EXHIBIT 4.1

                                                                       EXECUTION


                                WARRANT AGREEMENT

            WARRANT  AGREEMENT,  dated as of April 12,  2001 (this  "AGREEMENT")
among KMC TELECOM HOLDINGS,  INC., a Delaware  corporation (the "COMPANY"),  the
"Lenders"  set  listed on the  signature  pages  hereto ( each a  "LENDER",  or,
together, "LENDERS"), FIRST UNION NATIONAL BANK, as administrative agent for the
Lenders (in such  capacity,  the  "AGENT"),  and FIRST UNION  NATIONAL  BANK, as
warrant agent (in such capacity, the "WARRANT AGENT").

                              W I T N E S S E T H:
                              -------------------

            WHEREAS, KMC Telecom Inc., a Delaware  corporation,  KMC Telecom II,
Inc., a Delaware corporation, KMC Telecom III, Inc., a Delaware corporation, and
the other borrowers party thereto (collectively, the "Borrowers"), the Agent and
the Lenders are parties to that certain  Amended and Restated  Loan and Security
Agreement  dated as of February 15, 2000,  as amended by Amendment No. 1 thereto
dated as of March 28, 2000,  Amendment  No. 2 thereto dated as of July 28, 2000,
Amendment  No. 3 and Limited  Waiver  thereto  dated as of February 23, 2001 and
Amendment  No. 4 and  Limited  Waiver  thereto  dated as of April 12,  2001 (the
"FOURTH AMENDMENT") (as so amended, the "LOAN AGREEMENT";  capitalized terms not
otherwise  defined  herein shall have the meanings  assigned to them in the Loan
Agreement),  pursuant to which the Lenders have agreed to make  certain  "Loans"
and other financial accommodations to the Borrowers; and

            WHEREAS,  pursuant  to the  terms of the  Fourth  Amendment,  and as
described  in Section 2.4 of this  Agreement,  Lenders  are  entitled to receive
certain warrants to purchase shares of common stock of the Company ("WARRANTS"),
unless certain conditions are satisfied;

            WHEREAS,  the Company  desires to engage the Warrant Agent to act on
the  Company's  behalf,  and the Warrant  Agent  desires to act on behalf of the
Company, in connection with the issuance of the Warrant Certificates (as defined
below) and the other matters as provided herein, including,  without limitation,
for the purpose of defining  the terms and  provisions  of the  Warrants and the
respective  rights and  obligations  thereunder  of the  Company  and the record
holders  thereof  (together with the holders of shares of Common Stock (or other
securities) received upon exercise thereof, the "HOLDERS").

            NOW, THEREFORE,  in consideration of the foregoing and of the mutual
agreements contained herein and in the Fourth Amendment, the Company, the Agent,
the Lenders and the Warrant Agent hereby agree as follows:


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                                   ARTICLE I
                               CERTAIN DEFINITIONS

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

            "AGENT" has the meaning specified in the recitals to this Agreement.

            "AUDITORS"  means,  at any time,  the  independent  auditors  of the
Company at such time.

            "BOARD"  means the board of  directors  of the Company  from time to
time.

            "BORROWERS"  has  the  meaning  specified  in the  recitals  to this
Agreement.

            "BUSINESS  DAY" means a day other than a Saturday or Sunday on which
commercial banks in The City of New York are open for business.

            "COMMISSION"   means  the  United  States  Securities  and  Exchange
Commission.

            "COMMON SHARES" means the shares of the Common Stock of the Company.

            "COMMON STOCK" means the common stock, par value $0.01 per share, of
the Company.

            "COMPANY"  has  the  meaning  specified  in  the  preamble  to  this
Agreement.

            "CURRENT  MARKET VALUE" has the meaning  specified in Section 4.1(f)
hereof.

            "EXCHANGE  ACT" means the United States  Securities  Exchange Act of
1934, as amended.

            "EXERCISE PRICE" has the meaning specified in Section 3.1 hereof.

            "EXPIRATION  DATE" means,  with  respect to any  Warrant,  the tenth
anniversary of the date such Warrant is countersigned by the Warrant Agent.

            "FINANCIAL  EXPERT"  means one of the  Persons  listed in Appendix A
hereto.

            "FIRST TRIGGER EVENT" has the meaning specified in Section 2.4(b) of
this Agreement.

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            "FIRST  TRIGGER  EVENT  DATE" has the meaning  specified  in Section
2.4(b) of this Agreement.

            "FIRST  TRIGGER EVENT  NOTICE" has the meaning  specified in Section
2.4(b) of this Agreement.

            "HOLDERS"  has  the  meaning  specified  in  the  recitals  to  this
Agreement.

            "INDEPENDENT  FINANCIAL  EXPERT" means a Financial  Expert that does
not (and whose directors,  executive officers and 5% stockholders do not) have a
direct or indirect  financial interest in the Company or any of its subsidiaries
or Affiliates, which has not been for at least five years and, at the time it is
called upon to give  independent  financial  advice to the Company,  is not (and
none of its directors,  executive  officers or 5%  stockholders  has been for at
least five years or is) a promoter,  director,  or officer of the Company or any
of its  subsidiaries  or Affiliates.  The  Independent  Financial  Expert may be
compensated  and indemnified by the Company for opinions or services it provides
as an Independent Financial Expert.

            "INSTITUTIONAL  ACCREDITED  INVESTOR" shall mean an institution that
is an "accredited investor" as that term is defined in Rule 501(a)(1),  (2), (3)
or (7) of Regulation D under the Securities Act.

            "LENDERS"  has  the  meaning  specified  in  the  recitals  to  this
Agreement.

            "LOAN  AGREEMENT" has the meaning  specified in the recitals to this
Agreement.

            "OFFICER"  means,  with respect to the Company,  (i) the Chairman of
the Board,  the Vice Chairman of the Board,  the President,  the Chief Executive
Officer, the Chief Operating Officer or the Chief Financial Officer and (ii) the
Treasurer or any Assistant  Treasurer,  the Secretary or any Assistant Secretary
of the Company.

            "OFFICERS'  CERTIFICATE"  means a certificate  signed by one Officer
listed in clause (i) of the definition  thereof and one Officer listed in clause
(ii) of the definition thereof; PROVIDED, HOWEVER, that any such certificate may
be signed by any two of the  Officers  listed  in clause  (i) of the  definition
thereof  in lieu of being  signed by one  Officer  listed  in clause  (i) of the
definition  thereof  and one  Officer  listed in clause  (ii) of the  definition
thereof.

            "OPINION OF COUNSEL" means a written opinion signed by outside legal
counsel to the Company or legal counsel to an applicable Holder.

            "PERSON"  means  any  individual,   corporation,  limited  liability
company, partnership, joint venture, trust, unincorporated organization or other
entity or any government or any agency or political subdivision thereof.

            "PRIVATE PLACEMENT LEGEND" means the legend set forth on the Warrant
Certificates in the form set forth in Section 2.2 hereof.

            "QIB"  means a  "qualified  institutional  buyer" as defined in Rule
144A.

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            "RIGHT" has the meaning specified in Section 4.1(c) hereof.

            "RULE 144A" means Rule 144A under the Securities Act.

            "SECOND  TRIGGER EVENT" has the meaning  specified in Section 2.4(c)
of this Agreement.

            "SECOND  TRIGGER  EVENT DATE" has the meaning  specified  in Section
2.4(c) of this Agreement.

            "SECOND  TRIGGER EVENT NOTICE" has the meaning  specified in Section
2.4(c) of this Agreement.

            "SECURITIES ACT" means the United States  Securities Act of 1933, as
amended.

            "SPREAD"  means,  with  respect  to any  Warrant,  as of any date of
determination, the Current Market Value less the Exercise Price of such Warrant,
as adjusted as provided herein.

            "SUBSCRIPTION  FORM"  means  the  form  on the  reverse  side of the
Warrant Certificate substantially in the form included in EXHIBIT A hereto.

            "UNDERLYING  SECURITIES"  shall  mean the  Common  Shares  (or other
securities) issuable upon exercise of the Warrants.

            "VALUE REPORT" has the meaning specified in Section 4.1(k) hereof.

            "WARRANTS"  has  the  meaning  specified  in the  recitals  to  this
Agreement.

            "WARRANT  AGENT" has the meaning  specified  in the preamble to this
Agreement.

            "WARRANT  CERTIFICATES"  has the  meaning  specified  in Section 2.1
hereof.

            "WARRANT   REGISTRATION   RIGHTS   AGREEMENT"   means  the   Warrant
Registration Rights Agreement,  of even date herewith,  between the Company, the
Agent and the Lenders.

            "WARRANT   REGISTRATION   STATEMENT"  means  a  shelf   registration
statement on the appropriate form which will be filed by the Company pursuant to
the Warrant Registration Rights Agreement.

                                   ARTICLE II

                           ORIGINAL ISSUE OF WARRANTS

            SECTION 2.1 FORM OF WARRANT CERTIFICATES.  Certificates representing
the Warrants (the "WARRANT  CERTIFICATES")  shall be  substantially  in the form
attached hereto as EXHIBIT A, shall be dated the date hereof,  without regard to
the date the Warrant  Certificates  are  countersigned by the Warrant Agent, and
shall have such  insertions as are  appropriate or required or permitted by this

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Agreement  and may have such letters,  numbers or other marks of  identification
and such legends and  endorsements  stamped,  printed,  lithographed or engraved
thereon as the Company may deem appropriate and as are not inconsistent with the
provisions  of this  Agreement,  or as may be required to comply with any law or
with any rule or regulation  pursuant  thereto or with any rule or regulation of
any  securities  exchange on which the Warrants may be listed,  or to conform to
usage.

            Warrants shall be issued initially in registered form  substantially
in the form set forth in EXHIBIT A.

            The  definitive  Warrant  Certificates  shall  be  typed,   printed,
lithographed  or engraved or produced by any combination of these methods or may
be  produced  in any  other  manner  permitted  by the  rules of any  securities
exchange on which the Warrants may be listed,  all as determined by the officers
executing  such Warrant  Certificates,  as evidenced by their  execution of such
Warrant Certificates.

            SECTION 2.2 RESTRICTIVE LEGENDS. The Warrant Certificates shall bear
the following legend on the face thereof:

            "THIS WARRANT AND THE SECURITIES  ISSUABLE UPON EXERCISE HEREOF HAVE
            NOT BEEN REGISTERED  UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR
            ANY STATE SECURITIES LAWS. THIS WARRANT AND THE SECURITIES  ISSUABLE
            UPON  EXERCISE  HEREOF  MAY  NOT  BE  SOLD,  TRANSFERRED,   PLEDGED,
            HYPOTHECATED  OR OTHERWISE  ENCUMBERED OR DISPOSED OF IN THE ABSENCE
            OF  SUCH   REGISTRATION  OR  AN  EXEMPTION  FROM  THE   REGISTRATION
            REQUIREMENTS OF SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAWS."

            SECTION  2.3  EXECUTION   AND  DELIVERY  OF  WARRANT   CERTIFICATES.

