3.3 to KMC Telecom Holdings, Inc.'s Registration
Statement on Form S-4 (Registration No. 333-50475) filed on April 20,
1998 (hereafter referred to as the "KMC Holdings' S-4")).

4.1 Amended and Restated Stockholders Agreement dated as of October 31,
1997 by and among KMC Telecom Holdings, Inc., Nassau Capital Partners,
L.P., NAS Partners I L.L.C., Harold N. Kamine, KMC Telecommunications
L.P., Newcourt Communications Finance Corporation (formerly known as
AT&T Credit Corporation), General Electric Capital Corporation,
CoreStates Bank, N.A. and CoreStates Holdings, Inc. (incorporated
herein by reference to Exhibit 4.1 to KMC Holdings' S-4).

4.2 Amendment No. 1 dated as of January 7, 1998 to the Amended and
Restated Stockholders Agreement dated as of October 31, 1997 and among
KMC Telecom Holdings, Inc., Nassau Capital Partners, L.P., NAS
Partners I L.L.C., Harold N. Kamine, KMC Telecommunications L.P.,
Newcourt Communications Finance Corporation (formerly known as AT&T
Credit Corporation), General Electric Capital Corporation, CoreStates
Bank, N.A. and CoreStates Holdings, Inc. (incorporated by reference to
Exhibit 4.2 to KMC Holdings' S-4).

4.3 Amendment No. 2 dated as of January 26, 1998 to the Amended and
Restated Stockholders Agreement dated as of October 31, 1997 by and
among KMC Telecom Holdings, Inc., Nassau Capital Partners, L.P., NAS
Partners I L.L.C., Harold N. Kamine, KMC Telecommunications L.P.,
Newcourt Communications Finance Corporation (formerly known as AT&T
Credit Corporation), General Electric Capital Corporation, CoreStates
Bank, N.A. and CoreStates Holdings, Inc. (incorporated herein by
reference to Exhibit 4.3 to KMC Holdings' S-4).

4.4 Amendment No. 3 dated as of February 25, 1998 to the Amended and
Restated Stockholders Agreement dated as of October 31, 1997 by and
among KMC Telecom Holdings, Inc., Nassau Capital Partners, L.P., NAS
Partners I L.L.C., Harold N. Kamine, KMC Telecommunications L.P.,
Newcourt Communications Finance Corporation (formerly known as AT&T
Credit Corporation), General Electric Capital Corporation, CoreStates
Bank, N.A. and CoreStates Holdings, Inc. (incorporated herein by
reference to Exhibit 4.4 to KMC Holdings' S-4).

4.5 Amendment No. 4 dated as of February 4, 1999 to the Amended and
Restated Stockholders Agreement dated as of October 31, 1997 among KMC
Telecom Holdings, Inc., Nassau Capital Partners, L.P., NAS Partners I
L.L.C., Harold N. Kamine, Newcourt Communications Finance Corporation
(formerly known as AT&T Credit Corporation), General Electric Capital
Corporation, CoreStates Bank, N.A. and CoreStates Holdings, Inc.
(incorporated herein by reference to Exhibit 4.5 to KMC Telecom
Holdings, Inc. Form 10-K for the fiscal year ended December 31, 1998).

4.6 Amendment No. 5 dated as of April 30, 1999 to the Amended and Restated
Stockholders Agreement among KMC Telecom Holdings, Inc., Nassau
Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine,
Newcourt Commercial Finance Corporation, General Electric Capital
Corporation, First Union National Bank, CoreStates Holdings, Inc. and
KMC Telecommunications L.P. (incorporated herein by reference to
Exhibit 4.11 to KMC Telecom Holdings, Inc. Form 10-Q for the quarterly
period ended June 30, 1999).
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
4.7 Amendment No. 6 dated as of June 1, 1999 to the Amended and Restated
Stockholders Agreement among KMC Telecom Holdings, Inc., Nassau
Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine,
Newcourt Commercial Finance Corporation, General Electric Capital
Corporation, First Union National Bank, CoreStates Holdings, Inc. and
KMC Telecommunications L.P. (incorporated herein by reference to
Exhibit 4.12 to KMC Telecom Holdings, Inc. Form 10-Q for the quarterly
period ended June 30, 1999).

4.8 Indenture dated as of January 29, 1998 between KMC Telecom Holdings,
Inc. and The Chase Manhattan Bank, as Trustee, including specimen of
KMC Telecom Holdings, Inc.'s 12 1/2% Senior Discount Note due 2008
(incorporated herein by reference to Exhibit 4.5 to KMC Holdings' S-
4).

4.9 First Supplemental Indenture dated as of May 24, 1999 among KMC
Telecom Holdings, Inc., KMC Telecom Financing, Inc. and The Chase
Manhattan Bank, as Trustee, to the Indenture dated as of January 29,
1998 between KMC Telecom Holdings, Inc. and The Chase Manhattan Bank,
as Trustee (incorporated herein by reference to Exhibit 4.1 to KMC
Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended
September 30, 1999).

4.10 Indenture dated as of May 24, 1999 among KMC Holdings, Inc., KMC
Telecom Financing, Inc. and The Chase Manhattan Bank, as Trustee,
including specimen of KMC Telecom Holdings, Inc.'s 13 1/2% Senior
Notes due 2009 (incorporated herein by reference to Exhibit 4.2 to KMC
Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended
September 30, 1999).

4.11 Purchase Agreement dated as of May 19, 1999 among KMC Telecom
Holdings, Inc. and Morgan Stanley & Co. Incorporated, Credit Suisse
First Boston Corporation, First Union Capital Markets Corp., CIBC
World Markets Corp., BancBoston Robertson Stephens Inc. and
Wasserstein Perella Securities, Inc. (incorporated herein by reference
to Exhibit 4.3 to KMC Telecom Holdings, Inc.'s Form 10-Q for the
quarterly period ended September 30, 1999).

4.12 Collateral Pledge and Security Agreement made and entered into as of
May 24, 1999 by KMC Telecom Financing, Inc. in favor of The Chase
Manhattan Bank, as Trustee (incorporated herein by reference to
Exhibit 4.4 to KMC Telecom Holdings, Inc.'s Form 10-Q for the
quarterly period ended September 30, 1999).

4.13 Registration Rights Agreement dated January 26, 1998 between KMC
Telecom Holdings, Inc. and Morgan Stanley & Co. Incorporated
(incorporated herein by reference to Exhibit 4.6 to KMC Holdings' S-
4).

4.14 Registration Rights Agreement dated as of May 19, 1999 among KMC
Telecom Holdings, Inc. and Morgan Stanley & Co. Incorporated, Credit
Suisse First Boston Corporation, First Union Capital Markets Corp.,
CIBC World Markets Corp., BancBoston Robertson Stephens Inc. and
Wasserstein Perella Securities, Inc. (incorporated herein by reference
to Exhibit 4.5 to KMC Telecom Holdings, Inc.'s Form 10-Q for the
quarterly period ended September 30, 1999).

4.15 Warrant Agreement between KMC Telecom Holdings, Inc. and The Chase
Manhattan Bank, as Warrant Agent, dated as of January 29, 1998
including a specimen of Warrant Certificate (incorporated herein by
reference to Exhibit 4.7 to KMC Holdings' S-4).

