===============================================================================
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  ------------

                                    FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2001

                                        OR

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

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

COMMISSION FILE NUMBER: 333-50475

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

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

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

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

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

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

          Class                                          Outstanding
          -----                                          -----------
   Common Stock, par value $0.01                         861,145 shares,
         per share.                                      as of August 10, 2001

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

<PAGE>

<TABLE>
<CAPTION>


                         PART I - FINANCIAL INFORMATION
                           KMC TELECOM HOLDINGS, INC.

                                      INDEX


PART I.  FINANCIAL INFORMATION                                                                     PAGE NO.
------------------------------                                                                     --------
<S>                                                                                                 <C>
ITEM 1. Financial Statements


        Unaudited Condensed Consolidated Balance Sheets, December 31, 2000
         and June 30, 2001.............................................................................2

        Unaudited Condensed Consolidated Statements of Operations,
         Three Months Ended June 30, 2000 and 2001 and Six Months Ended June 30,
         2000 and 2001.................................................................................3

        Unaudited Condensed Consolidated Statements of Cash Flows, Six Months Ended
         June 30, 2000 and 2001........................................................................4

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

ITEM 2. Management's Discussion and Analysis of Financial Condition
         and Results of Operations.....................................................................15

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.....................................25

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

ITEM 1. Legal Proceedings..............................................................................26

ITEM 2. Changes in Securities and Use of Proceeds......................................................26

ITEM 3. Defaults Upon Senior Securities................................................................26

ITEM 4. Submission of Matters to a Vote of Security Holders............................................26

ITEM 5. Other Information..............................................................................27

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

SIGNATURES.............................................................................................29



</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                         PART I - FINANCIAL INFORMATION
                           KMC TELECOM HOLDINGS, INC.
                 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

                                                                                            DECEMBER 31,          JUNE 30,
                                                                                                2000                2001
                                                                                            ------------         ----------
<S>                                                                                               <C>               <C>
ASSETS
Current assets:
   Cash and cash equivalents.........................................................      $      109,977    $      171,160
   Restricted investments............................................................              37,125            44,875
   Accounts receivable, net of allowance for doubtful accounts of $10,921 and
      $7,641 in 2000 and 2001, respectively..........................................              47,141            67,280
   Prepaid expenses and other current assets.........................................              14,888             7,661
                                                                                           ---------------   --------------
Total current assets.................................................................             209,131           290,976
Long-term restricted investments.....................................................              62,931            25,115
Networks, property and equipment, net................................................           1,021,684         1,268,822
Intangible assets, net...............................................................               3,835             3,773
Deferred financing costs, net........................................................              32,766            31,658
Other assets.........................................................................                 928             2,500
                                                                                           --------------    --------------
                                                                                           $    1,331,275    $    1,622,844
                                                                                           ==============    ==============
LIABILITIES, REDEEMABLE AND NONREDEEMABLE EQUITY (DEFICIENCY)
Current liabilities:
   Accounts payable..................................................................      $      180,803    $      199,637
   Accrued expenses..................................................................              73,605            77,046
   Deferred revenue..................................................................              17,839            16,718
   Current portion of notes payable..................................................                   -           224,044
                                                                                           --------------    --------------
Total current liabilities............................................................             272,247           517,445
Other liabilities....................................................................                   -            20,127
Notes payable........................................................................             728,173           956,433
Senior notes payable.................................................................             275,000           275,000
Senior discount notes payable........................................................             340,181           223,940
                                                                                           --------------    --------------
Total liabilities....................................................................           1,615,601         1,992,945

Commitments and contingencies

Redeemable equity:
   Senior redeemable, exchangeable, PIK preferred stock, par value $.01 per
    share; authorized:
    630 shares in 2000 and 2001; shares issued and outstanding:
        Series E, 75 shares in 2000 and 132 shares in 2001  ($131,861 liquidation
        preference)                                                                                61,992           122,501
        Series F, 48 shares in 2000 and -0- shares in 2001...........................              50,568                 -
   Redeemable cumulative convertible preferred stock, par value $.01 per share;
      499 shares authorized; shares issued and outstanding:
        Series A, 124 shares in 2000 and 2001 ($12,380 liquidation preference).......             109,272            27,923
        Series C, 175 shares in 2000 and 2001 ($17,500 liquidation preference).......              72,701            19,309
   Redeemable cumulative convertible preferred stock, par value $.01 per share;
      2,500 shares authorized; shares issued and outstanding:
        Series G-1, 59 shares in 2000 and 2001 ($19,900 liquidation preference)......              19,435            19,514
        Series G-2, 481 shares in 2000 and 2001 ($162,600 liquidation preference)....             158,797           159,449
   Redeemable common stock, shares issued and outstanding, 224 in 2000 and 2001......              45,563            22,123
   Redeemable common stock warrants..................................................              16,817            22,390
                                                                                           --------------    --------------
Total redeemable equity..............................................................             535,145           393,209
                                                                                           --------------    --------------
Nonredeemable equity (deficiency):
  Common stock, par value $.01 per share; 4,250 shares authorized; shares issued
     and outstanding:  630 shares and 637 shares in 2000 and 2001, respectively.......                  6                 6
  Additional paid-in capital..........................................................                  -            36,013
  Unearned compensation...............................................................            (16,608)             (289)
  Accumulated deficit.................................................................           (802,869)         (778,913)
  Accumulated other comprehensive income..............................................                  -           (20,127)
                                                                                           ---------------   ---------------
Total nonredeemable equity (deficiency)...............................................           (819,471)         (763,310)
                                                                                           ---------------   ---------------
                                                                                           $    1,331,275    $     1,622,844
                                                                                           ===============   ===============

                             See accompanying notes

                                       2

</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                                PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

                                                                   THREE MONTHS ENDED                     SIX MONTHS ENDED
                                                                        JUNE 30,                              JUNE 30,
                                                             ---------------------------------      ------------------------------
                                                                2000                 2001                2000               2001
                                                             ------------        -------------      --------------     -----------
<S>                                                          <C>                 <C>                 <C>               <C>
Revenue..................................................... $     38,925        $     108,117       $      68,076     $   204,943
Operating expenses:
  Network operating costs:
    Non-cash stock compensation expense/(credit)............          655               (1,033)              1,853          (6,043)
    Other network operating costs...........................       36,483               61,981              65,290         123,311
  Selling, general and administrative:
    Non-cash stock compensation expense/(credit)............        8,709              (12,039)             20,819         (70,453)
    Other selling, general and administrative costs.........       39,724               42,771              79,050          91,728
  Depreciation and amortization.............................       17,381               48,676              31,118          81,291
                                                             ------------        -------------       -------------      ----------
    Total operating expenses................................      102,952              140,356             198,130         219,834
                                                             ------------        -------------       -------------      ----------
Loss from operations........................................      (64,027)             (32,239)           (130,054)        (14,891)
Interest income.............................................        2,539                3,476               4,508           6,000
Interest expense............................................      (31,236)             (46,501)            (58,400)        (89,650)
                                                             ------------        -------------       -------------      ----------
Net loss before extraordinary item and cumulative effect
    of change in accounting principle.......................      (92,724)             (75,264)           (183,946)        (98,541)
Extraordinary item..........................................            -              109,400                   -         109,400
Cumulative effect of change in accounting principle.........            -                    -              (1,705)              -
                                                             ------------        -------------       -------------      ----------
Net income/(loss)...........................................      (92,724)              34,136            (185,651)         10,859
(Dividends and accretion)/reversal of accretion on
    redeemable preferred stock..............................      (25,454)              39,396             (58,981)        107,030
                                                             ------------        -------------       -------------      ----------
Net income/(loss) applicable to common shareholders......... $   (118,178)       $      73,532       $    (244,632)     $  117,889
                                                             ============        =============       =============      ==========
Net income/(loss) per common share before extraordinary
    item and cumulative effect of change in accounting
    principle - basic....................................... $    (138.42)       $      (41.65)      $     (284.60)     $     9.86
Extraordinary item -basic...................................            -               127.04                   -          127.04
Cumulative effect of change in accounting principle                     -
    - basic.................................................            -                    -               (2.00)              -
                                                             ------------        -------------       -------------      ----------
Net income/(loss) per common share - basic.................. $    (138.42)       $       85.39             (286.60)     $   136.90
                                                             ============        =============       =============      ==========
Net income/(loss) per common share before extraordinary
    item and cumulative effect of change in accounting
    principle - diluted.....................................            -        $      (25.17)                  -      $   (32.31)
Extraordinary item - diluted................................            -                36.59                   -           35.87
                                                             ------------        -------------       -------------      ----------
Net income per common share - diluted.......................          N/A        $       11.42                 N/A      $     3.56
                                                             ============        =============       =============      ==========
Weighted average number of common shares outstanding -
    basic...................................................      853,765              861,145             853,553         861,145
                                                             ============        =============       =============      ==========
Weighted average number of common and common equivalent
    shares outstanding - diluted............................          N/A            2,989,670                 N/A       3,049,670
                                                             ============        =============       =============      ==========
Pro forma amounts assuming the change in accounting
    principle was applied retroactively:
Net income/(loss) applicable to common shareholders......... $   (118,178)                 N/A       $    (242,927)            N/A
                                                             ============        =============       =============      ==========
Net income/(loss) per common share-basic.................... $    (138.42)                 N/A       $     (284.60)            N/A
                                                             ============        =============       =============      ==========

                             See accompanying notes

                                       3

</TABLE>


<PAGE>


<TABLE>
<CAPTION>
                                PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

                                                                                           SIX MONTHS ENDED
                                                                                               JUNE 30,
                                                                                   ---------------------------------
                                                                                        2000             2001
                                                                                   ---------------  ----------------

<S>                                                                                <C>               <C>

OPERATING ACTIVITIES
Net income/(loss).............................................................     $     (185,651)   $      10,859

Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization...........................................             31,118           81,291
      Non-cash interest expense...............................................             17,150           22,796
      Non-cash stock option compensation expense/(credit).....................             22,672          (76,496)
      Gain on repurchase of senior discount notes.........................                      -         (109,400)
      Changes in assets and liabilities:
         Accounts receivable..................................................             (9,533)         (20,139)
         Prepaid expenses and other current assets............................             (1,818)           7,227
         Other assets.........................................................             10,525           51,304
         Accounts payable.....................................................            (60,696)          18,834
         Accrued expenses.....................................................             16,972             (570)
         Deferred revenue.....................................................             10,156           (1,121)
                                                                                   ---------------   --------------
Net cash used in operating activities.........................................           (149,105)         (15,415)
                                                                                   ---------------   --------------

INVESTING ACTIVITIES
Construction of networks and purchases of equipment...........................           (210,720)        (326,818)
Acquisitions of franchises, authorizations and related assets.................               (751)            (245)
                                                                                   ---------------   --------------
Net cash used in investing activities.........................................           (211,471)        (327,063)
                                                                                   ---------------   --------------

FINANCING ACTIVITIES
Proceeds from monetizations, net of issuance costs............................                  -          545,866
Repurchase of senior discount notes...........................................                  -          (19,178)
Repayment of monetization debt................................................                  -          (24,883)
Repayment of credit facilities................................................                  -         (189,710)
Proceeds from credit facilities, net of issuance costs........................            334,907           91,566
                                                                                   ---------------   --------------
Net cash provided by financing activities.....................................            334,907          403,661
                                                                                   ---------------   --------------

Net increase/(decrease) in cash and cash equivalents..........................            (25,669)          61,183
Cash and cash equivalents, beginning of period................................             85,966          109,977
                                                                                   ---------------   --------------

Cash and cash equivalents, end of period......................................     $       60,297    $     171,160
                                                                                   ===============   ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of amounts capitalized..........     $       35,779    $      34,404
                                                                                   ===============   ==============

                             See accompanying notes

                                       4


</TABLE>

<PAGE>


                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 2001

1.      BASIS OF PRESENTATION AND ORGANIZATION

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

        The Company is a fiber-based integrated communications provider
offering data, voice and Internet infrastructure services. The Company offers
these services to businesses, governments and institutional end-users, Internet
service providers, long distance carriers and wireless service providers,
primarily in the South, Southeast, Midwest and Mid-Atlantic United States. The
business has two distinct components: serving communications-intensive customers
in Tier III markets, and providing data services on a nationwide basis.

