SECURITIES PURCHASE AGREEMENT


                                   dated as of

                                 April 30, 1999

                                     between

                           KMC TELECOM HOLDINGS, INC.

                                       and

                           FIRST UNION INVESTORS, INC.


<PAGE>

                                TABLE OF CONTENTS

                                                                           PAGE
                                                                           ----

ARTICLE I.  DEFINITIONS......................................................1

         SECTION 1.01.  Definitions..........................................1

ARTICLE II.  PURCHASE AND SALE OF SECURITIES.................................4

         SECTION 2.01.  Commitment to Purchase...............................4
         SECTION 2.02.  The Closing..........................................4
         SECTION 2.03.  Use of Proceeds......................................5
         SECTION 2.04.  Allocation of Consideration..........................5

ARTICLE III.  REPRESENTATIONS AND WARRANTIES OF THE ISSUER...................5

         SECTION 3.01.  Organization, Standing, etc..........................5
         SECTION 3.02.  Capitalization.......................................6
         SECTION 3.03.  Authorization; Non-Contravention.....................7
         SECTION 3.04.  Binding Effect.......................................7
         SECTION 3.05.  Governmental Regulation..............................8
         SECTION 3.06.  Solicitation.........................................8
         SECTION 3.07.  Authorization to Do Business.........................8
         SECTION 3.08.  Compliance with Laws.................................9
         SECTION 3.09.  Litigation...........................................9
         SECTION 3.10.  Properties...........................................9
         SECTION 3.11.  Tax Matters..........................................9
         SECTION 3.12.  Patents and Trademarks...............................9
         SECTION 3.13.  Labor Matters........................................9
         SECTION 3.14.  Environmental Matters...............................10
         SECTION 3.15.  Insurance...........................................10
         SECTION 3.16.  Year 2000...........................................10
         SECTION 3.17.  Certain Existing Agreements.........................11
         SECTION 3.18.  Financial Information...............................11
         SECTION 3.19.  Disclosure..........................................11
         SECTION 3.20.  Investment Company Act..............................11
         SECTION 3.21.  Brokers.............................................11

                                      i
<PAGE>

ARTICLE IV.  REPRESENTATIONS AND WARRANTIES OF THE PURCHASER................12

         SECTION 4.01.  Organization........................................12
         SECTION 4.02.  Authority; No Other Action..........................12
         SECTION 4.03.  No Conflict.........................................12
         SECTION 4.04.  Binding Effect......................................12
         SECTION 4.05.  No Defaults.........................................12
         SECTION 4.06.  Private Placement...................................12

ARTICLE V.  CONDITIONS PRECEDENT TO CLOSING.................................13

         SECTION 5.01.  Conditions to the Purchaser's Obligations...........13
         SECTION 5.02.  Conditions to Issuer's Obligations..................14

ARTICLE VI.  COVENANTS......................................................15

         SECTION 6.01.  Covenants of the Issuer.............................15

ARTICLE VII.  MISCELLANEOUS.................................................16

         SECTION 7.01.  Notices.............................................16
         SECTION 7.02.  No Waivers..........................................17
         SECTION 7.03.  Successors and Assigns..............................17
         SECTION 7.04.  New York Law........................................17
         SECTION 7.05.  Counterparts; Effectiveness.........................17
         SECTION 7.06.  Entire Agreement....................................17
         SECTION 7.07.  Expenses............................................18

                                       ii
<PAGE>


EXHIBITS
--------

Exhibit   A Certificate of Amendment to Certificate of  Designations of Series A
          Preferred Stock

Exhibit   B Certificate of Amendment to Certificate of  Designations of Series C
          Preferred Stock

Exhibit   C Certificate of Amendment to Certificate of  Designations of Series D
          Preferred Stock

Exhibit   D Certificate of Amendment to Certificate of  Designations of Series E
          Preferred Stock

Exhibit   E Certificate of Amendment to Certificate of  Designations of Series F
          Preferred Stock

Exhibit   F Form of Amendment No. 5 to the Stockholders Agreement

Exhibit   G Form of Preferred Stock Registration Rights Agreement


SCHEDULES
---------

Schedule 3.01     -   Organization; Capital Stock; Subsidiaries

Schedule 3.02     -   Capitalization of Issuer

Schedule 3.08     -   Compliance with Laws

Schedule 3.09     -   Litigation

Schedule 3.10     -   Liens on Property

Schedule 3.14     -   Environmental Matters

Schedule 3.17     -   Encumbrances and Restrictions

                                      iii

<PAGE>


          SECURITIES PURCHASE AGREEMENT (this "Agreement") dated as of April 30,
1999 between KMC Telecom Holdings,  Inc., a Delaware corporation (the "Issuer"),
and First Union Investors, Inc., a North Carolina corporation (the "Purchaser").

          The parties hereto agree as follows:


                                    ARTICLE I

                                   DEFINITIONS


          SECTION 1.01.  DEFINITIONS.  The following terms, as used herein, have
the following meanings:

          "Amendment No. 5" means Amendment No. 5 to the Stockholders  Agreement
in the form attached to this Agreement as Exhibit F.

          "Certificates of Amendment" means the Certificates of Amendment to the
Certificates of Designations  with respect to the Series A Preferred  Stock, the
Series C Preferred  Stock,  the Series D Preferred Stock, the Series E Preferred
Stock and the Series F Preferred Stock, in  substantially  the forms attached to
this Agreement as Exhibits A, B, C, D and E, respectively.

          "Certificate  of  Designations"  means the Certificate of Designations
with  respect  to the  Series E  Preferred  Stock as  previously  filed with the
Secretary  of State of Delaware,  as amended by the  Certificate  of  Correction
dated  February  19, 1999 and filed with the  Secretary  of State of Delaware on
March 3, 1999, as further  amended by the  Certificate of Amendment with respect
to the Series E Preferred  Stock (Exhibit D to this  Agreement)  dated as of the
date hereof.

          "Charter" means the Amended and Restated  Certificate of Incorporation
of the Issuer, as amended as of the Closing Date.

          "Closing" has the meaning set forth in Section 2.02.

          "Closing Date" has the meaning set forth in Section 2.02.

          "Common  Stock" means the Common Stock,  par value $.01 per share,  of
the Issuer.

          "Environmental Laws" shall mean any applicable law concerning releases
into any part of the natural  environment,  or protection of natural  resources,
the  environment and public and employee  health and safety  including,  without
limitation, the Comprehensive Environmental Response, Compensation and Liability
Act (42 U.S.C. ss. 9601 et seq.), the Hazardous Materials Transportation Act (49


                                       1
<PAGE>

U.S.C. ss. 1801 et seq.), the Resource  Conservation and Recovery Act (42 U.S.C.
ss. 6901 et seq.),  the Clean Water Act (33 U.S.C.  ss. 1251 et seq.), the Clean
Air Act (33 U.S.C.  ss.  7401 et seq.),  the Toxic  Substances  Control  Act (15
U.S.C. ss. 7401 et seq.), and the Occupational  Safety and Health Act (29 U.S.C.
ss.  651 et seq.),  as such laws have been and may be  amended  or  supplemented
through the Closing Date, and the regulations  promulgated pursuant thereto, and
any applicable state or local statutes, and the regulations promulgated pursuant
thereto.

          "Exchange Act" means the  Securities  Exchange Act of 1934, as amended
from time to time, or any successor statute.

          "Existing  Warrant   Agreement"  means  the  Warrant  Agreement  dated
February 4, 1999,  as amended on April 29, 1999,  between the Company,  Newcourt
Commercial Finance Corporation,  Lucent Technologies Inc., the Purchaser and The
Chase Manhattan Bank relating to the Existing Warrants.

          "Existing  Warrants"  means the  52,272  existing  warrants  issued to
Newcourt and Lucent pursuant to the Existing Preferred Warrant Agreement.

          "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.

          "Lien"  means any lien,  claim,  charge,  pledge,  mortgage,  security
interest or other encumbrance.  "Loan and Security Agreement" means the Loan and
Security  Agreement,  dated as of February 4, 1999, among KMC Telecom III, Inc.,
KMC Telecom Leasing III LLC,  certain lenders from time to time parties thereto,
Lucent and the Collateral Agent (as defined therein).

          "Lucent" means Lucent Technologies Inc., a Delaware corporation.

          "Material  Adverse  Effect" means a material  adverse  effect,  or any
event,  occurrence,  state of circumstances or facts or development  involving a
prospective  material  adverse  effect,  on the  business,  operations,  assets,
condition (financial or otherwise),  results of operations,  properties, assets,
value or prospects of the Issuer and its Subsidiaries taken as a whole.

          "Newcourt" means Newcourt Commercial Finance  Corporation,  a Delaware
corporation.

          "Person"   means   an   individual,   general   partnership,   limited
partnership, corporation, limited liability company, trust, joint stock company,
association, joint venture or any other entity or organization, whether or not a


                                       2
<PAGE>

legal entity,  including a government or political  subdivision  or an agency or
instrumentality thereof.

          "Preferred  Stock" means the shares of Series E Preferred Stock issued
to the Purchaser under this Agreement.

          "Preferred Stock  Registration  Rights  Agreement" means the Preferred
Stock  Registration  Rights  Agreement  dated as of the date hereof  between the
Issuer and the Purchaser in the form attached to this Agreement as Exhibit G.

          "Regulation D" means Regulation D under the Securities Act.

          "Securities"  means,  collectively,  the Series E Unit,  the shares of
Preferred Stock and the Warrants  comprising the Series E Unit, and the warrants
to be issued under the Existing Warrant Agreement,  all of which will be sold by
the Issuer and purchased by the Purchaser as set forth in Section 2.01.

          "Securities Act" means the Securities Act of 1933, as amended.

          "Series A Preferred Stock" has the meaning set forth in Section 3.02.

          "Series C Preferred Stock" has the meaning set forth in Section 3.02.

          "Series D Preferred Stock" has the meaning set forth in Section 3.02.

          "Series E Preferred Stock" has the meaning set forth in Section 3.02.

          "Series E Unit" has the meaning set forth in Section 2.01.

          "Series  F  Certificate  of  Designations"  means the  Certificate  of
Designations  with respect to the Series F Preferred  Stock as previously  filed
with the  Secretary  of State of  Delaware,  as  amended by the  Certificate  of
Amendment  with  respect to the Series F  Preferred  Stock  dated as of the date
hereof (Exhibit E to this Agreement).

          "Series F Preferred Stock" has the meaning set forth in Section 3.02.

          "Springing  Warrants"  means the 227,273  warrants which may be issued
pursuant to Section 2.4 of the Existing Warrant Agreement.