4.16 Warrant Agreement dated as of February 4, 1999 among KMC Telecom
Holdings, Inc., The Chase Manhattan Bank, as Warrant Agent, Newcourt
Commercial Finance Corporation and Lucent Technologies Inc.
(incorporated herein by reference to Exhibit 10.2 to KMC Telecom
Holdings, Inc. Form 10-Q for the quarterly period ended March 31,
1999).

4.17 Warrant Agreement dated as of April 30, 1999 among KMC Telecom
Holdings, Inc., The Chase Manhattan Bank, as Warrant Agent, First
Union Investors, Inc., Harold N. Kamine and Nassau Capital Partners
L.P. (incorporated herein by reference to Exhibit 4.4 to KMC Telecom
Holdings, Inc. Form 10-Q for the quarterly period ended June 30,
1999).
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
4.18 Amendment No. 1 dated as of April 30, 1999 to the Warrant Agreement
dated, as of February 4, 1999 among KMC Telecom Holdings, Inc., The
Chase Manhattan Bank, as Warrant Agent, Newcourt Commercial Finance
Corporation, Lucent Technologies, Inc. and First Union Investors, Inc.
(incorporated herein by reference to Exhibit 4.7 to KMC Telecom
Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30,
1999).
4.19 Amendment No. 2, dated as of June 1, 1999, to Warrant Agreement, dated
as of February 4, 1999, among KMC Telecom Holdings, Inc., The Chase
Manhattan Bank, Newcourt Commercial Finance Corporation and Lucent
Technologies Inc. (incorporated herein by reference to Exhibit 4.8 to
KMC Telecom Holdings, Inc. Form 10-Q for the quarterly period ended
June 30, 1999).

4.20 Securities Purchase Agreement dated as of February 4, 1999 among KMC
Telecom Holdings, Inc., and Newcourt Commercial Finance Corporation
and Lucent Technologies Inc. (incorporated herein by reference to
Exhibit 10.1 to KMC Telecom Holdings, Inc. Form 10-Q for the quarterly
period ended March 31, 1999).

4.21 Securities Purchase Agreement dated as of April 30, 1999 between KMC
Telecom Holdings, Inc. and First Union Investors, Inc. (incorporated
herein by reference to Exhibit 4.2 to KMC Telecom Holdings, Inc. Form
10-Q for the quarterly period ending June 30, 1999).

4.22 Amendment No. 1 dated as of June 1, 1999, to Securities Purchase
Agreement among KMC Telecom Holdings, Inc., First Union Investors,
Inc., Newcourt Commercial Finance Corporation and Lucent Technologies,
Inc. (incorporated herein by reference to Exhibit 4.3 to KMC Telecom
Holdings, Inc. Form 10-Q for the quarterly period ending June 30,
1999).

4.23 Warrant Registration Rights Agreement dated as of January 26, 1998
between KMC Telecom Holdings, Inc. and Morgan Stanley & Co.
Incorporated (incorporated herein by reference to Exhibit 4.8 to KMC
Holdings' S-4).

4.24 Warrant Registration Rights Agreement dated as of February 4, 1999
among KMC Telecom Holdings, Inc., Newcourt Commercial Finance
Corporation and Lucent Technologies Inc. (incorporated herein by
reference to Exhibit 10.3 to KMC Telecom Holdings, Inc. Form 10-Q for
the quarterly period ended March 31, 1999).

4.25 Warrant Registration Rights Agreement dated as of April 30, 1999
between KMC Telecom Holdings, Inc. and First Union Investors, Inc.
(incorporated herein by reference to Exhibit 4.5 to KMC Telecom
Holdings, Inc. Form 10-Q for the quarterly period ended June 30,
1999).

4.26 Amendment No. 1 dated as of April 30, 1999 to Warrant Registration
Rights Agreement among KMC Telecom Holdings, Inc., Newcourt Commercial
Finance Corporation and Lucent Technologies Inc. (incorporated herein
by reference to Exhibit 4.6 to KMC Telecom Holdings, Inc. Form 10-Q
for the quarterly period ended June 30, 1999).

4.27 Preferred Stock Registration Rights Agreement dated as of April 30,
1999 between KMC Telecom Holdings, Inc. and First Union Investors,
Inc. (incorporated herein by reference to Exhibit 4.9 to KMC Telecom
Holdings, Inc. Form 10-Q for the quarterly period ended June 30,
1999).

4.28 Amendment No. 1 dated as of June 1, 1999 to Preferred Stock
Registration Rights Agreement among KMC Telecom Holdings, Inc., First
Union Investors, Inc., Newcourt Commercial Finance Corporation and
Lucent Technologies. (incorporated herein by reference to Exhibit 4.10
to KMC Telecom Holdings, Inc. Form 10-Q for the quarterly period ended
June 30, 1999).

*5.1 Opinion of Kelley Drye & Warren LLP.

*8.1 Opinion of Kelley Drye & Warren LLP regarding tax matters (contained
in Exhibit 5.1).

10.1 Purchase Agreement dated January 26, 1998 by and between KMC Telecom
Holdings, Inc. and Morgan Stanley & Co. Incorporated (incorporated
herein by reference to Exhibit 10.1 to KMC Holdings' S-4).

</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.2 Loan and Security Agreement dated as of December 22, 1998 among KMC
Telecom Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC
Telecom Leasing I, LLC, KMC Telecom Leasing II, LLC, the additional
subsidiaries from time to time parties thereto, the financial
institutions signatory thereto from time to time as "Lenders", First
Union National Bank as Administrative Agent for the Lenders and
Newcourt Commercial Finance Corporation (formerly known as AT&T
Commercial Corporation), as Collateral Agent for the Lenders.
(incorporated herein by reference to Exhibit 10.2 to KMC Telecom
Holdings, Inc. Form 10-K for the fiscal year ended December 31, 1998).

10.3 Amendment No. 1, dated as of March 3, 1999, to Loan and Security
Agreement dated as of December 22, 1998, among KMC Telecom Inc., KMC
Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing
I, LLC, KMC Telecom Leasing II, LLC, the additional subsidiaries from
time to time parties thereto, the financial institutions signatory
thereto from time to time as "Lenders", First Union National Bank as
Administrative Agent for the Lenders and Newcourt Commercial Finance
Corporation (formerly known as AT&T Commercial Corporation), as
Collateral Agent for the Lenders. (incorporated herein by reference to
Exhibit 10.3 to KMC Telecom Holdings, Inc. Form 10-K for the fiscal
year ended December 31, 1998).

*10.4 Waiver and Amendment No. 3 to Loan and Security Agreement dated as of
October 29, 1999 among KMC Telecom Inc., KMC Telecom II, Inc., KMC
Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom
Leasing II LLC, the financial institutions from time to time parties
thereto as "Lenders", First Union National Bank as Administrative
Agent for the Lenders and Newcourt Commercial Finance Corporation
(f/k/a AT&T Commercial Finance Corporation), as Collateral Agent for
the Lenders.

