===============================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  ------------

                                    FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 1998

                                       OR

|_|      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
         OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from --------------- to ---------------


COMMISSION FILE NUMBER:  333-50475

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

           DELAWARE                                 22-3545325
(State or other jurisdiction               (I.R.S. Employer Identification No.)
of incorporation or organization)

                            1545 ROUTE 206, SUITE 300
                          BEDMINSTER, NEW JERSEY 07921
          (Address, including zip code, of principal executive offices)

                                 (908) 470-2100
              (Registrant's telephone number, including area code)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. [X ] Yes [ ] No

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the latest practicable date.

          CLASS                                 OUTSTANDING
          -----                                 -----------

    Common Stock, par value $0.01               837,876 shares,
    per share.                                  as of  November 10, 1998

===============================================================================


<PAGE>


                           KMC TELECOM HOLDINGS, INC.

                                      INDEX



PART I.       FINANCIAL INFORMATION                                     PAGE NO.
-----------------------------------                                     --------

ITEM 1.    Financial Statements

           Unaudited  Condensed   Consolidated   Balance  Sheets,
           December 31, 1997 and September 30, 1998 ........................  2

           Unaudited   Condensed   Consolidated   Statements   of
           Operations,  Three Months Ended September 30, 1997 and
           1998 and Nine Months Ended September 30, 1997 and 1998 ..........  3

           Unaudited  Condensed  Consolidated  Statements of Cash
           Flows, Nine Months Ended September 30, 1997 and 1998 ............  4

           Notes to Unaudited  Condensed  Consolidated  Financial
           Statements ......................................................  5

ITEM 2.    Management's  Discussion  and  Analysis  of  Financial
           Condition and Results of Operations .............................  9

ITEM 3.    Quantitative and Qualitative Disclosures About Market Risk....... 12


PART II.  OTHER INFORMATION
---------------------------

ITEM 1.    Legal Proceedings................................................ 13

ITEM 2.    Changes in Securities and Use of Proceeds........................ 13

ITEM 3.    Defaults Upon Senior Securities.................................. 13

ITEM 4.    Submission of Matters to a Vote of Security Holders.............. 13

ITEM 5.    Other Information................................................ 14

ITEM 6.    Exhibits and Reports on Form 8-K................................. 14

SIGNATURES.................................................................. 15


<PAGE>


                  PART I - FINANCIAL INFORMATION

                    KMC TELECOM HOLDINGS, INC.

         UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                          (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,      SEPTEMBER 30,
                                                                                        1997              1998
                                                                                   ---------------  ------------------
<S>                                                                                <C>              <C>
ASSETS
Current assets:
   Cash and cash equivalents....................................................    $      15,553    $         32,290
   Accounts receivable, net of allowance for doubtful accounts..................            1,318               5,259
   Prepaid expenses and other current assets....................................              489                 843
                                                                                   ---------------  ------------------
Total current assets............................................................           17,360              38,392
Investments held for future capital expenditures................................                -              90,000
Networks and equipment, net.....................................................           71,371             157,456
Intangible assets, net..........................................................            2,655               3,410
Deferred financing costs, net...................................................            4,196              14,833
Other assets....................................................................              361               4,000
                                                                                   ---------------  ------------------
                                                                                    $      95,943    $        308,091
                                                                                   ===============  ==================

LIABILITIES AND REDEEMABLE AND NONREDEEMABLE EQUITY
Current liabilities:
   Accounts payable.............................................................    $       5,513   $           2,860
   Accrued expenses.............................................................            8,128              10,868
   Due to affiliates............................................................               47                   -
                                                                                   ---------------  ------------------
Total current liabilities.......................................................           13,688              13,728
Notes payable...................................................................           51,277              40,476
Subordinated notes payable......................................................           10,000                   -
Senior discount notes payable...................................................                -             260,667
                                                                                   ---------------  ------------------
Total liabilities...............................................................           74,965             314,871
Redeemable equity:
  Redeemable  cumulative  convertible  preferred stock, par value $.01 per share
      498,800 shares authorized; shares issued and outstanding:
      Series A, 123,800 shares in 1997 and 1998.................................           18,879              27,928
      Series C, 150,000 shares in 1997 and 175,000 shares in 1998...............           14,667              20,540
      Series D, 25,000 shares in 1997 and 0 shares in 1998......................            2,379                   -
   Redeemable common stock, shares issued and outstanding: 132,773 in 1997 and
      224,041 in 1998...........................................................           11,187              21,954
   Redeemable common stock warrants.............................................              539                 642
                                                                                   ---------------  ------------------
Total redeemable equity.........................................................           47,651              71,064
                                                                                   ---------------  ------------------
Nonredeemable equity (deficiency):
   Common stock, par value  $.01 per share; 3,000,000 shares authorized,
      613,835 shares issued and outstanding.....................................               6                   6
   Additional paid-in capital...................................................          15,374              17,696
   Unearned compensation........................................................          (6,521)             (6,311)
   Accumulated deficit..........................................................         (35,532)            (89,235)
                                                                                   ---------------  ------------------
Total nonredeemable equity (deficiency).........................................         (26,673)            (77,844)
                                                                                   ---------------  ------------------
                                                                                    $     95,943     $       308,091
                                                                                   ===============  ==================
</TABLE>


                     See accompanying notes.


                                2
<PAGE>

                    KMC TELECOM HOLDINGS, INC.

    UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
         (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED                  NINE MONTHS ENDED
                                                                  SEPTEMBER 30,                      SEPTEMBER 30,
                                                        ----------------------------------  ---------------------------------
                                                             1997              1998              1997              1998
                                                        ----------------  ----------------  ----------------  ---------------
<S>                                                     <C>               <C>               <C>               <C>
Revenue..............................................    $       1,045     $       6,250    $        1,558     $     13,588
Operating expenses:
   Network operating costs...........................            2,501            10,658             3,564           24,577
   Selling, general and administrative...............            2,041             6,081             5,606           15,301
   Stock option compensation expense.................              508               398               640            6,594
   Depreciation and amortization.....................            1,361             3,142             1,647            5,198
                                                        ----------------  ----------------  ----------------  ---------------
      Total operating expenses.......................            6,411            20,279            11,457           51,670
                                                        ----------------  ----------------  ----------------  ---------------
Loss from operations.................................           (5,366)          (14,029)           (9,899)         (38,082)
Interest expense, net................................              449             6,077               926           15,621
                                                        ----------------  ----------------  ----------------  ---------------
Net loss.............................................    $      (5,815)    $      20,106)   $      (10,825)    $    (53,703)
Dividends and accretion on redeemable preferred stock             (947)           (4,117)           (2,581)         (14,157)
                                                        ----------------  ----------------  ----------------  ---------------
Net loss applicable to common shareholders...........    $      (6,762)    $     (24,223)   $      (13,406)    $    (67,860)
                                                        ================  ================  ================  ===============
Net loss per common share............................    $      (11.01)    $      (28.91)   $       (22.16)    $     (81.94)
                                                        ================  ================  ================  ===============
Weighted average number of common shares outstanding.          614,342           837,876           604,833          828,181
                                                        ================  ================  ================  ===============
</TABLE>



                     See accompanying notes.


                                3

<PAGE>

                    KMC TELECOM HOLDINGS, INC.

    UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                          (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                          NINE MONTHS ENDED
                                                                                            SEPTEMBER 30,
                                                                                   ---------------------------------
                                                                                        1997             1998
                                                                                   ---------------  ----------------
<S>                                                                                <C>              <C>
OPERATING ACTIVITIES
Net loss........................................................................   $     (10,825)   $      (53,703)
Adjustments to reconcile net loss to net cash used in operating activities:
   Depreciation and amortization................................................           1,647             5,198
   Non-cash interest expense....................................................              50            22,774
   Non-cash stock option compensation expense...................................             640             6,593
  Changes in assets and liabilities:
      Accounts receivable.......................................................            (472)           (3,941)
      Prepaid expenses and other current assets.................................            (249)             (354)
      Other assets..............................................................             (15)             (584)
      Accounts payable..........................................................          (2,564)           (2,653)
      Accrued expenses..........................................................            2,959            3,571
      Due to affiliates.........................................................             (59)              (47)
                                                                                   ---------------  ----------------
Net cash used in operating activities...........................................          (8,888)          (23,146)
                                                                                   ---------------  ----------------

INVESTING ACTIVITIES
Construction of networks and purchases of equipment.............................         (22,363)          (90,938)
Acquisitions of franchises, authorizations and related assets...................          (2,312)           (1,100)
Deposit on purchase of equipment................................................          (5,000)           (3,055)
Purchases of investments, net...................................................                -          (90,000)
                                                                                   ---------------  ----------------
Net cash used in investing activities...........................................         (29,675)         (185,093)
                                                                                   ---------------  ----------------

FINANCING ACTIVITIES
Proceeds from notes payable.....................................................          40,848                  -
Repayment of notes payable......................................................                -          (20,801)
Proceeds from issuance of common stock..........................................           9,301            10,000
Proceeds from issuance of senior discount notes and warrants, net of issuance
   costs of $13.6 million.......................................................                -          236,369
Dividends on preferred stock of subsidiary......................................                -             (592)
                                                                                   ---------------  ----------------
Net cash provided by financing activities.......................................          50,149           224,976
                                                                                   ---------------  ----------------

Net increase in cash and cash equivalents.......................................          11,586            16,737
Cash and cash equivalents, beginning of period..................................           1,487            15,553
                                                                                   ---------------  ----------------
Cash and cash equivalents, end of period........................................   $      13,073    $       32,290
                                                                                   ===============  ================


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of amounts capitalized...........    $         435    $        3,274
                                                                                   ===============  ================
</TABLE>

                     See accompanying notes.


                                4
<PAGE>

                           KMC TELECOM HOLDINGS, INC.

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 1998


1. BASIS OF PRESENTATION AND ORGANIZATION

     KMC Telecom  Holdings,  Inc.  ("KMC  Holdings") and its  subsidiaries,  KMC
Telecom Inc.  ("KMC  Telecom"),  KMC Telecom II, Inc. ("KMC Telecom II") and KMC
Telecom of Virginia,  Inc. are  collectively  referred to herein as the Company.
All significant  intercompany  accounts and transactions have been eliminated in
consolidation.

     The  unaudited  condensed   consolidated  financial  statements  have  been
prepared in accordance with generally accepted accounting principles for interim
financial  reporting.  Accordingly,  they do not include certain information and
note disclosures required by generally accepted accounting principles for annual
financial  reporting  and  should  be read in  conjunction  with  the  financial
statements and notes thereto of KMC Telecom  Holdings,  Inc. and Predecessors as
of and for the year ended December 31, 1997.

         The unaudited  interim  financial  statements  reflect all  adjustments
which management  considers  necessary for a fair presentation of the results of
operations for these periods.  The results of operations for the interim periods
are not necessarily indicative of the results for the full year.

         The balance  sheet of KMC Telecom  Holdings,  Inc. at December 31, 1997
was derived from the audited consolidated balance sheet at that date.