          "Stockholders  Agreement" means the Amended and Restated  Stockholders
Agreement dated as of October 31, 1997, as previously  amended by Amendments No.
1, No. 2, No. 3 and No. 4, among the Issuer,  Nassau Capital  Partners L.P., NAS
Partners 1 L.L.C.,  Harold N.  Kamine,  KMC  Telecommunications  L.P.,  Newcourt
Commercial Finance Corporation, as successor to AT&T Credit Corporation, General
Electric  Capital  Corporation,  First Union  National  Bank,  as  successor  to
CoreStates Bank, N.A. and CoreStates Holdings, Inc.

                                       3
<PAGE>

          "Subsidiary"  means,  with  respect to any  Person,  any  corporation,
association or other  business  entity of which more than fifty percent (50%) of
the total voting power of shares of capital stock  entitled  (without  regard to
the  occurrence  of any  contingency)  to vote  in the  election  of  directors,
managers or trustees thereof, or at least a majority of the ownership interests,
and the power to direct the policies,  management and affairs thereof, is at the
time owned or controlled,  directly or indirectly, by such Person or one or more
of the other Subsidiaries of such Person or a combination thereof.

          "Taxes"  shall  mean  all  taxes,  charges,   fees,  levies  or  other
assessments,  including,  without  limitation,  all net income,  gross receipts,
capital,  sales, use, ad valorem,  value added,  transfer,  franchise,  profits,
inventory,  capital stock, license,  withholding,  payroll,  employment,  social
security,  unemployment,  excise,  severance,  stamp,  occupation,  property and
estimated  taxes,  customs,  duties,  fees,  assessments and charges of any kind
whatsoever,  together with any interest and any penalties,  fines,  additions to
tax or additional amounts imposed by any public or governmental taxing authority
(domestic or foreign) and shall include any  transferee  liability in respect of
Taxes.

          "Tax  Returns"   shall  mean  all  returns,   declarations,   reports,
estimates, information returns and statements required to be filed in respect of
any Taxes.

          "Warrant  Agreement"  means  the  warrant  agreement,  dated  the date
hereof,  between the Issuer,  the  Purchaser  and The Chase  Manhattan  Bank, as
warrant agent.

          "Warrant Registration Rights Agreement" means the warrant registration
rights agreement, dated the date hereof, between the Issuer and the Purchaser.

          "Warrants" means the warrants to purchase shares of Common Stock to be
issued  pursuant to the Warrant  Agreement;  each warrant  entitling  the holder
thereof to purchase 0.471756 shares of Common Stock.


                                   ARTICLE II

                         PURCHASE AND SALE OF SECURITIES

          SECTION  2.01.  COMMITMENT  TO PURCHASE.  (a) Subject to the terms and
conditions  hereinafter  stated,  upon  the  basis  of the  representations  and
warranties of the  Purchaser  herein  contained,  the Issuer agrees to issue and
sell to the Purchaser and, upon the basis of the  representations and warranties
of the Issuer herein contained, the Purchaser agrees to purchase from the Issuer
the Series E Unit, which consists of (i) an aggregate of 35,000 shares of Series
E Preferred Stock,  and (ii) 94,513 Warrants (the "Series E Unit"),  on the date
hereof for the aggregate purchase price of $32,950,470.

          (b) Subject to the terms and conditions  hereinafter  stated, upon the
basis of the  representations  and warranties of the Purchaser herein contained,
the Issuer agrees to issue and sell to the Purchaser  and, upon the basis of the
representations  and  warranties of the Issuer herein  contained,  the Purchaser
agrees to purchase from the Issuer 33,419  warrants  under the Existing  Warrant
Agreement,  on the date hereof for the aggregate  purchase price,  $2,049,530 by
complying  with  the  requirements  of  Section  2.5  of  the  Existing  Warrant


                                       4
<PAGE>

Agreement. The Purchaser will, immediately upon issuance of such warrants to the
Purchaser,  transfer all such  warrants  purchased  under the  Existing  Warrant
Agreement to Newcourt for no additional  consideration  from,  and at no cost or
expense to Newcourt.

          SECTION 2.02. THE CLOSING. (a) Subject to the fulfillment or waiver of
the  conditions  set forth in  Article V hereof,  the  purchase  and sale of the
Securities,  as set forth in Section 2.01 (the  "Closing"),  shall take place at
the  offices of Kelley  Drye & Warren LLP at 10:00 a.m. on the date hereof or on
such other date and at such other location as the Issuer and the Purchaser shall
agree.  The date and time of the Closing are  referred to herein as the "Closing
Date."

          (b) At the Closing, the Purchaser shall deliver to the Issuer, by wire
transfer (of immediately available funds) to an account designated by the Issuer
in writing delivered to the Purchaser,  the consideration referred to in Section
2.01(c).

          (c) At the Closing, the Issuer shall deliver to the Purchaser, against
payment  of  the  consideration  set  forth  in  Section  2.01(c),  certificates
evidencing  the  Series E Unit  (including  the  Preferred  Stock  and  Warrants
referred to therein),  and certificates  evidencing the Warrants issued pursuant
to section 2.01(b), in each case registered in the name of the Purchaser.


          SECTION 2.03.  USE OF PROCEEDS.  The proceeds from the issuance of the
Series  E  Unit  will  be  used  to  make  equity  contributions  and  Qualified
Intercompany  Loans  (as  defined  in the Loan and  Security  Agreement)  to KMC
Telecom  III,  Inc. and to pay fees and  expenses  relating to the  transactions
contemplated by this Agreement.

          SECTION  2.04.  ALLOCATION  OF  CONSIDERATION.   The  Issuer  and  the
Purchaser  hereby agree that the  allocation of the  consideration  described in
Section 2.01(a) for the Preferred Stock and the Warrants comprising the Series E
Unit shall be as follows: $27,154,150 of the consideration shall be allocated to
the Preferred Stock, and $5,796,320 of the  consideration  shall be allocated to
the Warrants.  In light of the highly  conditional nature of the purchase rights
provided for in the  Springing  Warrants,  the parties agree that for income tax
purposes  only,  none of the  consideration  paid by the  Purchaser  under  this
Agreement will be allocated to the Springing Warrants.


                                   ARTICLE III

                  REPRESENTATIONS AND WARRANTIES OF THE ISSUER

          The Issuer  represents  and warrants to the Purchaser as follows as of
the Closing Date:

          SECTION  3.01.  ORGANIZATION,  STANDING,  ETC.  (a)  The  Issuer  is a
corporation duly  incorporated,  validly existing and in good standing under the
laws of the  State  of  Delaware  and  has all  requisite  corporate  power  and
authority  under such laws to own or lease and  operate  its  properties  and to
carry on its business as now conducted. The Issuer is duly qualified or licensed
to do business as a foreign corporation in good standing in each jurisdiction in


                                       5
<PAGE>

which the  nature  of the  business  transacted  by it or the  character  of the
properties  owned or leased by it  requires  it to so  qualify  or be  licensed,
except  where the failure to so qualify or be  licensed  or be in good  standing
would not have a Material  Adverse Effect.  The copies of the Issuer's  Charter,
bylaws and other  organizational  documents  and  instruments  (in each case, as
amended and/or restated  through the date hereof),  heretofore made available to
the Purchaser, are true, complete and correct copies thereof.

          (b) Each  Subsidiary  of the  Issuer  is duly  organized  and  validly
existing  under  the  laws of the  jurisdiction  of its  formation,  and has all
corporate  or other power and  authority to own its  properties  and conduct its
business as now conducted.  All the outstanding  shares of capital stock of each
corporate  Subsidiary of the Issuer have been duly authorized and validly issued
and are fully paid and  nonassessable  and, except as disclosed on SCHEDULE 3.01
hereto,  are owned  directly or  indirectly  by the Issuer free and clear of all
liens, security interests, charges and encumbrances. The Issuer does not own any
interest in any other company or entity other than the Subsidiaries set forth on
SCHEDULE  3.01.  Except  as set  forth on  SCHEDULE  3.01  hereto,  there are no
outstanding options,  warrants,  rights,  agreements or commitments to any third
party to subscribe for or purchase any equity  security of any  Subsidiary or to
cause any Subsidiary to issue any such equity security.

          SECTION  3.02.  CAPITALIZATION.  (a) The Issuer's  authorized  capital
stock  consists of  3,000,000  shares of Common  Stock and  1,128,800  shares of
preferred  stock.  Of the  1,128,800  authorized  shares of preferred  stock (i)
123,800 shares have been designated as Series A Cumulative Convertible Preferred
Stock (the "Series A Preferred  Stock") all of which are currently  outstanding,
(ii) 350,000  shares have been  designated  as Series C  Cumulative  Convertible
Preferred  Stock (the "Series C Preferred  Stock") of which  175,000  shares are
currently  outstanding,  (iii) 25,000  shares have been  designated  as Series D
Cumulative Convertible Preferred Stock (the "Series D Preferred Stock") of which
none are currently outstanding,  (iv) 575,000 shares have been designated as the
Series E Senior  Redeemable,  Exchangeable,  PIK Preferred  Stock (the "Series E
Preferred  Stock"),  of  which  60,695  shares  will  be  outstanding  upon  the
consummation of the purchase of the Series E Unit pursuant to this Agreement and
55,000 shares have been  reserved for issuance  upon  conversion of the Series F
Preferred  Stock,  and (v) 55,000 shares have been designated as Series F Senior
Redeemable,  Exchangeable, PIK Preferred Stock (the "Series F Preferred Stock"),
of which 41,112 shares are currently  outstanding.  Of the 3,000,000  authorized
shares of Common  Stock:  (i) 837,876  shares are issued and  outstanding,  (ii)
600,000  shares have been reserved for issuance upon  conversion of the Series A
Preferred  Stock,  (iii)  333,333  shares have been  reserved for issuance  upon
conversion  of the  Series C  Preferred  Stock,  (iv)  10,000  shares  have been
reserved  for  issuance  upon  exercise  of a warrant  held by General  Electric
Capital  Corporation,  (v) 100,385  shares have been  reserved for issuance upon
exercise of warrants issued in connection  with the Issuer's  offering of its 12
1/2% Senior Discount Notes,  (vi) 195,000 shares have been reserved for issuance
upon exercise of the Warrants, the Existing Warrants and the Springing Warrants,
(vii) 262,750 shares have been reserved for issuance pursuant to options granted
under the 1998 Stock  Purchase and Option Plan for Key  Employees of KMC Telecom
Holdings,  Inc. and  Affiliates  and (viii) no shares are held in  treasury.  No
other shares of capital  stock have been issued or reserved for issuance for any
purpose.  All of the outstanding shares of capital stock of the Issuer have been
duly authorized and validly issued,  are fully paid and  nonassessable,  free of
preemptive  rights and have been  offered and issued  without  violation  of the
Securities  Act or any  preemptive  rights of any person.  SCHEDULE  3.02 hereto
accurately  sets  forth,  as of the  date  hereof,  the  number  of  issued  and
outstanding  shares of Common  Stock held by each person  known by the Issuer to
own beneficially or of record any shares of the Issuer's capital stock.