10.5 Loan and Security Agreement dated February 4, 1999 among KMC Telecom
III, Inc., KMC Telecom Leasing III LLC, the financial institutions
signatory thereto from time to time as Lenders, Lucent Technologies
Inc., as agent for the Lenders and the party to be named as Collateral
Agent for the Lenders. (incorporated herein by reference to Exhibit
10.4 to KMC Telecom Holdings, Inc. Form 10-Q for the quarterly period
ended March 31, 1999).

10.6 General Agreement between KMC Telecom Inc., KMC Telecom II, Inc. and
Lucent Technologies, Inc. dated September 24, 1997, as amended on
October 15, 1997. (incorporated herein by reference to Exhibit 10.7 to
KMC Holdings' S-4).

10.7 Professional Services Agreement between KMC Telecom Inc. and Lucent
Technologies, Inc. dated September 4, 1997. (incorporated herein by
reference to Exhibit 10.8 to KMC Holdings' S-4).

10.8 Memorandum of Agreement between KMC Telecom Holdings, Inc. and EFTIA
OSS Solutions Inc., dated as of October 26, 1998. (incorporated herein
by reference to Exhibit 10.6 to KMC Telecom Holdings, Inc. Form 10-K
for the fiscal year ended December 31, 1998).

10.9 Master License Agreement dated December 31, 1998 by and between
Billing Concepts Systems, Inc. and KMC Telecom Holdings, Inc.
(incorporated herein by reference to Exhibit 10.7 to KMC Telecom
Holdings, Inc. Form 10-K for the fiscal year ended December 31, 1998).

10.10 Lease Agreement dated January 1, 1996 between Cogeneration Services
Inc. (now known as Kamine Development Corp.) and KMC Telecom Inc.
(incorporated herein by reference to Exhibit 10.8 to KMC Telecom
Holdings, Inc. Form 10-K for the fiscal year ended December 31, 1998).

10.11 1998 Stock Purchase and Option Plan for Key Employees of KMC Telecom
Holdings, Inc. and Affiliates. (incorporated herein by reference to
Exhibit 4 to KMC Telecom Holdings, Inc. Form 10-Q for the quarterly
period ended September 30, 1998).

10.12 Specimen of Non-Qualified Stock Option Agreement for options granted
under the 1998 Stock Purchase and Option Plan for Key Employees of KMC
Telecom Holdings, Inc. and Affiliates. (incorporated herein by
reference to Exhibit 10.10 to KMC Telecom, Inc. Form 10-K for the
fiscal year ended December 31, 1998).

10.13 Amendment No. 1 made as of June 7, 1999 to 1998 Stock Purchase and
Option Plan for Key Employees of KMC Telecom Holdings, Inc. and
Affiliates. (incorporated herein by reference to Exhibit 10.1 to KMC
Telecom Holdings, Inc. Form 10-Q for the quarterly period ended June
30, 1999).
</TABLE>

II-5
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
*12.1 Statement Regarding Computation of Ratios.

*21.1 Subsidiaries of KMC Telecom Holdings, Inc.

*23.1 Consent of Kelley Drye & Warren LLP (contained in Exhibit 5.1).

*23.2 Consent of Ernst & Young LLP.

*24.1 Power of Attorney (Appears on signature page).

*25.1 Statement of Eligibility and Qualification (Form T-1) under the Trust
Indenture Act of 1939 of The Chase Manhattan Bank.

**99.1 Form of Letter of Transmittal.

**99.2 Notice of Guaranteed Delivery.
</TABLE>
- --------
*Filed herewith.
**To be filed by amendment.

(b) Financial Statement Schedules.
Report of Independent Auditors (included at page S-1 of the prospectus)
Schedule I--Condensed Financial Information of Registrant (included at
pages S-2 to S-9 of the prospectus

ITEM 22. UNDERTAKINGS

A. The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

II-6
<PAGE>

(5) To deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule
14c-3 under the Securities Exchange Act of 1934; and, where interim
financial information required to be presented by Article 3 of Regulation
S-X are not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the
latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.

(6) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.

(7) That every prospectus: (i) that is filed pursuant to paragraph (6)
immediately proceeding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(8) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.

(9) To supply by means of post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.

B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

II-7
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of
Bedminster, State of New Jersey, on the 18th day of November, 1999.

KMC Telecom Holdings, Inc.

/s/ Michael A. Sternberg
By: _________________________________
Michael A. Sternberg
President and Chief Executive
Officer

KNOW BY ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael A. Sternberg and James D. Grenfell his
true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement on Form S-4, and all amendments and
supplements to any prospectus relating thereto and any other documents and
instruments incidental thereto, and any registration statement filed pursuant
to Rule 462 under the Securities Act of 1933, as amended, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-
fact and agent, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 has been signed below by the following
persons on behalf of the Registrant and in the capacities indicated on the
18th day of November, 1999.

<TABLE>
<CAPTION>
Signature Title(s)
--------- --------

<S> <C>
/s/ Michael A. Sternberg President, Chief Executive Officer and
______________________________________ Director (Principal Executive
Michael A. Sternberg Officer)

/s/ James D. Grenfell Executive Vice President, Chief
______________________________________ Financial Officer (Principal
James D. Grenfell Financial Officer)

/s/ Robert F. Hagan Vice President, Controller (Principal
______________________________________ Accounting Officer)
Robert F. Hagan

/s/ Harold N. Kamine Chairman of the Board of Directors
______________________________________
Harold N. Kamine

/s/ Gary E. Lasher Vice Chairman of the Board of
______________________________________ Directors
Gary E. Lasher
</TABLE>

II-8
<PAGE>

<TABLE>
<CAPTION>
Signature Title(s)
--------- --------

<S> <C>
/s/ Richard H. Patterson Director
______________________________________
Richard H. Patterson

/s/ Randall A. Hack Director
______________________________________
Randall A. Hack

/s/ William H. Stewart Director
______________________________________
William H. Stewart
</TABLE>

II-9
<PAGE>

INDEX OF EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1 Certificate of Incorporation of KMC Telecom Holdings, Inc., as
amended, dated as of April 30, 1999. (incorporated herein by reference
to Exhibit 3.1 to KMC Telecom Holdings, Inc. Form 10-Q for the
quarterly period ended June 30, 1999).

3.2 Certificate of Powers, Designations, Preferences and Rights of the
Series A Cumulative Convertible Preferred Stock, Par Value $.01 Per
Share, as amended, dated as of April 30, 1999. (incorporated herein by
reference to Exhibit 3.2 to KMC Telecom Holdings, Inc. Form 10-Q for
the quarterly period ended June 30, 1999).

3.3 Certificate of Powers, Designations, Preferences and Rights of the
Series C Cumulative Convertible Preferred Stock, Par Value $.01 Per
Share, as amended, dated as of April 30, 1999. (incorporated herein by
reference to Exhibit 3.3 to KMC Telecom Holdings, Inc. Form 10-Q for
the quarterly period ended June 30, 1999).

3.4 Certificate of Powers, Designations, Preferences and Rights of the
Series D Cumulative Convertible Preferred Stock, Par Value $.01 Per
Share, as amended, dated as of April 30, 1999. (incorporated herein by
reference to Exhibit 3.4 to KMC Telecom Holdings, Inc. Form 10-Q for
the quarterly period ended June 30, 1999).