2. INVESTMENTS HELD FOR FUTURE CAPITAL EXPENDITURES

         The Company has  designated a portion of the  proceeds  from the Senior
Discount  Notes  offering (See Note 6) as  investments  held for future  capital
expenditures.  As of September  30, 1998,  the  Company's  investments  held for
future capital  expenditures  consisted of cash equivalents  (bank term deposits
and commercial  paper with maturities of less than 90 days) of $44.7 million and
debt  securities (US government  obligations  and commercial  bonds due within 1
year) of $45.3 million.  All debt securities have been designated by the Company
as   held-to-maturity.   Accordingly,   such  securities  are  recorded  in  the
accompanying  September  30, 1998  financial  statements  at amortized  cost. At
September 30, 1998, the carrying value of such  held-to-maturity debt securities
approximated their fair value.

3. NETWORKS AND EQUIPMENT

         Networks and equipment are comprised of the following (in thousands):

                                                 DECEMBER 31,     SEPTEMBER 30,
                                                     1997             1998
                                                 ------------     -------------
Fiber optic systems...........................   $    20,484        $  40,009
Telecommunications equipment..................        27,406           53,001
Furniture and fixtures and other..............         1,518            6,492
Leasehold improvements........................           792            1,011
Construction-in-progress......................        23,555           64,180
                                                 ------------     -------------
                                                      73,755          164,693
Less accumulated depreciation.................        (2,384)          (7,237)
                                                 ------------     -------------
                                                 $    71,371        $ 157,456
                                                 ============     =============


         Costs  capitalized  during the  development  of the Company's  networks
include amounts incurred related to network engineering, design and construction
and capitalized  interest.  Capitalized  interest related to the construction of
the networks for the three months ended  September 30, 1997 and 1998 amounted to
approximately  $103,000 and $1.5 million  respectively,  and for the nine months
ended  September  30,  1997 and  1998  amounted  to  $251,000  and $2.9  million
respectively.  For  the three months and nine months ended  September  30, 1998,
interest  expense is net of interest  income of $2.4  million and $7.4  million,
respectively.

                                       5
<PAGE>

4. INTANGIBLE ASSETS

     Intangible assets are comprised of the following (in thousands):

                                             DECEMBER 31,       SEPTEMBER 30,
                                                 1997               1998
                                            ----------------  -----------------
Franchise costs...........................   $       1,342     $        1,673
Authorizations and rights-of-ways.........           1,151              1,468
Building access agreements and other......             567              1,019
                                            ----------------  -----------------
                                                     3,060              4,160
Less accumulated amortization.............            (405)              (750)
                                            ----------------  -----------------
                                             $       2,655  $           3,410
                                            ================  =================

5. OTHER ASSETS

        At September 30, 1998, other assets include non-refundable  deposits for
the purchase of switching equipment aggregating $3,055,000.

6. SENIOR DISCOUNT NOTES

         On January  29,  1998,  KMC  Holdings  sold  460,800  units,  each unit
consisting of a 12 1/2% senior discount note with a principal amount at maturity
of $1,000 due 2008 (the  "Senior  Discount  Notes")  and one warrant to purchase
 .21785  shares of Common Stock of KMC Holdings at an exercise  price of $.01 per
share.  Interest  on the Senior  Discount  Notes will be payable in cash on each
February 15 and August 15, commencing August 15, 2003. The Senior Discount Notes
are  unsubordinated,  unsecured  indebtedness  of  KMC  Holdings.  However,  KMC
Holdings is a holding  company and the Senior Discount Notes will be effectively
subordinated to all existing and future  liabilities  (including trade payables)
of the Company's  subsidiaries.  The gross and net proceeds of the offering were
approximately $250.0 million and $236.4 million, respectively.  Upon the closing
of the  offering,  the Company  used the proceeds as follows:  $10.8  million to
repay all amounts borrowed by the Company's subsidiary, KMC Telecom II, under an
Amended and Restated Loan and Security  Agreement with AT&T  Commercial  Finance
Corporation ("AT&T Finance"); $10.1 million to repay all amounts borrowed by the
Company's  subsidiaries,  KMC Telecom and KMC Telecom II,  under a  subordinated
term loan from AT&T Finance  (including  $100,000 of accrued interest  thereon);
$5.0 million as a non-refundable  down payment for future purchases of switching
equipment;  and $592,000 to pay dividend  arrearages  on the Series A Cumulative
Convertible  Preferred Stock of KMC Telecom. The balance will be used to finance
the planned expansion and further  development of the Company's  networks and to
fund operating losses and for other general corporate purposes.  As of September
30,  1998,  $90 million of the  proceeds  have been  classified  as  non-current
assets, as such amounts have been designated for future capital expenditures.

         The Senior Discount Notes contain  covenants that,  among other things,
restrict the ability of KMC Holdings and its  subsidiaries  to incur  additional
indebtedness, create liens, engage in sale-leaseback transactions, pay dividends
or make  distributions  in respect of their capital stock,  make  investments or
certain other restricted payments,  sell assets,  redeem capital stock, issue or
sell  stock of  subsidiaries,  enter  into  transactions  with  stockholders  or
affiliates or, with respect to KMC Holdings,  effect a consolidation  or merger.
However,  these  limitations  are  subject  to a number  of  qualifications  and
exceptions.