                                       6
<PAGE>

          (b) Except as  disclosed  on SCHEDULE  3.02  hereto:  (i) there are no
issued or outstanding  securities that are convertible  into or exchangeable for
shares of the Issuer's capital stock ("Convertible Securities");  (ii) there are
no issued or  outstanding  subscriptions,  options,  warrants or other rights to
purchase  or  acquire  any  shares  of the  capital  stock of the  Issuer or any
Convertible  Securities  ("Option  Rights")  other than the Warrants;  (iii) the
Issuer is not a party to any agreement or understanding  pursuant to which it is
obligated  to  purchase  or  redeem  any  shares  of its  capital  stock  or any
Convertible  Securities or Option Rights,  other than pursuant to the redemption
provisions in respect of the Series E Preferred Stock and the Series F Preferred
Stock set forth in the Certificate of Designations  and the Series F Certificate
of  Designations,  respectively,  and is not otherwise  under any  obligation to
repurchase,  redeem or otherwise  acquire any shares of its capital stock or any
Convertible  Securities or Option Rights;  (iv) the Issuer is not a party to any
agreement  or  understanding  pursuant to which it is  obligated to register any
shares of its capital stock or other  securities under the Securities Act or any
state  securities  law; and (v) the Issuer is not, and to the best  knowledge of
the  Issuer,  no  securities  holder  of the  Issuer  is a party  to any  voting
agreement,  voting trust,  irrevocable  proxy or other  agreement  affecting the
voting  rights of any  shares of the  Issuer's  capital  stock or any  agreement
providing  for any call or put option,  right of first refusal or offer or other
right to acquire or dispose of any shares of the Issuer's  capital  stock or any
Convertible  Securities or Option Rights. Except as described in Section 3.02(a)
or Schedule  3.02,  no shares of Common Stock are issuable  upon the exercise of
any  outstanding  Convertible  Securities  or Option Rights of the Issuer and no
additional  shares of Common Stock will become  issuable  upon  exercise of such
Convertible  Securities  or Option  Rights on  account  of the  issuance  of the
warrants.

          SECTION  3.03.   AUTHORIZATION;   NON-CONTRAVENTION.   The  execution,
delivery and performance by the Issuer of this Agreement, the Warrant Agreement,
the Warrant  Registration  Rights  Agreement,  the Preferred Stock  Registration
Rights  Agreement and  Amendment  No. 5, the issuance,  sale and delivery by the
Issuer of the  Securities  and the warrants  issued to the  Purchaser  under the
Existing  Warrant  Agreement,  the  execution  of  Springing  Warrants,  and the
amendments  to the  Charter  effected  by the  filing  of  the  Certificates  of
Amendment are within the Issuer's corporate powers, have been duly authorized by
all necessary corporate action, require no action by or in respect of, or filing
with, any  governmental  body,  agency or official (other than the filing of the
Certificates  of Amendment  with the  Secretary of State of Delaware) and do not
(i)  contravene or constitute a default under any provision of applicable law or
regulation,  judgment, injunction, order or decree binding upon or applicable to
the Issuer,  (ii) contravene or constitute a default under the Charter or bylaws
or (iii)  require  any  consent,  approval or other  action by any other  Person
(other than the holders of the Series A Preferred  Stock, the Series C Preferred
Stock, the ouststanding  Series E Preferred Stock, the Series F Preferred Stock,
and the other parties to the  Stockholders  Agreement,  which  consents shall be
obtained  prior to the Closing Date) or constitute a default under or contravene
any material agreement,  judgment, injunction, order, decree or other instrument
binding upon the Issuer or any of its Subsidiaries.

          SECTION 3.04. BINDING EFFECT.  This Agreement,  the Warrant Agreement,
the Warrant  Registration  Rights  Agreement,  the Preferred Stock  Registration
Rights  Agreement and Amendment  No. 5 have been duly  authorized,  executed and
delivered by the Issuer and constitute valid and legally binding  obligations of
the Issuer,  enforceable in accordance with their  respective  terms,  except as
enforceability   may  be   limited   by   applicable   bankruptcy,   insolvency,
reorganization,  moratorium  and  similar  laws  affecting  the  enforcement  of


                                       7
<PAGE>

creditors'  rights  generally  and by  general  principles  of  equity  (whether
enforcement  is sought by  proceedings in equity or at law). The Issuer has duly
authorized  the issuance,  sale and delivery of the  Securities to the Purchaser
and, when issued and delivered by the Issuer pursuant to this Agreement  against
payment  of the  consideration  set  forth  herein,  and,  with  respect  to the
Warrants,  countersigned  by the  Warrant  Agent  (as  defined  in  the  Warrant
Agreement),  with  respect to the warrants  issued  under the  Existing  Warrant
Agreement,  countersigned  by the Warrant Agent under such agreement (as defined
in the Existing  Warrant  Agreement),  and with respect to the Preferred  Stock,
authenticated   by  the  Transfer  Agent  (as  defined  in  the  Certificate  of
Designations),   the  Securities  will  be  validly   issued,   fully  paid  and
non-assessable  free  and  clear  of all  Liens  and  without  violation  of any
preemptive  rights.  The Issuer has duly authorized the issuance and delivery of
the Springing  Warrants in accordance with the terms and conditions set forth in
Section 2.4 of the Existing Warrant  Agreement,  and, when  countersigned by the
Warrant  Agent under the  Existing  Warrant  Agreement  and  delivered  pursuant
Section 2.4 of the Existing Warrant  Agreement,  the Springing  Warrants will be
validly issued,  fully paid and  non-assessable  free and clear of all Liens and
without violation of any preemptive rights. All of the shares of Common Stock to
be issued upon  exercise of the Warrants,  the warrants  issued to the Purchaser
under the Existing Warrant Agreement,  and the Springing Warrants have been duly
and validly  authorized  and reserved for issuance  upon such exercise and, when
issued and delivered,  upon exercise of the Warrants,  the warrants issued under
the Existing Warrant Agreement and the Springing Warrants in accordance with the
terms of the Warrant  Agreement or the Existing Warrant  Agreement,  as the case
may be, will be duly and validly issued,  fully paid and non-assessable free and
clear of all Liens and without violation of any preemptive rights.

          SECTION 3.05. GOVERNMENTAL REGULATION.  Except for the Securities Act,
the Exchange  Act and state  securities  laws,  the Issuer is not subject to any
federal or state or foreign law or regulation  limiting its ability to issue the
Securities or the  Springing  Warrants or to perform its  obligations  under the
terms of this Agreement,  the Warrant Agreement, the Warrant Registration Rights
Agreement,  the Preferred Stock Registration Rights Agreement,  Amendment No. 5,
the Securities or the Springing Warrants.  Except as may be required pursuant to
"blue sky laws" or as may be required  under the  Securities Act or the Exchange
Act in connection  with the  registration  of the Warrant Shares as contemplated
under the Warrant  Registration  Rights  Agreement  or the  registration  of the
Series  E  Preferred  Stock  under  the  Preferred  Stock  Registration   Rights
Agreement,  no notices,  reports or other filings are required to be made by the
Issuer  or  any   Subsidiary   with,   nor  are  any  consents,   registrations,
applications,  approvals,  permits,  licenses or  authorizations  required to be
obtained  by the  Issuer or any  Subsidiary  from,  any  public or  governmental
authority or other third party in connection  with the execution and delivery of
this  Agreement,   the  Warrant  Agreement,   the  Warrant  Registration  Rights
Agreement, the Preferred Stock Registration Rights Agreement or Amendment No. 5,
or the  consummation by the Issuer of the  transactions  contemplated  hereby or
thereby,  or the exercise by the Purchaser of its rights  hereunder,  except for
(i) any of the foregoing,  the failure of which to make or obtain would not have
a Material Adverse Effect or adversely affect the Purchaser's  rights hereunder,
(ii) the consent, with respect to the Certificates of Amendment,  of the holders
of the Series A Preferred  Stock,  the Series C Preferred Stock, the outstanding
Series E Preferred Stock and the Series F Preferred Stock,  which consents shall
be obtained  prior to the Closing Date,  and (iii) the consent,  with respect to
Amendment  No. 5, of the other  parties  to the  Stockholders  Agreement,  which
consent shall be obtained prior to the Closing Date.

          SECTION  3.06.   SOLICITATION.   Assuming  the   representations   and
warranties  of the  Purchaser  set forth in  Section  4.06  hereof  are true and
correct in all material respects,  the offer and sale of the Securities pursuant


                                       8
<PAGE>

to this  Agreement  and the issuance of the shares of Common Stock upon exercise
of the Warrants and the Springing  Warrants pursuant to the Warrant Agreement or
the  Existing  Warrant  Agreement,  as the case may be,  will be exempt from the
registration requirements of the Securities Act. No form of general solicitation
or general  advertising was used by the Issuer or, to the best of its knowledge,
any other  Person  acting on its  behalf,  in  respect of the  Securities  or in
connection with the offer and sale of the Securities. Neither the Issuer nor any
Person acting on behalf of the Issuer has, either  directly or indirectly,  sold
or offered  for sale to any Person any of the  Securities  or any other  similar
security of the Issuer except as  contemplated  by this  Agreement.  Neither the
Issuer nor any Person acting on its behalf has, in connection  with the offering
of the  Securities,  engaged in any action that would  require the  registration
under the Securities Act of the offering and sale of the Securities  pursuant to
this Agreement.

          SECTION  3.07.  AUTHORIZATION  TO DO  BUSINESS.  The  Issuer  and  its
Subsidiaries (i) possess all licenses, certificates,  authorizations,  approvals
and  permits  issued  by  the  appropriate  federal,  state,  local  or  foreign
regulatory  authorities  necessary to conduct their  respective  businesses,  as
presently conducted, excepting any license, certificate, authorization, approval
or permit, the failure to possess which,  singly or in the aggregate,  could not
reasonably be expected to result in a Material  Adverse Effect and (ii) have not
received any notice of proceedings relating to revocation or modification of any
such license, certificate,  authorization, approval or permit, nor is the Issuer
or any of its  Subsidiaries  in  violation  of, or in  default  under,  any such
license,  authorization,  approval  or permit  or any  decree,  order,  judgment
applicable to the Issuer or its Subsidiaries  the effect of which,  singly or in
the  aggregate,  could  reasonably  be expected to result in a Material  Adverse
Effect.