3.5 Certificate of Voting Powers, Designations, Preferences and Relative
Participating, Optional or Other Special Rights and Qualifications,
Limitations and Restrictions Thereof of the Series E Senior
Redeemable, Exchangeable, PIK Preferred Stock, as amended, dated as of
April 30, 1999. (incorporated herein by reference to Exhibit 3.5 to
KMC Telecom Holdings, Inc. Form 10-Q for the quarterly period ended
June 30, 1999).

II-10
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.4 Amendment No. 3 dated as of February 25, 1998 to the Amended and
Restated Stockholders Agreement dated as of October 31, 1997 by and
among KMC Telecom Holdings, Inc., Nassau Capital Partners, L.P., NAS
Partners I L.L.C., Harold N. Kamine, KMC Telecommunications L.P.,
Newcourt Communications Finance Corporation (formerly known as AT&T
Credit Corporation), General Electric Capital Corporation, CoreStates
Bank, N.A. and CoreStates Holdings, Inc. (incorporated herein by
reference to Exhibit 4.4 to KMC Holdings' S-4).

4.7 Amendment No. 6 dated as of June 1, 1999 to the Amended and Restated
Stockholders Agreement among KMC Telecom Holdings, Inc., Nassau
Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine,
Newcourt Commercial Finance Corporation, General Electric Capital
Corporation, First Union National Bank, CoreStates Holdings, Inc. and
KMC Telecommunications L.P. (incorporated herein by reference to
Exhibit 4.12 to KMC Telecom Holdings, Inc. Form 10-Q for the quarterly
period ended June 30, 1999).

4.8 Indenture dated as of January 29, 1998 between KMC Telecom Holdings,
Inc. and The Chase Manhattan Bank, as Trustee, including specimen of
KMC Telecom Holdings, Inc.'s 12 1/2% Senior Discount Note due 2008.
(incorporated herein by reference to Exhibit 4.5 to KMC Holdings' S-
4).

II-11
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.13 Registration Rights Agreement dated January 26, 1998 between KMC
Telecom Holdings, Inc. and Morgan Stanley & Co. Incorporated
(incorporated herein by reference to Exhibit 4.6 to KMC Holdings' S-
4).

4.18 Amendment No. 1 dated as of April 30, 1999 to the Warrant Agreement,
dated as of February 4, 1999 among KMC Telecom Holdings, Inc., The
Chase Manhattan Bank, as Warrant Agent, Newcourt Commercial Finance
Corporation, Lucent Technologies, Inc. and First Union Investors, Inc.
(incorporated herein by reference to Exhibit 4.7 to KMC Telcom
Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30,
1999).

4.19 Amendment No. 2, dated as of June 1, 1999, to Warrant Agreement, dated
as of February 4, 1999, among KMC Telecom Holdings, Inc., The Chase
Manhattan Bank, Newcourt Commercial Finance Corporation and Lucent
Technologies Inc. (incorporated herein by reference to Exhibit 4.8 to
KMC Telecom Holdings, Inc. Form 10-Q for the quarterly period ended
June 30, 1999).

4.20 Securities Purchase Agreement dated as of February 4, 1999 among KMC
Telecom Holdings, Inc., Newcourt Commercial Finance Corporation and
Lucent Technologies Inc. (incorporated herein by reference to Exhibit
10.1 to KMC Telecom Holdings, Inc. Form 10-Q for the quarterly period
ended March 31, 1999).

II-12
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------

<C> <S>
4.25 Warrant Registration Rights Agreement dated as of April 30, 1999
between KMC Telecom Holdings, Inc. and First Union Investors, Inc.
(incorporated herein by reference to Exhibit 4.5 to KMC Telecom
Holdings, Inc. Form 10-Q for the quarterly period ended June 30,
1999).
4.26 Amendment No. 1 dated as of April 30, 1999 to Warrant Registration
Rights Agreement among KMC Telecom Holdings, Inc., Newcourt Commercial
Finance Corporation and Lucent Technologies Inc. (incorporated herein
by reference to Exhibit 4.6 to KMC Telecom Holdings, Inc. Form 10-Q
for the quarterly period ended June 30, 1999).
4.27 Preferred Stock Registration Rights Agreement dated as of April 30,
1999 between KMC Telecom Holdings, Inc. and First Union Investors,
Inc. (incorporated herein by reference to Exhibit 4.9 to KMC Telecom
Holdings, Inc. Form 10-Q for the quarterly period ended June 30,
1999).
4.28 Amendment No. 1 dated as of June 1, 1999 to Preferred Stock
Registration Rights Agreement among KMC Telecom Holdings, Inc., First
Union Investors, Inc., Newcourt Commercial Finance Corporation and
Lucent Technologies (incorporated herein by reference to Exhibit 4.10
to KMC Telecom Holdings, Inc. Form 10-Q for the quarterly period ended
June 30, 1999).
*5.1 Opinion of Kelley Drye & Warren LLP.
*8.1 Opinion of Kelley Drye & Warren LLP regarding tax matters (contained
in Exhibit 5.1).
10.1 Purchase Agreement dated January 26, 1998 by and between KMC Telecom
Holdings, Inc. and Morgan Stanley & Co. Incorporated (incorporated
herein by reference to Exhibit 10.1 to KMC Holdings' S-4).
10.2 Loan and Security Agreement dated as of December 22, 1998 among KMC
Telecom Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC
Telecom Leasing I, LLC, KMC Telecom Leasing II, LLC, the additional
subsidiaries from time to time parties thereto, the financial
institutions signatory thereto from time to time as "Lenders", First
Union National Bank as Administrative Agent for the Lenders and
Newcourt Commercial Finance Corporation (formerly known as AT&T
Commercial Corporation), as Collateral Agent for the Lenders
(incorporated herein by reference to Exhibit 10.2 to KMC Telecom
Holdings, Inc. Form 10-K for the fiscal year ended December 31, 1998).
10.3 Amendment No. 1, dated as of March 3, 1999, to Loan and Security
Agreement dated as of December 22, 1998, among KMC Telecom Inc., KMC
Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing
I, LLC, KMC Telecom Leasing II, LLC, the additional subsidiaries from
time to time parties thereto, the financial institutions signatory
thereto from time to time as "Lenders", First Union National Bank as
Administrative Agent for the Lenders and Newcourt Commercial Finance
Corporation (formerly known as AT&T Commercial Corporation), as
Collateral Agent for the Lenders (incorporated herein by reference to
Exhibit 10.3 to KMC Telecom Holdings, Inc. Form 10-K for the fiscal
year ended December 31, 1998).
*10.4 Waiver and Amendment No. 3 to Loan and Security Agreement dated as of
October 29, 1999 among KMC Telecom Inc., KMC Telecom II, Inc., KMC
Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom
Leasing II LLC, the financial institutions from time to time parties
thereto as "Lenders", First Union National Bank as Administrative
Agent for the Lenders and Newcourt Commercial Finance Corporation
(f/k/a AT&T Commercial Finance Corporation), as Collateral Agent for
the Lenders.
10.5 Loan and Security Agreement dated February 4, 1999 among KMC Telecom
III, Inc., KMC Telecom Leasing III LLC, the financial institutions
signatory thereto from time to time as Lenders, Lucent Technologies
Inc., as agent for the Lenders and the party to be named as Collateral
Agent for the Lenders (incorporated herein by reference to Exhibit
10.4 to KMC Telecom Holdings, Inc. Form 10-Q for the quarterly period
ended March 31, 1999).
10.6 General Agreement between KMC Telecom Inc., KMC Telecom II, Inc. and
Lucent Technologies, Inc. dated September 24, 1997, as amended on
October 15, 1997 (incorporated herein by reference to Exhibit 10.7 to
KMC Holdings' S-4).
10.7 Professional Services Agreement between KMC Telecom Inc. and Lucent
Technologies, Inc. dated September 4, 1997 (incorporated herein by
reference to Exhibit 10.8 to KMC Holdings' S-4).
</TABLE>

II-13
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------

<C> <S>
10.8 Memorandum of Agreement between KMC Telecom Holdings, Inc. and EFTIA
OSS Solutions Inc., dated as of October 26, 1998 (incorporated herein
by reference to Exhibit 10.6 to KMC Telecom Holdings, Inc. Form 10-K
for the fiscal year ended December 31, 1998).