        The unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting. Accordingly, they do not include certain information and
note disclosures required by generally accepted accounting principles for annual
financial reporting and should be read in conjunction with the financial
statements and notes thereto of KMC Telecom Holdings, Inc. as of and for the
year ended December 31, 2000.

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

        The balance sheet of KMC Telecom Holdings, Inc. at December 31, 2000
was derived from the audited consolidated balance sheet at that date.

        Certain reclassifications have been made to the 2000 unaudited
condensed consolidated financial statements to conform with the 2001
presentation.

2.      ACCOUNTING CHANGE

        In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. SAB 101 provides additional guidance in applying generally accepted
accounting principles to revenue recognition in financial statements. Through
December 31, 1999, the Company recognized installation revenue upon completion
of the installation. Effective January 1, 2000, in accordance with the
provisions of SAB 101, the Company is recognizing installation revenue over the
average contract period. The cumulative effect of this change in accounting
principle resulted in a charge of approximately $1.7 million which was recorded
in the quarter ended March 31, 2000. Revenue for the six months ended June 30,
2000 includes $1.2 million of revenue that, prior to the accounting change, had
been recognized through December 31, 1999.



                                       5
<PAGE>

                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


3.      NETWORKS, PROPERTY AND EQUIPMENT

        Networks and equipment are comprised of the following:

<TABLE>
<CAPTION>

                                                                          DECEMBER 31,                 JUNE 30,
                                                                            2000                        2001
                                                                          -------------------------------------
                                                                                      (IN THOUSANDS)
<S>                                                                   <C>                        <C>
Fiber optic systems..........................................         $     249,690              $      268,067
Telecommunications equipment.................................               696,683                   1,130,825
Furniture and fixtures.......................................                27,790                      28,805
Leasehold improvements.......................................                 2,704                       2,917
Construction-in-progress.....................................               157,075                      29,654
                                                                      -------------              ---------------
                                                                          1,133,942                   1,460,268
Less accumulated depreciation................................              (112,258)                   (191,446)
                                                                      --------------             ---------------
                                                                       $  1,021,684               $   1,268,822
                                                                      ==============             --=============


</TABLE>

         Costs capitalized during the development of the Company's networks
include amounts incurred related to network engineering, design and construction
and capitalized interest. Capitalized interest related to the construction of
the networks for the six months ended June 30, 2000 and 2001 amounted to $5.9
million and $1.3 million, respectively.

4.      ACCRUED EXPENSES

        Accrued expenses are comprised of the following:


<TABLE>
<CAPTION>
                                                                          DECEMBER 31,                 JUNE 30,
                                                                            2000                        2001
                                                                       ----------------------------------------
                                                                                      (IN THOUSANDS)
<S>                                                                    <C>                        <C>
Accrued compensation and benefits............................          $     20,068               $      17,004
Accrued telecommunications costs.............................                 8,125                      10,513
Accrued interest payable.....................................                20,419                      10,256
Accrued property taxes.......................................                 3,143                       7,356
Other accrued expenses.......................................                21,850                      31,917
                                                                       ------------               -------------
                                                                       $     73,605               $      77,046
                                                                       ============               =============


</TABLE>


5.      INFORMATION BY BUSINESS SEGMENT

        The Company has two reportable segments as defined by FASB Statement
No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION":
a Tier III Markets segment and a Nationwide Data Platform segment. The Company
owns and operates robust fiber-based networks and switching equipment in all of
its 37 Tier III markets, which are predominantly located in the South,
Southeast, Midwest and Mid-Atlantic United States. The Nationwide Data Platform
segment provides local Internet access infrastructure and other enhanced data
services in over 140 markets nationwide.

        The Company evaluates the performance of its operating segments based
on earnings before interest, taxes, depreciation and amortization, excluding
general corporate expenses and non-cash stock compensation expense/(credit)
("Adjusted EBITDA"). There are no significant intersegment transactions.


                                       6

<PAGE>

                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


        Prior to the development of the Nationwide Data Platform segment in
late fiscal 2000, the Company was managed as one reporting segment for the six
months ended June 30, 2000. Therefore, segment data for such period is not
presented.
<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED JUNE 30, 2001
                                                                (IN THOUSANDS)
                                        TIER III         NATIONWIDE
                                         MARKETS       DATA PLATFORM         CORPORATE             TOTAL
                                        --------       -------------         ---------             -----

<S>                                 <C>                 <C>               <C>               <C>
Revenue..........................   $     51,434        $     56,683      $          -      $    108,117

Adjusted EBITDA..................        (24,040)             31,932            (4,527)            3,365
Depreciation and amortization....        (21,743)            (22,347)           (4,586)          (48,676)
Stock compensation credit........            708                 236            12,128            13,072
Interest income..................          1,695                 679             1,102             3,476
Interest expense.................        (37,095)            (10,106)             (700)          (46,501)
Net income/(loss) common
   shareholders..................        (80,475)                394             4,817           (75,264)
Extraordinary item...............              -                   -           109,400           109,400
Dividends and reversal of
   accretion on redeemable
   preferred stock...............              -                   -            39,396            39,396
                                    ------------        ------------      ------------      ------------
Net income/(loss) applicable to
   common shareholders...........   $    (80,475)       $        394      $    153,613      $     73,532
                                    ============        ============      ============      ============

Total assets.....................   $    827,661        $    699,465      $     95,718      $  1,622,844
                                    ============        ============      ============      ============
Capital expenditures.............   $     11,235        $     97,841      $          -      $    109,076
                                    ============        ============      ============      ============
Total debt.......................   $  1,153,851        $    525,566      $          -      $  1,679,417
                                    ============        ============      ============      ============
Total principal repayments of
  indebtedness...................   $          -        $     24,883      $          -      $     24,883
                                    ============        ============      ============      ============

</TABLE>
<TABLE>
<CAPTION>
                                                       SIX MONTHS ENDED JUNE 30, 2001
                                                                (IN THOUSANDS)
                                        TIER III         NATIONWIDE
                                         MARKETS       DATA PLATFORM         CORPORATE             TOTAL
                                        --------       -------------         ---------             -----

<S>                                    <C>                 <C>               <C>               <C>
Revenue..........................   $    102,033        $    102,910      $          -      $    204,943

Adjusted EBITDA..................        (51,713)             46,144            (4,527)          (10,096)
Depreciation and amortization....        (43,126)            (27,470)          (10,695)          (81,291)
Stock compensation credit........          2,611                 870            73,015            76,496
Interest income..................          2,210               1,230             2,560             6,000
Interest expense.................        (74,477)            (14,321)             (852)          (89,650)
Net income/(loss) common
   shareholders..................       (164,495)              6,453            59,501           (98,541)
Extraordinary item...............              -                   -           109,400           109,400
Dividends and reversal of
   accretion on redeemable
   preferred stock...............              -                   -           107,030           107,030
                                    ------------        -------------     ------------      ------------
Net income/(loss) applicable to
   common shareholders...........   $   (164,495)       $      6,453      $    275,931      $    117,889
                                    ============        ============      ============      ============

Total assets.....................   $    827,661        $    699,465      $     95,718      $  1,622,844
                                    ============        ============      ============      ============
Capital expenditures.............   $     23,410        $    302,916      $          -      $    326,326
                                    ============        ============      ============      ============
Total debt.......................   $  1,153,851        $    525,566      $          -      $  1,679,417
                                    ============        ============      ============      ============
Total principal repayments of
  indebtedness...................   $          -        $     24,883      $          -      $     24,883
                                    ============        ============      ============      ============

</TABLE>
                                       7
<PAGE>

                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)

SERVICE REVENUE

        The Company provides on-net switched and dedicated services and resells
switched services previously purchased from the incumbent local exchange
carrier. On-net services include both services provided through direct
connections to our own networks and services provided by means of unbundled
network elements leased from the incumbent local exchange carrier.

        The Company's service revenue consists of the following:


<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED                 SIX MONTHS ENDED
                                                        JUNE 30,                          JUNE 30,
                                              ------------------------------    ------------------------------
                                                  2000             2001             2000             2001
                                              -------------    -------------    -------------    -------------
                                                     (IN THOUSANDS)                    (IN THOUSANDS)

<S>                                           <C>             <C>              <C>               <C>
On-net....................................    $  36,149       $ 106,148        $  61,890         $ 200,882
Resale....................................        2,776           1,969            6,186             4,061
                                              ---------       ---------        ---------         ---------
Total......................................   $  38,925       $ 108,117        $  68,076         $ 204,943
                                              =========       =========        =========         =========

</TABLE>

        Contracts with Qwest Communications Corporation and Qwest Communications
International Inc. accounted for approximately 15% and 57% of the Company's
total revenue during the six months ended June 30, 2000 and 2001, respectively.

6.      COMMITMENTS AND CONTINGENCIES

PURCHASE COMMITMENTS

        As of June 30, 2001, the Company has outstanding commitments
aggregating approximately $17.7 million related to purchases of
telecommunications equipment and fiber optic cable and its obligations under its
agreements with certain suppliers.