            (a) Warrant Certificates  evidencing Warrants to be issued under the
Agreement  shall be executed on the date of this  Agreement,  by the Company and
delivered to the Warrant Agent for  countersignature.  Two Warrant  Certificates
will be issued to each Lender,  initially  exercisable  for the number of Common
Shares set forth on Schedule I with respect to such Lender aggregating 5% of the
Common  Stock of the Company on a fully  diluted  basis.  The  Warrant  Agent is
hereby  authorized  and shall  thereupon  countersign  and deliver  such Warrant
Certificates  as required by this Section  2.3,  Section 2.4, or by Section 3.3,
Article VI or Article VIII hereof.

            (b) The  Warrant  Certificates  shall be  executed  on behalf of the
Company by its  Chairman of the Board,  Vice  Chairman of the Board,  President,
Chief  Operating  Officer,  Chief Financial  Officer or Chief Executive  Officer
either  manually  or  by  facsimile  signature  printed  thereon.   The  Warrant
Certificates shall be countersigned by manual signature of the Warrant Agent and
shall not be valid for any purpose unless so countersigned.  In case any officer
or director of the Company  whose  signature  shall have been placed upon any of
the  Warrant  Certificates  shall  cease to be such  officer or  director of the
Company  before  countersignature  by the  Warrant  Agent and the  issuance  and

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delivery thereof, such Warrant Certificates may nevertheless be countersigned by
the  Warrant  Agent and issued and  delivered  with the same force and effect as
though such person had not ceased to be such officer or director of the Company.

            SECTION 2.4 TRIGGER EVENTS.

            (a) On the date hereof,  the Warrant  Certificates  duly executed by
the Company  shall be delivered  to the Warrant  Agent  together  with a written
order  directing  the Warrant  Agent to hold such  Warrants  Certificates  until
either:

            (i) the Warrant Agent has received a First Trigger Event Notice or a
      Second  Trigger  Event  Notice from the Agent,  upon  receipt of which the
      Warrant Agent shall be authorized to promptly  countersign and deliver one
      of the two Warrant Certificates in the name of each Lender to such Lender;
      or

            (ii) the Warrant  Agent has received  written  notice from the Agent
      certifying  that the First Trigger Event Date and the Second Trigger Event
      Date have passed  without the occurrence of the First Trigger Event or the
      Second Trigger Event, as applicable, in which case the Warrant Agent shall
      return the Warrant Certificates to the Company.

            (b) If (i) on or before  October 31, 2001 the  Borrowers  shall have
failed to prepay  the Term  Loans and  permanently  reduce  the  Revolving  Loan
Commitment  Amount  (and  prepay the  Revolving  Loans in  connection  with such
reduction to the extent required pursuant to the Loan Agreement),  each on a pro
rata basis by a cash amount  equal to  $50,000,000  from the  proceeds of events
described in Section  6.03(a)(iii)  of the Loan  Agreement and (ii) on or before
January 31, 2002 (the "FIRST  TRIGGER  EVENT DATE"),  the  Borrowers  shall have
failed to (A) prepay the Term Loans and  permanently  reduce the Revolving  Loan
Commitment  Amount  (and  prepay the  Revolving  Loans in  connection  with such
reduction to the extent required pursuant to the Loan Agreement),  each on a pro
rata basis by a cash amount  equal to  $50,000,000  from the  proceeds of events
described  in Section  6.03(a)(iii)  of the Loan  Agreement  and (B) generate or
receive  an  additional  $50,000,000  in cash from  either  (1) Net  Asset  Sale
Proceeds or (2) a  contribution  by the Company to one or more Borrowers of cash
proceeds  consisting  of  additional  equity  or cash  from  Data  Holdco or its
Subsidiaries  or any other  source,  in the case of  clauses  (b)(ii)(B)(1)  and
(b)(ii)(B)(2) over and above, and in addition to, any amounts previously applied
to prepay the Loans  under the Loan  Agreement  pursuant  to clauses  (b)(i) and
(b)(ii)(A) above (the "FIRST TRIGGER EVENT"),  the Agent shall at any time after
the First  Trigger  Event Date deliver a notice to the Warrant Agent in the form
set forth in EXHIBIT B hereto (the "FIRST  TRIGGER  EVENT  NOTICE"),  indicating
that the First  Trigger  Event has occurred and  directing  the Warrant Agent to
countersign and deliver one of the two Warrant  Certificates in the name of each
Lender to such Lender.

            (c) If on or  before  March  31,  2002 (the  "SECOND  TRIGGER  EVENT
DATE"),  the  Borrowers  shall have failed to generate or receive an  additional
$50,000,000  in  cash  from  either  (1)  Net  Asset  Sale  Proceeds  or  (2)  a
contribution by the Company to one or more Borrowers of cash proceeds consisting
of additional  equity or cash from Data Holdco or its  Subsidiaries or any other
source, in the case of clauses (c)(1) and (c)(2) over and above, and in addition
to, any  amounts  previously  applied to either  prepay the Loans under the Loan

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Agreement  pursuant  to clauses  (b)(i)  and  (b)(ii)(A)  above or  satisfy  the
requirement of clause  b(ii)(B) above (the "SECOND  TRIGGER  EVENT"),  the Agent
shall  thereupon  deliver a notice to the Warrant Agent in the form set forth in
EXHIBIT B hereto (the "SECOND TRIGGER EVENT NOTICE"), indicating that the Second
Trigger Event has occurred and directing  the Warrant Agent to  countersign  and
deliver one of the two Warrant  Certificates  in the name of each Lender to such
Lender.

                                  ARTICLE III

                     EXERCISE PRICE AND EXERCISE OF WARRANTS

            SECTION 3.1 EXERCISE PRICE.  Each Warrant  Certificate  shall,  when
countersigned  by the  Warrant  Agent,  initially  entitle  the Holder  thereof,
subject to the  provisions of this  Agreement,  to purchase the number of Common
Shares indicated  thereon at a purchase price (the "EXERCISE PRICE") of $.01 per
Common  Share,  subject to  adjustment  as provided in Section 4.1 and Article V
hereof.

            SECTION 3.2 EXERCISE;  RESTRICTIONS ON EXERCISE. At any time or from
time to time, any outstanding Warrants may be exercised, in whole or in part, on
any Business Day by the Holders thereof; PROVIDED, that the Warrant Registration
Statement is, at the time of exercise,  effective and available for the exercise
of the Warrants or the exercise of such Warrants is exempt from the registration
requirements of the Securities Act. Any Warrants not exercised by 5:00 p.m., New
York City  time,  on the  Expiration  Date  shall  expire  and all rights of the
Holders of such  Warrants  shall  terminate.  Additionally,  pursuant to Section
4.1(j)(ii) hereof and subject to the conditions set forth therein,  the Warrants
shall expire and all rights of the Holders of such Warrants  shall  terminate in
the event the Company merges or consolidates  with or sells all or substantially
all of its  property  and assets to a Person  (other  than an  Affiliate  of the
Company) if the consideration payable to holders of Common Stock in exchange for
their  Common  Stock in  connection  with  such  merger,  consolidation  or sale
consists  solely  of cash or in the  event of the  dissolution,  liquidation  or
winding up of the Company.

            SECTION 3.3 METHOD OF EXERCISE;  PAYMENT OF EXERCISE PRICE. In order
to exercise all or any of the Warrants represented by a Warrant Certificate, the
Holder  thereof  must  surrender  for exercise  the Warrant  Certificate  to the
Warrant  Agent at its corporate  trust office  address set forth in Section 12.5
hereof,  with the  Subscription  Form set forth on the  reverse  of the  Warrant
Certificate  duly executed,  together with payment in full of the Exercise Price
then in  effect  for each  Common  Share  (or other  securities)  issuable  upon
exercise of the Warrants as to which a Warrant is exercised; such payment may be
made  by  wire  transfer,  in  cash or by  certified  or  official  bank or bank
cashier's  check  payable to the order of the  Company  and shall be made to the
Warrant  Agent at its corporate  trust office  address set forth in Section 12.5
hereof  prior to the close of business on the date the  Warrant  Certificate  is
surrendered  to the Warrant Agent for exercise.  Notwithstanding  the foregoing,
the  Exercise  Price  may be paid by  surrendering  additional  Warrants  to the
Warrant Agent having an aggregate  Spread equal to the aggregate  Exercise Price
of the Warrants being exercised. All payments received upon exercise of Warrants
shall be delivered to the Company by the Warrant  Agent as instructed in writing
by the  Company.  If  less  than  all  the  Warrants  represented  by a  Warrant
Certificate  are  exercised  or  surrendered  (in  connection  with  a  cashless
exercise),  such  Warrant  Certificate  shall be  surrendered  and a new Warrant

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Certificate  of the same  tenor and for the  number of  Warrants  which were not
exercised or  surrendered  shall be executed by the Company and delivered to the
Warrant  Agent  and  the  Warrant  Agent  shall   countersign  the  new  Warrant
Certificate,  registered  in such name or names as may be directed in writing by
the  Holder,  and shall  deliver the new  Warrant  Certificate  to the Person or
Persons  entitled  to  receive  the  same.  Upon the  exercise  of any  Warrants
following  the  surrender  of a  Warrant  Certificate  in  conformity  with  the
foregoing  provisions,  the Warrant Agent shall instruct the Company to transfer
promptly to the Holder or, upon the written  order of the Holder of such Warrant
Certificate,  appropriate  evidence of ownership  of any Common  Shares or other
security or property to which it is entitled,  registered or otherwise placed in
such name or names as may be directed  in writing by the Holder,  and to deliver
such evidence of ownership to the Person or Persons entitled to receive the same
and fractional  shares,  if any, or an amount in cash, in lieu of any fractional
shares,  as provided in Section  4.5  hereof;  PROVIDED  that the Holder of such
Warrant shall be  responsible  for the payment of any transfer taxes required as
the result of any change in ownership  of such  Warrants or the issuance of such
Common  Shares other than to the Holder of such  Warrants and any such  transfer
shall comply with  applicable  law.  Upon the exercise of a Warrant or Warrants,
the Warrant  Agent is hereby  authorized  and directed to  requisition  from any
transfer  agent of the Common  Shares (and all such  transfer  agents are hereby
authorized to comply with all such  requests)  certificates  (bearing the legend
set  forth in  Section  12.10  hereof,  if  applicable,  unless  a  registration
statement relating to such Common Shares filed with the Commission shall then be
in effect or the  Company  and the Holder  exercising  such  Warrant or Warrants
otherwise  agree) for the necessary number of Common Shares to which said Holder
may be entitled.  The Company shall enter,  or shall cause any transfer agent of
the Common  Shares to enter,  the name of the  Person  entitled  to receive  the
Common  Shares upon  exercise of the  Warrants  into the  Company's  register of
shareholders  within 3 days of such exercise.  A Warrant shall be deemed to have
been  exercised  immediately  prior to the close of  business on the date of the
surrender  for  exercise,   as  provided  above,  of  the  Warrant   Certificate
representing  such Warrant  together with payment in full of the Exercise  Price
(or surrender of sufficient  Warrant  Certificates in connection with a cashless
exercise) and, for all purposes  under this  Agreement,  the Person  entitled to
receive any Common Shares  deliverable upon such exercise shall, as between such
Person  and the  Company,  be deemed to be the Holder of such  Common  Shares of
record as of the close of business on such date,  notwithstanding that the stock
transfer  books  of the  Company  shall  then be  closed  or  that  certificates
representing such Common Shares shall not actually be delivered to the Holder at
such time, and shall be entitled to receive, and the Warrant Agent shall deliver
to such Person,  any Common Shares to which such Person would have been entitled
had such Person been the registered holder on such date.