10.11 1998 Stock Purchase and Option Plan for Key Employees of KMC Telecom
Holdings, Inc. and Affiliates (incorporated herein by reference to
Exhibit 4 to KMC Telecom Holdings, Inc. Form 10-Q for the quarterly
period ended September 30, 1998).

10.12 Specimen of Non-Qualified Stock Option Agreement for options granted
under the 1998 Stock Purchase and Option Plan for Key Employees of KMC
Telecom Holdings, Inc. and Affiliates (incorporated herein by
reference to Exhibit 10.10 to KMC Telecom, Inc. Form 10-K for the
fiscal year ended December 31, 1998).

10.13 Amendment No. 1 made as of June 7, 1999 to 1998 Stock Purchase and
Option Plan for Key Employees of KMC Telecom Holdings, Inc. and
Affiliates (incorporated herein by reference to Exhibit 10.1 to KMC
Telecom Holdings, Inc. Form 10-Q for the quarterly period ended June
30, 1999).

*12.1 Statement Regarding Computation of Ratios.

*21.1 Subsidiaries of KMC Telecom Holdings, Inc.

*23.1 Consent of Kelley Drye & Warren LLP (contained in Exhibit 5.1).

*23.2 Consent of Ernst & Young LLP.

*24.1 Powers of Attorney (Appears on signature page).

*25.1 Statement of Eligibility and Qualification (Form T-1) under the Trust
Indenture Act of 1939 of The Chase Manhattan Bank.

**99.1 Form of Letter of Transmittal.

**99.2 Notice of Guaranteed Delivery.
</TABLE>
- --------
*Filed herewith.
**To be filed by amendment.

II-14

<PAGE>

Exhibit 5.1

KELLEY DRYE & WARREN LLP
101 Park Avenue
New York, NY 10178
Telephone: (212) 808-7800

November 18, 1999

KMC Telecom Holdings, Inc.
KMC Telecom Financing, Inc.
1545 Route 206, Suite 300
Bedminster, New Jersey 07921

Ladies and Gentlemen:

We are acting as counsel to KMC Telecom Holdings, Inc. (the "Company")
and KMC Telecom Financing, Inc. (the "Guarantor", a wholly-owned subsidiary of
the Company and together with the Company, the "Registrants"), each a
corporation organized under the laws of the State of Delaware, in connection
with the offer to exchange (the "Exchange Offer") one $1,000 principal amount of
the Company's 13 1/2% Senior Notes due May 15, 2009 (the "Exchange Notes") which
have been guaranteed by the Guarantor (the "Guarantee") for each $1,000
principal amount of the Company's outstanding 13 1/2% Senior Notes due May 15,
2009 (the "Original Notes"), and in connection with the preparation of the
prospectus (the "Prospectus") contained in the registration statement on
Form S-4 (the "Registration Statement") filed with the Securities and Exchange
Commission by the Company for the purpose of registering the Exchange Notes and
the Guarantee under the Securities Act of 1933, as amended (the "Act"). The
Original Notes have been, and the Exchange Notes will be, issued pursuant to an
Indenture, dated as of May 24, 1999 (the "Indenture"), between the Company, the
Guarantor and The Chase Manhattan Bank, as Trustee. Unless otherwise defined
herein, terms defined in the Prospectus are used herein as defined therein.

We have examined originals or copies, certified or otherwise
identified to our satisfaction, of such corporate records, agreements, documents
and other instruments and such certificates of comparable documents of public
officials and representatives of the Company, and have made such other and
further investigations, as we have deemed relevant and necessary as a basis for
the opinion hereinafter set forth.

In such examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals, to conformity to original documents of
all documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such latter documents.

Based on the foregoing, and subject to the qualifications and
limitations stated herein, we are of the opinion that, assuming the due
authorization, execution and delivery by the Trustee of the Indenture, (i) the
Indenture has been duly authorized, executed and delivered by, and is a
<PAGE>

valid and binding agreement of the Company and the Guarantor, as the case may
be, enforceable in accordance with its terms and (ii) the Exchange Notes have
been duly authorized by, and when executed and authenticated in accordance with
the provisions of the Indenture will constitute valid and legally binding
obligations of, the Company, entitled to the benefits of the Indenture and (iii)
the Guarantee has been duly authorized, executed and delivered by the Guarantor
and will constitute a valid and legally binding obligation of the Guarantor.

Our opinion set forth above is subject to the effects of bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other similar
laws relating to, or affecting, creditors rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing.

We are members of the Bar of the State of New York and we do not
express any opinion herein concerning any law other than the laws of the State
of New York, the General Corporation Law of Delaware and the federal law of the
United States of America.

We hereby consent the description of our opinion and to the reference
to our firm under the caption "Certain United States Federal Income Tax
Considerations" and to the reference to our firm under the caption "Legal
Matters" in the Prospectus forming part of the Registration Statement and to the
filing of this opinion as an exhibit to the Registration Statement. In giving
such consent, we do not thereby admit that we come within the categories of
persons whose consent is required under Section 7 of the Act.

Very truly yours,

/s/ Kelley Drye & Warren LLP

<PAGE>

Exhibit 10.4

WAIVER AND AMENDMENT NO. 3 TO
LOAN AND SECURITY AGREEMENT

WAIVER AND AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT (the

"Amendment") dated as of October 29, 1999, is among KMC TELECOM INC., a
- ----------
Delaware corporation ("KMC"), KMC Telecom II, Inc., a Delaware corporation ("KMC
--- ---
II"), KMC Telecom of Virginia, Inc., a Virginia public service company ("KMC
- -- ---
Virginia"), KMC Telecom Leasing I LLC, a Delaware limited liability company
- --------
("Leasing I"), KMC Telecom Leasing II LLC, a Delaware limited liability company
- -----------
("Leasing II"; KMC, KMC II, KMC Virginia, Leasing I and Leasing II being
----------
hereinafter collectively referred to as the "Borrowers"), the financial
---------
institutions from time to time parties thereto (the "Lenders"), FIRST UNION
-------
NATIONAL BANK, as administrative agent for the Lenders (the "Agent") and
-----
NEWCOURT COMMERCIAL FINANCE CORPORATION (f/k/a AT&T COMMERCIAL FINANCE
CORPORATION), as collateral agent for the Lenders (the "Collateral Agent" the
----------------
Agent together with the Collateral Agent hereinafter referred to as the