REDEMPTION RIGHTS

        Pursuant to a stockholders agreement, certain of the Company's
stockholders and warrant holders have "put rights" entitling them to have the
Company repurchase their preferred and common shares and redeemable common stock
warrants for the fair value of such securities if no Liquidity Event (defined as
(i) an initial public offering with gross proceeds of at least $40 million, (ii)
the sale of substantially all of the stock or assets of the Company or (iii) the
merger or consolidation of the Company with one or more other corporations) has
taken place by the later of (x) October 22, 2003 or (y) 90 days after the final
maturity date of the Senior Discount Notes. The restrictive covenants of the
Senior Discount Notes limit the Company's ability to repurchase such securities.
All of the securities subject to such "put rights" are presented as redeemable
equity in the accompanying balance sheets.

        The redeemable preferred stock, redeemable common stock and redeemable
common stock warrants, which are subject to the stockholders agreement, are
being accreted up to their fair market values from their respective issuance
dates to their earliest potential redemption date (October 22, 2003). At June
30, 2001, the aggregate redemption value of the redeemable equity was
approximately $274.2 million, reflecting per share redemption amounts of $226
for the Series A Preferred Stock, $110 for the Series C Preferred Stock, $47 for
the Series G Preferred Stock and $45 for the redeemable common stock and
redeemable common stock warrants.


                                       8

<PAGE>

                                PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)



7.      NET INCOME/(LOSS) PER COMMON SHARE

        The following table sets forth the computation of net income/(loss) per
common share-basic and diluted (in thousands, except share and per share
amounts):
<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED               SIX MONTHS ENDED
                                                                 JUNE 30,                        JUNE 30,
                                                     ----------------------------------------------------------------
                                                           2000             2001             2000            2001
                                                     ----------------------------------------------------------------
<S>                                                       <C>               <C>             <C>               <C>
Numerator:
   Net loss before extraordinary item and
      cumulative effect of change in accounting
      principle..................................... $   (92,724)       $  (75,264)      $  (183,946)     $  (98,541)
   Extraordinary item...............................           -           109,400                 -         109,400
   Cumulative effect of change in accounting
      principle.....................................           -                 -            (1,705)              -
                                                     ----------------------------------------------------------------
   Net income/(loss)................................      (92,724)          34,136          (185,651)         10,859
   (Dividends and accretion)/reversal of
      accretion on redeemable preferred stock.......      (25,454)          39,396           (58,981)        107,030
                                                     ----------------------------------------------------------------
   Numerator for net income/(loss) applicable
      to common shareholders........................ $   (118,178)       $  73,532        $ (244,632)     $  117,889
                                                     ================================================================
Denominator:
   Denominator for basic net income/(loss)
      per common share-weighted average
      number of common shares outstanding...........      853,765          861,145           853,553         861,145
                                                        ===========                        ===========
   Dilutive effect of options and warrants and
      preferred stock...............................                     2,128,525                         2,188,525
                                                                        -------------                     -----------
   Denominator for diluted net income/(loss)
      per common share-weighted average
      number of common and common
      equivalent shares outstanding.................                     2,989,670                         3,049,670
                                                                        =============                     ===========

Net income/(loss) per common share before
   extraordinary item and cumulative effect of
   change in accounting principle - basic........... $   (138.42)        $  (41.65)       $ (284.60)      $     9.86

Extraordinary item - basic..........................           -            127.04                -           127.04
Cumulative effect of change in accounting
   principle - basic................................           -                 -            (2.00)               -
                                                     ----------------------------------------------------------------
Net income/(loss) per common share before
   extraordinary item - basic....................... $    (138.42)       $   85.39        $ (286.60)      $   136.90
                                                     ================================================================

Net loss per common share before extraordinary
   item - diluted...................................                     $  (25.17)                       $   (32.31)

Extraordinary item - diluted........................                         36.59                             35.87
                                                     ----------------------------------------------------------------
Net income per common share - diluted...............       N/A           $   11.42              N/A       $     3.56
                                                     ================================================================

</TABLE>


                                       9
<PAGE>

                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


        Options and warrants to purchase an aggregate of 655,819 shares of
common stock were outstanding as of June 30, 2000, but a computation of diluted
net loss per common share for such period has not been presented, as the effect
would be anti-dilutive.

8.      SIGNIFICANT CONTRACTS

VOIP MGS CONTRACT

        In March 2001, the Company entered into an agreement with a major
carrier customer pursuant to which the Company agreed to purchase, install and
maintain, throughout the United States, approximately $65.0 million of Voice
over Internet Protocol equipment, principally to handle Voice over Internet
Protocol traffic on behalf of the carrier. The services agreement commences in
the second half of 2001 and expires 48 months later, and provides minimum
guaranteed annualized revenues of approximately $28.7 million. The Company
expects to finance the cost of this equipment.

PORT ACCESS CONTRACT

        In June 2001, the Company entered into an agreement with a major carrier
customer pursuant to which the Company agreed to purchase, install and maintain,
throughout the United States, approximately $83.0 million of Internet protocol
routers and switches, principally to handle high speed Internet traffic on
behalf of the carrier. The services agreement commences in the second half of
2001 and expires 63 months later, and provides minimum guaranteed annualized
revenues of approximately $42.4 million. The Company expects to finance the cost
of this equipment.


9.      SIGNIFICANT FINANCING TRANSACTIONS

KMC FUNDING MONETIZATION

        In March 2001, the Company entered into a financing transaction (the
"KMC Funding Monetization") that resulted in the Company receiving unrestricted
gross proceeds of $325.0 million from a secured loan. The KMC Funding
Monetization is secured by the future cash flows from the Company's Nationwide
Data Platform business contract that was entered into in June 2000. The KMC
Funding Monetization requires that the principal and interest be paid on a
monthly basis upon receipt of the monthly proceeds from the related contract.
The Company retains the right to receive the remaining cash flows from this
contract which are expected to be approximately 25% of the monthly cash flows
(from which on-going operational expenses must be paid). The Company realized
net proceeds of approximately $145.5 million after using a portion of the gross
proceeds to repay the 48 month loan which the Company obtained from Dresdner
Kleinwort Benson North American Leasing, Inc. in November 2000 to finance its
acquisition of the KMC Funding Equipment, as well as to pay any financing fees
and expenses related to the monetization. The interest rate on the KMC Funding
Monetization is 7.34%.

KMC FUNDING V MONETIZATION

        In March 2001, the Company entered into a financing transaction (the
"KMC Funding V Monetization") that resulted in the Company receiving
unrestricted gross proceeds of $225.4 million from a secured loan. The KMC
Funding V Monetization is secured by the future cash flows from the Company's
Nationwide Data Platform business contract that was entered into in March 2000.
The KMC Funding V Monetization requires that the principal and interest be paid
on a monthly basis upon receipt of the monthly proceeds from the related
contract. The Company retains the right to receive the


                                       10

<PAGE>

                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)

remaining cash flows from this contract which are expected to be approximately
25% of the monthly cash flows (from which on-going operational expenses must be
paid). The Company realized net proceeds of approximately $125.5 million after
using a portion of the gross proceeds to exercise its purchase option with
respect to the KMC Funding V Equipment which the Company was leasing from GECC
and CIT Lending Services Corporation under an operating lease, as well as to pay
any financing fees and expenses related to the monetization. The interest rate
on the KMC Funding V Monetization is 6.77%.

10.     EQUITY TRANSACTIONS

SPRINGING WARRANTS

        Effective February 4, 2001, the Company became obligated to issue
warrants to purchase an aggregate of 107,228 shares of its common stock at an
exercise price of $.01 per share to certain holders of the Series E Preferred
Stock and Series F Preferred Stock as a result of the Company's failure to
redeem, prior to that date, all of the outstanding shares of Series F Preferred
Stock. The issuance of these warrants will trigger anti-dilution provisions in
our Series A Preferred Stock, Series C Preferred Stock and Series G Preferred
Stock resulting in adjustments to the conversion prices which will result in an
increase in the number of shares of common stock into which they are convertible
of 20,522 shares, 14,194 shares and 18,478 shares, respectively. The issuance of
the Springing Warrants will also trigger anti-dilution provisions in certain of
our other outstanding warrants which will increase the number of shares of
common stock for which such warrants are exercisable by 3,740 shares.

SERIES F PREFERRED STOCK

        Effective February 4, 2001, all then outstanding shares of Series F
Preferred Stock were converted into shares of Series E Preferred Stock on a one
to one basis in accordance with the provisions of the Certificate of
Designations of the Series F Preferred Stock.

CHANGE IN FAIR VALUE OF COMMON STOCK

        As a result of decreases in the estimated fair value of the Company's
common stock in the first and second quarters of 2001 as compared to December
31, 2000, the Company reversed $63.4 million and $13.0 million of previously
recognized stock compensation expense during the first and second quarters of
2001, respectively. In addition, the decreases in the estimated fair value of
the Company's common stock also resulted in the reversal of $67.6 million and
$39.4 million of previously recognized accretion on redeemable equity
instruments during the first and second quarters of 2001, respectively. Neither
of these non-cash items were directly generated by the Company's operating
activities. In view of the significant decrease in the estimated fair value of
the common stock, during the first quarter of 2001, the Compensation Committee
of the Company's Board of Directors determined to reprice 77,931 options to
purchase shares of its common stock which had been previously granted under its
1998 Stock Purchase and Option Plan. The exercise price of these options, which
were originally granted with exercise prices ranging from $250 to $300 per
share, was reduced to $100 per share. This repricing had no current impact on
the financial statements.

11.     RELATED PARTIES

        Pursuant to an arrangement between the Company and KNT Network
Technologies, LLC ("KNT"), a company independently owned by Harold N. Kamine and
Nassau Capital, the principal stockholders of the Company, effective June 1,
2000, the Company transferred substantially all of the

                                       11

<PAGE>

                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


employees of its construction division to KNT. KNT is providing construction and
maintenance services to the Company and is being reimbursed for all of the
direct costs of these activities. In addition, the Company is currently funding
substantially all of KNT's general overhead and administrative costs at an
amount not to exceed $15 million per annum.

        Amounts paid to KNT during the six months ended June 30, 2001 related
to this arrangement amounted to $21.0 million, of which $10.5 million was for
network related construction and was capitalized into networks and equipment and
the remainder was expensed.

        The Company has reached an agreement with Mr. Kamine and Nassau Capital
as to terms upon which the Company would acquire all of the membership interests
in KNT from Mr. Kamine and Nassau Capital. In accordance with the provisions of
its Amended Senior Secured Credit Facility, the Company has submitted the terms
to the Lenders under the Amended Senior Secured Credit Facility for their
approval, which is pending.

12.     HEDGING ACTIVITIES

        Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, as amended, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES ("Statement 133"), which requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.

        The Company has two interest rate swap agreements to hedge its interest
rate exposure, and the effect of applying Statement 133 as of January 1, 2001
resulted in the fair value of the swaps of $13.2 million being included as a
liability with a corresponding charge to other comprehensive income. For the
period from January 1, 2001 through June 30, 2001, the value of the swaps
decreased to a liability of $20.1 million, reflecting payments of $1.5 million
and decreases in fair value of $8.6 million (included as a component of other
comprehensive income).