         The  Senior  Discount  Notes  are   "applicable   high  yield  discount
obligations"  ("AHYDOs"),  as defined in the Internal  Revenue Code of 1986,  as
amended,  because the yield to maturity of such Senior  Discount  Notes exceeded
the  "applicable  federal  rate" in  effect at the time of their  issuance  (the
"AFR") plus five  percentage  points.  Under the rules  applicable to AHYDOs,  a
portion  of the  original  issue  discount  ("OID")  that  accrues on the Senior
Discount  Notes  will  not  be  deductible  by the  Company  at  any  time.  The
non-deductible portion of the OID will be an amount that bears the same ratio to
such OID as (i) the excess of the yield to maturity of the Senior Discount Notes
over the AFR plus six  percentage  points bears to (ii) the yield to maturity of
the Senior Discount Notes. To the extent that the non-deductible  portion of OID
would have been treated as a dividend if it had been distributed with respect to
the Company's  stock,  it generally  will be treated as a dividend to holders of
the Senior  Discount  Notes for purposes of the rules  relating to the dividends
received  deduction  applicable to corporate  holders.  Any remaining OID on the
Senior  Discount  Notes will not be  deductible by the Company until such OID is
paid.

                                       6
<PAGE>

         The warrants  may be exercised at any time during the period  beginning
on the date that is one year after the closing date of the Senior  Discount Note
offering and ending on January 31, 2008. Warrants that are not exercised by such
date will expire.  The warrants were recorded at their  aggregate  fair value of
$11 million.

         KMC  Telecom's  $70.0  million  senior line of credit with AT&T Finance
(the "AT&T Facility")  restricts the ability of KMC Telecom to pay dividends to,
or to pay principal or interest on loans from, KMC Holdings.  Such  restrictions
could  adversely  affect the  Company's  liquidity  and ability to meet its cash
requirements, including its ability to repay the Senior Discount Notes.

7. COMMITMENTS AND CONTINGENCIES

LITIGATION

         By letter dated  August 29,  1997,  KMC Telecom  notified  I-Net,  Inc.
("I-NET")  that KMC  Telecom  considered  I-NET to be in default  under a Master
Telecommunications  System  Rollout  Agreement  dated as of October 1, 1996 (the
"I-NET Agreement"), pursuant to which I-NET had agreed to manage construction of
telephone  systems for KMC Telecom in several cities,  including the preparation
of design plans and specifications for each system. KMC Telecom 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 a 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.

PURCHASE COMMITMENTS

         As of  September  30,  1998,  the Company has  outstanding  commitments
aggregating    approximately    $41.2   million    related   to   purchases   of
telecommunications equipment and fiber optic cable and its obligations under its
agreements with certain suppliers.

REDEMPTION RIGHTS

         Pursuant  to  a  stockholders  agreement,   certain  of  the  Company's
stockholders  and  warrantholders  have "put rights"  entitling them to have the
Company repurchase their preferred and common shares and redeemable common stock
warrants for the fair value of such securities if no Liquidity Event (defined as
(i) an initial  public  offering with gross  proceeds of at least $40.0 million,
(ii) the sale of  substantially  all of the stock or assets  of the  Company  or
(iii)  the  merger  or  consolidation  of the  Company  with  one or more  other
corporations)  has taken  place by the later of (x)  October  22, 2003 or (y) 90
days after the final  maturity of the Senior  Discount  Notes.  The  restrictive
covenants of the Senior Discount Notes limit the Company's ability to repurchase
such  securities.  All of the  securities  subject  to  such  "put  rights"  are
presented as redeemable equity in the accompanying balance sheets.

         The redeemable preferred stock,  redeemable common stock and redeemable
common  stock  warrants are being  accreted up to their fair market  values from
their  respective  issuance dates to their earliest  potential  redemption  date
(October 22, 2003). At September 30, 1998, the aggregate redemption value of the
redeemable  equity  was  approximately   $152  million,   reflecting  per  share
redemption amounts of $630 for the Series A Preferred Stock, $248 for the Series
C Preferred Stock and $130 for the redeemable common stock and redeemable common
stock warrants.


                                       7
<PAGE>
8. NET LOSS PER COMMON SHARE

         The following  table sets forth the  computation of net loss per common
share-basic (in thousands):

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED          NINE MONTHS ENDED
                                                    SEPTEMBER 30,                SEPTEMBER 30,
                                             ---------------------------  ---------------------------
                                                 1997           1998           1997           1998
                                             ------------  -------------  -------------  ------------
<S>                                          <C>           <C>            <C>            <C>
Numerator:
   Net loss...............................    $  (5,815)    $  (20,106)      $(10,825)     $(53,703)
   Dividends and accretion on redeemable
      preferred stock.....................         (947)        (4,117)        (2,581)      (14,157)
                                             ------------  -------------  -------------  ------------
   Numerator for net loss per common
      share - basic.......................    $  (6,762)    $  (24,223)      $(13,406)     $(67,860)
                                             ============  =============  =============  ============
Denominator:

Denominator for net loss per common share
   - weighted average number of common
   shares outstanding.....................      614,342        837,876        604,833       828,181
                                             ============  =============  =============  ============

Net loss per common share - basic.........    $  (11.01)    $   (28.91)      $ (22.16)     $ (81.94)
                                             ============  =============  =============  ============
</TABLE>

    Options and warrants to purchase an aggregate of 209,768 and 373,135  shares
of  common  stock  were   outstanding   as  of  September  30,  1997  and  1998,
respectively,  but a  computation  of diluted net loss per common  share has not
been presented, as the effect would be anti-dilutive.

9. STOCK OPTION GRANTS

    The Company was formed as a holding company in September 1997.  Prior to the
establishment  of the present holding company  structure,  during 1996 and 1997,
KMC Telecom (now the Company's principal  operating  subsidiary) granted options
to purchase  shares of its common stock,  par value $.01 per share ("KMC Telecom
Common Stock"), to employees pursuant to the KMC Telecom Stock Option Plan.