"Agents").
------

WHEREAS, the Borrowers, the Agents and the Lenders are parties to that
certain Loan and Security Agreement (the "Loan Agreement"; undefined capitalized
--------------
terms used herein shall have the meanings assigned thereto in the Loan
Agreement) dated as of December 22, 1998, as amended by Amendment No. 1 thereto
dated as of March 3, 1999, and Amendment No. 2 thereto dated as of August 13,
1999, pursuant to which the Lenders have agreed to make certain "Loans" and
other financial accommodations to the Borrowers;

WHEREAS, the Borrowers have requested that the Agents and the Lenders
amend the Loan Agreement and waive the applicability of certain provisions of
the Loan Agreement in the manner set forth herein, and the Agents and the
Lenders have agreed to such request; and

WHEREAS, the Requisite Lenders and the Borrowers are entering into
this Amendment pursuant to Section 11.02(b) of the Loan Agreement.

NOW, THEREFORE, in consideration of the premises set forth above, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Borrowers, the Agents and the Lenders agree as
follows:

1. Amendment to the Loan Agreement. Effective as of the date first
-------------------------------
above written and subject to the execution of this Amendment by the parties
hereto, the Loan Agreement shall be and hereby is amended as follows:

Section 7.01(c)(i) shall be deleted in its entirety and replaced with
------------------
the following new Section 7.01(c)(i):
------------------

(i) As of the last day of each fiscal quarter occurring on or after
the Closing Date and on or prior to September 30, 2000, the Borrowers shall
not permit the EBITDA losses for all the Borrowers on a combined basis for
the two fiscal quarters then ending
<PAGE>

to exceed the greater of (A) 115% of such losses projected for each such
date in the Milestone Plan, which amount is set forth in item 2 on Annex B
------ -------
attached hereto and (B) $5,000,000 less than the aggregate amount of EBITDA
projected for each such date in the Milestone Plan, which amount is set
forth in item 2 on Annex B attached
------ -------
hereto, provided, however, that for the fiscal quarter ending December 31,
-----------------
1999, the Borrowers shall not permit the EBITDA losses for all the
Borrowers on a combined basis for the two fiscal quarters then ending to
exceed ($48,000,000).

2. Waiver. The Lenders hereby waive compliance by the Borrowers with
------
the provisions of Sections 7.01(b) and 7.01 (c)(i) of the Loan Agreement for the
fiscal quarter ended September 30, 1999.

3. Conditions Precedent. This Amendment shall become effective as of
--------------------
the date above written, if, and only if, the Agents have received duly executed
originals of this Amendment from the Borrowers, the Requisite Lenders and the
Agents.

4. Representations and Warranties of the Borrowers. The Borrowers
-----------------------------------------------
hereby represent and warrant as follows:

(a) This Amendment and the Loan Agreement, as amended hereby,
constitute legal, valid and binding obligations of the Borrowers and are
enforceable against the Borrowers in accordance with their terms.

(b) Upon the effectiveness of this Amendment, the Borrowers hereby
reaffirm all representations and warranties made in the Loan Agreement, and to
the extent the same are not amended hereby, agree that all such representations
and warranties shall be deemed to have been remade as of the date of delivery of
this Amendment, unless and to the extent that any such representation and
warranty is stated to relate solely to an earlier date, in which case such
representation and warranty shall be true and correct as of such earlier date.

(c) As of the date hereof, and after giving effect to this Amendment,
each Borrower shall be in compliance with all the terms and provisions set forth
in the Loan Agreement, as amended hereby, on its part to be observed or
performed, and no Event of Default or Default shall have occurred and be
continuing.

5. Reference to and Effect on the Loan Agreement.
---------------------------------------------

(a) Upon the effectiveness of Section 1 hereof, on and after the date
hereof, each reference in the Loan Agreement to "this Loan Agreement,"
"hereunder," "hereof," "herein" or words of like import shall mean and be a
reference to the Loan Agreement as amended hereby, and each reference to the
Loan Agreement in any other document, instrument or agreement shall mean and be
a reference to the Loan Agreement as modified hereby.

(b) The Loan Agreement, as amended hereby, and all other documents,
instruments and agreements executed and/or delivered in connection therewith,
shall remain in full force and effect, and are hereby ratified and confirmed.

2
<PAGE>

(c) Except as expressly provided herein, the execution, delivery and
effectiveness of this Amendment shall not operate as a waiver of any right,
power or remedy of the Agents or the Lenders, nor constitute a waiver of any
provision of the Loan Agreement or any other documents, instruments and
agreements executed and/or delivered in connection therewith.

6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE OTHER REMAINING TERMS OF THE LOAN AGREEMENT AND THE
INTERNAL LAWS (AS OPPOSED TO CONFLICT OF LAW PROVISIONS) OF THE STATE OF NEW
YORK.

7. Paragraph Headings. The paragraph headings contained in this
------------------
Amendment are and shall be without substance, meaning or content of any kind
whatsoever and are not a part of the agreement among the parties hereto.

8. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

3
<PAGE>

IN WITNESS WHEREOF. this Amendment has been duly executed as of the
day and year first above written.

THE BORROWERS: KMC TELECOM INC.

KMC TELECOM II, INC.

KMC TELECOM OF VIRGINIA. INC.

In each case:

By: /s/ James D. Grenfell
------------------------------------
Name: James D. Grenfell
Title: CFO

KMC TELECOM LEASING I LLC
By: KMC TELECOM INC., as its Sole Member

By: /s/ James D. Grenfell
------------------------------------

Name: James D. Grenfell
Title: CFO

KMC TELECOM LEASING II LLC
By: KMC TELECOM II, INC., as its Sole
Member

By: /s/ James D. Grenfell
------------------------------------
Name: James D. Grenfell
Title: CFO

4
<PAGE>

FIRST UNION NATIONAL BANK, as the Agent
and as a Lender

By: /s/ Elizabeth Elmore
------------------------------------
Name: Elizabeth Elmore
Title: SVP

NEWCOURT COMMERCIAL FINANCE CORPORATION
(f/k/a AT&T COMMERCIAL FINANCE CORPORATION),
as the Collateral Agent and as a Lender

By: /s/ Michael V. Monohan
------------------------------------
Name: Michael V. Monohan
Title: Vice President

CANADIAN IMPERIAL BANK OF
COMMERCE, as a Lender

By: /s/ Ellen Marshall
------------------------------------
Name: Ellen Marshall
Title: Managing Director

GENERAL ELECTRIC CAPITAL
CORPORATION, as a Lender

By: /s/ Mark F. Mylon
------------------------------------
Name: Mark F. Mylon
Title: Managing Director

BANKBOSTON, N.A., as a Lender

By: /s/ Michael Ashton
------------------------------------
Name: Michael Ashton
Title: Vice President

5
<PAGE>

CREDIT SUISSE FIRST BOSTON, as a
Lender

By: /s/ Kristin Lepri
------------------------------------
Name: Kristin Lepri
Title: Associate