13.     COMPREHENSIVE INCOME

        The Company has adopted Statement of Financial Accounting Standards No.
130, REPORTING COMPREHENSIVE INCOME, which establishes standards for the
reporting and disclosure of comprehensive income and its components in the
financial statements. The adoption of this Statement had no impact on the
Company's net income. Prior to the adoption of Statement 133 in the quarter
ended March 31, 2001 (see Note 12), the Company did not have any items that were
required to be disclosed in comprehensive income. The Company's comprehensive
income for the three months and six months ended June 30, 2001 is set forth in
the following table:

<TABLE>
<CAPTION>


                                                                             THREE MONTHS           SIX MONTHS ENDED
                                                                            ENDED JUNE 30,              JUNE 30,
                                                                                 2001                     2001
                                                                            --------------          ----------------
<S>                                                                         <C>                     <C>
Net income applicable to common shareholders............................    $    73,532             $    117,889
Other comprehensive income:
   Change in fair value of the swaps....................................          2,553                   (8,382)
                                                                            --------------          ----------------
Comprehensive income....................................................    $    76,085              $   109,507
                                                                            ==============          ================

</TABLE>


                                       12

<PAGE>

                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


14.     AMENDMENT TO AMENDED SENIOR SECURED CREDIT FACILITY

        In April 2001, the Company and its Lenders under the Amended Senior
Secured Credit Facility agreed to make certain further amendments to the
facility, including the following:

        Certain of the financial covenants were amended to reflect changes in
the Company's business since the Amended Senior Secured Credit Facility was
entered into and to permit continued compliance with those covenants by the
Borrowers in accordance with the Company's revised business plan. In addition,
certain additional financial covenants were added, the most significant of which
will require the Borrowers to meet specific liquidity tests prior to each due
date of cash interest and dividend payments on the Company's senior discount
notes, senior notes and preferred stock.

        In addition to the existing reductions in the aggregate Revolver
commitment, the Revolver commitment will be further reduced, pro rata with the
Term Loan and Lucent Term Loan, (i) by applying the net asset sale proceeds of
certain asset sales (both as defined in the Amended Senior Secured Credit
Facility) in an amount equal to 85% of gross property, plant and equipment
allocated to the assets sold, plus 50% of any proceeds in excess of the full
gross property, plant and equipment allocated to the assets sold (plus a make up
of any shortfall on prior asset sales), (ii) by 50% of the net securities
proceeds (as defined) from the future issuance of equity interests by KMC
Holdings in excess of a cumulative $200.0 million and (iii) by prepayment of an
aggregate of $100 million on or before May 1, 2002.

        The Company will be required to use 50% of the excess cash flows (as
defined) from its National Data Platform business to make additional capital
contributions to the Borrowers.

        The repayment schedule for the Term Loan was amended to provide for 17
consecutive quarterly installments commencing April 1, 2003 in the same
percentages of outstanding principal amount as the specified percentage
reduction in the Revolver commitment on the same date. The final installment
will now be due on April 1, 2007. Repayments of the Term Loan will also be made
from its pro rata share of net asset sale proceeds, net securities proceeds and
the $100.0 million repayment required to be made by May 1, 2002, all as
described above.

        The repayment schedule for the Lucent Term Loan was also amended to
provide for 17 consecutive quarterly installments commencing April 1, 2003 in
the same percentages of outstanding principal amount as the specified percentage
reduction in the Revolver commitment on the same date. The final installment
will now be due on April 1, 2007. Repayments on the Lucent Term Loan will also
be made from its pro rata share of net asset sale proceeds, net securities
proceeds and the $100.0 million repayment required to be made by May 1, 2002,
all as described above.

        The interest rates on loans under the Amended Senior Secured Credit
Facility were increased. The "Applicable Base Rate Margin" now ranges from 3.25%
to 4.25% and the "Applicable LIBOR Margin" now ranges from 4.25% to 5.25%.
Interest is now payable monthly.

        KMC Holdings has agreed that it will form a subsidiary holding company
which will own all of the common stock of its operating subsidiaries which are
engaged in its Nationwide Data Platform business. KMC Holdings has agreed to
pledge the shares of the data subsidiary holding company as further collateral
for KMC Holdings' guaranty of the Amended Senior Secured Credit Facility.

        In connection with the amendment, the Lenders also waived failures by
the Borrowers to comply with certain of the prior financial covenants as of
March 31, 2001 and the Company made aggregate


                                       13

<PAGE>

                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)

capital contributions to the Borrowers of $200.0 million. In addition, the
collateral for KMC Holdings' guaranty of the Amended Senior Secured Credit
Facility was expanded to include substantially all of the assets of KMC
Holdings.

LENDER WARRANTS

        In connection with the execution of the amendment to the Amended Senior
Secured Credit Facility discussed above, the Company agreed to deliver to a
warrant agent certificates representing warrants to purchase an aggregate of
166,542 shares of common stock at an exercise price of $.01 per share (the
"Lender Warrants"). The terms of the Lender Warrants provide that they will
become issuable under the circumstances described in the following paragraph.

        If the Company fails to (i) prepay an aggregate of $50 million under
the Amended Senior Secured Credit Facility by October 31, 2001, (ii) prepay an
additional $50 million under the Amended Senior Secured Credit Facility by
January 31, 2002 and (iii) make additional cash capital contributions to the
Borrowers in the aggregate amount of $50 million by January 31, 2002, 50% of the
Lender Warrants will be issued pro rata to the Lenders under the Amended Senior
Secured Credit Facility. If the Company fails to make aggregate cash capital
contributions to the Borrowers in the amount of $100 million by March 31, 2002
(including any amounts taken into consideration pursuant to clause (iii),
above), 50% of the Lender Warrants will be issued pro rata to the Lenders under
the Amended Senior Secured Credit Facility. Any Lender Warrants which do
not become issuable as described herein will be returned to the Company by the
warrant agent.

15.     EXTRAORDINARY ITEM - NOTE REPURCHASES

        During the second quarter of 2001, the Company recognized a net gain of
$109.4 million on the repurchase of a portion of its senior discount notes. The
Company used $19.2 million of the cash proceeds from the two monetizations
completed in the first quarter of 2001(see Note 9) to purchase approximately 39%
of its senior discount notes (with an aggregate carrying value of $135.1
million).

        The Company is aware that its outstanding senior discount notes and
senior notes are continuing to trade at substantial discounts to their accreted
value and face amounts, respectively. In order to reduce future cash interest
payments, as well as future amounts due at maturity, the Company or its
affiliates may, from time to time, consistent with its covenant obligations,
purchase such securities for cash, exchange them for common stock under the
exemption provided by Section 3(a)(9) of the Securities Act of 1933, or acquire
such securities for a combination of cash and common stock, in each case in open
market purchases or negotiated private transactions with institutional holders.
The Company will evaluate any such transactions in light of then existing market
conditions, taking into account its present liquidity and prospects for future
access to capital. The amounts involved in any such transactions, individually
or in the aggregate, may be material.



                                       14

<PAGE>

                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.


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

        THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS
REFLECT OUR CURRENT ESTIMATES, EXPECTATIONS AND PROJECTIONS ABOUT OUR FUTURE
RESULTS, PERFORMANCE, PROSPECTS AND OPPORTUNITIES. IN SOME CASES, YOU CAN
IDENTIFY THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "ANTICIPATE",
"BELIEVE", "COULD", "ESTIMATE", "EXPECT", "INTEND", "MAY", "SHOULD", "WILL",
"WOULD" AND SIMILAR EXPRESSIONS. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON
ALL INFORMATION CURRENTLY AVAILABLE TO US AND ARE SUBJECT TO A NUMBER OF RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS,
PERFORMANCE, PROSPECTS OR OPPORTUNITIES TO DIFFER MATERIALLY FROM THOSE
EXPRESSED IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS. THESE RISKS,
UNCERTAINTIES AND OTHER FACTORS INCLUDE MATTERS RELATED TO:

        O       OUR OPERATIONS AND PROSPECTS,
        O       OUR EXPECTED FINANCIAL POSITION,
        O       OUR FUNDING NEEDS AND POTENTIAL FINANCING SOURCES,
        O       OUR NETWORK DEVELOPMENT AND EXPANSION PLANS,
        O       THE MARKETS IN WHICH OUR SERVICES ARE CURRENTLY OFFERED OR WILL
                BE OFFERED IN THE FUTURE,
        O       THE SERVICES WHICH WE EXPECT TO OFFER IN THE FUTURE,
        O       THE CONTINUING IMPLEMENTATION OF OUR OPERATIONS SUPPORT SYSTEM,
        O       REGULATORY MATTERS,
        O       EXPECTED COMPETITORS IN OUR MARKETS, AND
        O       THE FACTORS SET FORTH IN ITEM 7 OF OUR ANNUAL REPORT ON
                FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 UNDER THE HEADING
                "-CERTAIN FACTORS WHICH MAY AFFECT OUR FUTURE RESULTS."

         EXCEPT AS OTHERWISE REQUIRED TO BE DISCLOSED IN PERIODIC REPORTS
REQUIRED TO BE FILED BY PUBLIC COMPANIES WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO THE COMMISSION'S RULES, WE HAVE NO DUTY TO UPDATE THESE
STATEMENTS.

OVERVIEW

        We are a rapidly growing fiber-based integrated communications provider
offering data, voice and Internet infrastructure services. We offer these
services to businesses, governments and institutional end-users, Internet
service providers, long distance carriers and wireless service providers. Our
business has two distinct components: serving communications-intensive customers
in Tier III markets, and providing data services on a nationwide basis.

        We provide a full suite of broadband communications services in 37 Tier
III markets, which we define as markets with a population between 100,000 and
750,000. We own and operate robust fiber-based networks and switching equipment
in all of our Tier III markets, which are predominantly located in the South,
Southeast, Midwest and Mid-Atlantic United States. We will continue to expand in
our existing Tier III markets because we believe that these markets have
attractive growth attributes and are typically less competitive than larger
markets. Our customers in these markets include: AT&T, Boeing, City of Augusta,
Columbia Hospital, NASA, Pillsbury, State of Wisconsin, Texas A&M University and
Wal-Mart.

        We also provide nationwide data services under long-term guaranteed
revenue contracts. Under these contracts, we currently provide local Internet
access infrastructure and other enhanced data services and, beginning in the
second half of 2001, will provide Voice over Internet Protocol and high speed


                                       15

<PAGE>
                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.


Internet teering services supporting Gigabit Ethernet Internet services.
Currently, we have contracts representing approximately $300 million in
annualized revenues. The Internet infrastructure we are deploying includes the
latest technology platforms from Cisco and Nortel, which we believe will result
in a cost-effective and technologically superior solution for our customers.