    In order to reflect  the  establishment  of the  Company's  holding  company
structure,  on June 26, 1998,  the Board of  Directors  of the Company  adopted,
effective upon stockholder  approval,  a new stock option plan, the KMC Holdings
Stock  Option Plan,  which  authorizes  the grant of options to purchase  Common
Stock of the  Company.  The KMC Holdings  Stock Option Plan was approved  by the
stockholders of the Company,  by unanimous  written consent,  effective July 15,
1998.  In  September  1998,  the Company  replaced  the options to purchase  KMC
Telecom Common Stock previously  granted under the KMC Telecom Stock Option Plan
with  options to  purchase  Common  Stock of the Company  granted  under the KMC
Holdings  Stock Option Plan and granted  options to additional  employees of the
Company under the KMC Holdings  Stock Option Plan.  The options for Common Stock
of the Company  granted  under the KMC  Holdings  Stock  Option Plan entitle the
recipients  to purchase an  aggregate  of 262,750  shares of Common Stock of the
Company at an average exercise price of $26.00 per share.

     For the three months ended September 30 1998, KMC Telecom  recorded charges
to stock  option  compensation  of $1.0 million  related to options  outstanding
under the KMC Telecom Stock Option Plan through the date of  termination of such
options. In connection with the issuance of options under the KMC Holdings Stock
Option  Plan and the  termination  of options  previously  issued  under the KMC
Telecom Stock Option Plan,  as described  above,  in September  1998 the Company
recorded a charge of $20.7 million to stock option compensation  expense,  while
KMC  Telecom  recorded a credit to stock  option  compensation  expense of $21.3
million.  This net credit of  approximately  $600,000,  when applied to the $1.0
million in charges to stock option compensation  recorded by KMC Telecom for the
three  months  ended  September  30, 1998,  reduced the  Company's  stock option
compensation  expense for the third  quarter to the  $398,000  reflected  in the
unaudited condensed  consolidated  statement of operations for the period. Based
upon the  provisions of the options  granted under the KMC Holdings Stock Option
Plan, the Company will continue to recognize non-cash  compensation expense over
the  vesting  period  of such  options,  with  future  charges/credits  to stock
compensation  expense reflecting future  increases/decreases  in the fair market
value of the Company's Common Stock.

                                       8
<PAGE>

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

     THIS FORM 10-Q CONTAINS FORWARD-LOOKING  STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES.  THE COMPANY'S ACTUAL RESULTS MAY DIFFER  SIGNIFICANTLY  FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING  STATEMENTS.  THE FOLLOWING  DISCUSSION
SHOULD  BE  READ  IN  CONJUNCTION  WITH  THE  UNAUDITED  CONDENSED  CONSOLIDATED
FINANCIAL  STATEMENTS,  INCLUDING THE NOTES THERETO,  INCLUDED ELSEWHERE IN THIS
FORM 10-Q.


RESULTS OF OPERATIONS

     As a result of the development  and rapid growth of the Company's  business
during the periods presented, the period-to-period  comparisons of the Company's
results of operations  are not  necessarily  meaningful and should not be relied
upon as an indication of future performance.

                THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
                      THREE MONTHS ENDED SEPTEMBER 30, 1997

         REVENUE. Revenue increased from $1.0 million for the three months ended
September  30, 1997 (the "1997  Third  Quarter")  to $6.3  million for the three
months ended  September  30, 1998 (the "1998 Third  Quarter").  This increase is
primarily  attributable  to the fact  that the  Company  had  eight  systems  in
commercial  operation  during the entire  1998 Third  Quarter,  as well as three
additional  systems which became  commercially  operational  during this period,
compared to only five  systems in  commercial  operation  during the entire 1997
Third Quarter,  with two additional  systems becoming  commercially  operational
during  such  period.  Revenue  for the 1997 and 1998  Third  Quarters  included
$700,000  and $4.2  million,  respectively,  of revenue  derived  from resale of
switched  services and an aggregate of $300,000 and $2.1 million,  respectively,
of revenue  derived  from  on-net  special  access,  private  line and  switched
services.

         NETWORK  OPERATING COSTS.  Network  operating costs increased from $2.5
million in the 1997 Third  Quarter to $10.7  million in the 1998 Third  Quarter.
This increase of approximately $8.2 million was due primarily to the increase in
the number of systems in commercial  operation in the 1998 Third Quarter and the
related  increases of $3.4 million in costs  associated  with  providing  resale
services,  $2.7  million in  personnel  costs,  $900,000 in  contracted  network
support costs, and $1.2 million in facilities, travel and other direct operating
costs.

         SELLING,  GENERAL AND  ADMINISTRATIVE  EXPENSES.  Selling,  general and
administrative  expenses  increased from $2.0 million for the 1997 Third Quarter
to $6.1 million for the 1998 Third Quarter.  This increase of approximately $4.1
million resulted primarily from increases of $2.3 million in personnel costs and
$500,000 in professional costs (consisting primarily of legal costs), as well as
increases in other marketing and general and  administrative  costs  aggregating
approximately $1.3 million.

         STOCK OPTION COMPENSATION EXPENSE. Stock option compensation expense, a
non-cash  charge,  decreased from $508,000 in the 1997 Third Quarter to $398,000
in the 1998 Third  Quarter.  This decrease  resulted  form a  combination  of an
increase in charges to stock option compensation  expense related to an increase
in the fair market value of the Company's  common stock and, to a lesser extent,
as a result of the greater  number of options  outstanding  during the 1998 Nine
Months,  which were partially offset by the effects of the  restructuring of the
Company's stock option plans, as discussed below.