          SECTION 3.08.  COMPLIANCE  WITH LAWS.  Except as set forth on SCHEDULE
3.08 hereto and except as would not have a Material Adverse Effect, the business
of the  Issuer  and each of the  Subsidiaries  has been and is  presently  being
conducted in compliance  with all applicable  federal,  state,  county and local
ordinances, statutes, rules, regulations and laws (collectively "Laws").

          SECTION 3.09. LITIGATION. Except as set forth on SCHEDULE 3.09 hereto,
there are no pending actions, suits, proceedings, arbitrations or investigations
against  or  affecting  the  Issuer or any of its  Subsidiaries  or any of their
respective properties, assets or operations, or with respect to which the Issuer
or any such  Subsidiary  is  responsible  by way of  indemnity  or  otherwise (a
"Material Claim") that, if there is an adverse decision, could singly, or in the
aggregate,  with all such other actions,  suits,  investigations or proceedings,
have a Material  Adverse  Effect,  and, to the knowledge of the Issuer,  no such
actions, suits, proceedings or investigations are threatened.

          SECTION 3.10. PROPERTIES. Except as described in SCHEDULE 3.10 hereto,
the  Issuer and its  Subsidiaries  have good and  marketable  title to all their
material  property  and  assets,   free  and  clear  of  all  Liens  except  (a)
materialmen's, mechanics', carriers', workmen's, warehousemen's, repairmen's, or
other like Liens  arising in the  ordinary  course of business  with  respect to
moneys  not yet due and  payable;  (b) Liens for  current  Taxes not yet due and
payable or which are being contested in good faith and by proper procedures;  or
(c) Liens or minor imperfections of title that do not materially  interfere with
the use or materially detract from the value of such property.

                                       9
<PAGE>

          SECTION 3.11. TAX MATTERS.  The Issuer and its Subsidiaries have filed
all Tax  Returns  required  to be filed and are not in default in the payment of
any Taxes which were  payable  pursuant to such  returns or any  assessments  in
respect  thereof,  other  than any which the  Issuer or any such  Subsidiary  is
contesting in good faith by proper procedures.

          SECTION  3.12.  PATENTS  AND  TRADEMARKS.  Each of the  Issuer and its
Subsidiaries  has  sufficient  right,   title  and  ownership  of  all  patents,
trademarks, service marks, trade names, copyrights, licenses with respect to the
foregoing,  information,  proprietary rights and processes,  or shall be able to
obtain all such licenses and other authority  necessary or useful for the lawful
conduct of its business as it is contemplated to be conducted, without any known
conflicts  with the rights of  others.  No  stockholder,  officer,  director  or
employee  of the  Issuer or any  Subsidiary  owns any rights  therein  which are
competitive  with those to be owned or used by the Issuer and any  Subsidiaries.
Neither  the  Issuer  nor any  Subsidiary  has  been  sued or  charged  with any
infringement of any patent,  license or permit or has knowledge of any basis for
any such claim.

          SECTION 3.13. LABOR MATTERS. (a) Neither the Issuer nor any Subsidiary
is party to any labor or collective  bargaining agreement and there are no labor
or collective  bargaining agreements which pertain to employees of the Issuer or
any Subsidiary.

          (b) No employees of the Issuer or any  Subsidiary  are  represented by
any labor  organization.  No labor  organization  or group of  employees  of the
Issuer or any Subsidiary has made a demand for recognition or certification, and
there are no representation or certification  proceedings or petitions seeking a
representation  proceeding presently pending or, to the knowledge of the Issuer,
threatened  to be brought or filed,  with the NLRB or any other labor  relations
tribunal or authority.  To the knowledge of the Issuer,  there are no organizing
activities  involving the Issuer or any  Subsidiary  pending with, or threatened
by, any labor organization.

          (c)  There  are  no  strikes,  work  stoppages,  slowdowns,  lockouts,
material  arbitrations  or material  grievances or other material labor disputes
pending or, to the knowledge of the Issuer,  threatened against or involving the
Issuer or any  Subsidiary.  Except as would not result in any  Material  Adverse
Effect,  there are no unfair labor  practice  charges,  grievances or complaints
pending or, to the  knowledge of the Issuer,  threatened  by or on behalf of any
employee or group of employees of the Issuer or any Subsidiary.

          SECTION  3.14.  ENVIRONMENTAL  MATTERS.  (a)  Except  as set  forth in
SCHEDULE  3.14,  (i) each of the  Issuer  and the  Subsidiaries  is in  material
compliance  with all  Environmental  Laws and (ii)  neither  the  Issuer nor any
Subsidiary has received any written communication from a governmental  authority
with respect to such compliance or the failure thereof.

          (b)  Except  as set  forth in  SCHEDULE  3.14,  (i) there is no civil,
criminal  or  administrative  action,  claim,  demand,  investigation  or notice
relating to a  violation  of an  Environmental  Law (an  "Environmental  Claim")
pending or, to the knowledge of the Issuer, threatened and (ii) to the knowledge
of the Issuer, there are no past or present actions, activities,  circumstances,
conditions,  events or incidents,  including,  without limitation,  the release,
emission, discharge or disposal of any chemical, pollutant,  contaminant, waste,
toxic substance,  petroleum or petroleum  product,  that would form the basis of
any  Environmental  Claim,  in  either  case  (A)  against  the  Issuer  or  any
Subsidiary,   (B)  against  any  person  or  entity  whose   liability  for  any
Environmental  Claim the Issuer or any  Subsidiary  has or may have  retained or


                                       10
<PAGE>

assumed either  contractually  or by operation of law, or (C) involving any real
or personal  property which the Issuer or any Subsidiary owns, leases or manages
except, in each case, as would not have a Material Adverse Effect.

          SECTION  3.15.  INSURANCE.  The  Issuer and its  Subsidiaries,  in the
reasonable  determination of the Issuer's management,  maintain with financially
sound  and  reputable  insurers  insurance  against  loss or damage of the kinds
customarily insured against by corporations of established reputation engaged in
the same or a similar business and similarly situated,  and of such types and in
such amounts as is customarily carried under similar circumstances by such other
corporations.

          SECTION  3.16.  YEAR 2000.  The Issuer has  engaged in a review of the
hardware and software  products used by the Issuer and the Subsidiaries in their
businesses  (collectively,  the "SOFTWARE")  which it believes to be adequate to
identify  any  material  deficiency  in "Year  2000  Capabilities".  "Year  2000
Capabilities"  means the ability of the  Software  (i) to manage and  manipulate
data  involving  dates,  including  single  century  formulas and  multi-century
formulas, and to not generate incorrect values or invalid results involving such
dates, (ii) to provide that all date-related user interface  functionalities and
data fields  include the  indication  of century,  and (iii) to provide that all
date-related data interface  functionalities  include the indication of century.
The Issuer is taking  appropriate  steps to identify exposure to deficiencies in
Year 2000 Capabilities resulting from the Year 2000 Capabilities of its vendors,
and to address them on a timely basis. In addition,  the Issuer believes that it
has adequate  resources to cause its Software to include Year 2000  Capabilities
which  currently may not contain them and that the costs of causing its Software
to  include  Year  2000  Capabilities  will  not be  material  to  the  Issuer's
consolidated financial position, results of operations or cashflows.

          SECTION 3.17. CERTAIN EXISTING AGREEMENTS.  Except as disclosed in any
document  or  report  filed by the  Issuer  with  the  Securities  and  Exchange
Commission  or on  SCHEDULE  3.17  hereto,  as of the date  hereof and as of the
Closing Date: (i) there are and will be no agreements providing for encumbrances
or  restrictions  that  would  be  grandfathered  under  Section  XI(C)  of  the
Certificate  of  Designations,   (ii)  there  is  and  will  be  no  outstanding
Indebtedness  that  would  be  grandfathered   under  Section  XI(A)(a)  of  the
Certificate of Designations,  and (iii) there are and will be no agreements with
any Affiliate (as defined in the Certificate of Designations) or any stockholder
agreements  (including   registration  rights  agreements  or  related  purchase
agreements)  that  would  be  grandfathered  pursuant  to  Section  XI(E) of the
Certificate of Designations.

          SECTION 3.18. FINANCIAL  INFORMATION.  (a) The Issuer has furnished to
the Purchaser the audited consolidated  financial statements of the Issuer dated
as of  December  31,  1998  and for  the  year  then  ended,  and the  unaudited
consolidated  financial  statements  for the fiscal quarter ended March 31, 1999
(collectively,   the  "FINANCIALS").   The  Financials  have  been  prepared  in
accordance  with GAAP  applied  on a basis  consistent  with  that of  preceding
periods and are complete and correct in all material  respects.  The  Financials
fairly represent the Issuer's consolidated financial position as of the dates of
the balance sheets  included in the Financials and its  consolidated  results of
operations for the periods  indicated  therein.  There are no omissions from the
Financials or any other facts or  circumstances  not reflected in the Financials
which are or may be material according to GAAP.

                                       11
<PAGE>

          (b) Except as and to the extent expressly set forth in the Financials,
or the notes,  schedules or exhibits  thereto,  or as disclosed in the documents
filed by the Issuer with the Securities and Exchange Commission, (i) as of March
31, 1999 (the "BALANCE SHEET DATE"), neither the Issuer nor its Subsidiaries had
any material liabilities or obligations (whether absolute,  contingent,  accrued
or otherwise) that would be required to be included on a balance sheet or in the
notes,  schedules or exhibits  thereto  prepared in accordance  with GAAP,  (ii)
since the Balance Sheet Date, the Issuer and its Subsidiaries  have not incurred
any such material  liabilities or obligations other than in the normal course of
business  and (iii) since  December 31,  1998,  no event has  occurred  that has
resulted in or is reasonably likely to result in a Material Adverse Effect.

          SECTION 3.19.  DISCLOSURE.  The Issuer has provided the Purchaser with
disclosure  about its and its  Subsidiaries'  business that in the aggregate did
not contain an untrue  statement of a material  fact or omit to state a material
fact necessary to make the statements in such disclosure not misleading.

          SECTION  3.20.  INVESTMENT  COMPANY  ACT. The Issuer is not, and after
giving effect to the offering and sale of the Securities and the  application of
the  proceeds  thereof  will not be,  an  "investment  company"  as such term is
defined in the Investment Company Act of 1940, as amended.

          SECTION 3.21.  BROKERS.  No brokerage or finder's  commissions or fees
are payable in connection with the transactions  contemplated by this Agreement,
and the Issuer shall defend,  indemnify and hold the Purchaser harmless from and
against  any  liability,   loss  or  expense  (including,   without  limitation,
reasonable  attorneys  fees) arising in  connection  with any claim for any such
commissions.