        TIER III MARKETS. We have installed fiber-based SONET networks, or
self-healing synchronous optical networks, using a Class 5 switch, in all of our
37 markets. Our fiber optic networks are initially designed and built to reach
approximately 80% of the business access lines in each of our markets, typically
requiring a local fiber loop of about 30 to 40 miles.

        As our switches have become operational, our operating margins have
improved meaningfully. Our operating margins have also improved due to increased
on-network revenues relative to resale revenues. On-network revenues are
revenues earned from services provided on our network, including by direct
connection to our switch, unbundled network element or dedicated line. Resale
revenues are generated when traffic is carried completely on the incumbent local
exchange carriers' facilities. On-network revenues have increased from
approximately 55% of our revenues for the six months ended June 30, 1999 to
approximately 98% of our revenues for the six months ended June 30, 2001.

        NATIONWIDE DATA PLATFORM. We currently provide Internet access
infrastructure using remote access servers manufactured by Cisco and Nortel
which we are deploying in our 41 supernodes, including ten in our existing Tier
III markets. Supernodes are concentration points for high-speed connectivity to
the Internet.

        Under the terms of our existing guaranteed revenue contracts, we
provide the routing and ancillary equipment for each supernode, as well as data
transport service from the incumbent local exchange carrier to our supernode
location. Our customers pay us a fixed price per port and compensate us for
certain expenses, including space, power and transport, that we may incur above
an agreed level. This structure provides highly predictable revenues and costs
over the life of each contract, currently ranging from 42 to 63 months. These
contracts began generating revenues during the third quarter of 2000. Revenues
will continue to increase as the contracts are phased in through the third
quarter of 2001. These contracts started providing positive margins beginning
with the commencement of revenues in the third quarter of 2000.

        We purchased approximately $134.4 million of equipment (the "KMC
Funding V Equipment") relating to these contracts during the first quarter of
2000. We sold this equipment to General Electric Credit Corporation and CIT
Lending Services Corporation, and leased it back from them, during the second
quarter of 2000. We purchased an additional $168.6 million of equipment (the
"KMC Funding Equipment") relating to these contracts during the second quarter
of 2000 and signed an agreement in November 2000 with Dresdner Kleinwort Benson
North American Leasing, Inc. to finance this equipment by means of a 48 month
term loan. In March 2001, we entered into two financing transactions (the "KMC
Funding V Monetization" and the "KMC Funding Monetization," respectively) and
repaid the remaining balance on this term loan and exercised our purchase option
on the KMC Funding V Equipment under the operating lease. See "--Liquidity and
Capital Resources" below for a detailed description of these transactions.

        In March 2001, we entered into an agreement pursuant to which we agreed
to purchase, install and maintain, throughout the United States, approximately
$65.0 million of Voice over Internet Protocol equipment, principally to handle
Voice over Internet Protocol traffic on behalf of a major carrier customer. The
related services agreement commences in the second half of 2001 and expires 48
months later. We expect to finance the cost of this equipment.


                                       16

<PAGE>
                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.

        In June 2001, we entered into an agreement pursuant to which we agreed
to purchase, install and maintain, throughout the United States, approximately
$83.0 million of Internet protocol routers and switches,  principally to handle
high speed Internet traffic on behalf of a major carrier customer. The services
agreement commences in the second half of 2001 and expires 63 months later. We
expect to finance the cost of this equipment.

        The table below provides selected key operational and financial data on
a consolidated basis as of the following dates:

<TABLE>
<CAPTION>

                                                                         Quarter Ended
                                        -------------------------------------------------------------------------------
                                         June 30,       September 30,      December 31,      March 31,       June 30,
                                           2000             2000               2000            2001            2001
                                         --------       -------------      ------------     ----------       -------
<S>                                          <C>               <C>                <C>              <C>            <C>
Tier III operational markets.....            35                35                 37               37             37
Route miles......................         1,989             2,178              2,285            2,325          2,336
Fiber miles......................       122,376           134,952            140,988          143,508        143,935
Collocations.....................           124               125                134              140            140
Customers........................         8,513             9,990             11,602           13,064         14,414
Total buildings connected........         7,088             9,085              9,745           11,343         12,934
Total lines in service...........       767,992         1,865,390          2,284,375        2,857,304      3,127,659

On-network revenues(a)(b)........            93%               96%                97%              98%            98%
Resale revenues(a)(c)............             7%                4%                 3%               2%             2%

--------
(a)  As a percentage of total revenues.
(b)  On-network revenues are revenues earned from services provided on our
     network, including by direct connection to our switch, unbundled network
     element or dedicated line.
(c)  Resale revenues are generated when traffic is carried completely on the
     incumbent local exchange carriers' facilities.

</TABLE>


        REVENUE. Our revenue is derived from the sale of local switched
services, long distance services, Centrex-type services, private line services,
special access services and Internet access infrastructure. In prior years, a
significant portion of our revenue was derived from the resale of switched
services. We have transitioned the majority of our customers on-network and, as
a result, the portion of our revenue related to the resale of switched services
has decreased significantly.

        RECIPROCAL COMPENSATION. We recognized reciprocal compensation revenue
of approximately $3.9 million, or 10% of our total revenue for the quarter ended
June 30, 2000 and approximately $4.3 million or 4% of our total revenue for the
quarter ended June 30, 2001. In May 2000, we reached a resolution of our claims
for payment of certain reciprocal compensation charges, previously disputed by
BellSouth Corporation. Under the agreement, BellSouth made a one-time payment
that resolved all amounts billed through March 31, 2000. In addition, we agreed
with BellSouth on future rates for reciprocal compensation, setting new
contractual terms for payment. Our prior agreement with BellSouth provided for a
rate of $.009 per minute of use for reciprocal compensation. Under the terms of
the new agreement, the rates for reciprocal compensation which will apply to all
local traffic, including ISP-bound traffic, will decrease over time. The
reduction will be phased in over a three-year period beginning with a rate of
$.002 per minute of use until March 31, 2001, $.00175 per minute of use from
April 1, 2001 through March 31, 2002 and $.0015 per minute of use from April 1,
2002 through March 31, 2003.

        In March 2001, we filed a formal complaint against Southwestern Bell
Telephone Company with the Kansas Corporation Commission seeking payment of past
due reciprocal compensation for calls to Internet service providers. The Kansas
Corporation Commission is not expected to rule on this complaint before the end
of 2001, and we cannot predict the outcome of this proceeding.


                                       17

<PAGE>
                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.


        We are currently pursuing resolution of this issue with other incumbent
local exchange carriers. Our goal is to reach mutually acceptable terms for both
outstanding and future reciprocal compensation amounts for all traffic. However,
we cannot assure you that we will reach new agreements with these carriers on
favorable terms.

        As of June 30, 2001, we have reserves which we believe are sufficient
to cover any amounts which may not be collected, but we cannot assure
you that this will be the case. Our management will continue to consider the
circumstances surrounding this dispute periodically in determining whether
additional reserves against unpaid balances are warranted.

        On April 27, 2001, the Federal Communications Commission released an
order addressing reciprocal compensation for ISP-bound traffic. The Federal
Communications Commission established a three year phase-down of compensation
for ISP-bound traffic. A rebuttable 3:1 ratio of terminating to originating
minutes was adopted as a proxy for identifying ISP-bound traffic. State
reciprocal compensation rates will apply to traffic exchanged within the ratio.
The rate cap on compensation for traffic above the ratio was set at $0.0015 per
minute of use for the first six months following the effective date of the
Federal Communications Commission's order, $0.0010 per minute of use for the
next eighteen months, and $0.0007 per minute of use through the thirty-sixth
month or until the Federal Communications Commission adopts a new mechanism,
whichever is later. In addition, a ten percent growth cap (applied on a per
interconnection agreement basis) applies to ISP-bound traffic eligible for
compensation. The order preserves the compensation mechanisms contained in
existing interconnection agreements, but permits the incumbent local exchange
carriers to invoke change-in-law provisions that may be contained in those
agreements. Numerous competitive local exchange carriers, including us,
petitioned for review of the Federal Communications Commission's decision. We
are unable to predict the outcome of any review proceedings that may be
initiated. If the Federal Communications Commission's order is upheld in its
present form, it is likely to adversely affect our future revenues.

        OPERATING EXPENSES. Our principal operating expenses consist of network
operating costs, selling, general and administrative expenses, stock option
compensation expense and depreciation and amortization. Network operating costs
include charges from termination and unbundled network element charges; charges
from incumbent local exchange carriers for resale services; charges from long
distance carriers for resale of long distance services; salaries and benefits
associated with network operations, billing and information services and
customer care personnel; franchise fees and other costs. Network operating costs
also include a percentage of both our intrastate and interstate revenues which
we pay as universal service fund charges. Nationwide Data Platform operating
expenses include space, power, transport, maintenance, staffing, sales, general
and administrative and rental expenses under our operating lease agreements.
Certain of these costs are passed through to the carrier customer which allows
us to limit our maintenance and servicing costs to predetermined levels, and to
receive additional revenues for any costs incurred in excess of such
predetermined levels. Selling, general and administrative expenses consist of
sales personnel and support costs, corporate and finance personnel and support
costs and legal and accounting expenses. Depreciation and amortization includes
charges related to plant, property and equipment and amortization of intangible
assets, including franchise acquisition costs. Depreciation and amortization
expense will increase as we place additional equipment into service, expanding
our existing networks.

        INTEREST EXPENSE. Interest expense includes interest charges on our
senior notes, senior discount notes, our senior secured credit facilities and
our Internet infrastructure equipment financings. Interest expense also includes
amortization of deferred financing costs.

        EXTRAORDINARY ITEM - NOTE REPURCHASES. During the second quarter of
2001, we recognized a net gain of $109.4 million on the repurchase of a portion
of our senior discount notes. We used $19.2


                                       18

<PAGE>
                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.

million of the cash proceeds from the two monetizations completed in the first
quarter of 2001(see Note 9, "Significant Financing Transactions," of the Notes
to Unaudited Condensed Consolidated Financial Statements included in Item 1 of
this Report on Form 10-Q) to purchase approximately 39% of our senior discount
notes (with an aggregate carrying value of $135.1 million).s

        We are aware that our outstanding senior discount notes and our senior
notes are continuing to trade at substantial discounts to their accreted value
and face amounts, respectively. In order to reduce future cash interest
payments, as well as future amounts due at maturity, we or our affiliates may,
from time to time, consistent with our covenant obligations, purchase such
securities for cash, exchange them for common stock under the exemption provided
by Section 3(a)(9) of the Securities Act of 1933, or acquire such securities for
a combination of cash and common stock, in each case in open market purchases or
negotiated private transactions with institutional holders. We will evaluate any
such transactions in light of then existing market conditions, taking into
account our present liquidity and prospects for future access to capital. The
amounts involved in any such transactions, individually or in the aggregate, may
be material.