         In  September  1998,  the Company  replaced the options to purchase KMC
Telecom Common Stock previously  granted under the KMC Telecom Stock Option Plan
with  options to  purchase  KMC  Holdings  Common  Stock  granted  under the KMC
Holdings  Stock Option Plan and granted  options to additional  employees of the
Company under the KMC Holdings  Stock Option Plan.  The options for Common Stock
of the Company  granted  under the KMC  Holdings  Stock  Option Plan entitle the
recipients to purchase an aggregate of 262,750  shares of the  Company's  Common
Stock at an average exercise price of $26.00 per share.


                                       9
<PAGE>

         For the three  months ended  September  30 1998,  KMC Telecom  recorded
charges  to  stock  option  compensation  of $1.0  million  related  to  options
outstanding  under  the KMC  Telecom  Stock  Option  Plan  through  the  date of
termination  of such options.  In connection  with the issuance of options under
the KMC Holdings  Stock Option Plan and the  termination  of options  previously
issued under the KMC Telecom  Stock Option Plan,  in September  1998 KMC Telecom
Holdings recorded a charge of $20.7 million to stock option compensation expense
while KMC  Telecom  recorded a credit to stock  option  compensation  expense of
$21.3 million.  This net credit of approximately  $600,000,  when applied to the
$1.0 million in charges to stock option compensation recorded by KMC Telecom for
the 1998 Third Quarter,  reduced the Company's stock option compensation expense
for the 1998 Third Quarter to $398,000. Based upon the provisions of the options
granted under the KMC Holdings  Stock Option Plan,  the Company will continue to
recognize non-cash compensation expense over the vesting period of such options,
with future  charges/credits  to stock  compensation  expense  reflecting future
increases/decreases in the fair market value of the Company's Common Stock.

         DEPRECIATION AND  AMORTIZATION.  Depreciation and amortization  expense
increased  from $1.4 million for the 1997 Third  Quarter to $3.1 million for the
1998 Third Quarter,  primarily as a result of  depreciation  expense  associated
with the greater  number of networks  commercially  operational  during the 1998
Third Quarter.

         INTEREST EXPENSE,  NET. Interest expense,  net, increased from $449,000
in the 1997  Third  Quarter  to $6.1  million  in the 1998  Third  Quarter.  The
increase  resulted  primarily  from the  issuance of the Senior  Discount  Notes
during  the first  quarter of 1998,  which  generated  interest  expense of $8.6
million in the 1998 Third  Quarter.  The increase was  partially  offset by $2.4
million of interest income earned on the investment of the unused portion of the
proceeds of the Senior Discount Note offering.  The Company capitalized interest
of $1.5 million related to network  construction  projects during the 1998 Third
Quarter, and $103,000 during the 1997 Third Quarter.

     NET LOSS.  For the  reasons  stated  above,  net loss  increased  from $5.8
million for the 1997 Third Quarter to $20.1 million for the 1998 Third Quarter.

                NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
                      NINE MONTHS ENDED SEPTEMBER 30, 1997

         REVENUE.  Revenue increased from $1.6 million for the nine months ended
September 30, 1997 (the "1997 Nine Months") to $13.6 million for the nine months
ended  September 30, 1998 (the "1998 Nine  Months").  This increase is primarily
attributable  to the fact that for the 1998 Nine  Months the  Company  had eight
systems in  commercial  operation  during the  entire  period,  as well as three
additional  systems  which became  commercially  operational  at various  points
during the period,  as compared to the 1997 Nine Months when the Company had one
system in  commercial  operation  during  the  entire  period, with six  systems
becoming commercially  operational at various points during the period.  Revenue
for the 1997  Nine  Months  and 1998  Nine  Months  included  $900,000  and $9.4
million,  respectively,  of revenue derived from resale of switched services and
an aggregate of $700,000 and $4.2 million, respectively, of revenue derived from
on-net special access, private line and switched services.

         NETWORK  OPERATING COSTS.  Network  operating costs increased from $3.6
million in the 1997 Nine Months to $24.6  million in the 1998 Nine Months.  This
increase of approximately $21.0 million was due primarily to the increase in the
number of  systems  in  commercial  operation  in the 1998 Nine  Months  and the
related  increases of $8.8 million in costs  associated  with  providing  resale
services,  $6.0  million in personnel  costs,  $1.3  million in  consulting  and
professional  services costs, $1.9 million in contracted  network support costs,
and $3.0 million in facilities, travel and other direct operating costs.

         SELLING,  GENERAL AND  ADMINISTRATIVE  EXPENSES.  Selling,  general and
administrative  expenses  increased from $5.6 million in the 1997 Nine Months to
$15.3  million in the 1998 Nine  Months.  This  increase of  approximately  $9.7
million resulted primarily from increases of $6.3 million in personnel costs and
$900,000 in professional costs (consisting  primarily of legal costs),  $800,000
in  travel,   as  well  as  increases  in  other   marketing   and  general  and
administrative costs aggregating approximately $1.7 million.

         STOCK OPTION COMPENSATION EXPENSE. Stock option compensation expense, a
non-cash charge, increased from $640,000 in the 1997 Nine Months to $6.6 million
in the 1998 Nine Months, primarily as a result of an increase in the fair market
value of the Company's common stock and, to a lesser extent,  as a result of the
greater number of options  outstanding  during the 1998 Nine Months,  which were
partially  offset by the  effect of the  restructuring  of the  Company's  stock
option plans, as discussed below.