                                   ARTICLE IV

                                   ADJUSTMENTS

            SECTION 4.1 ADJUSTMENTS. The Exercise Price and the number of Common
Shares  issuable  upon  exercise of each Warrant  shall be subject to adjustment
from time to time from and after the date  hereof as  follows,  and each  Holder
shall otherwise have the rights set forth in this Section 4.1 from and after the
date hereof,  without regard to the date on which the Warrant Agent countersigns
and delivers such Warrant:

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            (a)  DIVISIONS;  CONSOLIDATIONS;   RECLASSIFICATIONS.  In  case  the
Company shall, on or before the Expiration  Date, (i) issue any Common Shares in
payment of a dividend or other  distribution  with respect to its Common  Stock,
(ii) subdivide its issued and outstanding  Common Shares,  (iii) consolidate its
issued and  outstanding  Common Shares into a smaller number of shares,  or (iv)
reclassify  or convert  the Common  Shares  (other  than a  reclassification  in
connection with a merger, consolidation or other business combination which will
be governed by Section  4.1(j)),  then the number of Common  Shares  purchasable
upon  exercise  of each  Warrant  immediately  prior to the record date for such
issue or distribution or the effective date of such subdivision,  consolidation,
reclassification  or  conversion  shall be  adjusted  so that the Holder of each
Warrant  shall  thereafter  be entitled to receive the kind and number of Common
Shares which such Holder would have been entitled to receive after the happening
of any of the events described above had such Warrant been exercised immediately
prior to the happening of such event or any record date with respect thereto. An
adjustment  made  pursuant  to  this  Section  4.1(a)  shall  become   effective
immediately  after the effective  date of such event  retroactive  to the record
date, if any, for such event.

            (b)  RIGHTS;  OPTIONS;  WARRANTS.  In case the  Company  shall issue
rights, options,  warrants or convertible or exchangeable securities (other than
convertible or exchangeable securities subject to Section 4.1(a)) to all holders
of its Common Shares,  entitling them to subscribe for or purchase Common Shares
at a price per share which is lower (at the record date for such  issuance) than
the then Current  Market Value per Common  Share,  then the Company shall ensure
that at the time of such  issuance,  the same or a like offer or  invitation  is
made to the Holders of the Warrants as if their  Warrants had been  exercised on
the day immediately preceding the record date of such offer or invitation on the
terms (subject to any  adjustment  pursuant to Section 4.1(a) for a prior event)
on which such  Warrants  could have been  exercised on such date (whether or not
such Warrant was then exercisable);  PROVIDED that if the Board so resolves, the
Company  shall not be required to ensure  that the same offer or  invitation  is
made to the Holders of the Warrants,  but the number of Common Shares thereafter
purchasable  upon the  exercise of each  Warrant  shall  instead be adjusted and
shall be  determined  by  multiplying  the number of Common  Shares  theretofore
purchasable upon exercise of each Warrant by a fraction,  the numerator of which
shall be the sum of (i) the  number of  Common  Shares  outstanding  immediately
prior to the  issuance  of such  rights,  options,  warrants or  convertible  or
exchangeable  securities plus (ii) the number of additional  Common Shares which
may be purchased or subscribed for upon exercise, exchange or conversion of such
rights,  options,  warrants or  convertible or  exchangeable  securities and the
denominator  of  which  shall  be the sum of (x) the  number  of  Common  Shares
outstanding immediately prior to the issuance of such rights, options,  warrants
or convertible or  exchangeable  securities  plus (y) the number of shares which
the total  consideration  received  by the  Company  for such  rights,  options,
warrants or convertible or exchangeable  securities so offered would purchase at
the then Current  Market Value per Common  Share.  Except as otherwise  provided
above, such adjustment shall be made whenever such rights, options,  warrants or
convertible or exchangeable  securities are issued,  and shall become  effective
retroactively  immediately  after  the  record  date  for the  determination  of
shareholders entitled to receive such rights,  options,  warrants or convertible
or exchangeable securities.

            (c) ISSUANCE OF COMMON SHARES AT LOWER  VALUES.  In case the Company
shall sell and issue any Common Share or Right (as defined below) (excluding (i)

                                       9
<PAGE>

any Right issued in any of the  transactions  described in Section 4.1(a) or (b)
above,  (ii) Common Shares issued pursuant to (x) any Rights  outstanding on the
date of this  Agreement  and set forth on Schedule  4.1(c)  hereto or any Rights
issued in any  transaction  described  in Section  4.1(a) or (b) above and (y) a
Right,  if on the date such  Right  was  issued,  the  exercise,  conversion  or
exchange  price per Common Share with respect  thereto was at least equal to the
then Current  Market Value per Common  Share,  (iii) any Common Shares or Rights
issued (A) as consideration when any corporation or business is acquired, merged
into or becomes  part of the  Company or a  subsidiary  of the Company or (B) in
good faith in connection with any other  acquisition of assets,  in each case in
an  arm's-length  transaction  between the  Company  and a Person  other than an
Affiliate  of the  Company,  (iv) grants or  exercises  of Rights  granted to or
exercised by employees, directors, consultants or advisors of the Company or any
of its  subsidiaries  for  issuances  of shares of Common  Stock to such Persons
(only to the extent  securities  under this  clause (iv) plus  securities  under
clause (v) below do not have an  aggregate  value in excess of 15% of the equity
value of the Company on a fully  diluted  basis,  as determined in good faith by
the Board) and (v) exercises of Rights by former  employees,  former  directors,
former  consultants or former advisors of the Company or any of its subsidiaries
for  issuances of shares of Common Stock to such  Persons) at a price per Common
Share  (determined  in the case of any such  Right,  by  dividing  (x) the total
consideration  receivable  by the  Company  in  consideration  of the  sale  and
issuance of such Right, plus the total consideration payable to the Company upon
exercise,  conversion  or exchange  thereof,  by (y) the total  number of Common
Shares  covered by such Right) that is lower than the Current  Market  Value per
Common Share in effect  immediately  prior to such sale or issuance (only to the
extent  securities under this clause (v) plus securities under clause (iv) above
do not have an  aggregate  value in  excess  of 15% of the  equity  value of the
Company on a fully  diluted  basis,  as  determined in good faith by the Board),
then the number of Common  Shares  thereafter  purchasable  upon the exercise of
each Warrant  shall be  determined  by  multiplying  the number of Common Shares
theretofore  purchasable  upon  exercise  of such  Warrant  by a  fraction,  the
numerator of which shall be the number of Common Shares outstanding  immediately
after such sale or issuance and the  denominator of which shall be the number of
Common Shares  outstanding  immediately  prior to such sale or issuance plus the
number of Common Shares which the aggregate  consideration  received (determined
as provided  below) for such sale or  issuance  would  purchase at such  Current
Market Value per Common Share.  For purposes of this Section 4.1(c),  the Common
Shares which the holder of any such Right shall be entitled to subscribe  for or
purchase  shall be deemed to be issued  and  outstanding  as of the date of such
sale and issuance and the  consideration  received by the Company therefor shall
be deemed to be the  consideration  received by the Company for such Right, plus
the  consideration  or  premiums  stated in such Right to be paid for the Common
Shares  covered  thereby.  In case the  Company  shall  sell and issue any Right
together  with one or more  other  securities  as part of a unit at a price  per
unit,  then in determining  the "price per Common Share" and the  "consideration
received by the  Company"  for  purposes of the first  sentence of this  Section
4.1(c),  the Board shall  determine,  in good faith, the fair value of the Right
then being sold as part of such unit. For purposes of this paragraph,  a "RIGHT"
shall mean any right,  option,  warrant or convertible or exchangeable  security
containing  the Right to  subscribe  for or acquire one or more  Common  Shares,
excluding the Warrants. This Section 4.1(c) shall not apply to: (i) the exercise
of Warrants,  or the conversion or exchange of other  securities  outstanding on
the date  hereof  and set  forth on  Schedule  4.1(c)  that are  convertible  or
exchangeable  for Common Shares;  or (ii) Common Shares issued upon the exercise
of Rights or warrants issued to all holders of Common Shares.

                                       10
<PAGE>

            (d)   DISTRIBUTIONS  OF  DEBT,   ASSETS,   SUBSCRIPTION   RIGHTS  OR
CONVERTIBLE  SECURITIES.  In case the Company shall make a  distribution  to all
holders of its Common  Shares of evidences of its  indebtedness,  or assets,  or
other distributions (excluding distributions in connection with the dissolution,
liquidation  or  winding-up  of the  Company  which shall be governed by Section
4.1(j) and  distributions of securities  referred to in Section 4.1(a),  Section
4.1(b) or  Section  4.1(c)),  then,  in each case,  the number of Common  Shares
purchasable  after such record date upon the exercise of each  Warrant  shall be
determined  by  multiplying  the number of Common  Shares  purchasable  upon the
exercise of such  Warrant  immediately  prior to such record date by a fraction,
the  numerator  of which  shall be the  Current  Market  Value per Common  Share
immediately  prior to the record date for such  distribution and the denominator
of which shall be the Current Market Value per Common Share immediately prior to
the record date for such distribution less the then fair value (as determined in
good faith by the Board) of the evidences of indebtedness,  or assets,  or other
distributions so distributed  attributable to one Common Share.  Such adjustment
shall be made whenever any such distribution is made, and shall become effective
on the date of distribution retroactive to the record date for the determination
of shareholders entitled to receive such distribution.

            (e) EXPIRATION OF RIGHTS,  OPTIONS AND CONVERSION  PRIVILEGES.  Upon
the  expiration  of any  rights,  options,  warrants or  conversion  or exchange
privileges  (including,  without  limitation,  any Rights) that have  previously
resulted  in an  adjustment  hereunder,  if any  thereof  shall  not  have  been
exercised,  exchanged or converted,  the Exercise Price and the number of Common
Shares issuable upon the exercise of each Warrant shall,  upon such  expiration,
be readjusted and shall  thereafter,  upon any future exercise,  be such as they
would  have  been  had  they  been  originally  adjusted  (or had  the  original
adjustment  not been  required,  as the  case may be) as if (i) the only  Common
Shares so issued were the Common Shares,  if any,  actually  issued or sold upon
the  exercise,  exchange or  conversion  of such  rights,  options,  warrants or
conversion or exchange rights (including,  without  limitation,  any Rights) and
(ii) such  Common  Shares,  if any,  were  issued or sold for the  consideration
actually received by the Company upon such exercise, exchange or conversion plus
the consideration,  if any, actually received by the Company for issuance,  sale
or grant of all such rights, options,  warrants or conversion or exchange rights
(including, without limitation, any Rights) whether or not exercised.