RESULTS OF OPERATIONS

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

                  THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO
                        THREE MONTHS ENDED JUNE 30, 2000

        REVENUE. Revenue increased 178% from $38.9 million for the three months
ended June 30, 2000 (the "2000 Second Quarter") to $108.1 million for the three
months ended June 30, 2001 (the "2001 Second Quarter"). This increase is
principally attributable to the fact that our data services business generated
substantial revenues in the 2001 Second Quarter, but had not generated any
revenues in the 2000 Second Quarter, as well as, to a lesser extent, increased
sales in our Tier III Markets business in the 2001 Second Quarter compared to
the 2000 Second Quarter.

        On-network local switched services, long distance services,
Centrex-type services, private line services, special access services and
Internet access infrastructure revenues ("On-network revenues") represented 98%
of total revenue in the 2001 Second Quarter, compared to 93% of total revenue in
the 2000 Second Quarter; while revenue derived from the resale of switched
services ("Resale revenue") represented 2% and 7% of total revenue,
respectively, during those periods. On-network revenues are revenues earned from
services provided on our network, including by direct connection to our switch,
unbundled network element or dedicated circuit. In addition, we recognized
reciprocal compensation revenue of $4.3 million, or 4% of our total revenues
during the 2001 Second Quarter as compared to $3.9 million, or 10% of our total
revenues during the 2000 Second Quarter.

        NETWORK OPERATING COSTS. Network operating costs, excluding non-cash
stock compensation expense, increased 70% from $36.5 million for the 2000 Second
Quarter to $62.0 million for the 2001 Second Quarter. This increase of
approximately $25.5 million is attributable to the fact that our data services
business generated direct costs in the 2001 Second Quarter, but had not
generated any direct costs in the 2000 Second Quarter, as well as increased
direct costs in the Tier III Markets business as a result of increased sales in
this segment for the 2001 Second Quarter compared to the 2000 Second Quarter.
The detailed components of the network operating costs increase are $17.9
million in direct costs associated with providing on-network services, resale
services and leasing unbundled network element services, $4.8 million in network
support services, $800,000 in personnel costs, $800,000 in telecommunications


                                       19

<PAGE>
                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.


costs, $700,000 in consulting and professional services costs and $500,000 in
other direct operating costs.

        SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, excluding non-cash stock compensation expense,
increased 8% from $39.7 million for the 2000 Second Quarter to $42.8 million in
the 2001 Second Quarter. This increase of approximately $3.1 million consists of
increases of: $3.8 million in consulting and professional services costs, $2.3
million in other costs, partially offset by decreases of $2.5 million in
personnel costs and $500,000 in travel costs.

        STOCK COMPENSATION. Stock compensation, a non-cash item, decreased from
an aggregate charge of $9.4 million in the 2000 Second Quarter to an aggregate
credit of $13.1 million for the 2001 Second Quarter. This decrease is due to a
significant decrease in the estimated fair value of the Company's common stock
in the 2001 Second Quarter compared to an increase in the fair value of such
stock in the 2000 Second Quarter.

        DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 180% from $17.4 million for the 2000 Second Quarter to $48.7 million
for the 2001 Second Quarter. This increase is due primarily to depreciation
expense associated with the startup of our Nationwide Data Platform business
during the third quarter of 2000 and the expansion of the networks for our Tier
III Markets business.

        INTEREST INCOME. Interest income increased from $2.5 million in the
2000 Second Quarter to $3.5 million in the 2001 Second Quarter. This increase is
due primarily to larger average cash, cash equivalents and restricted cash
balances during the 2001 Second Quarter as compared to the 2000 Second Quarter.

        INTEREST EXPENSE. Interest expense increased from $31.2 million in the
2000 Second Quarter to $46.5 million in the 2001 Second Quarter. Of this
increase, $10.2 million is due to the financing of our Internet infrastructure
equipment purchased in June and November of 2000 and $3.0 million is
attributable to higher borrowings under our amended senior secured credit
facility. These increases were partially offset by a reduction in interest
expense of $1.2 million on our senior discount notes as a result of the
repurchase of a portion of these notes. In addition, we capitalized interest of
$3.7 million related to network construction projects during the 2000 Second
Quarter versus $400,000 during the 2001 Second Quarter.

        NET LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE. For the reasons stated above, net loss before
extraordinary item and cumulative effect of change in accounting principle
decreased from $92.7 million for the 2000 Second Quarter to $75.3 million for
the 2001 Second Quarter.

                   SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO
                         SIX MONTHS ENDED JUNE 30, 2000

        REVENUE. Revenue increased 201% from $68.1 million for the six months
ended June 30, 2000 (the "2000 Six Months") to $204.9 million for the six months
ended June 30, 2001 (the "2001 Six Months"). This increase is principally
attributable to the fact that our data services business generated substantial
revenues in the 2001 Six Months, but had not generated any revenues in the 2000
Six Months, as well as, to a lesser extent, increased sales in our Tier III
Markets business in the 2001 Six Months compared to the 2000 Six Months.


                                       20

<PAGE>
                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.

        On-network local switched services, long distance services,
Centrex-type services, private line services, special access services and
Internet access infrastructure revenues ("On-network revenues") represented 98%
of total revenue in the 2001 Six Months, compared to 91% of total revenue in the
2000 Six Months; while revenue derived from the resale of switched services
("Resale revenue") represented 2% and 9% of total revenue, respectively, during
those periods. On-network revenues are revenues earned from services provided on
our network, including by direct connection to our switch, unbundled network
element or dedicated circuit. In addition, we recognized reciprocal compensation
revenue of $8.3 million, or 4% of our total revenues during the 2001 Six Months
as compared to $10.3 million, or 15.1% of our total revenues during the 2000 Six
Months.

        NETWORK OPERATING COSTS. Network operating costs, excluding non-cash
stock compensation expense, increased 89% from $65.3 million for the 2000 Six
Months to $123.3 million for the 2001 Six Months. This increase of approximately
$58.0 million is attributable to the fact that our data services business
generated direct costs in the 2001 Six Months, but had not generated any direct
costs in the 2000 Six Months, as well as increased direct costs in the Tier III
Markets business as a result of increased sales in this segment for the 2001 Six
Months compared to the 2000 Six Months. The detailed components of the network
operating costs increase are $42.3 million in direct costs associated with
providing on-network services, resale services, leasing unbundled network
element services and operating lease payments, $7.0 million in network support
services, $3.9 million in personnel costs, $2.0 million in consulting and
professional services costs, $1.6 million in telecommunications costs and $1.2
million in other direct operating costs.

        SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, excluding non-cash stock compensation expense,
increased 16% from $79.0 million for the 2000 Six Months to $91.7 million in the
2001 Six Months. This increase of approximately $12.7 million consists of
increases of: $9.0 million in consulting and professional services costs, $1.4
million in facility costs and $2.3 million in other costs.

        STOCK COMPENSATION. Stock compensation, a non-cash item, decreased from
an aggregate charge of $22.7 million in the 2000 Six Months to an aggregate
credit of $76.5 million for the 2001 Six Months. This decrease is due to a
significant decrease in the estimated fair value of the Company's common stock
in the 2001 Six Months compared to an increase in the fair value of such stock
in the 2000 Six Months.

        DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 161% from $31.1 million for the 2000 Six Months to $81.3 million for
the 2001 Six Months. This increase is due primarily to depreciation expense
associated with the startup of our Nationwide Data Platform business during the
third quarter of 2000 and the expansion of the networks for our Tier III Markets
business.

        INTEREST INCOME. Interest income increased from $4.5 million in the
2000 Six Months to $6.0 million in the 2001 Six Months. This increase is due
primarily to larger average cash, cash equivalents and restricted cash balances
during the 2001 Six Months as compared to the 2000 Six Months.

        INTEREST EXPENSE. Interest expense increased from $58.4 million in the
2000 Six Months to $89.6 million in the 2001 Six Months. Of this increase, $15.2
million is due to the financing of our Internet infrastructure equipment
purchased in June and November of 2000 and $11.4 million is attributable to
higher borrowings under our amended senior secured credit facility. In addition,
we capitalized interest of $5.9 million related to network construction projects
during the 2000 Second Quarter versus $1.3 million during the 2001 Second
Quarter.

        NET LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE. For the reasons stated above, net loss before
extraordinary item and cumulative effect of change in


                                       21

<PAGE>
                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.


accounting principle decreased from $183.9 million for the 2000 Six Months to
$98.5 million for the 2001 Six Months.

LIQUIDITY AND CAPITAL RESOURCES

        We have incurred significant operating and net losses as a result of
the development and operation of our networks. We expect that such losses will
continue as we service our debt, expand our networks and build our customer
base. As a result, we do not expect there to be any cash provided by operations
in the near future. We have financed our operating losses and capital
expenditures with equity invested by our founders, preferred stock
placements, credit facility borrowings, equipment loans, operating leases,
monetizations and our 12 1/2% senior discount notes and 13 1/2% senior notes.

        In March 2001, we entered into a financing transaction (see Note 9,
"Significant Financing Transactions-KMC FUNDING MONETIZATION," of the Notes to
Unaudited Condensed Consolidated Financial Statements included in Item 1 of this
Report on Form 10-Q) that resulted in us receiving unrestricted gross proceeds
of $325.0 million from a secured loan. The KMC Funding Monetization is secured
by the future cash flows from our Nationwide Data Platform business contract
that was entered into in June 2000. The KMC Funding Monetization requires that
the principal and interest be paid on a monthly basis upon receipt of the
monthly proceeds from the related contract. We retain the right to receive the
remaining cash flows from this contract which are expected to be approximately
25% of the monthly cash flows (from which on-going operational expenses must be
paid). We realized net proceeds of approximately $145.5 million after using a
portion of the gross proceeds to repay the 48 month term loan which we obtained
pursuant to our November 2000 agreement with Dresdner Kleinwort Benson North
American Leasing, Inc. to finance our acquisition of the KMC Funding Equipment,
as well as to pay any financing fees and expenses related to the monetization.

        In March 2001, we entered into a financing transaction (see Note 9,
"Significant Financing Transactions-KMC FUNDING V MONETIZATION," of the Notes to
Unaudited Condensed Consolidated Financial Statements included in Item 1 of this
Report on Form 10-Q) that resulted in us receiving unrestricted gross proceeds
of $225.4 million from a secured loan. The KMC Funding V Monetization is secured
by the future cash flows from our Nationwide Data Platform business contract
that was entered into in March 2000. The KMC Funding V Monetization requires
that the principal and interest be paid on a monthly basis upon receipt of the
monthly proceeds from the related contract. We retain the right to receive the
remaining cash flows from this contract which are expected to be approximately
25% of the monthly cash flows (from which on-going operational expenses must be
paid). We realized net proceeds of approximately $125.5 million after using a
portion of the gross proceeds to exercise our purchase option with respect to
the KMC Funding V Equipment which we were leasing from GECC and CIT Lending
Services Corporation under an operating lease, as well as to pay any financing
fees and expenses related to the monetization.