                                       10
<PAGE>


         For the nine months  ended  September  30 1998,  KMC  Telecom  recorded
charges  to  stock  option  compensation  of $7.2  million  related  to  options
outstanding  under  the KMC  Telecom  Stock  Option  Plan  through  the  date of
termination  of such options.  In connection  with the issuance of options under
the KMC Holdings  Stock Option Plan and the  termination  of options  previously
issued under the KMC Telecom  Stock Option Plan,  in September  1998 KMC Telecom
Holdings recorded a charge of $20.7 million to stock option compensation expense
while KMC  Telecom  recorded a credit to stock  option  compensation  expense of
$21.3 million.  This net credit of approximately  $600,000,  when applied to the
$7.2 million in charges to stock option compensation recorded by KMC Telecom for
the 1998 Nine Months,  reduced the Company's stock option  compensation  expense
for the 1998 Nine Months to $6.6 million.

         DEPRECIATION AND  AMORTIZATION.  Depreciation and amortization  expense
increased  from $1.6  million for the 1997 Nine  Months to $5.2  million for the
1998 Nine Months,  primarily as a result of depreciation expense associated with
the greater  number of networks  commercially  operational  during the 1998 Nine
Months.

         INTEREST EXPENSE,  NET. Interest expense,  net, increased from $926,000
in the 1997 Nine Months to $15.6 million in the 1998 Nine Months.  This increase
resulted  primarily  from the issuance of the Senior  Discount  Notes during the
first quarter of 1998, which generated  interest expense of $22.2 million in the
1998 Nine Months,  as well as the increased  expense  attributable to the higher
level of  borrowings  under  the AT&T  Facility  in the 1998 Nine  Months.  This
increase was partially  offset by $7.4 million of interest  income earned on the
investment  of the unused  portion of the proceeds of the Senior  Discount  Note
offering during the 1998 Nine Months. The Company  capitalized  interest of $2.9
million  related to network  construction  projects during the 1998 Nine Months,
and $251,000 during the 1997 Nine Months.

     NET LOSS.  For the reasons  stated  above,  net loss  increased  from $10.8
million for the 1997 Nine Months to $53.7 million for the 1998 Nine Months.

LIQUIDITY AND CAPITAL RESOURCES

         The  Company has  incurred  significant  operating  and net losses as a
result of the  development  and operation of its networks.  The Company  expects
that such  losses  will  continue as the  Company  emphasizes  the  development,
construction and expansion of its networks and builds its customer base and that
cash provided by operations  will not be sufficient to fund the expansion of its
networks and service capabilities.

         Net cash provided by financing  activities  from  borrowings and equity
issuances  was $225.0  million for the 1998 Nine Months.  The Company's net cash
used in operating and investment activities was $208.2 million for the 1998 Nine
Months.

         The Company made capital expenditures of $90.9 million in the 1998 Nine
Months. These capital expenditures were financed from the proceeds of the Senior
Discount Note offering.  The Company currently plans to make additional  capital
expenditures  of  approximately  $40.0  million  during the  remainder  of 1998.
Continued  significant capital  expenditures are expected to be made thereafter.
The  majority  of  these  expenditures  are  expected  to be  made  for  network
construction  and the purchase of switches and related  equipment to  facilitate
the offering of the  Company's  services.  In addition,  the Company  expects to
continue to incur operating  losses while it expands its business and builds its
customer base.  Actual capital  expenditures and operating losses will depend on
numerous  factors,  including  the nature of future  expansion  and  acquisition
opportunities  and factors  beyond the  Company's  control,  including  economic
conditions,   competition,  regulatory  developments  and  the  availability  of
capital.

         At  September  30,  1998  the  Company  had   outstanding   commitments
aggregating  approximately  $41.2 million related to the purchase of fiber optic
cable and telecommunications equipment as well as engineering services.


                                       11
<PAGE>


         Under the AT&T  Facility,  the Company may borrow up to an aggregate of
$70.0 million for the construction of fiber optic telecommunications networks in
certain  markets,  subject to certain  conditions.  At September  30, 1998,  the
Company had $40.5 million of  indebtedness  outstanding  under the AT&T Facility
and had $29.5 million in borrowing  capacity  available under the AT&T Facility,
subject to certain  conditions.  On January 29, 1998,  the Company  completed an
offering of 460,800 units,  each unit  consisting of one 12 1/2% Senior Discount
Note due 2008  with a  principal  amount at  maturity  of  $1,000  (the  "Senior
Discount  Notes") and one warrant to purchase  .21785  shares of Common Stock of
the  Company at an  exercise  price of $.01 per share.  The net  proceeds to the
Company from the offering were approximately  $236.4 million.  The AT&T Facility
restricts the ability of KMC Telecom to pay dividends to, or to pay principal or
interest on loans from, KMC Holdings.  Such restrictions  could adversely affect
the Company's liquidity and ability to meet its cash requirements, including its
ability to repay the Senior Discount Notes.

         At  September  30, 1998 the Company had cash and cash  equivalents  and
marketable securities of approximately $122.3 million. The Company believes that
these  funds,  together  with  available  cash  and  borrowings  expected  to be
available under the AT&T Facility, will provide sufficient funds for the Company
to expand its  business  as  currently  planned  and to fund  certain  currently
anticipated expenses through the completion of its twelve existing networks, the
six new networks  currently under  construction  and expected to be completed by
the end of 1998, and the five  additional  networks  expected to be completed in
1999, and to fund its working capital  requirements  for 1999.  Thereafter,  the
Company  will  require  additional  financing.  However,  in the event  that the
Company's plans change, the assumptions upon which the Company's plans are based
prove  inaccurate,  the Company  expands or accelerates its business plan or the
Company determines to consummate additional acquisitions,  the foregoing sources
of funds may prove to be  insufficient  to complete all such  networks,  and the
Company may be required to seek additional financing.