DRESDNER BANK AG NEW YORK AND GRAND
CAYMAN BRANCHES, as a Lender

By: /s/ John R. Fleseler
------------------------------------
Name: John R. Fleseler
Title: Senior Vice President

By: /s/ Constance Loosemoore
------------------------------------
Name: Constance Loosemoore
Title: Assistant Vice President

MORGAN STANLEY SENIOR
FUNDING, INC., as a Lender

By: /s/ T. Morgan Edwards III
------------------------------------
Name: T. Morgan Edwards III
Title: Vice President

By:
------------------------------------
Name:
Title:

SUMMIT BANK, as a Lender

By:
------------------------------------
Name:
Title:

MORGAN STANLEY DEAN WITTER
PRIME INCOME TRUST, as a Lender

By: /s/ Sheila Finnerty
------------------------------------
Name: Sheila Finnerty
Title: Vice President

6
<PAGE>

UNION BANK OF CALIFORNIA, N.A. as a
Lender

By: /s/ Ryan D. Flanagan
------------------------------------
Name: Ryan D. Flanagan
Title: Assistant Vice President

KEYPORT LIFE INSURANCE
COMPANY, as a Lender

By: /s/ Brian W. Good
------------------------------------
Name: Brian W. Good
Title: Vice President & Portfolio Manager

STEIN ROE FLOATING RATE LIMITED
LIABILITY COMPANY, as a Lender

By: /s/ Brian W. Good
------------------------------------
Name: Brian W. Good
Title: Vice President
Stein Roe & Farnham Incorporated,
as Advisor to the Stein Roe
Floating Rate Limited Liability
Company

7
<PAGE>

REAFFIRMATION OF GUARANTY

Reference is hereby made to (i) that certain Guaranty dated as of
December 22, 1998 (as amended, restated, supplemented or otherwise modified from
time to time, the "Guaranty") by KMC Telecom Holdings, Inc., a Delaware
--------
corporation (the "Guarantor"), in favor of Newcourt Commercial Finance
---------
Corporation (formerly known as AT&T Commercial Finance Corporation), as
collateral agent for the ratable benefit of the "Lenders" (defined below) (in
such capacity, the "Collateral Agent"), (ii) that certain Loan and Security
----------------
Agreement dated as of December 22, 1998 (as amended, restated supplemented or
otherwise modified from time to time, the "Loan Agreement") among KMC Telecom,
--------------
Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I
LLC, KMC Telecom Leasing II LLC (each of the foregoing being referred to
collectively as the "Borrowers"), the financial institutions from time to time
---------
parties thereto (the "Lenders"), First Union National Bank, as administrative
-------
agent for the Lenders (the "Agent") and the Collateral Agent, and (iii) that
-----
certain Waiver and Amendment No. 3 to Loan and Security Agreement dated as of
October 29, 1999 (the "Amendment") among the Borrowers, the Lenders, the Agent
---------
and the Collateral Agent.

The Guarantor, by its signature below, without in any way establishing a
course of dealing, hereby (i) acknowledges and consents to the execution and
delivery of the Amendment by the parties thereto, (ii) agrees that the Amendment
shall not limit or diminish the obligations of the Guarantor to guarantee all of
the "Obligations" of each Borrower under and as defined in the Loan Agreement
and such other amounts as are more specifically described in the Guaranty, (iii)
reaffirms all of its obligations under the Guaranty, and (iv) agrees that the
Guaranty remains in full force and effect and is hereby ratified and confirmed.

IN WITNESS WHEREOF, this instrument has been executed and delivered as
of this 29th day of October, 1999.

KMC TELECOM HOLDINGS, INC.

By: /s/ James D. Grenfell
---------------------------
Name: James D. Grenfell
Title: CFO, Executive Vice President
and Secretary

<PAGE>

Exhibit 12.1

KMC Telecom Holdings, Inc.
Statement RE: Computation of Ratio of Earnings to Fixed Charges (in thousands):

<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands)
--------------
<S> <C> <C> <C> <C> <C>
Net loss $ (4) $ (1,620) $ (4,495) $ (32,686) $ (76,753)
Interest expense - 23 596 2,582 29,789
Interest portion of rental expense - 14 57 195 450
---------------------------------------------------------------------------------------------
Earnings $ (4) $ (1,583) $ (3,842) $ (29,909) $ (46,514)
=============================================================================================

Interest expense - $ 23 $ 596 $ 2,582 $ 29,789
Interest portion of rental expense - 14 57 195 450
Capitalized interest - 37 103 854 5,133
---------------------------------------------------------------------------------------------
Fixed Charges $ - $ 74 $ 756 $ 3,631 $ 35,372
=============================================================================================

---------------------------------------------------------------------------------------------
Deficiency of earnings to cover
fixed charges $ (4) $ (1,657) $ (4,598) $ (33,540) $ (81,886)
=============================================================================================

<CAPTION>
Nine Months Ended September 30,
---------------------------------------
1998 1999
---- ----
(in thousands)
--------------
<S> <C> <C>
Net loss $ (53,703) $ (152,185)
Interest expense 25,970 47,848
Interest portion of rental expense 209 526
---------------------------------
Earnings $ (27,524) $ (103,811)
=================================

Interest expense $ 25,970 $ 47,848
Interest portion of rental expense 209 526
Capitalized interest 2,972 3,526
---------------------------------
Fixed Charges $ 29,151 $ 51,900
=================================

---------------------------------
Deficiency of earnings to cover
fixed charges $ (56,675) $ (155,711)
=================================
</TABLE>

<PAGE>

Exhibit 21.1

Subsidiaries of KMC Telecom Holdings, Inc.
------------------------------------------

Company State of Incorporation/Organization
- ------- -----------------------------------

KMC Financial Services, LLC Delaware

KMC Telecom Inc. Delaware

KMC Telecom II, Inc. Delaware

KMC Telecom Financing, Inc. Delaware

KMC Tele.com, Inc. Delaware

KMC Telecom III Holdings, Inc. Delaware

KMC Telecom III, Inc. Delaware
(subsidiary of KMC Telecom III Holdings, Inc.)

KMC Telecom Leasing I, LLC Delaware
(subsidiary of KMC Telecom Inc.)

KMC Telecom Leasing II, LLC Delaware
(subsidiary of KMC Telecom II, Inc.)

KMC Telecom Leasing III, LLC Delaware
(subsidiary of KMC Telecom III, Inc.)

KMC Telecom of Virginia, Inc. Virginia
(subsidiary of KMC Telecom Inc.)

<PAGE>

Exhibit 23.2

We consent to the reference to our Firm under the caption "Experts" and to the
use of our reports dated February 2, 1999 in the Registration Statement on Form
S-4 and related Prospectus of KMC Telecom Holdings, Inc. for the registration of
$275,000,000 of 13 1/2% Senior Notes due 2009.