        In March 2001, we purchased approximately $65.0 million of Voice over
Internet Protocol equipment in association with entering into an agreement with
a major carrier customer (see Note 8, "Significant Contracts - VOIP MGS
CONTRACT," of the Notes to Unaudited Condensed Consolidated Financial Statements
included in Item 1 of this Report on Form 10-Q). We expect to finance the cost
of this equipment; however, we can give no assurances that we will be able to
obtain such financing.

        In April 2001, we further amended our amended senior secured credit
facility. The aggregate amount of the facility remains at $700.0 million and
funds are available under it for the same purposes. The primary changes effected
by the amendment were (i) changes to certain of the financial covenants to
reflect changes in the Company's business since the amended senior secured
credit facility was entered into and to permit continued compliance with those
covenants by the borrowers in accordance with its


                                       22

<PAGE>
                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.

revised business plan, (ii) to conform the repayment schedules of both term
loans and the revolving loan, (iii) to require the borrowers to make an
aggregate of $100 million in prepayments on the loans in accordance with an
agreed schedule, (iv) to require the Company to use a portion of the proceeds of
future equity issuances in excess of a cumulative $200.0 million to make
additional prepayments on the loans, (v) to require the Company to use agreed
upon portions of the proceeds from certain sales of assets to make additional
prepayments on the loans, (vi) to require the Company to use agreed upon
portions of the excess cash flows from its Nationwide Data Platform business to
make additional capital contributions to the borrowers, (vii) to require the
Company to restructure those of its subsidiaries involved in its Nationwide Data
Platform business under a single subsidiary holding company, the shares of which
will be pledged as additional collateral for KMC Holdings' obligations under its
guaranty of the amended senior secured credit facility, and (viii) to increase
the interest rate. In connection with the amendment, the lenders also waived
failures by the borrowers to comply with certain of the prior financial
covenants as of March 31, 2001, and the Company made aggregate capital
contributions to the borrowers of $200.0 million. In addition, the collateral
for KMC Holdings' guaranty of the facility was expanded to include substantially
all of the assets of KMC Holdings. For a more detailed discussion of this
amendment see Note 14, "Amendment to Amended Senior Secured Credit Facility," of
the Notes to Unaudited Condensed Consolidated Financial Statements included in
Item 1 of this Report on Form 10-Q.

        In June 2001, we purchased approximately $83.0 million of high speed
Internet protocol routers and switches in association with entering into an
agreement with a major carrier customer (see Note 8, "Significant Contracts -
PORT ACCESS CONTRACT," of the Notes to Unaudited Condensed Consolidated
Financial Statements included in Item 1 of this Report on Form 10-Q). We expect
to finance the cost of this equipment; however, we can give no assurances that
we will be able to obtain such financing.

        As of August 8, 2001, we had $654.9 million and $515.6 million of
indebtedness outstanding under the amended senior secured credit facility and
the combined KMC Funding V Monetization and KMC Funding Monetization,
respectively. Subject to certain conditions, as of that date we had an
additional $37.9 million in borrowing capacity available under the amended
senior secured facility, excluding $7.2 million of drawn letters of credit. The
KMC Funding V Monetization and KMC Funding Monetization were both fully drawn at
that date.

        Net cash provided by financing activities from borrowings was $403.7
million and our net cash used in operating and investing activities was $342.5
million for the 2001 Six Months.

        We made capital expenditures of $177.4 million in the 2000 Six Months
versus $326.3 million in the 2001 Six Months. Of the total capital expenditures
for the 2001 Six Months, $23.4 million was related to the Tier III Markets
business segment and $302.9 million was for the Nationwide Data Platform
business segment. As of August 8, 2001, we had outstanding purchase commitments
aggregating approximately $13.7 million related to the purchase of fiber optic
cable and telecommunications equipment under our agreements with certain
suppliers and service providers. We currently anticipate capital expenditures
for 2001 to be approximately $60.0 million for the Tier III Markets business. It
is our intention that capital expenditures for the Nationwide Data Platform
business will be financed separately and therefore will not affect our current
liquidity position. The majority of the Tier III Market expenditures are
expected to be made for network expansion to facilitate the offering of our
services. We expect to continue to incur operating losses while we expand our
business and build our customer base. Actual capital expenditures and operating
losses will depend on numerous factors, including the nature of future expansion
and acquisition opportunities and factors beyond our control, including economic
conditions, competition, regulatory developments and the availability of
capital.


                                       23

<PAGE>
                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.

        We believe that our cash and borrowings available under the amended
senior secured credit facility will be sufficient to meet our liquidity needs to
fund operating losses and capital expenditure requirements for our current
business plan into the first quarter of 2003. This date is predicated on the
continued ramp-up in our Tier III markets and Nationwide Data Platform
businesses, reduced capital expenditures, prudent cost controls and continued
gross margin improvements.  In addition, under the terms of our amended senior
secured credit facility, by May 1, 2002, we are required to effect loan
prepayments and reductions in the revolving loan commitment thereunder in the
aggregate amount of $100 million. We may need to arrange additional financing to
fund these prepayments. We can give no assurance that this additional financing
will be available to us, or if available, that it can be obtained on a timely
basis and on acceptable terms.

        In addition, in the event that our plans change, the assumptions upon
which our plans are based prove inaccurate, we expand or accelerate our business
plan or we determine to consummate acquisitions, the foregoing sources of funds
may prove insufficient and we may be required to seek additional financing
sooner than we currently expect. Additional sources of financing may include
public or private equity or debt financings, leases and other financing
arrangements. We can give no assurance that additional financing will be
available to us or, if available, that it can be obtained on a timely basis and
on acceptable terms.

        During the second quarter of 2001, we recognized a net gain of $109.4
million on the repurchase of a portion of our senior discount notes. We used
$19.2 million of the cash proceeds from the two monetizations completed in the
first quarter of 2001 (see Note 9, "Significant Financing Transactions," of the
Notes to Unaudited Condensed Consolidated Financial Statements included in Item
1 of this Report on Form 10-Q) to purchase approximately 39% of our senior
discount notes (with an aggregate carrying value of $135.1 million).

        We are aware that our outstanding senior discount notes and our senior
notes are continuing to trade at substantial discounts to their accreted value
and face amounts, respectively. In order to reduce future cash interest
payments, as well as future amounts due at maturity, we or our affiliates may,
from time to time, consistent with our covenant obligations, purchase such
securities for cash, exchange them for common stock under the exemption provided
by Section 3(a)(9) of the Securities Act of 1933, or acquire such securities for
a combination of cash and common stock, in each case in open market purchases or
negotiated private transactions with institutional holders. We will evaluate any
such transactions in light of then existing market conditions, taking into
account our present liquidity and prospects for future access to capital. The
amounts involved in any such transactions, individually or in the aggregate, may
be material.




                                       24

<PAGE>
                               PART I - (CONT'D)
                           KMC TELECOM HOLDINGS, INC.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Market risks relating to our operations result primarily from changes
in interest rates. A substantial portion of our long-term debt bears interest at
a fixed rate. However, the fair market value of the fixed rate debt is sensitive
to changes in interest rates. We are subject to the risk that market interest
rates will decline and the interest expense due under the fixed rate debt will
exceed the amounts due based on current market rates. We have entered into two
interest rate swap agreements with commercial banks to reduce the impact of
changes in interest rates on a portion of our outstanding variable rate debt.
The agreements effectively fix the interest rate on $415.0 million of our
outstanding variable rate borrowings under the amended senior secured credit
facility due 2007. A $325.0 million interest rate swap agreement entered into in
April 2000 terminates in April 2004 and a $90.0 million interest rate swap
agreement entered into in June 2000 terminates in June 2005.

        The following table provides information about our significant
financial instruments that are sensitive to changes in interest rates (in
millions):


<TABLE>
<CAPTION>

                                     Fair Value
                                      on June
                                         30,                            Future Principal Payments
                                        2001        2001       2002        2003       2004     2005     Thereafter      Total
                                      --------     ------     ------     -------     ------   -----     ----------     ------
<S>                                  <C>           <C>         <C>        <C>        <C>       <C>         <C>         <C>
Long-Term Debt:
   Fixed Rate:
     Senior Discount Notes,
      interest payable at
      12 1/2%, maturing 2008........ $    34.4     $      -    $     -    $     -    $     -   $     -     $  223.9    $   223.9
     Senior Notes, interest
      payable at 13 1/2%,
      maturing 2009.................      67.0            -          -          -          -         -        275.0        275.0
     KMC Funding
      Monetization, interest
      payable at 7.34%,
      maturing 2005.................     211.3         28.0       59.7       65.0       58.6         -            -        211.3
     KMC Funding V
      Monetization, interest
      payable at 6.77%,
      maturing 2005.................     314.3         32.8       69.4       74.7       80.4      57.0            -        314.3
   Variable Rate:
     Amended Senior Secured
      Credit Facility, interest
      variable (9.68% at June
      30, 2001)(a)                       654.9            -      100.0       80.6      129.0     161.2        184.1        654.9
                                     ---------     ---------   -------    -------    -------   -------     --------    ---------
Interest Rate swaps:
     Variable rate for fixed rate...      20.1            -          -          -          -         -            -            -
                                     ---------     ---------   -------    -------    -------   -------     --------    ----------
        Total....................... $ 1,302.0     $   60.8    $ 229.1    $ 220.3    $ 268.0   $ 218.2     $  683.0    $ 1,679.4
                                     =========     =========   =======    =======    =======   =======     ========    ==========
     ---------------
     (a) Interest is based on a variable rate, which at our option, is determined by
     either a base rate or LIBOR, plus, in each case, a specified margin.




                                       25

</TABLE>



<PAGE>



                           PART II - OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS.
        -----------------

        Not Applicable.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
        -----------------------------------------

        (a)     Not Applicable.

        (b)     Not Applicable.

        (c)     On April 11 and June 11, 2001, the Company granted options to
purchase 36,500 and 3,500 shares of common stock, respectively, to certain
employees and employees of certain of its affiliates under the 1998 Stock
Purchase and Option Plan for Key Employees of KMC Telecom Holdings, Inc. and
Affiliates. No consideration was received by the Company for the issuance of the
options. The options to purchase these shares are exercisable at an exercise
price of $100 per share. The issuance of the options was made in reliance upon
the exemption from the registration requirements of the Securities Act provided
by Section 4(2) of that Act, on the basis that the transaction did not involve a
public offering.