            (f) CURRENT MARKET VALUE. For the purposes of any computation  under
this  Article IV, the  "CURRENT  MARKET  VALUE" per Common Share or of any other
security  (herein  collectively  referred to as a "security") at any date herein
specified shall be:

            (i) if the security is not  registered  under the Exchange  Act, the
      value of the security (1) most recently determined as of a date within the
      six months preceding such date by an Independent Financial Expert selected
      by the Board in accordance with the criteria for such valuation set out in
      Section  4.1(k),  or (2) if no such  determination  shall  have  been made
      within such six-month  period or if the Company so chooses,  determined as
      of such a date by an Independent Financial Expert selected by the Board in
      accordance with the criteria for such valuation set out in Section 4.1(k),
      or

            (ii) if the  security is  registered  under the  Exchange  Act,  the
      average of the daily market prices of the security for the 20  consecutive
      trading days immediately  preceding such date or, if the security has been

                                       11
<PAGE>

      registered  under the  Exchange Act for less than 20  consecutive  trading
      days before such date, then the average of the daily market prices for all
      of the trading  days before  such date for which daily  market  prices are
      available. The market price for each such trading day shall be: (A) in the
      case  of a  security  listed  or  admitted  to  trading  on  any  national
      securities exchange, the closing sales price, regular way, on such day, or
      if no sale takes  place on such day,  the  average of the  closing bid and
      asked prices on such day on the principal national  securities exchange on
      which such security is listed or admitted,  as determined by the Board, in
      good faith,  (B) in the case of a security  not then listed or admitted to
      trading on any national securities exchange,  the last reported sale price
      on such day,  or if no sale takes  place on such day,  the  average of the
      closing  bid and asked  prices on such day,  as  reported  by a  reputable
      quotation source designated by the Company,  (C) in the case of a security
      not then listed or admitted to trading on any national securities exchange
      and as to which no such  reported  sale price or bid and asked  prices are
      available,  the average of the  reported  high bid and low asked prices on
      such day, as reported by a reputable  quotation service, or a newspaper of
      general  circulation  in the Borough of  Manhattan,  City and State of New
      York  customarily  published  on  each  Business  Day,  designated  by the
      Company,  or, if there shall be no bid and asked  prices on such day,  the
      average of the high bid and low asked prices, as so reported,  on the most
      recent day (not more than 30 days prior to the date in question) for which
      prices have been so reported  and (D) if there are no bid and asked prices
      reported  during the 30 days prior to the date in  question,  the  Current
      Market Value of the security  shall be  determined as if the security were
      not registered under the Exchange Act.

            (g)  CONSIDERATION   RECEIVED.   For  purposes  of  any  computation
respecting  consideration  received  pursuant to this Section 4.1, the following
shall apply:

            (i) in the case of the  issuance  of Common  Shares  for  cash,  the
      consideration  shall be the amount of such cash;  PROVIDED that in no case
      shall  any  deduction  be made  for any  commissions,  discounts  or other
      expenses  incurred  by the Company  for any  underwriting  of the issue or
      otherwise in connection therewith;

            (ii)  in  the  case  of  the   issuance  of  Common   Shares  for  a
      consideration in whole or in part other than cash, the consideration other
      than  cash  shall  be  deemed  to be the  fair  market  value  thereof  as
      determined  in good  faith by the Board  (irrespective  of the  accounting
      treatment thereof),  whose determination shall be conclusive and described
      in reasonable detail in a board resolution which shall be provided as soon
      as practicable thereafter to the Warrant Agent; and

            (iii) in the case of the  issuance of rights,  options,  warrants or
      securities convertible into or exchangeable for Common Shares, (including,
      without  limitation,  any Rights),  the aggregate  consideration  received
      therefor shall be deemed to be the  consideration  received by the Company
      for  the  issuance  of  such  rights,  options,   warrants  or  securities
      convertible  into or exchangeable  for Common Shares,  plus the additional
      minimum  consideration,  if any, to be  received  by the Company  upon the
      exercise,  conversion or exchange thereof (the  consideration in each case
      to be determined in the same manner as provided in clauses (i) and (ii) of
      this Section 4.1(g)).

                                       12
<PAGE>

            (h) DE MINIMIS  ADJUSTMENTS.  No  adjustment in the number of Common
Shares  purchasable  hereunder shall be required  unless such  adjustment  would
require an increase  or  decrease of at least one percent  (1%) in the number of
Common Shares purchasable upon the exercise of each Warrant; PROVIDED,  HOWEVER,
that any adjustments  which by reason of this Section 4.1(h) are not required to
be made  shall be carried  forward  and taken  into  account  in any  subsequent
adjustment.  All calculations  shall be made to the nearest  one-thousandth of a
share.

            (i)  ADJUSTMENT  OF EXERCISE  PRICE.  Whenever  the number of Common
Shares  purchasable  upon the exercise of each  Warrant is  adjusted,  as herein
provided,  the  Exercise  Price per Common Share  payable upon  exercise of such
Warrant  shall be adjusted  (calculated  to the  nearest  $.01) so that it shall
equal the price determined by multiplying such Exercise Price  immediately prior
to such  adjustment  by a fraction the numerator of which shall be the number of
Common Shares purchasable upon the exercise of each Warrant immediately prior to
such  adjustment  and the  denominator  of which  shall be the  number of Common
Shares so purchasable  immediately  thereafter.  Following any adjustment to the
Exercise Price pursuant to this Article IV, the amount  payable,  when adjusted,
together  with the amount paid in connection  with the original  issuance of the
Warrants, shall never be less than the par value per Common Share at the time of
such adjustment;  provided, that, in the event that, but for this provision, the
Exercise  Price would be reduced to an amount less than the par value per Common
Share, the number of Common Shares for which the Warrants are exercisable  shall
increase  automatically  by an amount entitling the Holders to the same economic
benefit they would have received if the Exercise Price were reduced to an amount
less than the par value per Common Share.

            If after an  adjustment,  a Holder of a Warrant upon  exercise of it
may receive  shares of two or more  classes in the capital of the  Company,  the
Company shall  determine the  allocation of the adjusted  Exercise Price between
such  classes of shares in a manner that the Board deems fair and  equitable  to
the Holders.  After such  allocation,  the exercise  privilege  and the Exercise
Price of each class of shares shall thereafter be subject to adjustment on terms
comparable to those applicable to Common Shares in this Article IV.

            Such adjustment shall be made successively whenever any event listed
above shall occur.

            (j) CONSOLIDATION, MERGER, ETC.

            (i)  Subject  to the  provisions  of  Subsection  (ii) below of this
      Section  4.1(j),  in case of the  consolidation  of the Company  with,  or
      merger of the Company with or into, or of the sale of all or substantially
      all of the  properties  and assets of the Company  to, any Person,  and in
      connection therewith  consideration is payable to holders of Common Shares
      (or other securities or property purchasable upon exercise of Warrants) in
      exchange  therefor,  then, as a condition of such transaction,  lawful and
      adequate provision shall be made whereby the Warrants shall remain subject
      to the terms and  conditions  set forth in this Agreement and each Warrant
      shall,  after such  consolidation,  merger or sale,  entitle the Holder to
      receive  upon  exercise  the  number  of shares  in the  capital  or other
      securities or property  (including  cash) of or from the Person  resulting
      from such  consolidation  or  surviving  such merger or to which such sale
      shall be made or of the parent of such  Person,  as the case may be,  that

                                       13
<PAGE>

      would have been  distributable  or payable on account of the Common Shares
      if such Holder's  Warrants had been  exercised  immediately  prior to such
      merger,  consolidation  or  sale  (or,  if  applicable,  the  record  date
      therefor);  and in any such case the  provisions  of this  Agreement  with
      respect to the rights and interests  thereafter of the Holders of Warrants
      shall be  appropriately  adjusted  by the Board in good  faith so as to be
      applicable,  as  nearly  as  may  reasonably  be,  to  any  shares,  other
      securities or any property  thereafter  deliverable on the exercise of the
      Warrants.

            (ii)  Notwithstanding  the  foregoing,  (x) if the Company merges or
      consolidates  with, or sells all or substantially  all of its property and
      assets to,  another  Person  (other than an  Affiliate of the Company) and
      consideration is payable to holders of Common Shares in exchange for their
      Common Shares in connection with such merger,  consolidation or sale which
      consists  solely  of  cash,  or  (y)  in the  event  of  the  dissolution,
      liquidation  or winding up of the  Company,  then the  Holders of Warrants
      shall be entitled to receive distributions on the date of such event on an
      equal basis with holders of Common  Shares (or other  securities  issuable
      upon  exercise of the  Warrants)  as if the  Warrants  had been  exercised
      immediately  prior to such  event  (whether  or not such  Warrant  is then
      exercisable),  less the Exercise Price.  Upon receipt of such payment,  if
      any, the rights of a Holder shall  terminate  and cease and such  Holder's
      Warrants shall expire.  In case of any such merger,  consolidation or sale
      of assets,  the  surviving  or  acquiring  Person and, in the event of any
      dissolution,  liquidation or winding up of the Company,  the Company shall
      deposit  promptly with the Warrant Agent the funds,  if any,  necessary to
      pay the Holders of the  Warrants.  After receipt of such deposit from such
      Person  or  the  Company  and  after   receipt  of   surrendered   Warrant
      Certificates,  the Warrant  Agent shall make payment by delivering a check
      in such amount as is appropriate (or, in the case of  consideration  other
      than cash, such other  consideration  as is appropriate) to such Person or
      Persons as it may be directed in writing by the Holder  surrendering  such
      Warrants.

            (k) VALUE REPORTS.  If required pursuant to Section  4.1(f)(i),  the
Current  Market  Value shall be deemed to be equal to the value set forth in the
Value  Report (as  defined  below) as  determined  by an  Independent  Financial
Expert,  which  shall be  selected  by the  Board in its  sole  discretion,  and
retained on customary terms and conditions,  using one or more valuation methods
that  the  Independent  Financial  Expert,  in its best  professional  judgment,
determines to be most  appropriate.  The Company shall use its  reasonable  best
efforts to cause the  Independent  Financial  Expert to deliver to the  Company,
with a copy to the  Warrant  Agent,  within  45 days of the  appointment  of the
Independent  Financial  Expert,  a value report (the "VALUE REPORT") stating the
value of the Common Shares and other  securities or property of the Company,  if
any, being valued as of the Valuation  Date and containing a brief  statement as
to the  nature  and scope of the  examination  or  investigation  upon which the
determination  of value was made.  The  Warrant  Agent  shall  have no duty with
respect to the Value Report of any Independent  Financial Expert, except to keep
it on file and available for inspection by the Holders.  The determination as to
Current  Market Value in accordance  with the  provisions of this Section 4.1(k)
shall be  conclusive  on all Persons.  The  Independent  Financial  Expert shall
consult with  management of the Company in order to allow  management to comment
on the proposed value prior to delivery to the Company of any Value Report.