                                   ARTICLE IV

                 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

          The Purchaser represents and warrants to the Issuer as follows:

          SECTION 4.01.  ORGANIZATION.  It is duly  organized and existing under
the laws of its jurisdiction of organization.


          SECTION 4.02. AUTHORITY; NO OTHER ACTION. (a) The execution,  delivery
and  performance  of  this  Agreement,   the  Warrant  Agreement,   the  Warrant
Registration  Rights  Agreement  and the  Preferred  Stock  Registration  Rights
Agreement are within its powers and have been duly authorized on its part by all
requisite corporate action.

          (b) No action by or in respect of, or filing  with,  any  governmental
authority,  agency or official  is  required  for the  execution,  delivery  and
performance  by the  Purchaser of this  Agreement,  the Warrant  Agreement,  the
Warrant Registration Rights Agreement or the Preferred Stock Registration Rights
Agreement.


                                       12
<PAGE>

          SECTION 4.03. NO CONFLICT. The execution,  delivery and performance by
it of this Agreement,  the Warrant Agreement,  the Warrant  Registration  Rights
Agreement  and  the  Preferred  Stock  Registration  Rights  Agreement  and  the
consummation of the transactions contemplated hereby and thereby do not and will
not (i) violate its charter, bylaws or similar organizational  documents or (ii)
violate any applicable law, rule,  regulation,  judgment,  injunction,  order or
decree,  which violation  would (a) affect the validity of this  Agreement,  the
Warrant Agreement,  the Warrant  Registration  Rights Agreement or the Preferred
Stock  Registration  Rights  Agreement or (b)  individually  or in the aggregate
impair the  ability of the  Purchaser  to perform in any  material  respect  the
obligations  which it has under  this  Agreement,  the  Warrant  Agreement,  the
Warrant Registration Rights Agreement or the Preferred Stock Registration Rights
Agreement.

          SECTION 4.04. BINDING EFFECT.  This Agreement,  the Warrant Agreement,
Warrant  Registration  Rights  Agreement  and the Preferred  Stock  Registration
Rights  Agreement have been duly  authorized,  executed and delivered by it and,
except  as  limited  by  applicable  bankruptcy,   insolvency,   reorganization,
moratorium  and similar laws  affecting the  enforcement  of  creditors'  rights
generally and by general principles of equity (whether  enforcement is sought by
proceedings in equity or at law), constitute valid and binding agreements of the
Purchaser enforceable in accordance with their respective terms.

          SECTION  4.05.  NO  DEFAULTS.  It is not in  violation of its charter,
bylaws or similar organizational  documents or in default under any provision of
applicable law or regulation or of any agreement,  judgment,  injunction, order,
decree or other instrument binding upon it, which violation or default (i) would
affect the  validity  of this  Agreement,  the  Warrant  Agreement,  the Warrant
Registration  Rights  Agreement  or  the  Preferred  Stock  Registration  Rights
Agreement or (ii) would (individually or in the aggregate) impair the ability of
the Purchaser to perform in any material  respect the  obligations  which it has
under this Agreement,  the Warrant Agreement,  the Warrant  Registration  Rights
Agreement or the Preferred Stock Registration Rights Agreement.

          SECTION  4.06.  PRIVATE  PLACEMENT.  (a) It  understands  that (i) the
offering and sale of the  Securities is intended to be exempt from  registration
under the Securities Act pursuant to Section 4(2) of the Securities Act and (ii)
there is no existing  public or other market for any of the Securities and there
can be no assurance  that it will be able to sell or dispose of such  Securities
purchased by it pursuant to this Agreement.

          (b)  It is an  "Accredited  Investor"  as  such  term  is  defined  in
Regulation D.

          (c) It has  sufficient  knowledge  and  experience  in  financial  and
business  matters so as to be capable of evaluating  the merits and risks of its
investment in the  Securities and it is capable of bearing the economic risks of
such investment, including a complete loss of its investment in the Securities.

          (d) It has had access to the  management and records of the Issuer and
has been  furnished  with all the  information  that it has  requested  from the
Issuer for determining whether to purchase the Securities and has been given the
opportunity  to ask  questions of, and receive  answers from,  management of the
Issuer  regarding  its  business  and  affairs  and  concerning  the  terms  and
conditions of the Securities and other related matters.


                                       13
<PAGE>

          (e) It understands  that the Securities and the shares of Common Stock
issuable  upon  exercise  of  the  Warrants  are  characterized  as  "restricted
securities"  under  the  federal  securities  laws  inasmuch  as they are  being
acquired  from the Issuer in a transaction  not involving a public  offering and
that under such laws and applicable  regulations  such  securities may be resold
without   registration   under  the  Securities  Act  only  in  certain  limited
circumstances.  In this  connection,  it represents that it is familiar with SEC
Rules  144 and  144A,  as  presently  in  effect,  and  understands  the  resale
limitations imposed thereby and by the Securities Act.



                                    ARTICLE V

                         CONDITIONS PRECEDENT TO CLOSING


          SECTION  5.01.   CONDITIONS  TO  THE  PURCHASER'S   OBLIGATIONS.   The
obligation  of the  Purchaser to purchase the  Securities  to be purchased by it
hereunder is subject to the  satisfaction,  on or prior to the Closing  Date, of
the following conditions:

          (a) each of the representations and warranties of the Issuer contained
     herein shall be true and correct in all material respects on and as of such
     Closing Date and the Purchaser shall have received a certificate  attesting
     thereto signed by the President or a Vice President of the Issuer;

          (b) there shall not have occurred and there shall not otherwise  exist
     any  condition,  event or  development  having,  or  likely to have (in the
     reasonable judgment of the Purchaser), a Material Adverse Effect;

          (c) the  Purchaser  shall have  received  an opinion  from  Shearman &
     Sterling, special counsel to the Issuer, and an opinion from Kelley, Drye &
     Warren LLP,  counsel to the Issuer,  each dated the Closing  Date,  in form
     reasonably satisfactory to the Purchaser;

          (d) the  Secretary or an Assistant  Secretary of the Issuer shall have
     delivered to the  Purchaser at the Closing Date a  Certificate  dated as of
     the  Closing  Date  certifying:  (i) that  attached  thereto  is a true and
     complete  copy of the bylaws of the Issuer as in effect on the date of such
     certification;  (ii) that  attached  thereto is a true and complete copy of
     all resolutions adopted by the Board of Directors of the Issuer authorizing
     the  execution,  delivery and  performance of this  Agreement,  the Warrant
     Agreement,  the Warrant Registration Rights Agreement,  the Preferred Stock
     Registration Rights Agreement, the Certificates of Amendment, Amendment No.
     5, the  issuance,  sale and delivery of the  Securities,  and that all such
     resolutions  are in full  force  and  effect  and  are all the  resolutions
     adopted in connection with the transactions contemplated by this Agreement,
     the Warrant Agreement,  the Warrant  Registration  Rights Agreement and the
     Preferred Stock  Registration  Rights Agreement (iii) that attached thereto
     is a true and complete copy of all resolutions  adopted by the stockholders
     of the Issuer  approving the amendments to the Certificates of Designations
     and  authorizing  the filing of the  Certificates  of Amendment;  (iv) that
     attached thereto is a true and complete copy of the Charter as in effect on
     the date of such  certification;  and (v) to the  incumbency  and  specimen
     signature of certain officers of the Issuer;

                                       14
<PAGE>

          (e) all corporate and other  proceedings  to be taken by the Issuer in
     connection  with  the  transactions  contemplated  by this  Agreement,  the
     Warrant Agreement, the Warrant Registration Rights Agreement, the Preferred
     Stock Registration  Rights Agreement and Amendment No. 5, and all documents
     reflecting or evidencing such proceedings shall be reasonably  satisfactory
     in scope,  form and substance to the Purchaser and its legal  counsel,  and
     the  Purchaser  and its legal  counsel  shall have  received  all such duly
     executed  counterpart  originals  or  certified  or  other  copies  of such
     documents and instruments as they may reasonably request.

          (f) the Purchaser shall have received duly executed and  authenticated
     certificates  representing the Series E Unit being purchased by it pursuant
     hereto;

          (g) the  Certificates of Amendment shall have been duly filed with the
     Secretary of State of Delaware and shall be in full force and effect;

          (h) the Purchaser shall have received the Warrant  Registration Rights
     Agreement duly executed by the Issuer;

          (i) the Purchaser shall have received the Preferred Stock Registration
     Rights Agreement duly executed by the Issuer;

          (j) the Purchaser shall have become an Additional  Purchaser under the
     Existing  Warrant  Agreement for the purpose of receiving  30,844  warrants
     thereunder;

          (k) the Existing Warrant  Agreement shall have been amended to provide
     for the issuance to the Purchaser,  unless certain conditions are met, of a
     number of Springing  Warrants equal to (1) 227,273 plus the total number of
     Warrants  held  by  the  Purchaser  on the  date  hereof,  multiplied  by a
     fraction,  the  numerator  of  which  shall  be the  aggregate  liquidation
     preference of the Purchaser's  Preferred Stock and the denominator of which
     shall be the aggregate liquidation  preference of all outstanding shares of
     Series E Preferred  Stock and Series F Preferred  Stock on the date hereof,
     LESS (2) the number of Warrants  held by the  Purchaser on the date hereof;
     and

          (l) the Issuer shall have paid to the  Purchaser  all fees and expense
     reimbursements  required  to be so paid on or  prior  to the  Closing  Date
     pursuant to the terms of this  Agreement or the fee letters being  executed
     and  delivered  concurrently  with  the  execution  and  delivery  of  this
     Agreement.

          SECTION 5.02. CONDITIONS TO ISSUER'S  OBLIGATIONS.  The obligations of
the Issuer to issue and sell the  Securities to the  Purchaser  pursuant to this
Agreement are subject to the  satisfaction,  at or prior to the Closing Date, of
the following conditions:

          (a) the  representations  and  warranties of the  Purchaser  contained
     herein shall be true and correct in all material  respects on and as of the
     Closing Date;

                                       15
<PAGE>

          (b) the Issuer shall have received from the Purchaser by wire transfer
     (of immediately  available funds) to an account designated by the Issuer in
     writing  delivered  to the  Purchaser,  the  consideration  referred  to in
     Section 2.01;

          (c) the Purchaser shall have become an Additional  Purchaser under the
     Existing Warrant Agreement; and

          (d) the  Certificates of Amendment shall have been duly filed with the
     Secretary of State of Delaware and shall be in full force and effect.

                                   ARTICLE VI

                                    COVENANTS

          SECTION 6.01. COVENANTS OF THE ISSUER.