         The Company has entered into a commitment  letter,  dated September 25,
1998 (the "Commitment  Letter"),  with AT&T Finance and three additional lenders
(collectively,  the  "Agents") in which the Agents  advised the Company of their
commitment,  subject  to the terms and  conditions  set forth in the  Commitment
Letter,  to provide  the Company  with an  aggregate  of $250  million of senior
secured financing (the "Proposed Facility"). The obligations of the Agents under
the Commitment  Letter are subject to a number of terms and conditions,  as well
as the  execution of definitive  documentation  satisfactory  to the Agents.  No
assurance  can  be  given  that  the  Proposed  Facility  will  be  successfully
completed.  If  completed,  it is  anticipated  that a portion  of the  Proposed
Facility will be used to repay all amounts then  outstanding  under the existing
AT&T  Facility  (which would then  terminate),  with the  remaining net proceeds
available to the Company for capital  expenditures and other operating purposes,
subject to certain  restrictions.  The Company anticipates that a portion of the
net proceeds  will be used to further  develop its  business,  which may include
further  expansion of both its existing  networks and those  networks  currently
under construction.

YEAR 2000 COMPLIANCE

         The Company believes that its existing  software  applications are Year
2000  compliant.  However,  there can be no assurance until the year 2000 occurs
that all systems will then function  adequately.  The Company currently requests
that all vendors proposing to provide it with software applications certify that
such software is year 2000 compliant.  If a proposed vendor were to be unable to
certify compliance, the Company will request that the proposed vendor provide it
with the vendor's plan for bringing its software  application  into  compliance.
The Company will consider that plan in making a decision whether to purchase the
software  application.  If  the  software  applications  of the  local  exchange
carriers, long distance carriers or others on whose services the Company depends
or with whom the Company's  systems  interface are not year 2000  compliant,  it
could affect the Company's systems which would have a material adverse effect on
the Company's business.


ITEM 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not Applicable.


                                       12
<PAGE>


                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

         Not Applicable.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

         Not Applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

         Not Applicable.

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

         (a) Written  consents of the  stockholders of the Company,  dated as of
         July 15,1998,  were executed by such  stockholders in lieu of an Annual
         Meeting of Stockholders.

         (b) The  existing  board  of  seven  directors  was  re-elected  in its
         entirety to hold office until the next Annual Meeting of  Stockholders,
         or until their respective successors shall be elected and qualified, by
         unanimous written consent of all  stockholders.  The persons elected as
         directors were:

                           Harold N. Kamine
                           Michael A. Sternberg
                           William H. Stewart
                           John G. Quigley
                           Randall A. Hack
                           Richard H. Patterson
                           Gary E. Lasher

         (c) The Stockholders of the Company, also by unanimous written consent,
         approved  and adopted the 1998 Stock  Purchase  and Option Plan for Key
         Employees  of KMC  Telecom  Holdings,  Inc.  and  Affiliates  (the "KMC
         Holdings  Stock  Option  Plan").  The KMC  Holdings  Stock  Option Plan
         authorizes the Compensation  Committee of the Board of Directors of the
         Company (the "Plan Committee") to grant (i) options intended to qualify
         as Incentive Stock Options ("Incentive  Options") within the meaning of
         Section 422 of the  Internal  Revenue  Code of 1986,  as amended,  (ii)
         options not  intended  to so qualify  ("Nonqualified  Options"),  (iii)
         stock  appreciation  rights,  (iv)  restricted  stock,  (v) performance
         units, (vi) performance shares and (vii) certain other types of awards,
         to employees,  directors and other persons having a unique relationship
         with  the  Company  or  any  of  its  affiliates  (subject  to  certain
         limitations).  The  number of shares  of  Common  Stock of the  Company
         available  for  grant  under  the KMC  Holdings  Stock  Option  Plan is
         262,750.  No participant  may receive more than 75,000 shares of Common
         Stock of the Company  under the KMC Holdings  Stock  Option  Plan.  The
         exercise price of all Incentive  Options granted under the KMC Holdings
         Stock  Option Plan must be at least equal to the fair market  value (as
         defined in the plan) of Company  Common  Stock on the date the  options
         are granted and the exercise price of all Nonqualified  Options must be
         at least equal to 50% of the fair market value of Company  Common Stock
         on the date the options are  granted.  The maximum  term of each option
         granted under the KMC Holdings Stock Option Plan will be ten years. The
         Plan Committee has the power and authority to determine other terms and
         conditions of grants under the plan and to interpret the plan.


                                       13
<PAGE>


ITEM 5.  OTHER INFORMATION.

         Not Applicable.



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

         (a)  EXHIBITS

         4.       1998 Stock  Purchase  and  Option  Plan for Key  Employees
                  of KMC  Telecom  Holdings,  Inc.  and  Affiliates.

         27.      Financial Data Schedule.

         (b)  REPORTS ON FORM 8-K

         No reports on  Form 8-K  were filed  by the Company  during the quarter
         ended September 30, 1998.


                                       14
<PAGE>


                                   SIGNATURES

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

DATED:   November 13, 1998



                                    KMC TELECOM HOLDINGS, INC.
                                           (Registrant)


                                    By: /s/ Michael A. Sternberg
                                       ----------------------------------------
                                       Michael A. Sternberg
                                       President and Chief Executive Officer
                                       (Principal Executive Officer)


                                   By:  /s/ Cynthia Worthman
                                       ----------------------------------------
                                       Cynthia Worthman
                                       Chief Financial Officer, Vice President,
                                       Secretary and Treasurer (Principal
                                       Financial and Accounting Officer)


                                       15
<PAGE>


                                  EXHIBIT INDEX



NO.         DESCRIPTION

 4          1998 Stock  Purchase  and Option Plan for Key  Employees  of KMC
            Telecom  Holdings,  Inc. and  Affiliates

27          Financial Data Schedule



                                       16