                                       14
<PAGE>

            (l)  WHEN  NO  ADJUSTMENT  REQUIRED.   Without  limiting  any  other
exception  contained in this Section 4.1, and in addition thereto, no adjustment
need be made for:

            (i) (A) grants to,  exercises  of Rights by, or  issuances of equity
      securities to employees, directors, consultants or advisors of the Company
      or any of its subsidiaries and (B) exercises of Rights by, or issuances of
      equity  securities in connection with Rights  previously  issued to former
      employees,  former directors, former consultants or former advisors of KMC
      Telecom, Inc., including, for these purposes those securities set forth on
      Schedule  4.1(c)  hereto  (in any case  only to the  extent  that all such
      securities  do not have an aggregate  value in excess of 15% of the equity
      value of the Company on a fully diluted basis, as determined in good faith
      by the Board);

            (ii) grants of options,  warrants or other  agreements  or rights to
      purchase  capital  stock of the  Company  entered  into  prior to the date
      hereof as set forth on Schedule  4.1(c)  hereto or any issuance of capital
      stock pursuant thereto;

            (iii) rights to purchase  Common  Shares  pursuant to a Company plan
      for the reinvestment of dividends or interest;

            (iv) future  options,  warrants or other  rights with an exercise or
      conversion price at least equal to the Current Market Value of the related
      shares on the date of grant;

            (v) a change  in the par value of the  Common  Shares  (including  a
      change from par value to no par value or vice versa); and

            (vi)  firm  commitment  underwritten  public  offerings  or  private
      placements in either case through investment banks of national standing.

            To  the  extent  the  Warrants  become  convertible  into  cash,  no
adjustment need be made  thereafter as to the cash.  Interest will not accrue on
the cash.

            (m)  STATEMENT  OF INTENT.  It is the intent of the parties  hereto,
that after giving  effect to the exercise of all of the Warrants  (assuming  any
combination  of the First Trigger  Event and the Second  Trigger Event occur and
assuming no  additional  issuances  of  securities  by the  Company  except with
respect to securities  outstanding on the date hereof), the Holders would be the
owner of (or have the right to acquire  pursuant  to the  Warrants)  a number of
Common  Shares  representing  5%  of  the  outstanding  shares  of  the  Company
immediately  after the date hereof on a fully-diluted  basis. If any event shall
occur as to which the provisions of this Section 4.1 are not strictly applicable
but as to which the  failure to make any  adjustment  would,  in the  reasonable
judgment  of the  Holders of a majority of the  Warrants,  adversely  affect the
purchase  rights  represented  by the Warrant in  accordance  with the essential
intent and  principles  of this Section 4.1 (which are to place the Holders in a
position as nearly as possible to the position  such Holder would have  occupied
had such Holders purchased the Common Shares on the date hereof),  then, in such
case,  the  Holders  may notify the  Company  of such  determination  and if the
Company  does not dispute  the same,  the Company  shall  forthwith  reissue the
Warrants  with  appropriate  adjustments.  If the  Company  shall  dispute  such
determination  and the parties cannot otherwise resolve the dispute promptly and
in good  faith,  then the Company  shall  appoint a firm of  independent  public
accountants  of  recognized  national  standing  (which  may not be the  regular

                                       15
<PAGE>

auditors of the Company),  which shall give their opinion as to the  adjustment,
if  any,  on a  basis  consistent  with  the  essential  intent  and  principles
established in this Section 4.1,  necessary to protect the rights represented by
the Warrants.  Upon receipt of such opinion,  the Company shall  promptly mail a
copy thereof to the Holders and shall make the adjustment described therein.

            (n) NO  AVOIDANCE.  The  Company  shall not  structure  or engage in
transactions  with the intent of  avoiding  the  application  of the  adjustment
provisions of this Section 4.1.

            SECTION  4.2  NOTICE OF  ADJUSTMENT.  Whenever  the number of Common
Shares  purchasable  upon the exercise of each Warrant or the Exercise  Price is
adjusted, as herein provided,  the Company shall promptly provide to the Warrant
Agent, and the Warrant Agent shall promptly mail, at the expense of the Company,
to each Holder  notice of such  adjustment  or  adjustments  and shall  promptly
deliver to the Warrant Agent an Officer's  Certificate  setting forth the number
of Common Shares  purchasable upon the exercise of each Warrant and the Exercise
Price  after  such  adjustment,  setting  forth a brief  statement  of the facts
requiring  such  adjustment  and  setting  forth the  computation  by which such
adjustment  was made.  Such  certificate  shall be  conclusive  evidence  of the
correctness of such adjustment except in the case of manifest error. The Warrant
Agent shall be entitled to rely on such  certificate  and shall be under no duty
or responsibility  with respect to any such  certificate,  except to exhibit the
same,  from time to time, to any Holder  desiring an inspection  thereof  during
reasonable business hours upon reasonable notice. The Warrant Agent shall not at
any time be under any duty or responsibility to any Holders to determine whether
any facts exist which may require any  adjustment  of the Exercise  Price or the
number of Common  Shares  purchasable  on exercise of the Warrants or any of the
other  adjustments  set forth in Section  4.1, or with  respect to the nature or
extent of any such  adjustment when made, or with respect to the method employed
in making such  adjustment,  or the validity or value (or the kind or amount) of
any Common  Shares which may be  purchasable  on exercise of the  Warrants.  The
Warrant  Agent shall not be  responsible  for any failure of the Company to make
any cash  payment or to issue,  transfer or deliver  any Common  Shares or share
certificates upon the exercise of any Warrant.

            SECTION 4.3 STATEMENT ON WARRANTS. Irrespective of any adjustment in
the Exercise Price or the number or kind of shares purchasable upon the exercise
of the  Warrants,  Warrants  theretofore  or  thereafter  issued may continue to
express  the same  price and  number  and kind of  shares  as are  stated in the
Warrants initially issuable pursuant to this Agreement.

            SECTION  4.4 NOTICE OF  CONSOLIDATION,  MERGER,  ETC. In case at any
time after the date  hereof  and prior to 5:00 p.m.  (New York City time) on the
Expiration  Date,  there shall be any (i)  consolidation or merger involving the
Company or sale,  transfer or other  disposition of all or substantially  all of
the  Company's  property,  assets  or  business  (except  (A) a merger  or other
reorganization  in which the  Company  shall be the  surviving  corporation  and
holders of Common Shares receive no consideration in respect of their shares and
(B) a merger of the Company into a wholly owned  subsidiary of the Company,  the
principal purpose of which, in the good faith  determination of the Board, is to
change the state of incorporation of the Company) or (ii) any other  transaction
contemplated by Section 4.1(j)(ii) above then, in any one or more of such cases,
the Company shall cause to be mailed to the Warrant Agent, and the Warrant Agent
shall promptly mail, at Company's expense,  to each Holder of a Warrant,  at the
earliest  practicable  time (and, in any event, not less than 20 days before any

                                       16
<PAGE>

date  set  for   definitive   action),   notice  of  the  date  on  which   such
reorganization, sale, consolidation, merger, dissolution, liquidation or winding
up shall take place,  as the case may be. Such notice  shall also set forth such
facts as shall indicate the effect of such action (to the extent such effect may
be known at the date of such  notice)  on the  Exercise  Price  and the kind and
amount of the  Common  Shares  and other  securities,  money and other  property
deliverable  upon exercise of the  Warrants.  Such notice shall also specify the
date as of which the holders of record of the Common Shares or other  securities
or property issuable upon exercise of the Warrants shall be entitled to exchange
their  shares for  securities,  money or other  property  deliverable  upon such
reorganization, sale, consolidation, merger, dissolution, liquidation or winding
up, as the case may be.

            SECTION 4.5 FRACTIONAL INTERESTS.  If more than one Warrant shall be
presented  for exercise in full at the same time by the same Holder,  the number
of full Common Shares which shall be issuable  upon such exercise  thereof shall
be computed on the basis of the aggregate number of Common Shares purchasable on
exercise of the  Warrants  so  presented.  The Company  shall not be required to
issue fractional Common Shares upon the exercise of Warrants. If any fraction of
a Common Share would, except for the provisions of this Section 4.5, be issuable
on the exercise of any Warrant (or specified portion  thereof),  the Company may
pay an amount in cash  calculated  by it to be equal to the then Current  Market
Value per Common Share multiplied by such fraction computed to the nearest whole
cent.

            SECTION 4.6 WHEN ISSUANCE OR PAYMENT MAY BE DEFERRED. In any case in
which this Article IV shall require that an adjustment in the Exercise  Price be
made effective as of a record date for a specified  event, the Company may elect
to defer  until the  occurrence  of such event (i)  issuing to the Holder of any
Warrant  exercised  after such record date the Common Shares and other shares in
the capital of the Company,  if any,  issuable upon such exercise over and above
the  Common  Shares and other  shares in the  capital  of the  Company,  if any,
issuable  upon such  exercise  and (ii) paying such Holder any amount in cash in
lieu of a fractional share; PROVIDED, HOWEVER, that the Company shall deliver to
such Holder a due bill or other appropriate  instrument evidencing such Holder's
right to receive such additional  Common Shares,  other shares and cash upon the
occurrence of the event requiring such adjustment.

            SECTION 4.7 INITIAL PUBLIC OFFERING. Notwithstanding anything to the
contrary herein contained, if the Company conducts an initial public offering of
equity securities (other than nonconvertible preferred shares), the Company will
give the Holders the  opportunity  to convert (i) such Warrants into warrants to
purchase such equity securities (other than nonconvertible preferred shares) and
(ii) any Common Shares or other securities that have been previously received by
the Holders upon the  exercise of Warrants  into such equity  securities  (other
than nonconvertible  preferred shares).  Such conversion  opportunity will be on
terms and conditions determined to be fair and reasonable by the Board.

                                   ARTICLE V

                           DECREASE IN EXERCISE PRICE

                                    RESERVED.

                                       17
<PAGE>

                                   ARTICLE VI

                               LOSS OR MUTILATION

            Upon  receipt  by the  Company  and the  Warrant  Agent of  evidence
satisfactory  to them of the  ownership  and the  loss,  theft,  destruction  or
mutilation of any Warrant  Certificate and of indemnity or bond  satisfactory to
them and (in the case of mutilation)  upon surrender and  cancellation  thereof,
then,  in the  absence of notice to the  Company or the  Warrant  Agent that the
Warrants  represented  thereby have been acquired by a bona fide purchaser,  the
Company shall execute and the Warrant Agent shall countersign and deliver to the
registered  Holder  of  the  lost,   stolen,   destroyed  or  mutilated  Warrant
Certificate,  in exchange for or in lieu thereof,  a new Warrant  Certificate of
the same tenor and for a like aggregate number of Warrants. Upon the issuance of
any new Warrant  Certificate  under this Article VI, the Company may require the
payment of a sum sufficient to cover any tax or other  governmental  charge that
may be imposed in relation  thereto and other  expenses  (including the fees and
expenses  of the  Warrant  Agent) in  connection  therewith.  Every new  Warrant
Certificate  executed and  delivered  pursuant to this Article VI in lieu of any
lost,  stolen or destroyed  Warrant  Certificate  shall constitute a contractual
obligation of the Company whether or not the allegedly lost, stolen or destroyed
Warrant  Certificates  shall be at any time  enforceable  by anyone and shall be
entitled to the benefits of this Agreement equally and proportionately  with any
and all other Warrant  Certificates duly executed and delivered  hereunder.  The
provisions of this Article VI are  exclusive  and shall  preclude (to the extent
lawful)  all  other  rights or  remedies  with  respect  to the  replacement  of
mutilated, lost, stolen, or destroyed Warrant Certificates.