/s/ ERNST & YOUNG LLP

MetroPark, New Jersey

November 18, 1999

<PAGE>

-------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_________________________

FORM T-1

STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
___________________________________________
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2) ________
________________________________________

THE CHASE MANHATTAN BANK
(Exact name of trustee as specified in its charter)

New York 13-4994650
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)

270 Park Avenue
New York, New York 10017
(Address of principal executive offices) (Zip Code)

William H. McDavid
General Counsel
270 Park Avenue
New York, New York 10017
Tel: (212) 270-2611
(Name, address and telephone number of agent for service)
____________________________________________
KMC Telecom Holdings, Inc.
(Exact name of obligor as specified in its charter)

Delaware 22-3545325
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)

1545 Route 206, Suite 300
Bedminster, New Jersey 07921
(Address of principal executive offices) (Zip Code)
------------------------------------------------------
13-1/2% Senior Notes due 2009
(Title of the indenture securities)
<PAGE>

------------------------------------------------

GENERAL

Item 1. General Information.

Furnish the following information as to the trustee:

(a) Name and address of each examining or supervising authority to which it
is subject.

New York State Banking Department, State House, Albany, New York 12110.

Board of Governors of the Federal Reserve System, Washington, D.C., 20551

Federal Reserve Bank of New York, District No. 2, 33 Liberty Street, New
York, N.Y.

Federal Deposit Insurance Corporation, Washington, D.C., 20429.

(b) Whether it is authorized to exercise corporate trust powers.

Yes.

Item 2. Affiliations with the Obligor.

If the obligor is an affiliate of the trustee, describe each such
affiliation.

None.

- 2 -
<PAGE>

Item 16. List of Exhibits

List below all exhibits filed as a part of this Statement of Eligibility.

1. A copy of the Articles of Association of the Trustee as now in effect,
including the Organization Certificate and the Certificates of Amendment dated
February 17, 1969, August 31, 1977, December 31, 1980, September 9, 1982,
February 28, 1985, December 2, 1991 and July 10, 1996 (see Exhibit 1 to Form T-1
filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).

2. A copy of the Certificate of Authority of the Trustee to Commence
Business (see Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-50010, which is incorporated by reference. On July 14, 1996,
in connection with the merger of Chemical Bank and The Chase Manhattan Bank
(National Association), Chemical Bank, the surviving corporation, was renamed
The Chase Manhattan Bank).

3. None, authorization to exercise corporate trust powers being contained
in the documents identified above as Exhibits 1 and 2.

4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form
T-1 filed in connection with Registration Statement No. 333-76439, which is
incorporated by reference).

5. Not applicable.

6. The consent of the Trustee required by Section 321(b) of the Act (see
Exhibit 6 to Form T-1 filed in connection with Registration Statement No. 33-
50010, which is incorporated by reference. On July 14, 1996, in connection with
the merger of Chemical Bank and The Chase Manhattan Bank (National Association),
Chemical Bank, the surviving corporation, was renamed The Chase Manhattan Bank).

7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining authority.

8. Not applicable.

9. Not applicable.

SIGNATURE

Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, The Chase Manhattan Bank, a corporation organized and existing under
the laws of the State of New York, has duly caused this statement of eligibility
to be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of New York and State of New York, on the 4th day of October, 1999.

THE CHASE MANHATTAN BANK

By /s/ R. Lorenzen
---------------------------
R. Lorenzen
Assistant Vice President
<PAGE>

- 3 -

Item 16. List of Exhibits

List below all exhibits filed as a part of this Statement of Eligibility.

3. None, authorization to exercise corporate trust powers being contained
in the documents identified above as Exhibits 1 and 2.

4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form
T-1 filed in connection with Registration Statement No. 333-76439, which is
incorporated by reference).

5. Not applicable.

7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining authority.

8. Not applicable.

9. Not applicable.
SIGNATURE

THE CHASE MANHATTAN BANK

By /s/ R. Lorenzen
-----------------
/s/ R. Lorenzen
Assistant Vice President

- 3 -
<PAGE>

Exhibit 7 to Form T-1

Bank Call Notice

RESERVE DISTRICT NO. 2
CONSOLIDATED REPORT OF CONDITION OF

The Chase Manhattan Bank
of 270 Park Avenue, New York, New York 10017
and Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System,

at the close of business June 30, 1999, in
accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.

Dollar Amounts
ASSETS in Millions

Cash and balances due from depository institutions:
Noninterest-bearing balances and
currency and coin.......................................... $ 13,119
Interest-bearing balances.................................. 6,761
Securities:..................................................
Held to maturity securities.................................. 892
Available for sale securities................................ 42,965
Federal funds sold and securities purchased under
agreements to resell....................................... 32,277
Loans and lease financing receivables:
Loans and leases, net of unearned income $130,602
Less: Allowance for loan and lease losses 2,551
Less: Allocated transfer risk reserve............ 0
--------
Loans and leases, net of unearned income,
allowance, and reserve..................................... 128,051
Trading Assets............................................... 41,426
Premises and fixed assets (including capitalized
leases).................................................... 3,190
Other real estate owned...................................... 28
Investments in unconsolidated subsidiaries and
associated companies....................................... 182
Customers' liability to this bank on acceptances
outstanding................................................ 901
Intangible assets............................................ 2,010
Other assets................................................. 14,567
--------
TOTAL ASSETS....................................... $286,369
========

- 4 -
<PAGE>

LIABILITIES

Deposits
In domestic offices ........................................... $101,979
Noninterest-bearing ................................$42,241
Interest-bearing ....................................59,738
------
In foreign offices, Edge and Agreement
subsidiaries and IBF's ........................................ 76,395
Noninterest-bearing ................................$ 4,645
Interest-bearing ....................................71,750

Federal funds purchased and securities sold under
agreements to repurchase ....................................... 36,604
Demand notes issued to the U.S. Treasury ........................ 1,001
Trading liabilities ............................................. 30,287

Other borrowed money (includes mortgage indebtedness
and obligations under capitalized leases):
With a remaining maturity of one year or less ................. 3,606
With a remaining maturity of more than one year through three
years .................................................... 14
With a remaining maturity of more than three years ............ 91
Bank's liability on acceptances executed and
outstanding .................................................... 901
Subordinated notes and debentures ............................... 5,427
Other liabilities ............................................... 11,247

TOTAL LIABILITIES ............................................... 267,552
--------
EQUITY CAPITAL

Perpetual preferred stock and related surplus 0
Common stock..................................................... 1,211
Surplus (exclude all surplus related to preferred stock)........ 11,016
Undivided profits and capital reserves........................... 7,317
Net unrealized holding gains (losses)
on available-for-sale securities ................................ (743)
Accumulated net gains (losses) on cash flow hedges............... 0
Cumulative foreign currency translation adjustments.............. 16
TOTAL EQUITY CAPITAL............................................. 18,817
--------
TOTAL LIABILITIES AND EQUITY CAPITAL............................. $286,369
========

I, Joseph L. Sclafani, E.V.P. & Controller of the above-named
bank, do hereby declare that this Report of Condition has
been prepared in conformance with the instructions issued
by the appropriate Federal regulatory authority and is true
to the best of my knowledge and belief.

JOSEPH L. SCLAFANI

We, the undersigned directors, attest to the correctness
of this Report of Condition and declare that it has been
examined by us, and to the best of our knowledge and
belief has been prepared in conformance with the in-
structions issued by the appropriate Federal regulatory
authority and is true and correct.

WALTER V. SHIPLEY )
WILLIAM B. HARRISON, JR. ) DIRECTORS
FRANK A. BENNACK, JR. )

-5-