          (a)  ANNOUNCEMENTS.  No  party or any  Affiliate  (as  defined  in the
Certificate of Designations),  officer or agent of the parties hereto shall make
any  announcement  concerning the transactions  contemplated  hereby without the
other parties' consent,  which consent may be withheld in their sole discretion;
provided,  however, that any party or such Affiliate,  officer or agent may make
any  announcements  required  by  applicable  law so  long  as the  text of such
announcement  shall have been provided to the parties hereto prior to the making
of such announcement.  The parties agree to consult with each other with respect
to announcements concerning the transactions contemplated hereby.

          (b)  SECURITIES.  The Issuer hereby  covenants that from and after the
date hereof and so long as the Purchaser owns any Securities, the Issuer shall:

          (i)  EXCHANGE OF  CERTIFICATES.  Upon  surrender  by the holder of any
certificates  representing  Securities  (or  securities  issued  upon  exchange,
conversion or exercise  thereof) for exchange or reissuance at the office of the
Issuer,  cause to be  issued  in  exchange  therefor  new  certificates  in such
denomination or  denominations as may be requested for the same aggregate number
of  Securities  (or  securities  issued upon  exchange,  conversion  or exercise
thereof)  represented by the  certificates so surrendered and registered as such
holder may request, subject to the provisions thereof.

          (ii)  REPLACEMENT  OF  CERTIFICATES.  Upon  receipt  by the  Issuer of
evidence reasonably satisfactory to it of loss, theft, destruction or mutilation
of any certificate  evidencing any of the Securities (or securities  issued upon
exchange,  conversion  or  exercise  thereof),  and (in case of  loss,  theft or
destruction) of indemnity  reasonably  satisfactory to the Issuer,  and upon the
surrender and cancellation of such certificate,  if mutilated,  the Issuer shall
make and deliver in lieu of such certificate a new certificate for the number of
Securities (or securities issued upon exchange, conversion or exercise thereof),
as the case may be,  evidenced  by such lost,  stolen,  destroyed  or  mutilated
certificate  which remains  outstanding.  The  Purchaser's  (which term does not
include any successors or assigns of the Purchaser) agreement of indemnity shall
constitute indemnity satisfactory to the Issuer for the purposes of this Section
6.01(b) without the need of any further surety or bond.

                                       16
<PAGE>

          (iii) GOVERNMENT AND OTHER  APPROVALS.  Promptly  prepare,  submit and
file with all public and governmental  authorities,  all applications,  notices,
registrations,  certificates,  statements and such other information,  documents
and instruments as may be required  pursuant to any federal,  state or local law
or rule or regulation of the National Association of Securities Dealers, Inc. or
any securities exchange, in connection with the consummation of the transactions
contemplated by this Agreement,  including the effect of any dividends, exchange
or conversion rights,  anti-dilution provisions or Board control contemplated by
the terms of the  Securities  or other  securities  of the  Issuer  which may be
acquired by the Purchaser  pursuant to this Agreement.  The Issuer shall use its
best efforts to obtain any necessary consents or approvals from any authority in
connection  with  the  consummation  of the  transactions  contemplated  by this
Agreement, including the effect of any dividends, exchange or conversion rights,
anti-dilution  provisions  or Board  control  contemplated  by the  terms of the
Securities.

          (c) ACCESS AND CONFIDENTIALITY.  Prior to the Closing Date, the Issuer
shall (and shall cause each of its Subsidiaries to) afford the Purchaser and its
representatives   reasonable   access  during  normal   business  hours  to  its
properties,  books,  contracts  and records and  personnel  and advisors and the
Issuer shall (and shall cause each of the  Subsidiaries  to) furnish promptly to
the Purchaser all information  concerning its business  properties and personnel
as the Purchaser or its representatives  may reasonably  request,  provided that
any review will be conducted in a way that will not interfere  unreasonably with
the conduct of the Issuer's business.

          (d)  REPORTS  TO  HOLDERS.  At all  times,  upon  the  request  of the
Purchaser so long as the Purchaser owns any Securities,  the Issuer shall supply
to the  Purchaser  such  financial  and other  information  as the Purchaser may
reasonably  determine to be necessary  in order to permit  compliance  with Rule
144A in connection with a resale or a proposed resale of any of the Securities.

          (e)  RESERVATION  OF SERIES E PREFERRED  STOCK.  Issuer  shall use its
reasonable  best  efforts  within one year after the  Closing  Date to amend its
Charter to increase the number of  authorized  shares of the Issuer's  preferred
stock and amend the  Certificate  of  Designations  in order to provide  for the
reservation of, and the Issuer hereby agrees to reserve,  a sufficient number of
authorized  but unissued  shares of Series E Preferred  Stock to provide for the
payment of all  dividends  that may  accrue on the shares of Series E  Preferred
Stock (including the Preferred  Stock) then outstanding in additional  shares of
Series E Preferred Stock.


                                   ARTICLE VII

                                  MISCELLANEOUS


          SECTION 7.01. NOTICES. All notices,  requests and other communications
to any party  hereunder  shall be in writing  (including  telecopier  or similar
writing) and shall be given to such party by  certified  first class mail at its
address with a return receipt requested, by Federal Express or similar overnight


                                       17
<PAGE>

mail  service  with  signature  required  for  receipt,  or by  telecopy  at the
telecopier  number set forth below or such other address or telecopier number as
such  party may  hereinafter  specify in  writing  for the  purpose to the party
giving such notice.  Each such notice,  request or other  communication shall be
effective  (i) if given by telecopy,  when such telecopy is  transmitted  to the
telecopy  number  specified  in  this  Section  and the  appropriate  electronic
confirmation  is received  and a copy of such notice is sent by  overnight  mail
service  or (ii) if given by mail or  overnight  courier,  72 hours  after  such
communication  is  deposited  in the mails with first class  postage  prepaid or
given to overnight courier service, addressed as aforesaid.

                  Issuer:      KMC Telecom Holdings, Inc.
                               1545 Route 206, Suite 300
                               Bedminster NJ 07921
                               Attn: James D. Grenfell
                                     Chief Financial Officer
                               Fax: (908) 719-8776

                  Purchaser:   First Union Investors, Inc.
                               1 First Union Center,
                               5th Floor
                               301 South College
                               Charlotte, NC  28288
                               Attn: L. Watts Hamrick, III
                               Fax:  (704) 374-6711


          SECTION 7.02. NO WAIVERS. No failure or delay on the part of any party
in exercising any right, power or privilege  hereunder shall operate as a waiver
thereof,  nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies herein provided shall be cumulative and not exclusive of
any rights or remedies provided by law.

          SECTION  7.03.  SUCCESSORS  AND ASSIGNS.  The Purchaser may assign its
rights  hereunder  without the consent of the Issuer to any transferee of any of
the  Securities.  Otherwise,  no party to this  Agreement  may assign any of its
rights or  obligations  hereunder  to any person  except with the prior  written
consent of the other  parties  hereto  (which  consent  may not be  unreasonably
withheld). This Agreement shall be binding upon the Issuer and the Purchaser and
their respective successors and assigns.

          SECTION 7.04.  NEW YORK LAW. This  Agreement  shall be governed by the
laws of the State of New York.

          SECTION  7.05.  COUNTERPARTS;  EFFECTIVENESS.  This  Agreement  may be
executed in any number of  counterparts  each of which shall be an original with
the same  effect as if the  signatures  thereto  and  hereto  were upon the same
instrument.  This Agreement shall become  effective when each party hereto shall
have received a counterpart hereof signed by the other hereto.

                                       18
<PAGE>

          SECTION 7.06. ENTIRE AGREEMENT. This Agreement, the Warrant Agreement,
the Warrant  Registration  Rights  Agreement,  the Preferred Stock  Registration
Rights  Agreement,  Amendment  No. 5, the fee letters and the other side letters
being  executed and  delivered  concurrently  with the execution and delivery of
this   Agreement,   the   Certificates  of  Amendment  and  the  Certificate  of
Designations  constitute the entire  agreement and  understanding of the parties
hereto in respect of the subject matter contained herein and therein,  and there
are  no  restrictions,  promises,  representations,  warranties,  covenants,  or
undertakings  with  respect  to the  subject  matter  hereof,  other  than those
expressly  set forth or referred to herein or therein.  This  Agreement  and the
documents  referred to in the preceding  sentence supersede all prior agreements
and understandings between the parties hereto with respect to the subject matter
hereof.

          SECTION 7.07. EXPENSES.  Whether or not the transactions  contemplated
in this Agreement  shall be  consummated,  the Issuer shall pay the  Purchaser's
reasonable  out-of-pocket  expenses  on demand  arising in  connection  with the
execution and delivery of this  Agreement,  the Warrant  Agreement,  the Warrant
Registration   Rights  Agreement,   the  Preferred  Stock  Registration   Rights
Agreement, Amendment No. 5, the Certificates of Amendment and the Certificate of
Designation (collectively,  the "Transaction Documents") and the purchase of the
Securities,  including, without limitation: (i) the reasonable fees and expenses
of counsel to the Purchaser in connection  with the  preparation and negotiation
of  the  Transaction   Documents  and  the   consummation  of  the  transactions
contemplated  therein,  and  (ii)  costs  and  expenses,   including  reasonable
attorneys  fees and expenses  and the fees and expenses of any other  special or
financial advisors,  incurred in connection with any bankruptcy or insolvency of
the Issuer or in  connection  with any  workout or  restructuring  of any of the
transactions  contemplated in the Transaction Documents.  The obligations of the
Issuer  under  this  Section  7.07  shall  survive  any  transfer  of any of the
Securities by the Purchaser or any subsequent holder thereof.


                                       19
<PAGE>

          IN WITNESS WHEREOF,  the parties have caused this Agreement to be duly
executed, as of the day and year first above written.


                                       KMC Telecom Holdings, Inc


                                       By:   /s/ James D. Grenfell
                                          --------------------------------------
                                          Name:   James D. Grenfell
                                          Title:  Chief Financial Officer



                                       First Union Investors, Inc.