                                  ARTICLE VII

                 RESERVATION AND AUTHORIZATION OF COMMON SHARES

            The  Company  shall at all times  reserve  and keep  available  such
number of its authorized but unissued Common Shares deliverable upon exercise of
the  Warrants  as will be  sufficient  to  permit  the  exercise  in full of all
outstanding  Warrants and will cause  appropriate  evidence of ownership of such
Common Shares to be delivered to the Warrant Agent upon its request for delivery
thereof  upon the exercise of Warrants.  The Company  covenants  that all Common
Shares of the Company that may be issued upon the exercise of the Warrants will,
upon issuance, be duly authorized, validly issued, fully paid and not subject to
any  calls for funds and free from  pre-emptive  rights  and all  taxes,  liens,
charges and security interests with respect to the issue thereof.

                                  ARTICLE VIII

                WARRANT TRANSFER BOOKS; RESTRICTIONS ON TRANSFER

            SECTION 8.1 TRANSFER AND EXCHANGE.

            (a) The  Warrant  Certificates  shall be issued in  registered  form
only. The Warrant Agent shall keep at its office a register for the registration
of Warrant  Certificates  and transfers or exchanges of Warrant  Certificates as

                                       18
<PAGE>

herein provided and other  appropriate  data as determined by the Warrant Agent.
The Company shall,  upon reasonable  notice to the Warrant Agent, have access to
such register  during the Warrant Agent's  regular  business hours.  All Warrant
Certificates  issued  upon any  registration  of transfer or exchange of Warrant
Certificates shall be the valid obligations of the Company,  evidencing the same
obligations,  and entitled to the same  benefits  under this  Agreement,  as the
Warrant Certificates surrendered for such registration of transfer or exchange.

            (b) A Holder may transfer its Warrants  only by written  application
to the Warrant Agent stating the name of the proposed  transferee  and otherwise
complying with the terms of this  Agreement.  No such transfer shall be effected
until,  and such  transferee  shall succeed to the rights of a Holder only upon,
final  acceptance and  registration  of the transfer by the Warrant Agent in the
register.  Prior to the  registration of any transfer of Warrants by a Holder as
provided herein, the Company, the Warrant Agent, and any agent of the Company or
the Warrant Agent may treat the Person in whose name the Warrants are registered
as the owner thereof for all purposes and as the Person entitled to exercise the
rights represented  thereby,  any notice to the contrary  notwithstanding.  When
Warrant  Certificates  are  presented  to the  Warrant  Agent  with a request to
register  the  transfer or to exchange  them for an equal  amount of Warrants of
other authorized  denominations,  the Warrant Agent shall register such transfer
or make such exchange as requested if its requirements for such transactions are
met. To permit  registrations  of transfers  and  exchanges,  the Company  shall
execute Warrant  Certificates at the Warrant Agent's request.  No service charge
shall be made for any registration of transfer or exchange of Warrants,  but the
Company  may  require  payment  of a sum  sufficient  to cover  any tax or other
governmental  charge that may be imposed in connection with any  registration of
transfer of Warrants.

            (c) PRIVATE  PLACEMENT  LEGEND.  Upon the  registration of transfer,
exchange  or  replacement  of  Warrant  Certificates  not  bearing  the  Private
Placement Legend,  the Warrant Agent shall deliver Warrant  Certificates that do
not bear the  Private  Placement  Legend.  Upon the  registration  of  transfer,
exchange or replacement of Warrant  Certificates  bearing the Private  Placement
Legend, the Warrant Agent shall deliver only Warrant  Certificates that bear the
Private  Placement  Legend  unless there is  delivered  to the Warrant  Agent an
Opinion of Counsel reasonably  satisfactory to the Company,  its Counsel and the
Warrant   Agent  to  the  effect  that  neither  such  legend  nor  the  related
restrictions  on transfer are required in order to maintain  compliance with the
provisions of the Securities Act.

            (d) GENERAL.  By its  acceptance  of any Warrants  represented  by a
Warrant  Certificate  bearing the Private Placement Legend,  each Holder of such
Warrants acknowledges the restrictions on transfer of such Warrants set forth in
this  Agreement  and in the  Private  Placement  Legend and agrees  that it will
transfer  such Warrants  only as provided in this  Agreement.  The Warrant Agent
shall not register a transfer of any Warrants unless such transfer complies with
the  restrictions on transfer of such Warrants set forth in this  Agreement.  In
connection  with any transfer of Warrants,  each Holder agrees by its acceptance
of Warrants to furnish the  Warrant  Agent or the Company  such  certifications,
legal opinions or other information as either of them may reasonably  require to
confirm that such  transfer is being made  pursuant to an exemption  from,  or a
transaction not subject to, the registration  requirements of the Securities Act
or any applicable laws of any state or foreign  jurisdiction;  PROVIDED that the
Warrant  Agent  shall  not  be  required  to  determine   (but  may  rely  on  a

                                       19
<PAGE>

determination  made by the Company with respect to) the  sufficiency of any such
certifications, legal opinions or other information.

            (e) The Warrant Agent shall retain, in accordance with its customary
procedure,  copies of all  letters,  notices  and other  written  communications
received  pursuant to this  Section  8.1.  The  Company  shall have the right to
inspect  and  make  copies  of  all  such  letters,  notices  or  other  written
communications  at any  reasonable  time upon the giving of  reasonable  written
notice to the Warrant Agent.

            SECTION  8.2   SURRENDER  OF  WARRANT   CERTIFICATES.   Any  Warrant
Certificate  surrendered for  registration of transfer,  exchange or exercise of
the Warrants  represented  thereby  shall,  if  surrendered  to the Company,  be
delivered to the Warrant Agent, and all Warrant  Certificates  surrendered or so
delivered to the Warrant Agent shall be promptly  cancelled by the Warrant Agent
and shall not be reissued by the Company and, except as provided in this Article
VIII in case of an exchange,  Article III hereof in case of the exercise of less
than all the Warrants  represented  thereby or Article VI in case of a mutilated
Warrant  Certificate,  no Warrant  Certificate shall be issued hereunder in lieu
thereof.  The Warrant  Agent shall  deliver to the Company  from time to time or
otherwise  dispose of such  cancelled  Warrant  Certificates  as the Company may
direct in writing.

                                   ARTICLE IX

                                 WARRANT HOLDERS

            SECTION 9.1 WARRANT HOLDER DEEMED NOT A SHAREHOLDER. The Company and
the Warrant  Agent may deem and treat the  registered  Holder(s)  of the Warrant
Certificates as the absolute owner(s) thereof  (notwithstanding  any notation of
ownership  or other  writing  thereon  made by  anyone),  for the purpose of any
exercise  thereof  and for all other  purposes,  and neither the Company nor the
Warrant  Agent nor any agent  thereof  shall be  affected  by any  notice to the
contrary. Accordingly, the Company and/or the Warrant Agent shall not, except as
ordered by a court of  competent  jurisdiction  as  required by law, be bound to
recognize  any  equitable  or other claim to or interest in the  Warrants on the
part of any Person other than such  registered  Holder,  whether or not it shall
have  express  or other  notice  thereof.  Prior to the  valid  exercise  of the
Warrants, no Holder of a Warrant Certificate,  as such, shall be entitled to any
rights of a shareholder of the Company, including, without limitation, the right
to vote or to  consent to any action of the  shareholders  (except as  otherwise
provided  in  Section  4.1(j)(ii)   herein),   to  receive  dividends  or  other
distributions,  to  exercise  any  preemptive  right or to receive any notice of
meetings of shareholders  and,  except as otherwise  provided in this Agreement,
shall not be entitled to receive any notice of any proceedings of the Company.

            SECTION 9.2 RIGHT OF ACTION.  All rights of action  with  respect to
this Agreement are vested in the Holders of the Warrants,  and any Holder of any
Warrant,  without the  consent of the Warrant  Agent or the Holders of any other
Warrant,  may, on such  Holder's  own behalf and for such  Holder's own benefit,
enforce,  and may institute and maintain any suit, action or proceeding  against
the Company suitable to enforce, or otherwise in respect of, such Holder's right
to  exercise  such  Warrants in the manner  provided in the Warrant  Certificate
representing such Warrants and in this Agreement.

                                       20
<PAGE>

                                   ARTICLE X

                                THE WARRANT AGENT

            SECTION  10.1  DUTIES AND  LIABILITIES.  The  Warrant  Agent  hereby
accepts the agency  established by this Agreement and agrees to perform the same
upon the terms and conditions  herein set forth, by all of which the Company and
the  Holders of  Warrants,  by their  acceptance  thereof,  shall be bound.  The
Warrant Agent shall not, by countersigning  Warrant Certificates or by any other
act  hereunder,  be deemed to make any  representations  as to the  validity  or
authorization  of the  Warrants  or the Warrant  Certificates  (except as to its
countersignature  thereon) or of any Common  Shares  issued upon exercise of any
Warrant,  or as to the accuracy of the  computation of the Exercise Price or the
number or kind or  amount of Common  Shares  deliverable  upon  exercise  of any
Warrant or the  correctness  of the  representations  of the Company made in the
certificates  that the Warrant  Agent  receives.  The Warrant Agent shall not be
accountable  for the use or  application  by the Company of the  proceeds of the
exercise of any Warrant.  The Warrant Agent shall not have any duty to calculate
or determine any  adjustments  with respect to either the Exercise  Price or the
kind and amount of Common  Shares  receivable  by Holders  upon the  exercise of
Warrants  required from time to time and the Warrant Agent shall have no duty or
responsibility  in determining the accuracy or correctness of such  calculation.
The Warrant  Agent shall not be (a) liable for any recital or  statement of fact
contained  herein  or in the  Warrant  Certificates  or for  any  action  taken,
suffered  or  omitted  by it in  good  faith  in the  belief  that  any  Warrant
Certificate  or any other  documents or any  signatures  are genuine or properly
authorized, (b) responsible for any failure on the part of the Company to comply
with any of its covenants and obligations  contained in this Agreement or in the
Warrant  Certificates  or (c) liable for any act or omission in connection  with
this  Agreement  except  for its own  gross  negligence,  bad  faith or  willful
misconduct.  The Warrant Agent is hereby authorized to accept  instructions with
respect to the  performance  of its duties  hereunder  from the  Chairman of the
Board, the Vice Chairman of the Board, the President,  Chief Executive  Officer,
the Chief Operating Officer, the Chief Financial Officer, or any other executive
officer of the Company and to apply to any such officer for instructions  (which
instructions  will be promptly given in writing when  requested) and the Warrant
Agent shall not be liable for any action  taken or suffered to be taken by it in
good faith in accordance with the  instructions  of any such officer;  PROVIDED,
HOWEVER, that, in its discretion, the Warrant Agent may, in lieu thereof, accept
other evidence of such or may require such further or additional  evidence as it
may deem reasonable.  The Warrant Agent shall not be liable for any action taken
with  respect  to any  matter in the  event it  requests  instructions  from the
Company  as to that  matter  and does not  receive  such  instructions  within a
reasonable period of time after the request therefor.