        (d)     Not Applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
        -------------------------------

        Not Applicable.

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

        (a)     An annual meeting of Stockholders of the Company was held on
June 11, 2001.

        (b)     The following directors were elected at the annual meeting:
Harold N. Kamine (Chairman), John G. Quigley (Vice-Chairman), Gary E. Lasher,
William F. Lenahan, Roscoe C. Young, II, Richard H. Patterson,
William H. Stewart, Alexander P. Coleman and Jeffrey Tuder.

        (c)(i)  The holders of the Registrant's Common Stock, Series A
Preferred Stock, Series C Preferred Stock and Series G-1 Preferred Stock, voting
as a single class, ratified all of the actions taken by the board of directors
of the Registrant since June 1, 2000 and ending June 11, 2001. In this vote each
share of Common Stock had one vote and each share of Series A Preferred Stock,
Series C Preferred Stock and Series G-1 Preferred Stock had a number of votes
equal to the number of shares of Common Stock into which it is convertible.

        The vote was as follows:

                  FOR               AGAINST          ABSTAINING
            1,332,831.9524             0                  0

        (c)(ii) The existing board of nine directors was re-elected in its
entirety to hold office until the next Annual Meeting of Stockholders, or until
their respective successors shall be elected and qualified, by a vote of the
holders of the Registrant's Common Stock, Series A Preferred Stock, Series C
Preferred Stock and Series G-1 Preferred Stock, voting as a single class. In
this vote each share of Common Stock had one vote and each share of Series A
Preferred Stock, Series C Preferred Stock and Series G-1 Preferred Stock had a
number of votes equal to the number of shares of Common Stock into which it is
convertible. The persons elected as directors were:


                                       26

<PAGE>

                                Harold N. Kamine
                                 John G. Quigley
                                 Gary E. Lasher
                               William F. Lenahan
                               Roscoe C. Young, II
                              Richard H. Patterson
                               William H. Stewart
                              Alexander P. Coleman
                                  Jeffrey Tuder

        The vote was as follows:

                  FOR               WITHHELD         ABSTAINING
            1,551,684.5363             0                  0


        (c)(iii) The holders of the Registrant's Common Stock, Series A
Preferred Stock, Series C Preferred Stock and Series G-1 Preferred Stock, voting
as a single class, ratified the retention of Ernst & Young LLP as independent
auditors of the Registrant for the fiscal year ending December 31, 2001. In this
vote each share of common stock had one vote and each share of Series A
Preferred Stock, Series C Preferred Stock and Series G-1 Preferred Stock had a
number of votes equal to the number of shares of Common Stock into which it is
convertible.

        The vote was as follows:

                  FOR               AGAINST          ABSTAINING
            1,551,684.5363             0                  0


        (d)     Not Applicable.

ITEM 5. OTHER INFORMATION.
        -----------------

        Not Applicable.

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

        (a)     Exhibits
                --------

4.1.            Warrant Agreement, dated as of April 12, 2001, among KMC Telecom
                Holdings, Inc., the "Lenders" party thereto, First Union
                National Bank, as administrative agent for the Lenders, and
                First Union National Bank, as warrant agent.

4.2             Warrant Registration Rights Agreement, dated as of April 12,
                2001, among KMC Telecom Holdings, Inc., the "Lenders" party
                thereto and First Union National Bank, as administrative agent
                for the Lenders.

10.1            Amendment No. 2 to Amended and Restated Loan and Security
                Agreement, dated as of July 28, 2000, among KMC Telecom Inc.,
                KMC Telecom II, Inc., KMC Telecom III, Inc., KMC Telecom of
                Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing
                II LLC, KMC Telecom Leasing III LLC, KMC Telecom.com, Inc., KMC
                III Services LLC, the "Lenders" party thereto, First Union
                National Bank, as administrative agent for the


                                       27


<PAGE>

                Lenders and CIT Lending Services Corporation (f/k/a Newcourt
                Commercial Finance Corporation), as collateral agent for the
                Lenders.

10.2            Amendment No. 3 and Limited Waiver to Amended and Restated Loan
                and Security Agreement, dated as of February 23, 2001, among KMC
                Telecom Inc., KMC Telecom II, Inc., KMC Telecom III, Inc., KMC
                Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC
                Telecom Leasing II LLC, KMC Telecom Leasing III LLC, KMC
                Telecom.com, Inc., KMC III Services LLC, the "Lenders" party
                thereto, First Union National Bank, as administrative agent for
                the Lenders and CIT Lending Services Corporation (f/k/a Newcourt
                Commercial Finance Corporation), as collateral agent for the
                Lenders.

10.3            Amendment No. 4 and Limited Waiver to Amended and Restated Loan
                and Security Agreement, dated as of April 12, 2001, among KMC
                Telecom Inc., KMC Telecom II, Inc., KMC Telecom III, Inc., KMC
                Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC
                Telecom Leasing II LLC, KMC Telecom Leasing III LLC, KMC
                Telecom.com, Inc., KMC III Services LLC, the "Lenders" party
                thereto, First Union National Bank, as administrative agent for
                the Lenders and CIT Lending Services Corporation (f/k/a Newcourt
                Commercial Finance Corporation), as collateral agent for the
                Lenders.

10.4            Amendment Number 3 to the Professional Services Agreement, dated
                as of April 16, 2001, by and among KMC Telecom Inc., KMC Telecom
                II, Inc., KMC Telecom III, Inc., KMC Telecom IV, Inc., KMC
                Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC
                Telecom Leasing II LLC, KMC Telecom Leasing III LLC, KMC
                Telecom Leasing IV LLC and Lucent Technologies Inc.

10.5            Amendment Number Five to the General Agreement, dated as of
                April 16, 2001, by and among KMC Telecom Inc., KMC Telecom II,
                Inc., KMC Telecom III, Inc., KMC Telecom IV, Inc., KMC Telecom
                of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom
                Leasing II LLC, KMC Telecom Leasing III LLC, KMC Telecom Leasing
                IV LLC, KMC III Services LLC and Lucent Technologies Inc.

10.6*           Media Gateway Services Agreement IV, effective as of March 31,
                2001, among KMC Telecom VIII LLC, Qwest Communications
                Corporation and Qwest Communications International, Inc.

10.7*           Port Access Services Agreement, dated as of June 30, 2001,
                between KMC Telecom IX LLC and Qwest Communications
                International Inc.

  -----------
  *  Filed herewith with information omitted. Confidential treatment has been
     requested as to certain portions, and the omitted portions have been
     separately filed.

                (b)   Reports on Form 8-K
                      -------------------

                      Not Applicable.





                                       28


<PAGE>



                                   SIGNATURES
                                   ----------

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


Dated: August 14, 2001


                                            KMC TELECOM HOLDINGS, INC.
                                                     (Registrant)


                                            By: /s/   William F. Lenahan
                                               _________________________
                                            William F. Lenahan
                                            Chief Executive Officer
                                            (Principal Executive Officer)


                                            By: /s/   William H. Stewart
                                                ________________________
                                            William H. Stewart
                                            Chief Financial Officer
                                            (Principal Financial Officer)



















                                       29


<PAGE>



EXHIBIT INDEX

       NO.        DESCRIPTION
       --         -----------

       4.1        Warrant Agreement, dated as of April 12, 2001, among KMC
                  Telecom Holdings, Inc., the "Lenders" party thereto, First
                  Union National Bank, as administrative agent for the Lenders,
                  and First Union National Bank, as warrant agent.

       4.2        Warrant Registration Rights Agreement, dated as of April 12,
                  2001, among KMC Telecom Holdings, Inc., the "Lenders" party
                  thereto and First Union National Bank, as administrative agent
                  for the Lenders.

       10.1       Amendment No. 2 to Amended and Restated Loan and Security
                  Agreement, dated as of July 28, 2000, among KMC Telecom Inc.,
                  KMC Telecom II, Inc., KMC Telecom III, Inc., KMC Telecom of
                  Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing
                  II LLC, KMC Telecom Leasing III LLC, KMC Telecom.com, Inc.,
                  KMC III Services LLC, the "Lenders" party thereto, First Union
                  National Bank, as administrative agent for the Lenders and CIT
                  Lending Services Corporation (f/k/a Newcourt Commercial
                  Finance Corporation), as collateral agent for the Lenders.

       10.2       Amendment No. 3 and Limited Waiver to Amended and Restated
                  Loan and Security Agreement, dated as of February 23, 2001,
                  among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom III,
                  Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I
                  LLC, KMC Telecom Leasing II LLC, KMC Telecom Leasing III LLC,
                  KMC Telecom.com, Inc., KMC III Services LLC, the "Lenders"
                  party thereto, First Union National Bank, as administrative
                  agent for the Lenders and CIT Lending Services Corporation
                  (f/k/a Newcourt Commercial Finance Corporation), as collateral
                  agent for the Lenders.

       10.3       Amendment No. 4 and Limited Waiver to Amended and Restated
                  Loan and Security Agreement, dated as of April 12, 2001, among
                  KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom III, Inc.,
                  KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC
                  Telecom Leasing II LLC, KMC Telecom Leasing III LLC, KMC
                  Telecom.com, Inc., KMC III Services LLC, the "Lenders" party
                  thereto, First Union National Bank, as administrative agent
                  for the Lenders and CIT Lending Services Corporation (f/k/a
                  Newcourt Commercial Finance Corporation), as collateral agent
                  for the Lenders.

       10.4       Amendment Number 3 to the Professional Services Agreement,
                  dated as of April 16, 2001, by and among KMC Telecom Inc., KMC
                  Telecom II, Inc., KMC Telecom III, Inc., KMC Telecom IV, Inc.,
                  KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC
                  Telecom Leasing II LLC, KMC Telecom Leasing III LLC, KMC
                  Telecom Leasing IV LLC and Lucent Technologies Inc.

       10.5       Amendment Number Five to the General Agreement, dated as of
                  April 16, 2001, by and among KMC Telecom Inc., KMC Telecom II,
                  Inc., KMC Telecom III, Inc., KMC Telecom IV, Inc., KMC Telecom
                  of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom
                  Leasing II LLC, KMC Telecom Leasing III LLC, KMC Telecom
                  Leasing IV LLC, KMC III Services LLC and Lucent Technologies
                  Inc.

       10.6*      Media Gateway Services Agreement IV, effective as of March 31,
                  2001, among KMC Telecom VIII LLC, Qwest Communications
                  Corporation and Qwest Communications International, Inc.








<PAGE>


       10.7*      Port Access Services Agreement, dated as of June 30, 2001,
                  between KMC Telecom IX LLC and Qwest Communications
                  International Inc.

                -----------
                 * Filed herewith with information omitted. Confidential
               treatment has been requested as to certain portions, and the
               omitted portions have been separately filed.