                                       By:   /s/ Pearce Landry
                                          --------------------------------------
                                          Name:  Pearce A. Landry
                                          Title: Vice President



                                       20
<PAGE>

                                    EXHIBIT A

                 Form of Certificate of Amendment to Certificate
                  of Designations of Series A Preferred Stock
























                                      A-1

<PAGE>

                                    EXHIBIT B

                 Form of Certificate of Amendment to Certificate
                  of Designations of Series C Preferred Stock

























                                      B-1

<PAGE>

                                    EXHIBIT C

                 Form of Certificate of Amendment to Certificate
                  of Designations of Series D Preferred Stock

























                                      C-1

<PAGE>

                                    EXHIBIT D

                 Form of Certificate of Amendment to Certificate
                  of Designations of Series E Preferred Stock

























                                      D-1

<PAGE>

                                    EXHIBIT E

                 Form of Certificate of Amendment to Certificate
                  of Designations of Series F Preferred Stock

























                                      E-1

<PAGE>

                                  Schedule 3.01

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


                                  Schedule 3.02

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


                                  Schedule 3.08

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


                                  Schedule 3.09

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

                                  Schedule 3.10

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


                                  Schedule 3.14

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


                                  Schedule 3.17

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


<PAGE>


                                  SCHEDULE 3.01

(A)  SUBSIDIARIES:
     -------------

     KMC Telecom Inc.
     KMC Telecom II, Inc.
     KMC Telecom III Holdings, Inc.
     KMC Telecom of Virginia, Inc. (wholly owned subsidiary of KMC Telecom Inc.)
     KMC Telecom Leasing I LLC (wholly owned subsidiary of KMC Telecom
     KMC Telecom Leasing II LLC (wholly owned subsidiary of KMC Telecom II,
     Inc.)
     KMC Telecom III, Inc. (wholly owned subsidiary of KMC Telecom  Holdings
     III, Inc.)
     KMC Telecom Leasing III LLC (wholly owned subsidiary of KMC Telecom III,
     Inc.)

(B)  LIENS, SECURITY INTERESTS, CHARGES, ENCUMBRANCES ON CAPITAL STOCK OF
     SUBSIDIARIES
     --------------------------------------------------------------------

     (1)  Pledge  Agreement  dated  December 22, 1998 by Issuer in favor of AT&T
          Commercial Finance  Corporation,  as Collateral Agent, with respect to
          the Capital Stock of KMC Telecom Inc. and KMC Telecom II, Inc.

     (2)  Pledge  Agreement dated December 22, 1998 by KMC Telecom Inc. in favor
          of AT&T Commercial  Finance  Corporation,  as Collateral  Agent,  with
          respect to one  hundred  percent  (100%) of the  Capital  Stock of KMC
          Telecom  of  Virginia,  Inc.  and one  hundred  percent  (100%) of the
          membership interests of KMC Telecom Leasing I LLC.

     (3)  Pledge  Agreement  dated  December 22, 1998 by KMC Telecom II, Inc. in
          favor of AT&T Commercial  Finance  Corporation,  as Collateral  Agent,
          with respect to one hundred percent (100%) of the membership interests
          of KMC Telecom Leasing II LLC.

     (4)  Pledge  Agreement  dated February 4, 1999 by KMC Telecom III Holdings,
          Inc.  in favor of the  Collateral  Agent (as  defined  therein),  with
          respect to one  hundred  percent  (100%) of the  Capital  Stock of KMC
          Telecom III, Inc.

     (5)  Pledge  Agreement  dated  February 4, 1999 by KMC Telecom III, Inc. in
          favor the Collateral Agent (as defined  therein),  with respect to one
          hundred  percent  (100%) of the  membership  interests  of KMC Telecom
          Leasing III LLC.

<PAGE>



                                  SCHEDULE 3.02
                                  -------------

(A)      HOLDERS OF COMMON STOCK
         -----------------------


         HOLDER                                           CURRENT SHARES
         ------                                           --------------

         Harold N. Kamine and family trusts                   573,835
         KMC Telecommunications L.P.                           40,000
         AT&T Credit Corporation                            203,288.5
         First Union National Bank                            6,917.5
         Nassau Capital Partners L.P.                          13,835
         D'Amico Family Partners, L.P.                         14,800


(B)  CONVERTIBLE SECURITIES

     (1)  Series A Preferred Stock is convertible into Common Stock.

     (2)  Series C Preferred Stock is convertible into Common Stock.

     (3)  Series F Preferred Stock is convertible into Series E Preferred Stock.



(C)  SUBSCRIPTION, OPTION, WARRANT RIGHTS

     (1)  Warrants  dated as of October  31,  1997  issued to  General  Electric
          Capital Corporation  ("GECC") currently  exercisable for 10,000 shares
          of Common Stock. (the "GECC WARRANTS")

     (2)  Warrants issued in connection with the Issuer's  January 29, 1998 High
          Yield Debt  Offering  exercisable  for 110,385  shares of Common Stock
          (the "HIGH YIELD WARRANTS")

     (3)  Options to  purchase  up to  262,500  shares of Common  Stock  granted
          pursuant to the Issuer's  1998 Stock  Purchase and Option Plan for Key
          Employees of KMC Telecom Holdings, Inc. and Affiliates.

     (4)  Warrants  issued  pursuant  to  the  Warrant  Agreement,  dated  as of
          February  4, 1999,  between the Issuer,  Newcourt  Commercial  Finance
          Corporation   ("Newcourt"),   Lucent   Technologies  Inc.   ("Lucent")
          (together, the "Purchasers"), and The Chase Manhattan Bank, as Warrant
          Agent,  exercisable for 18,226.76 shares of Common Stock, and 6,432.86
          shares of Common Stock, respectively (the "SERIES E & F WARRANTS").

<PAGE>

(D)  REPURCHASE RIGHTS, PUTS, VOTING RIGHTS, RIGHTS OF FIRST REFUSAL

     (1)  Amended and Restated Stockholders  Agreement,  dated as of October 31,
          1997 among Issuer,  Nassau Capital Partners L.P. ("Nassau  Capital") ,
          NAS  Partners  I,  L.L.C.  ("NAS"),  Harold  N.  Kamine  ("HNK"),  KMC
          Telecommunications LP, AT&T Credit Corporation, CoreStates Bank, N.A.,
          General Electric Capital Corporation ("GECC") and CoreStates Holdings,
          Inc., as amended (the "STOCKHOLDERS AGREEMENT") contains:

          (i)      put rights;
          (ii)     agreements as to voting;
          (iii)    rights of first refusal;
          (iv)     registration rights; and
          (v)      preemptive and/or anti-dilutive rights.

     (2)  The GECC Warrant contains preemptive and/or anti-dilutive rights.

     (3)  Amended and Restated Note Purchase and Investment  Agreement  dated as
          of October 22, 1996 by and among KMC Telecom Inc., Nassau Capital, NAS
          and HNK, as amended  through the Amendment  and  Assignment of Amended
          and  Restated  Note  Purchase  and  Investment  Agreement  dated as of
          September 22, 1997 by and among KMC Telecom Inc., Nassau Capital, NAS,
          HNK and the Issuer, as amended (the "Investment  Agreement")  contains
          preemptive and/or anti-dilutive rights.

(4) The High Yield Warrants contain preemptive and/or  anti-dilutive  rights and
registration rights.

     (5)  The  Warrant  Agreement,  dated as of January  29,  1998,  between the
          Issuer and The Chase Manhattan Bank, as Warrant Agent,  and applicable
          to the High  Yield  Warrants  (the  "High  Yield  Warrant  Agreement")
          contains certain anti-dilutive rights.

     (6)  The Warrant  Registration  Rights  Agreement,  dated as of January 26,
          1998,  between the Issuer and Morgan  Stanley & Co.  Incorporated  and
          applicable to the High Yield Warrants contains registration rights.

     (7)  The  Warrant  Agreement,  dated as of  February  4, 1999,  between the
          Issuer, Newcourt Commercial Finance Corporation  ("Newcourt"),  Lucent
          Technologies Inc.  ("Lucent")  (together,  the "Purchasers"),  and The
          Chase Manhattan Bank, as Warrant Agent, and applicable to the Series E
          & F Warrants (the "Series E & F Warrant  Agreement")  contains certain
          anti-dilutive rights.

     (8)  The Warrant  Registration  Rights  Agreement,  dated as of February 4,
          1999, between the Issuer,  Newcourt,  and Lucent and applicable to the
          Series E & F Warrants contains registration rights.

     (9)  The Series A Preferred Certificate of Designations contains conversion
          rights, preemptive and/or anti-dilutive rights and voting rights.

     (10) The Series C Preferred Certificate of Designations contains conversion
          rights,   preemptive  and/or  anti-dilutive   rights,  voting  rights,
          redemption rights.

     (11) The Series E Preferred Certificate of Designations contains conversion
          rights,   preemptive  and/or  anti-dilutive   rights,  voting  rights,
          redemption rights.

     (12) The Series F Preferred Certificate of Designations contains conversion
          rights,   preemptive  and/or  anti-dilutive   rights,  voting  rights,
          redemption rights.

     (13) The Issuer's Amended and Restated Certificate of Incorporation.

<PAGE>



                                  SCHEDULE 3.08
                                  -------------


(A)      COMPLIANCE WITH LAWS
         --------------------

         NO EXCEPTIONS.


<PAGE>

                                  SCHEDULE 3.09
                                  -------------

(A)  LITIGATION

     I-NET

     By letter dated August 29, 1997, KMC Telecom Inc. (the "Company")  notified
     I-Net,  Inc.  ("I-NET") that the Company  considered I-NET to be in default
     under a Master  Telecommunications  System  Rollout  Agreement  dated as of
     October 1, 1996 (the "I-NET Agreement"), pursuant to which I-NET had agreed
     to manage  construction  of  telephone  systems  for the Company in several
     cities,  including the preparation of design plans and  specifications  for
     each system.  The Company  considered I-NET to be in default 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.  By letter  dated
     October 27, 1997, I-NET demanded payment of all amounts it alleged were due
     under the I-NET  Agreement and an alleged  related  agreement  (aggregating
     $4.1  million) and stated that it would invoke the  arbitration  provisions
     under the I-NET  Agreement if the parties  could not agree as to the amount
     due and payment  terms on or before  November  27,  1997.  By letter  dated
     December 1, 1997,  I-NET  extended its  deadline for reaching  agreement to
     December 15, 1997.  Although  the Company and I-NET  conducted  discussions
     they were  unable to reach an  agreement  and 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  under way. 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.

     U S WEST Communications, Inc.