            The Warrant  Agent may execute  and  exercise  any of the rights and
powers hereby vested in it or perform any duty hereunder  either itself or by or
through its attorneys,  agents or employees,  and the Warrant Agent shall not be
answerable or  accountable  for any act,  default,  neglect or misconduct of any
such  attorneys,  agents or employees;  PROVIDED that  reasonable  care has been
exercised with respect to the retention of any such attorney, agent or employee.
The Warrant Agent shall not be under any obligation or duty to institute, appear
in or defend any action,  suit or legal  proceeding  in respect  hereof,  unless
first  indemnified  to its  reasonable  satisfaction.  The  Warrant  Agent shall
promptly  notify the  Company  in  writing of any claim made or action,  suit or

                                       21
<PAGE>

proceeding  instituted  against it  arising  out of or in  connection  with this
Agreement.

            The Company will perform, execute,  acknowledge and deliver or cause
to be  delivered  all such  further  acts,  instruments  and  assurances  as are
consistent  with this Agreement and as may reasonably be required by the Warrant
Agent in order to  enable it to carry  out or  perform  its  duties  under  this
Agreement. The Warrant Agent shall act solely as agent of the Company hereunder.
The  Warrant  Agent shall not be liable  except for the failure to perform  such
duties as are specifically set forth herein or for its own gross negligence, bad
faith or willful  misconduct,  and no implied  covenants or obligations shall be
read into this Agreement against the Warrant Agent, whose duties and obligations
shall be determined solely by the express provisions hereof.

            SECTION 10.2 RIGHT TO CONSULT COUNSEL.  The Warrant Agent may at any
time consult with legal counsel (who may be legal counsel for the Company),  and
the  written  opinion  or  advice  of such  counsel  shall be full and  complete
authorization  and  protection  to the Warrant Agent and the Warrant Agent shall
incur no  liability  or  responsibility  to the Company or to any Holder for any
action  taken,  suffered or omitted by it in good faith in  accordance  with the
opinion or advice of such counsel.

            SECTION  10.3  COMPENSATION;  INDEMNIFICATION.  The  Company  agrees
promptly  to pay the  Warrant  Agent from time to time and in any case within 30
days of receipt of an invoice,  compensation  for its services  hereunder as the
Company and the Warrant  Agent may agree from time to time,  and to reimburse it
upon  its  request  (which  shall  be   accompanied  by  reasonable   supporting
documentation)  for reasonable fees or expenses and reasonable  counsel fees and
expenses  incurred in connection with the execution and  administration  of this
Agreement,  and  further  agrees  to  indemnify  the  Warrant  Agent and save it
harmless against any losses,  liabilities or reasonable  expenses arising out of
or in connection  with the  acceptance  and  administration  of this  Agreement,
including,   without   limitation,   the   reasonable   costs  and  expenses  of
investigating or defending any claim of such liability,  except that the Company
shall have no liability hereunder to the extent that any such loss, liability or
expense  results  from the Warrant  Agent's own gross  negligence,  bad faith or
willful misconduct. The obligations of the Company under this Section 10.3 shall
survive the exercise and the expiration of the Warrants, the termination of this
Agreement  and the  resignation  or removal of the  Warrant  Agent in respect of
services or expenses incurred in connection with the Warrants or this Agreement.

            SECTION 10.4 NO RESTRICTIONS  ON ACTIONS.  Nothing in this Agreement
shall be deemed to prevent  the  Warrant  Agent and any  shareholder,  director,
officer or employee of the Warrant Agent from buying,  selling or dealing in any
of the  Warrants or other  securities  of the  Company or  becoming  pecuniarily
interested  in  transactions  in  which  the  Company  may  be  interested,   or
contracting  with or lending  money to the Company or otherwise  acting as fully
and freely as though it were not the Warrant Agent under this Agreement. Nothing
herein shall  preclude the Warrant  Agent from acting in any other  capacity for
the Company or for any other legal entity.

            SECTION 10.5 DISCHARGE OR REMOVAL;  REPLACEMENT  WARRANT AGENT.  The
Warrant  Agent may resign from its position as such and be  discharged  from all

                                       22
<PAGE>

further duties and liabilities  hereunder  (except liability arising as a result
of the Warrant Agent's own gross negligence,  bad faith or willful  misconduct),
after giving one month's prior written notice to the Company. The Company may at
any time remove the Warrant Agent upon one month's written notice specifying the
date  when such  discharge  shall  take  effect,  and the  Warrant  Agent  shall
thereupon in like manner be discharged  from all further duties and  liabilities
hereunder, except as aforesaid. The Warrant Agent shall mail to each Holder of a
Warrant,  at the  Company's  expense,  a copy of said notice of  resignation  or
notice of  removal,  as the case may be.  Upon such  resignation  or removal the
Company shall appoint in writing a new warrant agent.  If the Company shall fail
to make such  appointment  within a period of 30 days after it has been notified
in writing of such  resignation  by the  resigning  Warrant  Agent or after such
removal,  then the  resigning  or  removed  Warrant  Agent or the  Holder of any
Warrant may apply to any court of competent  jurisdiction for the appointment of
a new warrant agent.  After 30 days from receipt of, or giving,  notice,  as the
case may be, and pending  appointment  of a successor  to the  original  Warrant
Agent, either by the Company or by such a court, the duties of the Warrant Agent
shall be carried out by the Company. Any new warrant agent, whether appointed by
the Company or by such a court,  shall be a bank or trust company doing business
under the laws of the United States or any state  thereof,  in good standing and
having a  combined  capital  and  surplus  of not less  than  $250,000,000.  The
combined capital and surplus of any such new warrant agent shall be deemed to be
the combined  capital and surplus as set forth in the most recent  annual report
of its  condition  published  by such  warrant  agent prior to its  appointment,
PROVIDED that such reports are published at least annually pursuant to law or to
the requirements of a federal or state supervising or examining authority. After
acceptance in writing of such  appointment by the new warrant agent, it shall be
vested with the same powers,  rights,  duties and  responsibilities as if it had
been  originally  named  herein  as  the  Warrant  Agent,  without  any  further
assurance, conveyance, act or deed; however, the original Warrant Agent shall in
all events  deliver and  transfer to the  successor  Warrant  Agent all property
(including, without limitation,  documents and recorded information), if any, at
the time held  hereunder by the original  Warrant Agent and if for any reason it
shall be necessary  or  expedient to execute and deliver any further  assurance,
conveyance,  act or deed,  the same shall be done at the  expense of the Company
and shall be legally and validly  executed  and  delivered  by the  resigning or
removed  Warrant  Agent.   Not  later  than  the  effective  date  of  any  such
appointment, the Company shall file notice thereof with the resigning or removed
Warrant  Agent and shall use its  reasonable  best efforts to forthwith  cause a
copy of such notice to be mailed by the  successor  Warrant Agent to each Holder
of a Warrant.  Failure to give any notice  provided  for in this  Section  10.5,
however, or any defect therein, shall not affect the legality or validity of the
resignation of the Warrant Agent or the  appointment of a new warrant agent,  as
the case may be. No  Warrant  Agent  hereunder  shall be liable  for any acts or
omissions of any successor Warrant Agent.

            SECTION 10.6 SUCCESSOR WARRANT AGENT. Any corporation into which the
Warrant  Agent or any new  warrant  agent  may be merged  or  converted,  or any
corporation  resulting from any  consolidation to which the Warrant Agent or any
new  warrant  agent  shall be a party or any  corporation  succeeding  to all or
substantially all the corporate agency business of the Warrant Agent, shall be a
successor  Warrant Agent under this Agreement  without any further act, PROVIDED
that such  corporation  would be eligible  for  appointment  as successor to the
Warrant Agent under the  provisions of Section 10.5 hereof.  Any such  successor

                                       23
<PAGE>

Warrant Agent shall  promptly cause notice of its succession as Warrant Agent to
be mailed to each Holder of a Warrant.

                                   ARTICLE XI

                            REPRESENTATION OF HOLDER

            SECTION 11.1 PRIVATE PLACEMENT.  Each Holder represents and warrants
that:

            (a) Such Holder  understands  that (i) the  offering and issuance of
the Warrants 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  Warrants  and there can be no  assurance
that it will be able to sell or dispose of such  Warrants  issued to it pursuant
to this Agreement.

            (b) Such Holder is an "Accredited  Investor" as such term is defined
in Regulation D promulgated  pursuant to the Securities Act.

            (c) Such Holder 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 Warrants and it is capable of bearing the economic  risks
of such investment, including a complete loss of its investment in the Warrants.

            (d) Such  Holder  understands  that the  Warrants  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 Company 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 XII

                                  MISCELLANEOUS

            SECTION 12.1 MONIES  DEPOSITED WITH THE WARRANT  AGENT.  The Warrant
Agent shall not be required to pay interest on any monies deposited  pursuant to
the provisions of this  Agreement  except such as it shall agree in writing with
the Company to pay thereon.  Any monies,  securities or other  property which at
any time shall be  deposited  by the  Company or on its behalf  with the Warrant
Agent pursuant to this Agreement shall be and are hereby  assigned,  transferred
and set over to the  Warrant  Agent in trust  for the  purpose  for  which  such
monies, securities or other property shall have been deposited; but such monies,
securities or other property need not be segregated from other funds, securities
or other property except to the extent  required by law. Any monies,  securities
or other property  deposited with the Warrant Agent for payment or  distribution
to the Holders  that remains  unclaimed  for one year after the date the monies,

                                       24
<PAGE>

securities  or other  property  was  deposited  with the Warrant  Agent shall be
delivered to the Company upon its request therefor.