     In May  1997,  KMC  Telecom  Inc.  ("KMC")  and U S WEST  entered  into  an
     agreement to interconnect  their telephone systems so that KMC could supply
     local  telephone  service to customers in selected areas of Minnesota.  KMC
     and U S WEST submitted  their agreement to the Minnesota  Public  Utilities
     Commission ("PUC") for approval. As a condition of approving the agreement,
     the Public Utilities  Commission required that the agreement be modified in
     three ways: (1) elimination of a provision stating that a customer that was
     in arrears on payment to one company could not retain the same phone number
     if it switched its service to another company;  (2) addition of a provision
     requiring U S WEST to get permission  from the PUC before  terminating  the
     interconnection  with KMC; and (3) addition of a provision  specifying that
     KMC must give a ten day notice to its customers prior to terminating  their
     service.  Using the procedure required under federal law, U S WEST appealed
     the PUC's decision by filing a lawsuit in federal district

<PAGE>

                                  SCHEDULE 3.09
                                  -------------
                                   (CONTINUED)


     court in Minneapolis, Minnesota, naming both the PUC and KMC as defendants.
     KMC is  merely a  nominal  defendant  in this  action  and has not  taken a
     position  on  any of the  issues  on  appeal,  and  it is  local  counsel's
     understanding   that  KMC  believes  that  the  ultimate  outcome  of  this
     litigation  will  not  have a  significant  effect  on  KMC's  business  in
     Minnesota.

     MFS Communications Company

     KMC Telecom Inc.'s ("KMC") interconnection agreement with U S WEST is based
     upon U S WEST's  virtually  identical  interconnection  agreement  with MFS
     Communications  Company ("MFS"; now owned by MCI WorldCom),  which U S WEST
     has  appealed to the federal  district  court in  Minneapolis  for judicial
     review in a parallel lawsuit.  KMC's agreement provides that any changes in
     MFS' agreement necessitated by the outcome of the MFS appeal may need to be
     made  to the KMC  agreement.  U S WEST  asserts  in its  appeal  of the MFS
     agreement that the Minnesota Public Utilities Commission erred in approving
     contract provisions  allegedly violating the  Telecommunications  Act that:
     (1) set an interim rate for purchase of U S WEST unbundled loops; (2) set a
     rate for transport and  termination  of local  exchange  telecommunications
     traffic;  (3)  establish  a method  for cost  recovery  of  interim  number
     portability  services;  (4) compel U S WEST to recombine  unbundled network
     elements   for   competitor   purchase;   (5)  allow  a  single   point  of
     interconnection  between carriers; and (6) set a discount for purchase of U
     S WEST wholesale  services.  KMC cannot quantify at this time the potential
     effect of a successful U S WEST  challenge  to MFS'  agreement.  Should U S
     WEST prevail in its lawsuit against MFS, KMC may be compelled to modify its
     own  agreement  with U S WEST  and,  as a  result,  pay  more  for U S WEST
     interconnection  and services,  which could have an adverse effect on KMC's
     operations in Minnesota.

     Alabama Directional Boring, Inc.

     On May 1, 1998,  the Company  received a Complaint  in ALABAMA  DIRECTIONAL
     BORING,  INC. V. KMC TELECOM INC.  (Madison  County,  Alabama) in which the
     plaintiff  alleged that KMC owes  $225,000  pursuant to a contract with the
     plaintiff to provide  directional  boring for the placement of  underground
     fiber optic cable.  Plaintiff also seeks punitive damages in an unspecified
     sum.  KMC has  served an Answer and the  parties  are  engaged in  document
     discovery.  On January 5, 1999, the Court issued a Scheduling and Mediation
     Order,  setting a trial date of August 16, 1999 and  requiring  non-binding
     mediation to occur prior to that date.  Given that  discovery  has not been
     completed,  we are unable to express an opinion as to the ultimate  outcome
     of this lawsuit.



<PAGE>



                                  SCHEDULE 3.09
                                  -------------
                                   (CONTINUED)

     Business Software Alliance

     On March 22, 1999 and April 5, 1999,  the  Company  received  letters  (the
     "Letters") from counsel for Business Software Alliance (the "BSA") alleging
     possible  instances of illegal  duplication of certain software  companies'
     proprietary  software  products and requesting that the Company conduct its
     own company-wide  investigation,  including an audit of the software on all
     of the  Company's  computers at all of its locations and proofs of purchase
     for that software.  By letters dated April 12, 1999 and April 26, 1999, the
     Company   advised   counsel  for  the  BSA  that  it  was  conducting  such
     investigation  and audit and  would  respond  in due  course.  The  Letters
     indicate  that 17 U.S.C.  Section  504  allows  the  recovery  of actual or
     statutory  damages;  that in the case of willful  infringement  a court has
     discretion to award statutory  damages up to $100,000 for each  copyrighted
     product that has been infringed;  and that attorneys' fees may be recovered
     by the  prevailing  party.  Because  the Company  continues  to conduct its
     investigation and audit, it is not in a position to determine the amount of
     liability to which it may be subject.

     Industry Lawsuits

     There are a number of  lawsuits  related to the  Telecommunications  Act of
     1996, decisions of the FCC related thereto and rules and regulations issued
     thereunder which may affect the rights,  obligations and business of ILECs,
     CLECs and other participants in the telecommunications industry in general,
     including the Company.



<PAGE>



                                  SCHEDULE 3.10
                                  -------------

(A)  LIENS ON PROPERTY

     (1)  Pursuant to a Loan and Security  Agreement,  dated  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
          (collectively,  the  "Borrowers"),  the Lenders (as defined  therein),
          First Union  National  Bank,  as Agent,  and AT&T  Commercial  Finance
          Corporation,   as  Collateral  Agent  (the  "Newcourt  Facility")  the
          Borrowers  have granted to AT&T  Commercial  Finance  Corporation,  as
          Collateral Agent, a right of setoff against and a continuing  security
          in and to all of their  respective  tangible and  intangible  personal
          property, fixtures and real property leasehold and easement interests,
          whether  currently owned or acquired after December 22, 1998,  subject
          to certain exceptions.

     (2)  Pursuant  to a Loan and  Security  Agreement,  dated as of February 4,
          1999,  among KMC Telecom  III,  Inc.,  KMC Telecom  Leasing  III,  LLC
          (collectively,  the  "Borrowers"),  the Lenders (as defined  therein),
          Lucent  Technologies,  Inc., as Agent,  and the  Collateral  Agent (as
          defined therein) (the "Lucent  Facility"),  the Borrowers have granted
          to the  Collateral  Agent  (as  defined  therein),  a right of  setoff
          against and a  continuing  security in and to all of their  respective
          tangible and intangible personal property,  fixtures and real property
          leasehold and easement interests,  whether currently owned or acquired
          after February 4, 1999, subject to certain exceptions.

<PAGE>

                                  SCHEDULE 3.14
                                  -------------


(A)  ENVIRONMENTAL MATTERS

     NO EXCEPTIONS.


<PAGE>

                                  SCHEDULE 3.17
                                  -------------

(A)  ENCUMBRANCES AND RESTRICTIONS

     (1)  The Newcourt Facility.

     (2)  Guaranty dated December 22, 1998,  executed by Issuer in favor of AT&T
          Commercial  Finance  Corporation,  as Collateral Agent pursuant to the
          Newcourt Facility.

     (3)  The Lucent Facility.

     (4)  Guaranty dated February 4, 1999, executed by KMC Telecom III Holdings,
          Inc. in favor of the Collateral Agent (as defined), in connection with
          the Lucent Facility.

     (5)  Series A Preferred Certificate of Designations.

     (6)  Series C Preferred Certificate of Designations.

     (7)  Series E Preferred Certificate of Designations.

     (8)  Series F Preferred Certificate of Designations.


(B)  OUTSTANDING INDEBTEDNESS

     (1)  The Newcourt Facility.

     (2)  The Lucent Facility.

     (3)  Indebtedness  pursuant to the  Issuer's  January  1998 High Yield Debt
          Offering.

     (4)  Indebtedness  pursuant to the  Issuer's  February 4, 1999 Series E & F
          Senior,  Redeemable,  Exchangeable  PIK  Preferred  Stock and  Warrant
          transaction.

     (5)  Guaranty dated  December 22, 1998,  executed by the Issuer in favor of
          AT&T Commercial Finance Corporation, as Collateral Agent in connection
          with the Newcourt Facility.

     (5)  Guaranty  dated  February 4, 1999,  executed by the Issuer in favor of
          the  Collateral  Agent (as  defined),  in  connection  with the Lucent
          Facility.

     (6)  Guaranty dated February 4, 1999, executed by KMC Telecom III Holdings,
          Inc. in favor of the Collateral Agent (as defined), in connection with
          the Lucent Facility.


<PAGE>



                                  SCHEDULE 3.17
                                  -------------
                                   (CONTINUED)



(C)  AFFILIATE TRANSACTIONS

     (1)  Those   transactions  set  forth  in  the  section  entitled  "Certain
          Relationships and Related Transactions" to the Prospectus contained in
          that certain Amendment No. 2 to the Registration Statement on Form S-4
          of KMC Telecom Holdings, Inc., Registration No. 333-50475,  filed with
          the Securities and Exchange Commission on July 10,1998.

     (2)  The  Issuer  reimbursed  certain  affiliated   companies  for  certain
          administrative  services  provided to it by such affiliated  companies
          during 1998, and may continue to do so in future years.

     (3)  The Board of Directors has approved, and an agreement in principal has
          been reached, subject to finalization,  by which the Issuer has agreed
          to employ Harold N. Kamine as its Chairman of the Board at a salary of
          $450,000 per annum for a period of 3 years.

     (4)  The Board of Directors has approved, and an agreement in principal has
          been  reached,  subject  to  finalization,  to enter  into a  Services
          Agreement between the Issuer and KMC Services LLC, dated as of January
          1, 1999.

     (5)  Letter  Agreement dated November 5, 1998 between the Issuer and Kamine
          Aviation LLC.

     (6)  Pursuant  to an  agreement  among the  Issuer,  Nassau  and  Harold N.
          Kamine,  for 1998 Nassau received certain fees for financial  advisory
          services and as  compensation  for the Nassau  designees who served on
          the Issuer's Board of Directors.  The Board of Directors has approved,
          and  an  agreement  in  principal   has  been   reached,   subject  to
          finalization, to enter into a Financial Advisory Agreement pursuant to
          which  Nassau will be paid  $450,000 as a financial  advisory  fee for
          1999.

     (7)  Tax  Allocation  Agreement  dated as of  December  21,  1998 among the
          Issuer,  KMC  Telecom  Inc.,  KMC  Telecom  II,  Inc.,  KMC Telecom of
          Virginia,  Inc., KMC Telecom III, Inc., KMC Telecom Leasing I LLC, and
          KMC  Telecom  Leasing II LLC,  as amended  by  Amendment  No. 1 To Tax
          Allocation Agreement dated as of January 29, 1999.


<PAGE>


                                  SCHEDULE 3.17
                                  -------------
                                   (CONTINUED)


     (8)  Management  Agreement  dated as of December 18, 1998 among the Issuer,
          KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc.,
          KMC Telecom  Leasing I LLC, KMC Telecom II Leasing LLC and KMC Telecom
          III, Inc., as amended by Amendment No. 1 To Management Agreement dated
          as of January 29, 1999.