            SECTION 12.2 PAYMENT OF TAXES.  All Common Shares  issuable upon the
exercise of Warrants shall be validly issued,  fully paid and not subject to any
calls for funds,  and,  subject to Article VI hereof,  the Company shall pay any
taxes and other  governmental  charges that may be imposed under the laws of the
United  States of  America  or any  political  subdivision  or taxing  authority
thereof or therein in respect of the issue or delivery  thereof upon exercise of
Warrants (other than income taxes imposed on the Holders). The Company shall not
be required,  however, to pay any tax or other charge imposed in connection with
any  transfer  involved  in the  issue  of any  certificate  for  Common  Shares
(including  other  securities  or  property  issuable  upon the  exercise of the
Warrants)  or payment  of cash to any Person  other than the Holder of a Warrant
Certificate  surrendered  upon the  exercise  of a  Warrant  and in case of such
transfer or payment,  the Warrant Agent and the Company shall not be required to
issue any share  certificate  or pay any cash  until such tax or charge has been
paid or it has  been  established  to the  Warrant  Agent's  and  the  Company's
satisfaction that no such tax or charge is due.

            SECTION  12.3 NO  MERGER,  CONSOLIDATION  OR SALE OF  ASSETS  OF THE
COMPANY.  The Company will not merge into or consolidate  with any other Person,
or sell or otherwise transfer its property, assets and business substantially as
an entirety to a successor of the Company, unless the Person resulting from such
merger or  consolidation,  or such  successor  of the Company,  shall  expressly
assume, by supplemental  agreement satisfactory in form to the Warrant Agent and
executed and delivered to the Warrant  Agent,  the due and punctual  performance
and  observance of each and every  covenant and  condition of this  Agreement or
contained in the Warrants to be performed and observed by the Company.

            SECTION  12.4  REPORTS TO  HOLDERS.  Whether  or not the  Company is
required to file reports with the  Commission,  the Company  shall file with the
Commission  all reports and other  information it would be required to file with
the  Commission  by Section  13(a) or 15(d)  under the  Exchange  Act if it were
subject  thereto.  The Company shall supply the Warrant Agent and each Holder or
shall supply to the Warrant Agent for  forwarding  to each such Holder,  without
cost to such Holder, copies of such reports and other information.  In addition,
at all times, upon the request of any Holder or any prospective purchaser of the
Warrants designated by a Holder, the Company shall supply to such Holder or such
prospective  purchaser  the  information  required  under  Rule  144A  under the
Securities Act.

            SECTION 12.5 NOTICES;  PAYMENT.  (a) Except as otherwise provided in
Section  12.5(b)  hereof,  any  notice,  demand or delivery  authorized  by this
Agreement  shall be  sufficiently  given or made when  mailed,  if sent by first
class  mail,  postage  prepaid,  addressed  to any  Holder of a Warrant  at such
Holder's last known address appearing on the register of the Company  maintained
by the Warrant Agent and to the Company or the Warrant Agent as follows:

            To the Company:

            KMC Telecom Holdings, Inc.
            1545 Route 206, Suite 300

                                       25
<PAGE>

            Bedminster, NJ 07921
            Attention: Chief Financial Officer


            To the Warrant Agent:

            First Union National Bank,
             as Warrant Agent
            301 South College Street, DC-5
            Charlotte, NC 28288-0537
            Attention: Christian Ullrich


or such other address as shall have been furnished to the party giving or making
such notice, demand or delivery.  Any notice that is mailed in the manner herein
provided  shall be  conclusively  presumed to have been duly given when  mailed,
whether or not the Holder receives the notice.

            (b) Payment of the Exercise Price should be made in accordance  with
the  provisions  of this  Agreement at the office of the Warrant Agent set forth
above.

            (c) Any notice  required  to be given by the  Company to the Holders
shall be made by mailing to the Holders at their last known addresses  appearing
on the register  maintained by the Warrant Agent. The Company hereby irrevocably
authorizes the Warrant Agent, in the name and at the expense of the Company,  to
mail any such notice upon receipt  thereof from the Company.  Any notice that is
mailed in the manner herein provided shall be conclusively presumed to have been
duly given when mailed, whether or not the Holder receives the notice.

            SECTION 12.6 BINDING  EFFECT.  This Agreement  shall be binding upon
and  inure to the  benefit  of the  Company  and the  Warrant  Agent  and  their
respective  successors  and  assigns,  and the Holders  from time to time of the
Warrants and their respective successors and assigns.  Nothing in this Agreement
is intended  or shall be  construed  to confer  upon any Person,  other than the
Company,  the  Warrant  Agent,  the Agent and the Holders of the  Warrants,  any
right, remedy or claim under or by reason of this Agreement or any part hereof.

            SECTION 12.7  COUNTERPARTS.  This Agreement may be executed manually
or by facsimile in any number of counterparts,  each of which shall be deemed an
original, but all of which together constitute one and the same instrument.

            SECTION 12.8 AMENDMENTS. The provisions of this Agreement, including
the provisions of this sentence,  may not be amended,  modified or supplemented,
and waivers or  consents to  departures  from the  provisions  hereof may not be
given unless the Company and the Warrant Agent have obtained the written consent
of Holders of at least a majority of the outstanding  Warrants  affected by such
amendment, modification, supplement, waiver or consent.

                                       26
<PAGE>

            SECTION  12.9  HEADINGS.  The  descriptive  headings  of the several
Sections of this  Agreement  are  inserted  for  convenience  only and shall not
control or affect the meaning or construction of any of the provisions hereof.

            SECTION  12.10  COMMON  SHARES  LEGEND.  Unless and until the Common
Shares  issuable  upon the  exercise of the Warrants  are  registered  under the
Securities  Act,  or unless  otherwise  agreed  by the  Company  and the  Holder
thereof, such Common Shares will bear a legend to the following effect:

            "THE COMMON SHARES  REPRESENTED  BY THIS  CERTIFICATE  HAVE NOT BEEN
            REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY STATE
            SECURITIES  LAWS  AND  ACCORDINGLY  MAY  NOT BE  SOLD,  TRANSFERRED,
            PLEDGED,  HYPOTHECATED OR OTHERWISE ENCUMBERED OR DISPOSED OF IN THE
            ABSENCE OF SUCH  REGISTRATION OR AN EXEMPTION FROM THE  REGISTRATION
            REQUIREMENTS OF SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS."

            SECTION 12.11 THIRD PARTY BENEFICIARIES. The Holders (other than the
Holders signatory  hereto) shall be third party  beneficiaries to the agreements
made hereunder  between the Company,  on the one hand, and the Warrant Agent and
the Holders  signatory hereto, on the other hand, and each Holder shall have the
right  to  enforce  such  agreements  directly  to  the  extent  it  deems  such
enforcement  necessary  or  advisable  to  protect  its  rights or the rights of
Holders hereunder.  By acquiring Warrants, each Holder agrees to be bound by the
obligations of Holders generally as set forth herein and as such obligations may
be applicable to such Holder.

            SECTION 12.12  TERMINATION.  Except as otherwise  specified  herein,
this  Agreement  shall  terminate  at 5:00  p.m.  (New  York  City  time) on the
Expiration Date.  Notwithstanding the foregoing,  this Agreement shall terminate
on any earlier date as of which all Warrants have been exercised.

            SECTION 12.13 GOVERNING LAW. This Agreement shall be governed by the
laws of the State of New York.

                                       27
<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/ CONSTANCE LOOSEMORE
                                             -----------------------
                                        Name:  Constance Loosemore
                                        Title: Treasurer


                                        FIRST UNION  NATIONAL  BANK,  as Warrant
                                        Agent


                                        By: /S/ G.C. ULLRICH
                                            ----------------
                                        Name: G.C. Ullrich
                                        Title: Senior Vice President


                                        FIRST UNION  NATIONAL BANK, as the Agent
                                        and as a Lender


                                        By: /S/ G.C. ULLRICH
                                            ----------------
                                        Name: G.C. Ullrich
                                        Title: Senior Vice President


                                        CIT LENDING SERVICES CORPORATION (f/k/a
                                        NEWCOURT COMMERCIAL FINANCE
                                        CORPORATION), as a Lender


                                        By: /S/ MARK O'KEEFFE
                                            -----------------
                                        Name: Mark O'Keeffe
                                        Title: Vice President


                                        CANADIAN IMPERIAL BANK OF COMMERCE, as a
                                        Lender


                                        By: /S/ JACQUELINE STEWART
                                            ----------------------
                                        Name: Jacqueline Stewart
                                        Title: Executive Director


                                       S-1
<PAGE>

                                        GENERAL ELECTRIC CAPITAL CORPORATION, as
                                        a Lender


                                        By: /S/ BRIAN P. WARD
                                            -----------------
                                        Name: Brian P. Ward
                                        Title: Manager-Operations



                                        LUCENT TECHNOLOGIES INC., as a Lender


                                        By: /S/ DINA FEDE
                                            -------------
                                        Name:  Dina Fede
                                        Title: Director - NA Customer Finance


                                        CREDIT SUISSE FIRST BOSTON, as a Lender


                                        By: /S/ DAVID L. SAWYER /S/LALITA ADVANI
                                            ------------------- ----------------
                                        Name: David L. Sawyer   Lalita Advani
                                        Title: Vice  President  Assistant  Vice
                                                                President


                                        DRESDNER  BANK  AG NEW  YORK  AND  GRAND
                                        CAYMAN BRANCHES, as a Lender


                                        By: /S/ BRIAN SCHNEIDER
                                            -------------------
                                        Name: Brian Schneider
                                        Title: Assistant Vice President


                                        By: /S/ MICHAEL S. GREENBERG
                                            ------------------------
                                        Name: Michael S. Greenberg
                                        Title: Assistant Vice President


                                       S-2

<PAGE>



                                        MORGAN STANLEY SENIOR FUNDING,  INC., as
                                        a Lender


                                        By: /S/ T. MORGAN EDWARDS II
                                            ------------------------
                                        Name: T. Morgan Edwards II
                                        Title: Vice President

                                        By:
                                           ------------------------
                                        Name:
                                        Title:


                                        MORGAN  STANLEY DEAN WITTER PRIME INCOME
                                        TRUST, as a Lender


                                        By: /S/ SHEILA FINNERTY
                                            -------------------
                                        Name: Sheila Finnerty
                                        Title: Senior Vice President


                                        UNION  BANK OF  CALIFORNIA,  N.A.,  as a
                                        Lender


                                        By: /S/ STENDER E. SWEENEY II
                                            -------------------------
                                        Name: Stender E. Sweeney II
                                        Title: Vice President


                                        STEIN  ROE  &  FARNHAM  INCORPORATED  as
                                        agent   for   KEYPORT   LIFE   INSURANCE
                                        COMPANY, as a Lender


                                        By: /S/ JAMES R. FELLOWS
                                            --------------------
                                        Name: James R. Fellows
                                        Title:  Sr.  Vice  President & Portfolio
                                                Manager


                                       S-3

<PAGE>

                                        STEIN   ROE   FLOATING    RATE   LIMITED
                                        LIABILITY COMPANY, as a Lender


                                        By: /S/ JAMES R. FELLOWS
                                            --------------------
                                        Name: James R. Fellows
                                        Title: Senior Vice President


                                        IBM CREDIT CORPORATION, as a Lender


                                        By: /S/ THOMAS S. CURCIO
                                            --------------------
                                        Name: Thomas S. Curcio
                                        Title: Manager of Credit, Commercial and
                                               Specialty Financing

                                       S-4